New York Daily Fantasy Sports Suit: Appellate Division, Third Department Holds the Entire Interactive Fantasy Sports Law Unconstitutional

Daily fantasy sports may not be long for New York. Article I, § 9 of the New York Constitution bans gambling, plain and simple. That includes, lotteries, pool selling, book making, and “any other form of gambling.” Now, the Appellate Division, Third Department has added DFS to that list of banned games, affirming a trial court judgment that had held that New York’s Interactive Fantasy Sports Law that declared DFS not to be gambling unconstitutional. A copy of the Third Department’s opinion can be read in full here.

The IFS law (Chapter 237 of the Laws of 2016) attempted to exempt “interactive fantasy sports” from the New York Constitution’s ban on gambling. Specifically, it provides:


That was the trick. Although the Constitution does not define what is prohibited as “any other form of gambling,” the Legislature had otherwise provided a definition for the term when the legislation implementing the constitutional ban was enacted in 1965. Penal Law § 225.00 (2) defines “gambling” as “stak[ing] or risk[ing] something of value upon the outcome of a contest of chance or a future contingent event not under his control or influence, upon an agreement or understanding that he will receive something of value in the event of a certain outcome.” A “contest of chance,” in turn, is “any contest, game, gaming scheme or gaming device in which the outcome depends in a material degree upon an element of chance, notwithstanding that skill of the contestants may also be a factor therein” (Penal Law § 225.00 [1]). By declaring that DFS was not a contest of chance or a wager on a future contingent event over which the players have no control and, thus, was not gambling, the Legislature tried to claim that it had the power to authorize the games by mere legislation, rather than following the 2-plus year process to amend the Constitution.

The majority of the Appellate Division, however, wasn’t convinced. Rather, the Court held, the Legislature can’t just declare that DFS isn’t gambling. That’s for the Courts to decide, and allowing the Legislature to simply declare that a game isn’t gambling would render the constitutional ban ineffectual:

White Excerpt 1

The Third Department, thus, held that the Penal Law definition of what is prohibited gambling governs the extent of the constitutional ban. That is, the Constitution prohibits any games that depend upon chance in a material degree, notwithstanding that they may also involve the players’ skill. In so holding, the Third Department rejected the State’s argument that the dominating element test for what is gambling should be applied. Under the State’s reasoning, a game wasn’t gambling if skill predominated any element of chance, and it was gambling if the opposite was true. The dominating element test, the Third Department held, however, was fashioned by the Court of Appeals in evaluating lotteries, not gambling, and was rejected by the Legislature when it defined gambling in the 1965 Penal Law implementing legislation as being based on whether chance is involved to a material degree. The Third Department, thus, held that “the Legislature’s own definition of gambling, as included in the Penal Law since 1965, [w]as the appropriate definition for courts to apply when interpreting that word in the pertinent constitutional provision” (Majority Op, at 7).

Turning to DFS, the Court held that “IFS contestants pay an entry fee (something of value) in hopes of receiving a prize (also something of value) for performing well in an IFS contest” (id. at 7-8). That satisfies two of the elements of the Penal Law definition of gambling. So, whether DFS is prohibited gambling would be determined on whether it involved a material degree of chance. And the Third Department held that it did.  Accepting the parties’ stipulation of facts regarding how DFS games work, the Court held

White Excerpt 2

It was as simple as that. Because DFS involves a material degree of chance, the Court held, it is prohibited gambling under the Constitution and cannot be authorized by mere legislation like the IFS Law. The Third Department, thus, affirmed the trial court’s holding that the IFS Law is unconstitutional. But the majority didn’t stop there. It also modified that portion of the trial court judgment that had upheld the IFS Law’s provisions decriminalizing DFS games. Although the Court held that the Legislature had to power to decriminalize DFS, it could not sever the provision from the rest of the IFS Law and, thus, declared it unconstitutional as well.

Justice Stan Pritzker dissented, arguing that the majority went well beyond the appropriate standard of review in this constitutional challenge to the IFS Law. As Justice Pritzker saw it, the Court’s task was to limited to “deciding whether the Legislature rationally determined, after hearing and considering evidence, that IFS contests are not ‘gambling’ as defined under Penal Law § 225.00” (Dissenting Op, at 12). Because ample evidence existed in the legislative record for that determination, Justice Pritzker would have upheld the IFS Law because the Plaintiffs did not meet their initial burden to show that the law was unconstitutional beyond a reasonable doubt.

Indeed, Justice Pritzker reasoned, “the Legislature’s judgment necessarily involved determining whether an IFS contest is a ‘game of chance’ and, as such, analyzing whether the degree of chance is ‘material’ in determining the outcome of an IFS contest. Because it is not seriously disputed that an IFS contest involves a high degree of skill, as was found by Supreme Court, then determining whether the degree of chance inherent in an IFS contest is ‘material’ presented a difficult and nuanced question for the Legislature. And, although it may have been rational to determine that the amount of chance in an IFS contest is material, as did some of the legislators who voted against the bill, it was not at all unreasonable, based upon the legislative record, to conclude otherwise. The difference is that the legislation bears the imprimatur and presumption of constitutionality and, thus, summary judgment should not have been granted in favor of plaintiffs” (Dissenting Op, at 16-17). Furthermore, Justice Pritzker would have held, “Supreme Court incorrectly focused on the fact that the participants do not have actual influence over the athletes. However, this notion was debated by the Legislature and it ultimately concluded that the proper focus is not on the participants’ influence over the real world events and a specific athlete’s performance, but the participants’ unquestionable influence on winning the contest by making skillful choices in assembling a fantasy roster. Indeed, the plethora of evidence that was rationally relied upon by the Legislature in finding that IFS contests are predominantly contests of skill – a finding that Supreme Court accepted – also supports the notion that IFS contestants meaningfully, using certain parameters such as data and salary cap management, influence the outcome of the contests” (id. at 19). Thus, because the Legislature rationally decided that skill predominates over chance in DFS games, Justice Pritzker would have declared that the IFS Law did not violate the New York Constitution’s ban on gambling.

From here, the State will undoubtedly appeal the Third Department’s ruling as of right to the Court of Appeals. Although few jurisdictional predicates exist for as of right appeals to the Court of Appeals, this case satisfies one because the decision directly involves a substantial constitutional question. Once the State serves the notice of appeal, it also gets the benefit of an automatic stay under CPLR 5519 (a) (1), which should preserve the status quo and allow DFS games to continue while the State pursues its appeal. Although not much will change in the near future, the long term viability of DFS in New York is very much in flux.

Within a year or so, we should know once and for all whether DFS games are prohibited gambling banned by the Constitution, or whether the Legislature can rationally decide that they are not gambling and can be authorized by a mere legislative enactment. It’s now up to the seven Judges of the Court of Appeals to make that call.

Court of Appeals Leave Grants for September-December Decision Days 2019

Happy New Year! It’s now 2020 and the Court of Appeals is back in session. It’s time to check in on the cases in which the Court of Appeals has granted leave to appeal from the beginning of the 2019-2020 term.

September 2019 Session

Daniels v New York City Transit Authority, 171 AD3d 601 (1st Dept 2019)

Issue: Whether the trial court abused its discretion by allowing expert witness testimony on non-mandatory “industry standards” and by admitting evidence of data concerning accidents at other subway stations.

