November 24, 2015

Did the New York AG Wait Too Long to Attack DFS Sites?

For those following the recent legal upheaval in the daily fantasy sports (DFS) industry, tomorrow will mark an important turning point in the battle over the future of DFS. A New York state court judge will hear arguments related to the New York Attorney General's request for an injunction prohibiting continued operations of several DFS sites. A flavor of the main arguments can be found on Legal Sports Report, or by following attorney Daniel Wallach on Twitter. As might be expected, the parties primarily spar over our old friend, the "skill game" argument (see HERE and HERE for my now well-aged discussions of the "skill game" argument in the context of poker).

There is one side argument that is worth additional discussion. In a recent op-ed piece in the New York Daily News, David Boies, the highly regarded attorney retained by DraftKings, argued:
"One major problem with the attorney general’s argument is that he has been attorney general for six years, and for each of those years, FanDuel has operated openly in New York without a single suggestion from him or anyone else that its operations were at all legally suspect. DraftKings entered about four years ago and has likewise operated openly and continuously without question or complaint ever since.

During those years, major companies like NBC Sports, Fox Sports, Comcast and private equity firm KKR have invested hundreds of millions of dollars in building platforms to offer daily fantasy-sports contests; none of them had any doubts about the legality of those contests either."
DFS supporters have echoed these comments on social media, wondering why the New York Attorney General waited so long to act against the DFS industry if DFS were so clearly illegal. Some commentators have gone so far as to suggest it is too late for the Attorney General to act, that the industry cannot be attacked now after so many companies have invested so much money building up what they were led to believe was a legal enterprise condoned by the state (attorney Daniel Wallach declares this to be one of the best arguments for the DFS sites). But will this argument ultimately matter in court?

A.  Laches and the Limits of Equity

At least on the surface, it seems unfair for the state of New York to sit back for several years and let the DFS industry grow, only to swoop in and declare that the entire business operations of several multi-million (or even billion) dollar companies are in violation of state gaming laws. Shouldn't the Attorney General have filed for an injunction years ago? Isn't it too late for the Attorney General to do anything now?

Some attorneys following the New York DFS case have suggested that the principle of laches might bar the Attorney General's lawsuit. [FN1]. Laches (pronounced "latches") is an equitable doctrine which prohibits a party from sitting on his rights to bring a legal claim until after others have acted to their detriment in reliance on the party's silence. Laches generally requires not just that there was a delay in asserting a legal right, but that the delay was both unreasonable and prejudicial. A classic example would be where a landowner knows his neighbor is constructing a building partially across a boundary line, but waits to assert a legal claim related to the property line until after the construction is completed.

Interestingly, laches can in some cases operate to bar a claim even where the claim is timely pursuant to a statute of limitations. For example, in the 2012 presidential primaries, a suit by several Republican candidates to be included on the Virginia primary ballot was rejected because the candidates had waited to file the suit until too close to the election date. The Fourth Circuit Court of Appeals cited the "disruption" to the electoral process and resulting "turmoil" to the nominating process caused by the "tardy" filing of the lawsuit at the "eleventh hour" as the basis for its decision to dismiss the suit on the basis of laches.

Although laches might appear to be an appealing argument in the New York DFS litigation, the reality is that laches would be a losing argument for the DFS sites. This is because principles of state sovereign immunity require courts to apply a different set of rules when the state is a litigant. In New York (as in most states), many equitable principles, including laches, simply do not apply against the state.

The principle that laches cannot be asserted against the state is well-established. For example, in State v. Tiraco, the New York Attorney General sought to enforce state securities registration laws against a company selling shares in a theatrical company; the appellate court needed only three sentences to summarily reject the defendants claim of laches: "Laches is not available as a defense as the prosecution is in the public interest." Similarly, in a more recent decision, a New York appellate court confirmed that "the equitable doctrine of laches may not be interposed as a defense against the State where, as here, it is acting in a governmental capacity to enforce a public right or protect a public interest." In re LaPine, 18 A.D.3d 552, 795 N.Y.S.2d 294 (N.Y. Sup. Ct. 2d Div. May 9, 2005). [FN2].

In sum, the doctrine of laches will be a non-starter in the pending DFS litigation.

B.  The Florida Faircloth Decision—A Slender Reed

Legal commentators have also pointed to a Florida appellate case as authority for the position that a state's failure to enforce gambling laws against certain games over a period of years prevents the state from later taking a different position on the issue. Faircloth v. Central Florida Fair, Inc., 202 So. 2d 608 (Fla. Ct. App. 1967). The Faircloth court was presented with the question of whether certain carnival midway games were illegal under state gaming laws. The relevant passage from the court comes at the tail end of the opinion, after extensive statutory analysis (emphasis added):
"There is a further basis for our decision, suggested ironically by the defendant himself. As suggested, we discard the mantle of naivete and recognize that, if these midway games do come within the gambling laws, they have nevertheless been played throughout the state for years with the knowledge and consent of public officials, law enforcement officers and state legislators. We will not adopt an unnecessarily strict and artificial construction of our statutes which will result in further hypocritical noncompliance with our gambling law."
The Faircloth opinion will be of only limited value to the DFS sites in the pending litigation for several reasons. First, the decision was from a Florida court interpreting Florida gaming statutes; New York courts will give little weight to a decision involving significantly different state gaming laws.

