Why Daily Fantasy Sports got the Penalty Box

Daily fantasy sports (DFS) sites FanDuel and DraftKings have been at the center of regulatory attention for months, as state attorneys general, Congressmen, and others call for them to be defined as illegal gambling operations. Residents of six states currently have bans on playing on the two sites: Montana, Arizona, Washington, Louisiana, Iowa, and Nevada. Representative Frank Pallone, Jr. (D-NJ) has called for a congressional hearing “examining the relationship between professional sports and fantasy sports to review the legal status of fantasy sports and sports betting.”

It may not be a coincidence that Iowa, Louisiana, and New Jersey are counted in the top ten states with the most consumer spending on casinos, casino tax revenue, and casino jobs, according to data from the American Gaming Association (AGA) reported by Bloomberg. Nevada is the biggest gambling state in the nation, by far.

There is clearly some interest on the part of established gaming interests such as the AGA to become involved in the area, but also some reticence. Sara Rayme, the senior vice president for public affairs of the AGA, said,

“It’s still sort of a gray, ambiguous market. Right now, we’re at a competitive disadvantage because of the ambiguity. Gaming regulators always reserve the right to take [gaming licenses] away. We’re not going to jeopardize that.” John McManus, general counsel for MGM Resorts International said, “It is not in the interests of consumers that established gaming companies, which are fully licensed and regulated, are the only market participants that cannot engage in the business.”

“Season-long” fantasy sports have been commonplace and fully accepted (if not formally legal) for years; however, the two major sites in question work on a different model than their predecessors. Players place bets on a daily basis and the sites themselves regulate payouts, variables (such as athlete “salaries”), and profit directly from the activity. Regulators have commented that they are pursuing FanDuel and DraftKings in order to protect the public. The office of New York state attorney general Eric Schneiderman sent cease and desist letters to the two sites in November 2015, in which his office alleges that, “… contests are neither harmless nor victimless. Daily Fantasy Sports are creating the same public health and economic concerns as other forms of gambling, including addiction.”

The legal complaint from Schneiderman’s office against DraftKings (the complaint against FanDuel is identical) states,

“Our review concludes that DraftKings’ operations constitute illegal gambling under New York law, according to which, ‘a person engages in gambling when he stakes or risks something of value upon the outcome of a contest of chance or a future contingent event not under his control or influence.’”

A panel of appellate judges in the state ruled on January 11 that the sites may continue operating until their dispute with Schneiderman’s office is resolved. The attorney general is seeking to prosecute the sites on seven separate violations of state law and regulation. New York is another of the top ten states with the largest established gambling interests.

In addition, New York is the biggest DFS market in the country, according to a poll by Eilers & Krejcik Gaming LLC, a California-based research company. California is the number two DFS market.

Texas’ state attorney general, Ken Paxton, is the most recent to denounce the sites. In a statement on January 19, he said:

“Paid daily ‘fantasy sports’ operators claim they can legally operate as an unregulated house, but none of their arguments square with existing Texas law. Simply put, it is prohibited gambling in Texas if you bet on the performance of a participant in a sporting event and the house takes a cut.”

Texas has not yet taken any concrete legal action to ban the sites from operating within state borders.

Washington State’s legislature is currently considering three separate bills which codify daily fantasy sports, for good or ill. The first, sponsored by state Representative Chris Hurst (D-Enumclaw) would reinforce existing state law against sports betting to declare that it is illegal to play any fantasy sports for money. The bill working its way through the state Senate, by Sen. Doug Ericksen (R-Ferndale) would legalize all fantasy sports by calling them games of skill, rather than games of chance. The third, sponsored by Sen. Pam Roach (R-Auburn) would permit season-long fantasy leagues as long as they involve no more than 50 people, with payouts of no more than $50.

The distinction between games of chance and games of skill is where daily fantasy’s main regulatory headaches seem to reside. Hurst, in promoting his bill, said “You cannot call this a game of skill.” New York’s complaint makes the issue of games of chance central to their complaint, alleging, “DraftKings’ customers are clearly placing bets on events outside of their control or influence… DraftKings has promoted, and continues to promote DFS like a lottery, representing the game to New Yorkers as a path to easy riches that anyone can win.”

Pallone, in his press release calling for a congressional hearing, said, “Fans are currently allowed to risk money
on the performance of an individual player. How is that different than wagering money on the outcome of a game?” It is of note that Pallone has not called for an outright
ban or restriction on fantasy sports; in the past he has advocated for the full legalization of sports betting in his state.

For their part, the sites do favor some regulation to their business. A Fanduel representative said in a statement in response to Schneiderman’s ban,

“We are confident that fantasy sports have always operated lawfully in New York, but we do believe that new, common-sense regulations to protect consumers and reflect the evolution and growth of the game are needed. The New York legislature, like many states around the country, is working towards such regulation, and we will work with them to achieve it.”

Perhaps seeking to prepare for whatever regulators may throw at it, both sites hired their first federal lobbyists in October 2015, and their lobbying expenditures increased to $100,000 total for the two sites, for the last three months of 2015. Since the beginning of 2016, the sites have ramped up their state efforts dramatically – the two sites together with the Fantasy Sports Trade Association have contracted with 78 lobbyists in 34 states. They will spend
a projected $5 million to $10 million this year in their effort to pass at least six to eight state laws exempting fantasy sports from gambling restrictions, according to an anonymous source cited by The Wall Street Journal.

Chris Grove, an online gambling and fantasy sports analyst, said, ““This legislative rush in the first few weeks of the new year is unlike any on gambling that I’ve seen. If all these bills passed you would have just essentially legalized a ton of sports betting that is unregulated and untaxed. I don’t think lawmakers get the ramifications of what they are doing.” If DFS were taxed similarly to state-run casinos, that could generate billions of dollars annually.

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