Appellate Division Holding: The First Department held that the trial court properly allowed the expert testimony regarding gap standards promulgated by the American Public Transit Association and the Public Transportation Safety Board because they were generally accepted in the industry. The Court also affirmed the trial court’s decision to admit the data concerning accidents at other subway stations.

Matter of Juarez v New York State Office of Victim Services, 169 AD3d 52 (3d Dept 2019)

Issue: Whether New York State Office of Victim Services exceeded its authority under Executive Law article 22 to adopt regulations for the approval of crime victims’ counsel fee requests by amending its regulations to provide that such awards may be considered only for fees incurred in successful administrative reconsideration reviews and judicial review (9 NYCRR 525.9 [a],[c]).

Appellate Division Holding: The Third Department annulled the amended regulations as in excess of authority, and remitted the matter to the Office of Victim Services for reconsideration of the fee requests.

November 2019 Session

Matter of Estate of Youngjohn v Berry Plastics Corp., 169 AD3d 1237 (3d Dept 2019)

Issue: Whether 2009 amendments to the Workers’ Compensation Law authorizing full payment of Schedule Loss Use (SLU) awards in one lump sum at the request of the injured employee altered the rule that where an injured employee dies without leaving a surviving spouse, child under 18 years old, or dependent, only that portion of claimant’s SLU award that had accrued at the time of death is payable to the claimant’s estate, along with reasonable funeral expenses.

Appellate Division Holding: The Third Department held that the 2009 amendments did not alter the longstanding rule that the claimant may only recover that portion of the SLU award that had accrued at the time of his death, and thus modified the Workers Compensation Board’s award that had limited the claimant’s recovery only to reasonable funeral expenses.

December 2019 Decision Days

Aybar v Aybar, 169 AD3d 137 (2d Dept 2019)

Issue: Whether, following the United States Supreme Court decision in Daimler AG v Bauman (571 US 117 [2014]), a foreign corporation may still be deemed to have consented to the general jurisdiction of New York courts by virtue of having registered to do business in New York and appointed a local agent for the service of process.

Appellate Division Holding: The Second Department held that a foreign corporation cannot be deemed to have consented to general jurisdiction by mere presence in New York.

Noteworthy: #AppellateTwitter’s Sean Marotta is counsel of record to one of the parties in Aybar. Looking forward to the briefs in the Court of Appeals!

Cole v Cole, 172 AD3d 680 (2d Dept 2019)

Issue: Whether the trial court properly awarded physical custody of the children of the marriage to the plaintiff and whether the Appellate Division properly directed the parties to contribute pro rata to the children’s future unreimbursed health care expenses.

Appellate Division Holding: The Second Department held that the trial court’s custody award was supported by the record, but that it should have required the parties to contribute pro rata to the children’s future unreimbursed health care expenses under Domestic Relations Law § 240 [1-b] [c] [5].


Through the first four months of the term, the Court has maintained its sleepy grant rate, granting only 5 cases, 2 from the Second Department, 2 from the Third Department, and 1 from the First Department. The pace should pick up in the Spring, especially as we head toward the end of the term and Decision Days in June.

Zervos v Trump Heads to the Court of Appeals to Decide Whether the Supremacy Clause Precludes State Courts From Exercising Jurisdiction Over a Sitting President

Ten months after the First Department held that the Supremacy Clause of the United States Constitution does not divest state courts of jurisdiction over a state law case against a sitting President, the First Department has granted President Trump leave to appeal to bring that question of first impression in New York to the Court of Appeals. First, a little background on the case and what lies ahead at the Court of Appeals. And second, a quick appellate practice tip that explains why it took so long for the First Department to certify this important question.

In October 2016, while President Trump was running for office, Summer Zervos, a former Apprentice contestant, held a press conference and claimed that Trump had made repeated unwanted sexual advances toward her. Trump denied the claims, calling Zervos’ story “totally false” and “all big lies,” among other things. Shortly after Trump was elected President, Zervos sued him for defamation in New York Supreme Court. Trump moved to dismiss the complaint, arguing that the state courts were precluded from exercising jurisdiction over him while he was the sitting President, or alternatively for a stay of the action until his presidency ends.

Supreme Court, New York County denied Trump’s motion, holding that nothing in the Supremacy Clause precluded the state courts from exercising their jurisdiction under the state constitution to decide a civil case brought against a sitting President. The court reasoned that allowing the defamation action to go forward would not threaten to intrude on the President’s official duties, and thus could not constitute state interference with federal government operations. The Court also denied Trump’s arguments for dismissal on the merits, and an appeal ensued.

In March 2019, the First Department, in a divided 3-2 opinion, affirmed the denial of Trump’s motion to dismiss. In particular, the majority held,

Trump 1

The dissent disagreed, and would have held Trump immune from suit because “subjecting the President to a state trial court’s jurisdiction imposes upon him a degree of control by the State of New York that interferes with his ability to carry out his constitutional duty of executing the laws of the United States. Since the Supremacy Clause guarantees that any effort by the individual states to annul, minimize, or otherwise interfere with those laws will be struck down, it follows that any effort by a state court to control the President must likewise fail” (Dissenting Op, at 34).

At the time when this decision came out, it seemed ripe to head directly to the Court of Appeals. The issue is one of first impression in New York, and the case has been closely followed across the country. Because the Appellate Division order was nonfinal—it merely affirmed the denial of motion to dismiss, thereby leaving the whole case pending—there was only one way that the parties could immediately get to the Court of Appeals. They had to ask the First Department to grant leave to appeal on a certified question of law. The Court of Appeals’ jurisdiction doesn’t allow it to grant leave on a nonfinal order like this one; only the Appellate Division could.

But, yet, the parties didn’t seem to be in a rush to ask the Appellate Division to certify the question to the Court of Appeals for further review. In fact, Zervos did not immediately serve the order with notice of its entry, as required by CPLR 5513(b) to start the clock for Trump’s time to move for permission to appeal. So Trump waited until November 2019, 8 months after the March decision, to make the leave motion to the First Department. That’s an unusually long time to wait.

It could have been much shorter had Zervos’ counsel served the First Department’s March 2019 order with notice of its entry immediately after it was issued. But if the prevailing party never serves the order with notice of its entry, as required under CPLR 5513(b), the time to seek permission to appeal never begins to run. So, conceivably, a case could go on for years, and the losing party would still have the right to move for permission to appeal from the order that was never served with notice of entry. Don’t make that mistake. Don’t subject your client to the risk that your opponent’s counsel will one day, years later decide to seek permission to appeal from an old Appellate Division order that was never served with notice of its entry. (By the way, the Court entering the order on the electronic docket, which is then sent to the losing counsel, DOES NOT count as service of the order with “written notice of its entry.” You have to draft a separate notice of entry document with the Appellate Division order attached to it, and e-file or otherwise serve that). If you’ve won, always serve the order with notice of its entry as soon as the order is issued to start your opponent’s time to make the motion for leave to appeal. And if you haven’t, hope you have Zervos’ counsel on the other side.

