New York Court of Appeals Rules Daily Fantasy Sports Are Not Gambling

On March 22, 2022, the New York Court of Appeals (the “Court”) issued a decision that brought to a close the long-running litigation contesting the legality of Interactive Fantasy Sports (often referred to as “Daily Fantasy Sports” (DFS)) contests in New York. In a 4-3 decision, Chief Judge Janet DiFiore found that DFS contests are not gambling and therefore the New York legislature had the authority under the New York State Constitution to regulate DFS contests.

Key Takeaways

• New York’s highest court, the Court of Appeals, found that Daily Fantasy Sports contests are not gambling under New York law.
• The Court’s decision resolved a long-running litigation that had been pending since 2016.
• The Court’s decision removes uncertainty surrounding Daily Fantasy Sports contests and, coupled with the recent expansion of sports betting in New York, may both create additional opportunities for existing operators and lower regulatory barriers for companies seeking to enter the New York market.

DFS contests consist of competitions of virtual teams, selected by DFS players and composed of real life athletes competing in real-life competitions. DFS participants select athletes for their teams based on their evaluation of how each athlete will perform as measured by pre-determined statistical metrics (such as, for example, touchdowns scored or runs batted in). Based on their team’s overall performances, the DFS participants accumulate “fantasy points,” which, in turn, determine the winner of the DFS contest. DFS operators offer contests for a variety of professional sports, including team sports such as football, baseball, basketball, hockey and individual sports such as golf and racing.

The fate of DFS in New York has been uncertain and providers have faced regulatory uncertainty since 2015, when the Office of the New York State Attorney General (“NYAG”) brought suit against two DFS providers alleging that DFS contests violated New York State’s constitutional prohibition on gambling. While that litigation was ultimately discontinued, the state legislature took up the issue, holding hearings on DFS. In 2016, the legislature passed Article 14 of the Racing, Pari-Mutuel Wagering and Breeding Law (“Article 14”), authorizing DFS contests in New York as skill-based competitions. Litigation commenced shortly thereafter, with plaintiffs seeking to enjoin the enforcement of Article 14 on the grounds that the legislature could not authorize any conduct – including DFS contests – that violated the state constitution’s prohibition on gambling. Both the trial court and intermediate appellate court agreed, finding that the legislature had exceeded its authority by passing Article 14 and finding that DFS contests were, in fact, gambling.

The Court disagreed. As a threshold question, the Court addressed the issue of what constitutes gambling, noting that New York law has consistently defined gambling as contests where chance predominated over the “skill and knowledge of the participants” in determining the outcome. Noting that there is a strong presumption that the legislative enactments are constitutional, the Court considered the lengthy history of gambling regulation in New York and the particular legislative history surrounding the passage of Article 14. Judge DiFiore determined that the factual record before it, including information considered by the legislature, supported the conclusion that DFS contests are predominantly skill-based competitions because the participants exercise their relevant knowledge, judgment, and strategy in selecting their teams. The Court noted that while chance played a role in the outcome of DFS contests, it was not the dominant factor. (“Studies showed that skilled players achieve significantly more success in [DFS] contests and that rosters of skilled human players were more successful in [DFS] contests than randomly generated lineups over 80% of the time.”) The Court further found that the standard structure of DFS contests – which pay out fixed prizes and have pre-determined entry fees – does not bring such contests within the universe of unlawful “betting and wagering” and are instead akin to “permissible contests for prizes,” which have been legal for a long time under New York law.

The Court’s decision will not result in an immediate sea change in New York, because DFS operators have continued their contests in the state during the pendency of the litigation. Nonetheless, the Court has removed the lingering regulatory uncertainty for DFS operators. In light of the decision, when coupled with the recent commencement of mobile sports betting in the state, existing operators may now be incentivized to expand operations in New York. Further, lower regulatory barriers to entry may lead new operators to enter the New York market for the first time. Finally, there will almost certainly be implications for other activities – such as online poker or other games that straddle the line of skill versus chance – as both the legislature and New York courts consider those topics moving forward.