This article originally appeared in SportBusiness, and is republished here with permission. 

Since the recent debut of mobile sports gambling in New York, citizens have started wagering on the production of skilled players to lead their bets to victory. More recently, however, “skilled” players of another kind scored a significant victory in New York.

In White v. Cuomo, the Court of Appeals of New York overturned the Appellate Division and the Supreme Court of New York in rejecting an argument brought forward by New York residents with gambling disorders that daily fantasy sports (DFS) is an act of gambling, and therefore prohibited under New York’s Constitutional prohibition on certain forms of gambling.

While the legalization of sports gambling continues to be legislated across the nation, the decision in White is a major victory for the DFS industry, which benefits and gains more room to grow as an alternative to legalized sports wagering, where, as here, courts narrowly construe state law definitions of “gambling” to exclude DFS games.

The DFS Landscape

DFS is a popular form of online fantasy gaming where users typically pay an entry fee to compete for cash prizes based on the performance of professional athletes whom users select and then track in their respective professional sports competitions.

As DFS is often described as combining elements of fantasy sports and conventional sports betting – the former traditionally considered legal (as a game of skill), the latter illegal (as a game of chance) – the legality of DFS has been subject to challenge since its inception.

Although several states have explicitly legalized DFS by statute, the majority have not. Where states have not specifically regulated or outlawed DFS, its legality has been determined by existing state gambling laws and the prevailing legal doctrines governing traditional gaming such as poker, sports betting and the like in each state.

As DFS is a relatively new technology, it does not fit neatly into this preexisting regulatory paradigm. Where legislators have been silent, courts have been required to parse the issues.

Defining Gambling

Colloquially speaking, an act of “gambling” is an “enterprise undertaken or attempted with a risk of loss and a chance of profit or success.” State regulation generally prohibits activities where a person pays consideration for the opportunity to win a prize as the result of a chance-based activity, with each of those elements central to the definition.

Defining gambling, then, generally requires a determination of the presence, or primacy, of “chance.”

Legislators and courts have struggled to articulate a single approach that determines the primacy of “chance” in any activity that might be considered gambling. Most games of chance, such as blackjack and poker, require at least a modicum of skill, rather than the blind luck associated with other games like randomized slot machines.

Determining the degree to which skill predominates, however, is a tricky, and often subjective, distinction.

States have sought to find a balance between skill and chance in determining what is and is not gambling, and have employed three main tests to do so: the predominant purpose test, the material element test, and the any chance test.

Under the predominant purpose test, a contest is not considered gambling where the outcome is mathematically more likely to be determined by skill than chance. As a New Jersey court opined, the relevant question is therefore not whether the game contains an element of chance or an element of skill, but rather “which of them is the dominating element that determines the result of the game.”

A majority of states, including California, Illinois, Massachusetts, Pennsylvania, Ohio, and North Carolina apply this test, which is the most permissive used by state courts. The predominant purpose test presents activities like DFS – where users exhibit skill in researching and selecting certain athletes based on anticipated performance – the greatest likelihood of sidestepping state gambling regulations.

Under the material element test, a contest is considered gambling if the outcome depends to a material degree upon an element of chance, even if a skill is otherwise dominant, as articulated by a Missouri appellate court.

For example, courts have found poker to be “gambling” in most material element jurisdictions, because chance plays a material role, regardless of whether a player’s skill impacts the outcome of a given hand.

Under the any chance test, a game is gambling if it involves any chance whatsoever. Because virtually all contests involve some component of chance, most skill games cannot survive scrutiny under this analysis. This restrictive view is a minority approach, which has been implemented in Arkansas, Arizona, Iowa, and Tennessee, among others.

Applying White

In White, plaintiffs sought a declaration of constitutional invalidity of Article 14 of the New York Racing, Pari-Mutuel Wagering and Breeding Law, which, when passed in 2016, authorized registered DFS contests in accordance with various restrictions and subject to regulatory oversight.

Before the New York legislature authorized DFS contests by passing Article 14, the Racing and Wagering Committee of the New York State Senate held public hearings and considered extensive research into the operations of fantasy sports. Following this public comment period, the panel concluded that fantasy sports were not gambling and therefore did not violate the New York Constitution.

The Supreme Court of New York, in granting plaintiffs motion, applied the penal law definitions of “gambling” and “games of chance” in construing whether or not DFS violated New York’s Constitution. Under the New York Penal Law, the material elements test is applied in determining whether a game constitutes a game of chance and is thus gambling.

Applying the material elements test, the Supreme Court reasoned that the outcomes of DFS games, to a material degree, rely upon elements of chance in as much as the performances of real-athletes is not subject to DFS participants’ control. The Appellate Division modified and affirmed this decision, agreeing with the Supreme Court that DFS contests are gambling prohibited by the Constitution on the rationale that DFS participants’ lack control of the performance of the athletes on their rosters, and thus contests involve a material degree of chance.

The Court of Appeals overturned both courts’ decisions. In the opinion, authored by chief judge Janet DiFiore, the Court found that the Penal Law’s definition of gambling, while a helpful guidepost, did not accurately reflect the ordinary meaning of the term “gambling” as written in the Constitution in 1894, the year the Constitution was adopted, because the Penal Law was not adopted until 1965.

Drawing from the plain language, history, and purpose of the constitutional provision, the court reasoned that when the Constitution was adopted, “games of chance” were understood to be those in which the element of chance was the “dominating element that determines the result of the game.” And not as the Penal Code defines “games of chance” as a game where the outcome depends upon an element of chance to a material degree.

Thus, the Court reasoned that the application of a predominant purpose test, and not the material element test, was the applicable standard to apply in determining DFS’ constitutionality. In applying this test, the court found that the skill involved in DFS predominates over the chance involved such that DFS does not constitute gambling under the constitutional provision.

To the extent that participants are not able to control or influence the performance of the athletes in the actual sporting events, the court reasoned that participants’ skills nevertheless play a substantial role in the outcome of DFS contests making DFS predominantly games of skill because DFS contests pit the strategic rosters of participants against one another.

Looking Forward

While the White decision only applies to DFS in New York, it marks a court’s well-reasoned analysis on the differences between the predominate purpose and material element tests. DFS is still a relatively new technology, with limited case law applying the various common-law gambling tests to it and White could act as a guidepost for courts when applying these tests.

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