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What the suspension of DraftKings, FanDuel in N.Y. means for DFS

A six-month long legal saga came to a pause on Monday, when the two largest daily fantasy sports operators agreed to suspend paid operations in the state of New York effective immediately.

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A six-month long legal saga came to a pause on Monday, when the two largest daily fantasy sports operators agreed to suspend paid operations in the state of New York effective immediately, as part of a settlement with attorney general Eric Schneiderman.

Calling the agreements a “decisive and important victory for the rule of law in New York state,” Schneiderman agreed to wait until September to pursue litigious action against either DraftKings or FanDuel that would compel the operators to pay back money to those players who lost money on the sites.

As part of the agreements, if a bill legalizing daily fantasy sports is passed in the New York state legislature by June 30, Schneiderman will terminate most of his claims against the operators and both sites will be allowed to offer paid games beginning in July. 

DraftKings, FanDuel to stop offering games in New York

The decision effectively ends the litigation that pitted the two companies against Schneiderman and allows time for DraftKings and FanDuel to lobby the New York legislature for passage of legislation that would permit them to operate in New York as regulated companies.

Meanwhile, the industry’s No. 3 operator on Tuesday said it would voluntarily pull its paid games out of the New York market just hours after it announced a series of self-regulatory changes to its games. Yahoo Sports said it would limit players to 10 entries, or no greater than 1% of total entries in multi-player tournaments. Additionally, as part of its “Fair Play” initiative, it also said it would label experienced players as “veterans” and prohibit computer scripting software to help optimize lineup entries.

Massachusetts attorney general Maura Healey, is expected to announce similar regulations for DFS in the Bay State in the coming weeks.

The false advertising claims leveled by Schneiderman, which resulted from both sites’ television advertising blitzes in 2015 that cost hundreds of millions of dollars, are ongoing and not affected by the settlements. It is unclear whether a September hearing will still take place in the event daily fantasy sports legislation is passed in New York.

Both companies have been in an ongoing legal battle with Schneiderman’s office since he began a probe into the businesses in early October following the leak of proprietary information by a DraftKings employee who won $350,000 himself competing in a DFS tournament on FanDuel.

According to the industry website LegalSportsReport, New York is the 13th state in which paid DFS is either not offered by operators or is significantly restricted after coming under significant legal questioning by regulators. That marks a significant change from before the start of Schneiderman’s investigation into the companies: At the start of October 2015, all but five states offered the paid contests.

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“As I’ve said from the start, my job is to enforce the law, and starting today, DraftKings and FanDuel will abide by it,” Schneiderman said in a statement. “Today’s agreement also creates an expedited path to resolve this litigation should that law change, or upon a decision by the appellate division.”

FanDuel took a less celebratory tone Monday, noting that New York is a “critical” state for the company, which employs 170 people and is headquartered in Manhattan. “We are proud to be one of New York’s largest startup companies, and while it is disheartening for us to restrict access to paid contests in our home state, we believe this is in the best interest of our company, the fantasy industry and our players while we continue to pursue legal clarity in New York,” the company said.

DraftKings said it would continue to work with state lawmakers, and that it was “grateful to the hundreds of thousands of New Yorkers who have enjoyed playing fantasy sports on DraftKings for the last four years.”

Both sites urged New York users to contact their legislators regarding fantasy sports.

The benefits for the operators and New York’s legislative hope

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On the surface, the settlements signaled a defiant win for the attorney general, who has taken the most aggressive stance against the operators of any of his peers across the country. While the daily fantasy sites face an uphill battle, they also might have netted a short-term victory.

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By settling and shortening a prolonged court battle, the companies could obtain an important cost savings. The potential cost reduction comes at a time when both companies are still looking to turn a profit despite increasing revenues and exposure. ​That's partially a result of DraftKings and FanDuel facing tens of millions of dollars in legal expenses in the wake of court battles in numerous states. FanDuel has budgeted legal costs this year at $25 million, according to a source close to the situation. A member of DraftKings' counsel said on Friday that the operator has budgeted 2016 legal expenses at a “staggering” number, and suggested they would likely exceed that.

The agreements also signaled the operators’ increasing confidence at the state legislative level. In the absence of federal legislative clarity, the operators, with the assistance of the industry’s main trade association, have aggressively spearheaded the introduction of bills at the state level in over half of the country. Virginia and Indiana became the first states to pass a regulatory framework for daily fantasy sports earlier this year.

There are several bills under consideration in New York, although according to industry experts, the best hope for a legislative solution in New York lies in Senate Bill 6793.

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The bill, sponsored by Sen. John Bonacic, would require companies to institute a minimum age of 18 for players, to pay a 15% tax on gross revenue generated in the state and to pay a mandatory licensing fee of $500,000 (which can be applied against an operator’s tax obligation) to operate in the state. Some in the industry are concerned that a high licensing fee structure could stifle innovation and prevent smaller DFS companies from being able to afford entering the market.

“The bills we are seeing in various states, put forward by lobbyists and a trade association claiming to represent the interests of the entire fantasy sports industry, are great examples of awful policy that, in reality, represent the interests of few,” said Seth Young, the COO of Flower City gaming and Star Fantasy Leagues, one of the earliest companies in the DFS space.

“The entire fantasy sports industry is interested in legal clarity, but I would urge the legislators in New York against introducing stopgap fantasy sports legislation that shuts out small businesses and does not effectively contemplate consumer protections.”

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If New York is to become the third state to do so, it could happen sooner rather than later. Assemblyman Dean Murray told Monday the best case scenario for New York was to take up consideration of the bill during the state’s budget process in the next two weeks.

One professional DFS player based in New York said Monday that he expected the state to pass SB 6793, and that operators were confident in their ability to get anywhere from four to 10 DFS bills passed in 2016.

Schneiderman has been attempting to get both sites to cease and desist operations in New York since Nov. 10. Attorneys general in other states such as Illinois and Georgia have also issued opinions saying DFS constitutes illegal gambling. Earlier this month, FanDuel reached a similar settlement with Texas attorney general Ken Paxton after he also concluded the offering of paid daily fantasy sports was illegal.

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​DraftKings and FanDuel are likely confident they can convince the New York legislature to pass a bill that would permit DFS gaming in some form, and that Governor Andrew Cuomo would sign into law. If any existing bills became law, DraftKings and FanDuel could resume business in New York—but in a more restricted and possibly less lucrative structure.

DFS as a regulated game in New York would follow the lead of other states to adopt similar regulatory schemes. In Virginia, for example, Governor Terry McAuliffe recently signed the Fantasy Sports Act into law. The Act requires an 18-year-old age floor and stipulates that DFS companies must pay the state $50,000 to obtain a license to operate. Massachusetts is expected to adopt similar regulations that would call for an 18-year-old age floor and advertising restrictions, among other restrictions.

Both operators ensured New York-based players on Monday that they were free to withdraw funds from their player balance at any time but said they would continue to hold on to player funds securely in the event paid contests are back up and running later this year. The settlements mandate operators process any withdrawals within seven days of an initial request.

September remains a key month for the operators because it signals the start of the NFL season. Football is the operators’ most profitable sport.