It was originally published in the LexisNexis Australian Media, Technology and Communications Law Bulletin.

Who hasn't fantasised about hitting a forehand like Roger, running for gold like Cathy or kicking a winning goal after the siren like Gary (Sr or Jr, take your pick)? Unfortunately, very few of us have the athletic talent or competitive focus to realise these ambitions in real life, and so we are generally limited to watching on as spectators from the boundary line or (more likely) on the couch in front of the TV. However, the booming industry of fantasy sports is now letting many fans take a step closer to the thrill of real world sporting competition by allowing them to take the reins of their own fantasy sports team.

Fantasy sports is big business, particularly in North America. In 2012, fantasy sport was estimated to contribute up to $5 billion per year to the United States economy alone. The industry is growing too in Australia, but in both countries it faces serious regulatory challenges that could potentially threaten further growth. In this article, we provide a brief history of fantasy sport and give an introduction to some of these regulatory challenges.

A short history of fantasy sports

While there are numerous variations, fantasy sport generally operates by requiring participants to select players from real life sporting teams to form part of a virtual team that will compete against other virtual teams in a league or other form of competition. Virtual teams score points for each player based on their real life performance (e.g. in AFL the number of possessions, marks taken or goals kicked). The team with the highest aggregate points total will be victorious. Some competitions will have simulated drafting processes for choosing teams or will allow participants to sign new players and trade players with other teams over the course of the season, in order to add a further level of complexity and interest.

Far from being a recent phenomenon, fantasy sport actually has a long history. In the United States, paper-based versions of fantasy football were first developed in the 1960s and fantasy baseball (commonly known as “rotisserie baseball”) took hold in the 1970s. Today fantasy sports competitions are now most often run online, and the power of the internet has allowed rapid improvements in the sophistication of their service offerings. This in turn has led to a massive increase in participation rates. There are currently over 56.8 million people participating in fantasy football sports alone in the United States and Canada, a figure which has sky-rocketed from 12.6 million in 2005 and a mere 500,000 in 1988.

Compared to the United States, Australia is slightly behind the curve in relation to fantasy sports. Nonetheless there are an estimated 1.65 million Australians currently involved in fantasy sport competitions, a figure that compares favourably with the estimated 1.8 million Australians actively involved in sports betting (which is often regarded as a national pastime).

A key reason for the boom in fantasy sports in North America has been the introduction of “daily fantasy sports” that, in exchange for payment of an entry fee, allow participants to compete against friends or other players for cash prizes over a short period of time (a day or a weekend) rather than over a full season. Daily fantasy sports have quickly become hugely popular, with the two largest daily fantasy sports operators in the United States, DraftKings and FanDuel, estimated to have paid out a staggering US$2 billion in prizes last year.

While to date most fantasy sports competitions in Australia have generally been free to enter, moves are afoot to bring similar pay-for-play daily fantasy sports services to Australia. This will be an interesting challenge for regulators, as fantasy sports involve an uneasy mix of chance and skill that may not fit neatly into Australia’s current framework of wagering and gaming regulations. Experience in the United States has already shown that regulatory barriers may be the single biggest impediment to the further growth of fantasy sports.

Regulation of fantasy sports in the United States

In the United States, federal legislation dealing with internet gambling carves out a neat exemption for fantasy sports on the basis that they are games of skill rather than chance. The exemption is created under the Unlawful Internet Gambling Enforcement Act 2006 (UIGEA) and applies provided the following criteria are satisfied:

  1. all prizes are known ahead of time, participants are notified of the prizes and the number of participants doesn’t affect the nature or value of the prizes;
  2. the out come of the competition reflects the relative knowledge and skill of the participants, and is determined predominantly by accumulated statistical results of the performance of athletes in multiple real-world sporting events; and
  3. the outcome is not based on the score, point-spread or performance of any single real world team or combination of teams or solely on any single performance of an individual athlete in a real world event.

However, like Australia, the United States is a federation and gambling activities are subject to regulation at a state as well as at a federal level. A number of states have gambling laws that are stricter than the UIGEA and do not contain specific exemptions for fantasy sports like the one discussed above. This has led to significant controversy in recent times, with a number of states challenging the right of the two industry heavyweights, DraftKings and FanDuel, to continue operating in their jurisdictions. Most notably, late last year the Attorney General of New York brought proceedings alleging that the services offered by DraftKings and FanDuel constituted illegal gambling and were prohibited under New York state law. This view was based on the fact that, while there is an element of skill involved in selecting a fantasy sports team, ultimately the success of that team depends on the actions of real life players. As such, in the Attorney General’s view, a person paying to enter a team in a fantasy sports competition is effectively placing a wager on an undetermined outcome over which they can exercise no control. Officials in other jurisdictions have taken a similar line, with the Attorney General of Texas also declaring an opinion that DraftKings and FanDuel are illegal.

Interestingly, in New York, the Attorney General drew a distinction between daily fantasy sports and “traditional” fantasy sports. In a public cease and desist notice, the Attorney General’s office stated that “Typically, participants in traditional fantasy sports conduct a competitive draft, compete over the course of a long season, and repeatedly adjust their teams. They play for bragging rights or side wagers, and the Internet sites that host traditional fantasy sports receive most of their revenue from administrative fees and advertising, rather than profiting principally from gambling. For those reasons among others, the legality of traditional fantasy sports has never been seriously questioned in New York.

