DraftKings, FanDuel head to court to remain in operation in New York

A legal battle that will shape the future of the billion-dollar daily fantasy sports industry kicks off Wednesday in New York Supreme Court, where powerhouse game operators DraftKings and FanDuel will try to fight off New York Attorney General Eric Schneiderman's quest to temporarily shut them down as the case heads to trial.

Schneiderman alleges that DraftKings and FanDuel are violating the state's gambling statutes and have misled the public with deceptive advertising. An emergency hourlong hearing in front of Justice Manuel Mendez is scheduled to begin at noon ET and will address Schneiderman's request for a preliminary injunction to prevent the companies from allowing New York residents from participating in contests inside the state.

The two operators say they offer games of skill, not gambling, and have been complying with state law for years.

If the injunction is granted, the sites would lose the state with their largest player base, a significant blow that DraftKings has said would affect its operations nationwide.

New York law states, "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 even 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."

David Boies, chairman of Boies, Schiller and Flexner, which represents DraftKings, will make the case that Schneiderman's case against the companies is flimsy, because daily fantasy is not gambling, but a game of skill.

"What matters decisively is how much skill there is," Boies told ESPN. "Case law is very clear that something that is predominately a game of skill is not illegal gambling."

To make that case, DraftKings, on Monday night submitted the affidavit of Zvi Gilula, visiting professor of statistics and econometrics at the University of Chicago's Booth School of Business. Gilula looked at one exceptional DraftKings contestant who won 70 of 70 head-to-head MLB contests on the site. He said that data provided to him by the company showed that the average person on the site would only win these contests 45 percent of the time.

The majority of states use a predominance test to determine whether games are based on skill or chance. New York law, however, as pointed out by Schneiderman, only requires a "material element" of chance to be involved in order for a game to be deemed one of chance, not skill.

Schneiderman opened his new brief summarizing the story of a Kansas man named Scott Overfield, who earlier this month said he won $438,000 on DraftKings in seven games in which he paid a total of $82 in entry fees. Overfield told the media he doesn't watch many NFL games and probably couldn't name more than 10 players.

"Chance is pervasive at every level of DFS [daily fantasy sports]," Schneiderman wrote.

Since the attorney general is accusing DraftKings and FanDuel of illegal activity, and not the bettors themselves, Boies also will argue that DraftKings isn't receiving "something of value in an event of a certain outcome." DraftKings, as does FanDuel, takes a percentage -- which averages to about 9 percent -- of the total entries, no matter who wins. Unlike a bookie, Boies argues, the company doesn't receive any extra benefit from anything happening in any game.

But Schneiderman has argued that as long as DraftKings is taking something from a player, "that has the prospect of losing money," which is what he interprets the entry fees to be, something of value being risked. "This is all the New York law requires to satisfy the first element of gambling," Schneiderman wrote in his brief filed late Monday.

DraftKings, FanDuel and the attorney general's office each will receive 20 minutes to argue during Wednesday's hearing, which will take place in downtown Manhattan. Marc Zwillinger of ZwillGen PLLC and John S. Kiernan of Debevoise & Plimpton LLP are the listed attorneys for FanDuel. The company declined to comment in the days leading up to the hearing. Opinions vary on if Mendez will actually issue an order after Wednesday's hearing.

If he does, more than 600,000 New York-based players who have collectively paid at least $200 million in entry fees in 2015 will no longer be able to access the site from inside the state.

"I'm very concerned. I do this for a living," New York resident and high-level daily fantasy player Brit Devine said. "The attorney general, theoretically, would take my job away."

The skill-versus-chance element of the argument has received the most attention and might ultimately be the deciding factor in the case, but not necessarily what the judge rules on Wednesday.

Jeff Ifrah, a prominent Washington, D.C., gaming lawyer, said ruling on the skill-versus-chance merits would be extremely challenging for the judge with limited time. He believes the deceptive advertising allegations could play a bigger factor in any ruling.

"Everyone is focused on skill versus chance, but history teaches us here that the outcome of these types of litigations often is arrived at without ever addressing skill versus chance," Ifrah said.

DraftKings and FanDuel flooded the market with advertising in the first two months of the football season. The companies have spent more than $250 million combined this year, according to ad tracker iSpot. Boies told ESPN that all DraftKings advertisements are true.

"There are fixed prizes and those prizes are given away," Boies told ESPN on Monday. "In fact, unlike a Publisher's Clearing House prize, you know more about the people competing for a DraftKings prize. You know how many players are playing and you can even see the contestants."

New York's state law trumps the federal statute -- the Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA) -- that daily fantasy operators have pointed to for year in regard to their legality. The federal law aims to prohibit payment processors from handling illegal gambling transactions like those from offshore sportsbooks. It includes language that precludes fantasy sports that meet certain criteria from being considered a "bet or wager" during financial transactions.

The UIGEA states that fantasy games will not be considered a "bet or wager" if:

• All prizes and awards offered to winning participants are established and made known to the participants in advance of the game or contest and their value is not determined by the number of participants or the amount of any fees paid by those participants.

• All winning outcomes reflect the relative knowledge and skill of the participants and are determined predominantly by accumulated statistical results of the performance of individuals (athletes in the case of sports events) in multiple real-world sporting or other events.

• No winning outcome is based -- on the score, point spread, or any performance or performances of any single real-world team or any combination of such teams or solely on any single performance of an individual athlete in any single real-world sporting or other event.

But, as with most gambling statutes, state law trumps the UIGEA.

Attorney Linda Goldstein of Manatt Phelps & Phillips, who represented the Fantasy Sports Trade Association interests in 2006, worked specifically on the language for fantasy sports in the UIGEA. She told ESPN that the criteria were written to create a distinction between fantasy sports and traditional sports betting.

"I think the legal arguments that the daily fantasy leagues have are very, very strong, based on traditional views of what constitutes a game of skill versus what constitutes a game of chance," Goldstein told ESPN. "What we don't know is if there will be a shift in the landscape."