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Monday, June 20, 2016
 
New York's Fantasy Sports Legislation May Face Constitutional Roadblock

The months-long legislative battle to legalize daily fantasy sports in New York mercifully ended last week with the passage of NY Senate Bill 8153 nearly 12 hours after the New York Assembly passed an identical version of the DFS bill. But while the legislative battle may be over (with New York Governor Andrew Cuomo expected to sign the measure into law within a matter of days), that does not necessarily mean that DFS has cleared its final legal hurdle in New York. A constitutional showdown may be on the horizon.

Like many states (such as New Jersey and Delaware, for example), New York has a constitutional prohibition against gambling (and, hence, any expansion of gambling) unless the constitution is “amended” to permit such activity. This prohibition is set forth in Article I, Section 9 of the New York State Constitution, which provides in relevant part:

[E]xcept as hereinafter provided, no lottery or the sale of lottery tickets, pool-selling, bookmaking, or any other kind of gambling, except lotteries operated by the state . . ., except pari-mutuel betting on horse races . . . , and except casino
gambling at no more than seven facilities. . . shall hereafter be authorized or allowed within this state; and the legislature shall pass appropriate laws to prevent offenses against any of the provisions of this section.

By its express terms, Article I, Section 9 prohibits any lottery or the sale of lottery tickets, pool-sellingbookmaking, or any other kind of gambling, except lotteries operated by the state, pari-mutuel betting on horse races, and casino gambling at no more than seven facilities. The provisions of Article I, Section 9 reflect the public policy of the State of New York against commercialized gambling.  New York Racing Ass’n, Inc. v. Holbrook, 270 A.D.2d 31, 33-34, 704 N.Y.S.2d 52, 55 (1st Dep’t 2000) (citing International Hotels Corp. v. Golden, 18 A.D.2d 45, 49, 238 N.Y.S.2d 33, rev’s on other grounds, 15 N.Y.2d 9, 254 N.Y.S.2d 527 (1964) [stating that “[t]he unqualified command” of Article I, Section 9 “expresses a clear and deep-rooted policy against gambling.”])

As anyone who frequents a racetrack or buys a lottery ticket knows full well, there are exceptions to this supposedly “deep-rooted” public policy. But these exceptions—most notably, those for pari-mutuel wagering, the state lottery, and casino gambling limited to seven sites—were accomplished through a constitutional amendment rather than as a straight-up legislative enactment. 
In order to amend the New York Constitution, two successive sessions of the state legislature are required to approve the proposed amendment before it can be placed on the ballot. (N.Y. Const., Art. 19, § 1). The proposed amendment must then be passed at a referendum by a majority of New York voters to become a part of the state constitution. (Id.). This process takes a minimum of two years to accomplish, as two “separately-elected” legislatures (separated by a general election) must vote to place the constitutional amendment on the ballot before it is submitted to voters.  (Id.).  Moreover, the voter referendum (which can take place in a general or special election) would not take effect until January 1 of the year following the referendum.
Under this procedure, the earliest date that a constitutional amendment to legalize DFS could have taken effect is January 1, 2018, because it would have required (1) legislative approval during this year’s legislative session (which has since ended), (2) a second approval during next year’s legislative session, and, finally, (3) a majority of New York voters approving the measure in a referendum held in 2017.

Labels Are Not Controlling

While the current New York bills to legalize DFS attempt to skirt this framework by declaring that daily fantasy sports is a “game of skill,” and, therefore, not “gambling” under New York law, the labels selected by legislators would not be controlling. Rather, a court would look at what the law seeks to accomplish, rather than being straightjacketed by the particular labels selected by the legislative body. See, e.g.Meegan v. Brown, 16 N.Y.3d 395, 403 (2011) (“While examining the specific language of statutory provisions is part of our inquiry, we must also look to the underlying purpose and the statute's history as we are mindful that in “'the interpretation of statutes, the spirit and purpose of the act and the objects to be accomplished must be considered. The legislative intent is the great and controlling principle.’”] (internal citations omitted)People v. Ryan, 274 N.Y. 149, 152 (1937) (“In the interpretation of statutes, the spirit and purpose of the act and the objects to be accomplished must be considered. The legislative intent is the great and controlling principle. Literal meanings of words are not to be adhered to or suffered to defeat the general purpose and manifest policy intended to be promoted.”)

