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Civil Litigation FLASHPOINTS May 2020

May 15, 2020Print This Post Print This Post

Donncha Ó Tuama, Katten Muchin Rosenman LLP, Chicago
312-577-8378 | E-mail Donncha Ó Tuama

Supreme Court Holds Daily Fantasy Sports Is Not Gambling Under Illinois Law

In Dew-Becker v. Wu, 2020 IL 124472, the Illinois Supreme Court held that popular daily fantasy sports (DFS) contests are predominantly games of skill, and not of chance, and so do not constitute gambling under state criminal law. As a result, the plaintiff was unable to recover in a civil action for the loss of his $100 DFS entry fee.

The amount in controversy was small; the principle, and implications, significant.

Facts of the case

Evidence established that in April 2016, the plaintiff and the defendant each paid a $109 entrance fee to participate in a head-to-head DFS contest hosted on the FanDuel website.

In a DFS contest, each participant creates a virtual roster of players by selecting athletes in a real professional or amateur sports league. Participants earn fantasy points by successfully predicting the performance of their selected athletes in games played on a given day. After all the day’s games are completed, a total score is calculated, and the winner is the participant whose roster has the most points. A head-to-head DFS contest involves only two participants who compete against each other directly.

This particular contest involved National Basketball Association (NBA) games, and both players selected a fantasy roster of nine NBA players. The plaintiff understood when entering the contest that the winner would keep $200, the loser would get nothing, and FanDuel would keep $18 for managing the contest. The defendant, participating under the fateful screen name “questionablylegal,” won the DFS contest by a score of 221.1 to 96.3 and received the $200 due him.

But six weeks later, the plaintiff filed a statutory claim seeking to recover his $100 from the defendant under the Illinois Loss Recovery Act (LRA), 720 ILCS 5/28-8, a statute enacted in 1819, on the basis that it was the proceeds of illegal gambling.

The Cook County Circuit Court rejected the plaintiff’s claim, relying primarily on its conclusion that recovery under the LRA was possible only when the gambling was “connected — conducted between one person and another person” and not when conducted through a third-party website, such as FanDuel. 2020 IL 124472 at ¶7. The First District Appellate Court upheld the ruling in the defendant’s favor, holding that the LRA applied only when there was a “direct connection between the two persons involved in the wager.” 2020 IL 124472 at ¶8, quoting Dew-Becker v. Wu, 2018 IL App (1st) 171675, ¶19, 123 N.E.3d 86, 428 Ill.Dec. 622.

The Arguments on Appeal

The Supreme Court rejected the appellate court’s conclusion that §28-8 does not permit recovery when a third-party intermediary has facilitated the illegal gambling transaction.

The court began its analysis by turning to the statutory language, looking to §28-8(a) of the LRA, which provides:

Any person who by gambling shall lose to any other person, any sum of money or thing of value, amounting to the sum of $50 or more and shall pay or deliver the same or any part thereof, may sue for and recover the money or other thing of value, so lost and paid or delivered, in a civil action against the winner thereof, with costs, in the circuit court. 720 ILCS 5/28-8(a).

The court held that the only “direct” connection required under §28-8 is that one person lose at gambling to another. The court further explained that nothing in the statute states that a third party’s help in conducting the gambling eliminates the plaintiff’s right to recovery and the courts are not free to read into a statute exceptions, limitations, or conditions that the legislature did not express. The court reasoned that if a gambling winner’s liability could be avoided simply by having an agent assist with the gambling transaction in some way, the purpose of the statute would essentially be negated. 2020 IL 124472 at ¶14.

The court also rejected the defendant’s policy argument that a holding in the plaintiff’s favor would create an avalanche of litigation from not only losing gamblers but also third parties. Specifically, under §28-8, if any actual loser does not assert his or her claim under subsection (a) within six months of the “loss,” subsection (b) allows “any person” to file a suit and recover triple the amount of the gambling loss that the actual loser could have asserted. The defendant argued that reversal of the appellate court’s finding would open the floodgates to actions by thousands of Illinois residents who had lost in DFS contests, or worse, an unlimited number of subsection (b) suits by “straw men” against any and every winner on any DFS website operating in Illinois. The Supreme Court saw this contention as speculative, quoting Sonnenberg v. Amaya Group Holdings (IOM) Ltd., 810 F.3d 509, 511 (7th Cir. 2016), for the proposition that “there is typically not a strong incentive for gamblers to file lawsuits to recover gambling losses because the gambler knows his money is at risk.” 2020 IL 124472 at ¶18. Also, the Supreme Court held, the fact that participants are known only by screennames would tend to limit the number of lawsuits filed, and, in any event, the filing of lawsuits would not be an absurd result but rather the explicit purpose of the statute. Id.

The Supreme Court noted that the appellate court observed that “the trend in Illinois is toward more relaxed gambling laws” and that §28-8’s “relevance and applicability have dwindled since its inception in the late 1800s.” 2020 IL 124472 at ¶19. The Supreme Court accepted that the recently enacted Sports Wagering Act (SWA), 230 ILCS 45/25-1, et seq., expanded legalized gambling significantly but determined that §28-8(a) remains the law and it was not the role of the judiciary to declare that the statute may not be enforced.

