New York Governor Andrew Cuomo signed into law a bill legalizing fantasy sports on August 3, 2016 – a nail-biting seven weeks after the New York legislature’s passage of the bill.
It’s Official. Fantasy Sports Games Are Not Illegal Gambling in New York.
In fantasy sports games, participants simulate the role of an owner or manager of a professional sports team, and then participants compete against each other to win points based on the real-world performance of the athletes on their rosters. Much of the legal clamor around the fantasy sports industry has focused on whether the games in which participants pay an entry fee qualify as legal skill-based contest or, alternatively, as illegal gambling. “Inadvertently offering an illegal lottery or gambling game” is mistake number one on my list of 10 Common Legal Mistakes for Contests and Sweepstakes Promotions. New York law now declares that fantasy sports games are legal and are neither games of chance nor illegal gambling.
What the New York Law Means for Fantasy Sports Operators
Fantasy sports operators that were active in New York prior to November 10, 2015 may return to New York as long as they receive a temporary permit from the New York State Gaming Commission and file a full registration application within ninety days of release of the registration regulations. November 10, 2015 is the date of New York Attorney General Eric Schneiderman’s letter ordering FanDuel and DraftKings, the two companies that dominate the daily fantasy sports industry, to cease operations in New York.
Operators eligible for quick re-entry include FanDuel and DraftKings. Those operators who were not active in New York prior to November 10, 2015 must wait for review and acceptance of a full registration application. Some view this November 10, 2015 cut-off date for temporary permit eligibility as an unintended punishment to fantasy sports operators who cautiously chose to stay out of the New York market due to the games’ questionable legality in the state.
About that Temporary Permit Application
I suspect the New York State Gaming Commission had a heads-up that Governor Cuomo would sign rather than veto the bill. The Interactive Fantasy Sports Contest Application for Temporary Permit was available on the Gaming Commission’s website the same day Cuomo signed.
The temporary permit application is not a perfunctory one. In response to twenty-three pointed questions, fantasy sports operators must provide descriptions, screen shots, documentary evidence, and illustrative examples of how they will comply with requirements of the new law – requirements that include prohibition of play by minors, use of non-misleading advertisements, identification of highly experienced players, and player privacy protections.
New York’s False Advertising Lawsuit Will Continue
New York fantasy sports legalization will not halt Attorney General Schneiderman’s pursuit of fraudulent conduct and false advertising claims against DraftKings and FanDuel. While stating he will uphold the new law in a statement about the new legislation, Schneiderman added that “Our false advertising and consumer fraud claims for past misconduct by DraftKings and FanDuel will continue to move forward.”
What the New York Law Requires of Fantasy Sports Operators
The New York requirements share many similarities with fantasy sports legislation recently passed in Indiana, Tennessee, and Virginia including the following:
Prohibition of players under 18 and of players who are fantasy sports industry insiders
Prohibition of fantasy sports games based on college or high school athletic events
Requirement to identify highly experienced players (defined in New York law as players who have entered more than 1,000 fantasy sports contests or won more than three prizes valued at $1,000 each or more)
Requirement to protect player funds and segregate those funds from the company’s operating funds
Prohibition on allowing players to use third-party computer scripts and optimization software
No New York Fixed Registration or Licensing Fee
New York diverges from other states on the licensing fee structure. Instead of a set licensing fee, fantasy sports operators registering in New York will pay the following:
a tax equal to 15% of their New York-generated fantasy sports gross revenue, payable on at least a monthly basis, plus
a tax equal to .05% of such revenue, also payable on at least a monthly basis, but not to exceed $50,000 annually plus
some potential additional nebulous annual assessment, as necessary to offset New York’s regulatory costs
The percentage fee structure is good news for smaller fantasy sports operators that have contemplated leaving states such as Indiana and Virginia where the initial registration fee is $50,000.
No New York Independent Annual Audit Requirement
Unlike other states, New York does not mandate an independent annual audit. At least not in the law – there might be additional regulatory requirements in the Gaming Commission’s forthcoming regulations. This is more good news for smaller operators that were concerned about the costs of such an audit. Instead, each New York registered operator must submit an annual report detailing the number of player accounts, revenue received, prizes awarded, and other operational information. After receiving the report, the Gaming Commission has the right to conduct a financial audit of the operator.
There Are Many More Legal Issues Swirling Around the Fantasy Sports Industry
And many of those issues are discussed in a forthcoming article, “What In-house Counsel Can Learn From the Fantasy Sports Industry”, to appear in the September 2016 issue of the Association of Corporate Counsel’s Docket Magazine and co-authored by my colleague, Ellen Zavian, and me.