BALANCING LIABILITIES IN AUTONOMOUS VEHICLE ACCIDENTS: DO NOT JUST BLAME THE GHOST INSIDE

By: Sean Kim*

I. Introduction

Despite its reemergence in the last five years, the concept of autonomous vehicles existed as early as the 1920s.[1]  While the early concept largely focused on speed and collision prevention systems provided by automated highway systems, or “smart roads,”[2] the advent of computers and artificial intelligence has shifted the focus from “smart roads” to “smart cars.”[3]  This shift has led to the continued development of vision-based systems of vehicle guidance.[4]  By 2007, all entrants in the United States Defense Advanced Research Projects Administration (DARPA) competition were successful in operating their autonomous vehicles in an urban setting that mimicked a city environment.[5]  As technology becomes more sophisticated, more automobile manufacturers and leading tech companies, such as Google and Apple, are cooperating to develop autonomous vehicles.[6]

As the number of autonomous vehicles on the road increases, ­a new genre of tort law is introduced: determining and balancing liability between drivers and manufacturers in autonomous vehicle accidents.[7]  While the general public expects autonomous vehicles to offer safer, hands-free driving experiences and to completely replace human interaction with motor vehicles, the need for consumer—or driver— education or behind-the-wheel training still exists.[8]

Section II provides an overview of negligence and strict liability under products liability law, as well as an overview of the types of automobile defects relevant to the analysis.  For the sake of this Note, breach of warranty will not be addressed.  Section III discusses recent developments of autonomous vehicle news and different state laws regulating autonomous vehicles.  Section IV recommends increased federal regulation for autonomous vehicles and heightened standards for vehicle manufacturers and drivers alike.

II. Background

A. Introduction to Products Liability

1. Negligence

Negligence is generally defined as “the failure to exercise reasonable care” under the circumstances.[9]  There are five elements required to establish a prima facie case for negligence: duty, breach of duty, “but-for” causation, proximate causation, and physical harm.[10]

Duty provides a maximum threshold to which people may be held accountable for their actions that cause harm to others.[11]  Without duty, one cannot be found liable for negligence.[12]  Breach of duty is often described as an “act or omission” that unreasonably affects the rights of others.[13]  While breach of duty implies a standard of reasonable care that people ought to follow to prevent undue harm to others,[14] the standard varies in different situations.[15]

The third and fourth elements of negligence are “but-for” and proximate causation.[16]  A causal relationship—both “but-for” and proximate—between a defendant’s breach of duty and the plaintiff’s harm must be established for liability to attach.[17]  “But-for” causation asks whether harm to the plaintiff would have happened were it not for defendant’s negligence,[18] while proximate causation relates to the closeness or remoteness of the defendant’s breach of duty to the plaintiff’s harm.[19]  The more remote a defendant’s action from a plaintiff’s harm, the less likely a court will find the defendant’s action a proximate cause of the plaintiff’s harm.[20]  The last element of negligence is actual harm.[21]  Without actual harm, no liability can be assigned to the defendant.[22]

2. Strict Liability

The doctrine of strict liability “[e]nsure[s] that the costs of injuries resulting from defective products are borne by the manufacturers that put such products on the market rather than by the injured persons who are powerless to protect themselves.”[23]  Strict liability attaches to a seller of defective or unreasonably dangerous products if the product causes harm to the user or consumer, or to his property, and if (a) the seller is engaged in the business of selling such a product, and (b) the product is expected to and does reach the consumer without substantial change in its condition.[24]  Although state courts apply different interpretations for the scope of strict liability,[25] almost all states have adopted the language of Section 402A of the Restatement in their rules.[26]

B. Types of Defects in Automobile Vehicles

1. Manufacture Defects

A manufacturing defect is a mistake in the process of building a product that would be safe if it were built as designed.[27]  A manufacturer may be held strictly liable for dangerous manufacturing defects, even if it has exercised “all possible care” in manufacturing the product.[28]  A plaintiff must establish that “the product does not conform to the specifications, regardless of whether there was negligence in the manufacturing process” to prevail in a products liability litigation.[29]  However, some courts hesitate to attach strict liability to software under the manufacturing defect doctrine.[30]

