daily-fantasy-sportsDaily fantasy sports contests are a hit in the US, but in some states fantasy sports offerings fall foul of intrastate gambling and lottery regulations. This situation appears set to change however, as states including Iowa and Montana have introduced bills to legalise fantasy sports contests. David O. Klein and Jonathan E. Turco of Klein Moynihan Turco LLP discuss the bills that have emerged and the grey areas surrounding whether or not daily fantasy sports games rely on a significant element of chance in determining the outcome of the contest.

Over the past several months, we have witnessed a series of high profile partnerships struck between America’s premier professional sports organisations – such as Major League Baseball and the National Basketball Association – and the leading providers of ‘daily’ fantasy sports contests. While the popularity of fantasy sports in America has been steadily rising for the better part of the last two decades, for the first time, professional sports leagues are jumping on the bandwagon in seeming recognition of the boon such fantasy sports provide in terms of creating fan interest in, and engagement with, their respective sports and entertainment offerings.

Media companies, such as Sports Illustrated and USA today, have also rolled out their own fantasy sport offerings, while NBC Sports Ventures recently headed up an investment group that provided $70 million in venture financing to FanDuel, the fantasy sports industry’s leading provider of short term fantasy sports contests. The NBC Sports Ventures stake represents just the tip of the iceberg in terms of Wall Street money that has flooded into this sector. That surge in investment dollars is producing results – even the casual sports viewer has likely noticed the increasingly ubiquitous television and print advertisements featuring FanDuel and DraftKings.

Despite the ongoing mainstreaming of daily fantasy sports contests, the legality of such games remains somewhat uncertain – and varies on a state-by-state basis. However, an interesting development is now transpiring, seemingly in tandem with the broader national trend: in the legislative bodies of at least a handful of states that had previously been excluded from most major fantasy sports offerings (namely, Iowa, Montana and Washington), or where the legality is somewhat in doubt (Indiana), lawmakers have introduced bills that would expressly legalise fantasy sports contests.

Rule Change?

Federal Law

Fantasy sports currently enjoy a privileged position under federal anti-gambling laws: specifically the Unlawful Internet Gambling Enforcement Act (‘UIGEA’) and the Interstate Wire Act (‘Wire Act’). Prevailing federal law (as well as the laws of several states) considers fantasy sports contests that involve a sufficient degree of skill to be exempt from anti-gambling statutes, even where an entry fee is charged and prizes awarded.

UIGEA establishes a statutory carve-out that specifically exempts fantasy sports contests, where those contests: (a) have outcomes that reflect the relative skill and knowledge of the entrants, but not chance; (b) have outcomes that are determined predominantly by accumulated statistical results of multiple athletes participating in multiple real-world sporting events; and (c) offer prizes that are not influenced by the amount of fees paid by, or the number of, entrants.

State Law

While UIGEA and the Wire Act create room at the federal level for pay-to-play fantasy sports contests, such contests must still comply with each state’s specific prohibitions on gambling and illegal lotteries. To date, only one state, Maryland, has enacted a law that expressly legalises fantasy sports contests (by closely tracking the UIGEA carve-out). On the other hand, only one state statute (a Montana law) specifically prohibits fantasy sports games – at least, those played for entry fees and prizes over the internet.

Relatedly, at present, the Washington State Gambling Commission’s website includes the following question and answer: ‘Is any type of sports betting legal? In 1973 when the Gambling Act was first passed, 100 square sports pool boards were authorized. This is the only type of sports betting allowed in Washington State. Bracket pools, office sports pools, and fantasy sports have never been authorized as gambling activities in Washington State, and are illegal.’

A review of other applicable state statutes, attorneys general opinions and case law reveals that certain states may deem that some fantasy sports leagues run afoul of intrastate gambling and lottery regulations. These states either take a dim view of fantasy sports contests (as expressed in attorney general opinions), apply a strict ‘chance’ test (namely, that if a game involves even a slight element of chance, then it is not a game of skill) or have laws on the books that prohibit even games of skill that are played for prizes.

