Is Fantasy Sports Gaming Legal?

November 12, 2015

nevada-daily-fantasy-sports-is-gamblingThis week, following an investigation into allegations that a DraftKings employee had used inside information to win $350,000 on FanDuel, the New York State Attorney General ordered the two largest daily fantasy sports companies, DraftKings and FanDuel, to stop accepting bets from New York state residents, claiming their games constituted illegal gambling under state law.[1]

The cease-and-desist order issued by the New York Attorney General is a major set-back to a multibillion-dollar industry that introduced sports betting to thousands of sports fans and has established partnerships with many of the nation’s professional sports leagues, influential sports franchise owners, sports networks and athletic stars. The action taken by the New York Attorney General is also likely to cause shock waves in other states where legislators and law enforcement authorities, including here in Massachusetts, are beginning to question whether the fantasy sports industry should be subject to increased regulation or banned entirely.

Fantasy sports gaming is the newest and by far the most controversial form of sport gaming. Originally the concept involved creating a fantasy team composed of real players from different professional teams, entering the team in a fantasy league at the start of the real team’s season and playing through the whole season, operating under an established salary cap and trading players as the season progressed. At the end, those who “owned” the top teams would get cash prizes made up of the money players paid to enter the league at the beginning of the season. The teams’s standings at the end of the season depended on the performance of the actual players on the fantasy team’s roster.

While that form of fantasy sport gaming still exists, millions of people now play daily fantasy sports games offered by two competing services which dominate the industry; the Edinburgh-based FanDuel, and the Boston-based, DraftKings.  Both companies were established by venture capitalists  who received funding from investment firms, sports broadcasters, professional sports leagues and individual team owners. As of September of 2015, both companies have an estimated value of at least $1 billion and control 95 percent of the daily fantasy sports market in the United States. The two primarily compete against smaller daily fantasy sports services, such as Fantasy Aces and Yahoo! Sports and are known for their aggressive marketing. Even the most casual viewer of sports network programming like ESPN or the NFL Network or listeners to sports radio broadcasts cannot fail to notice that for much of the N.F.L. season, DraftKings and FanDuel have blanketed television and radio with advertising, spending more than $100 million each and consistently ranking among the top companies each week in buying airtime advertising. Daily fantasy sports has even been credited with helping to improve television viewership and general interest in professional sports leagues and players.

As with traditional fantasy sports games, players compete against one another by building a team of professional athletes from a particular league or sport and earn points based on the actual statistical performance of the players in real-life competition. Some are played across an entire season while other games can be conducted over short-term periods, such as a week or even a single day or event. Users pay an entry fee in order to participate and build a team of players in a certain sport while complying with a predetermined salary cap. Depending upon the performance of the players making up their “fantasy” roster, players may win a share of a pre-determined pot. Entry fees help fund prizes, while the host of the league receives a portion of the entry fee. In addition to football, basketball, baseball and hockey, DraftKings and FanDuel offer the opportunity for fantasy play on golf, NASCAR racing, college basketball and football, as well as other sports. The entry feeds are relatively small but one can create and enter as many teams as one chooses. The payoffs to the winners at the end of the day are substantial.

The fact is, America is in the midst of a “fantasy sports revolution” which is transforming both the world of sports wagering and professional sports. Last September, FanDuel said it was signing between 20,000 and 30,000 new players every day.  And, this weekend, as many as 30 million bettors will set their fantasy sports rosters and eagerly await the results of N.F.L. games. It has been observed that today’s sports fans spend as much time predicting the performance of professional athletes as Wall Street investors spend predicting the performance of stocks and bonds.

Fantasy sports companies contend that their games are not gambling because they involve more skill than luck and were legally sanctioned by a 2006 federal law that exempted fantasy sports from a prohibition against processing online financial wagering.[2] That view is being challenged as fantasy sites have begun offering million-dollar prizes and in addition to bets on football, basketball, baseball and hockey, DraftKings and FanDuel now offer the opportunity for fantasy play on golf, NASCAR racing, college basketball and football, and other sports, magnifying the element of chance and making the exemption more difficult to defend.

