Fantasy Sports: Navigating the Regulatory Groundswell

November 25, 2015

By David O. Klein, Neil E. Asnen and Joshua R. Wueller

fantasy sportsAnyone who has turned on a television or radio, visited a professional sports venue or surfed the Web in recent months will undoubtedly be familiar with the meteoric rise – and tremendous marketing efforts – of the multi-billion-dollar fantasy sports industry.1  From football to fishing, nearly every real-life sporting event is now accompanied by some form of fantasy sports contest.

At its core, fantasy sports contests consist of competitors assembling virtual teams of actual athletes, which are then pitted against other rosters similarly constructed by their peers, the outcome of which is based on the athletes’ statistical performance in real-life competition.  However, in recent years, fantasy sports contests have substantially evolved from the traditional season-long variety (in which participants draft a roster at the beginning of a given sports’ season and subsequently manage that roster over the course of several months), to the accelerated variants being popularized today (in which new rosters can be constructed on a daily basis and participants often are unaware against whom they are competing).

According to the Fantasy Sports Trade Association (FSTA), 20 percent of Americans (51.6 million) now participate in fantasy sports contests, and more are joining every day.2  As the industry continues to skyrocket, a growing number of professional sports organizations, such as the National Football League (NFL), National Basketball Association (NBA), Major League Baseball (MLB), National Hockey League (NHL) and NASCAR, have negotiated deals directly with fantasy sports enterprises.

As the fantasy sports industry continues to grow and evolve, so too have the regulatory efforts of federal and state governmental bodies. Some jurisdictions have welcomed fantasy sports contests openly, while others have implemented various regulations and efforts aimed at restricting or even shutting down the industry.

Federal Regulation

The unmistakable success of the fantasy sports industry in recent years can be attributed in large part to the Unlawful Internet Gambling Enforcement Act (UIGEA). Although UIGEA generally expanded the scope of the federal criminal code in 2006 to include certain Internet gambling, the statute expressly exempts fantasy sports contests from regulations otherwise generally aimed at the financial industry that had been processing payments for Internet poker operators prior to what is known in the gaming industry as “Black Friday.”

Fantasy sports contests are exempted under UIGEA provided that: (1) participants are notified of applicable prizes before each contest begins, and the value of the prizes are not influenced by the number of participants or the amount of fees paid to enter; (2) winners are determined predominantly by the statistical performance of athletes participating in multiple real-world sporting events; and (3) no winning outcome is based solely on any single performance of an individual athlete in any single real-world sporting event, or the score, point spread or performance of one or more real-world teams.3

Separate from UIGEA, the Interstate Wire Act (Wire Act) bars anyone engaged in the business of betting or wagering from knowingly using a “wire communication facility” (such as a computer or telephone) to transmit in interstate commerce: (1) bets, wagers or information assisting in the placing of bets or wagers on any sporting event or contest; and/or (2) communications that entitle the recipient to receive money or credit for such information or activities.4

In 2011, the U.S. Department of Justice’s Criminal Division concluded that the Wire Act’s restrictions are limited exclusively to wagering on sporting events or contests.5  Given this constraint, unless UIGEA-exempt fantasy sports contests are later determined to be sporting events, the Wire Act should not bar such contests.

With the rapid evolution of fantasy sports contests from the traditional structure in which they existed at the time UIGEA was enacted to the daily, fast-paced and high-stakes form that they resemble today, it is unsurprising to see significant developments in the legal landscape governing the industry.

At the federal level, recent activity concerning the legality of daily fantasy sports contests include federal investigations by U.S. Attorneys in Florida and New York, as well as calls from a half-dozen or more U.S. Senators and Representatives for congressional hearings and Federal Trade Commission (FTC) intervention.

Additionally, class action lawsuits have begun to be filed in United States District Courts across the country. One such class action lawsuit was recently filed in the U.S. District Court for the Southern District of New York against the credit card companies and banks that process payments on behalf of DraftKings, Inc. (DraftKings) and FanDuel, Inc. (FanDuel), alleging various violations of New York State gambling law.

