Daily Fantasy Sports are Constitutional in New York!

After 5 years of litigation, and countless sleepless nights in DraftKings and FanDuel offices (I assume), the New York Court of Appeals today held that daily fantasy sports is constitutional. And, as I thought might have been the case, the deciding vote for DFS’s constitutionality was cast not by a Judge of the Court of Appeals, but by Presiding Justice Hector LaSalle of the Appellate Division, Second Department, who was vouched in to replace the recused Judge Michael Garcia. Able advocacy by the State, and just a tad bit of luck of the draw, saved DFS in New York.

The vote split 4-3, with Chief Judge DiFiore and Judges Singas and Cannataro joining Presiding Justice LaSalle in the majority (with the Chief Judge writing), and Judges Wilson, Rivera, and Troutman in the dissent (with Judge Wilson writing. Judge Troutman’s vote is interesting, because this is the first real case of constitutional interpretation she has been a part of, but I’ll have to look at that a little later when she authors her first real interpretation case on the Court of Appeals. With the mechanics of the decision out of the way, let’s turn to what the Court actually held.

Chief Judge DiFiore began the majority opinion with a clear statement of the Court’s holding:

Today, we clarify that the historic prohibition on “gambling” in article I, § 9 does not encompass skill-based competitions in which participants who exercise substantial influence over the outcome of the contest are awarded predetermined fixed prizes by a neutral operator. Because ample support exists for the legislature’s determination that the IFS contests authorized in article 14 are properly characterized as lawful skill-based competitions for prizes under our precedent, plaintiffs have not met their burden to demonstrate beyond a reasonable doubt that article 14 is unconstitutional.

(Majority Opn, at 2).

Let’s break that down. As I’ve discussed all along, this case really turned on the standard of review that the Court of Appeals chose to apply. Does the Court defer to the Legislature’s findings of fact that DFS is predominately a game of skill and decide only whether support exists in the legislative record for that finding? Or does the Court take the constitutional definition of gambling for its own determination, like the Appellate Division did below? And here, Chief Judge DiFiore started with the oft-recited principle of deference: “It is well settled that legislative enactments are entitled to a strong presumption of constitutionality, and courts strike them down only as a last unavoidable result after every reasonable mode of reconciliation of the statute with the Constitution has been resorted to, and reconciliation has been found impossible. Thus, while the presumption of constitutionality is not irrefutable, as the party challenging a duly enacted statute, plaintiffs face the initial burden of demonstrating [article 14’s] invalidity beyond a reasonable doubt” (Majority Opn, at 6-7 [cleaned up]).

That was critical for the State. With the heavy burden on the Plaintiffs to show unconstitutionality beyond a reasonable doubt, the Court merely had to hold that the Legislature’s decision was not so irrational that it conflicted with New York’s constitutional ban on gambling. Indeed, the majority emphasized, “while the legislature may not circumvent the Constitution merely by declaring that an activity which unquestionably constitutes prohibited ‘gambling’ should no longer be considered such, we must remain cognizant of the ‘distribution of powers in our State government’ that render it improper for courts to lightly disregard the considered judgment of a legislative body that is also charged with a duty to uphold the Constitution” (Majority Opn, at 8).

Analyzing the constitutional text, its history, and the history of gambling bans throughout the country around the same time as New York’s, the majority rejected the plaintiffs’ reliance on the definition of “gambling” from the Penal Law, holding that “[w]hile a helpful guidepost, this definition does not necessarily reflect the ordinary meaning of the term ‘gambling’ in 1894 inasmuch as this statute was not adopted until 1965, over 70 years after ‘gambling’ was added to article I, § 9” (Majority Opn, at 12). Rather, the majority held, it was “games of chance” that “were considered gambling in 1894,” which was confirmed by “[s]ubsequent constitutional amendments” that authorized those games notwithstanding the general ban on “gambling” (Majority Opn, at 13).

