Interactive fantasy sports in New York down for the count?

The New York State Appellate Division, Third Department, struck down most of a law that authorized interactive fantasy sports (“IFS”) at certain locations in New York, dealing a setback to companies like FanDuel and DraftKings.

The law, signed by Governor Andrew Cuomo in August 2016, declared that IFS did not constitute gambling. At issue was whether IFS are a form of gambling based on chance (which is prohibited in New York), rather than skill. State lawmakers amended the Racing, Pari-Mutuel Wagering and Breeding Law by adding an article related to the registration and regulation of IFS. Lawmakers reclassified IFS as a game of skill instead of chance. Further, the law provided for consumer safeguards, minimum standards and the registration, regulation and taxation of IFS providers.

In October of 2016, the law was challenged by four New York residents who said they had been harmed by gambling, including Jennifer White, whose father regularly patronized off-track betting establishments in western New York while her mother was harassed by loan sharks and creditors.

Their lawsuit argued that the law carved out an illegal exemption to the New York State Constitution’s prohibition on gambling, which forbids the practice except for a few exceptions, including at a limited number of horse tracks and casinos. Legalizing IFS, the lawsuit argued, would require a constitutional amendment approved by New York State voters, not a simple statutory change signed by the governor.

In 2018, Gerald W. Connolly of the Albany County Supreme Court agreed with part of the lawsuit, holding that the law, to the extent that it authorized IFS, violated the Constitution’s ban on gambling. At the same time, the court found that the legislature had acted properly when it exempted IFS from the penal code.

Subsequently, on February 6, 2019, Associate Robert Mulvey delivered a stronger ruling for the law’s opponents, finding both that the law was unconstitutional and that IFS could not be exempted from the penal code.

The ruling was based on the court’s finding that, while IFS require skill, they also involve a degree of chance, including scenarios where a player might have an injury or illness or be affected by bad weather or poor officiating. The ruling states that IFS “constitute gambling if their outcomes depend to ‘a material degree upon an element of chance, notwithstanding that skill of the contestants may also be a factor therein.’” Further, because “public policy continues to disfavor gambling,” exceptions to the constitutional prohibition on gambling must be strictly construed to ensure that they do not consume the rule itself…allowing the Legislature unfettered discretion to determine what is not gambling would render meaningless the constitutional prohibition on “lottery or the sale of lottery tickets, pool-selling, book-making, or any other kind of gambling.”

Any expansion of gambling in New York is required by the constitution to be approved in a ballot referendum -- as happened in 2013 when voters approved the legalization of commercial gambling casinos in Upstate New York. The 2016 change regarding IFS did not go to the voters. Given the combination of, according to Judge Mulvey, IFS incorporating chance, given the inordinate amount of “chance” factors that go into a sporting event (i.e., weather, poor officiating or an injury), and the legislature circumventing the New York State Constitution by reclassifying IFS as a game of skill, it seems the voters of New York may be needed to authorize IFS in New York. The final determination on the law’s constitutionality will likely be made by the state’s highest court, the Court of Appeals. Until then, gamblers will still be able to play IFS in New York.