A recent example of this principle in play can be found in the litigation surrounding New Jersey’s efforts to legalize sports betting at the state’s racetracks and casinos. If you recall, New Jersey tried to navigate around the federal ban on state-sponsored sports betting by partially repealing its own state-law prohibitions criminalizing that activity, a legislative approach that was arguably endorsed in an earlier federal court ruling and in statements made by the four major professional sports leagues, the NCAA, and the U.S. Department of Justice (which have long been opposed to New Jersey’s efforts to legalize sports betting). Notwithstanding the fact that New Jersey claimed to be acting in reliance on these prior statements, the U.S. Court of Appeals for the Third Circuit concluded that the New Jersey Legislature’s partial “repeal” of its state law prohibitions against sports betting was tantamount to an “authorization” of same (and therefore a violation of the federal PASPA law).[1] The Court explained:

The presence of the word “repeal” does not prevent us from examining what the provision actually does, and the Legislature’s use of the term does not change the fact that the 2014 Law [partially repealing the state-law prohibitions on sports betting] does not change the fact that the 2014 Law selectively grants permission to certain entities to engage in sports gambling. . . . While artfully couched in terms of a repealer, the 2014 Law essentially provides that, notwithstanding any other prohibition by law, casinos and racetracks shall hereafter be permitted to have sports gambling. This is not a repeal; it is an authorization.

(Opinion, at p. 18). Although this August 25, 2015 panel opinion was vacated as a result of the Third Circuit subsequently deciding to rehear the appeal in an “en banc” setting (no decision has been reached as of the date of this post), the principle of statutory interpretation articulated by the Third Circuit is a common one, applicable anytime a state legislature tries to use artful drafting to describe a proposed law in a way that is belied by the practical effect or true intent of the law.

So too here, a New York court could disregard the “game of skill” label strategically placed into the DFS bills by state legislators and look instead at what the law seeks to accomplish. The DFS bill might not fare well under such an analysis since it may be seen as an attempt to nullify a core principle of the state constitution.

Factors That A Court May Consider

What factors might a court consider?  For one thing, the new law provides for oversight and regulation by a state gambling commission, and mandates that all fantasy sports operators (whether of the daily or season-long variety) “register” with the New York State Gaming Commission, which would then “review” the application and decide whether to approve to deny it. The new law also gives the state gaming commission the authority to promulgate regulations governing fantasy sports. It is worth noting that the state gaming commission oversees only gambling activities, such as the lottery, casino gambling, tribal gaming, horse racing and charitable gaming, and has never before been charged with regulating a “non-gambling” activity. Until now, that is. It seems somewhat incongruous for legislators to assert that DFS is not gambling when the new law provides for oversight by a gambling commission and seeks to amend the state’s “racing, pari-mutuel wagering and breeding law” to accomplish that objective.

But that’s not all. The new law also provides for many “gambling-style” regulations. Among other things, the DFS bill (1) establishes an age minimum for players, (2) limits users to a single account, (3) requires operators to enable players to exclude themselves from contests (so-called “self-exclusion”) and take reasonable steps to prevent such players from entering a contest from which they have excluded themselves, and (4) mandates that DFS operators provide information concerning assistance for “compulsive play” (euphemism alert!) reminiscent of compulsive gambling safeguards typically found in other state gambling laws.  To my knowledge, there is no other “non-gambling” regime in the United States (and certainly not in New York) that has a similar regulatory structure.

