By Daniel Wallach
April 15, 2022
The debate over whether participants in daily fantasy sports contests are the "actual contestants" in their own distinct game of skill or, as some have contended, are merely passive players whose performance is entirely derivative of the skill deployed by the real-life athletes in the underlying sporting events has finally been resolved in the DFS industry's favor. If you recall, during the early days of DFS, several state attorney general opinions expressed skepticism that DFS participants were the actual contestants in a bona fide contest of skill because their success was tied to the performance of the real-life athletes who were beyond their control or influence.
But the pendulum has now swung the other way.
Two recent state court appellate court opinions lend support to treating DFS contests as bona fide contests of skill between actual contestants. Those rulings could open the door to other skill-based games tethered to real-life sporting events being similarly treated as bona fide contests of skill between actual contestants, even if some degree of chance determines which contestant prevails. Under the so-called "bona fide contest of skill" exception recognized in many states, the definition of “gambling,” “bet,” or “wager” specifically excludes: “offers of purses, prizes or premiums to the actual contestants in any bona fide contest for the determination of skill, speed, strength, endurance, or quality.” The typical fact-pattern usually involves a contestant who pays an entry fee to enter a contest of skill to win a prize in which they are the actual participant. Oft-cited examples include fishing tournaments, hole-in-one golf contests, spelling bees, hot dog eating contests and baking competitions.
In a resounding one-two punch, the highest court of two states would add DFS contests to this expanding list of bona fide games of skill between actual contestants falling outside the purview of state gambling prohibitions.
Dew-Becker v. Wu
In Dew-Becker v. Wu, 178 N.E.3d 1034 (Ill. 2020), the Illinois Supreme Court concluded that daily fantasy sports contests are predominantly skill-based, and, as such, do not constitute gambling where the applicable definitional test is the "predominance" or "dominating element" standard. The Court began its analysis by recognizing that daily fantasy sports contestants are the "actual contestants" in a DFS contest, implicitly rejecting the notion that they were only passive players whose participation was entirely derivative of the real-world athletes in the underlying sporting events. Id.at 1039. The more relevant inquiry from the Court's perspective was whether the DFS contestants were engaging in a "bona fide contest for the determination of skill " when they competed head-to-head. Id. *(emphasis added). Of the three gambling definitional tests used to determine whether a contest was one of skill or chance, the Court determined that the "dominate factor" test was "the most appropriate" standard since it "provides a workable rule that allows for greater consistency and reliability in determining what constitutes a contest of skill." id.at 140.
Citing several recent peer-reviewed studies, the Court concluded that participants in head-to-head daily fantasy sports contests were not engaging in "gambling" because such contests were "predominately determined" by the skill of the participants "in using their knowledge of statistics and the relevant sport to select a fantasy team that will outperform the opponent." Id. at 140-41 (adding that the historically dominant performance of highly skilled DFS players has created a potential revenue problem for the DFS websites since "new or unskilled players are often hesitant to participate.”) (citing Ed Miller & Daniel Singer, For Daily Fantasy Sports Operators, the Curse of Too Much Skill, Sports Bus. J., (July 27, 2015)).
White v. Cuomo
More recently, in White v. Cuomo, --- N.E.3d ---, 2022 WL 837573 (N.Y. Mar. 22, 2022), the New York Court of Appeals held that interactive fantasy sports contests do not constitute "gambling" within the ambit of New York's constitutional prohibition against gambling. Crucially, New York’s highest court used the “dominating element” standard (instead of the stricter “material degree” test under section 225.00 of the Penal Law) as the “constitutional” standard for determining whether IFS contests are permissible contests of skill or impermissible games of chance. Id. at *7.
Applying the dominating element standard, the Court of Appeals concluded that the New York Legislature’s factual determination that IFS contests are a game of “skill,” not of “chance,” has “resounding support” from statistical studies showing 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." Id. The Court also pointed to a "statistical analytic report" quoted at the legislative public hearing in 2016, wherein an unnamed statistical expert opined that IFS contests 'haver 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.” Id.