Following the New York Attorney General’s order, DraftKings sent an email to its players, stating, “Attorney General Eric Schneiderman is considering preventing New Yorkers from playing daily fantasy sports,” and added: “Hey, New York, protect your right to keep playing daily fantasy sports. Contact the attorney general today!” According to the New York Times, Sabrina Macias, a spokeswoman for DraftKings, said, “We’re disappointed he hasn’t taken the time to meet with us or ask any questions about our business model before his opinion.” She said there were more than 500,000 daily fantasy sports users in New York State.[3]

It has been debated whether daily fantasy sports constitute gambling. [4] Although the process of preparing a fantasy team is one that requires a degree of skill, players are essentially wagering on the performance on individual athletes in specific sporting events. DraftKings CEO Jason Robins described his service as being “almost identical to a casino”, compared the concept of daily fantasy sports to being a cross between fantasy sports and online poker, and repeatedly used gambling-oriented terms such as “wager” and “betting” in reference to the nature of the service. At the same time, the company, as well as FanDuel, has insisted that their daily fantasy games represent a game of skill. So, is fantasy sports betting illegal or should it be considered the same as Wall Street traders making an investment based upon informed predictions about the performance of a particular stock or bond? While few will stop to consider whether playing fantasy football is legal before placing their bets this weekend, the answer is not so clear.

The United States’ Unlawful Internet Gambling Enforcement Act (UIGEA), which generally prohibits the transfer of funds in connection to online gambling, has been frequently cited by the industry and many legal commentators alike as having exempted fantasy games, as the law does not consider an online contest with pre-determined prizes and an outcome based on skill that is “determined predominantly by accumulated statistical results of sporting events, including any non-participant’s individual performances in such sporting events”, to be unlawful wagering.[5] However, this may be an over-simplification of a narrowly drafted statute concerned primarily with enforcement and payment and processing, particularly since daily fantasy sports did not exist at the time that UIGEA was passed in 2006.

In a majority of states, play-for-cash contests are only illegal if they involve more chance than skill (“predominant purpose test”).  Under Massachusetts law, gaming is considered illegal if it involves: (1) the payment of a price for (2) the possibility of wining a prize, depending upon (3) hazard or chance.[6] The precise definition of “chance” varies by state.   In order to set chance-based endeavors apart from other contests that evaluated the skill of participants, Massachusetts courts have adopted an approach now known as the “dominant factor test”. The Supreme Judicial Court stated that:

“Where the game contains elements both of chance and skill, in order to render the laws against lotteries effectual to combat the evils at which they are aimed, it has been found necessary to draw a compromise line between the two elements, with the result that by weight of authority a game is now considered a lottery if the element of chance predominates and not a lottery if the element of skill predominates”[7]

By contrast, in other states, fantasy sports gaming is illegal if results are based even in the smallest part on chance (“any chance test”). In “any chance” states, most forms of play-for-cash fantasy football would appear to violate the state gambling laws (unless, of course, they fall under “social gaming or “in-house gaming” exceptions) because even the most intricate fantasy football contests involve some chance with respect to weather conditions and injuries.  Currently, daily sports fantasy hosts cannot offer paid games in the states of Arizona, Iowa, Louisiana, Montana, Nevada, New York and Washington due to local gambling laws, or rulings that explicitly ban or regulate their operation.

Beyond the ‘any chance’ states, there are also a limited number of other states in which there might be a reasonable possibility that the state views fantasy football as illegal.  For example, in 1991 the Florida state attorney general issued an opinion that certain forms of fantasy sports betting were illegal.[8] And, while both CBS and Yahoo have operated play-for-cash fantasy football leagues in Florida for years without a legal challenge, recently a grand jury in Tampa subpoenaed records of the fantasy sports group DraftKings. Similarly, in Kansas, the state’s Racing and Gaming Commission until recently included on its webpage language that called into doubt the legality of fantasy sports.  Yet again, neither the CBS nor Yahoo games have faced public legal challenge in Kansas. In Boston, where DraftKings’ headquarters are located, the F.B.I. has begun interviewing fantasy players.