A court might also consider statements made by the legislators themselves. One, in particular, comes to mind. Remember when state lawmakers rejected efforts by casino industry lobbyists to link daily fantasy sports contests with the state’s “brick-and-mortar” gaming venues out of concern that it would be viewed as “gambling” activity, with Senator Bonacic pointedly stating that “it could be a violation of betting on sports activity and it would create serious problems.” Does that problem (or, rather, perception) go away based simply on the identity of the operator? After all, the character of the fantasy sports contests would remain the same no matter who administers them. If it’s a “game of skill” when operated by DraftKings and FanDuel, it is no less skill-based when offered by a land-based racetrack or casino. Senator Bonacic’s comments about the “gambling” perception created by the involvement of brick-and-mortar casinos in DFS would seem to undercut that characterization.

Earlier statements by New York Assemblyman Dean Murray (one of the chief proponents of the DFS bill) also evince a belief that an amendment to the New York Constitution is required before the state could legalize daily fantasy sports. On December 2, 2015, Assemblyman Murray introduced a bill that would amend the New York Constitution to allow the state to authorize (as his bill coined it) “fantasy sports wagering.” The constitutional amendment bill (A08587) sought to add the following language to Article I, Section 9 of the New York State Constitution:

. . . and except for fantasy sports wagering on professional sports which may be authorized by the legislature, in a manner prescribed by the legislature for offering and conducting gaming and wagering, provided, however, that such authorizations shall be preceded by the elimination of the federal an on professional sports wagering. . . . 

Notably, Assemblyman Murray’s earlier bill contemplated two critical steps before DFS could be legalized in New York: the elimination of the federal ban on state-sponsored sports betting (in other words, the repeal or striking down of PASPA), followed by a state constitutional amendment that (if approved by New York voters) that would “authorize” the New York Legislature to legalize daily fantasy sports “wagering.” This mandated process—championed only a few months ago by Assemblyman Murray--is a quantum leap from the final approved bill, which bypasses the constitutional amendment process and ignores PASPA altogether. 

In a press release accompanying that earlier bill, Assemblyman Murray explained that “if the courts rule that [the DFS] sites constitute gambling, this measure serves as the first step in a constitutional amendment process in granting fantasy sports sites like FanDuel and DraftKings exemptions.”[2] Murray’s earlier bill was proposed against the backdrop of a New York State Supreme Court decision barring FanDuel and DraftKings from offering paid contests to New York State consumers. That decision, which is now on appeal, preliminarily concluded that DFS is gambling in contravention of the New York Penal Law and Article I, Section 9 of the New York State Constitution. A decision by the New York Appellate Division, First Department, is expected later this year. If the First Department affirms the lower court decision, a high likelihood in my view, then two courts will have ruled—at least preliminarily—that DFS constitutes gambling under the New York Penal Law and state constitution.   

Regardless, Assemblyman Murray’s earlier bill signaled his belief—only a few months ago—that a constitutional amendment (preceded by a voter referendum) would be required to legalize daily fantasy sports, particularly if the courts ruled that DFS is gambling. And so far the only court to speak on that issue has ruled—at least preliminarily—that DFS is gambling, with an appellate ruling expected later this year. 

But, perhaps, the most problematic factor for proponents of the DFS bill is the legal position advanced by the New York Attorney General in his still-pending lawsuit against FanDuel and DraftKings. In a series of court filings, the New York AG has consistently and unwaveringly maintained that daily fantasy sports is a form of gambling, and violates both the New York Penal Law and the state constitutional ban against gambling, bookmaking and pool-selling. He made these statements in the cease-and-desist notices[3] sent to DraftKings and FanDuel, in the original and amended complaints filed in the New York court action, in the briefing on the motion for a preliminary injunction,[4] and, finally, in opposing FanDuel’s and DraftKing’s request for a stay of the injunction pending the outcome of the appeal.

To be sure, in virtually every court filing made by Mr. Schneiderman in the New York court case, he unequivocally characterized DFS as “gambling” under state law and in contravention of Article I, Section 9 of the New York Constitution. Notably, AG Schneiderman did not retract or withdraw those statements as part of his office’s recent settlement with DraftKings and FanDuel. Do these prior statements lose any and all import simply because a state legislative body legalized DFS several months later? That may ultimately be for a New York court to decide. A court evaluating whether the DFS bill violates Article I, Section 9 of the New York State Constitution would likely accord significant weight to AG Schneiderman’s prior characterization of DFS as gambling, particularly since he is the highest-ranking law enforcement official in New York State and a New York state judge has already agreed with him.

