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Tallying States' Activity on Fantasy Sports

New York Attorney General Eric Schneiderman had declared online fantasy sports a form of illegal gambling, ordering industry giants DraftKings and FanDuel to shut down operations in a state that generated about 10% of the companies' revenues. The companies countered by suing. Then, faced with enormous legal costs, the companies chose a second course of action. They would pursue state legislation to legitimize their operations while offering consumer protection language ' and a cut in revenues ' in return.


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Somewhere in New York today, a football fan will make his final picks on a roster of professional players, hoping the selections and the results from this weekend’s National Football League games will deliver a payout from DraftKings, FanDuel or one of a myriad of other daily fantasy sports sites.

The fact that he ‘ about two-thirds of fantasy sports players are men, according to statistics from the Fantasy Sports Trade Association (FSTA) ‘ and 3.5 million other New Yorkers are plunking down anywhere between 25 cents and $10,000 to test their lineup-picking prowess was unthinkable a few months ago. New York Attorney General Eric Schneiderman had just declared online fantasy sports a form of illegal gambling, ordering industry giants DraftKings and FanDuel to shut down operations in a state that generated about 10% of the companies’ revenues. The companies countered by suing.’

DraftKings and FanDuel founders insisted they stood on solid legal ground ‘ that the games they offered were ones of skill, not chance. Still, faced with enormous legal costs generated by an army of litigators and an uncertain outcome, the companies chose a second course of action. They would pursue state legislation to legitimize their operations while offering consumer protection language ‘ and a cut in revenues ‘ in return.

Going on Offense

The still-developing strategy worked in Kansas under the guidance of Jeremy Kudon, the Orrick, Herrington & Sutcliffe partner retained by DraftKings and FanDuel. See, “Kansas Legislators Approve Bill Legalizing Fantasy Sports,” Chicago Tribune, May 7, 2015. With the industry’s explosive growth ‘ and saturation of TV airtime with ads suggesting any backyard Joe could win big ‘ prosecutors, gaming commissions and other regulators had started raising questions. The rival companies agreed to work together.

They went on offense ‘ to change state laws instead of challenging existing ones in court. “Can you imagine if we had litigations in anywhere from 10 to 20 states? It would be endless,” says Kudon, founder of Orrick’s public policy group. “State-by-state legislation may not be optimal, but in my experience ‘ and I was a litigator for many years ‘ it’s a hell of a lot better than litigation.”

In New York, the strategy worked. The companies agreed in March to stop offering paid contests in the state while lawmakers worked on a bill. They hired a cadre of local lobbyists, flooded offices with pleas from players, brought in ex-professional football players Vinny Testaverde and Jim Kelly to hob-knob with legislators and used some deft political maneuvering to avoid opposition from established gaming interests. New York Gov. Andrew Cuomo signed legislation in August to allow millions of Empire State players back into online fantasy games by the start of the 2016-17 football season. See, “Governor Cuomo Signs Legislation to Legalize and Regulate Fantasy Sports in New York State.”‘

That political success is now the model for an industry campaign to secure daily fantasy sports legislation in almost every other state in the country. Thirty-six related bills were introduced in the most recent legislative sessions, according to Kudon’s tally. Fifteen moved out of two or more committees. Eight eventually passed; four more were still pending in active legislatures. “Even if we stopped today, it was a fantastic beginning,” Kudon says. “With that said, we still have our work cut out for us next year.”

Incomplete Pass

Some of the industry’s biggest markets remain in legal limbo. Fantasy sports legislation was introduced in California in late 2015, and it sailed out of the state Assembly this year. But the bill got bogged down in the Senate amid a contentious, almost decade-long fight over Internet poker regulations. See, “Clock Running on Fantasy Sports Bill in Calif.,” The Recorder. Similar legislation stalled in Florida, too, as lawmakers grappled with an Indian gaming compact and other issues central to established gaming interests. DraftKings and FanDuel still operate in the two states, though with less legal clarity than a state such as New York.

Daily fantasy sports sites remain off limits in a handful of states, either because a law expressly forbids operations there or a state’s attorney general issue has issued a negative opinion about the games’ legality. Among those states are Washington, Nevada, Hawaii and Iowa.

