By Richard Brand, Anthony Lupo, Sarah Bruno, Eva Pulliam, and Christina Campbell, of Arent Fox LLP
The troubled arena of daily fantasy sports (DFS) has become a major focus point in recent weeks. The issue began with an investigation into alleged insider trading activities by an employee of one major DFS operator on a rival site. From there, regulators have risen to attack this popular pastime. The continuous stream of analysis on these issues mirrors the incessant media blitz pushed forward by DFS companies themselves. The discussion has a lot to do with the patchwork of laws and interpretations that create a potential legal minefield for DFS operators to navigate. As the exploding popularity, multi-billion dollar valuations, and professional-league sponsorships have pushed DFS into the hearts and wallets of millions of sports fans, this has become an area garnering major attention from both regulators and fans alike.
What are Fantasy Sports?
For those who aren’t familiar with the technology, DFS sites allow participants to enter contests for various buy-ins, ranging from less than a dollar to several thousands of dollars. Participants are allowed to select a roster of players that cannot exceed a given salary cap and are awarded points for the performance of real-life players over a day or two of games. Many players spend hours poring over statistical research and game predictions, and can be rewarded with thousands, or even millions of dollars, for finding the right combination of players. For those players seeking a quicker turnaround, DFS offers an incredibly condensed version of the traditional fantasy sports leagues, which lasts for an entire sports season, with players selecting a “team” at the beginning of the season, and then changing their roster each week and trading players over the course of the season based on injuries and team needs. There are arguments on both sides of the spectrum as to which variety, daily or season-long fantasy sports, requires more skill.
Current State of the Law
The primary legal issue at play has to do with whether or not DFS falls within the definition of “gambling.” Both federal and state governments have laws in place to address gambling, which typically involves the presence of consideration (often monetary), chance, and a prize. Where an activity is designed so that skill replaces chance or dominates over chance, many laws impose fewer restrictions. That said, very few specifically address how to categorize fantasy sports.
On the federal level, there is only one law that specifically addresses fantasy sports: the Uniform Internet Gambling Enforcement Act (UIGEA). Notably, UIGEA exempts fantasy sports from being characterized as illegal online gambling 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.
On the state level, there is a patchwork of laws regulating gambling. The primary focus, as noted above, relies upon the characterization of a game as one of skill or chance. There are four main tests to determine this skill versus chance debate: (1) the predominance test, which considers if skill is the predominant factor in determining the outcome of a contest; (2) the material element test, which outlaws games where chance is a “material element,” even if the game is predominantly skill; (3) the any chance test, which forbids games where any chance influences the outcome of the game; and (4) the gambling instinct test, which forbids games that appeal to one’s gambling instinct, regardless of whether skill or chance predominates.
The majority of states apply the predominance test, but the test is somewhat ambiguous and allows for different rulings based on the state, the current attorney general, the judge, the facts of the case, etc. The material element test, however, is a more stringent test, and states that employ this test, such as New York, may be more likely to view DFS as gambling. Still, there are states that follow the any chance test and the gambling instinct test that continue to permit DFS sites to operate. While many states may be considering how best to characterize DFS, as it looks now, much of the country is watching New York.
Regulator Reactions to DFS
Following the recent scandals that have impacted the DFS industry, there has been a wide spectrum of regulator responses. These have included announcements that regulators will further investigate DFS, some calls for more regulation, as well as outright bans on DFS.
On the federal level, the US Department of Justice and the Federal Bureau of Investigations are allegedly investigating the legality of daily fantasy sports leagues under UIGEA. Their determination may provide useful guidance regarding the interpretation of UIGEA in this area.
On the state level, several regulators have spoken out. The attorneys general of both Massachusetts and New York, the two states in which DraftKings and FanDuel are based (respectively), have addressed DFS. On one hand, Attorney General Maura Healey of Massachusetts chose not to shut down DFS sites operating in that state. Instead, Attorney General Healey issued a set of proposed regulations that include raising the minimum age of participants from 18 to 21, leveling the playing field for “amateur” participants, altering the content and disclosures in DFS advertisements, and providing financial protections to prevent sustained losses. These proposed regulations, though rigorous, were met with positive responses from both Draft Kings and FanDuel, the leading DFS operators, who both indicated a desire to work with Healey to come up with regulations that would benefit both participants and the operators themselves.
Conversely and most notably, in New York, Attorney General Eric Schneiderman sent cease and desist orders to the two companies. These orders mandated that DraftKings and FanDuel stop accepting bets from New York residents, a real blow to an industry whose biggest client base is New York. Though Attorney General Schneiderman’s orders came merely a week after the Attorney General of Nevada outlawed DFS sites from operating in Nevada, the New York orders felt more stunning. After all, FanDuel is headquartered in New York and both sites have massive offices in Manhattan.
Furthermore, Attorney General Schneiderman made several inflammatory comments regarding the DFS industry before filing a preliminary injunction against them, saying “DraftKings and FanDuel are the leaders of a massive multi-billion dollar scheme intended to evade the law and fleece sports fans across the country.” In response, the two operators moved for a temporary restraining order to prevent Schneiderman from shutting down the sites in New York, which was later denied by the judge. There was a hearing on the matter on November 25th and now both sides nervously await the decision, which will likely set the tone for future challenges to the industry.
What’s Next?
The industry is anxiously awaiting the outcome of the New York decision and the DOJ and FBI investigations. Enough questions have been raised about this booming industry to indicate that both congressional and state action may also 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.
Arent Fox regularly assists clients with compliance with state and federal laws governing games of chance and skill. We will be watching closely and working with our clients to ensure their interests are protected and that “no foul” is called on the play.