In that suit, the plaintiff has alleged that he amassed between $5,000 and $10,000 in losses playing fantasy sports contests on DraftKings and FanDuel, but that the operators’ subsequent attempts to collect on the debt through his credit card companies was improper because, he argues, the debt is the result of illegal gambling.

State Regulation

Ultimately, however, the legality of daily fantasy sports contests is now being crafted on the state level, in state legislatures and by state regulatory bodies, on a near-daily basis. The following is a non-inclusive sample of states that have generated the most buzz for either seeking to implement a regulatory framework for daily fantasy sports, prohibiting the contests and their operators altogether, or are otherwise notably going through the process of deciding which path to take. The states are presented below in order of whose determinations and/or proposals are believed to have the most significant impact upon the industry.

New York

Perhaps no state has generated more fantasy sports-related headlines recently than New York, home to the headquarters of FanDuel. Last month, reports surfaced that United States Attorney Preet Bharara’s office in the Southern District of New York had begun investigating whether daily fantasy sports contests violate federal law.6

Shortly thereafter, New York State Attorney General (NYAG) Eric Schneiderman sent cease-and-desist letters to both DraftKings7 and FanDuel,8 informing each operator that he had reached the conclusion that their respective business models constitute illegal gambling under applicable New York State law, and further instructing both companies to stop accepting fantasy sports contest entry fees in the State.

In response to the NYAG’s actions, both FanDuel9 and DraftKings10 filed lawsuits seeking to enjoin the NYAG from taking any enforcement action against the fantasy sports operators on the basis that the contests allegedly violate New York State law. In turn, the NYAG’s Office filed its own actions against both FanDuel11 and DraftKings,12 seeking to enjoin the companies from conducting any further business in the State, as well as seeking to hold the companies liable for violations of the State’s penal code prohibitions against gambling and various violations of the State’s deceptive trade practices laws.

The NYAG’s Office has recently expanded its investigation to include Yahoo, Inc.’s daily fantasy sports operations, though it is unclear whether the State intends to aggressively pursue litigation against Yahoo, Inc. in the same manner as it has against DraftKings and FanDuel.

During the pendency of the aforementioned lawsuits, DraftKings and FanDuel have adopted starkly different operating practices. FanDuel initially decided to cease accepting new deposits from New York State customers, but subsequently decided to block such participants from its contests altogether. DraftKings, on the other hand, recently notified its customers that it will continue to operate in New York until a court of law tells it to do otherwise.

Not all New York State lawmakers agree with the aggressive position taken by the NYAG, however. State Senator Michael H. Ranzenhofer has come to the defense of the industry by introducing a bill13 aimed at undercutting most of the arguments made by the NYAG in its papers by specifically classifying fantasy sports contests as games of skill.

The NYAG’s Office has historically created a reputation for itself as a zealous pursuer of headline-grabbing victories over some of the biggest players in various industries. Nevertheless, there is little doubt that regulators and policymakers across the country will be intently following the developments in New York State given how vociferously the biggest players in the daily fantasy sports space have fought the NYAG’s actions. Likewise, other fantasy sports operators are also keenly interested in how these lawsuits shake out, given the potential ramifications for the industry in the state that offers operators their largest number of
participants.

Nevada

This fall, under intense pressure from the highly regulated Nevada State casino industry, the Nevada Gaming Control Board issued a notice declaring that daily fantasy sports contests constitute gambling under Chapter 463 of the Nevada Revised Statutes (the Notice).14  The Notice advised daily fantasy sports operators that to conduct business lawfully within the State of Nevada, they must apply to become licensed sports pools.

The Gaming Control Board’s Notice also served as a cease-and-desist order, barring fantasy sports operators from continuing to accept entries from State residents until such time as each has obtained the requisite sports pool license.

