By James Gatto, of Sheppard Mullin Richter & Hampton LLP
Seven weeks into the NFL season, the outcome is too hard to predict. So, too, is the outcome of the regulatory and legislative activity around fantasy sports. A confluence of factors has led to a flurry of regulatory review of fantasy sports and, in particular, daily fantasy sports (DFS). The outcome of these regulatory actions is hard to predict, but regardless of these outcomes, there should be a legal path forward for fantasy sports.
Much of the recent news around DFS seems bad. Yet this “cloud” may have a silver lining. As is often the case in a rapidly growing industry, the business focus is on capturing market share. Given the dearth of regulatory guidance, other details sometimes get pushed to the back burner. Rationale and balanced regulation and carefully crafted legislation can often lead to long term stability and a greater level of legal certainty for the industry. Increased legislative action covering DFS is imminent. In many cases, the goal is to strike the right balance with consumer protection, not to kill fantasy sports. California Assemblyman Adam Gray, who is sponsoring a bill seeking to regulate daily fantasy sports made clear he wants the California’s regulatory scheme to be “well thought out.”
Illinois is one of the most recent states to initiate potential legislation involving DFS. Like a number of other states, it is not looking to declare DFS illegal. Rather, it is taking a consumer protection-focused approach. According to Rep. Mike Zalewski (D, Ill.), the forthcoming legislation would create standards for auditing daily fantasy companies that do business in Illinois and prohibit fantasy sports operator employees from playing in contests on other sites, in addition to other potential restrictions.
In another approach, the Nevada Gaming Control Board (NGCB) recently declared pay to play DFS to be gambling and has required DFS operators to cease and desist from operating in Nevada unless and until they are licensed in the state. It is possible other states may declare DFS illegal. It is possible some other states may hand over control of fantasy sports to the state lottery.
For the most part, fantasy sports is subject to state law. As is well known, the 2006 Unlawful Internet Gambling Enforcement Act (“UIGEA”) includes a carve-out for certain fantasy sports competitions. This carve-out is an exemption under UIGEA. It does not declare fantasy sports legal under state law. Efforts to address online gambling at a federal level have failed. For similar reasons, efforts to legislate fantasy sports at a federal level are unlikely to succeed.
Many states gambling laws were drafted before the advent of fantasy sports. A handful of lawsuits which have been brought against fantasy sports operators in state courts largely have been resolved in favor of the fantasy sports operators based on a conclusion that fantasy sports was not illegal gambling in those states. For example, in Humphrey v. Viacom, a New Jersey court ruled that a “traditional” season-long fantasy sports (not DFS) offering was not illegal gambling under New Jersey law. In Langone v. Kaiser & FanDuel, the plaintiff’s claims that DFS was illegal under Illinois law were dismissed. However, the dismissal of that suit was based on facts specific to that case and did not provide a blanket ruling that DFS was legal under Illinois law. Nevertheless, the litigation failed.
Nearly all DFS operators exclude participation from certain states. Historically, most have excluded Washington, Montana, Iowa, Arizona, and Louisiana. In light of the recent declaration from Nevada, this state is now also typically excluded. Some, but not all, DFS operators commonly exclude other states, such as Florida (where an old AG opinion alleges real-money fantasy sports is illegal under Florida law). At the other end of the spectrum, one DFS operator, StarsDraft blocks players from all states except Kansas, Maryland, Massachusetts, and New Jersey. Clearly, there is not a consistent view of which states should be excluded.
Recently, the gambling commissions or AGs in some other states have opined that at least DFS may be illegal in those states. The response by some states legislature has been to change or attempt to change the law. A number of states are amending or have amended their laws, often to mirror the fantasy sports exception to UIGEA.
At least two states, have passed legislation exempting fantasy sports from their gambling laws, subject to certain conditions (similar to those in UIGEA).
Maryland passed a law in 2012 that exempts certain fantasy sports competitions from illegal betting, wagering or wagering prohibitions. It defines “Fantasy Competition” to include:
“Any online fantasy or simulated game or contest such as fantasy sports, online or otherwise, in which:
participants own, manage, or coach imaginary teams;
all prizes and awards offered to winning participants are established and made known to participants in advance of the game or contest;
the winning outcome of the game or contest reflects the relative skill of the participants and is determined by statistics generated by actual individuals (players or teams in the case of a professional sport); and
no winning outcome is based:
(i) solely on the performance of an individual athlete; or (ii) on the score, point spread, or any performances of any single real—world team or any combination of real—world teams.” http://mlis.state.md.us/2012rs/billfile/HB0007.htm
Kansas passed a law in 2015 that exempted “fantasy sports leagues” from being a bet. It defines “fantasy sports league” as:
“any fantasy or simulation sports game or contest in which no fantasy or simulation sports team is based on the current membership of an actual team that is a member of an amateur or professional sports organization and that meets the following conditions:
All prizes and awards offered to winning participants are established and made known to the participants in advance of the game or contest and their value is not determined by the number of participants or the amount of any fees paid by those participants;
all winning outcomes reflect the relative knowledge and skill of the participants and are determined predominantly by accumulated statistical results of the performance of individual athletes in multiple real-world sporting events; and
no winning outcome is based: On the score, point spread or any performance or performances of any single real-world team or any combination of such teams; or
solely on any single performance of an individual athlete in any single real-world sporting event.” http://kslegislature.org/li/b2015_16/measures/hb2155/
These legislative actions are helpful to give the fantasy sports some level of certainty in these states. Unfortunately, this legislation does not resolve all of the issues. Much of the focus on fantasy sports is on team sports such as football, baseball, hockey and others. Some fantasy sports operators have offerings based on more individual activities, such as golf and NASCAR. It will be interesting to see if any legislation addresses these types of issues as well.
Conclusion
Despite the wave of negative headlines and some adverse gaming commission and AG opinions, the fantasy sports industry likely will survive. It may be that in some states, DFS will be declared illegal, require licensing or be taken over by the state lottery. However, in the states where positive laws are passed, the result should be greater certainty as to continuing operations. Hopefully state legislation going forward will be clear on all of the issues and strike a balanced approach between consumer protection and permitting this burgeoning industry to thrive.
Jim Gatto is a partner in the Intellectual Property Practice Group in the firm’s Washington, D.C. office. He is also Co-Team Leader of the firm’s Digital Media Industry and Social Media and Games Industry Teams, and Team Leader of the firm’s Open Source Team.
