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Why the State of New York Keeps Giving Fantasy Sports Sites a Hard Time

There's skill involved, but critics say the biggest sites are skewing the game too heavily toward chance.
February 8, 2016, 12:00pm
Image: by the author

Just in time for Super Bowl Sunday, the fantasy sports business suffered a big blow on Friday when Bloomberg revealed that New York-based Citigroup, the largest credit card lender in the world, would start blocking credit and debit card payments from New Yorkers made through fantasy industry juggernauts DraftKings and FanDuel.

It's but the latest in a number of tackles daily fantasy sports have endured in the Empire State. The trouble began after the two sites ran large-scale advertising campaigns last November, which prompted New York Attorney General Eric Schneiderman to send cease-and-desist letters to both sites, saying they represented unregulated gambling. In December, a New York judge granted Schneiderman's injunction barring both sites from doing business in the state.

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A Manhattan appeals court ruled last month that the sites may continue operating in New York while all this business gets sorted out, but hasn't done much to allay the concerns of third parties associated with the site. Bank of America, for instance, started blocking payments from New Yorkers two months ago. Last week, key payment processor Vantiv announced that, beginning Feb. 29, it will stop working with both sites until New York courts rule on DraftKings' and FanDuel's legality.

As Fortune notes, Vantiv had previously asked a Manhattan court to decide if it could keep processing payments for the sites, but the company shied away once attorney generals from other heavily populated states like Illinois and Texas joined the chorus denouncing them as well. In such a climate and with so many key providers leaving, DraftKings and FanDuel are rapidly becoming teams without a stadium.

So what's New York's deal? At the heart of the storm is the question of whether daily fantasy sports involve skill or merely chance. It's a question that almost always pops up in debates over whether a particular activity counts as gambling, particularly in New York. Indeed, the state also pegged pinball as gambling for decades until Roger Sharpe famously called and made a shot on a pinball machine in a 1976 courtroom. More recently, a federal judge in Brooklyn ruled in 2012 that "the influence of skill [rather than luck] becomes obvious and overwhelming" in poker, and the U.S. Supreme Court refused to hear an appeal two years later.

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DraftKings and FanDuel have argued a similar case for fantasy sports, and there's some merit to it. In their purest form, fantasy sports involve the creation of imaginary teams based on real players of a sport like football or basketball (or, these days, League of Legends). Participants create their teams with the existing statistics and game performance histories of a particular athlete in mind, and then use these to make prognostications and earn points based on those players' performances in real games over the course of a season. It theoretically involves extensive knowledge of the sports and players in question, meaning that it's far less likely that someone who thinks a wide receiver is some kind of truck will walk away with big bucks.

It's an important distinction, as a predominant focus on skill would mean fantasy sports require no government oversight. Sites like FanDuel, DraftKings, FanBall, and DraftDay have long been protected by the Unlawful Internet Gambling and Enforcement Act of 2006, which counts fantasy gaming as legal as long as it has "an outcome that reflects the relative knowledge of the participants, or their skill at physical reaction or physical manipulation (but not chance), and, in the case of a fantasy or simulation sports game, has an outcome that is determined predominantly by accumulated statistical results of sporting events."

The law even faced its day in court soon after in 2007's Humphrey v. Viacom, Inc. case from nearby New Jersey, in which legal action against three online fantasy sports sites was thwarted with the skill argument. Importantly, though, the brief noted that players filled out the statistics manually in the past, while the online variety of fantasy sports "allows for automatic statistic updates for players and teams and access to expert fantasy sports analysis."

"[Participants] are clearly placing bets on events outside their control of influence, specifically on the real game performance of professional athletes."

That's kind of the problem here. As The New York Times reports, much of the trouble began when DraftKings and FanDuel started making it easy to throw away money by shortening the time spans involved—thus the "daily" in the name of the variant of fantasy sports promoted by the two sites. Sometimes they'd pick a fantasy team for the customers, thus removing the need for any calculations and prior knowledge of the players and teams involved. On other occasions, they'd let customers place bets on whether basketball players would make their next shots. Worse, outrage spread in October when The New York Times reported allegations of "insider trading" after a DraftKings employee won $350,000 at rival FanDuel. (Outrage or no, both sites went on to pull in a record $43 million in entry fees the following weekend.)

Under such conditions, the fantasy sports business did much to undermine the skill argument that had propped it up. It's why Schneiderman said that participants "are clearly placing bets on events outside their control of influence, specifically on the real game performance of professional athletes." And now, the Times adds, the IRS and FBI are investigating daily fantasy sports to see if they affect problem gamblers, and Major League Baseball is threatening to cancel its exclusive marketing agreement with DraftKings.

For now, the issue remains in the air, even with so many high-profile institutions jumping ship. Yet the sites aren't without some friends in nearby states. Just last Thursday, Rhode Island Attorney General Peter F. Kilmartin defended the sites' legality and their focus on skill, while adding "there should be strict regulations imposed on the operation of these sites to address the issues we have experienced with gambling in Rhode Island, including infiltration of the criminal element, youth participation, and addiction issues."

For its part, FanDuel is maintaining its optimism. In a statement to The Boston Globe, the site said: "We are unaware of Citigroup's attempts to prohibit their New York based customers from playing fantasy sports but we are grateful that there are various payment options and companies that allow their customers to make their own decision about what fantasy sports they can play."

As for DraftKings? Well, as Wired reports, it's going to the UK on Friday to try its luck.

Or is it skill?