The First Department has now sent the Zervos case up to the Court of Appeals for a decision on whether state courts are precluded from exercising their jurisdiction granted under the State Constitution over cases involving only state law brought against a sitting President. It should be a fascinating case, and will definitely liven up the Court of Appeals’ term.  Or, as Professor Steve Vladeck explained yesterday on Twitter:

Trump 2

Only time will tell.

New York Daily Fantasy Sports Suit: The Third Department Hears Oral Argument on Whether DFS is Prohibited Gambling

Oral argument of an appeal is often an appellate attorney’s most fun moment in a case. You’ve labored over lengthy briefs on the issues at hand, thought about how you want the appellate court to decide your case, and pored over the briefs and record for hours creating an iron clad argument that will tip the court in your favor. Now the time has come when you get to stand up at that podium with a panel of Judges staring at you and engage them in a conversation about why the law says you should win.

Your case is called. You stand up and introduce yourself. May it please the Court. You start in on your well crafted first few lines, and then it begins. A barrage of questions from a hot bench, or worse yet, a cold bench where you have ten minutes to fill with no one seemingly interested. Thankfully, the advocates in White v Cuomo got a mixture of the two at oral argument before the Appellate Division, Third Department.

Because the State appealed Justice Connolly’s order holding the DFS Law unconstitutional, it was up first. Deputy Solicitor General Victor Paladino, relying on the point ably made in the State’s brief, emphasized that the Legislature had undertaken a thorough look at DFS and rationally decided that it was not gambling. When a new game is proposed in NY, he argued, the Legislature gets to decide in the first instance whether the game is gambling or not, and DFS is not. Unlike sports gambling where bettors wager on the outcome of a game over which they have absolutely no control, the relevant contest for DFS is the not the sports game, but the task of putting together the best lineup for the day to compete against other DFS players. Yes, the scores of that lineup are determined by professional players over whom the DFS player has no control, but the DFS player very much controls which players are selected. It’s just like being a general manager, Paladino argues, and that takes skill. Because the Legislature rationally concluded that the DFS contest is not gambling, and the Court is required to defer to that legislative choice, the State argued that Judge Connolly’s order should be reversed.

In contrast, Neil Murray argued for the Plaintiffs, there is only one definition of gambling in NY and when a game meets it, the Legislature can’t merely say that the game isn’t gambling. Murray argued that not only is DFS a game of chance, because a material degree of chance is involved in the result (a player could get hurt, the weather could impact game conditions, etc.), but it’s also a wager on a contingent future event over which the bettor has no control (that is, DFS is effectively wagering on player performances). Either way, because DFS fits the definition of gambling under the Penal Law section that implements the constitutional ban, the Legislature could not authorize it by mere legislation. A constitutional amendment was required.

If you watch the argument, which can be found here, the Judges did a very good job of hiding where they stood on the outcome. Only Judge Pritzker seemed to indicate through his questioning—he asked about the very heavy burden that the Plaintiffs face to establish the DFS Law’s unconstitutionality beyond a reasonable doubt—that he favored the State’s position. The remaining Judges (Presiding Justice Garry, Justice Clark, Justice Mulvey, and Justice Molly Reynolds Fitzgerald, who had only been sworn in just a few days earlier) kept a tight lid on which way they were leaning. The questions were fair and clearly showed that the Judges were well prepared for the thorny issues facing them. In light of that, it’s hard to predict where this will turn out, though I still lean slightly in favor of the State’s position given the extremely heavy burden that the Plaintiffs face and the deference usually accorded to legislative determinations. You can hear me on Capitol Pressroom with David Lombardo talking about the case here.

Whichever way this comes out, it will not be the end of the case. Because the issue of DFS’s constitutionality presents an adequate jurisdictional predicate for an appeal as of right to the Court of Appeals, the case is likely be headed there next for a final answer to the question: can DFS continue in NY without an amendment to the constitutional ban on gambling?

The Appellate Division’s decision is expected by early January 2020.

New York Daily Fantasy Sports Suit: What Happens When an Amicus Isn’t Actually a Friend of the Court

It isn’t often that New York appellate courts deny someone the right to submit an amicus brief in a pending appeal. It happens, but it’s rare. In fact, the only time that I remember seeing a New York appellate court turn away a proposed amicus brief was when the proposed amicus had a direct financial interest in the outcome of the appeal. The party, thus, wasn’t a true friend of the Court.

Time to add one more to my list.  In White v Cuomo, the case about whether daily fantasy sports are prohibited gambling under Article I, § 9 of the New York Constitution, the Appellate Division, Third Department, on Thursday, denied Rivers Casino’s motion to file an amicus brief in the case. Rivers’ brief had sought to provide the Court with an alternate definition of prohibited gambling, arguing that the term in the Constitution can’t be understood by the definition the Legislature later put in the Penal Law. Instead, it argued, the constitutional term can only be defined by its original meaning at the time the constitutional amendment was adopted in 1894, and at that time all forms of gambling were prohibited regardless of whether skill or luck dominated. Thus, DFS is prohibited gambling, Rivers sought to argue.

But now having denied Rivers’ amicus motion, the Court won’t consider those arguments. Why would the Court have denied Rivers’ motion when these kinds of motions are routinely granted, and none of the parties opposed Rivers’ motion? Let’s see if we can figure it out.

The Rules for Amicus Curiae Briefs

The rules for amicus submissions in pending appeals are fairly straightforward. Under Rule 500.23 of the Court of Appeals’ Rules of Practice, the Court looks at these criteria for determining whether to grant amicus relief:

Court of Appeals Amicus Rules

The Joint Appellate Division Rules are similar:

Appellate Division Amicus Rules

So, under the rules, New York’s appellate courts want to know:

  • who is the proposed amicus party;
  • what their interest in the case is;
  • what issues they want to brief for the court to consider;
  • that the issues are not mere duplications of the parties’ arguments, and bring something different for the court to consider, but do not raise new issues not raised or addressed by the parties or the court from which the appeal was taken; and
  • the proposed amicus party is a true friend of the court, and not someone who has a direct financial interest in the outcome of the litigation.

Although the Appellate Division’s Rules don’t have a formal timeliness component, the Court of Appeals has made clear that for an amicus motion to be considered, it must be made returnable at least one month before the appeal is scheduled for oral argument. Failure to comply will likely lead the Court to deny the motion, because the Judges wouldn’t have enough time to consider it before hearing the appeal. I’d venture to say that the Appellate Division likely applies a similar, albeit unexpressed, rule.

The Denial of Rivers’ Amicus Motion

The courts have a great deal of discretion in deciding whether to accept a proposed amicus brief, and unfortunately don’t have to give any reason for their decisions. So, we’re left to guess why the Third Department denied Rivers’ motion. In Rivers’ motion, it explained its interest in the case:

This appeal has important implications for Rivers’ business and for the regulated gambling industry more broadly. The industry has relied upon the settled understanding that the Constitution’s prohibition on gambling bound the Legislature, such that the only way to authorize a form of gambling was through constitutional amendment. To say the least, Chapter 237 fundamentally upsets the legal framework upon which this industry has justifiably relied (Rivers’ Proposed Amicus Brf, at 1).

It identified the issues it wanted the Third Department to consider—whether the constitutional ban on gambling must be interpreted according to its own terms based upon their original meaning—and Rivers’ arguments certainly differ from the parties’ focus on the statutory test for what is prohibited gambling. And the motion was submitted well before the case is scheduled for argument during the November term. Rivers’ motion seems to satisfy most of the Rules’ requirements for amicus submissions.

