Place Your Bets: States Take on Daily Fantasy Sports
One of the biggest new trends in digital applications is daily fantasy sports. Dominated by two leading companies, DraftKings and FanDuel, the daily fantasy sports industry swelled in size in 2015, with the two companies collecting a combined $50 million in weekly fees from about 7.5 million users during the NFL season. However, the industry is receiving considerable backlash from many state governments, who argue that daily fantasy sports services are illegal online gambling. Currently, online sports gambling is illegal in every state except Nevada, Delaware, Montana, and Oregon. However, DraftKings and FanDuel have countered that their industry is distinct from other types of gambling because it is a “game of skill” that reflects knowledge of participants, is not dependent solely on the outcome of any single sporting event, and is not predominantly determined by chance. The ambiguity over the status of the industry has culminated in a high-stakes consolidated court case in Massachusetts, and the holding in that case may determine the fate of daily fantasy sports in general, with billions of dollars on the line.
The first state to attack the status of daily fantasy sports was Nevada, whose Gaming Control Board issued a memoranda in October 2015 stating that daily fantasy sports providers were required to cease service until they obtained government-issued sports pool licenses. The next month, New York Attorney General Eric Schneiderman issued an injunction against the industry, claiming its services were illegal online sports wagering in a scathing 35-page report. By February 2016, several other states’ attorneys general issued statements of their own, including Illinois Attorney General Lisa Madigan, Texas Attorney General Ken Paxton, and Hawaii Attorney General Doug Chin. This string of rulings was considered to be a jeopardizing blow against providers of daily fantasy sports services, and momentum against the industry continues to grow.
In response to the backlash, DraftKings and FanDuel filed lawsuits against the various states, asking courts to determine the legality of the industry. In a statement made after Illinois’s attack on the industry, FanDuel asked for “clarity” from the courts and said that it “intend[s] to continue offering play … until there has been a decision from a court on our lawsuit.” DraftKings released a similar statement, saying that actions from attorneys general have “set off a chain of events that – if unchecked – will unjustly destroy a legitimate industry.” In response to the various lawsuits, the U.S. Judicial Panel on Multidistrict Litigation decided to centralize the DraftKings’ and FanDuel’s many lawsuits in the U.S. District Court of Massachusetts. What remains is a complicated case involving various claims and anti-gambling laws from multiple states.
Should daily fantasy sports be considered illegal online gambling? There does not appear to be a simple answer. The industry regularly points to the 2006 Unlawful Internet Gambling Enforcement Act (UIGEA), which exempted fantasy sports from gambling since it was a “game of skill” and not determined purely by chance. Though it is distinct from traditional fantasy sports league by abandoning the season-long format for shorter intervals of time and thus increasing the amount of chance needed to succeed, DraftKings and FanDuel argue that daily fantasy sports still requires skill and knowledge and therefore should be treated like traditional fantasy sports. Some states found this line of thinking to be convincing. For instance, Rhode Island Attorney General Peter Kilmartin applied the regularly-used “dominant factor” test, which weighs the amount of skill involved with the amount of chance necessary to win, and found that daily fantasy sports was predominantly skill-based and therefore legal under Rhode Island state law.
DraftKings and FanDuel have even gone as far as creating mathematically-intense simulations to support the idea that chance has little to do with strong performance in daily fantasy sports. The simulation logs win ratios and probabilities of success for service users, and according to a report from DraftKings, the results of the simulation show that it is “overwhelmingly unlikely that the performance of any exceptionally performing clients … could be due to chance.”
However, opponents of the services have argued that both DraftKings and FanDuel are relying on statistical data that can be easily manipulated, and that the companies’ actions seem to indicate that they view themselves as gambling entities. For instance, in internal documents produced by subpoena, DraftKings compares itself to the “online betting and casino market,” and a FanDuel document details how players can use a “Vegas line,” a common betting technique, to improve their odds of winning. Additionally, in the U.K., where sports gambling is legal and subject to regulation, both DraftKings and FanDuel applied for operating licenses from the U.K. Gambling Commission. Though both companies argue the licenses are simply safety precautions to guarantee they were following the rules, many of the companies’ corporate actions seem to raise doubts about the validity of the arguments they will likely make in the courtroom.
Ultimately, the final decision on the nature of daily fantasy sports will lie in the hands of courts. With strong arguments on both sides of the debate as well as variations in state anti-gambling laws, determining an outcome in this case may prove to be quite complicated, especially with billions of dollars and an entire industry on the line. The federal district court in Massachusetts will have to figure out how to balance state and private interests without stifling innovation in the digital app economy. But no matter what the court decides, this is likely just the beginning of these companies’ attempts to hold on to their foothold in the online economy. Followers of the ongoing legal battle should expect more challenges, increased lobbying efforts, and legislative efforts to clarify how states will ultimately regulate daily fantasy sports. Either way, we can expect an exciting finish.
Eddie Guers is a J.D. candidate, 2017, at NYU School of Law.