A REGULATORY FUMBLE: THE CHANGING REGULATORY SCHEME SURROUNDING GAMBLING AND DAILY FANTASY SPORTS

By: Paul Strey, Volume 104 Staff Member

INTRODUCTION

On September 26, 2019, the National Football League formally announced that DraftKings would be the official daily fantasy provider for professional football.[1] The partnership allows DraftKings to use the official NFL logo, special highlight reels, and the NFL’s NextGen statistics program.[2] This endorsement represents the first time the NFL has fully bought-in to the daily fantasy sports (“DFS”) industry, which has traditionally remained distant.[3] The change, however, is not too surprising. After all, at the height of football season, DFS sites like DraftKings receive roughly half a billion dollars in revenue,[4] and every other major American sports league had already decided to embrace the rise of daily fantasy sports.

DFS is a relatively recent invention, first coming to prominence in roughly 2009, and with it, a host of controversies surrounding Internet gambling.[5] This Post seeks to achieve three goals. First, this Post illustrates the relationship between DFS and online gambling. Next, it demonstrates the various state responses to DFS. Finally, this Post examines how recent developments are likely to shape the DFS world, as well as what responses state and local governments can take to either embrace or combat DFS.

I.  DAILY FANTASY SPORTS AND ONLINE GAMBLING

Fantasy sports generally involve individuals gathering a group of friends or coworkers into a “league,” where each of them “manages” a team.[6] Each manager “drafts” their team of desired players at the beginning of the season, and points are earned by each of those players’ performances each week.[7] Managers go head-to-head each week with one other manager in their league, and the player with the most points at the end of the week is deemed the winner.[8] The statistical analysis used in calculating the point value of specific plays, like a twenty-six yard touchdown pass, is extremely complex, and statistic reporting was not always uniform. Thus, fantasy sports did not really take off until the growth of the Internet.[9] But once it started growing, fantasy sports exploded. With the Internet, fantasy sports have given NFL fans a “hobby-turned-obsession engagement in the league.”[10] Today, fantasy sports have around sixty million users.[11]

DFS follows a roughly similar format to its predecessor with one major difference; DFS does not follow the entire season, or even a week. DFS allows its users to draft, manage, and finish their leagues all in the same day.[12] Because DFS has such a short duration, providers like DraftKings require their users to compete in multiple events in order to be eligible for prizes.[13] Therefore, users of DFS compete most often against strangers online, as opposed to a group of friends. The other key difference is the structure of rewards; DFS requires users to pay a fee to compete and receive prizes from the DFS provider.[14]

It is precisely these two distinctions that have led various individuals, from sports fans to state legislatures, to refer to DFS as the newest form of Internet gambling. Classic fantasy sports were explicitly exempt from Internet gambling laws. Congress, in passing the Unlawful Internet Gambling Act of 2006, specifically stated that “participation in any fantasy or simulation sports game” is exempt so long as it meets three conditions: (1) Prizes and winnings are made known in advance; (2) “[W]inning outcomes reflect knowledge and skill of the participants;” and (3) Winning is not dependent on a single athlete’s performance or single team’s performance.[15] The unique context of DFS seems to undermine these requirements. Often, prizes are not known with certainty to users, the lack of following an entire season makes DFS as much a game of chance as anything else, and DFS challenges often require users to choose how a single athlete or team will perform.[16] It should thus come as no surprise that DFS was quickly likened to online poker as its popularity continued to soar.[17]

II.  STATES’ RESPONSE TO DAILY FANTASY

Perhaps due to a lack of prosecution on behalf of the federal government,[18] states were quick to respond to the issue of DFS, especially during the industry’s meteoric rise.[19] Most states have taken the position that DFS does constitute gambling.[20] And that has led some states to ban its practice altogether, usually based on traditional reasons to outlaw gambling.[21]

Nevada presents an interesting study in the context of DFS. On October 15, 2015, A.G. Burnett, Chairman of the Nevada Gaming Control Board, issued a formal statement finding DFS to be a gambling activity.[22] Unlike most states, Nevada was not motivated by traditional motives of public welfare. Instead, the Gaming Control Board states that DFS companies cannot continue to operate “without the appropriate license.”[23] This has led commentators to believe that Nevada was motivated primarily by revenue potential and a desire to protect existing, large-scale casinos.[24]