Speaking of which, Justice Manuel Mendez’s written decision in early December would be another factor for a court to consider (particularly, if it is upheld on appeal). In his December 11, 2015 decision preliminarily enjoining FanDuel and DraftKings from offering paid DFS contests to New York consumers (which was later stayed by an appellate court pending the outcome of the appeal), Justice Mendez concluded that the New York Attorney General “has a greater likelihood of success on the merits [of his claim that the paid DFS contests offered by FanDuel and DraftKings are prohibited] under New York State Constitution Article I, § 9, and the definitions of gambling and ‘contest of chance’ as currently stated in [New York] Penal Law § 225.00(1)(2).” As SI’s Michael McCann and Will Green observed in their analysis of the ruling, Justice Mendez placed significance in the fact that Article I, Section 9 [of the Constitution] reflects—in Mendez’s words—“the public policy of the State of New York against commercialized gambling.” (Decision, at p. 4)

Who Has “Standing” to Challenge the DFS Law on Constitutional Grounds?

Since New York’s Attorney General has already declared that daily fantasy sports is illegal gambling and violates the state constitution, and a New York State trial court has preliminarily sided with the Attorney General’s interpretation, a constitutional challenge to a New York DFS law could succeed. The bigger question, however, is who exactly would bring such a lawsuit? There are several categories of potential plaintiffs, as reflected by the vigorous and well-coordinated (albeit, unsuccessful) opposition to the New York DFS bill. Opponents to the bill included, among others, the New York Gaming Association (which represents racetracks with video lottery terminal operations as well as other casino companies from upstate New York), the New York Conservative Party, the New York Independence Party, and the Coalition Against Gambling in New York (which generally opposes any expansion of legalized gambling in New York), as well as Roger Goodell’s first cousin (a New York State Assemblyman) and a host of other lawmakers, including Assemblyman Thomas Abinanti (D-Greenburgh), who raised the constitutional issue during the vigorous floor debate preceding the passage of the bill.[5]

A lawsuit backed or financed by New York’s casino industry, a vocal opponent of the DFS bill, seems like an obvious starting point. Lobbyists for New York’s casino industry have argued that the legalization of DFS—which they contend is an expansion of online gambling—will “cannibalize” their existing customer base and cause licensed “brick-and-mortar” gaming facilities to lose significant revenues. 

Another potential category of challengers, ironically, would be fantasy sports operators that offer only longer-duration contests (such as season-long fantasy leagues). Although earlier versions of the DFS bill had contained an exemption for season-long operators, the approved version (purportedly at the behest of New York Governor Andrew Cuomo) subjects such operators to the same tax rate (15%) on in-state revenues (after payouts to customers), registration fees, mandatory consumer protections, and regulatory compliance that apply to daily fantasy sports operators. This may be seen as objectionable to season-long operators, who would argue that their contests were previously declared “legal” by the New York Attorney General in the court case against FanDuel and DraftKings, thereby obviating the need for a new law specifically authorizing season-long fantasy sports contests. Thus, as a result of the new legislation, season-long operators (many of which are smaller companies than FanDuel and DraftKings) would be incurring a substantial increased cost via tax payments, registration fees and regulatory compliance that would not otherwise exist—or even be needed—in the absence of new legislation.