Defining the scope of games of chance that are prohibited under the NY Constitution, however, is “nuanced,” the majority reasoned. Relying on the Court of Appeals’ prior decision in People ex rel. Ellison v Lavin (179 NY 164 [1904]), which drew a distinction between games where chance was the dominating element and games where skill predominated, the Court adopted the State’s argument that “gambling” under the Constitution should be defined by whether skill or chance are the dominating element of the game, rather than the “material degree of chance” test that the current version of the Penal Law uses to describe gambling offenses (Majority Opn, at 15-17). That, the Court held, best reflects the intent of the drafters of the 1894 constitutional amendment that banned gambling in New York. And for DFS, the majority concluded:

the legislature’s factual determination that IFS contests are a game of “skill,” not of “chance” (Racing, Pari-Mutuel Wagering and Breeding Law § 1401 [8])—and therefore are not “gambling”—has resounding support. Evidence presented to the legislature indicated that outcomes in IFS contests are predominantly based on skill. Studies showed that skilled players achieve significantly more success in IFS contests and that rosters of skilled human players were more successful in IFS contests than randomly generated lineups over 80% of the time. Through a statistical analytic report quoted at the public legislative hearing, an expert opined that IFS games “have an inherent and vast character of skill where chance is overwhelmingly immaterial in the probability of winning” and winning a prize in such contests “strongly depends more on skill than on chance.” In fact, it is now “widely recognized” that IFS contests are predominately skill-based competitions

(Majority Opn, at 17).

Chance obviously plays a role in DFS, but it is not the dominating element of the game, as the Legislature rationally found, the majority opined. Thus, DFS was not a prohibited game of chance.

The majority also concluded that the plaintiffs failed their heavy burden to show that DFS are wagers on future contingent events over which the participants have no control. In particular, the court recognized that it has “long distinguished the bets and wagers of gambling activities from lawful contests that award prizes to competitors—contests integral to the fabric of American social life, spanning the range from spelling bees to golf tournaments to televised game shows” (Majority Opn, at 19). And here, the Court held, “[c]ontests charging entry fees and awarding fixed prizes do not constitute gambling prohibited by article I, § 9 of the Constitution” (Majority Opn, at 21). DFS does exactly that—operators set up the contests for an entry fee and a fixed prize pool no matter how many participants join in. As the majority explained,

Article 14 permits only IFS contests that have prizes that are predetermined, announced prior to the start of the contest, awarded by a neutral operator, and which do not change based upon the number of participants or the amount of entry fees collected (see Racing, Pari-Mutuel Wagering and Breeding Law § 1404 [1] [n]-[q]). Thus, IFS participants are not “wagering” in the hopes of scoring a pool of funds “wagered” by other players; rather, at the outset, an IFS contestant knows the set fee to enter the competition and the sum total of prizes that may be awarded—and that sum must be awarded even if entry fees are insufficient to cover the cost of the prize. In this regard, the legislature was careful to authorize only a contest for a prize, not place its imprimatur on a scheme of prohibited bets and wagers.

(Majority Opn, at 21-22).

And finally, the majority understood that the outcome of DFS contests does not depend on the performance of any particular athlete, as it would in proposition bets, but rather depends on how skillfully the contestant can assemble his or her roster in comparison to all of the other contestants. That, the majority held, was the distinguishing factor.

Most importantly, the Court of Appeals provided a roadmap for the Legislature and courts to follow in the future when they assess games under the constitutional gambling prohibition:

the prohibition on “gambling” in article I, § 9 encompasses either the staking of value on a game in which the element of chance predominates over the element of skill or the risking of value through bets or wagers on contests of skill where the pool of wagered value is awarded upon some future event outside the wagerer’s influence or control. However, games in which skill predominates over chance and skill-based competitions for predetermined prizes in which the participants have influence over the outcome do not constitute “gambling.”

For nearly five years, the constitutionality of daily fantasy sports has hung in the balance while the New York courts have sorted out this issue. And now the State, DFS operators, and most importantly DFS players can breathe a sigh of relief that we don’t have to wait for November 2023 and a constitutional amendment to permit the games to continue.

A copy of the Court’s decision is here.