New York initially created an outlet to allow for DFS through its amendment to the Racing, Pari-Mutuel Wagering and Breeding Law, which states that DFS will be allowed in the state, so long as it follows the appropriate regulations.[25] However, the courts of New York have determined that this law is unconstitutional, as it was found too similar to casino gambling, which the state constitution outright bans.[26] Thus, the status of DFS in New York remains an unanswered question. While the courts may have invalidated its statutory allowance, DFS is still played in the state, often for money.[27]

III.  FUTURE OF DAILY FANTASY SPORTS

Despite efforts by states like Nevada to characterize DFS as gambling, the industry has continued to grow at an impressive rate. This growth appears to have two bases. First, the incredible growth of DFS created an enormous revenue base that has allowed DraftKings and others to ultimately edge out the state interest in regulating gambling.[28] The recent partnership with the NFL demonstrates that DraftKings is as popular and powerful today as it has ever been, if not more so.[29] In order to regulate, state legislatures need to be willing to pass legislation that will likely be seen as extremely unpopular by their constituents, as well as combat a powerful and wealthy lobbying group.

Second, as DFS became more popular, it became more akin to a game of skill, suggesting that it may be exempt from the Unlawful Internet Gambling Act. For one, the influx of individual statistics and prediction models of how an individual will likely perform in a given match up require extensive knowledge and study.[30] That is to say nothing of the adaptation skills required to change strategy when a key player is injured, which play a factor in both season-long and DFS.[31] In fact, DFS may better fit the Unlawful Internet Gambling Act’ exemption than season-long fantasy because it eliminates the possibility that owners collude in negotiating trade deals, leaving each individual to rely on his or her skill alone.[32] Thus, as its usage continued to rise, the DFS industry has managed to effectively illustrate how it may be classified as a game of skill, rather than a game of chance.

So, states are left with only two options: continue to fight a losing battle to frame DFS as gambling or give in to the trend. And the determination is likely to be made based on how states continue viewing DFS. States like Nevada, with such a strong presence from highly profitable casinos, are unlikely to give up the fight, solely because other gambling entities control so much power in the industry. However, states that continue to hold out because of social well-being are likely to give in to societal pressures.[33] And by allowing DFS, states are given the opportunity to regulate the practice and ensure that DFS follows the moral code they want to uphold. Also, DFS provides states with a substantial potential tax revenue source and a certain social utility,[34] so it seems to be only a matter of time before these states open up to DFS.

CONCLUSION

By officially partnering with DraftKings, the NFL has reopened the debate of the appropriateness of DFS. To be certain, DFS presents a significant challenge to state legislatures, beyond just setting the perfect line-up. Modern gambling laws in almost every state seem to preclude this type of industry from operating without a license and approval from the state’s attorney general. Yet, DFS continues to grow, and to a large extent they are basically now ignored by the state legislatures that fought so hardly to regulate them. Thus, it seems to be only a matter of time before DFS is left unregulated in all states.

[1]David Purdum, NFL Chooses DraftKings as Daily Fantasy Partner, ESPN (Sept. 26, 2019), https://www.espn.com/chalk/story/_/id/27705701/nfl-chooses-draftkings-daily-fantasy-partner.

[2]Id.

[3]Id.

[4]Dustin Gouker, How Much Money Did DraftKings, FanDuel, and the DFS Industry Make in the Past Year? Now We Know Almost Exactly, Legal Sports Report(Oct. 19, 2017), https://www.legalsportsreport.com/16152/draftkings-fanduel-dfs-revenue/(reporting that DFS earned $419,302,327 in November of 2016).

[5]Joshua Shancer, Daily Fantasy Sports and the Clash of Internet Gambling Regulation, 27 DePaul J. of Art, Tech., & Intell. Prop. L.295, 296 (2017).

[6]Jonah Ottley, Fantasy Sports and Gambling: Drawing the Line in the Sand Between Pete Rose’s Gambling and Daily-Play Fantasy Sports, 42 N. Ky. L. Rev.549, 556 (2015).

[7]Id. at 557.

[8]Id.

[9]Id. at 556.