In addition, New York law recognizes broad ‘taxpayer’ standing to challenge state legislative enactments as contrary to New York’s constitution. In Boryszewski v. Brydges, 37 N.Y.2d 361(1975), the New York Court of Appeal liberalized taxpayer standing, holding that “[a] taxpayer has standing to challenge enactments of our State Legislature as contrary to the mandates of our State Constitution.” Id. at 362. That avenue exists to permit “‘taxpayers to challenge important governmental actions, despite such parties being otherwise insufficiently interested for [traditional] standing purposes, when ‘the failure to accord such standing would be in effect to erect an impenetrable barrier to any judicial scrutiny of legislative action.’” Matter of Colella v. Board of Assessors of County of Nassau, 95 N.Y. 401, 410, 718 N.Y.S.2d 268 (2000) (quoting Boryszewski, 37 N.Y.2d at 364).

The enactment of a statewide DFS law—affecting potentially hundreds of thousands of players (although the industry claims it has more than three million customers in New York)—would seem to rise to the level of an “important government action” sufficient to allow taxpayer standing to challenge the legislation on constitutional grounds, particularly where the proposed law would involve the expenditure of state funds and state regulatory personnel to regulate the fantasy sports industry in New York. To deny taxpayer standing under these circumstances might cause an important governmental issue to be effectively insulated from judicial review, something that the New York Court of Appeal cautioned against in Boryszewski. In such cases, where the denial of standing would pose an “impenetrable barrier” to judicial scrutiny of legislative action, the New York courts, to quote the state’s highest court, have a duty to “open rather than close the door to the courthouse.” Saratoga Cty. Chamber of Commerce, Inc. v. Pataki, 100 N.Y.2d 801, 814-815 (2003). 

Under New York’s liberalized taxpayer standing framework, a taxpayer-citizen (e.g., basically any New York resident) could potentially bring a lawsuit challenging the New York DFS law as contrary to Article I, Section 9 of the New York State Constitution (even if they are not personally aggrieved in any tangible or economic way), although their legal standing would surely be challenged by the state.

But Can’t Legislators Decide What Is And What Isn’t “Gambling”?

In response to any legal challenge on this basis, proponents of the New York DFS law would likely counter that it is the prerogative of the state legislature to determine what is and what it not “gambling” under New York law. Along those lines, New York Assemblyman J. Gary Pretlow, who sponsored one of the two DFS bills, told lawmakers during last Friday’s floor vote that the state legislature has the authority to define what activities are legal in New York as defined by the state constitution, humorously remarking to one yellow-tie-wearing opponent of the DFS bill that “[w]e as a legislature can today say that wearing a yellow tie is illegal.” 

But while the legislature can enact “appropriate laws” in furtherance of the constitutional prohibition against gambling as a valid exercise of its police power, see Harris v. Econ. Opportunity Comm’n of Nassau Cty., 171 A.D.2d 223, 227, 575 N.Y.S.2d 672, 674-75 (2d Dep’t 1991), holding modified by Dalton v. Pataki, 11 A.D.2d 62, 780 N.Y.S.2d 47 (2d Dep’t 2004), it is another thing entirely to legalize a game or contest that has been determined by New York’s highest-ranking law enforcement official (and preliminary by one lower court) to constitute illegal gambling under New York’s Penal Law,  thereby expanding legal gambling in New York State without a constitutional amendment. In other words, while the legislature can certainly expand the definition of “gambling” to bring a game, device or contest within the statutory prohibition, that does not, a fortiori, mean that the legislature is also free to expand legal gambling outside of the mandatory constitutional amendment process.

Despite Assemblyman Pretlow’s colorful yellow-tie analogy, the state legislature did not change the definition of “gambling” under New York Penal Law 225.00 when it approved the two DFS bills. This is a critical point. While the legislature can certainly declare that “wearing a yellow tie” is illegal, the legislature in this instance did not criminalize an activity; it approved it., a particularly risky endeavor when it comes to gambling (which, subject to certain exceptions, is banned under the state constitution). For example, the legislature could have changed the statutory definition of “gambling” under Section 225.00 to require a “predominance” of luck or chance, which is the lower threshold used in many other states. Instead, the legislature kept the existing statutory definition of gambling (e.g., the “material degree/future contingent event” test) intact and simply removed “interactive fantasy sports contests” from its reach, a decision that legislators may soon come to regret if a lawsuit challenging the new law on constitutional grounds is brought. 