Second, the court's language in Faircloth is supported only by a general citation to a law review article and a Mississippi appellate decision (State v. Wood) which really does not support the Faircloth court's argument. It is hardly surprising, then, that only one appellate court from another state (the Arizona supreme court) has ever cited Faircloth, and then only for the unrelated proposition that "wagers" or "bets" are legally distinguishable from "entry fees" for contests. State v. American Holiday Ass'n, 727 P.2d 807 (1986). [FN3]. No other appellate court has ever cited let alone adopted the Faircloth rationale that lax enforcement of gaming laws is relevant to an analysis of whether a particular game constitutes illegal gambling.

Third, and most important, the Faircloth decision ultimately turned on the language of the relevant Florida statutes. In Faircloth, a statute had authorized by name twenty-three specific carnival midway games which could be played at public fairs, and were subject to licensing requirements. The court concluded that this statute thereby implied a distinction between the specifically identified "games of skill" and those "games of chance" which were otherwise prohibited by law. In New York, by contrast, no statute exists which implicitly or explicitly suggests DFS is a game of skill or otherwise exempt from the state's general gambling prohibition statutes.

C.  Legal Irrelevance

Ultimately, the issue of why the state of New York and its Attorney General have waited several years to pursue legal action against the DFS sites is nothing more than a legal red herring. If the DFS sites establish that DFS is legal under New York law, then whether the Attorney General improperly delayed in bringing the enforcement action becomes a moot issue.

On the other hand, however, if the court determines that DFS in fact is illegal gambling, there is no legal basis for the court to give the DFS sites a "get out of jail free card" and hold that the sites can continue to operate an active illegal gambling business merely because the state took its time to bring an enforcement action. [FN4]. Courts recognize that the state has limited resources and must make judgment calls as to how best use those resources. Just because the state does not arrest every driver who speeds or bust every home poker game does not mean that the state cannot enforce traffic or gaming laws in specific instances (absent an illegal discriminatory intent). [FN5]. Here, the state can plausibly argue that DFS was, until recently, sufficiently small-scale so as not to warrant the Attorney General's attention. The recent dramatic uptick in advertising and the claim of potential for "insider trading" and other unfair anti-consumer practices easily justify the Attorney General's decision to take a closer look at the DFS industry in recent weeks. Essentially, DFS sites got too big and too brazen to be ignored, much like the difference between small-stakes home poker games and multi-million dollar online poker businesses.

D.  Rhetorical Value

David Boies is an exceptional attorney, and has to realize that the DFS sites' argument about the state's delay in bringing an enforcement action is ultimately beside the point as a legal argument. What, then, is the point of making this argument a cornerstone of the DFS defense?

Let's look at more of Boies' op-ed piece:
"Nothing has changed about the nature of the contests FanDuel and DraftKings offer.

What changed is that the attorney general’s office suddenly decided without notice or discussion that daily fantasy sports contests represented a violation of the law and a threat to public morals that had to be stamped out.

There are many things wrong with that decision, but right or wrong, no one can pretend that the illegality of these contests is clear or obvious—it certainly was not clear or obvious to Schneiderman or his predecessor, who, for eight years, did not think there was a problem.

If the attorney general (or anyone else) doesn’t like the law, the proper course of action is to get the law changed. Changing the law is up to the Legislature, not any single public official, no matter how well-intentioned. The attorney general is entitled to change his mind. He is not entitled to unilaterally change the law."
Boies' purpose for this argument is threefold. First, he wants to establish a sense of unfairness—his clients have been operating in New York for years, and now the Attorney General wants to change the rules without notice (though in fairness to the Attorney General, there was no actual "change" in opinion; the Attorney General went from having no opinion on the legality of DFS to determining DFS was illegal gambling under state law). This "innocent victim" rhetoric may not matter legally, but it can help generate both public support and political support; DFS's legal status will be a legislative rather than a judicial decision in the long run.

Second, and perhaps most important for the pending court cases, Boies wants to suggest to the judge that the legal status of DFS is, at best, murky under New York law. If DFS were clearly illegal, the state would have acted long ago. Boies' rhetoric thus is attempting to create judicial skepticism regarding the Attorney General's claims that DFS is unquestionably illegal gambling under New York law. This skepticism creates space for the DFS industry to not only advance their "skill game" arguments, but to otherwise highlight differences between DFS and traditional forms of gambling (notably sports gambling and poker).