Going beyond the statistical studies, the Court also emphasized that the facts "bear out" that IFS contests "involve a significant exercise of the participants' skills," reasoning that:
[p]articipants draw from their knowledge of the relevant sport, player performance and histories, offensive and defensive strengths of players and teams, team schedules, coaching strategies, how certain players on opposing teams perform against each other, statistics, strategy, and the fantasy scoring system in order to exercise considerable judgment in selecting virtual players for their rosters.
While acknowledging that chance plays some role in IFS contests, the Court reiterated that participant skill “plays a substantial role in the outcome of the IFS contest—that is, the competition between IFS participants as to whose roster will yield more fantasy points, a contest which is scored through a metric different from that of the actual sport.” Id. Ultimately, the Court deferred to the findings of the legislature, concluding that, based on the record, the legislature’s determination that IFS contests are predominantly games of skill because they pit the strategic rosters of participants against one another—that is participants have control over their own skill-based roster selection, which substantially determines the outcome of the IFS contest—is firmly grounded in evidence and logic.” Id.
The Court cited the Illinois Supreme Court's decision in Dew-Becker approvingly, stating that "it is now 'widely recognized’ that IFS contests are predominantly skill-based competitions” as distinguishable from games of chance. Id. at *7 (emphasis added) (quoting Dew-Becker, 178 N.E.3d at 1041). This is a promising development for those who operate (or seek to launch) DFS products in states where daily fantasy sports contests have not yet been authorized by statute or regulation.
Despite the clear win for proponents of daily fantasy sports contests, the White decision is of limited precedential value in assessing the legality of other types of skill-based contests under the New York Penal Law’s definition of “gambling” in Section 225.00(2). That statutory provision incorporates a lower definitional threshold for what constitutes “gambling,” finding it to exist either: (i) when the outcome of the contest “depends in a material degree upon an element of chance,” or (ii) when a contestant stakes or risks something of value upon the outcome of "a future contingent event not under his control or influence." The New York Court of Appeals did not apply this statutory standard in assessing whether the Legislature exceeded its constitutional authority in authorizing IFS contests through a purely statutory enactment. Instead, the Court declared that "the proper benchmark in assessing whether an activity is a 'game of chance' for purposes of the constitutional gambling prohibition is whether chance is the dominating or controlling element." Id.at *7. But this constitutional standard is of no import when assessing the legality of other skill-based contests that have not been legislatively authorized. In all other instances, the Penal Law's "material degree" standard still governs.
“Actual Contestants” in “Bona Fide Contests of Skill”
Despite the apparent limited impact of the main holding in White, there is another section in the Court's majority opinion that could be helpful outside of the constitutional context, and, in particular, for the operators of other types of skill-based contests that award prizes to contestants who pay an entrance fee in order to participate. While not labeled as such, the Court acknowledged that IFS contests were "bona fide contests of skill" between "actual contestants" irrespective of the definitional standard used. The "bona fide contest of skill" principle is generally recognized as an exception to the definition of "gambling" in a growing number of states (including New York) and is codified by statute in at least nine states. (States which recognize this exception by statute include Colorado, Georgia, Illinois, Idaho, Indiana, New Mexico, Texas, Wisconsin, and Wyoming).
But even in the absence of a statutory exception, courts have repeatedly held that contests for which the contestants pay entry fees to participate and for which prizes are awarded are not illegal gambling activities, even if some degree of chance determines which contestant prevails. See, e.g., Las Vegas Hacienda, Inc. v. Gibson, 359 P.2d 85 (Nev. 1961) (hole-in-one golf contest for which contestants paid entrance fee and stood to receive a $5000 prize was not illegal gambling). Rather than constituting gambling, “[p]aying an entrance fee in order to participate in a game of skill, or mixed skill and chance, in the hope of winning prize money guaranteed by some sponsor to successful participants, is a traditional part of American social life." State v. Am. Holiday Assn, 727 P.2d 807, 812 (Ariz. 1986) (“We are reluctant to adopt a statutory interpretation that would turn sponsors of golf, tennis or bridge tournaments, spelling bees and beauty contests into class 6 felons.”).
