The New York Appellate Division dealt a shocking blow to the fantasy sports industry by ruling earlier this month that daily fantasy sports contests are a form of gambling and that the law passed by New York in 2016 legalizing and regulating fantasy sports was unconstitutional.

Fantasy sports have historically had a rocky history with the state of New York. Back in 2016, DraftKings and FanDuel exited the state following a lawsuit filed by the New York attorney general alleging that these companies’ daily fantasy games violated New York’s prohibition on gambling. Later that year, the Legislature passed an amendment to the Racing, Pari-Mutuel Wagering and Breeding Law, declaring that what it referred to as “interactive fantasy sports” are not games of chance and do not constitute gambling under the state’s penal law. The amendment also created a regulatory scheme similar to those that were being adopted in other states to govern the operation of the contests. Following the passage of that amendment, a group of private citizens sued Andrew Cuomo and the state of New York. The lower court sided with the plaintiffs and ruled that the amendment was invalid.

The Appellate Division upheld the Supreme Court’s ruling that the state Legislature unconstitutionally legalized “interactive fantasy sports contests.” The court, unlike the Legislature, found that fantasy sports contests contain “a material degree of chance” and consequently are prohibited as gambling under the New York Constitution. As a result, what had been legalized by the state Legislature has now been undone by the courts, pending any further appeal.

To reach its conclusion, the majority had to make the difficult determination that the Legislature’s finding that fantasy sports contests are not gambling was invalid beyond a reasonable doubt. The majority analyzed the key phrase “contest of chance,” finding that “the determinative question is whether [fantasy] contests involve a material degree of chance.” While the court accepted for purposes of the analysis that fantasy sports involve some level of skill, it also ruled that they involve a material degree of chance because participants are not able to influence how athletes will perform on the field. It is worth noting that unlike New York, which looks at whether chance is a “material element” of the contest, most states follow what is known as the “dominant element” test, meaning that the game will be deemed a game of chance only if chance is the “dominant” element. This may help limit the precedential impact of this decision, and it underscores the importance of the specific language of each state’s gambling law to the legal analysis.

The dissent found that the law represented a rational determination by the Legislature, as supported by the legislative history, and should have been upheld. The majority, however, defended its position, arguing that “allowing the Legislature unfettered discretion to determine what is not gambling would render meaningless the constitutional prohibition.” It’s notable that the opinion also included a footnote citing that other exceptions to the gambling prohibition are enshrined in the constitution rather than in statutory law.

This decision will likely be appealed, and at least FanDuel has stated that it intends to continue offering contests while any appeal is pending. It is unlikely that fantasy operators will exit the large New York market without a fight, but absent the passage of a constitutional amendment, their options may be limited. We’ll keep you updated on any future developments here.