Reality Check: Fantasy Sports Sites Facing Serious New Challenges

by Buchanan Ingersoll & Rooney PC
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Fantasy sports, especially Daily fantasy sports (“DFS”), are big business in the United States. Two DFS sites in particular, FanDuel and DraftKings, are the most dominant players in this industry (they control 95% of the DFS market in the US). These two companies alone each have an estimated value of $1 billion. Initially started on a small-scale as start-up companies, both FanDuel and DraftKings received venture capital-backed investments, followed by investments by other investment firms, sports broadcasters, leagues, and team owners.

For those unfamiliar with fantasy sports in general, players, for an entrance fee, put together teams of professional or college sports players (these sites offer fantasy games for pro football, MLB baseball, NBA basketball, NHL hockey, pro golf, NASCAR, MMA, pro soccer, college football & college basketball) to form a “fantasy team” to compete against other players’ fantasy teams. The athletes’ actual performance in their respective games earn the players points toward their fantasy team. Depending on the dollar amount of the entrance fee, a player can win either a few dollars or thousands and even millions. DFS games are conducted over short-term periods, such as a week or single day of competition, as opposed to those that are played across an entire season. In these competitions (typically referred to as a “contest”) users pay an entry fee in order to participate, and build a team of players in a certain sport while complying with a salary cap. Depending on their overall performance, players may win a share of a pre-determined pot. The entry fees paid to the sites help fund prizes, while a portion of the entry fee goes to the site operator as “rake-off revenue.”

The DFS industry has always faced questions as to whether such games are gambling prohibited by state and Federal law. Now, it is facing three critical issues: 1) rulings by certain jurisdictions that such fantasy games actually constitute illegal gambling; 2) allegations of “insider knowledge” by employees of the two sites who have “rigged” the outcome of the games; and 3) claims that these DFS sites are unlawfully exploiting the names and likenesses of the players involved. Each of these issues could have a major impact on the ability of DFS sites to continue operating in the same fashion.

Before the emergence of these DFS sites, groups of sports fans often would create and participate in season-long fantasy leagues, during which they “managed” their rosters of fantasy players over the course of a season. Of course, these types of fantasy leagues still widely exist and are even “managed” on behalf of the fantasy leagues by large sports sites such as ESPN.com and CBSSports.com. However, in those situations, the sites are only paid a fixed administrative fee (if anything) for the support they provide to fantasy leagues to operate on their own. The DFS sites are another thing altogether—they derive huge profits from taking a “house share” of the monies paid by the fantasy players.

Is this illegal gambling? While the basic rules for fantasy sports apply to both season-long leagues and the DFS games, some states have flat-out ruled them to be illegal gambling. These states are Arizona, Iowa, Louisiana, Montana, Nevada (no surprise there—protecting their own gambling turf) and Washington . Residents of those states may not participate in DFS games even if they happen to access those sites from a location outside of their own state. The reason why these states have barred DFS games as “gambling” is that the games are viewed by those states as allowing players to make “proposition wagers” on the performance of individual athletes in specific games and not just managing their player rosters on a weekly basis. There is no uniform definition of illegal gambling in every state and under Federal law. A key issue is whether or not these games are viewed as games of skill versus games of chance. Some states’ gambling laws consider any game that has any meaningful component of chance as being enough to constitute gambling, while other states require that the game be predominantly one of chance in order to constitute gambling.

As far as US Federal law is concerned, the United States’ Unlawful Internet Gambling Enforcement Act, which does not consider fantasy sports games to be a form of unlawful internet wagering, has often been cited by the DFS operators as evidence that daily fantasy games are legal. However, the law only prohibits the transfer of funds related to online gambling (such as use of credit card accounts), and does not actually affect any other Federal or state laws addressing gambling. So, even Federal law is not entirely clear. While the Federal Wire Act prohibits interstate sports wagering and the Illegal Gambling Business Act prohibits the interstate conduct of wagering activity prohibited under state law, that begs the question as to what is prohibited wagering under state law.   Because there is no uniform state law in this area, this has led to varying rulings on DFS games. (The law is clear in Canada, where DFS games are considered gambling, as the Criminal Code of Canada also uses an “any chance” test in regards to classifying games of chance.)

The latest state to enter the fray is New York, and it has done so on multiple fronts. On November 10, 2015, New York attorney general Eric Schneiderman issued a cease-and-desist order to DraftKings and FanDuel, stating that DFS is illegal under New York law, and ordering the two services to cease offering such services to New York residents. New York is a state whose gambling law only requires that the element of chance is “material” rather than “predominant.” Schneiderman’s cease and desist order stated that daily fantasy sports “wagers” represented “a wager on a ‘contest of chance’ where winning or losing depends on numerous elements of chance to a ‘material degree’.” He characterized the industry as being a “massive, multi-billion-dollar scheme intended to evade the law and fleece sports fans across the country,” causing the “same public health and economic problems associated with gambling, particularly for populations prone to gambling addiction and individuals who are unprepared to sustain losses, lured by the promise of easy money.” In response to this New York AG ruling, both DraftKings and FanDuel filed lawsuits against the state of New York, alleging that: 1) their games were ones of skill; 2) they had been denied due process by the AG; 3) alleging that the AG did not have the authority to issue the cease and desist order; and 4) that the AG had wrongfully interfered with the legitimate contractual relationships between the sites and their payment processors. It appears that this one is going to have to be decided by the New York courts. In direct opposition to the AG’s position, a New York state senator has introduced a bill into the New York legislature that would explicitly classify DFS as a game of skill and not gambling.

Even in those states where DFS games are considered to be games of skill and, thus, legal, they are facing increasing scrutiny. Last month, it was alleged that a DraftKings employee had used inside information to win $350,000 on FanDuel. The New York AG promptly announced thereafter that he had opened an investigation into the two services and the allegations that employees from the two services were using this information to win prizes from each other. As a result of the investigation (and no doubt the awful PR generated by the revelation of the activities of the services’ employees), both FanDuel and DraftKings have since barred their employees from participating in daily fantasy games. In addition, multiple class-action lawsuits have been filed against both DraftKings and FanDuel, alleging charges such as fraud, racketeering, negligence, and false advertising as a result of this employee “inside information” scandal.

Another threat to these services has emerged in the past month. I previously have written about former collegiate basketball player Ed O’Bannon’s class-action lawsuit again the NCAA and the video game companies arising out of the use of players’ names, likenesses and images in video games [http://www.gurwinskeyboard.com/video-game-battle-ground-fight-right-publicity/]. The crux of that case is that the unauthorized use of such names, likenesses and images violates the players’ rights of publicity (a type of intellectual property right that is recognized in many, but not all, states).

On October 30, 2015, Pierre Garçon, a wide receiver for the NFL’s Washington Redskins, filed a class-action lawsuit against FanDuel, arguing that the service had exploited his name and likeness (i.e., his right of publicity) without permission as part of its services and marketing. FanDuel has marketing agreements with 15 NFL teams, including Washington, which was one of the first teams to sign on. The National Football League Players Association (the players’ union that has the right to grant licenses for the use of player images as a group, as opposed to individual deals) has a licensing deal with DraftKings but not FanDuel. In response, FanDuel has argued that its use of his likeness fell within existing case law surrounding the use of player names and statistics in fantasy sports games. If this case goes the way of the O’Bannon case, these services may find themselves forced to pay right of publicity licensing fees to the players who are the subject of their DFS games.

One thing is certain: DFS games have become huge business in the United States and, as a result, are facing ever increasing scrutiny. I will post updates to this blawg as developments in this area warrant.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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