And then there’s the potentially big-player prize of Texas. The attorney general there, Ken Paxton, concluded in January that a Texas court would likely find daily fantasy sports to be illegal gambling. See, “Attorney General Statement on Daily Fantasy Sports Betting Just the Opening Kick to a Long, Complicated Contest in Texas,” Texas Lawyer (Jan. 20, 2016). FanDuel agreed to stop paid contests in the state. See, “Ken Paxton Announces Settlement with FanDuel Sports Site,” American-Statesman (March 4, 2016). DraftKings sued Paxton in state court and continues to operate in the Lone Star state. See, “Texas Attorney General Paxton Challenges DraftKings’s Lawsuit and Venue,” (May 2, 2016). The Texas Legislature does not convene in regular session in even-numbered years, so the companies could not immediately pursue favorable legislation. Texas Rep. Richard Pe’a Raymond (D-Laredo), on Sept. 8 announced plans to sponsor a bill favorable to the industry. See, “Lawmaker Pledges Bill to Protect Texas Fantasy Sports Betting,” The Texas Tribune (Sept. 8, 2016).

The complexities of operating in this multistate theater would seem mind-boggling. In some states, the legislatures only convene for several months in any given year. Some states have receptive attorneys general, while others don’t. Other states have significant cultural opposition to anything resembling gambling while others have powerful gaming interests wary of the upstart, well-invested daily fantasy sports companies. See, “Draft Kings Partners with Revolution Growth, Finds New Investors,” (Sept. 1, 2016).

Special Teams

Jeremy Kudon shrugs off any amazement at an operation that includes a 12- to 15-member legal team from multiple practice areas, endless charts and lists of legislative protocols and, at one time, more than 100 locally based lobbyists. He compares it to multidistrict litigation.

DraftKings and FanDuel, and their industry group, the FSTA, have shown a willingness to spend freely on lobbyists and consultants who know the legislative players ‘ and the attorneys general. They’ve made campaign contributions and, occasionally, they’ve played hardball.

In California, the two companies paid a combined $343,500 to four Sacramento firms to lobby the governor, the attorney general and lawmakers between Jan. 1, 2015, and June 30. See, “Fantasy Sports Sites Add Lobbying Muscle in Sacramento,” The Recorder (Jan. 8, 2016). They also contributed $40,000 to various legislators’ campaigns and ballot measure committees. The industry’s trade association also retained a consultant, who worked with the media, for an undisclosed amount.

And then there was Marc Levine. The two-term assemblyman from San Rafael in the northern San Francisco Bay Area was the only lawmaker to publicly raise questions about the legality of fantasy sports operations in the state, accusing DraftKings and FanDuel of running gambling websites in violation of California law. In November 2015, he wrote a letter to Attorney General Kamala Harris, asking her to follow Eric Schneiderman’s lead in New York and move to shut down the sites. “Even if the games are viewed as games of skill, they should still specifically be regulated under California law before the games can operate in California,” Levine wrote then.’

The companies’ reaction was swift. They blasted emails critical of Levine to their California players and also created a website that automatically generated pro-fantasy sports letters to lawmakers based on visitors’ addresses. See, “FanDuel Lashes Out at Calif. Lawmaker Who Sought Shut Down,” The Recorder (Nov. 13, 2015). The FSTA got involved, spending $61,000 on radio ads that targeted Levine and promoted the industry.

Levine says he got a lot more “pats on the back” from constituents than criticism. The assemblyman is running for a third term this November and is expected to win re-election handily.

Levine proved to be the only “no” against fantasy sports legislation in a January vote in the Assembly. Harris, now a U.S. Senate candidate, never responded to Levine’s letter and her office has declined to comment on whether agency lawyers have reviewed the legality of fantasy games under California law.

Such advocacy work in California and elsewhere “wasn’t cheap,” Peter Schoenke, chairman of the FSTA, says. “But at the same time it was pretty important.”

Investors want clarity and daily fantasy sports advocates are finding a mostly receptive audience in state legislatures where lawmakers and their constituents are already playing. “There’s always a debate about what’s the best tactic, but in the end it’s just best to clarify the law,” Schoenke says. “It’s hard to do business when everything is called into question.”

In New York, Schneiderman is still pursuing false-advertising and consumer-fraud claims against DraftKings and FanDuel for “past misconduct.” See, “Statement From A.G. Schneiderman On Daily Fantasy Sports Legislation Signed Into Law By Governor Cuomo Today,” (Aug. 3, 2016). But the companies have obtained temporary licenses to operate in the state, just in time for football season. The state will receive an estimated $6 million annually from a new tax on fantasy sports sites’ gross revenues.

The new law “strikes the right balances that allows this activity to continue with oversight from state regulators, new consumer protections and more funding for education,” Gov. Cuomo said in a statement when he signed the legislation in August. An onslaught of television ads has returned, too. “Welcome to the big time,” says one DraftKings spot.

Cheryl Miller writes for The Recorder, the San Francisco-based ALM sibling of Entertainment Law & Finance.

The views expressed in the article are those of the authors and not necessarily the views of their clients or other attorneys in their firm.

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