Nick Catrakilis – Lately, television and the Internet have become inundated with advertisements for the daily fantasy sports (DFS) companies- FanDuel and DraftKings. The two DFS behemoths have spent $150 million on television and web ads in the third quarter of 2015 alone, and plan on spending significantly more in the future. This fast growing national industry has brought with it a host of problems for state and federal governments. DFS sites have been able to operate under an ambiguous statutory classification of DFS. Recently, however, many states (including Nevada, New Jersey, and New York) are seeking to classify FanDuel and DraftKings’ services as “gambling activities,” which would subject them to increased state regulation.
On a federal level, several lawsuits have been filed claiming that fantasy sports like FanDuel and DraftKings violate federal regulations such as the Professional and Amateur Sports Protection Act (PASPA), which was passed in 1992 and outlaws online sports wagering and online gambling. The Professional and Amateur Sports Prohibition Act of 1992 (PASPA) exempts four states (Nevada, Oregon, Delaware and Montana) out of a federal ban of the licensing, sponsoring or authorizing by states of sports betting. While the classification of DFS as gambling does not make it automatically unlawful in Nevada, it means that DFS companies will need to apply and obtain a license from the Nevada Gaming Control Board in order to lawfully operate in Nevada. In the meantime, DFS will essentially be banned in Nevada, with criminal sanctions a likely consequence for DFS companies who don’t apply for and receive gambling licenses within the state.
Requiring that companies like FanDuel and DraftKings receive state gambling licenses before beginning operations within the state. Nevada regulators determined that DFS are based primarily on chance rather than skill, therefore warranting its classification as a form of “gambling.” FanDuel and DraftKings had been able to continue operating in states without gambling regulations being imposed on them because of their exemption status under the Unlawful Gambling Enforcement Act of 2006. The Act provides a gambling regulation exemption for activities based on skill rather than chance. DFS had originally been granted this exemption because of their qualification as a skill-based activity, but states like Nevada have determined that DFS can no longer be defined in such a manner. The skill-based definition has come under scrutiny due to the structure of FanDuel and DraftKings. For example, participants are incentivized to “draft” high risk players if they hope to receive substantial payouts, and the element of risk under these circumstances arguably outweighs the skill component involved. Users select a lineup of players each week and score points based on how well they perform. Lineups are determined by using an in-game budget, with the best players having higher salaries who require more money to purchase them. The most challenging component of DFS involves selecting low value players who will have outstanding performances on a given day. For example, users typically win money when they are able to insert a player into their lineup who “costs” very little, but performs well enough to provide roughly the same amount of “fantasy points” as would a player who “costs” significantly more. The problem arises when users are required to pay fees in order to participate in the construction of their lineups. The argument revolves around whether these fees should be classified as “wages” or “bets”. Users who accumulate high fantasy points as a result of their lineups win prize money; those who fail to accumulate enough points lose the money they had initially paid to participate.
New Jersey has taken a different approach to this sudden phenomenon. Rather than seeking to regulate DFS, New Jersey lawmakers- backed by Governor Chris Christie and Representative Frank Pallone– have argued that the lack of federal regulation of DFS should allow for casinos and other gambling venues to offer sports betting. Although New Jersey lawmakers consider FanDuel and DraftKings to be gambling activities, rather than seeking to impose gambling regulations on DFS they instead want to lift gambling regulations on all forms of gambling in order to level the playing field for more traditional gambling activities that compete with DFS. Essentially, New Jersey argues that DFS and the traditional sports betting that takes place at casinos and involves betting on the outcomes of games should fall into the same category as DFS (free of federal gambling regulations), and it is therefore unjust for DFS to remain immune from federal gambling regulations while casinos and other gambling venues within New Jersey are forced to abide by federal regulations that prohibit traditional sports betting.
Professional sports organizations such as the NBA have expressed strong interest in altering federal law to permit sports betting in casinos and other gambling venues. Should Congress opt to legalize sports betting on a federal level, this could result in a severe decrease in fantasy sport profits, since it is likely that legalizing sports betting would cut into the market now exclusively dominated by DFS.
The pressure to implement federal regulation of companies like FanDuel and DraftKings has gained momentum as questions of federal law violations like insider trading and anti-competitive practices continue to plague fantasy sports companies. Most recently, a DraftKings employee allegedly used internal information, available only to employees, to enter and win a $350,000 DFS competition in FanDuel. Claims of insider trading are traditionally associated with stock or other types of securities like bonds. There are no precedent cases that would offer guidance in determining if DFS may be classified as security that would be subject to insider trading violations. These insider trading allegations have subsequently led to closer investigation of other possible federal violations, namely, the failure of companies like FanDuel and DraftKings to police their employees by denying them access to information unavailable to the general public. These failures are often associated with anti-competitive practices that violate antitrust law (DFS are primarily controlled by these two companies, who control more than 90% of the market).
Furthermore, there are several significant similarities between the DFS phenomenon and the online poker movement of the mid 2000’s. Similar explosions in advertisements and a large consumer market are two key similarities. Unfortunately for fantasy sports, it may meet the same fate as online poker. The online poker industry made significant financial gains by marketing its services through television and Internet advertising, but the federal government eventually prohibited these advertisements because of the classification of online poker as a gambling activity.
The fantasy sports industry finds itself in a difficult position as both the federal and state governments seek to impose some form of regulation on the industry. On the one hand, many states seem keen on either imposing some form of restrictions, like Nevada, or pushing for legalization of sports betting that would enable casinos and other gambling venues to enter into the same market as DFS, like New Jersey. The federal government has taken a similar approach that involves efforts to either completely regulate DFS as if it were a gambling activity or legalizing sports betting on a federal level, essentially creating a legalized national sports betting industry. Regardless of which path succeeds, it is certain that DFS will not be able to continue without the regulation that they have thus far been able to avoid.