Finally, Boies' rhetoric highlights the relative roles of the legislature and the courts. Although old laws are regularly applied to new technologies and industries, here Boies suggests that the state's delay in bringing an enforcement action demonstrates the ambiguity surrounding the status of DFS under New York's established gaming laws. Boies then argues the Attorney General was wrong to turn to the courts to resolve that ambiguity; instead, the issue of how to deal with the new DFS industry is best resolved by the legislature.

In an interview today with Fortune, Boies reiterated his rhetorical points about the perceived sudden "change" in the law, and declared:  "We feel good about the position we’re in. I think we look very strong. I’d rather have our hand than the Attorney General’s hand." Boies is a brilliant lawyer, and he has some good arguments to make on the "skill game" issue. But the smart money, as always, is to bet on the state.

* * * * *

[FN1].  In law, principles of fairness are generally governed by the rules of equity. Years ago, there were separate courts of law and courts of equity. Courts of law were concerned with bright line rules; if you signed a contract, the law wouldn't care that you agreed to terrible terms, but would hold you to your obligations. Courts of equity, however, were concerned with issues of fairness, and operated to provide relief from overly harsh or technical applications of the law; if you could prove you signed a contract because of fraudulent misrepresentations by the other side, you could ask the court to rescind the contract.

Today, courts of law and equity have generally been combined, but the distinction between law and equity remains important, particularly in the realm of remedies. If a claim is brought at law, a court will generally be limited to awarding damages (money). If a claim is brought in equity, a court will award other forms of relief, such as restitution, rescission, injunctive relief, or declaratory relief.

[FN2].  Laches may be available against the state where the state is not acting in its governmental capacity, but instead is operating in a "private or proprietary capacity" (e.g., in a manner akin to a private company). Carney v. Newburgh Park Motors, 84 A.D.2d 599, 444 N.Y.S.2d 220 (N.Y. Sup. Ct. 3d Dep't 1981). Also, the legislature can limit the state's sovereign immunity by explicitly making the state subject to statutes of limitations or other time requirements. State v. Seventh Regiment Fund, Inc., 98 N.Y.2d 249, 774 N.E.2d 702 (N.Y. Ct. App. 2002). However, neither of these limited exceptions are applicable to the present DFS litigation.

[FN3].  Ironically, the Arizona opinion in American Holiday Ass'n also cites an old New York court of appeals decision, People v. Fallon, 152 N.Y. 12, 46 N.E. 296 (1897), for the proposition that there is a distinction between a wager and a contest entry fee:
"There is a plain and obvious distinction between a race for a prize or premium contributed [by the association] and a race where the stake is contributed by the participants alone, and the successful contestant is to have the fund thus created. The latter is a race for a mere bet or wager, while the former is for a prize offered by one not a party to the contest."
Considering the DFS model relies on participant entry fees going into a common prize pool with prizes being paid out of that pool (less house rake/fees), the Fallon decision is decidedly a negative for DFS operators in New York.

[FN4]. "[T]he doctrine of laches has no application when plaintiffs allege a continuing wrong." Capruso v. Village of Kings Point, 23 N.Y.3d 631, 16 N.E.3d 527, 992 N.Y.S.2d 469 (N.Y. Ct. App. 2014).

[FN5]. New York courts follow the rule that a selective enforcement claim will fail without evidence of improper discriminatory intent (In re Matter of 303 West 42nd v. Klein, 46 N.Y.2d 686 (N.Y. 1979)):
"The burden of proving a claim of discriminatory enforcement is a weighty one. Common sense and public policy dictate that it be so. The presumption is that the enforcement of laws is undertaken in good faith and without discrimination (see, e.g., United States v Falk, 479 F.2d 616, 620). Moreover, latitude must be accorded authorities charged with making decisions related to legitimate law enforcement interests, at times permitting them to proceed with an unequal hand. For example, it has been held that, in order to bring an appropriate case to test a new regulation or statute, or because of limited manpower or other resource inadequacies, or for the purpose of deterring other potential transgressors, certain violators may be selected for prosecution out of the class of all known violators (see People v Utica Daw's Drug Co., 16 A.D.2d 12, 21, supra; Comment, 61 Col L Rev 1103, 1119-1133). Such an enforcement strategy may also permissibly be directed at only serious violations (see English v Town of Huntington, supra, p 323 [enforcement of building and zoning codes only against buildings where fire and sanitary hazards had gone far beyond tolerable limits]) or those occurring in a geographic area where the probability or rate of violations is high (see, generally, Tieger, Police Discretion and Discriminatory Enforcement, 1971 Duke LJ 717). The reasoning goes that these instances of legitimate law enforcement should not be hampered by requiring that a hearing be held every time one subject to a regulatory or criminal penalty feels he has been unfairly singled out."