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Fantasy sports sites lose appeal, must shut in New York market

The two biggest daily fantasy sports sites, FanDuel Inc. and DraftKings Inc., lost their appeal to stay open in New York State while they fight to prove they should not be banned under gambling laws. The decision chokes off the sites’ largest market and threatens the future of companies that as recently as September boasted valuations of more than $1 billion.

In granting Attorney General Eric Schneiderman’s request for a preliminary injunction, Justice Manuel Mendez said he thinks Schneiderman would succeed on the merits of the case. The injunction is not a final determination, Mendez added, calling for both sides to submit more evidence.

Lawyers for FanDuel and DraftKings have requested an emergency stay; their request is scheduled to be heard at 2 p.m. In light of the ruling, PayPal Holdings Inc. said in a statement it would stop processing payments for fantasy sports providers.

The two companies stand to lose an estimated $35 million in combined annual revenue without New York, which accounts for 13 percent of the nation’s fantasy sports market, according to Eilers Research data. California is No. 2, with 10 percent, and is worth $27 million in combined annual revenue to the two biggest sites. A committee of the state legislature there is scheduled to discuss a bill that would regulate daily fantasy sports on Dec. 16.

Judicial support for a ban in New York might embolden other states, Joseph M. Kelly, a professor of business law at SUNY College of Buffalo, said following the ruling, which he called a “great victory for Schneiderman” pending the outcome of an appeal.

David Boies, a lawyer for DraftKings, said the company was “disappointed with the court’s decision and will immediately file an emergency notice of appeal in order to preserve the status quo.” In doing so, the company hopes a panel of judges will find the companies’ arguments more compelling. The Boston- based site has remained open to New Yorkers since Schneiderman filed his cease-and-desist order last month. It did not explicitly say it would stop operating now.

FanDuel, based in New York, said in a statement it will also appeal Mendez’s decision, while preparing for a trial in his court. It has been closed to New York residents since mid- November.

In daily fantasy sports games, players assemble rosters of professional players and win or lose based on the real-life performance of those players. The attorney general says the sites are running an illegal gambling operation under New York law because the outcome of their contests depends mostly on chance and factors outside of players’ control. The sites have argued that their games are contests of skill, in which players act as de facto general managers and select a team that doesn’t exist in real life.

Several smaller companies, including DraftOps, DraftDay, DailyMVP and MondoGoal, shut down their New York operations, although they were not compelled by Schneiderman’s order. Yahoo Inc., which operates the third-largest fantasy sports site, was subpoenaed but not included in Schneiderman’s order and remains open for business in New York. The Sunnyvale, Calif.-based tech company, which is currently considering selling its core Internet assets, did not return calls for comment.

“We are pleased with the decision, consistent with our view that DraftKings and FanDuel are operating illegal gambling operations in clear violation of New York law,” Schneiderman said in a statement.

Six states have banned daily fantasy sports games. Others have chosen more moderate regulation. Nevada has classified the activity as gambling, subject to the rules and taxation there. The attorney general in Massachusetts has proposed regulations that label the sites gambling but legal for players over 21 for contests excluding college sports.

The decision could immediately influence the more than half-dozen states with laws that define gambling contests as games whose outcomes depend on a “material degree” of chance rather than mostly on skill, Kelly, of Buffalo, said.

It also could change the calculus for the companies that help facilitate card payments for some of the daily fantasy sites, he said. PayPal’s announcement today follows Cincinnati- based Vantiv Inc., which in November told the daily fantasy sports sites it works with to stop accepting players from New York.

“If I were a payment processor that has not already gotten out of New York state, I would certainly immediately do so,” he said.

Friday’s court decision is temporary, freezing operations until the judge rules on whether daily fantasy sports constitute illegal gambling operations under New York law and should be blocked for good. DraftKings and FanDuel have 30 days to respond to Schneiderman’s claims in court.