Here are the two potential issues that could have led to the Court deciding to deny Rivers the right to participate in the case. First, the issue that Rivers sought to raise is a new one to the case, and wasn’t raised by the parties or addressed by Judge Connolly at Supreme Court. That presents a problem under New York precedent. The Appellate Division has previously held that a proposed amicus party can’t raise new issues different from those argued by the parties (see e.g. Colgate-Palmolive Co. v Erie County, 39 AD2d 641 [4th Dept 1972] [“an Amicus curiae is not a party, and cannot assume the functions of one; he must accept the case before the court with issues made by the parties, and may not control the litigation. Nor may he introduce any issues; only the issues raised by the parties may be considered” (quotation marks and alterations omitted)]). And the Court of Appeals’ rules provide that expressly.

That may not be a fatal flaw, however. There’s certainly an argument that the scope of the constitutional definition of gambling has always been in the case, and Rivers’ argument for an originalist interpretation is merely an extension of the parties’ arguments, a new and different way of looking at the issue. But, the Court certainly was within its discretion to have concluded that Rivers’ proposed amicus brief sought to improperly raise a new constitutional issue that no one had addressed before and to have denied Rivers’ motion on that basis.

Second, although the Appellate Division’s rules don’t contain an express requirement for a proposed amicus party to disclose their financial stake in the case or whether a party is backing or funding the amicus submission, whether an amicus party is a true friend of the court, rather than a party with a direct financial interest in the outcome of the case, is certainly something that the Court can, and often does, consider. Indeed, the Court of Appeals’ rules expressly require those disclosures in an amicus motion.

Here, Rivers’ motion does not disclose who contributed to or was financially backing the amicus submission. Rivers states that it has paid a bunch of money for a casino license in reliance on its understanding that the only forms of gambling that will be allowed in New York are those that have secured a constitutional amendment to be excepted from the constitutional ban, like horse racing and casino gambling. Could the Court have been concerned that Rivers’ interest was a purely economic concern about competition to its brick and mortar casino, and wasn’t a true friend of the court seeking to assist the Court with its decision? That’s what some have guessed, including former Court of Appeals Judge Robert Smith:

We’ll never know exactly why the Third Department decided against considering Rivers’ amicus brief in support of the plaintiffs’ position that DFS is unconstitutional gambling, but it certainly seems the Court had justifiable grounds for deciding as it did.


New York Daily Fantasy Sports Suit: The Amici Bring an Interesting Twist to Whether DFS Violates the NY Constitution’s Ban on Gambling

The State and the Plaintiffs aren’t the only ones who want to be heard on whether the New York Interactive Fantasy Sports Law violates New York’s constitutional ban on gambling. And New York courts are happy to hear their opinions. In White v Cuomo, three parties have sought and been granted leave to file amici briefs—FanDuel and DraftKings in support of the State, and Rivers Casino, one of New York’s four licensed brick and mortar casinos, in support of the Plaintiffs.

Let’s take a quick run through the amici briefs to see what new arguments they bring to the table.

FanDuel and DraftKings

FanDuel’s and DraftKings’ arguments are remarkable similar to the State’s arguments in its opening brief. They both argue that DFS is not gambling prohibited by the New Yor Constitution because the skill required dominates chance-based elements. Thus, it is a bona fide contest for a prize, they argue.

What distinguishes FanDuel’s and DraftKings’ arguments from the State’s is the legal test that they each apply. While the State seeks to have the Appellate Division apply the “dominating element” test that holds that a game constitutes prohibited gambling when chance dominates any skill involved instead of the “material degree” test that holds a game is gambling when chance is involved in a material respect, which Supreme Court applied to hold the IFS Law unconstitutional, FanDuel and DraftKings argue that the tests are substantively identical. It’s just that Supreme Court got it wrong under both.

Particularly, FanDuel and DraftKings trace the “dominating element” test back to a 1904 Court of Appeals’ decision in People ex rel. Ellison v Lavin (179 NY 164, 170-171 [1904]), where the Court held:

Throwing dice is purely a game of chance, and chess is purely a game of skill. But games of cards do not cease to be games of chance because they call for the exercise of skill by the players, nor do games of billiards cease to be games of skill because at times, especially in the case of tyros, their result is determined by some unforeseen accident, usually called luck. The test of the character of the game is not whether it contains an element of chance or an element of skill, but which is the dominating element that determines the result of the game.

The dominating element test was long applied in New York, until at least the 1965 Penal Law amendments that defined gambling to include any contest the outcome of which “depends in a material degree upon an element of chance, notwithstanding that skill of the contestants may also be a factor therein.” Penal Law § 225.00 (1) (emphasis added). The State argues that these amendments changed the test for gambling to the stricter “material degree” test. FanDuel and DraftKings, on the other hand, argue for two reasons that the amendment changed nothing at all.

First, after the 1965 Penal Law amendments, New York courts continued to apply Lavin’s dominating element test to determine when a game depended on chance to a material degree. If skill dominated, the courts held, the game didn’t depend in a material degree on an element of chance, and it wasn’t prohibited gambling.  And vice versa.

Second, FanDuel and DraftKings argue, the legislative history underlying the 1965 Penal Law amendments do not identify any explicit desire to overrule the Court of Appeals’ common law “dominating element” test. The Court, in other contexts, has been very reluctant to find a wholesale abrogation of the common law absent the Legislature’s expressed intention to do so. That simply isn’t present here, they argue.  Instead, the Bartlett Commission that proposed these revisions actually said they weren’t intending to make many changes of substance at all, and the “dominating element” vs. “material degree” test conflict does not appear anywhere in the Commission’s report. Thus, FanDuel and DraftKings argue, the Legislature can’t have intended to replace more than 60 years of precedent applying the “dominating element” test to determine whether a game is prohibited gambling without so much as a word on the subject.

This interpretation is in line with numerous holdings across the country, they argue, including many holding that fantasy sports and daily fantasy sports, in particular, are not gambling because they are contests for which the players pay set entry fees, compete against others in picking the best roster, and play for a set prize pool. One such holding was from New Jersey, and was eventually endorsed by the Third Circuit and Congress. Where DFS games involve “(1) prizes [that] are established and announced in advance; (2) outcomes [that] reflect the ‘relative knowledge and skill of the participants’; and (3) the result is not determined by the outcome for a real-world team or teams or an athlete’s performance in a single real-world sporting event (FanDuel and DraftKings Amici Brf, at 14, quoting Unlawful Internet Gambling Enforcement Act, 31 U.S.C. § 5362(1) (E) (ix) (2006)), they are not gambling.

Rivers Casino

On the other side, Rivers Casino appeared in support of the Plaintiffs’ arguments that the IFS Law is unconstitutional, arguing that the law had fundamentally upset the casino gambling industry’s legitimate expectations that gambling can only be authorized in New York by a constitutional amendment. That’s what the casinos had to do, and so too should the fantasy sports industry, it argues.

