By David Klein, of Klein Moynihan Turco LLP
Late last week, reports surfaced that the United States Attorney’s office in Tampa, Florida has convened a federal grand jury to consider whether daily fantasy sports operators are in violation of the Illegal Gambling Business Act (IGBA). It remains unclear though whether federal prosecutors are targeting a specific fantasy sports operator or the industry as a whole.
What is the IGBA and how could fantasy sports be in violation of the law?
Any prosecution under the IGBA must be based on a violation of an underlying state law. Unlike most states where the legality of fantasy sports contests turns on the determination of whether the game is one of chance or skill, Florida law prohibits wagering or betting money on certain contests of skill. However, on July 27, 1990, the Florida Attorney General issued an advisory opinion in which he stated, “Florida’s gambling laws generally apply to games of chance and not to contests of skill. Further, in that same advisory opinion, the Florida Attorney General states that, “A contest of skill . . . where the contestants pay an entry fee, which does not directly make up the prize, for the opportunity to win a valuable prize by the exercise of skill does not violate the gambling laws of this state,” where the party offering the prize does not itself have the opportunity to win the prize. Accordingly, the grand jury investigation may ultimately grant the U.S. Attorney an indictment only if it makes the heretofore unprecedented determination that entry fees paid to participate in fantasy sports contests may be the equivalent of a bet or a wager of money.
The fantasy sports space has also seen a flurry of activity in New York in the last week. On the heels of the reports of possible insider trading that have rocked the industry, New York’s Attorney General has opened his own inquiry into fantasy sports sites. The reports indicated that Eric Schneiderman sent written requests to FanDuel and DraftKings seeking information on how each of the websites conducts internal operations, including which employees compile statistical information, set player-prices and who is allowed to access sensitive data. The industry leaders have since announced that they have each retained the services of former federal prosecutors to conduct reviews of their respective internal practices. Additionally, FanDuel and DraftKings were both named as defendants in a federal class action lawsuit filed last week in connection with these same allegations of improper employee access and use of non-public information.
Uncertain Times for Fantasy Sports Industry
Reports of the filing of the class action lawsuit, as well as both the federal and New York Attorney General investigations, punctuate a highly turbulent news cycle for the industry. In addition to the foregoing, we have also seen activity at all levels of government throughout the country. Reports out of Nevada have indicated that the State’s gaming commission may undertake a review of the legality of fantasy sports under Nevada law. California and Massachusetts may be moving towards regulation of the industry. Additionally, there are calls from within the United States Congress to conduct hearings on the subject of fantasy sports.
As fantasy sports contests, and the laws and regulations that govern them, continue to grow and evolve, it is essential that fantasy sports enterprises keep abreast of the developing legal landscape. Operators should regularly review their respective contest platforms, entry fees and prize structures with knowledgeable counsel in order to effectively navigate this rapidly changing regulatory framework and in order to maintain compliance with applicable laws.
