A federal judge’s ruling this week that the entry fees paid to play on the fantasy horse racing website Derby Wars are wagers—the first time a U.S. court has taken that position—could be a warning signal to the booming fantasy sports industry, lawyers say.
The decision was issued by Judge James Otero of the U.S. District Court for the Central District of California in a case pitting Louisville, Kentucky-based Horse Racing Labs, the parent company of Derby Wars, against The Stronach Group, a collection of horseracing associations operating at tracks including Santa Anita Park in Southern California, Golden Gate Fields in San Francisco and Pimlico in Baltimore, Maryland.
“The Derby Wars decision could tip the scales against fantasy sports operators in several other lawsuits, especially those in Illinois, Massachusetts, Texas and New York, where the courts are confronted with the similar question of whether fantasy sites constitute a form of gambling or betting,” according to Florida-based attorney Daniel Wallach of Becker & Poliakoff, an authority on sports, fantasy sites and gaming.
The fees paid by online players on Derby Wars go into a pool which is then disbursed—minus a percentage for the site’s operators—to the top handicappers based on the results of several real-life horse races, and to the winners of head-to-head matchups with other players.
Derby Wars lawyers, Manatt, Phelps & Phillips attorneys Maura Gierl, Arunabha Bhoumik and Matthew Kanny, argued that the entry fees weren’t wagers at all, but rather contests, as defined by the California Business and Professions Code.
Michael Knapp, founder and chief operating officer of USFantasy Sports, said industry insiders “had to be shocked to read what happened in California.”
Knapp added: “Most of the cases are related and may hinge on that differentiation between a pot built through participation and a wager. This has been to a degree a gray area, so when a state like California rules a certain way with a certain logic, it will be given consideration.”
The most immediate court threat to the daily fantasy sports industry appears to be in New York, where a group of residents are seeking to invalidate New York’s fantasy sports law by arguing that it violates the state’s constitutional prohibition of gambling.
“If that legal challenge succeeds, it could potentially put a temporary end to daily fantasy sports in New York,” said Wallach. Online poker sites in the U.S. have never recovered from a comparable shutdown in 2011 under anti-gambling laws, and Judge Otero played the poker card in his ruling in the Derby Wars case.
“The court agrees with (the Stronach Group) that Derby Wars entry fees are more akin to wagers which form the ‘pot’ in poker,” citing a 1995 case about whether a jackpot poker game constituted an illegal lottery.
Wallach is also watching a nationwide class action suit brought in 2015 by fantasy sports players against DraftKings and FanDuel, the two largest fantasy football sites, is moving forward in Massachusetts.
The suit accuses the sites of illegal gambling and deceptive practices, and claims the banks and other companies negligently failed to realize they were investing in illegal gambling operation. The court will hear motions on whether portions of the suit are eligible for arbitration next week.
“That will be a big part of the case,” Wallach said, “and if it goes forward and the court follows the ruling made in the California case, DraftKings and Fan Duel could be exposed to an eight- or nine-figure monetary judgment.”
In the Derby Wars case, plaintiffs, represented by Richard Specter of Irvine, California-based Coleman Steele & Specter, sued Horse Racing Labs in late 2015 claiming that Derby Wars has been operating as an off-track betting business in violation of the Interstate Horseracing Act of 1978.
The site operates no differently than a bookie, Specter wrote in a motion for summary judgment, accepting bets on real horse races, taking a cut and then distributing the pot to the winner. “Simply, the defendant is running the exact same operation as Joe the Bookmaker,” the motion states, “… the only difference is the chosen terminology.”
The Manatt team said Derby Wars offers games of skill, not chance, and expressly took up the fantasy sports mantle. The horse racing site, the lawyers wrote, operates similarly to other fantasy sports sites “using essentially the same contest rules.” The term “fantasy sports” appeared 21 times in the Manatt opposition brief.
“Plaintiffs appear lost in the annals of a Hollywood gangster film, seemingly unaware that a new dawn has ushered in a global phenomenon known as the Internet, and with it fantasy sports contests,” stated the Manatt lawyers, who did not respond immediately to calls.
Specter cheered Otero’s ruling for establishing that “fantasy horse racing contests are indeed wagering” and that “revenue must be shared with the industry, including the race track and the horsemen.”
But the application of the Derby Wars ruling to other fantasy sports cases isn’t a slam dunk, according to Specter.
“As the court opinion noted, the federal law most applicable to other fantasy sports, the Unlawful Internet Gambling Enforcement Act, specifically excludes horse racing from its provisions, so the effect of the court’s decision beyond the horse racing realm may be limited,” he said.