DraftKings, FanDuel file lawsuits in New York after cease-and-desist order

Brent Schrotenboer | USA TODAY Sports

Fighting for their lives in New York, DraftKings and FanDuel have filed separate lawsuits against the state's attorney general and are asking the state Supreme Court to save their businesses.

The move comes in response to the attorney general's decision this week to demand that the companies stop accepting "wagers" in the state after classifying their operations as illegal gambling.

On Tuesday, New York Attorney General Eric Schneiderman gave both daily fantasy sports companies five days to respond before possibly starting legal proceedings against them in an attempt to shut them down. Both companies now have struck back at him in the state Supreme Court.

"Today, we have taken decisive legal action to prevent a unilateral, misinformed and legally misguided attempt by the New York Attorney General to act as judge, jury and executioner for daily fantasy sports in New York," DraftKings said in statement. "We are asking the New York Supreme Court to rule that the Attorney General's cease-and-desist letter is unconstitutional, an abuse of discretion, and simply wrong. We are confident in our legal position and intend to continue to fight to preserve the right of the over 500,000 New York consumers to play the fantasy sports games they love."

DraftKings' suit says that Schneiderman's office this week contacted the company's payment processors, PayPal and Vantiv, and told them to stop immediately processing payments from New York customers.

"As a direct result of respondents' misconduct, DraftKings has suffered and will continue to suffer irreparable harm to its ability to operate its business in New York and elsewhere," the suit states.

Supporters of the sites protested outside of Schneiderman's offices in Manhattan on Friday morning.

Schneiderman's decision represents an existential threat to the companies. Not only is New York a huge market for fantasy sports, but Schneiderman's decision could influence other states to do the same and play a hand in a possible federal prosecution under the Illegal Gambling Business Act (IGBA), said attorney Daniel Wallach, a gaming and sports law expert in Florida.

Under IGBA, it's a federal crime to violate state gambling laws, with penalties that could include seizure of assets and shutdown of websites.

"I'm looking two chess moves ahead, and how Schneiderman's opinion can serve as the foundation for an escalated federal law prosecution," said Wallach, who is not involved in the case. "Their future depends on winning the battle of New York, winning the battle of the Hudson. If they lose the battle of the Hudson, there may not be too many battles for them left to fight."

Schneiderman issued a statement Friday in response to the lawsuits.

“The Attorney General's job is to enforce New York State law, and the law here is clear," the statement said. "Online sports gambling sites are illegal in New York. DraftKings and FanDuel are operating illegal sports betting websites under New York law, causing the same kinds of social and economic harms as other forms of illegal gambling. As a result, our office issued a cease and desist letter to stop them from violating state law by accepting bets from people in New York. Because both companies have refused to follow the law in our state, we will take action to enforce state law."

FanDuel, based in New York, was founded in 2009. DraftKings, based in Boston, started offering daily fantasy games around April 2012. But it wasn’t until recently that they came under heavy legal scrutiny, putting them both at heavy risk. The attention is due in part to a heavy advertising blitz by both companies at the start of the NFL season, with television commercials boasting about the huge cash prizes that could be won by playing their games.

Then suspicions grew about possible insider trading at the companies after a DraftKings employee mistakenly leaked insider data about which players were the most popular to own that week. The leak came the same week he won $350,000 in a FanDuel contest, raising questions about whether he used such data to game the system.

Though the companies denied wrongdoing, the controversy led to a torrent of lawsuits and investigations.

"As we said, this week was only the beginning of the legal process (in New York),” FanDuel said in a statement. “We have a legal business that millions and millions of people love and we are entitled to due process and look forward to being heard in court."

The companies believe they are legal under a 2006 federal law that cracked down on online gambling but exempted paid fantasy sports. That law, however, was enacted before the advent of daily fantasy sports, which differs from traditional fantasy sports because the games are played over the course of a day or week instead of a full season.

Follow sports reporter Brent Schrotenboer on Twitter @Schrotenboer. E-mail: bschrotenb@usatoday.com