The problem with New York’s move against fantasy sports

Daily fantasy sports sites FanDuel and DraftKings have always maintained that the services they offer don’t count as gambling because they were contests of skill. On Tuesday, New York Attorney General Eric Schneiderman cast the most important vote yet against this argument. In letters to both companies, Schneiderman defined daily fantasy sports as illegal gambling under New York State law, saying that “winning or losing depends on numerous elements of chance to a ‘material degree.’” If public officials in other states agree, it could be the end of the daily fantasy sports industry in the United States.

FanDuel and DraftKings have always cited a 2006 federal law to distinguish themselves from illegal gambling. But that law explicitly defers to state definitions of what counts as betting. In most cases, states determine the legal status of contests with cash prizes based on whether an activity is based on skill (like playing in bowling tournament) or chance (like pulling the arm on a slot machine.) Many activities are a mix of both, of course, and states have different thresholds for how much chance is acceptable before something becomes gambling. For Schneiderman, season-long fantasy sports are tolerable in part because they involve long-term strategy over several months. Daily fantasy games can turn on a single play.

New York’s standard is in the middle of the pack, according to Daniel Wallach, a sports and gaming attorney with the firm Becker & Poliakoff. Wallach says about 10 states have said that games involving any chance count as gambling, while about  20 states say that chance must be the "predominant factor" in the outcome.  

Given New York’s influence, states with similar thresholds may follow its lead. Still, the precedent wouldn’t be as bad for the future of fantasy sports companies as an unfavorable outcome in Massachusetts, where the district attorney has also been examining the legality of daily fantasy sports under that state’s predominant factor test.

While the legality of daily fantasy sports turns on the skill-versus-chance question, the cases made both by advocates and critics have a fundamental contradiction. At the same time that Schneiderman argues that daily fantasy sports resembles the lottery, he complains that a small number of top players win almost all the time. He even compares the games to poker, which many academics see as heavily skill-based. Considering that Schneiderman’s letter doesn’t weigh in on allegations of cheating, it stands to reason that some players win all the time because they’re just better than everyone else.

FanDuel and DraftKings, on the other hand, describe daily fantasy as a skill-based activity when discussing legal matters. But they push back against the idea that the success of elite players make it less likely for less sophisticated users to win. They see the presence of sophisticated sharks as a potential public relations disaster. According to their commercials, any dude who can stop shaving for a few days and put on a hoodie is standing on the precipice of life-changing victory every Sunday.

Schneiderman’s letter mentions the ads, which promote daily fantasy sports as something of a lottery. He also raises concerns that daily fantasy sports will lead to the same kinds of public health and economic problems that illegal gambling have caused. Potential problem gamblers are likely to be lured in by “the quick rate of play, the large jackpots, and the false perception that it is eminently winnable,” he wrote. “Ultimately, it is these types of harms that our Constitution and gambling laws were intended to prevent in New York.”

None of these points directly address the legal standard of chance versus skill. Instead, they seem to hint at another standard sometimes used to determine the legality of contest with cash prizes: the “gambling instinct” test. Basically, this test says that if something feels like gambling, it should be banned. If that's the way that public officials start looking at daily fantasy, DraftKings and FanDuel are going to have some big trouble ahead.