Critics of fantasy sports betting have pointed out, as is perhaps illustrated by the case in New York, that the possession of insider information by those with a financial interest in the gaming sites presents an inherent conflict of interest which could lead to abuses. Nearly every N.F.L. team has a sponsorship deal with DraftKings or FanDuel, and two powerful N.F.L. owners — Jerry Jones of the Dallas Cowboys and Robert K. Kraft of the New England Patriots — have equity stakes in the companies. Likewise, major League Baseball, the N.B.A. and companies like Comcast, NBC and Google are heavily invested in the two fantasy sports sites. The New York Times investigation revealed that operators of online gambling sites had begun investing in fantasy companies and that some of DraftKings’ senior managers came from online gambling companies or were professional poker players.[9] The New York attorney general’s office also said that ads on the two sites “seriously mislead New York citizens about their prospects of winning.” Investigators found that to date, “the top 1 percent of DraftKings winners receive the vast majority of the winnings.”

On October 15, 2015, the Nevada Gaming Control Board published a memorandum ruling that daily fantasy sports games were a form of sports wagering, and that fantasy sport services must cease serving customers in the state of Nevada until they obtain a sports pool license.[10]  The Board felt that the gaming sites fell under the state’s definitions of a “gambling game” and a “sports pool”, as they “[accept] wagers on sporting events or other events by any system or method of wagering”, including wagers on events occurring during a sporting event (props), combinations of multiple events occurring within an event (parlays), and against the performance of other players, with “rake-offs” taken by the operator on each wager (defined as a “percentage game” under Nevada law).[11] In further support of its argument, the memorandum cited Jason Robins’ comments on Reddit that described DraftKings using gambling-oriented terminology; the board thus argued that its decision was “consistent with how operators of certain daily fantasy sports describe themselves”.[12]

Even though traditional fantasy football is likely legal in a majority of states, unusual formats of fantasy football that stray from the traditional skill-to-chance ratio present greater risk.  For example, fantasy football contests that give points based on the final scores of real-world football games are probably not protected by the “fantasy sports” carve-out to the Unlawful Internet Gambling Enforcement Act or under various state gambling laws.  In addition, fantasy football contests that involve smaller roster sizes or a shorter fantasy seasons involve greater risk because the results of games with fewer iterations are more likely impacted by a single act of chance.

Massachusetts case law has noted that “the word ‘game’ is very comprehensive and embraces any contrivance or institution which has for its object the furnishing of sport, recreation or amusement”.[13] The Massachusetts Attorney General has said that she thinks the games should be regulated but does not believe they violate Massachusetts gaming laws. However, it’s not entirely clear the games would pass legal scrutiny in Massachusetts if they were put to the test. That was the conclusion of the Massachusetts Gaming Commission, which looked at how the games fit within state gambling laws and past court decisions.

According to a report released last month by the Massachusetts Gaming Commission, a paid contest for a prize is considered an illegal lottery in Massachusetts if chance plays a bigger role in determining success than skill.[14] The memo cited several Massachusetts cases about games involving a combination of chance and skill, including video poker, a combination of darts and bingo, and even a toy crane game. In those cases Massachusetts courts have held that each could be considered illegal lotteries because luck played a bigger role.[15] The Gaming Commission memo suggested that daily fantasy games may involve even less skill than those games.[16]

“The cited cases all involved analyzing chance versus skill where the individual playing the game had a direct effect on the outcome of the game (i.e., personally operating a crane, choosing cards or throwing darts),” the memo stated. “These examples stand in contrast to daily fantasy sports where the player’s skill is exercised only in choosing the roster, as the player has no ability to control the final outcome of the sporting events.” The memo also cited a past court decision that could open daily fantasy sports companies to questions about whether they operate illegal betting pools under state law.[17]

