Increasing Regulation of Daily Fantasy Sports Games

By: Lori W. Sieron

LEXIS PRACTICE ADVISOR RESEARCH PATH: Business & Commercial > E-Commerce > Social Media > Articles > Sweepstakes, Contests and Prize Promotions

UNTIL RECENTLY, THE ONLINE BUSINESSES THAT ALLOW people to wager on daily and weekly fantasy sports games were operating largely under the radar. That changed at the start of the 2015 NFL season, when several daily fantasy sports (DFS) companies launched massive advertising campaigns on ESPN and other sports channels, propelling the games into the spotlight. Regulation of daily fantasy sports hit the headlines last fall when it became a topic of discussion during the third Republican presidential debate. With increased awareness came increased scrutiny. Now, pay-to-play daily and weekly games are being aggressively reviewed, and some states are shutting them down. It is not necessarily the office fantasy sports contests or March Madness bracket pools that are causing controversy; it is the pay-to-play daily games that are the subject of legislation, investigation, and litigation.

A key issue in legal reviews of pay-to-play daily and weekly games is the question of whether these are games of skill or chance. Under most related laws, gambling involves risking or staking something of value in a contest involving luck. The notion that fantasy sports require a certain level of expertise helped keep DFS out of the spotlight until recently. Daily fantasy site operators argue that their games require expertise and are a form of entertainment, not gambling. The resolution of legal challenges to DFS, many of which are pending in the coming year, could ultimately alter definitions of gambling, increase consumer protections, and—critically—impact revenue available to states that choose to allow and regulate DFS.

How Is DFS Different From Traditional Fantasy Sports Games?

Fantasy sports games generally involve players assembling teams made up of imaginary rosters of real players. When the selected athletes score points, gain yardage, or accumulate touchdowns, hits, baskets, or goals in real games, the fantasy team’s coach (the player) accumulates points in the competition against other teams in the league. The popular favorite is season-long fantasy football, although other sports including professional baseball, basketball, hockey, and soccer are also in the mix. Traditional fantasy sports games are the kind that many of us play in leagues with our coworkers, family, and friends. This season-long, social gaming among friends enjoys a specific exemption under the Unlawful Internet Gambling Enforcement Act, 31 U.S.C.S. § 5362 (UIGEA), because long-term strategy and skill are thought to be involved. Daily fantasy sports are an accelerated version of traditional fantasy sports and involve an entry fee in order to select players and participate. Daily and weekly games are being questioned as games of chance similar to sports betting, which is illegal in most states; however, DFS site operators counter that their games involve expertise and are a form of entertainment, not gambling.

Volatile Legal Atmosphere for DFS

“It may not be fourth and long for daily fantasy sports sites, but it’s safe to say they can sense a blitz coming,” noted Senior Policy Specialist Jonathan Griffin, from the National Conference of State Legislatures, when assessing the current status of DFS operations.ⁱ At least 16 states introduced DFS legislation in 2015,ⁱⁱ and many others have actions pending in 2016. New York appears poised to serve as the bellwether for DFS regulation. It is reportedly the state that has the most users and brings in more DFS entry fees compared to other states,ⁱⁱⁱ and New York Attorney General Eric Schneiderman is tackling DFS directly. In November 2015, he issued cease-and-desist orders to operators DraftKings and FanDuel, claiming the games constitute illegal gambling and violate N.Y. Penal Code § 225. This was followed by a flurry of court actions. Schneiderman went on to seek a preliminary injunction to enjoin the companies from “continuing to operate an unlawful gambling business in New York.”^iv The site operators followed with requests for temporary restraining orders to block enforcement. Schneiderman’s injunction was initially granted by New York Supreme Court Judge Manuel Mendez, but an appeals court judge issued a temporary stay later the same day, allowing New York residents to participate in DFS until the full appellate panel could hear from both sides. At the end of December, Schneiderman doubled down against DFS operators by revising the complaint to request damages and restitution of all fees received from consumers and imposition of civil penalties of up to $5000 for each violation of New York law. In January, a panel of appellate division judges granted a long-term stay of the preliminary injunction, which remains in effect through the outcome of the case.^v Legislation aimed at legalizing DFS in the Empire State is simultaneously being discussed.

New York’s attorney general is not alone in his view that daily fantasy sports games should be considered gambling. Illinois Attorney General Lisa Madigan issued an advisory opinion stating that DFS falls within the definition of illegal gambling under state law,^vi specifically Illinois Criminal Code Chapter 720 § 28-1(a). DraftKings and FanDuel filed lawsuits asking Illinois courts to declare DFS legal in the state, which the attorney general followed with motions to dismiss. Texas Attorney General Ken Paxon also issued an opinion finding that DFS constitutes betting, which he went on to say would likely be considered illegal gambling under Texas Penal Code § 47.02.

