Occasionally, we post articles on legal subjects other than insurance subrogation because they are of such a wide interest that it would not be right to avoid comment on them. Such a topic is the meteoric growth of daily fantasy sports (DFS) such as DraftKings and FanDuel. In 2015, nearly 60 million people played fantasy sports in the U.S. and Canada, a number which has doubled since 2008. On average, adult fantasy sports participants spend an average $465 on league-related costs, single-player challenge games, and league-related materials over a 12-month period. It doesn’t take a mathematician to conclude that DFS sponsors are making millions in profit. FanDuel took in just shy of $1 billion in 2014, and that number is expected to be widely increased in 2015. It is estimated that in 2016, entry fees on DFS contests will exceed the total amount wagered on sports in Nevada. It was only a matter of time before DFS caught the eye of government regulators, politicians, and jealous legal sports gambling sponsors. The regulation of DFS was even the subject of a question asked in a recent Republican presidential debate.
Many DFS events are hosted online, but they often feature live finals where qualifying finalists are sent to exotic locations to compete for millions of dollars. The two DFS market leaders are DraftKings and FanDuel, but there are dozens of lesser-known players in the industry. DraftKings came into the national spotlight recently when DraftKings employee Ethan Haskell won $350,000 in a FanDuel game after releasing player percentage data before the competitions locked in NFL week three. The two industry leaders inundated football fans with commercials at the start of the NFL season last month alone, spending more than $31 million for 9,000 television commercials during the NFL’s opening weekend. DraftKings and FanDuel have partnered with heavyweight partners such as Major League Baseball, the National Hockey League, ESPN, the NBA, NBC, the UFC, and Comcast.
The Fantasy Sports Trade Association (FTSA) is a Chicago-based trade group representing the fantasy sports industry. Last month, the FTSA announced the formation of the Fantasy Sports Control Agency to oversee fantasy sports sites like FanDuel and DraftKings. Former acting U.S. Secretary of Labor Seth D. Harris will lead the independent agency with the goal of creating a strict, transparent, and effective system of self-regulation of the hundreds of businesses that comprise the fantasy sports industry.
The law regarding DFS is complex and ambiguous, and has been changing almost daily. You may recall that, in 2006, the Unlawful Internet Gambling Enforcement Act (UIGEA) was signed into law after Congress unsuccessfully tried to use three other Federal laws to regulate online gambling. It crippled the domestic online poker industry, but contained specific language legalizing DFS. The UIGEA regulates the financial intermediaries (banks and other financial institutions) serving as the financial link between Internet gambling consumers and Internet casinos. Fueled by this exception, FanDuel was launched in 2009 and DraftKings followed suit in 2010, quickly becoming the second largest DFS site. Dozens of others followed suit, including Yahoo, StarsDraft, Fantasy Draft, Fantasy Feud, Fantasy Aces, Draft Ops, and Star Fantasy Leagues.
The laws governing operation of DFS sites and the laws regulating participation in a DFS game are different. DFS sites operate in some states and not in others, not because DFS is illegal, but rather, because the sites themselves change their policy in a given state with little or no notice based on that state’s political climate and attitude toward DFS. The Wall Street Journal even recently announced that the FBI and Justice Department are investigating the DFS industry to see if its members are in violation of federal gambling laws.
I play DraftKings in Wisconsin, but when I checked my online games while travelling in Iowa over Thanksgiving, the website was blocked and all I could get was a DraftKings notice that participating in such games in Iowa was prohibited by law. In fact, when I looked into the law, Iowa’s § 725.7 provides that it is a “serious misdemeanor” for a person to:
- Participate in a game for any sum of money or other property of any value.
- Make any bet.
- For a fee, directly or indirectly, give or accept anything of value to be wagered or to be transmitted or delivered for a wager to be placed within or without the state of Iowa.
- For a fee, deliver anything of value which has been received outside the enclosure of a racetrack licensed under chapter 99D to be placed as wagers in the pari-mutuel pool or other authorized systems of wagering.