As a result of the strict interpretation of chance – or other hostile statutory/legal guidance – most leading daily fantasy sports providers block residents from a contingent of states from participating in paid contests for cash prizes.

The Next Wave

Feeling Shut Out

Against the backdrop of legal uncertainty, legislative efforts to specifically legalise pay-to-play fantasy sports contests have picked up steam in the jurisdictions of Indiana, Iowa, Montana and Washington. There are a couple of common themes that emerge when assessing the rationale put forward by lawmakers in these states to support their respective legislative efforts.

The first is lost tax revenue. FanDuel and DraftKings alone paid out an estimated $700 million in prizes in 2014. However, residents of blocked states are unable to get a piece of that enormous prize pool and, likewise, the governments in those states miss out on much-needed tax revenue in an era of diminished state coffers.

In addition, these lawmakers cite the inequity of the situation. Residents of their states are shut out from a gripping form of sports entertainment that lured an estimated 35 million Americans (most, presumably hailing from other states) in 2014 alone. With fantasy sports being embraced by so many average citizens across the country, and with the overt support of large professional and business interests, it is difficult to justify prohibitions on a state level. These prohibitions will be made even harder to justify if one or more of the proposed bills outlined above passes, and residents from even more states are allowed to participate in daily fantasy sports contests.

In UIGEA We Trust

In addition to the similar supporting arguments for the latest wave of state-level fantasy sports legislation, there are also many similarities in terms of the substance of the pending bills, and accompanying process. For example, each of the bills enjoys bipartisan support in its respective legislative body, and each has been endorsed by the Fantasy Sports Trade Association. Further, each bill adheres closely to the language of the UIGEA carve out (with some variance in Montana’s bill, as detailed below).

The bill introduced in Montana is slightly different from the other three state bills. Just as the Washington bill would directly address the Washington State Gambling Commission’s position on fantasy sports, the Montana bill would repeal Montana’s current statutory prohibition on fantasy sports leagues that charge an entry fee and are played over the internet. However, the definition of ‘fantasy sports’ set forth in the Montana bill does not require all of the same elements of the UIGEA carve-out. Instead, the Montana bill references, in greater detail, specific aspects of popular fantasy sports leagues, such as player drafts (or auctions), as well as subsequent trades and waiver wire acquisitions. Unlike the other pending legislation, the Montana bill does limit permissible entry fees to $100, and provides that anything above that amount would be considered a violation of Montana law.

As an interesting aside, while there is a general consensus that typical ‘season long’ fantasy sports leagues involve enough skill on the part of participants to satisfy the requirements of applicable federal laws (such as UIGEA), what is less clear (according to some) is whether or not daily fantasy sports games rely on a significant element of chance in determining contest results. Given that many of the lawmakers involved are, in stated purpose, addressing the lack of daily fantasy sports options available to their respective constituents, it seems plausible that these lawmakers conclude that daily fantasy sports contests satisfy the UIGEA test – as that is the standard proposed in their respective bills.

Conclusion

While the bills introduced in Indiana, Iowa, Montana and Washington, respectively, enjoy bipartisan support, each may face opposition from existing statewide gaming interests, religious leaders and other groups wary of the spread of activities that even resemble gambling. The Iowa bill, for example, represents the third attempt in as many years to push through a pro-fantasy sports initiative. Opponents of the prior bills have alleged that, among other things, fantasy sports addictions are common where, like traditional gambling, there are more losers than winners. A recent poll of Iowans, conducted by Selzer & Co., revealed that a majority of Iowans (63%) opposed legalising cash payouts for fantasy sports leagues. Nevertheless, the increasing acceptance of fantasy sports as a legitimate form of entertainment, with backing from several powerful segments of society, creates fertile ground for legislative victories in heretofore recalcitrant states. More than any time in the past, there is cause for optimism amongst those looking for a permissive legal environment for pay-to-play fantasy sports contests.

David O. Klein, Managing Partner

Jonathan E. Turco, Partner

Klein Moynihan Turco LLP, New York

dklein@kleinmoynihan.com

This article was first published in the March 2015 issue of the World Online Gambling Law Report.

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