Virginia is the first state to adopt daily fantasy sports legislation this year. Governor Terry McAuliffe signed the bill into law in early March, creating the Fantasy Sports Act. California appears to be moving closer to some form of regulation of daily fantasy sports. A DFS bill passed in the California Assembly with only one “no” vote. At the end of February, that bill sat before the senate awaiting consideration. California’s action was followed quickly by Florida where bills have cleared committees in both houses, then Indiana where a DFS bill was sent to the governor in early March. The California bill imposes rules for the way DFS could operate and provides consumer protection measures. In addition, California Attorney General Kamala Harris was reportedly asked by Assembly member Marc Levine to issue an opinion as to whether DFS violates existing state law.^vii Two relevant statutes include California Penal Code § 337a, which sets fines and possible imprisonment for certain types of wagering, bookmaking, and pool selling, and Cal. Bus. & Prof. Code § 19801(d), which states that “no person in this state has a right to operate a gambling enterprise except as may be expressly permitted by the laws of this state and by the ordinances of local governmental bodies.”

Nevada recently banned pay-to-play DFS sites from operating there without a license. The Nevada Gaming Control Board issued a notice to licensees on October 15, 2015.^viii The board concluded that DFS constitutes gambling under Nevada law because it involves wagering on the collective performance of athletes participating in sporting events. It went on to require that DFS operators obtain licenses issued by the Nevada Gaming Commission in order to offer a sports pool.^ix Both DraftKings and FanDuel suspended operations in Nevada soon after the announcement.^x

Pennsylvania, Massachusetts, Illinois, Indiana, Minnesota, and Washington are among other states that drafted or introduced DFS legislation in 2015, with more than half of all states already moving in that direction in 2016.^xi The Massachusetts Gaming Commission called the status of DFS “unsettled legal territory”^xii and asked the state legislature to take definitive action after state Attorney General Maura Healey declared that daily fantasy sports games were legal under current state law. She proposed regulations that would impose age restrictions, set limits on users’ monthly deposits, and include additional consumer protections. Several states, including Kansas and Maryland, showed their hand early by passing laws mimicking the language of the federal fantasy sports exemption,^xiii although Maryland’s attorney general has asked the legislature to take a second look at the 2012 law.

States are not the only regulators with their eyes on the situation. Two federal investigations may up the ante on high stakes enforcement actions. There are reports that a federal grand jury was assembled in Tampa, Florida to look into daily fantasy sports operations.xiv News of an investigation of DFS by New York Federal Prosecutor Preet Bharara is seen as a major escalation of the threat to ongoing operations of daily fantasy sports games. Sports gaming attorney Daniel Wallach told the Wall Street Journal, “Because of his [Bharara’s] past and his reputation, this is probably the most frightening development yet for the industry.”^xv

Federal Law Exemption for Fantasy Sports

The Unlawful Internet Gambling Enforcement Act (UIGEA) banned online gambling in 2006. An exception was carved out for fantasy sports in § 5362 (1)(e)(ix) of the Act. The language of the relevant section specifically exempts skill-based fantasy games:

• Participation in any fantasy or simulation sports game or educational game or contest in which (if the game or contest involves a team or teams) no fantasy or simulation sports team is based on the current membership of an actual team that is a member of an amateur or professional sports organization (as those terms are defined in section 3701 of title 28 [28 U.S.C.S. § 3701]) and that meets the following conditions:

• All prizes and awards offered to winning participants are established and made known to the participants in advance of the game or contest and their value is not determined by the number of participants or the amount of any fees paid by those participants.
• All winning outcomes reflect the relative knowledge and skill of the participants and are determined predominantly by accumulated statistical results of the performance of individuals (athletes in the case of sports events) in multiple real-world sporting or other events.
• No winning outcome is based—on the score, point-spread, or any performance or performances of any ingle real-world team or any combination of such teams; or —solely on any single performance of an individual athlete in any single real-world sporting or other event.

It is the knowledge and skill element of this exemption that is frequently referred to by DFS operators when defending the lawfulness of the online fantasy games they offer. However, the federal exemption does not provide an all-access pass. States can still enact laws making DFS illegal within their borders.

DFS Defensive Maneuvers

Some fantasy operators are hedging, hoping for more advantageous treatment by state regulators rather than rolling the dice in court. On the heels of several instances of unfavorable state enforcement actions, FanDuel CEO Nigel Eccles issued the following statement to DFS players and the media encouraging regulation of the industry.

