If Fantasy Sports Can Make It There, They’ll Make It Anywhere! They’re Constitutional According to You, New York, New York Court of Appeals
Game On, New York. Daily Fantasy Sports are here to stay.
After over five years of back-and-forth litigation on which both sides bet the house, New York’s Court of Appeals ruled that Daily Fantasy Sports are not prohibited under the state constitution, and declined the plaintiffs’ request for an injunction to stop implementation of a state law authorizing such contests. (White v. Cuomo, 2022 NY Slip Op 01954 (N.Y. Mar. 22, 2022)). In the case, the Court found that Interactive Fantasy Sports (“IFS”) contests, including the subset of Daily Fantasy Sports (“DFS”), as authorized under Article 14 of the Racing, Pari-Mutuel Wagering and Breeding Law (“Article 14” or the “Law”) are constitutional in New York because they are “predominately games of skill” and therefore are not prohibited gambling activities under the definition of “gambling” in Article I, §9 of the State Constitution.
The immediate upshot of the Court’s ruling is two-fold: First, IFS and DFS contests are now conclusively legal in New York and may be regulated under Article 14, a 2016 law passed by the state legislature that authorized and regulated IFS. Second, the decision continues IFS proponents’ winning streak, echoing the Illinois Supreme Court’s decision in Dew-Becker v. Wu, 178 N.E.3d 1034 (Ill. 2020), which held that head-to-head DFS contests are predominantly skill-based. These state high court victories provide more evidence that the odds are increasingly in favor of continued IFS legalization across the U.S.
For those who are not familiar with fantasy sports, participants of IFS contests create virtual “teams” comprised of players from real-life teams to compete against other virtual teams compiled by other IFS contestants. While professional athletes strive to win games for their teams, an IFS player’s roster is only concerned with the performance of the real-life athletes “drafted” for his or her roster because participants of IFS contests earn fantasy points based on their selected athletes’ game stats (as opposed to the outcome of the games). Traditionally, fantasy sports participants would pit their roster against other players over the course of an entire season but, in recent years, IFS operators began offering weekly and daily IFS contests; these contests became known as Daily Fantasy Sports.
The story of the Court of Appeals ruling in White v. Cuomo began in 2015, when large-scale daily fantasy sports websites and applications started operating in New York. In 2016, the state legislature passed Article 14, which legalized and regulated registered prize-based IFS contests. In this legislation, the New York state legislature declared that IFS contests were not “gambling” because: (1) the outcome of such contests are dependent on the “skill and knowledge of participants” rather than chance, and (ii) the contests were not wagers on future contingent events not under the contestants’ control because the outcome of a contest is dependent on the skill of each IFS participant.
Both of these determinations by the state legislature were aimed as responses to language in Article I, §9 of New York’s Constitution stating that, except as authorized therein, “no lottery or the sale of lottery tickets, pool-selling, book-making, or any other kind of gambling . . . shall . . . be authorized or allowed within this state.” [emphasis added]. The definition of “gambling” is undefined in the Constitution and has evolved over time with various amendments. This definition has also been interpreted in subsequent case law (as agreed by both parties to this case), which generally defined gambling as “the risking of money or something of value on ‘games of chance,’ as well as ‘bets and wagers’ by nonparticipants on competitions of skill.” [emphasis added]. So, the state legislature’s determination that IFS was both (i) a game of skill and (ii) not a bet or wager on a future event not under the participants’ control was meant to directly counteract arguments that IFS was gambling and therefore unconstitutional.
After Article 14 was passed, a group of bettors with gambling addictions and their family members sued the Governor and the state gaming commission to block the law. They argued that Article 14 was unconstitutional because IFS contests should properly be considered gambling as they are “games of chance” or “bets or wagers” on events outside the participants’ control. In response, the Government asserted that, although IFS contests may superficially resemble “gambling,” the legislature reasonably concluded they are neither “games of chance” nor “bets or wagers by nonparticipants on competitions of skill” because IFS contests are themselves skill-based contests in which fixed prizes are awarded based upon the participants’ own judgment and strategy.
In October 2018, plaintiffs, the opponents of IFS contests, were successful in the Supreme Court of New York (the state’s trial court), which ruled that IFS contests are “gambling” under the state constitution because they “involve[ed], to a material degree, an element of chance.” In February 2020, the New York Supreme Court, Appellate Division, Third Department, affirmed, holding, among other things, that IFS contests are “gambling” prohibited by the State Constitution.
