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Thursday, January 12, 2017
 
The Battle of New York (DFS) is Back On!

The recent enactment of New York's Interactive Fantasy Sports Law supposedly settled the long-simmering debate over the legality of daily fantasy sports ("DFS") in New York. But a new lawsuit could potentially reignite that debate. In October, a quartet of New York residents--backed by the anti-gambling group aptly named "Stop Predatory Gambling"--filed a lawsuit in Albany County Supreme Court challenging the New York DFS Law on constitutional grounds. The thrust of the lawsuit is that the New York Legislature and Governor Andrew Cuomo impermissibly expanded gambling in New York in violation of Article I, Section 9 of the New York State Constitution. In short, Article I, Section 9 prohibits all forms of gambling unless specifically exempted through a constitutional amendment. It reflects New York's longstanding (but apparently elastic) public policy against gambling. In order to amend the New York Constitution to allow any new form of gambling, two successive sessions of state legislative approval are required, followed by a voter referendum. In short, the plaintiffs asserted that the Legislature exceeded its powers in passing the DFS law without a voter referendum, which is a time-consuming process that would take at least two years to accomplish. The lawsuit seeks to invalidate the new DFS law on that basis, and thereby force the issue to a voter referendum. The downside risk to the fantasy sports industry is that if the plaintiffs prevail (and there is a decent chance that they will), it could shelve fantasy sports in New York until at least 2019, if not longer.

Although filed in October to great fanfare (and a press conference by the lawyers!), the lawsuit had been dormant for the past three months while the New York Attorney General's Office (which ironically is defending the state here) requested and received several extensions of time to respond to the complaint. On January 11th, the AG's Office finally responded by filing a motion to dismiss the complaint. (A copy of the memorandum of law can be found here). A hearing on the motion is scheduled for March 24th in Albany. The plaintiffs will likely file a detailed response to the motion before the end of February, and, quite possibly, could also move for summary judgment since purely legal issues are involved that would probably not require any significant fact-finding.

The crux of the AG's motion is that the Legislature enjoys considerable discretion to determine what is--and what is not--"gambling" in New York. The AG's motion asserts that the New York Legislature has "latitude to determine what conduct constitutes (and does not constitute) impermissible gambling in New York," and that such determination "is ultimately a policy choice that lies within the province of the Legislature to address." I believe that this argument might be flawed. While the Legislature can certainly 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.

In my opinion, the entire lawsuit rises or falls on this argument. If the Attorney General is wrong (and I believe that he may be), it could shelve fantasy sports in New York for at least two years while the constitutional referendum process plays out. 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.

The most surprising aspect of the AG Office's motion, however, was its abject failure to explain (or even address) any of the AG's prior statements--advanced in court papers before Justice Mendez--that daily fantasy sports contests constituted impermissible gambling in violation of New York Penal Law Section 225.00 and Article I of the New York State Constitution. Think about it. The same AG who forcefully argued that DFS is illegal gambling under the state constitution is now advancing the diametrically opposite position that such contests do not run afoul of the constitution. That is a tricky balancing act. At the very least, the AG should have addressed his prior statements and explained why they do not apply anymore. His failure to tackle this issue leaves him (and the industry) exposed on the plaintiff's reply beef. Expect  the plaintiffs' lawyer to exploit this omission in his opposition papers filed later next month. Having the AG--who once took the position that DFS is "gambling'--act as the "defender" of the new DFS law presents a troubling optic for the industry, and, potentially, for the court. For this reason, I would have expected DraftKings and FanDuel (the real parties in interest) to intervene in the lawsuit and present their own arguments unencumbered by any prior inconsistent statements. To date, however, the two companies have not filed a motion to intervene, leaving the fate of New York's fantasy sports law in the conflicted hands of the New York Attorney General. From the plaintiffs' perspective, this may be the best possible scenario.

This lawsuit will likely play out over several years, and could ultimately be decided by New York's highest court--the New York Court of Appeal. But at first blush, it would appear that the plaintiffs have a strong case based on the arguments advanced (or not advanced) by the New York Attorney General. A decision on the AG's motion to dismiss--and potentially on the plaintiff's motion for summary judgment (if one is filed)--is expected by the late Spring, several weeks after the March 24th oral argument. Regardless of who prevails in the lower court, expect an immediate appeal. While this case may have been dormant for several months, it will become active throughout 2017 and could dictate the future of fantasy sports in New York, By no means is it a slam dunk for the State.

If you would like a deeper dive on these issues, I previewed the lawsuit here back in June, several months before it was actually filed.








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