Another method available to consumers is the malfunction doctrine, a variation of the manufacturing defect doctrine.[31]  The malfunction doctrine allows a plaintiff to show a manufacturing defect by inferring product defect from “circumstantial evidence that (1) the product malfunctioned, (2) the malfunction occurred during proper use, and (3) the product had not been altered or misused in a manner that probably caused the malfunction.”[32]

2. Design Defects

A design defect is a defect in intended product design that makes a product harmful or dangerous.[33]  Many states assign strict liability to manufacturers for manufacturing design defects.[34]  The State of California uses two tests—the consumer expectation test and the risk/benefit test—to establish design defects­­[35] and to hold sellers and manufacturers strictly liable.[36]  Under the consumer expectation test, a plaintiff must prove that a defendant’s defective product did not perform as safely as an ordinary consumer would have expected it to perform when used or misused in an intended or reasonably foreseeable way, and that the product’s failure to perform safely was a substantial factor in causing the plaintiff’s harm.[37]  As for the risk/benefit test, strict liability attaches to a manufacturer when two conditions are satisfied: (1) the manufacturer’s product design was a substantial factor in causing harm to the plaintiff and (2) the manufacturer fails to prove that the benefits of the product’s challenged design outweigh the risks of such design.[38]

3. Failure to Warn

Manufactures may be held liable for injuries that are attributable to the relevant risks of their products.[39]  They are required to disclose and warn consumers of the foreseeable risks of using their products, and they can be liable for any injury or damage attributable to the lack of information disclosed.[40]  In California, for example, failure to warn (or inadequate warning) is a sufficient ground to hold manufacturers and sellers strictly liable.[41]  In order to minimize potential liability stemming from failure to warn, manufacturers err on the safe side by providing copious disclaimers and warnings.[42]

For example, Tesla’s new autonomous vehicle technology manual may have a disclaimer asking drivers to pay close attention to the traffic when using its autonomous vehicle technology.  Without a disclaimer warning drivers to pay close attention to the traffic while using the autonomous technology, Tesla could be held liable for any accident that may be attributable to this lack of disclaimer.[43]  In addition to providing adequate warning at the time of sale, manufacturers have post-sale responsibilities to provide warnings for newly discovered facts pertinent to the safety of their products.[44]  Although this post-sale responsibility is widely recognized by manufacturers, the “common law legal framework for addressing liability when manufacturers fail to do so is less well established.”[45]

III. Analysis

A. State Regulations for Autonomous Vehicle Drivers

As autonomous vehicle technology becomes more available to the public, a new standard may be required for drivers that utilize this technology.  Negligence is based on a standard that asks what a reasonably prudent person would do in a given, particular situation.[46]  In light of the perceived benefit of autonomous vehicle technology, however, the reasonable driver standard may shift, placing a higher burden on the vehicle and software manufacturers.

Basic reasonableness standards for autonomous vehicle drivers can be found in different state statutes.  For example, Nevada statute Sections 482A.070, outlining requirements for a human operator for highway testing of an autonomous vehicle,[47] and 482A.080, outlining equipment requirements for autonomous vehicles,[48] provide a basic requirement for autonomous vehicle drivers.  California, Florida, and the District of Columbia outline similar requirements for drivers and autonomous vehicles.[49]

These statutes generally include the following requirements: First, drivers must be seated in a position to allow them to immediately take control of the vehicle, i.e., being able to access the means to engage or disengage the technology.  Second, drivers must be able to safely monitor the autonomous vehicle operation.  Monitoring vehicle operation consists of monitoring the dashboard and hearing or seeing an alert indicating a failure of the autonomous system, or any other malfunction affecting the autonomous vehicle technology.  Third, drivers must be capable of taking control of the vehicle when necessary.  This requires that drivers not be in various physical or mental states—falling asleep behind the wheel or driving under the influence—that renders them incapable of manually driving the vehicle legally.

