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DFS companies argue in court games are of skill, not chance

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Real Money: DFS companies take case to court (0:40)

ESPN sports business reporter Darren Rovell updates the latest on the efforts of daily fantasy companies to argue in court that they promote games of skill and not chance. (0:40)

Lawyers for DraftKings and FanDuel were in New York Supreme Court on Wednesday arguing against New York Attorney General Eric Schneiderman, who is seeking a preliminary injunction to shut down the companies from operating in New York state.

Justice Manuel Mendez did not rule on the request Wednesday, though he said he would make his decision soon.

At stake for the daily fantasy sports companies is the business of at least 600,000 New York customers who paid more than $200 million in entry fees this year.

Arguing for the state, Internet Bureau Chief Kathleen McGee told Mendez that DraftKings and FanDuel are operating an illegal betting operations as they meet all three requirements under state law.

Those requirements are that the "bettor" gets something of value in a prize, that the "bettor" risks something of value in entry fee and that it's all based on a future contingent event not in their control.

"Daily fantasy sports is about betting on what others do," McGee said. "That is gambling."

While the daily fantasy companies have said that DFS games are more based on skill than chance, and therefore not gambling, McGee said New York state law just requires chance to be present to a material degree.

"Chance pervades daily fantasy sports," she said. "Outcomes depend on uncertain sports events."

FanDuel's opposition was argued by John Kiernan, partner at Debevoise & Plimpton. Kiernan made the case that the $1 billion daily fantasy sports industry wasn't subject to the test of chance vs. skill because it is what the courts have defined as "true contest."

A true contest is defined by a payment of an entry fee that is not considered a wager because it does not risk something of value.

Kiernan made the case that daily fantasy contests are "part of the American fabric" and have as much skill and chance as a spelling bee.

Although McGee made the case that daily fantasy players don't have ultimate control, Kiernan suggested that even those who seemingly have control -- the players on the field -- don't. In a spelling bee, Kiernan opined, the words ultimately given to the contestants are not in the speller's control. In a fishing contest, he continued, a skilled fisherman throws out the line, but the rest is up to the fish.

Lawyer David Boies of Boies, Schiller & Flexner and Randy Mastro of Gibson, Dunn & Crutcher, representing DraftKings, continued Kiernan's argument, making the case that DFS contestants were in as much control as they could be.

"In poker, you play the hand that you are dealt," Boies said. "What you can't do is change your cards. In fantasy sports, you don't get dealt a hand, you get to pick your own team, and that's something you have complete control over."

Boies said the attorney general's office erred in basing its case on actual events that take place on the field. Unlike individual bettors, who simply go against a bookmaker, daily fantasy games pit players against other daily fantasy players, not on-field events, meaning the players have control over the outcome -- even if there are entry fees and prizes.

He also argued that daily fantasy has to be a game in which the best players have control because of the data of the best winners relative to the prize pool.

"They have said themselves that 1.3 percent of the contestants win 91 percent of the money, and that can't happen when contestants have no control," Boies said.

Boies also said a preliminary injunction in New York, as the case went to trial, would kill the business in the state. He said the judge couldn't grant that injunction because such moves -- injunctive relief -- are based on preserving the status quo, not changing it, as he alleged the attorney general's office was doing by suddenly calling daily fantasy sports illegal after four years operating in the state.

Mastro focused his argument on a New York case that established that an owner who entered a horse in the Belmont Stakes with an entry fee and the promise of a prize for placing was not in fact gambling, even though the owner doesn't have ultimate control over whether the horse wins.

"The owner isn't riding the horse, and the owner isn't the horse," Mastro asserted. "The owner is putting the team together."

"Today, we presented compelling evidence that Daily Fantasy Sports competitions are as legal now as they have been for the past seven years that New Yorkers have been playing them," a DraftKings spokesperson said in a statement. "We look forward to Justice Mendez's ruling."

Mendez made only two comments during the hearing. He asked Kiernan how the fantasy player could be considered as important as the athlete who was going through the motions and asked McGee why daily fantasy was considered illegal gambling and why seasonal fantasy isn't.

In her rebuttal, McGee fought for the injunction on the basis of the cost of "irreparable harm" increasing with each day because of what she called "illegal and socially damaging activity," though she provided no evidence of the latter.