COMMENT: It should be noted that the court was considering §28-8 in the context of the parties’ DFS contest in 2016. While not considered by the majority, it is likely that DFS has not been gambling under the LRA since 2019, when §28-1(b)(15) added an exception from the definition of gambling for “sports wagering” under the SWA. Although it does not explicitly reference DFS, the SWA defines “sports wagering” as including “accepting wagers . . . on the individual performance statistics of athletes in a sports event or combination of sports events, by any system or method of wagering, including, but not limited to, in person or over the Internet through websites and on mobile devices,” which, on any reasonable interpretation, must include DFS. 2020 IL App 124472 at ¶47 (Karmeier, J., dissenting), quoting 230 ILCS 45/25-10.

However, despite rejecting each of the appellate court’s reasons for rejecting the plaintiff’s case, the Supreme Court ultimately affirmed the ruling on an argument that was not substantively briefed by the parties — that the DFS contest at issue was not “gambling” in the first place.

The Test for “Gambling”

Once more, the Supreme Court turned to the specific language in the LRA. Section 28-8 states that a person commits gambling if he or she “knowingly plays a game of chance or skill for money or other thing of value, unless excepted in subsection (b).” 2020 IL 124472 at ¶21, quoting 720 ILCS 5/28-1(a)(1). Subsection (b)(2) then provides an exception to gambling for a participant in any contest that offers “prizes, award[s] or compensation to the actual contestants in any bona fide contest for the determination of skill, speed, strength or endurance or to the owners of animals or vehicles entered in such contest.” 2020 IL 124472 at ¶21, quoting 720 ILCS 5/28-1(b)(2). As DFS clearly offered a prize, award, or compensation to the “actual contestants,” the question turned on whether the plaintiff and the defendant were engaged in a “bona fide contest for the determination of skill.”

The court recognized the difficulty of the question “because the outcome of every contest depends, at least to some degree, on chance” and considered three general tests applied by the courts to determine whether a person was engaged in a “bona fide contest for the determination of skill,” and therefore exempt from gambling laws. 2020 IL 124472 at ¶22. The court adopted the “predominant purpose test” or “dominant factor test” applied by the majority of courts, whereby contests in which the outcome is mathematically more likely to be determined by skill than chance are not considered gambling. As one court has put it, “[t]he test of the character of the game is, not whether it contains an element of chance or an element of skill, but which is the dominating element that determines the result of the game, or, alternatively, whether or not the element of chance is present in such a manner as to thwart the exercise of skill or judgment.” Id., quoting O’Brien v. Scott, 20 N.J.Super. 132, 89 A.2d 280, 283 (1952). See also Joker Club, LLC v. Hardin, 183 N.C.App. 92, 643 S.E.2d 626 (2007); Banilla Games, Inc. v. Iowa Department of Inspections & Appeals, 919 N.W.2d 6 (Iowa 2018).

The court rejected the “material element test,” whereby a contest is considered a game of chance if the outcome depends in a material degree on an element of chance, even if skill is otherwise dominant. The court also rejected the “any chance test,” whereby a contest is gambling if it involves any chance whatsoever, as “no test at all,” because every contest involves some degree of chance. 2020 IL 124472 at ¶¶22 – 25.

Of the three, the court found that the predominant purpose test provided a workable rule that “allows for greater consistency and reliability in determining what constitutes a contest of skill.” 2020 IL 124472 at ¶25.

Applying the predominant purpose test to DFS, the court relied on several recent peer-reviewed studies that “established” that DFS contests were determined by the skill of the participants in using their knowledge of statistics and the relevant sport to select a fantasy team that will outperform the opponent:

In particular, it has been shown that “skill is always the dominant factor” in head-to-head DFS contests involving NBA games. [Daniel Getty et al., Luck and the Law: Quantifying Chance in Fantasy Sports and Other Contests, 60 SIAM Rev. 869, 882 (2018)]; see also, generally, Jeffrey C. Meehan, The Predominate Goliath: Why Pay-to-Play DailyFantasy Sports Are Games of Skill Under the Dominant Factor Test, 26 Marq. Sports L.Rev. 5 (2015). Indeed, the fact that DFS contests are predominately skill based is not only widely recognized to be true but has created a potential revenue problem for the DFS websites. Because skilled players can predominate the DFS contests, new and unskilled players are often hesitant to participate. Ed Miller & Daniel Singer, For Daily Fantasy Sports Operators, the Curse of Too Much Skill,Sports Bus.J., (July 27, 2015). 2020 IL 124472 at ¶26.

Having concluded that outcomes of head-to-head DFS contests are predominately skill based, the court held that the plaintiff was not engaged in “gambling” with the defendant as required under §28-8 and affirmed the judgment of the appellate court.

A Strong Dissent

Justice Karmeier agreed with the majority in their adoption of the predominant purpose test but concluded that DFS was not a contest of skill under that analysis.

