By Michael Erman and Suzanne Barlyn
NEW YORK (Reuters) - Leading daily fantasy sports companies FanDuel and DraftKings won a temporary reprieve allowing them to keep operating in New York through the New Year, reversing for now an order by a state judge to close the businesses in the state.
New York State Appeals Court Judge Paul Feinman temporarily suspended an injunction granted earlier in the day by New York Supreme Court Justice Manuel Mendez.
Mendez had stopped short of deciding whether daily fantasy sports are a game of skill or chance under New York law, but ruled that there was a likelihood that New York Attorney General Eric Schneiderman would be able to prove that the games are illegal if the matter goes to trial.
The short-term stay, issued in an emergency appeal filed by FanDuel and DraftKings on Friday, allows the companies to do business in New York until at least Jan. 4, a DraftKings lawyer said. After that a panel of judges will rule on whether the injunction granted by Mendez was appropriate.
"This is a necessary first step on the road to an appeal," said DraftKings' attorney Randy Mastro, a partner at law firm Gibson Dunn. "We are confident we will prevail in appeal because daily fantasy sports are legal in New York."
Schneiderman last month sent cease and desist letters to the companies demanding that they stop taking money from players in the state.
FanDuel stopped letting New York state residents play the games after receiving the letter, but DraftKings has continued operating as usual.
Since FanDuel stopped taking money from New Yorkers, entry fees in the company's weekly National Football League (NFL) games have dropped by about 25 percent, according to data from fantasy sports analytics company SuperLobby.
Over that same period, entries into DraftKings' NFL guaranteed prize pool contests are down around 12 percent.
Professional football is the most popular sport for daily fantasy contests.
The legal sparring comes amid nationwide scrutiny at the state and federal level as to whether the games amount to gambling. A New York decision has the potential to ripple throughout the country as eight other states have gambling laws similar to New York's, according to DraftKings.
Fantasy sports started in 1980 and surged in popularity online. Participants typically create teams that span an entire season in professional sports, including American football, baseball, basketball and hockey.
Daily fantasy sports, a turbocharged version of the season-long game, have developed over the past decade. Players draft teams in games played in just one evening or over a weekend.
This has enabled fans to spend money on the games with a frequency that critics say is akin to sports betting.
The companies have raised hundreds of millions of dollars from investors including Fox Sports, Major League Baseball, the National Hockey League, KKR & Co LP, Raine Group, Google Capital and the venture arms of Time Warner Inc and Comcast Corp.
DraftKings also partnered with Major League Baseball to advertise in ballparks while FanDuel signed partnerships with several NFL teams.
Privately-held FanDuel and DraftKings may have painted targets on their own backs with aggressive advertising at the start of the NFL season that promised large winnings.
Bernstein research estimates that 59 percent of total TV ad revenue growth in the third quarter alone was from spending on daily fantasy football ads.
FanDuel has said it planned to pay out $2 billion in cash prizes this year.
The companies could also be saved in New York's state legislature where a number of bills of have been introduced to make the games legal. But the level of support for these bills is unclear and lawyers said the state's attorney general could challenge any such laws as being unconstitutional.
(Reporting by Michael Erman and Suzanne Barlyn; editing by G Crosse)