- Engage in bookmaking.
The penalty is up to ten years in jail. In February, a bill introduced to the Iowa legislature would have approved fantasy sports as “games of skill” and allowed cash payouts to participants. It was approved on a voice vote with just one voice of dissent, and then passed in the Senate by a 32-16 vote. However, the bill died in the House.
DFS sites have to carefully dance around the UIGEA in order to stay legal in many states. The UIGEA law applies to all 50 states, but some states, such as the ones mentioned above, have laws which make the legality of participating in DFS uncertain. The UIGEA specifically states that:
[The UIGEA does not include] 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) and that meets the following conditions:
(I) 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.
(II) 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.
(III) No winning outcome is based (aa) on the score, point spread, or any performance or performances of any single real world team or any combination of such teams; or (bb) solely on any single performance of an individual athlete in any single real-world sporting or other event.
In other words, an entire team cannot be used as part of a DFS roster, prizes need to be made known to all participants in advance of the contest, the value of a prize cannot be determined by the number of participants (as in a lottery), and the scoring must be for individual players/athletes only as applied across multiple, real-world, sporting events or games. You could not, therefore, have a DFS game centered on the Super Bowl alone. According to this federal law, DFS is a game of skill and are, therefore, not gambling. However, add some states’ laws, which are less clear, into to the mix, and you find some DFS sponsors conservatively opting not to offer the game in certain states.
DFS sites have come up with different policies for different states. DraftKings and FanDuel remain relatively uniform with regard to which states they do not allow players to participate, including Arizona, Iowa, Louisiana, Montana, Nevada, and Washington. This doesn’t necessarily mean that DFS is illegal in these states, only that the DFS sites are not willing to “gamble” by allowing participation in those states where the law regarding DFS remains “unclear.” FanDuel is currently not allowing residents of New York to play, while DraftKings and Yahoo are. Yahoo also prevents Florida residents from playing. As you might expect, with a sports gambling empire to protect, Nevada’s Gaming Control Board recently issued a notice that DFS constituted illegal “gambling” and vowed to stop future play from the state.
DFS sites are scrambling to put tight internal controls and regulations into place. They have a good thing and don’t want to lose it. The UIGEA prohibits a DFS site from “knowingly” accepting payments in connection with illegal gambling. Whether lax DFS enforcement constitutes a “knowing” violation is the stuff lawyers argue over. However, DFS sites are working overtime to ensure they do not knowingly violate state or federal law. Sites like DraftKings and FanDuel track the location of computers in a variety of ways, including partnering with national geolocation firms, tracking IP addresses, GPS tracking on mobile devices, and payment verification devices which rely on the honesty of the DFS participant. Determined players in states where DFS is prohibited can use proxy servers and other techniques to circumvent the ban.
States like Nevada requested that DFS operators stop accepting play from “within the state.” This means that, like my attempt to play while travelling in Iowa, they are seeking to ban play from more than just residents of Nevada. However, the point of concern should be the player’s location when he or she pays the entry fee.
The future of DFS is uncertain. The head of the Michigan Gaming Control Board has stated that DFS is gambling. Other states are sure to follow suit, requiring either a license or that the activity be banned. In Florida, a federal grand jury investigation of DFS and a decade-old attorney general opinion there suggesting that DFS is illegal are causing some operators to pull out of that state. There’s also a huge tax issue for DFS to consider. If the IRS concludes that DFS is gambling and that instead of issuing Form 1099-MISCs to winners they should issue Form W-2Gs, there would be a nationwide implication which could affect the future of DFS in every state. Such a thing could happen at any time.
In the end, DFS operators hope common sense prevails. If poker is a game of “chance”, why are some people so much better at it than others? The gray area here is that there may not be a clear “game of skill” versus “game of chance” line to draw. You can use dice, a coin flip, playing cards, and more to add an element of chance to any game. Even chess can be considered a game of chance, where drawing the white pieces in a tournament means that you statistically hold a 2% advantage over the black pieces.