Justice Karmeier argued that the studies that the majority relied on had not been presented at any stage of the litigation. This, the judge argued, raised concerns of witness credibility and hearsay normally associated with citations to empirical or scientific studies whose authors cannot be observed or cross-examined, and “the majority should not . . . hastily accept[ ] the validity of studies that it searched for outside the record . . . especially considering the majority failed to engage in its own analysis of the studies’ validity or credibility.” [Citation omitted.] 2020 IL 124472 at ¶35.

The majority, he argued, had also erred in their reliance on O’Brien, supra, because subsequent decisions had undermined its analysis and held the predominant purpose test is whether the results predominately depend on chance, regardless of whether skill predominates in the process. 2020 IL 124472 at ¶36, citing Ruben v. Keuper, 43 N.J.Super. 128, 127 A.2d 906, 909 – 910 (1956). This “qualitative approach” had been adopted in the vast majority of “predominant factor” jurisdictions (including New Jersey, Delaware, Washington, Massachusetts, Iowa, Alaska, Pennsylvania, North Carolina, and Kentucky), where “the participant’s efforts or skill must control the final result, not just one part of the larger scheme” 2020 IL 124472 at ¶37.

Justice Karmeier explained that under a qualitative approach, games or contests whose outcome depends on the results of a contingent event out of the participant’s control, like DFS, were, in his view, games of chance as a matter of law. “This is so because predictions, regardless of the likelihood of being true, are mere guesses innate with chance.” 2020 IL 124472 at ¶38, citing Opinion of Justices, 795 So.2d 630, 641 (Ala. 2001).

For Justice Karmeier, all of the prohibited activities enumerated in §28-8 (lotteries, bingos, raffles, making a wager on the result of any game or contest, selling pools on the result of any game or contest of skill, and operating an Internet site that permits a person to make a wager on the result of any game or contest) involve outcomes that depend on a contingent event out of the participants’ control, and therefore the legislature had demonstrated its intent to broadly prohibit activities of that nature, requiring the court to adopt the qualitative approach. 2020 IL 124472 at ¶41. Although every game, to some extent, involves chance or an unknown — the critical distinction between a game of chance and a game of skill is the participant’s ability to overcome chance with superior skill. For example, a runner might train harder to affect the outcome of a race. 2020 IL 124472 at ¶42. But in DFS, “[o]nce a lineup is set and the athletic games commence, the DFS participant cannot influence the athlete’s performance or how points are accumulated. At this point in the game, the outcome of the contest relies entirely on a contingent event that the participant lacks all control over, and there is no subsequent opportunity for the participant to overcome the chance involved. Accordingly, a DFS contest is a game of chance.” 2020 IL 124472 at ¶46.

In Justice Karmeier’s view, the majority opinion risked legalizing traditional forms of gambling any time a study concluded that it involved skill more than chance. The judge gave the example of poker, which Illinois Courts have determined to be a game of chance, despite statistical evidence that skill dominates. 2020 IL 124472 at ¶44, citing People v. Mitchell, 111 Ill.App.3d 1026, 444 N.E.2d 1153, 1155, 67 Ill.Dec. 669 (3d Dist. 1983). Thus, Justice Karmeier suggested, because studies show that skill dominates in poker, “[such] cases are effectively overruled, and poker is now legal,” an “absurd result [that] could not have been intended by the legislature.” 2020 IL 124472 at ¶44.

Implications

Since the landmark 2018 U.S. Supreme Court decision in Murphy v. National Collegiate Athletic Ass’n, ___ U.S. ___, 200 L.Ed.2d 854, 138 S.Ct. 1461 (2018), the states have been free to develop their own legislation and caselaw to regulate sports betting.

In Dew-Becker, the Illinois Supreme Court has for the first time considered the appropriate test for determining whether a game is one of skill or one of chance, and therefore gambling, and has followed the majority in applying the predominant purpose test.

The immediate and direct implications of the decision are that the plaintiff cannot recover his $100, a potential “floodgate of suits” from unlucky, or, rather, less skilled DFS contestants (or those seeking triple damages when the original loser doesn’t bring suit within six months) has been avoided, and DFS contests are not gambling under the LRA.

On a broader level, the decision arguably sets a lower bar in Illinois for defendants seeking to characterize their contests as games of skill, when they can supply (or when the court itself finds) peer-reviewed studies supporting that contention. In so doing, Illinois has, at least on Justice Karmeier’s analysis, set itself apart from the majority of states that adopt the “qualitative approach” to the predominant purpose test, which focuses on the contestant’s ability to control the result. The decision also distinguishes Illinois from the minority of states that apply the “material degree of chance” test, such as New York, where a state appellate court has recently concluded that DFS is a form of gambling. White v. Cuomo, 62 Misc.3d 877, 87 N.Y.S.3d 805 (N.Y.Sup. 2018), reargument denied (N.Y.Sup. 2019), aff’d as modified, 181 A.D.3d 76 (2020). And some skilled poker fans have been left to ponder, with some basis, whether poker is also exempted from the LRA because it is a game of skill. We await that case with interest.

For more information about civil litigation, see FEDERAL CIVIL PRACTICE (IICLE®, 2020). Online Library subscribers can view it for free by clicking here. If you don’t currently subscribe to the Online Library, visit www.iicle.com/subscriptions.

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