The report also pointed out that various federal laws could also threaten the industry under certain circumstances. Two of the laws—the Professional and Amateur Sports Protection Act and Illegal Gambling Business Act—could be triggered if the games are determined to be illegal gambling under a given state’s laws. While fantasy sports may be exempt from the frequently cited 2006 federal law banning online gambling companies from accepting payments, the Gaming Commission report concluded that does not protect the games from other state or federal gambling laws.

On the possible intersection between fantasy sports gaming and lotteries under state statutes the report concludes:

“To date, no Massachusetts case has addressed whether fantasy sports or daily fantasy sports would constitute a “lottery” as in the examples set forth above. The cited cases all involved analyzing chance versus skill where the individual playing the game had a direct effect on the outcome of the game (i.e., personally operating a crane, choosing cards or throwing darts). These examples stand in contrast to daily fantasy sports where the player’s skill is exercised only in choosing the roster, as the player has no ability to control the final outcome of the sporting events. It is not clear whose skill a Massachusetts court would examine in determining the skill versus chance contest in the fantasy sports arena”.[18]

And on its possible intersection with the laws and betting pools, the report notes that Nevada has already determined that daily fantasy sports constitutes a betting pool under its gaming regulations:

“Many of the contests offered by DFS operators involve numerous participants paying their entry fees into a common pool, from which the winner receives his/her award (with the operator also receiving a percentage of the total pool value). No Massachusetts court has addressed whether fantasy sports or DFS would qualify as betting pools and thus run afoul of either G.L. c. 271, §§ 16A or 17”.[19]

Thus, the legality of daily fantasy sports in Massachusetts is at best unclear. “The common denominator to any analysis of daily fantasy sports will hinge on specific state interpretation of whether daily fantasy sports constitutes illegal gaming under state law, which could potentially also trigger liability under federal statutes.”

Daily fantasy sports games could be illegal under state law if they were considered lotteries taking place outside a gaming establishment. Under Massachusetts law, whether or not a contest is a lottery hinges on whether it is considered a game of “hazard or chance.” Yet, there has been no official effort to clarify that distinction. The games could be illegal if they are found to constitute “betting pools” and if illegal under state law, the companies could be federally prosecuted under the federal Illegal Gambling Business Act of 1970 which allows for prosecution if a gambling business violates state law. The gaming commission, however, is not responsible for determining whether something is legal or illegal under the law.

In the final analysis, the question of whether fantasy sports betting is legal depends upon where you live. The New York attorney general’s office made note of the fact that daily fantasy sports “appears to be creating the same public health and economic problems associated with gambling.” Likewise, the National Council on Problem Gambling says it has received reports of “severe gambling problems” in some people who play daily fantasy sports, while noting that seasonal competitions with minimal prizes “offer little risk.” So, while considered legal by many the question of whether fantasy sports is legal appears to be in a state of flux and as the industry comes under increasing scrutiny it will no doubt experience additional challenges to its legality and ever increasing regulatory oversight.  Here in Massachusetts, rather than debate whether it is legal or not, perhaps the time has come for the legislature to act and clarify the issue by enacting a comprehensive regulatory scheme which could establish the conditions under which the industry could operate and which provides protection for consumers from fraud and other abuses.

[1] The investigation began after a DraftKings employee inadvertently released internal betting data and that same week won $350,000 on FanDuel, which is based in New York. DraftKings hired an outside law firm to investigate the matter, and found that the employee did nothing wrong. Both fantasy companies had allowed employees to bet on rival sites, but no longer do. Mr. Schneiderman asked the two companies for internal data and details on how they prevent fraud. See also, Scandal Erupts In Unregulated World of Fantasy Sports, New York Times, October 5, 2015.