Beyond the “we had to get a constitutional amendment, and so should you” rhetoric, Rivers Casino’s legal argument is fairly straightforward. It offers a definition of constitutionally prohibited gambling that is far more strict than any party to this case has previously discussed and doesn’t rely at all on the skill vs. chance dichotomy. As Rivers’ puts it,

Before considering the meaning and scope of the Penal Law, this Court first must decide if DFS constitutes gambling as that term is used in the Constitution. For reasons explained below, the term gambling as used in the Constitution means simply: to wager on games of skill or chance. Whether DFS is viewed as a game of skill or chance, or should be subject to criminal penalties in New York, it is still unauthorized “gambling” as that term is used in the Constitution. From there, the Legislature presumably may decide to criminalize DFS, or to prescribe civil penalties, but the Legislature cannot somehow “authorize” DFS. Chapter 237, therefore violates the Constitution’s general prohibition against gambling. (Rivers’ Brf, at 3-4).

To support this argument, Rivers breaks out the early 1900s dictionaries, which appear to define gambling as wagering money on games of either chance or skill, without differentiation. Rivers, thus, argues that selling access to the DFS pool is prohibited gambling under the Constitution, even if it involves a measure of skill. Indeed, at the time the constitutional ban was implemented for the first time, the Legislature also amended the Penal Law to criminalize wagering on “the skill, speed, or power of endurance of man or beast” involving “any unknown or contingent event whatsoever” (Rivers Brf, at 8, quoting L. 1895, ch. 1, § 1, amending § 351 of the Penal Law). That, Rivers argues, is a conclusive construction that even games of skill are subject to the constitutional ban.

Rivers also argues that the constitutional ban itself was intended to prohibit the Legislature from authorizing any form of gambling by merely calling it not gambling. The debates surrounding the constitutional ban show that the intent was to take the decision about what is gambling and what is not out of the Legislature’s purview, because, the convention delegates believed, the temptation to grab the gambling tax revenues and run would always be strong and often too strong to resist. Thus, Rivers argues, while the Legislature can decide how to enforce the constitutional ban on gambling, it can’t redefine it and authorize what the Constitution prohibits.

Oral Argument

In addition to seeking leave to file an amici brief, FanDuel and DraftKings also sought leave to participate in the oral argument of the appeals. The Third Department, however, denied that request. It’s not often in New York appeals that an appellate court will grant oral argument to an amicus party. In fact, the only time I’ve seen it is when it’s the State asking for divided argument. That’s not a hard and fast rule, but it seems to be the way that these high profile cases play out.

With the case now fully briefed, and the amici briefs in, we now have to wait until November for the oral argument, with a decision expected in late December 2019 or January 2020.

NY Daily Fantasy Sports Suit: Plaintiffs Argue that a Rose is a Rose and DFS is Gambling, Notwithstanding the Legislature’s Attempt to Say Otherwise

What kind of world do we live in, the Plaintiffs in White v Cuomo want to know in their constitutional challenge to New York’s Interactive Fantasy Sports Law that authorized and regulated daily fantasy sports games in New York for the first time. “[A] Shakespearean world inhabited by Romeo and Juliet where substance trumps form, and a rose is, in fact, a rose; or . . . in a parallel universe of alternative facts, like the one inhabited by Humpty Dumpty—and now by the New York State Legislature—where ‘gambling’ is not ‘gambling’ simply because the Legislature has decided to call it something else” (Plaintiffs’ App Div Brf, at 2). To the Plaintiffs, a rose is still a rose, and DFS is wagering money on real life athletes in real life games over which the bettors have no control. That’s gambling, they argue, and barred by Article I, § 9 of the New York Constitution.

In the Plaintiffs’ opening brief to the Appellate Division, Third Department, they make four principal arguments in support of Justice Connolly’s decision declaring the IFS Law unconstitutional: (1) DFS falls within the Penal Law’s definition of prohibited gambling, and the Legislature’s rationale for an opposite finding ignores the realities that DFS is a game involving a material degree of chance and are wagers on future contingent events; (2) the New York Attorney General admitted that DFS is prohibited gambling when it prosecuted DraftKings and FanDuel before the IFS Law was adopted; (3) DFS looks like gambling and is regulated like gambling, so it must be gambling; and (4) the Legislature was not free to define gambling to exclude DFS because it had applied the constitutional gambling ban to all forms of sports wagering over more than 100 years. Let’s take a closer look at each of the arguments.

DFS is Gambling Under the Penal Law Because it Involves a Material Degree of Chance and Wagers on Future Contingent Events

The Plaintiffs start with the Penal Law definition of gambling. Under Penal Law § 225.00(2), “[a] person engages in gambling when he stakes or risks something of value upon the outcome of a contest of chance or a future contingent event not under his control or influence, upon an agreement or understanding that he will receive something of value in the event of a certain outcome.” According to Plaintiffs, that means “[t]he key elements, therefore, of gambling are (1) whether a contestant stakes or risks something of value, (2) upon a contest of chance or a future contingent event not under his control or influence, (3) with the understanding he will receive something of value in the event of a certain outcome” (Plaintiffs’ App Div Brf, at 32).

DFS fits all three, they argue. DFS players pay an entry fee to the companies to participate—that’s something of value. The players have absolutely no control over how the athletes they select for their fantasy teams perform in the real life games—that’s a wager on a future contingent event not under their control. And if their fantasy team outperforms others, they win a prize—that’s receiving something of value in the event of a winning outcome. So, the Plaintiffs contend, DFS is gambling as the Legislature has defined it in the Penal Law.

The Legislature’s opposite conclusion in the IFS Law, they argue, lacks a rational basis and shouldn’t be accorded the presumption of constitutionality on which the State strongly relies. Attacking the Legislature’s rationale, the Plaintiffs first argue that DFS is a game of chance. There is no real distinction between the fantasy DFS game and betting on a real sports contest, the Plaintiffs contend, because the performances on which DFS is based are real life athletes in real games on any given night over whom the DFS players have absolutely no control. An athlete they choose for their DFS team could get hurt in the first inning, or have an off night shooting the ball, or could miraculously score the game winning goal in the Miracle on Ice, but in the end, the DFS player’s performance is all based on things well outside of his or her control.  There’s unquestionably a material degree of chance involved, they contend. And just like poker, the mere fact that the players use their skill to play their hands, or for DFS to assemble their teams, doesn’t eliminate that material degree of chance.

But even if DFS didn’t involve a material degree of chance, as the Legislature found and the State contends on this appeal, the Plaintiffs argue that DFS is nevertheless a wager on future contingent events over which the DFS players have no control, and so it is prohibited gambling. As the Plaintiffs put it, “it is indisputable that the outcome of any IFS contest must inevitably be based upon a future contingent event—the performance of real-life athletes in real-life games. It is equally indisputable that an IFS contestant has absolutely no control over how those athletes will perform in those games, as the State itself has stipulated” (Plaintiffs’ App Div Brf, at 47). Indeed, the Plaintiffs argue, the mere fact that those real life players are being used in a fantasy game doesn’t magically transform the bets on their performances from gambling to not gambling. Supreme Court, therefore, properly declared the IFS Law unconstitutional, the Plaintiffs assert.