The Gaming Control Board’s Notice has left many in the industry in a precarious public relations situation, forcing them to make a choice between obtaining licenses to operate lawfully while accepting Nevada’s determination that their services are the equivalent of gambling (a position the industry has been loath to accept), or simply adding Nevada to the blacklist of states from which they block prospective customers.

To date, fantasy sports websites have, for the most part, simply opted to cease accepting deposits from, and otherwise operating in, Nevada.

New Jersey

Similar to Nevada, New Jersey has laws that allow for legal gambling within the State and, accordingly (like Nevada), is widely seen as a state whose stance regarding the legality of daily fantasy sports could have reverberations well beyond state borders. However, unlike Nevada, New Jersey has not, to date, provided much clarity concerning the legality of daily fantasy sports contests within its borders.

The New Jersey Attorney General has thus far refused to comment when asked publicly for his opinion regarding the legality of the industry under the State’s gambling laws. Meanwhile, Governor Chris Christie has made his opinion well-known. When presented with the question at a recent Republican presidential debate, he stated that it his opinion that there is no place for government to get involved in fantasy sports.

The Governor has also recently railed against the move by the NYAG to shut down the operations of DraftKings and FanDuel, declaring it to be unnecessary governmental overreach.

Lawmakers in New Jersey, however, seemingly do not share the Governor’s reluctance to address the legality of daily fantasy sports. State Senator Jim Whelan recently released a draft bill (although legislation has not yet been formally introduced) aimed at vetting and licensing daily fantasy sports operators in the same fashion that the State employs in evaluating Internet gambling companies, and to subsequently allow them to operate under the licensure and oversight of the State’s Division of Gaming Enforcement.

Finally, perhaps the most high-profile recent news coming out of New Jersey has been U.S. Representative Frank Pallone’s vocal call for the U.S. House of Representatives’ Energy and Commerce Committee to hold hearings concerning the legality of daily fantasy sports contests. Rep. Pallone has also called on the Federal Trade Commission to regulate the industry.

Congressman Pallone, a proponent of legalized sports betting, is particularly concerned about the close relationship between DraftKings, FanDuel and the major sports leagues and associations (the Leagues). Representative Pallone has expressed his belief that daily fantasy sports is sports gambling by a different name and, accordingly, has described the perceived relationship between the Leagues and daily fantasy operators as hypocritical, given the Leagues’ staunch opposition to New Jersey’s recent efforts to legalize sports gambling on a state level.

Massachusetts

Massachusetts has generated its own recent headlines, which is especially noteworthy because industry leader DraftKings has its headquarters based in Boston.

This week, Attorney General Maura Healey held a press conference to announce that she is proposing a new regulatory framework under which fantasy sports operators would be required to provide various forms of consumer protection and operate with heightened transparency.15 Attorney General Healey’s proposal seeks to protect minors by restricting contest participation to individuals twenty-one years of age and older, prohibiting advertisements and promotional activities on high school and college campuses and sporting
venues, and prohibiting operators from offering contests that are based on the performance of high school or collegiate athletes.

The proposed regulations also seek to provide transparency to participants by:
• prohibiting participation in contests by fantasy sports operator employees and others with
access to insider information;
• requiring clear and easy identification to other participants of the 2 percent of players that win 90 percent of all prizes; and
• excluding experienced players from participation in contests limited to beginners.

Additionally, the proposed regulations seek to provide further consumer protections by limiting the amount of monthly deposits that operators may accept from any given single participant, as well as a prohibition on operators extending credit to participants. Finally, the Massachusetts Attorney General has proposed restrictions on fantasy operators’ advertising and marketing practices that arguably have, to date, mischaracterized the ease of winning fantasy sports contests.

Florida

In contrast to New York and Nevada, Florida State regulators have recently shown a reluctance to weigh in on the legality of fantasy sports. The most recent authority of record in Florida regarding fantasy sports contests is a 1991 opinion issued by then-State Attorney General Bob Butterworth.16 Since that time, the nature of fantasy sports contests have drastically evolved from season-long hobbies among friends and coworkers to fast-paced, high-stakes contests comprising a multi-billion dollar industry.

