Fantasy Sports Faces Reality of NY Court Ruling They Are Illegal Gambling

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A New York law permitting interactive fantasy sports (IFS) is unconstitutional, an appellate court in the state has ruled, dealing a blow to the multimillion-dollar industry.

The state legislature amended the Racing, Pari-Mutuel Wagering and Breeding Law in August 2016 to add a provision declaring that IFS contests do not constitute gambling. The amended law also provided consumer safeguards, minimum standards, and the registration, regulation and taxation of IFS providers.

A group of New York residents who are or have been affected by the negative impacts of gambling filed a lawsuit seeking a declaratory judgment that the amended statute violates the state constitution.

On cross motions for summary judgment, the trial court sided with the plaintiffs, holding that the provision—to the extent it authorizes and regulates IFS—was void in violation of the New York Constitution. The state appealed and the appellate panel affirmed.

Exceptions to the constitutional prohibition on gambling “must be strictly construed to ensure that they do not consume the rule itself,” the court noted. “IFS contests are not excluded from the constitutional meaning of ‘gambling’ merely because the legislature now says that it is so.”

It was undisputed that IFS contestants pay an entry fee (something of value) in hopes of receiving a prize (also something of value) for performing well in an IFS contest. Therefore, such contests constitute gambling under the New York Penal Law definition of the term if their outcomes depend to “a material degree upon an element of chance, notwithstanding that skill of the contestants may also be a factor therein.”

IFS contests do require some measure of skill, the court acknowledged, with research demonstrating that lineups chosen by actual contestants beat those chosen at random, and that contestants improve their performance over time.

However, even the most skillful IFS contestants “cannot control how the athletes on their IFS teams will perform in the real-world sporting events,” the court wrote, with players impacted by injury or illness, weather conditions or poor officiating.

“In other words, the skill level of an IFS contestant cannot eliminate or outweigh the material role of chance in IFS contests,” the court concluded. “Thus, we agree with the [trial court’s] interpretation and finding that plaintiffs met their burden to demonstrate beyond a reasonable doubt that Racing, Pari-Mutuel Wagering and Breeding Law article 14, to the extent that it authorizes or regulates IFS, is unconstitutional because it violates the prohibition against gambling” in the New York Constitution.

One member of the panel dissented, writing that the legislature acted rationally in adopting the provision and the opinions offered by the plaintiff—while “both interesting and heartfelt”—were insufficient to shift the burden to the state to prove the constitutionality of the law.

To read the opinion in White v. Cuomo, click here.

Why it matters: While the New York Constitution states that “no lottery or the sale of lottery tickets, pool-selling, book-making, or any other kind of gambling…shall hereafter be authorized or allowed within this state,” it does not include a definition of “gambling.” Regulators and courts instead look to the New York Penal Law Section 225.00(2) definition, which states that “[a] person engages in gambling when he [or she] stakes or risks something of value upon the outcome of a contest of chance or a future contingent event not under his [or her] control or influence, upon an agreement or understanding that he [or she] will receive something of value in the event of a certain outcome.” There has been an ongoing debate as to whether IFS—which involves an arguably skill-based element of assembling a lineup of a fantasy team (namely, a group of players who do not actually play together) to win contests based on the performance of that team’s players—qualifies as such a “contest of chance.”

The court’s holding in White leaves the status regarding the legality of operating and participating in IFS in the state of New York uncertain. Ironically, while IFS for the time being is illegal in New York, more traditional in-person sports betting on the outcome of actual sporting events is currently legal and operational at certain New York casinos (although mobile and online sports wagering is still not legal in New York). In the short term, the state is likely to appeal the decision to the New York Court of Appeals, New York’s highest court, which would automatically stay the Appellate Division’s order, meaning it will be business as usual for IFS operators in New York. However, in the event that the state decides not to pursue an appeal (or the appeal is lost), companies offering fantasy games in New York will need to quickly re-evaluate how to approach their operations in New York, and may consider alternatives such as pursuing a lobbying effort around supporting a constitutional amendment to formally recognize legalized IFS.

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