The New York Attorney General’s Prior Admissions

Unsurprisingly, the Plaintiffs support much of their argument with citations to the New York Attorney General’s position and public statements that DFS is gambling prohibited by the New York Constitution in People v DraftKings. Back before the adoption of the IFS Law, the Attorney General commenced criminal proceedings against DraftKings and FanDuel for what the Attorney General claimed was illegally offering DFS games that constituted prohibited sports betting. In particular, the Attorney General told the New York Daily News:

Daily fantasy sports is much closer to online poker than it is to traditional fantasy sports … FanDuel and DraftKings take a bite out of every bet. That is what bookies do, and it is illegal in New York … In fact, as our court papers lay out, these companies are based on business models that are identical to other forms of gambling . . . Consider the final moments of a football game where the outcome has been decided and the winning quarterback takes a knee to run out the clock and assure victory. Let’s say it’s Eli Manning, and the Giants are defeating the Eagles or the Cowboys. Statistically, this play would cost the quarterback one yard – a yard that could make the difference between someone on DraftKings or FanDuel winning or losing tens of thousands of dollars. What did that have to do with the bettor’s skill? It’s the classic risk involved in sports betting. Games of choice involve some amount of skill; this does not make them legal. Good poker players often beat novices. But poker is still gambling, and running a poker room – or online casino – is illegal in New York (Plaintiffs’ App Div Brf, at 50).

Throughout the criminal proceedings, the Attorney General took a strong position that DFS was prohibited gambling, for many of the same reasons that Judge Connolly invalidated the IFS Law. The Plaintiffs now use the Attorney General’s own arguments as evidence that DFS remains the same kind of banned gambling that it was then. Indeed, quoting from a former Attorney General’s opinion, the Plaintiffs attempt to equate DFS to straight sports betting, which the Attorney General has long held needed a constitutional amendment to be authorized.

If DFS Looks Like Gambling and is Regulated Like Gambling, It Must be Gambling

What do they say about ducks? If it looks like a duck, and quacks like a duck, then it’s a duck. Well, that’s how the Plaintiffs frame their third argument for why DFS is gambling banned by the New York Constitution.

Listing off a number of factors that make DFS look like gambling, the Plaintiffs cite to the bets on real life athletes in real life games over whom the DFS players have no control, that the DFS operators rake a piece of the prize pool, that the Legislature put the IFS within the Racing, Pari Mutuel Wagering and Breeding Law where other forms of gambling are regulated, and that the law offers protections for “compulsive” players, aka problem gamblers. Although the Legislature excluded “registered” DFS operators from the criminal prohibition, the mere fact of registration does not change the underlying nature of the DFS game. DFS is still DFS whether or not the operator is register, and it’s still gambling, the Plaintiffs argue.

The Legislature Was Not Free to Exclude DFS From the Definition of Gambling

Even though the term “gambling” is not defined in Article I, § 9 of the New York Constitution, that does not grant the Legislature unlimited license to define the term in any manner it wishes, the Plaintiff argue. Words must be construed to have their ordinary meanings, and thus “the Legislature [could not] ignore certain kinds of gambling, let alone pass laws to enable rather than to prevent it, as it has done here . . . Otherwise, as Supreme Court pointed out in this case, the prohibition against gambling, a protection embodied in the Bill of Rights in Article I of the New York Constitution, would exist only at the sufferance of the Legislature” (Plaintiffs’ App Div Brf, at 61-62).

From the 1894 addition of the constitutional ban on gambling, the Legislature and the Attorney General have always understood that sports betting is illegal gambling. DFS is no different than sport betting, because the bets are still placed on real life performances over which the DFS players have no control. Thus, it too is illegal gambling, and the Legislature wasn’t free to ignore over 100 years of history to find otherwise. Indeed, the Plaintiffs argue,

Courts are not required to stand by helplessly while the Legislature interprets the Constitution any way it wants. The difference between what Plaintiffs and the State cite as precedent turns on the distinction between the “interpretation” versus the “implementation” of a constitutional mandate. It is the Judiciary’s sole prerogative to interpret “gambling”; it falls to the Legislature to implement laws to prevent it. Thus, the determination on whether daily fantasy sports falls within the definition of “gambling” is for the Judiciary, not the Legislature, to decide. Supreme Court properly interpreted the term (Plaintiffs’ App Div Brf, at 68).

Plaintiffs’ Cross Appeal

Finally, Plaintiffs argue on their cross appeal of Judge Connolly’s decision that he also should have declared the Legislature’s attempt to decriminalize DFS without substituting some other penalty unconstitutional. As the Plaintiffs view the constitutional commands, Article I, § 9 requires the State to pass laws to prevent gambling. The removal of the criminal sanction in the IFS Law is permitted, therefore, only if the Legislature substitutes some other penalty in its place.  “It could, for example, have enacted a civil law prohibiting gambling and imposing civil fines to prevent any person or entity from operating IFS. Instead, it left a statutory and regulatory vacuum by decriminalizing gambling while not substituting something else in its place to prevent it” (Plaintiffs’ App Div Brf, at 70).

This legal limbo, where DFS has been decriminalized but still violates the constitutional ban, cannot withstand scrutiny, the Plaintiffs’ argue. Either the IFS law falls in its entirety, or it doesn’t. As an example, the Plaintiffs point out that DraftKings and FanDuel are still operating with impunity, and without any statute or regulation to stop them from continuing to violate the Constitution. “This is precisely why Chapter 237 should be struck down in its entirety, and not just partially, as Supreme Court did. The Legislature did not exclude IFS from the Penal Law definition of ‘gambling’ because it intended to substitute in its place some alternative measure to prevent it. Quite to the contrary, it inserted the exclusion for the obvious and sole purpose of enabling IFS to occur, so that the State could regulate and tax it. This is precisely why the exclusion is unconstitutional because it had the effect—an effect that was the Legislature’s deliberate objective—to enable that which is constitutionally prohibited” (Plaintiffs’ App Div Brf, at 72).

Next up in my run through the Appellate Division briefs, a not so surprising application for two DFS titans to participate in the appeal.



Court of Appeals Holds Commercial Contracts Can Waive Right to Seek Declaratory Judgment to Interpret the Terms of the Agreement and Yellowstone Relief

Contracts are often ambiguous. They are usually long, with many terms, and you never know how they will apply in circumstances that the parties never contemplated. That’s why the power to go to court to ask for an interpretation of the agreement and how it applies to the unique facts that the parties face has been so important in New York, the self-proclaimed commercial center of the world.

Not anymore, says the majority of the Court of Appeals in 159 MP Corp. v Redridge Bedford, LLC (No. 26). The right to freedom of contract trumps all. And sophisticated parties with counsel are allowed to agree to waive the right to seek a declaratory judgment to interpret the terms of a commercial contract if they do so in the agreement. Public policy can’t invalidate the express terms of the waiver, and a suit seeking to interpret the agreement and a stay of the period in which to cure any default while the court decides the issues—better known as a Yellowstone injunction—must be dismissed.

In 159 MP Corp., commercial tenants executed two 20-year commercial leases to occupy a building in Brooklyn and run a grocery store. The leases were typical boilerplate commercial agreements, but had been revised by handwritten additions and deletions, including this paragraph in the lease rider:

159 MP - 1

After the building owner sent notices of default to the tenants, the tenants commenced a declaratory judgment action seeking a declaration that they hadn’t defaulted under the leases and a Yellowstone injunction to prohibit the owner from terminating the leases or bringing removal proceedings while the court decided the issues. The owner, however, moved to enforce the waiver clause, arguing that the action should be dismissed.