The Government appealed the rulings to the Court of Appeals. Thus, the state’s highest court was tasked with discerning whether the legislature erred in finding that Article 14 IFS contests fall outside the scope of the constitutional prohibition on gambling. In a close 4-3 vote, over a particularly lengthy and forceful dissent, a majority of the Court of Appeals agreed with the state legislature and IFS proponents that IFS contests are not gambling under the New York Constitution, granted summary judgment to the Government and declared that Article 14 does not violate Article I, §9 of New York’s Constitution.
Before reaching its determination about whether or not IFS contests should be considered gambling, the Court of Appeals essentially weighed the odds in the state’s favor from the beginning. This is because, according to the Court, when a legislative enactment is challenged, there is an “exceedingly strong presumption of constitutionality” and a “presumption that the [l]egislature has investigated for and found facts necessary to support the legislation.” Therefore, at the outset of its analysis, the Court flatly stated that “courts may not ‘substitute their judgment for that of the [l]egislature.’”
With this advantage to the state regarding standard of review in hand, the Court then dove into the substance of determining whether IFS contests fell under the New York Constitution’s definition of gambling. Making things slightly easier, both sides agreed that “gambling” in the state constitution should be defined as either “games of chance” or “bets and wagers by nonparticipants on
competitions of skill.” So, the Court decided to tackle whether IFS contests fit either of those two definitions separately.
The Court hit a roadblock pretty early on in its “game of chance” inquiry; namely, how does one define a “game of chance”? After all, every game has some element of chance. A gust of wind might blow a golf ball five yards further than expected; a wet spot of flooring might cause a basketball player to slip and miss their shot; an entire soccer team might wake up the day of their most important match of the season with food poisoning from a rogue lasagna. All true stories. Conversely, many games of chance have at least some element of skill – just ask any casino why certain players are no longer welcome at their craps or blackjack tables.
The Court solved this conundrum by applying what it called the “dominating element test.” The test, taken by the Court from a 1904 case, People ex rel. Ellison v. Lavin, asks whether a game is one in which the “element of chance was the dominating element that determines the result of the game.” Essentially, is skill or chance the controlling factor in deciding who wins? The Court decided to apply the dominating element test over an alternative “material degree test,” which was employed by the Appellate Division, and which asks whether “the outcome depends in a material degree upon an element of chance.”
Applying the dominant element test along with its earlier discussed deference to the state legislature, the Court found that the legislature’s determination that IFS contests were games of skill and not gambling “has resounding support.” For example, the Court referenced studies in the legislative record that skilled players achieve significantly more success in IFS contests. The Court further stated that participants in IFS contestants “draw from their knowledge of the relevant sport, player performance and histories, offensive and defensive strengths of players and teams, team schedules . . . statistics, strategy, and the fantasy scoring system in order to exercise considerable judgment in selecting virtual players for their rosters.” While not discounting that chance plays some role in determining the victor of IFS contests, the Court concluded that “the legislature’s determination of the skill issue . . . is supported by considerable evidence . . . demonstrating that IFS contests are not games of chance because the outcome is predominantly dependent upon the skill of the participants.”
The Court used that same analysis to reject the plaintiffs’ contention that IFS contests are “bets or wagers” of non-participants on future events outside the contestants’ control. Because IFS contestants use skill in making their lineup selections in a contest featuring upfront entry fees and a pre-set prize pool, they are not non-participants in future events but rather active participants in determining their success or failure in getting the fixed premium or prize, similar to participants in “a spelling bee . . . golf tournaments . . . [or] televised game shows.” The Court further concluded that “unlike bets or wagers on games of skill in which a bettor takes no part, participants in IFS contests engage in a distinct game of their own, separate from the real-life sporting events, in which they strive against other IFS participants.” The combination of the skill involved in setting the lineups and the pre-set size of the prize pool (and the fact that outcomes are never based on score, point spread, or the performance of a single athlete, team or sporting event) appeared to be the key factors for the Court in determining that there was no betting on future events outside the contestants’ control.
So, what’s the impact of the Court of Appeals ruling on New York and other states? First, IFS and DFS as regulated under Article 14 are now in the clear moving forward in New York State. Second, other determinations made by the New York legislature in recent sports betting legislation, such as that mobile sports bets take place in the place “transmitted to and accepted” at a “licensed gaming facility,” could be entitled to a similar level of deference regarding their constitutionality as given to Article 14 in this case. Third, it appears the number of states applying the dominating element test (as compared to the material degree test) is increasing, with New York following Illinois’ lead in Dew-Becker v. Wu in deciding that dominating element was the correct (and likely more straightforward) test to apply when determining whether a game is a game of chance or skill. Finally, at least in New York, it appears that the pre-determination of the entry fees and size of the prize remain an important element of the constitutionality of IFS games, and that other states’ future legislation may want to consider this facet of the IFS contests when drafting legislation that may be challenged under similar state constitutional or other legal grounds.