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Gambling and the Law: Are daily fantasy sports legal?

19 May 2015

Technology is speeding up changes in the world of gaming. It took almost two centuries for poker to evolve from Straight Poker – five paper cards dealt face down with no draw – to Internet Hold ‘Em linking players using computers in different states and even on different continents. Decades passed before three-reel mechanical slot machines were replaced by electro-mechanical gaming devices; then decades more before those made way for 100% computerized video games with virtual reels, and online slots with no physical cabinets at all. Even bingo took years to evolve from a game played with beans on hard cardboard cards, to printed papers daubed with ink markers, to linked machines that are almost indistinguishable from slot machines.

There has always been a latest new thing in gaming. But those are coming faster and faster, usually in completely unpredictable ways. Internet gambling, especially online poker is still being fought over in state legislatures. But the real growth area, a couple of years ago, was social casino games. Today it is daily fantasy sports.

The introduction of daily games has been as big a boost to the world of fantasy sports betting as the invention of the under-the-table camera was to T.V. poker.

But, is daily fantasy legal?

The first thing to know about the law of fantasy is that the federal Unlawful Internet Gambling Enforcement Act did not make fantasy sports betting legal. I have been on three or four panels in the last five or six months discussing daily fantasy games. Many operators and proponents seem to truly believe that the UIGEA creates a safe harbor carve out for all fantasy sports. The industry leader FanDuel declares:

Fantasy sports is considered a game of skill and received a specific exemption from the 2006 Unlawful Internet Gambling Enforcement Act (UIGEA 2006). FanDuel uses exactly the same rules as any other season-long fantasy sports format, the only difference is that our games last only one day or one week.

Sites like FanDuel point to the following language from the UIGEA:
§§ 5362. Definitions
In this subchapter:
(1) BET OR WAGER.--The term 'bet or wager'--
….
(E) does not include--
….
(ix) participation in any fantasy or simulation sports game or educational game or contest in which (if the game or contest involves a team or teams) no fantasy or simulation sports team is based on the current membership of an actual team that is a member of an amateur or professional sports organization . . . and that meets the following conditions:
(I) All prizes and awards offered to winning participants are established and made known to the participants in advance of the game or contest and their value is not determined by the number of participants or the amount of any fees paid by those participants.
(II) All winning outcomes reflect the relative knowledge and skill of the participants and are determined predominantly by accumulated statistical results of the performance of individuals (athletes in the case of sports events) in multiple real-world sporting or other events.
(III) No winning outcome is based--
(aa) on the score, point-spread, or any performance or performances of any single real-world team or any combination of such teams; or
(bb) solely on any single performance of an individual athlete in any single real-world sporting or other event.

Note how easy it is for operators to comply with these provisions. Fantasy sports is played by fans who pay a fee to enter and compete against each other for valuable prizes. Players create and manage their “teams,” made up of real-world athletes. But the athletes are not normally actually competing against each other in real-world games. Rather, the fantasy sports team consists of athletes from different real-world teams and events. The only thing that is real is the statistics generated by the individual athletes. Computers combine the information about real-world performances to determine which fantasy team has won.

Under the UIGEA, a fantasy team cannot be composed entirely of the players of a real-world team. But there is nothing preventing all players but one of a fantasy football team from being from the same real-world team. There is no limit on the cost of entering, the size of the prizes or, most significantly, the length of time involved.

Until recently, fantasy sports was season-long. But this appealed mostly to only the most devoted of sports fans, who follow a sport over weeks or months. Technology has shortened our attention spans. And the brilliant idea that a fantasy league could be started and finished on the same day, using statistics generated by real-world contests on that day, led to an explosion of interest in fantasy sports.

So, the UIGEA does permit, under its own terms, daily fantasy sports. But, the argument that the UIGEA preempts all other federal and state anti-gambling laws might be defensible, except for the following from the very opening section of the UIGEA:

RULE OF CONSTRUCTION.--No provision of this subchapter shall be construed as altering, limiting, or extending any Federal or State law or Tribal-State compact prohibiting, permitting, or regulating gambling within the United States.

It is hard to imagine a clearer express statement that this Act was not intended to change any other anti-gambling law.