B. State Regulations for Autonomous Vehicles
1. Autonomous Vehicle Requirements

In Nevada, autonomous vehicles are required to provide a visual indication to its drivers when the autonomous technology has been engaged/disengaged, and be equipped with a means to alert the driver that the autonomous technology is unable to operate the vehicle safely.[50]  Moreover, Nevada statute requires that a driver of an autonomous vehicle be actively engaged while driving.[51]  For autonomous vehicle equipment and functionality, California, Nevada, Michigan, and the District of Columbia all require the vehicles to meet federal standards and regulations for motor vehicles and comply with applicable state traffic and motor vehicle laws.[52]  Furthermore, they require the vehicles to have safety mechanisms for engaging/disengaging the technology, visual indicators inside the vehicle that show when the vehicle is in autonomous mode, and a means of alerting the operator of a technology failure.[53]

2. Data Collecting and Reporting Requirements

One noticeable discrepancy between the aforementioned states is the requirement of reporting all disengagements of autonomous mode, near misses, and crashes.[54]  While California requires manufacturers to collect and report data related to accidents[55] or disengagement from autonomous mode by the test driver resulting from a failure of the autonomous technology,[56] Nevada only requires manufacturers to report accidents or traffic violations occurring during autonomous vehicle testing.[57]  Neither Florida nor the District of Columbia, on the other hand, has data collecting and reporting requirements for autonomous vehicle testing or operation.

3. Manufacturers’ Liability and Its Scope

For manufacturers, Nevada limits a manufacturer’s liability to accidents or injuries caused by defects that were present in the vehicle as originally manufactured.[58]  It thus shields manufacturers from potential liabilities from accidents or injuries caused by defects originating from any conversion or installation necessary to convert a regular vehicle into an autonomous vehicle.[59]  Michigan and the District of Columbia followed suit with Nevada’s approach.[60]  This approach to manufacturers’ liability seems fair and reasonable, and it closely follows the Restatement’s approach that if there were substantial changes in a product’s original condition, the manufacturer of the product would not be held liable.[61]

However, some jurisdictions have adopted a different approach.[62]  In 1996, an Illinois court wrote that “[w]here an unreasonably dangerous condition is caused by a modification to the product after it leaves the manufacturer’s control, the manufacturer is not liable unless the modification was reasonably foreseeable.”[63]  The “reasonably foreseeable” approach broadens the scope of potential liability of the automobile manufacturers because they could be held liable for damages or injuries caused by third-party modifications if these modifications were reasonably foreseeable to the manufacturer.[64]  On the other hand, California code does not even mention manufacturers’ liability, failing to address and balance liabilities between vehicle manufacturers and third­ parties that make modifications to manufactured vehicles.[65]

C. Determining a Standard for Manufacturers Liability

Further development and public use of autonomous vehicle technology may challenge the adequacy of current product liability law.  It has been suggested that the advent of autonomous vehicles will result in an imbalance of liability between autonomous vehicle manufacturers and consumers.[66]  After a much-publicized fatal accident that involved a driver with his Tesla Model S electric sedan in autonomous driving mode, federal regulators opened a formal investigation into the accident.[67]  Although Tesla, with possible recall of its vehicles looming (depending on U.S. National Highway Traffic Safety Administration (NHTSA) findings), escaped from the aforementioned accident unscathed, the accident nevertheless highlighted the need for manufacturers to eliminate any software and/or hardware defects and to provide all required information to drivers and vehicle owners.[68]

The Restatement (Third) of Torts recognized that the seller’s duty to warn of product-related defects after the point of sale is “often daunting.”[69]  Continued technological developments, such as on-board sensors and driver assistance systems—adaptive cruise control, automated emergency braking, and pedestrian detection[70]—make automakers more vulnerable to negligence and strict liability.[71]  This increase in liability, so-called “proximity-driven liability,” resulting from increased proximity between drivers and automobiles, may run against the spirit of the doctrine of strict liability, which is to safeguard the general public from defective products by increasing liability of the manufacturer—the only party able to rectify the defect and prevent public loss.[72]

The purpose of autonomous vehicle technology is to make the vehicle safe for consumers.[73]  Knowing that software is never perfect, however, it is unfair to place a higher burden of liability on manufacturers that aim to make driving easier and safer for the general public.  Barring specific instances in which software failure or malfunction is the sole cause of an accident, autonomous vehicle operators should also shoulder the responsibility of being safe operators.  Nevertheless, vehicle manufacturers should shoulder any liability stemming from defects of its hardware and/or software, regardless of whether it was negligent.

IV. Recommendation

A. Standards for Manufacturers and Drivers

Courts have generally refused to apply the doctrine of strict liability to software failures because of the notion that software cannot be perfect and error-free.[74]  While understandable, strict liability should be applied to lessen the burden borne by the public—the burden of potential dangers and both the economic and social costs associated with automotive accidents.