Despite this evolution, current Attorney General Pam Bondi has not publicly revealed her opinion regarding the legality of fantasy sports contests, instead indicating that she has been in close contact with the U.S. Attorney’s Office and believes that this issue should be handled on a federal level.

To this end, the U.S. Attorney headquartered in Tampa recently made news by convening a grand jury to investigate the industry, and subpoenaing the board-meeting minutes of the FSTA in connection with a reported investigation of potential antitrust violations and fraud among the largest fantasy sports websites.

Notwithstanding the State Attorney General’s hesitation to comment on the legality of fantasy sports contests, and the U.S. Attorney’s ongoing investigation, high-ranking defenders of the industry within the Florida State Legislature have recently introduced legislation that seeks to clarify the legality of fantasy sports contests within the State through industry regulation. State Senator Joe Negron17 and Representative Matt Gaetz18 each recently filed proposed legislation in their respective legislative bodies that together would: (1) specifically legalize fantasy sports contests; (2) require daily fantasy sports companies to pay $500,000 to register and become licensed in the State; and (3) require fantasy sports operators to implement procedures to prevent minors and employees from participating in their contests.

Illinois

This October, Illinois State Representative Mike Zalewski introduced the Fantasy Contests Act19 to the General Assembly which, if passed, would provide regulatory oversight to the daily fantasy sports industry.

The key consumer protection provisions of the proposed Illinois regulations include requirements that fantasy sports operators implement internal policies that:
• prevent minors from participating in contests;
• prevent employees from competing in contests, regardless of the operator;
• prevent sharing non-public information with third parties that could affect the outcome of
contests until such information is shared with the public;
• set limits on the maximum number of entries that a single individual can submit in any given
contest.

The proposal would also establish financial security measures requiring segregation of fantasy sports company operating funds from individual funds, as well as requirements that fantasy sports operators maintain reserves on hand in amounts equal to the amount of deposits in player accounts.

Finally, the proposed regulations seek to bring transparency to the industry by requiring operators to have independent third parties conduct annual audits to ensure compliance with the regulatory framework.

Violations of the regulations as currently written contemplate maximum fines of up to $1,000 per violation.

California

Earlier this fall, Assemblyman Adam C. Gray introduced Assembly Bill 1437 to the California State Assembly, with the stated intention of providing consumer protection through implementation of a regulatory framework to govern daily fantasy sports operators.20 Under the proposed bill, providers of fantasy sports contests would be required to obtain a license from the State’s Department of Justice, pay annual regulatory fees, remit a percentage of gross income on a quarterly basis and incorporate a number of restrictions into their contests aimed at providing transparency and various forms of consumer protection.

These restrictions and contest-specific guidelines would include the requirement that all contest participants register with licensed operators to verify that each such participant is located within the State of California at the time of participation and is at least twenty-one years of age. Additionally, under the proposed bill, fantasy sports operators would be required to implement internal protocols to ensure that participants’ private information is protected to prevent fraud and identity theft, and to further ensure that all financial transactions are safe and secure.

To ensure compliance with the proposed regulatory framework, the legislation proposes fines of up to $10,000 per violation and jail time of up to one year, depending on the number of prior violations.

Georgia

Recent comments from high-ranking officials in Georgia have left interested observers unsure of how the State plans to treat the fantasy sports industry, as the Governor and the Attorney General have offered conflicting public comments.

Governor Nathan Deal recently indicated that he is not convinced that there is much that the State of Georgia can do to police daily fantasy sports without federal guidance concerning a proper form of industry regulation. Notwithstanding the Governor’s position, officials with the Georgia State Lottery recently sent a letter to both FanDuel and DraftKings requesting that each company provide its legal justification for how fantasy sports contests comply with Georgia State law.21

The Georgia State Lottery’s skepticism seems to closely track that of the Georgia Attorney General, who recently announced that his office is currently undertaking its own fantasy sports-specific investigation.