Admittedly, the UIGEA was rammed through without any hearings or even proof-reading, so it is sometimes difficult to know what Congress intended. But the bill itself is labeled an “Enforcement Act.” By its own language, the UIGEA made only two changes in the law of Internet gaming. It created a new federal crime of receiving money by an operator of an illegal gambling website. And it ordered federal regulators to enact regulations to identify and block money transfers by bettors in the United States to those outlaw gambling sites. The UIGEA is designed to go after online gaming that is already illegal under some other federal or state anti-gambling law; and, today, no serious legal commentator, regulator or enforcement agent would argue otherwise.

Of course, the UIGEA has had a real-world impact far beyond its actual, limited changes in the law. Within hours of it being passed by Congress, long before it was signed into law by President George W. Bush, PartyGaming, then the largest publicly traded Internet poker company, announced that it was pulling out of the American market. This was apparently based on a misunderstanding of the bill: the frankly bizarre belief that before the UIGEA only online bettors were violating state anti-gambling laws and now operators could be prosecuted as well.

Whatever the reason, the exist of this giant online gaming operator from the U.S. scared every other publicly traded Internet gaming company to also stop taking money bets from America.

The passage of the UIGEA had many other impacts, both large and small. The one most relevant for the question of daily sports bets was the acceptance of UIGEA’s “carve out” listed above by state and local police and prosecutors.

Fantasy sports has always been problematic for law enforcement. Sports betting is one of the few forms of gaming that clearly is illegal under just about every anti-gambling law. Illegal bookies have been using telephones since they were first invented to take bets on horse races and sports events. In fact, the first prohibitions on remote wagering were enacted before the phone was invented, because criminals were taking bets by telegraph.

But everyone charged with enforcing the laws against gambling also knows that contests of skill are almost never illegal. Gambling requires prize, consideration and chance. If any one of those elements are absent the activity can still be regulated, but not under the anti-gambling laws.

A game whose outcome is determined entirely by the skill of the players is simply not gambling. The prize of value might still be cash. But the consideration is no longer considered a bet. Paying to play a contest of skill is an entry fee, not a wager.

Bowling tournaments, for example, that charge entry fees and offer cash prizes might still be regulated or even outlawed. But the organizer would not be charged with running a lottery, operating a casino or being a bookmaker.

Agents of law enforcement have always been wary of fantasy sports. The reasons are practical as well as legal. A season-long fantasy sports league would seem to require enough skill to take the game out of the prohibition against sports betting. More importantly, nobody likes to look like a fool, especially if the mass media may become involved. There are few prosecutors who would care to go in front of a jury to prosecute a months-long fantasy sports contest. Just describing how the game operates would be so complicated to the layman that the battle to get that juror to declare the operation predominantly chance would be already half lost.

But a fantasy game that starts and ends in a single day and involves as few as two real-world sports events is another matter. The game is easy to explain and may even look like sports betting. Some of the skill elements of the season-long fantasy leagues are missing. For example, the “manager” of a daily fantasy team has no opportunity to make trades. Fortuitous events, like injuries and weather, are much more likely to not only occur, but to determine which fantasy team wins.

There are no court cases yet on whether a daily fantasy game has enough skill elements remaining to keep it out of the category of sports betting. The question will be determined entirely by state law. Which means it is very possible that courts in different states will come to different conclusions as to whether daily fantasy is legal.

States are free to decide their own public policies toward gambling. Utah and Nevada share a common border, yet their state legislatures have come to completely opposite decisions on whether gambling should be legal.

This is already beginning to happen with fantasy sports. Although the general test for gambling is chance, prize and consideration, states and other jurisdictions are free to create other tests, or outlaw or legalize specific activities. FanDuel every state and decided to prohibit residents of Arizona, Iowa, Louisiana, Montana and Washington from participating in fantasy games for money. Maryland, on the other hand, expressly legalized fantasy sports in 2012. It did this by enacting a statute that tracked the language of the UIGEA on fantasy games and then simply declared those games not to be gambling.

Although a few state legislatures are considering expressly outlawing fantasy sports, the trend is definitely in the opposite direction. Besides the question of whether daily or even season-long fantasy competitions have enough skill elements to make them non-gambling, very powerful political players have entered the arena. The sports leagues, until recently consistently united in their opposition to sports betting, are very much in favor of fantasy sports, to the point where they are partnering and investing tens of millions of dollars in the companies that run the games. The reason is obvious: Fantasy players will continue to watch a game to the end, even if one team is wiping out the other, because they want to know how their individual fantasy team players do. More viewers mean more advertising revenue.