“It has become apparent to me that our industry has grown to a size where a more formal, industrywide approach is needed. To be clear, our industry needs strong, common-sense, enforceable consumer protection requirements to ensure its continued growth and success. . . . A number of smart, but tough proposals in various state legislatures have begun to emerge, which I believe can serve as the basis for the sensible regulation of the fantasy sports industry.”^xvi

This is the approach taken in Massachusetts, the home of DraftKings, which is among the states looking to regulate rather than ban the DFS industry. Attorney General Maura Healy proposed a consumer protection law that would require age verification and impose age restrictions barring anyone under 21 from participating. The proposed law bans games involving college sports and aims to require truth in DFS advertising and fairness in the games themselves. The proposed regulation also includes assistance for players with gambling problems.^xvii

League Sponsorships and Equity Investments in Fantasy Sports

Big-name players with stakes in the DFS game include a handful of high-profile investors. Among them, according to USA Today, are NBC Sports, Fox Sports, Time Warner, and the Kraft Group (owners of the New England Patriots).^xviii Several major sports leagues also have money in the game. Major League Baseball (MLB) reportedly made an equity investment in DraftKings in 2013.^xix This was followed by an agreement making DraftKings the “Official Daily Fantasy Game” of MLB beginning in April of 2015.^xx The National Hockey League (NHL) reportedly signed a multi-year contract with DraftKings in November 2014, making it the “Official Fantasy Game” of the NHL.^xxi At roughly the same time, the National Basketball Association (NBA) inked a multi-year equity and sponsorship deal with FanDuel, which hosts the “Official One-Day Fantasy Basketball Game of the NBA.”^xxii This bet is paying off nicely for the NBA, according to DFS analytics tracking provider SuperLobby. com, which reports that “a single week of NBA has become larger in terms of entry fees and net profit than a slate of NFL.”^xxiii

March Madness—A Different Ball Game

The National Collegiate Athletic Association (NCAA) basketball championships present a number of unique issues. Office and social March Madness bracket pools could run afoul of the UIGEA and the gambling laws of numerous states if players pay to participate. The UIGEA’s fantasy sports exemption would not cover this type of game because players select the winners of actual games. In most NCAA bracket pools, winning the pot depends on accurately guessing the greatest number of real college team champions. The UIGEA’s fantasy sports exemption does not cover games where real winning teams are chosen. Even friendly NCAA bracket pools could violate the UIGEA and the gambling laws of numerous states if an entry or participation fee is involved.

For these reasons, along with profitability considerations, some DFS operators, who rely heavily on the UIGEA to support claims that their daily games are legal, have stayed away from offering NCAA tournament bracket games.^xxiv Without the exemption carve-out protection of the UIGEA, March Madness tournament games may also conflict with two other federal laws. The Professional and Amateur Sports Protection Act (PASPA), 28 U.S.C.S. § 3701, chapter 178, prohibits wagering schemes based on a competitive game in which professional or amateur athletes participate.^xxv The Interstate Wire Act, 18 U.S.C.S. § 1081, prohibits online pay-to-play betting or wagering.

The Drive for Revenue

For DFS participants, the biggest impact will likely be taxation, regulation, and in some states, the possibility of bans. Gamechanging regulations and requirements leading to shutdowns of DFS as seen in states such as Nevada could limit access by interested players who reside in certain states. If DFS survives the current round of challenges, additional regulation, consumer protections, policing of related Internet activity, and taxation can be expected. The emphasis, however, is likely to be on revenue. The Colorado Gaming Association’s Executive Director Lois Rice told The Denver Post that there is “a feeling that states should be able to benefit from tax revenue that could be generated from fantasy sports games. They [DFS operators] aren’t paying any taxes right now.”^xxvi The survival of daily fantasy sports may be tied to the drive for new funding sources. This opportunity will likely become an important deciding factor for those states looking to hit the tax revenue jackpot.

Lori W. Sieron, JD, is Managing Editor of The Lexis Practice Advisor Journal and a Product Manager for Lexis Practice Advisor.

