Why quitting N.Y. is a good bet for daily fantasy sports

Last Updated Mar 23, 2016 12:11 PM EDT

Daily fantasy sports (DFS) operators DraftKings and FanDuel may have temporarily lost their legal fight with New York State Attorney Eric Schneiderman, but they may ultimately win the war.

DraftKings and FanDuel both agreed this week to quit operating in New York, their largest market, until questions about the legality of their games are resolved. According to legal experts, this gives the DFS industry, which is facing similar battles in many states, some much-needed breathing room.

The parties agreed to put on hold Schneiderman's lawsuit that was seeking to shut down the companies to give legislation to legalize the games a chance to pass in the New York State legislature. If the state doesn't legalize daily fantasy sports by June 30, the companies will refrain from doing any business in New York until a court rules on their appeals of injunctions against them. That's expected sometime in September.

Yahoo (YHOO) has also quit offering the games in New York, even though it wasn't subject to Schneiderman's suit.

"They bought themselves some piece of mind knowing they have limited their downside risk significantly," said Daniel Wallach, a sports and gaming law attorney at Becker and Poliakoff. "Now, their only enemy is time."

Marc Edelman, an associate professor of law at the Zicklin School of Business at City University of New York's Baruch College, called the agreement "wonderful news for the daily fantasy sports operators." That's because had the litigation moved forward, it was likely that one or both of them would have been found to violated the law.

The companies would have then been vulnerable to "crushing" legal penalties, including the "return of every single dollar transmitted or remitted from a New York-based user," Wallach said.

It isn't clear if and when legislators will address the issue. The Republican-controlled State Senate last week passed a resolution that legalized the industry. Meanwhile, the Democratic-controlled General Assembly has taken no formal position nor has Governor Andrew Cuomo, according to The New York Times.

"The downside is there is no DFS in New York until a law gets passed," Wallach said. "That could be several months or ... several years. That's the risk they're taking."

In recent months, the Fantasy Sports Trade Association, the industry's main trade group, has ramped up its lobbying in state capitols to press for legalizing the games. The industry has long argued that DFS isn't gambling but rather that it's a game of skill. Schneiderman and four other state attorneys general, including in Texas and Illinois, have rejected this argument.

However, Virginia has become the first state to enact legislation to legalize daily fantasy sports. "Active" legislative efforts are ongoing in more than a dozen states to do the same, according to the Legal Sports Report. They've stalled in seven states, including Washington, Wisconsin, and Georgia. There are also separate federal criminal probes.

According to Edelman, some of these bills, such as the one Virginia passed, don't provide the industry with the legal clarity it needs.

"These bills are poorly written, deeply flawed and create huge license fees to prevent market competition and likely do not legalize anything at all," he said.

DraftKings recently agreed to quit taking bets in Texas as of May 2 after state Attorney General Ken Paxson declared daily fantasy sports to be illegal. The company had filed suit in the Lone Star State challenging Paxson's decision. FanDuel wasn't a party to the suit. It had separately agreed to stop offering paid games in Texas.

Both companies last year filed suit against Illinois Attorney General Lisa Madigan after she declared that the games violated state gaming law. Unlike New York's Schneiderman, however, Madigan never threatened to go after the industry and urged the legislature to address the issue, Wallach said.

"Let's face it," he added, "the most aggressive and hostile AG toward the industry was Schneiderman." Still, if their gambit works out, FanDuel and Draft Kings may have a future in New York after all.

Editor's note: CBS has an investment in FanDuel of less than 1 percent of that company's value.

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    Jonathan Berr is an award-winning journalist and podcaster based in New Jersey whose main focus is on business and economic issues.