There may also be another, more subtle factor. Sports betting is here to stay, whatever federal or state laws are passed. The professional and collegiate teams and leagues are beginning to recognize that wagering on sports events has been and continues to be a significant factor in the popularity of athletic contests.

Fantasy sports is a way for the individuals and organizations that have said that they would never support sports betting to get many of the benefits without having to be openly hypocritical. And it doesn’t require them lobbying to repeal the very same anti-sports-betting laws that they worked so hard to have passed only a few years ago.

©Copyright 2015. Professor I Nelson Rose is recognized as one of the world’s leading authorities on gambling law and is a consultant and expert witness for governments and industry. His latest books, GAMING LAW IN A NUTSHELL, INTERNET GAMING LAW and GAMING LAW: CASES AND MATERIALS, are available through his website, www.GAMBLINGANDTHELAW.com.
Gambling and the Law: Are daily fantasy sports legal? is republished from Online.CasinoCity.com.
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Best of I. Nelson Rose
I. Nelson Rose

Professor I. Nelson Rose is an internationally known scholar, public speaker and writer and is recognized as one of the world's leading authorities on gambling law. A 1979 graduate of Harvard Law School, he is a tenured full Professor at Whittier Law School in Costa Mesa, California, where he teaches one of the first law school classes on gaming law.

Professor Rose is the author of more than 300 books, articles, book chapters columns. He is best known for his internationally syndicated column, "Gambling and the Law ®," and his landmark 1986 book by the same name. His most recent book is a collection of columns and analysis, co-authored with Bob Loeb, on Blackjack and the Law.

A consultant to governments and industry, Professor Rose has testified as an expert witness in administrative, civil and criminal cases in the U.S., Australia and New Zealand, and has acted as a consultant to major law firms, international corporations, licensed casinos, players, Indian tribes, and local, state and national governments, including Arizona, California, Florida, Illinois, Michigan, New Jersey, Texas and the federal governments of Canada and the United States.

With the rising interest in gambling throughout the world, Professor Rose has spoken before such diverse groups as the F.B.I., National Conference of State Legislatures, Congress of State Lotteries of Europe, United States Conference of Mayors, and the National Academy of Sciences. He has presented scholarly papers on gambling in Nevada, New Jersey, Puerto Rico, England, Australia, Antigua, Portugal, Italy, Argentina and the Czech Republic.

He is the author of Internet Gaming Law (1st & 2nd editions), Blackjack and the Law and Gaming Law: Cases and Materials.

I. Nelson Rose Websites:

www.gamblingandthelaw.com

Books by I. Nelson Rose:

Gambling and the Law

> More Books By I. Nelson Rose

I. Nelson Rose
Professor I. Nelson Rose is an internationally known scholar, public speaker and writer and is recognized as one of the world's leading authorities on gambling law. A 1979 graduate of Harvard Law School, he is a tenured full Professor at Whittier Law School in Costa Mesa, California, where he teaches one of the first law school classes on gaming law.

Professor Rose is the author of more than 300 books, articles, book chapters columns. He is best known for his internationally syndicated column, "Gambling and the Law ®," and his landmark 1986 book by the same name. His most recent book is a collection of columns and analysis, co-authored with Bob Loeb, on Blackjack and the Law.

A consultant to governments and industry, Professor Rose has testified as an expert witness in administrative, civil and criminal cases in the U.S., Australia and New Zealand, and has acted as a consultant to major law firms, international corporations, licensed casinos, players, Indian tribes, and local, state and national governments, including Arizona, California, Florida, Illinois, Michigan, New Jersey, Texas and the federal governments of Canada and the United States.

With the rising interest in gambling throughout the world, Professor Rose has spoken before such diverse groups as the F.B.I., National Conference of State Legislatures, Congress of State Lotteries of Europe, United States Conference of Mayors, and the National Academy of Sciences. He has presented scholarly papers on gambling in Nevada, New Jersey, Puerto Rico, England, Australia, Antigua, Portugal, Italy, Argentina and the Czech Republic.

He is the author of Internet Gaming Law (1st & 2nd editions), Blackjack and the Law and Gaming Law: Cases and Materials.

I. Nelson Rose Websites:

www.gamblingandthelaw.com

Books by I. Nelson Rose:

> More Books By I. Nelson Rose