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Draft Ops Lawsuit And Proposed DraftKings-FanDuel Merger Invite New Scrutiny Of Daily Fantasy Sports

The daily fantasy sports industry was on the precipice of destruction early last year when New York Attorney General Eric Schneiderman brought a lawsuit against market leaders FanDuel and DraftKings, arguing that both contests constituted illegal gambling under New York State gambling laws.

Ultimately, the DFS industry survived thanks to brilliant lobbying and the passing of new state law.

However, just when most government scrutiny of daily fantasy sports has subsided, three daily fantasy sports operators have brought the legal issues surrounding daily fantasy sports back into the mainstream.

Specifically, FanDuel and DraftKings have invited renewed federal scrutiny with their recent and controversial proposed merger.  Meanwhile, the much smaller Draft Ops has invited Minnesota courts to assess the legal status of daily fantasy sports by arguing that their very own contests were illegal.

In some ways, the Draft Ops legal situation is the comparatively odder of the two developments.  As reported previously by FORBES's Darren Heitner, the daily fantasy sports operator Draft Ops, which seeks out of its exclusive endorsement contract with the Minnesota Wild, has argued in court documents that a contract that it had previously signed with the Minnesota Wild is void because the underlying substance of the contract (daily fantasy sports in Minnesota) is, in itself, illegal.

Forget for a moment the dubious legal nature of Draft Ops's legal argument (it is well established under contract law's 'unclean hands' document that a participant in a conspiracy cannot necessarily use his own wrongdoing to avoid contractual liability).  In essence, what Draft Ops lawyers are seeking in court is even more bizarre -- a declaration that their own business operations were illegal.

Without the Draft Ops lawsuit, the State of Minnesota would probably not be too focused on whether daily fantasy sports is legal -- a highly complex and somewhat ambiguous question. Nevertheless, if the court finds that Draft Ops indeed was operating illegally under Minnesota state law, it likely to invite a new series of civil lawsuits against daily fantasy sports operators, as well as potentially even some criminal challenges.

Meanwhile, at the same time as Draft Ops pursues its odd legal strategy to attempt to void its contract with the Minnesota Wild, daily fantasy operators FanDuel and DraftKings have announced a proposed merger that seeks to join America's two largest daily fantasy sports companies into a single entity with nearly 100 percent market share in the DFS category.

Under traditional antitrust policy, any attempted merger between an industry's dominant No. 1 and No. 2 players would face  substantial regulatory challenges under the Hart Scott Rodino Antitrust Improvements Act of 1976.  For example, in August 2010, the Federal Trade Commission and Department of Justice issued new Horizontal Merger Guidelines that state the agencies' intent is to challenge any mergers that serve to "substantially ... lessen competition, or ... tend to create a monopoly.”

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