New York's Top Regulator Steps In
On November 10, New York's attorney general ordered DraftKings and FanDuel to stop accepting bets from the state's residents, arguing the games constituted illegal gambling. The cease-and-desist order is the most recent in a string of setbacks for the burgeoning multi-billion-dollar industry that intertwines betting with fantasy sports.
Critically for DraftKings and FanDuel, the move by Attorney General Eric T. Schneiderman could create a domino effect, leading other states to take similar action. For their part, fantasy sports companies say the games are not gambling because they involve skill and are legal due to a 2006 federal law that exempts fantasy sports from a ban against processing online sports betting.
How Did We Get Here?
Scrutiny of DraftKings and FanDuel began to mount several weeks ago following allegations that employees were using company data to win contests on rival sites. These insider-trading concerns were reported after a DraftKings employee won $350,000 in one week on FanDuel, having allegedly used internal data about how participants were constructing their teams. As a result of the ongoing investigation, there have been more far-reaching reverberations on the future of daily fantasy sports leagues that boil down to one central question: are they even legal in the first place?
What are “Fantasy Sports”?
It’s football season, so we’re sure that discussions of fantasy sports are circling everywhere. That said, many do not fully understand quite how the game works. So, before we provide an explanation of the law, we want to ensure that the term is clear. A “fantasy sport” is one in which players assemble their own imaginary teams composed of players that play the sport in real life. The teams compete within a league (group of teams) based upon certain categories of statistics earned by each player on the team, which come together to impact the overall team score. Typically, a team will win or lose based upon its performance over the course of a season. However, some games are now beginning to be played on a daily basis.
Luck or Skill?
Luck or skill? That is truly the question here. United States laws are typically designed to permit games of skill with fewer restrictions than those imposed upon games of chance or luck. States vary regarding their treatment of fantasy sports with some prohibiting it, others permitting it or remaining silent, and a third category only permitting it if conducted by an entity that has obtained a license from the relevant state authority. Despite the state-level split, the federal government has chosen to generally permit fantasy sports leagues if: (a) all prizes are determined prior to the game and not based upon the number of participants, (b) winning is based upon “relative knowledge and skill,” and (c) no winning outcome is based on the performance of any single team or combination of teams or on any single performance of an individual athlete in a specific game. See Uniform Internet Gambling Enforcement Act (UIGEA).
Given the increase in daily games, the US Department of Justice and the Federal Bureau of Investigations are investigating the legality of daily fantasy sports leagues under UIGEA, the federal law regulating gambling by prohibiting persons in the “business of better or wagering” from accepting certain payment methods in connection with “unlawful Internet gambling.” Fantasy sports have been challenged in the past (see our 2006 alert here); but, at that time, the court came out in favor of the leagues. That said, despite UIGEA’s exemption for the more popular version of fantasy sports from the definition of “unlawful gambling,” the uptick of daily games may cause the whole castle to crumble—or at least succumb to stricter regulation.
And, to be clear, the “castle” brings in a lot of money. Reports state that DraftKings and FanDuel bought nearly $200 million in television commercials since August of this year, outspending even pizza chains and beer brands. The investors to these websites are industry giants like Robert Kraft, owner of the New England Patriots, Jerry Jones, owner of the Dallas Cowboys, in addition to Major League Baseball and television networks. One research firm estimated that daily games will pull in around $2.6 billion in entry fees this year alone, grow at a 41 percent annual rate, and eventually reach around $14.4 billion in 2020.
With this enormous amount of financing, popularity and influence, at first glance it seems as though DraftKings and FanDuel are here to stay. However, the DOJ is not an agency that is likely to be swayed by popularity. As you may recall, it was only a decade ago that the online poker industry faced a similar explosion in popularity, only to be nearly outlawed by UIGEA, the same act on which daily fantasy sports leagues currently rely.
The DOJ and FBI investigations are likely only the first in many challenges that daily fantasy sports leagues will face. Enough questions have been raised about this booming industry to indicate that both congressional and state action may be on the horizon, and that a brighter line may be drawn between what will be considered a game of skill and one of chance.