Final Thoughts and a Look Ahead

By legalizing DFS during the waning hours of the 2016 legislative session, did state lawmakers fumble the snap? If a constitutional amendment was required, opponents of the DFS bill (such as New York’s casino/racino industry, anti-gambling forces, or even ordinary taxpayer-citizens) could seize upon that failure and challenge the DFS law in court. Any such challenge would likely be joined with a request for a preliminary injunction, which, if granted, could sideline daily fantasy sports in New York for the foreseeable future while the court battle plays out. 

In my view, the New York Legislature chose the riskiest of three options. The safest play would have been to authorize a constitutional amendment (a process that could have taken up to two years longer) or change the New York penal law definition of “gambling” in a manner that would have definitionally excluded fantasy sports contests through a lowering of the statutory threshold for gambling. For example, under the predominant factor test employed in many other jurisdictions (such as Massachusetts), fantasy sports contests (whether of the daily or season-long variety) would probably not be considered gambling since it is generally recognized that success at such contests requires more skill than luck or chance. Having chosen the most expedient route—and one which is constitutionally risky—the Legislature may have opened the door to a potential legal challenge by one or more adversely affected parties or even by a taxpayer-citizen (or several of them).

If such a challenge were to emerge (and succeed), it could delay the effectiveness of the DFS law by several years, since an amendment to the state constitution via a voter referendum preceded by two consecutive sessions of legislative approval (a multi-year process) would then be required to legalize DFS. Were that scenario to play out in this fashion, legislators (and DFS lobbyists) might ultimately come to regret choosing the most expedient, albeit risky, path to legalization over fidelity and adherence to the state constitution.

-- Daniel Wallach




[1]  A more extreme example of such wordsmithing, as recalled by Yancey Roy (Newsday’s Albany Bureau Chief), is when Louisiana once excluded chickens from the definition of “animal” to allow cockfighting.
[2]   Along the same lines, New York Assemblyman J. Gary Pretlow  (the sponsor of the Assembly’s DFS bill which passed on Friday night) told GamblingCompliance (an online publication covering the global gaming industry) back in December 2015 that he would be willing to sponsor a constitutional amendment bill to legalize DFS.
[3]   In his original cease-and-desist notices sent to DraftKings and FanDuel on November 10, 2015, Attorney General Schneiderman wrote that “[t]he illegality of DFS is clear from any reasonable interpretation of our laws, beginning with the New York State Constitution,” (Notice, at p. 2). Earlier in the same notices, he stated that his office had “conclude[d]” that DraftKing’s and FanDuel’s operations “constitute illegal gambling under New York law because their customers “are clearly placing bets on events outside of their control or influence, specifically on the real-game performance of professional athletes. Further, each [DraftKings and FanDuel] wager represents a wager on a “contest of chance” where winning or losing depends on numerous elements of chance to a ‘material degree.’” (Id. at p. 1)
[4]  In his memorandum of law in support of the motion for a preliminary injunction (which was later granted by New York State Supreme Court Justice Manuel Mendez), Mr. Schneiderman wrote that DFS contests “fit squarely” within the definition of “gambling” under the New York Penal Law and the New York State Constitution, and “is nothing more than a rebranding of sports betting. It is plainly illegal.” He also opined in the same document that FanDuel and DraftKings “run afoul of [the New York Constitutional] prohibition [against] bookmaking, which is defined as the “acceptance of bets on a professional basis . . . upon the result of any trial or contest of skill, speed or power of endurance of man or beast.”  He described this as the “precise business” of both DFS operators and thus concluded that FanDuel and DraftKings are “in direct violation” of the state constitution. 
[5] During the floor debate, Assemblyman Abinanti insisted that “[t]hose who want to make fantasy sports legal in New York should be presenting to us a constitutional amendment.” He said that “[y]ou’ve got to tie yourself into a pretzel to somehow say this is not gambling. Just because some skill is involved doesn’t remove it from the category of gambling.”





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