NY’s Interactive Fantasy Sports Act: opportunity and threat

While New York’s Interactive Fantasy Sports Act creates an opportunity for many companies to enter the DFS space, the law is clearly geared towards FanDuel and DraftKings and creates hurdles for the wider fantasy sports industry, writes Marc Edelman of Edelman Law.

On August 3 New York became the 11th state – and by far the most populous state – to enact law related to registering and regulating interactive fantasy sports contests.

Although New York’s new law creates a bona fide opportunity for many companies to enter the daily fantasy sports marketplace, the new law also creates administrative hurdles that companies in the fantasy sports industry must handle cautiously.

New York’s new fantasy sports law asserts that “interactive fantasy sports” contests (which include both full season and daily fantasy sports contests) do not constitute illegal “games of chance” or “wagers on future contingent events” under New York law.

However, companies that wish to operate these contests (irrespective of their prior legal status) must obtain a licence and thereafter comply with numerous new regulations.

Among these new regulations, companies seeking to offer “interactive fantasy sports” contests must bar minors from play-for-cash contests, exclude problem gamblers from their websites, disclose the number of entries allowed in each of their contests, segregate user funds, disallow third party scripts, and allow for periodic audits of their books.

Additionally, operators of “interactive fantasy sports” must pay a tax equivalent to 15% of their “interactive fantasy sports gross revenues generated within the state”, as well as a tax equal to 0.5% of total revenues up to $50,000.

Winners and losers
The primary beneficiaries of New York’s new fantasy sports law are the two largest daily fantasy sports operators, FanDuel and DraftKings. Each of these companies currently partners with a US professional sports league, and has invested heavily in lobbying efforts supporting the new law.

Not only does the new law allow FanDuel and DraftKings to re-enter the New York market, but it gives them preferential treatment over new companies by allowing them to receive “temporary permits” even before a full review of their applications.

By contrast, the companies most harmed by the change in New York law are the full-season fantasy sports operators.  Before the change in law, most forms of full-season fantasy sports were presumed to be legal in New York.

However, after the change in law, full-season fantasy sports contests, much like their daily fantasy sports counterparts, presumably must apply for a licence, comply with detailed regulations (some of which do not make any sense based on their game format), and pay additional taxes.

Finally, it is worth noting that the change in New York law does not provide protection to all companies that operate under the moniker of daily fantasy sports. 

Indeed, the New York law only applies to contests where “one or more contestants compete against each other by using their knowledge and understanding of athletic events and athletes to select and manage rosters of simulated players whose performance directly corresponds with the actual performance of human competitors on sports teams and in sports events”.

Thus, fantasy sports contests played “against the house” instead of against other humans lie outside the law’s new protections. Similarly, the new law does not likely extend to contests that are based on the performance of athletes who compete in individual sports within just a single event.

Finally, a separate section of New York’s new interactive fantasy sports law disallows companies from offering contests based on the performance of athletes in any collegiate or high school event, or based on “any horseracing event”.

Thus, companies that purport to offer “fantasy college football” or “fantasy horse racing” are entirely forbidden from offering play-for-cash contests in the Empire State.

For the aforementioned reasons, it is wise for any company seeking to offer “interactive fantasy sports” in New York to consult with a lawyer before commencing operations. It also may be helpful to seek legal counsel when contemplating new game formats, and when seeking to implement internal player controls.

Marc Edelman is a professor of law at Baruch College’s Zicklin School of Business and the founder of Edelman Law.