In March this year, DraftKings and FanDuel bowed to pressure and reached a settlement under which they agreed to cease operating in New York (at least until there is a change in laws that would allow them to recommence or unless an appeals hearing scheduled for September finds in their favour). This is obviously a major blow to these businesses, given that New York represents one of their largest markets.

Regulation of fantasy sports in Australia

Gambling in Australia is governed by a complex patch-work of laws at both federal and state level. However, for gambling that takes place online, the critical point of reference is the Interactive Gambling Act 2001 (Cth) (IGA).

The IGA does not explicitly deal with fantasy sports (though there are provisions that enable Ministerial determinations to be made to specifically exempt types of services from the scope of the IGA, which could theoretically be used to create special treatment for fantasy sports if considered necessary). However, under the IGA, a fantasy sports competition conducted online may be regulated as an “interactive gambling service” if it is characterised as:

  1. a service for making bets or for introducing individuals who wish to make bets with one another (such as a betting exchange);
  2. a service for the conduct of a game that (a) is played for money or something else of value, (b) is a game of chance or of mixed chance and skill, and (c) requires players to provide some form of consideration in order to participate; or
  3. a service that otherwise constitutes a “gambling service” (within the ordinary meaning of that expression).

Whether or not a particular fantasy sport competition could be characterised as a service for making bets depends on how the competition is structured. For the reasons raised by the Attorney General in New York, it may be more difficult to characterise an administration or other fee paid to participate in a “traditional” season-long fantasy competition as a bet on the outcome of that competition. However, fees paid to take part in the faster-paced world of daily fantasy sports may be another matter. If two players pay for their specially chosen fantasy teams to face off on a single day, then the payments do start to look like wagers on the outcome of that contest, which will depend on the various real life events that take place on the sporting field. In other words, it is possible to argue that each player is effectively placing a complex multi-bet based on the performances of each of the athletes they have selected in their fantasy team.

While a fantasy sport competition could potentially be characterised as a gambling service on this basis, the IGA specifically exempts “excluded wagering services” being services for betting on sporting events. Given any bet made in the course of participating in a daily fantasy sports competition would in effect be a bet on an underlying sporting event, then that activity should not be subject to the IGA. However, this may be a case of “out of the frying pan and into the fire”, as this type of sports wagering activity may then be caught by state and territory laws, which vary from jurisdiction to jurisdiction. Fantasy sports operators would need to carefully structure their operations so as to not fall foul of these laws, potentially following the lead of many online bookmakers who have based their operations in the Northern Territory (as a jurisdiction with a relatively favourable licensing regime).

Alternatively, a fantasy sport could be considered to be a game of mixed chance and skill and, therefore, subject to the IGA if it is played for prize money and involves payment of an entry fee. Clearly there is a considerable element of skill in selecting players for a fantasy team, and participants who have a better knowledge of the sport are more likely to achieve success than novices who select their fantasy sides at random. However, the outcome of each fantasy contest will still ultimately depend on what happens on the field and, given the participants in a fantasy sports league can exercise no control over that outcome, it necessarily involves a significant element of chance. The game of poker may serve as a useful comparison, as it is widely recognised as a game that involves a mixture of skill and chance, as skilled players are more likely to emerge victorious from any given contest even though the fall of the cards is clearly a matter of pure chance.

Whatever way you cut it, if you accept that the outcome of a fantasy sports contest involves an element of chance (even if you do not consider a fantasy sports service to be a gambling service within the ordinary meaning of the term), then clearly there is a significant possibility that any such contest will be subject to some form of regulation either under the IGA or under state-based sports wagering laws.

However, there remains a degree of uncertainty over how Australian laws may apply to new and innovative fantasy sports leagues. This was reflected in a 2012 review of the IGA carried out by the Department of Broadband, Communications and the Digital Economy. The review revealed some divergent views on how fantasy sports should be treated. For example, News Limited submitted that fantasy sports competitions for which no entry fee applied should be treated as free trade promotion lotteries. News Limited argued that fantasy sports competitions should be distinguished from gambling services because there was no ongoing investment required to participate (assuming no regular fee is charged) and competitions were (at least in the view of News Limited) primarily used for social purposes. On the other hand, the Department concluded that “[a]s fantasy sports are based upon real statistics of professional players and teams, they more closely resemble wagering on a sporting event (which is permitted under the IGA), than a casino-style game (which is prohibited)”. Ultimately, the Department recommended that the treatment of fantasy sports under the IGA be subject to further consultation with industry participants, state and territory gambling regulators and sports industry bodies. If daily fantasy sports operators gain a foothold in Australia, as they have in the United States, then this may well prompt Government to revisit this issue.

Conclusions

Australians are avid consumers of sport in all its forms – from attending in person, to watching on TV, listening on the radio, or placing a bet with their bookmaker, it seems that too much sport is barely enough for the average Australian. As such, Australia should be a very attractive market for fantasy sports operators. However, whether any new fantasy sports ventures prove to be a boom or a bust may largely depend on how our regulators decide to characterise their service offerings within the complex web of existing gambling regulations. If the experience from the United States is any guide, new entrants to the market would be well advised to engage with relevant regulators to seek their views before investing too heavily in any particular course of action. Of course, in the meantime, there is no harm in any of us dreaming of a fantasy world in which we play a Federer-esque backhand on centre court to take out the Wimbledon crown. Now wouldn’t that be nice!