Eric Schneiderman Amends DFS Lawsuit to Include Punitive Damages against Defendants
New York Attorney General Eric Schneiderman appears to be taking ideas from the Kentucky district judge who leveled a punitive fine on PokerStars earlier this week. Schneiderman amended his lawsuit against DraftKings and FanDuel on Thursday night, seeking punitive damages against the daily fantasy sports companies.
If Schneiderman has his way, both DFS companies will have to pay back every dime collected from people from New York State who who played daily fantasy sports on DraftKings and FanDuel in the past few years, plus potential $5,000 fines per player. The amendment raised the stakes in the upcoming lawsuit against the DFS companies, setting damages at a level that would seem to drive each into financial oblivion.
Lawsuit Takes a Pound of Cash
It would seem to be a significant shift away from the standard punishments meted out to illegal gambling operators, which is what Eric Scheiderman accuses the daily fantasy sports companies of being. In a standard case against illegal sports gambling operators (“bookies”), the judge tends to assess a one-time fee in the range of a few hundred thousand dollars. Of course, that is in criminal cases, and the lawsuit appears to be an attempt to punish the DFS companies financially.
Of course, the DFS companies say their contest do not work like traditional sportsbooks. They do not have “banked games”, meaning DraftKings and FanDuel do not put up their cash against a player’s cash, like a casino would in blackjack. DraftKings and FanDuel do not pit themselves against players, and their success does not depend on who wins or loses. Instead, they host events in which players compete against other players. The DFS companies make their profits by taking a rake from the entry fees — usually 9% of the prize pool.
$200 Million in Winnings in 2015 Alone
The companies are thought to have taken in a combined $200 million from New Yorkers in 2015. That money is thought have to come from roughly 600,000 players, for an average of a little over $300 apiece from the contestants. If Schneiderman had his way, each player apparently would receive $5,300 in damages. Under the New York attorney general’s law, the price to pay for gambling illegally would be a nice windfall.
David Boies Says Schneiderman Does Not Understand Gaming
David Boies, the Chairman of Boies, Schiller & Flexner LLP and a legal counsel to DraftKings, released a statement critical of the New York AG on Friday. In it, Boies says the amended lawsuit “reveals that the Attorney General’s office still does not understand fantasy sports….Like the NYAG original complaint, it is based on the fundamental misunderstanding of fantasy sports competitions.”
The Boies statement continued, “Originally, the NYAG claimed that daily fantasy sports were illegal gambling because they were games of chance. That was disproven. Now, the NYAG complains that DFS contests are so much contests of skill that some advertising is misleading because, the NYAG says, certain ads imply that DFS contests are games of chance. This claim, too, is baseless.”
At the moment, FanDuel and DraftKings continue to operate in New York. Eric Schneiderman received a temporary injunction to stop their activities in the state on December 11, but an appellate court reversed that decision a few hours later. The two sites are allowed to continue taking money until the results of a Janury 4 appellate hearing are announced.
Schneiderman Critical of Deposit Bonuses
The new filing by Schneiderman focuses less on the legality of daily fantasy sports and more on the “convoluted scheme” the companies’ deposit bonuses represent. Each offers the type of deposit bonus long used by online casinos and poker sites to draw customers, in which a player is offered a matching bonus that unlocks when a certain minimum playthrough requirement is met.
In the case of DraftKings, Schneiderman pointed out that the $600 signup bonus only unlocks when $15,000 has been spent on contests. If one assume the usual payout percentage on that $15K in entry fees, the resulting bonus would be $24 on average. FanDuel’s $200 deposit bonus works on the same principles. Players must pay $5000 in entry fees to unlock the bonus, which comes to an average of $8 per player.
Those familiar with the industry are (generally) well aware that the bonuses do not pay out the full amount, on average. At the same time, they realize it is free money and they might win significantly more than the average (or lose all their bonus and then some). It is part of the business model of such companies and hardly a surprise to such players. If DraftKings and FanDuel can be criticized, it is for borrowing a bonus structure so similar to an industry which they have tried to distance themselves from.
Says Advertising Is Deceptive
Schneiderman’s newest filing also notes that the companies’ advertising is deceptive, because it promotes huge winnings which do not reflect the reality of the average player’s net losses. He cited the fact that only 11.7% of DraftKings customers showed a positive return on their entry fees in 2013 and 2014. DraftKings and FanDuel use those same statistics to argue that their games are, in fact, a game of skill, because a minority of players who crunch the numbers and find the best match-ups end up winning. Earlier, Eric Schneiderman had argued that DFS is a game of luck.
It hardly matters what the public believes, at this point. The New York Supreme Court will decide the fate of DFS gaming in the state. Like the PokerStars case in Kentucky this week, if the gaming operators lose, the state could take a huge chunk of money out of their bank accounts. Like the judge in Kentucky, Eric Schneiderman is not an American politician who supports private businesses.
