Legal Overview of Daily Fantasy Sports

The Evolution of Daily Fantasy Sports

By: Neil Braslow, Esq. Walters Law Group

It is estimated that nearly $100 billion dollars will be gambled during the upcoming 2016 football season. Of that amount, nearly 95% will be gambled illegally. While considering which outlets would allow individuals to gamble legally, it is hard to forget the media blitz surrounding the daily fantasy sports (“DFS”) industry during the 2015 season that encompassed all aspects of TV and digital media. While the campaign may have been successful in recruiting a large amount of new customers, the over exposure in the media contributed to significant scrutiny and cries for much needed regulation within the industry. Only two years ago, the DFS industry was still somewhat unknown. While awareness of the industry is at an all-time high, the question remains whether DFS should be categorized as gambling or a game of skill. Since October 2015, several states have now labeled DFS as a form of illegal gambling. While the industry appeared to be exploding with popularity just one year ago, the outlook now seems a bit dimmer with questions and concerns about the overall health and sustainability of the industry. The main battleground for the DFS industry has been in the State of New York. It is estimated that nearly 10% of the revenue for the major DFS companies come from New York.  In November 2015, New York state Attorney General Eric Schneiderman sought to stop DraftKings and FanDuel, the two largest operators of DFS, from operating in the state. Schneiderman contended that DFS constituted illegal gambling under state law because they constituted games of chance, not games of skill. The companies argued that their games are legal because they require skill, not just luck. Moreover, federal online gambling law contains an exemption for fantasy sports wagering. However, in June after much debate and an expensive lobbying effort, the New York state legislature approved a bill to legalize and regulate daily fantasy sports. The debate over DFS continues as to whether it is a game of skill or a game of chance. By being categorized as a game of skill, it is highly unlikely that DFS can be categorized as illegal gambling. In order to be classified as gambling, the elements of prizes, consideration, and chance must be present. The activity can still be regulated if any of those elements are absent, but under different laws. Some states, such as Florida for example, prohibit wagering on certain skill games along with games of chance. If it is determined that the outcome of a game is determined entirely by skill of the players, DFS will escape scrutiny under traditional gambling laws. Although New York has grabbed many of the headlines, about 20 states have pending legislation that would largely permit DFS. Most of the proposed laws emphasize consumer protection and are viewed favorably by DFS operators.  While each state’s laws must be examined independently, historically, 5 states have banned DFS: Arizona, Iowa, Louisiana, Montana, and Washington. Additionally, 11 states have allowed DFS: Colorado, Indiana, Kansas, Maryland, Massachusetts, Mississippi, Missouri, New York, Rhode Island, Tennessee, and Virginia. The remaining states either have contested legislation, proposed legislation, or no legislation at all. In addition to the ongoing battle for legalization, rumors continue to swirl that a DraftKings and FanDuel merger is imminent. A merger would result in a single entity controlling more than 95% of the industry. In addition to FanDuel and DrafKings, several smaller entities exist, many of which have innovative products that are trying to grab a larger piece of the market share. DFS is only around six years old, so the industry is still evolving. New forms and versions of DFS are continuing to emerge. The industry continues to push for regulation, and the hope is that over 40 states will become regulated over the next three years. However, DFS faces a long and difficult path to legalization in all 50 states. It will likely be a battle that lasts several years, with a patchwork of inconsistent legislation throughout the country. Another major issue moving forward for the DFS industry is payment processing. In February 2016, payment processor Vantiv decided to cease processing payments by DFS operators. Many other payment processors are increasingly concerned about doing business in the DFS space, due to banking and regulatory concerns. The industry relies heavily on PayPal which is the biggest provider of DFS payments processes. It appears the legalization will solve the problem, but as previously discussed, that will be a lengthy and uncertain battle. Another area of concern for the DFS industry is protecting customer deposits. DFS startup FantasyHub suspended operations in February and owes hundreds of thousands of dollars to players. The reputation of the industry can be significantly damaged by such wrongdoing, and companies can be held civilly or criminally liable for such actions. It is apparent that there is an intense interest and appetite for the DFS industry to the general public. Therefore, it is expected that DFS will continue on a large scale, notwithstanding any regulation that may result. The legal issues have yet to be settled, thus creating both risk and opportunity for operators.