Conclusion

As the fantasy sports industry, and the laws and regulations that govern it, continue to evolve, it is essential that fantasy sports operators keep abreast of the developing legal landscape, which is seemingly being written in real time. This is likely to create a variety of challenges to operators in this field, given the hodgepodge of laws and regulatory frameworks being proposed across the country.

These challenges include:
• careful, intensive reviews of each contest’s marketing materials, platforms, entry fees and
prize structures;
• analysis of the degree to which chance may influence the outcome of the contests;
• implementation of transparency and consumer protection measures; and
• adherence to the varying requirements to maintain compliance with regulation and licensure
standards ultimately adopted by states across the country.

Given the current regulatory climate, working closely with knowledgeable counsel is critically important for fantasy sports operators that plan to survive and thrive in the years to come.

David O. Klein is the managing partner, and Neil E. Asnen and Joshua R. Wueller are associates, with the law firm Klein Moynihan Turco LLP in New York. They can be reached at dklein@kleinmoynihan.com, nasnen@kleinmoynihan.com and  jwueller@kleinmoynihan.com.


1. Litigation and regulatory activity arising from daily fantasy sports is rapidly developing. The information in this article is current as of Nov. 20, 2015.
2. Fantasy Sports Trade Ass’n, Fantasy Sports Market Study (2015).
3. 31 U.S.C. §5362(1)(E)(ix) (2012).
4. 18 U.S.C. §1084.
5. Whether Proposals by Ill. and N.Y. Violate the Wire Act, 35 Op. O.L.C. 1 (2011).
6. Devlin Barrett & Christopher M. Matthews, U.S. Prosecutor Probing Daily Fantasy-Sports Business, Wall Street J. (Oct. 21, 2015).
7. Letter from Kathleen McGee, Chief, Internet Bureau, Div. of Econ. Justice, State of N.Y. Office of the Attorney Gen., to Jason Robins, Chief Executive Officer, DraftKings, Inc. (Nov. 10, 2015).
8. Letter from Kathleen McGee, Chief, Internet Bureau, Div. of Econ. Justice, State of N.Y. Office of the Attorney Gen., to Nigel Eccles, Chief Executive Officer, FanDuel Inc. (Nov. 10, 2015).
9. FanDuel Inc. v. Schneiderman, No. 161691/2015 (N.Y. Sup. Ct. filed Nov. 13, 2015).
10. DraftKings, Inc. v. Schneiderman, No. 102014/2015 (N.Y. Sup. Ct. filed Nov 13, 2015).
11. State v. FanDuel Inc., No. 453056/2015 (N.Y. Sup. Ct. filed Nov. 17, 2015).
12. State v. DraftKings, Inc., No. 453054/2015 (N.Y. Sup. Ct. filed Nov. 17, 2015).
13. S. 6092, 2015–16 Reg. Sess. (N.Y. 2015).
14. Notice from A.G. Burnett, Bd. Chairman, Nev. Gaming Control Bd., to All Licensees and Interested Parties (Oct. 15, 2015).
15. Press Release, Mass. Attorney Gen., AG Healey Proposes Strong Consumer Prot. Regulations for Daily Fantasy Sports Operations in Mass. (Nov. 19, 2015).
16. Gambling / Fantasy Sports League, No. AGO 91-03 (Fla. 1991).
17. S. 832, 2016 Leg. (Fla. 2015).
18. H.R. 707, 2016 Leg. (Fla. 2015).
19. H.R. 4323, 99th Gen. Assemb. (Ill. 2015).
20. Assemb. 1437, 2015–16 Reg. Sess. (Cal. 2015).
21. Letter from Joseph J. Kim, Senior Vice President & Gen. Counsel, Ga. Lottery Corp., to Nigel Eccles, Chief Executive Officer, FanDuel Inc., and Jason Robins, Chief Executive Officer, DraftKings, Inc. (Sept. 23, 2015).

Reproduced with permission from Copyright 2015 The Bureau of National Affairs, Inc. (800-372-1033) www.bna.com.

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