Supreme Court, Kings County denied the Yellowstone injunction and dismissed the complaint, holding that the clear terms of the waiver clause prohibited the declaratory judgment action. The Court held that the waiver didn’t prevent an action for damages or prohibit the tenants from raising any interpretation arguments in defense of a removal proceeding, but just precluded this action for declaratory relief.

The Appellate Division, Second Department affirmed, with one Justice dissenting, on this issue of first impression in New York. Like Supreme Court, the Appellate Division agreed that the waiver should be enforced according to its terms, and noted that the tenants were not left without available relief. The lone dissenting Justice, however, argued that the waiver clause is void as against public policy because “the declaratory judgment action, together with the Yellowstone injunction, serve a valuable public policy role in relations between commercial landlords and tenants, providing a mechanism for a commercial tenant to protect its valuable property interest in the lease while challenging the landlord’s assessment of its rights” (159 MP Corp. v Redbridge Bedford, LLC, 160 AD3d 176, 204 [1st Dept 2018] [Connolly, J., dissenting]).

On appeal, the Court of Appeals majority too held that the waiver clause should be enforced according to its plain terms. In doing so, the majority rejected the tenants’ argument that the waiver clause violates New York public policy. The public policy, the majority emphasized, actually cuts the other way in favor of the freedom of contract: “In keeping with New York’s status as the preeminent commercial center in the United States, if not the world, our courts have long deemed the enforcement of commercial contracts according to the terms adopted by the parties to be a pillar of the common law” (Opn, at 6). Thus, the majority held, “because freedom of contract is itself a strong public policy interest in New York, we may void an agreement only after ‘balancing’ the public interests favoring invalidation of a term chosen by the parties against those served by enforcement of the clause and concluding that the interests favoring invalidation are stronger” (id. at 8). According to the majority, that balancing in most cases, including this one, weighs in favor of the freedom of contract.

159 MP - 2159 MP - 3

The availability of a Yellowstone injunction, the majority noted, is premised on having a valid action. Without one, the request for a stay is academic. But, the majority emphasized, a Yellowstone injunction isn’t necessary because a commercial tenant can’t be evicted from a property without first being able to defend its rights in a removal proceeding, where it will have the chance to argue about how the agreement should be interpreted and that it didn’t breach the lease. Thus, the majority reasoned, “there is no strong societal interest in the ability of commercial entities to seek such a remedy that would justify voiding an unambiguous declaratory judgment waiver negotiated at arm’s length, merely because this incidentally precluded access to Yellowstone relief” (Opn, at 16).

Judge Rowan Wilson, in dissent, would have voided the waiver clause on public policy grounds. As Judge Wilson put it,

159 MP - 4

Judge Wilson forecasts that the majority’s prioritization of the freedom of contract over access to the courts for interpretation of commercial agreements will incentivize building owners to “include a waiver of declaratory and Yellowstone relief in their leases as a matter of course. Those clauses will enable them to terminate the leases based on a tenant’s technical or dubious violation whenever rent values in the neighborhood have increased sufficiently to entice landlords to shirk their contractual obligations” (Dissenting Opn, at 2-3). Those dire consequences of the majority’s departure from the longstanding New York rule, he argues, are not worth the cost.

The Court of Appeals’ opinion can be found here.


New York Daily Fantasy Sports Suit: State’s Opening Brief Makes a Strong Pitch that the Legislature Rationally Determined that DFS is Not “Gambling” Under the NY Constitution

The game for the fate of daily fantasy sports in New York is on, and the State has scored first. Ok, ok. In appellate litigation, the losing party below always gets the ball first. And the State certainly lost below in this one. Judge Connolly of Supreme Court, Albany County held that daily fantasy sports were “gambling” prohibited by Article I, § 9 of the New York Constitution. But oftentimes the appellant’s opening brief leaves much to be desired, and much for the Court to decipher.

Not so here. The State has called on its stable of ready appellate lawyers, picked a great one—I know from personal experience because he’s beaten me in a case at the Court of Appeals before (still hurts now three years later)—and articulated a very strong argument for why the New York Legislature has the power to define what is and what is not gambling prohibited by the Constitution, how the Legislature exercised that power rationally here in deciding that the mixed skill and chance DFS games are not gambling, and how the courts should defer to that rationally supported legislative choice.

To recap quickly, back in 2016, there was a huge push to allow daily fantasy sports contests in New York, but the New York Attorney General said that the games violated New York’s constitutional ban on gambling. The DFS industry in response started a full court press to lobby for legislative authorization of the games. The industry didn’t want to wait the two-plus years it would have taken to amend the New York Constitution. The result: Chapter 237 of the Laws of 2016, known as the Interactive Fantasy Sports Law, which attempted to exempt “interactive fantasy sports” from the New York Constitution’s ban on gambling. Specifically, it provides:


A number of plaintiffs challenged the law as a violation of the constitutional gambling ban, and they won. At least in part. Judge Connolly held that DFS was gambling and struck down most of the IFS law, but held that the Legislature acted within its power to decriminalize the games. So, as we stand now, DFS is unconstitutional gambling, but if the games are offered in New York nevertheless, the operators can’t be brought up on criminal charges.

In the State’s opening brief challenging Judge Connolly’s holding that the IFS Law is unconstitutional, the State makes the case that because the Constitution leaves the term “gambling” undefined, and specifically authorizes the Legislature to implement the constitutional ban, it has to be up to the Legislature to fill the gap by defining what is and what isn’t prohibited gambling. Specifically, the State builds its case on traditional notions of judicial deference to rational legislative decision making. The State points out that the Court of Appeals has repeatedly held that where the Constitution provides broad and undefined powers to the Legislature to implement a constitutional provision, as here, the courts must defer to the Legislature’s factual findings and rational implementations of that power. The State’s constitutional duty to care for the “needy” and to provide a “sound, basic education” are two such examples. Neither constitutional provision actually spells out what standard the State is required to meet, and so that job is left to the Legislature to undertake.

So too here, the State argues. Article I, § 9 of the Constitution bans “gambling” but expressly delegates to the Legislature to pass laws that carry out that command. Because the Legislature has outlined what prohibited “gambling” looks like in the criminal statutes, and undertook an extensive fact finding process in enacting the IFS Law, the State argues that it’s not for the courts to undermine the Legislature’s rational conclusion that DFS games are not prohibited gambling. As the IFS Law specifically found, they are not games of pure chance, but are instead based on a player’s skill in assembling a roster of real life athletes to compete against everyone else’s chosen rosters. DFS games, therefore, are not predominately contingent upon games outside of the player’s control, but on his or her player selection and roster management abilities.

Notably, the State points out a number of examples of times when the Legislature has in the past declared that a certain activity is not prohibited gambling, including the selling of insurance and commodities trading. The strongest example, however, is that in 1995, the Legislature specifically exempted horse race handicapping tournaments from the constitutional ban: 

As the State sees it, therefore, the IFS Law is just the Legislature’s latest exercise of its constitutional power to implement Article I, § 9 by defining what is and what is not prohibited gambling. That finding and policy judgment, which is based on extensive record evidence from the pre-enactment legislative hearings, is entitled to deference from the courts, the State argues.

