Are daily fantasy sports in danger of being illegal?

Business, Money, News

Win $1.2 million with a two-dollar bet playing fantasy football? That sounds like gambling to anyone with half a brain. Even to a congressman.

Fantasy Sports have always walked a fine line between gambling and a harmless game you play with your buddies. With 56.8 million people playing in the United States and Canada, it has steadily grown into a big business for everyone from ESPN to entrepreneurs creating small businesses around “expert advice.” Everything was humming along quite nicely until this year, when two companies went big on “daily” fantasy games.

During the first week of football season, DraftKings and FanDuel spent a combined $31 million on ads targeting new users with stories of those who’ve won big money sitting in their jammies watching football. People started taking notice, including those with the power to pull back the curtain on how the games operate.

On September 14, U.S. Congressman Frank Pallone of New Jersey requested a hearing regarding daily fantasy sports games and their legal status. Pallone, who’s in his fourteenth term, is a ranking member in the Energy & Commerce Committee. Bad news for daily fantasy, right? Maybe not. Pallone doesn’t exactly seem to be on any kind of warpath, commenting, “The legal landscape governing these activities remains murky and should be reviewed.”

Still, there are big questions swirling around how daily fantasy is different, from a legal standpoint, than good ol’ fashion fantasy football that fans have been playing for a few decades.

Chance vs. skill

Let’s start at the beginning, looking at why any fantasy sports are legal. The industry itself falls under the federal Unlawful Internet Gambling Enforcement Act.  As covered by our own Stephanie Reid here at the Naked Law Blog, fantasy sports have to abide by three parts of the act:

  1. Available prizes are established and made known in advance of the game
  2. Winning outcomes “reflect the relative knowledge” of the participant
  3. No successful outcome is based on the score or point-spread of an actual game or solely on the performance of a single athlete

So does daily fantasy differ materially from those guidelines?

Both daily and traditional fantasy sports involve assembling a make-believe team, composed of real NFL players. In traditional fantasy leagues, the performance of each team is based on its how well its fantasy roster performs in real games over the course of the NFL schedule. The daily fantasy games, by contrast, determine winners based on the performance of the fantasy lineup players on a single day’s NFL games.

So the question, per the whole “reflect the relative knowledge” thing, is how much of the game comes down to chance versus skill.  While season-long fantasy games arguably require that winners display a modicum of skill, the outcome of the daily games seem much more susceptible to chance. Some critics have pointed out that the legality of the daily fantasy games could open the floodgates for legalization of online poker and other games that today fall just on the wrong side of the federal internet gaming laws.

Blame ESPN?

Prior to this season, the legality of daily fantasy football wasn’t a major issue, because the daily games were for the hardcore player and not the average fan. That changed with DraftKings’s big partnership with ESPN.

DraftKings is sponsoring ESPN’s fantasy football in a deal that’s worth a reported $250 million over the next two years. The DraftKings logo is plastered all over ESPN’s website, TV studio, and anything else you can think of. Fans accuse ESPN of selling out for the almighty dollar; Matthew Berry, ESPN “fantasy expert,” even addressed this topic in the opinion part of his weekly Love/Hate column on September 17.

Federal law aside, a handful of states have already restricted or outright banned them, most recently New York. Meanwhile, politicians like Pallone and Governor Chris Christie, along with NBA commissioner Adam Silver, are pushing for the legalization of more traditional sports betting. As Pallone has 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?”

And when 44 states allow legalized betting on lotteries—a matter of chance if there ever was one—it’s hard for state governments to stake out the high ground on prohibiting daily fantasy football.

So the game is afoot…for now.

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