[2] The Unlawful Internet Gambling Enforcement Act (“UIGEA”) of 2006, Title 31 U.S.C. §§ 536-5367. The act specifically excludes fantasy sports that meet certain requirements, skill-games and legal intrastate and inter-tribal gaming

[3] See, Scandal Erupts In Unregulated World of Fantasy Sports, New York Times, October 5, 2015.

[4] See, Edelman, M., A Short Treatise on Fantasy Sports and the Law, 2012 Harvard Journal of Sports & Entertainment Law, Vol. 3, January 2012.

[5] Federal criminal gambling statutes are found in Title 18 of the United States Code, such as the Federal Wire Act, 18 U.S.C., § 1084 which makes it illegal to use “a wire communication facility for the transmission in interstate or foreign commerce of bets or wagers or information assisting in the placing of bets or wagers on any sporting event or contest, or for the transmission of a wire communication which entitles the recipient to receive money or credit as a result of bets or wagers, or for information assisting in the placing of bets or wagers” and prohibits interstate sports wagering; and, the Illegal Gambling Business Act, 18 U.S.C. § 1955, which prohibits the interstate conduct of wagering activity prohibited under state law, and are thus, not changed by UIGEA. Congressman James Leach, who authored the act, explained that the exemptions were meant to relieve the burden of enforcement of the act by banks, and that “it is sheer chutzpah for a fantasy sports company to cite the law as a legal basis for existing.

[6] See, Commonwealth v. Stewart-Johnson, 78 Mass. App. Ct. 592, 594 (2011), quoting Commonwealth v. Lake, 317 Mass. 264, 267 (1944).

[7] Commonwealth v. Lake, 317 Mass. 264, 267 (1944); see also, Commonwealth v. Plisner, 295 Mas. 457, 464 (1936).

[8] Advisory Legal Opinion No. 91-03 held that Florida Gaming Law “Section 849.14, F.S., prohibits the operation of and participation in a fantasy sports league whereby contestants pay an entry fee for the opportunity to select actual professional sports players to make up a fantasy team whose actual performance statistics result in cash payments from the contestants’ entry fees to the contestant with the best fantasy team”.

[9] The Times, in conjunction with the PBS series “Frontline,” has conducted its own extensive investigation of illegal gambling in the Internet age.

[10] See, Legality of Daily Sports Under Nevada Law, State of Nevada Office of the Attorney General, October 16, 2015.

[11] Id.

[12] Id.

[13] See, Commonwealth v. Theatre Adver. Co., 286 Mass. 319 (1922)(the receiving of a bet on a horse race and making a memo of same on a slip of paper is “registering a bet” and thus constitutes illegal gaming)

[14] See, Report of the Massachusetts Gaming Commission on Daily Fantasy Sports, October 23, 2015.

[15] See, Commonwealth v. Plisner, 295 Mass. 457 (1936)(court found that a machine where a player operated a toy crane to attempt to pick prizes was more chance than skill and thus a lottery where the players’ only ability to manipulate the crane was to set the area where it would descend and where the player had no ability to influence the manner or strength by which the crane closed its claw on a potential prize); Commonwealth v. Theatre Advertising Co., Inc., 286 Mass. 405 (1934)(the court found that a game called “Beano”, consisting of a combination of darts and bingo, involved more chance than skill and thus constituted illegal gaming). In U.S. v. Marder, 48 F,3d 564 (1st Cir. 1995) the First Circuit Court of Appeals examined the chance versus skill argument in the context of poker machnines while applying Massachusetts law and found that chance predominated and that the jury could lawfully find that the defendant had been operating an illegal lottery despite recognizing that there was some skill involved in the player choosing which cards to discard from any given hand).

[16] Id., at 1.

[17] See, Report of the Massachusetts Gaming Commission on Fantasy Sports, October 23, 2015, p. 3.

[18] Id.

[19] Id, at 5-6.

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