The State also contends that Judge Connolly confused which constitutional standard should apply to evaluate whether DFS is a prohibited “game of chance.” From the adoption of the constitutional gambling ban, the State argues, the standard for deciding whether a game is prohibited has been whether skill or chance predominates while playing. Judge Connolly, however, used the “material degree” test that is derived from the statutory definitions of gambling under the Penal Law, not the dominating element standard required by the Constitution. Judge Connolly held that DFS was prohibited gambling because a material degree of chance was involved, notwithstanding that the players’ skill predominates. This was reversible error, the State contends. Because Judge Connolly accepted the Legislature’s factual finding that skill predominates over chance in DFS, that should have been the end of the Court’s inquiry and the IFS law should have been upheld.

For good measure, the State even argues that the law satisfies the statutory material degree standard, because the “Legislature heard a wealth of expert opinion, witness testimony, and statistical studies supporting the view that skill was such a dominant element in success at interactive fantasy sports contests that the role of chance was ‘overwhelmingly immaterial'” (State’s App Div Brf, at 34). The Legislature was entitled to credit that evidence, and the Court should defer to it as well, the State contends.

Next, the State argues that Judge Connolly’s conclusion that the DFS players exercise no control over the sporting events on which DFS is scored focuses on the wrong contest. It’s not the real world games that DFS players are playing in. They’re playing in separate contests over which they exercise substantial control. They choose which undervalued players to roster, which stacks to try to take advantage of, and which potential overvalued busts to avoid. In doing so, they meaningfully influence the outcome of the DFS games in which they play. Thus, the State argues, the Legislature rationally decided that DFS games “are not wagers on future contingent events not under the contestants’ control or influence,” which would be prohibited (State’s App Div Brf, at 35, quoting Racing Law § 1400 [l] [b]).

Finally, the State asserts that the Legislature rationally found that DFS is a bona fide contest for prizes where the players are required to pay an entrance fee to play and use their skill to influence the outcome. This, the State contends, is not gambling, and is just like when the owner of a horse pays an entrance fee to race the horse for the chance to win the purse. The Court of Appeals has held that that isn’t unconstitutional gambling, and thus neither is DFS, the State argues.

Coming into this appeal, I wasn’t very confident about the State’s chances to have Judge Connolly’s decision reversed. But the State’s reframing of the issues to ones focused on legislative policy making and the deference owed to those decisions by the court, so long as they are rational, has considerably strengthened their case. If the State succeeds in convincing the Appellate Division that this case is all about a legislative policy choice to allow DFS in New York, a decision with which the judiciary shouldn’t interfere, the State has a strong case to defend the IFS law and have Judge Connolly’s decision overturned. Indeed, given the very heavy burden that the plaintiffs face to show that the law is unconstitutional beyond a reasonable doubt, and the strong case for judicial deference that the State has made, this is turning out to be a much closer case than I had originally thought.  I’ll be watching closely to see how the Plaintiffs now respond.


No Office, No Problem: Court of Appeals Holds that Violation of Judiciary Law § 470’s “Physical Office” Requirement Does Not Render Action a Nullity, But Could Subject Attorney to Discipline

In a unanimous decision authored by Judge Michael Garcia, the Court of Appeals today resolved an important issue of first impression implicating multi-state practice in New York—“whether an action, such as filing a complaint, taken by a lawyer duly admitted to the bar of this State but without the required New York office is a nullity.”

In Arrowhead Capital Finance, Ltd. v Cheyne Specialty Finance Fund L.P., the Court held that the failure of a nonresident attorney to comply with the physical office requirement in Judiciary Law § 470 at the time an action is commenced does not render the action a nullity. The opinion resolved a split between the First Department, which has held that any action taken by a nonresident attorney who fails to maintain a physical office in New York as required under Judiciary Law § 470 is a nullity, and the Second and Third Departments, which have permitted nonresident attorneys to cure a Judiciary Law § 470 violation by obtaining an attorney with a New York office or by application for admission pro hac vice by appropriate counsel.

The Court noted that the rule adopted by the Second and Third Departments stems from its prior decision in Dunn v Eickhoff (35 NY2d 698, 699 [1974]) where it held that “[t]he disbarment of a lawyer creates no ‘nullities,’ the person involved simply loses all license to practice law.” The Court held that “given [its] holding in Dunn, it would be incongruous to conclude that, unlike the acts of a disbarred attorney, actions taken by an attorney admitted to the New York bar who has not satisfied Judiciary Law § 470’s office requirement are a nullity.” Thus, the Court adopted the Second and Third Department rule and concluded that “the party can cure the section 470 violation with the appearance of compliant counsel or an application for admission pro hac vice by appropriate counsel.”

The Court, however, clarified that a Judiciary Law § 470 violation is not without consequences. The attorney who violates section 470 by practicing in the State without a physical office could face discipline. The court held that “[w]here further relief is warranted, the trial court has discretion to consider any resulting prejudice and fashion an appropriate remedy and the individual attorney may face disciplinary action for failure to comply with the statute.” “This approach,” the court concluded, “ensures that violations are appropriately addressed without disproportionately punishing an unwitting client for an attorney’s failure to comply with section 470.”

Important Practice Tip

Beyond clarifying the effect of a nonresident attorney’s violation of the physical office requirement in Judiciary Law § 470, the Court’s decision in Arrowhead includes a notable practice point that should not be overlooked.

In its motion for leave to appeal, Arrowhead limited its appeal “to the extent that the Appellate Division failed to reverse and remand the Order and Judgment of Supreme Court dismissing [its] Complaint as a ‘nullity’” for the Judiciary Law § 470 violation. The Judiciary Law § 470 dismissal, however, only related to the breach of contract and fiduciary duty claims that survived Defendant’s first motion to dismiss. By limiting its appeal to the distinct Judiciary Law § 470 issue, and not appealing the dismissal of its other claims, Arrowhead precluded the Court from reviewing the propriety of Defendant’s first motion to dismiss (see Quain v Buzzetta Constr. Corp, 69 NY2d 376, 380 [1987]). Thus, the Court granted defendant’s motion to strike the portion of Arrowhead’s brief addressed to defendant’s first motion to dismiss.

It is unclear whether Arrowhead’s decision to limit the appeal was strategic. Certainly, crystalizing an issue of first impression doesn’t hurt a party’s chances of having its motion for leave to appeal granted. But, by limiting the appeal, you give up other issues that could have otherwise been raised. Attorneys should be wary of the Court’s rule in Quain and only limit their appeals if they are willing to relinquish their rights to challenge other issues in the case.

And one more thing. The Court would do well to explain the practical impacts of its decisions to the parties and the bar in general in as plain of terms as possible. Here, the Court’s decretal paragraph reads:

To aid the parties and trial court, adding a clarifying clause to the decretal saying expressly that only the claims dismissed for the Judiciary Law § 470 violation remain to be litigated on remand would go a long way. Although this may appear straightforward in this case, many times the Court’s decisions on jurisdiction and reviewability leave parties scratching their heads about what to do next to fix the issues. The Court should try to help address those issues in its decisions to the best it can.

The Court of Appeals’ opinion can be found here.

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