FanDuel shuts down "temporarily" in New York

Last Updated Nov 17, 2015 6:40 PM EST

Last week, daily sports fantasy site FanDuel quit taking new deposits from players in New York. But now it says it has "temporarily" stopped doing business altogether in the Empire State, its largest market, while a lawsuit filed by New York Attorney General Eric Schneiderman seeking to shut down FanDuel and rival DraftKings is pending before a state court.

According to a statement on New York-based FanDuel's website, the restrictions are effective Tuesday, 2:30 p.m. Eastern time and are "temporary." FanDuel added: "...we hope to be able to offer our paid contests to New Yorkers again very soon."

Boston-based DraftKings hasn't placed any restrictions on New York players and said in a statement that it won't block their play unless a "New York court decides otherwise." The high-powered law firm Boies Schiller Flexner is representing the company

Schneiderman argues that DraftKings and FanDuel, the two largest daily fantasy sports (DFS) operators, are illegal gambling sites that are ripping off the public. The companies counter that they aren't gambling sites but are actually games of skill, not chance. They've accused Schneiderman, a Democrat, of overstepping his legal authority.

"DraftKings has been more aggressive from the get-g0," said Brooklyn Law School sports law expert Jodi Balsam, in an interview with CBS MoneyWatch. Balsam has been critical of the industry's lack of transparency but is sympathetic to its arguments. "This is a moment for them to cut their losses and focus their efforts where they ought to be, on the state level."

The New York court has scheduled an emergency hearing next Wednesday to hear both sides of the case. Schneiderman's office has told the companies that it won't bring any action against them before then. But if Schneiderman prevails, it could lead to challenges from other states.

"If they're outlawed in New York, they're in trouble," said I. Nelson Rose, a scholar of gaming law at California's Whittier Law School.

In New York, there is no objective test that can determine whether a particular game is legally permissible, which makes forecasting how a court may rule on the issue difficult. The Empire State prohibits most "contests of chance" in which the outcome depends in a "material degree" on an element of chance, according to Balsam, an assistant professor of law.

"This means that even if skill predominates, the state can shut down a game where chance is a material factor in the outcome," said Balsam. "It can certainly be argued that daily fantasy fits this description." She believes the issue should be decided by the state legislature, not the courts.

In a filing today seeking a preliminary injunction, Schneiderman argues that chance plays as much of a role here as it does in poker: "A few good players in a poker tournament may rise to the top based on their skill; but the game is still gambling."

Both FanDuel and DraftKings have likened themselves to gaming in comments to investors and use gambling terms to attract customers, according to Schneiderman. He also argues that only a small percentage of daily fantasy sports players win.

"(I am) not sure why the AG emphasizes the fact that the sharks eat the minnows in DFS," said Bennett Liebman, a former New York State gaming regulator now affiliated with Albany Law School's Government Law Center, in an email to CBS MoneyWatch. "This may help to establish an overall consumer fraud, but it could also be used by the DFS sites to say that the appropriately skilled players are the winners."

DFS is illegal Arizona, Iowa, Louisiana, Montana and Washington state, and was outlawed recently in Nevada.

"This forces them to be on the offensive," said Whittier's Rose of the New York lawsuit. "Everything else could just be defensive and try to stave off the lawsuits and legislation using their tremendous money and political power."

Editor's Note: CBS has an investment in FanDuel of less than 1 percent of that company's value

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    Jonathan Berr is an award-winning journalist and podcaster based in New Jersey whose main focus is on business and economic issues.