The White court reaffirmed this longstanding principle. (The last time the Court of Appeals had addressed this issue was in 1897; so maybe it was in need of a bit of refreshing). In Section "B" of the opinion, the Court drew a sharp distinction between "permissible contests for prizes," such as spelling contests and golf tournaments, and illegal "bets and wagers," declaring 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.” Id. at *8. “Permissible contests,” the Court explained, “share the ‘essential particulars’ that ‘one of the parties strives with others for a prize; the competing parties pay an entrance fee for the privilege of joining in the contest, and . . . the entrance fee forms a part of the general fund from which the premiums or prizes are paid.” Id. (citation omitted).
“By comparison,” the Court continued, “bets and wagers are ‘agreement[s] between two or more, that a sum of money or some valuable thing, in contributing which all agreeing take part, shall become the property of one or some of them, on the happening in the future of an event at the present uncertain.’” Id. at *9 (citation omitted). “In other words,” as the Court explained, “‘[i]llegal gaming implies gain and loss between the parties by betting, such as would excite a spirit of cupidity’—an element that is notably lacking when entrance fees are fixed, and predetermined prizes are awarded by a neutral party whose monetary stake is limited to the payment of the prize.” Id. (internal citations omitted) (emphasis in original).
“Contests charging entry fees and awarding fixed prizes do not constitute gambling prohibited by article I, § 9 of the Constitution,” the Court declared, noting that the IFS contests which were authorized by statute “are structured in the manner of fixed prizes for skill-based competitions—consistent with [New York case-law].” Id. The IFS statute permits only those contests that have prizes which are “[i] predetermined, [ii] announced prior to the start of the contest, [iii] awarded by a neutral operator, and [iv] which do not change based upon the number of participants or the amount of entry fees collected.” Id. With these guardrails in place, the Court determined that “IFS participants are not ‘wagering’ in the hopes of scoring a pool of funds ‘wagered’ by other players.” Id. “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,” the Court added. Id.
The Court also rejected the assertion that IFS contests were “indistinguishable” from traditional sports betting due to the lack of a contestant’s control or influence over the performance of the real-life athletes. The Court found that comparison inapt, stating that “[u]nlike bets or wagers on games of skill in which a bettor takes no part, participants in IFS contests engage in a distinct game of their own, separate from the real-life sporting events, in which they strive against other IFS participants.” Id. (emphasis added). As distinguished from sports betting, “[t]he outcome of an IFS contest turns—not on the performance of real-life athletes, as it would with respect to a bet or wager—but on whether the participant has skillfully composed and managed a virtual roster so as to garner more fantasy points than rosters composed by other participants.” Id.“An IFS contestant’s success is therefore not dependent upon the outcome of any particular real-life athlete’s performance or on the score sheet of any sporting event. Rather, success in IFS contests is relative, measured only by the quantity and quality of skill exercised by other IFS participants,” the Court reasoned. Id.
In the majority opinion’s concluding paragraph, the Court summarized its holding in the case as follows: “[T]he 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.’” Id.at *10.
Takeaways from Dew-Becker and White
The Dew-Becker and White decisions clearly reflect a judicial trend towards recognizing DFS contests as legal skill-based contests between "actual contestants," especially in those states which employ the "dominating element" standard for analyzing whether the contests at issue constitute illegal gambling activity. But a strong case could also be made that regardless of the standard employed, Dew-Becker and White amply support the proposition that DFS contests are true contests of skill between the actual contestants, and, therefore, fall outside the scope of the definition of gambling regardless of the standard utilized. And other skill-based competitions not tethered to sporting events could likewise potentially avail themselves of this legal reasoning.