[10]Bret McCormick, Rise in Fantasy Football Played Big Part in League’s Growth, Sports Bus. J.(Sept. 2, 2019), https://www.sportsbusinessdaily.com/Journal/Issues/2019/09/02/Media/Fantasy.aspx.

[11]Id.

[12]Ottley, supra, note 6, at 559.

[13]Id. See also Frequently Asked Questions, DraftKings, https://www.draftkings.com/help/faq(last visited, Oct. 14, 2019) (stating that the biggest prizes come from “steps tournaments,” requiring four wins per user).

[14]See DraftKings,supra, note 13.

[15]31 U.S.C. § 5362(1)(E)(ix) (2006).

[16]Shancer, supra, note 5 at 303–05.

[17]Ottley, supra, note 6 at 560.

[18]See, e.g., Humphrey v. Viacom, Inc., 2007 WL 1797648, *7 (D.N.J. 2007) (holding that fantasy sports generally should not be considered gambling under statute just because they require an entry fee).

[19]Currently, users in 42 states and the District of Columbia can use DraftKings and be eligible for prizes if they win. DraftKings, supra, note 13. Users in Arizona, Hawaii, Idaho, Iowa, Louisiana, Montana, Nevada, and Washington can still play on DraftKings, but they are not eligible for prizes. Id.

[20]SeeMemorandum from Lisa Madigan, Attorney General of Illinois, to the State Judiciary Committee (Dec. 23, 2015) (finding that DFS are gambling under Illinois law); Nick Statt, Texas Attorney General Says Daily Fantasy Sports Are ‘Prohibited Gambling’, Verge(Jan. 19, 2016), https://www.theverge.com/2016/1/19/10791654/daily-fantasy-sports-texas-attorney-general-draftkings-fanduel(stating that Texas courts are encouraged to find DFS to be gambling). But see Jason Gonzalez & J. Patrick Coolican, Fantasy Sports Industry Seeks Legal Status; Opponents Say It’s Gambling, Star Tribune (Apr. 30, 2016), http://www.startribune.com/fantasy-sports-industry-seeks-legal-status-opponents-say-it-s-gambling/377660771/(showing that support for DFS grew to outweigh opposition in Minnesota).

[21]Nicole Davidson, Internet Gambling: Should Fantasy Sports Leagues Be Punished?, 39 San Diego L. Rev. 201, 221–225 (2002) (outlining traditional reasons for banning gambling as increased crime rates, economic loss, erosion of morality, and sanctity of sports).

[22]Memorandum from A.G. Burnett, Chairman of the Nevada Gaming Control Board, to All Gambling Licensees (Oct. 15, 2015).

[23]Id.

[24]See, e.g., Joe Drape, Nevada Says It Will Treat Daily Fantasy Sports Sites as Gambling, N.Y. Times(Oct. 15, 2015), https://www.nytimes.com/2015/10/16/sports/gambling-regulators-block-daily-fantasy-sites-in-nevada.html.

[25]N.Y. Racing, Pari-Mutuel Wagering and Breeding Law § 1402 (2016).

[26]See White v. Cuomo, 87 N.Y.S.3d. 805 (N.Y. Sup. Ct. 2018).

[27]“New York Sports Betting and Daily Fantasy Sports,” Legal Sports Report (last updated Aug. 2, 2019), https://www.legalsportsreport.com/ny/.

[28]See Gonzalez & Coolican, supra, note 20.

[29]Purdum, supra, note 1.

[30]Andrew J. Griffin, A Fantastic Gamble: An Analysis of Daily Fantasy Sports under the UIGEA and the Predominance Test,23 Boston U. J. Sci. & Tech. L. 456, 476.

[31]Id. at 476–77.

[32]Id. at 478–79.

[33]For example, representatives from the Minnesota recently traveled to Iowa to learn how to better implement modern sports betting. J. Patrick Coolican, Minnesota Legislators Head to Iowa to See if Sports Betting Is Right for State, Star Tribune(Sept. 24, 2019), http://www.startribune.com/minnesota-politicos-head-to-iowa-see-if-sports-betting-is-right-for-the-state/561168492/. While Iowa does still ban prize payouts from DraftKings, it allows DFS to be conducted in casinos. Id.

[34]See Davidson, supra, note 21 at 225–26.