i. Jonathan Griffin, Daily Fantasy Sites Sacked in Nevada. Will Other States Follow?, NCSL.org (Oct. 20, 2015), http://www.ncsl.org/blog/2015/10/20/daily-fantasy-sites-sacked-in-nevada-will-other-states-follow.aspx.
ii. David Royse, Fantasy Sports Come Under Legislative Scrutiny, State Net Capitol J. (Nov. 13, 2015), http://www.lexisnexis.com/communities/state-net/b/capitol-journal/archive/2015/11/13/fantasy-sports-come-under-legislative-scrutiny.aspx.
iii. Dustin Gouker, NY AG’s Latest DFS Filing: Stay Lets DraftKings, FanDuel Continue Expanding Their Gambling Operations, Legal Sports Rep. (Jan. 11, 2016), http://www.legalsportsreport.com/7006/ny-ag-stay-vs-draftkings-fanduel/.
iv. Schneiderman v. DraftKings Inc., No. 453054/2015, New York Supreme Court, New York County, Nov. 17, 2015, http://www.ag.ny.gov/pdfs/DK_Complaint.pdf; Schneiderman v. FanDuel Inc., No. 453056/2015, New York Supreme Court, New York County, Nov. 17, 2015, http://www.ag.ny.gov/pdfs/FD_Complaint.pdf.
v. Gouker, supra note iii.
vi. Letter from Lisa Madigan, Attorney General, State of Illinois, to Elgie R. Sims, Jr., and Scott R. Drury, Illinois State Representatives (Dec. 23, 2015), http://rms3647.typepad.com/files/illinois-dfs-opinion.pdf.
vii. Dustin Gouker, Could California’s Attorney General be Next to Weigh in on Daily Fantasy Sports?, Legal Sports Rep. (Nov. 12, 2015), http://www.legalsportsreport.com/6128/california-ag-on-dfs/.
viii. Nevada Gaming Control Board Notice # 2015-99, Oct. 15, 2015, http://gaming.nv.gov/modules/showdocument.aspx?documentid=10481.
ix. Id. x. Jonathan Griffin, Sr. Policy Specialist, National Conference of State Legislatures, Oct 20, 2015, http://www.ncsl.org/blog/2015/10/20/daily-fantasy-sites-sacked-in-nevada-will-other-states-follow.aspx.
xi. Chris Grove, Legislative Tracker: Daily Fantasy Sports, Sports Betting, Legal Sports Rep. (Jan. 8, 2016), http://www.legalsportsreport.com/dfs-bill-tracker/.
xii. Steve Crosby, The Massachusetts Gaming Commission Submits White Paper on Daily Fantasy Sports to the Legislature, MassGaming.com (Jan 11, 2016). Crosby is the Chairman of the Massachusetts Gaming Commission.
xiii. How State Law, the UIGEA and Fantasy Sports Interact, Unlawful Internet Gambling Enforcement Act of 2006, OnlineGamblingSites.com, http://www.Onlinegamblingsites.com/uigea.
xiv. Chris Grove and Dustin Gouker, DFS State Watch: Monitoring Daily Fantasy Sports Action in State Government, Legal Sports Rep. (Jan. 20, 2016), http://legalsportsreport.com/dfs-state-watch.
xv. Devlin Barrett and Christopher M. Matthews, U.S. Prosecutor Probing Daily Fantasy Sports Business, Wall St. J. (Oct. 21, 2015), http://www.wsj.com/articles/u-s-prosecutor-probing-daily-fantasy-sports-business-1445400505.
xvi. Letter to Users from FanDuel CEO, Nigel Eccles (Oct. 29, 2015), https://newsroom.fanduel.com/2015/10/29/a-letter-to-users-from-fanduel-ceo-nigel-eccles/.
xvii. Press Release, AG Healy Proposes Strong Consumer Protection Regulations for Daily Fantasy Sports Operators in Massachusetts, Mass.gov (Nov. 11, 2015), http://www.mass.gov/ago/news-and-updates/press-releases/2015/2015-11-19-daily-fantasy-sports.html.
xviii. Elaine Popovich, States Consider Regulation of Daily Fantasy Sports Sites FanDuel, DraftKings, USA Today (Dec. 2, 2015), http://www.usatoday.com/story/sports/fantasy/2015/12/02/pew-stateline-state-regulation-daily-fantasy-sports-fanduel-draftkings/76660516/.
xix. DFS Partnership/Sponsorship Tracker, Legal Sports Rep. (Jan. 8, 2016), http://www.legalsportsreport.com/dfs-sponsorship-tracker/.
xx. Id. xxi. Id. xxii. Id.
xxiii. The SuperLobby NBA Lowdown, SuperLobby.com (Dec. 23, 2015), http://superlobby.com/NBA_lowdown.
xxiv. Tom Somach, Daily Fantasy Sports Leagues Not Mad for March Madness as Most Shun College Hoops, Gambling911.com (Mar. 11, 2015), http://www.gambling911.com/gambling-news/daily-fantasy-sports-leagues-not-mad-march-madness-most-shun-college-hoops-031115.html.
xxv. Marc Edelman, Are NCAA Tournament Bracket Pools Legal?, Forbes (Mar. 21, 2013), http://www.forbes.com/sites/marcedelman/2013/03/21/are-online-ncaa-tournament-pools-illegal/.
xxvi. Jason Blevins, Colorado Casinos Want Fantasy Sports Leagues Regulated—and Taxed, The Denver Post (Oct. 10, 2015), http://www.denverpost.com/business/ci_28980903/colorado-casinos-call-regulation-fantasy-sports-leagues.

LEXIS PRACTICE ADVISOR RESEARCH PATH: Business & Commercial > E-Commerce > Social Media > Articles > Sweepstakes, Contests and Prize Promotions