Manufacturers and developers are in a far better position to prevent and mitigate software failures or defects.  Furthermore, increasingly sophisticated marketing of autonomous vehicles and the autonomous vehicle technology makes it more difficult for the consumers to see the risk behind the technology.[75]  Moreover, complicated chains of supply of parts and distribution of autonomous vehicles make it that much more difficult for consumers to pinpoint the origin of the defect in a manufacturer’s product.[76]  Some autonomous vehicle manufacturers such as Google and Mercedes-Benz have indicated that they will take full responsibility of any accidents caused by failures of their autonomous vehicle software.[77]

Moreover, courts should apply the objective reasonable-person standard to autonomous vehicle software, which should consider the following, non-exhaustive factors in determining whether a software was defective: (1) total utility, or benefit, to the drivers and others, (2) total amount of risk, or harm, to the driver and others, (3) the likelihood of the risk actually causing harm to others, and (4) any existing, reasonable alternatives of lesser risk and the costs of those alternatives.[78]  This standard should allow courts to determine whether the software made a reasonable—as opposed to correct—decision, eliminating potential ethical dilemmas from the liability calculus. [79]  Although the reasonable-person standard lacks certainty,[80] courts, nevertheless, have been successfully applying it to many tort cases, and thus should be able to determine whether autonomous vehicle software has acted reasonably according to the standard.

As autonomous vehicle technology becomes more advanced and ready for public use, autonomous vehicle drivers may become less responsible on the road, creating a potential imbalance of liability between manufacturers and consumers.[81]  Courts should apply a higher standard to autonomous vehicle drivers involved in an automobile accident while using autonomous vehicle technology.  This will require the courts to determine whether drivers of autonomous vehicles were driving, or monitoring their autonomous vehicles in a reasonable way.  Despite possible concerns about uncertainty and the unpredictable nature of the reasonable-person standard, its application would not be difficult for the courts since they have been more than capable of determining whether one has acted reasonably or not in a given situation.

B. Federal Regulation for Autonomous Vehicle Technology

Congress should enact a law regulating autonomous vehicle operations, especially to require sensors and software functionality, including parameters that govern and influence autonomous vehicle software’s decision making.  The United States Department of Transportation (USDOT) already has extensive safety standards and regulations provided by NHTSA for regular vehicles.[82]  As evidenced in numerous state laws, bills, and regulations on autonomous vehicles, regulations and requirements for the operation of autonomous vehicles are scant and general at best.[83]  On the other hand, for aircrafts, the Code of Federal Regulations (CFR) and the Federal Aviation Administration (FAA) have extensive requirements and regulations for flight guidance systems.[84]

An example of a possible federal regulation on autonomous vehicles may be monitoring and recording autonomous vehicle and driver activities for a specified time period before an accident.  The recorded vehicle and driver activities would greatly help courts determine whether the driver was monitoring his or her autonomous vehicle operation in a reasonable manner.  Furthermore, the government should regulate technical parameters such as sensor sensitivity, radar range, and software processing speed, and delineate what constitutes a substantial change, or material modification, to autonomous vehicles and autonomous vehicle software.  Unified quality standards for autonomous vehicle parts and sensors would provide clarity and information to consumers and greater control and guidance on autonomous vehicle performance, safety, installation, modification, and testing standards.

V. Conclusion

Autonomous vehicle technology is no longer a product of science fiction.  Google’s self-driving vehicles have driven over two million miles so far,[85] and many Tesla drivers are already taking advantage of Tesla’s autonomous vehicle software.[86]  However, the technology is far from perfect, and there are scenarios that are beyond technology’s current capabilities to handle.[87]  In order to protect the public from accidents caused by autonomous vehicle software defects or malfunctions, standards for autonomous vehicle manufacturers should be heightened.  Likewise, in order to protect the public from accidents caused by negligent drivers using this technology, reasonableness standards for these drivers should likewise be heightened.[88]

In addition, a federal department such as the Department of Transportation, or an agency such as NHTSA, should regulate autonomous vehicle operation, including sensor and radar operations, software controls and parameters, vehicle inspection guidelines for manufacturers and third parties, and operation manuals for autonomous vehicle drivers.  Centralized federal regulation would provide concrete guidelines not only for the states but also for the vehicle manufacturers and the public alike.  The technology is already vastly ahead of the regulation, and there is some serious work to do for our state and federal legislatures.


* Juris Doctor, University of Illinois College of Law, 2017. Thanks to the editors and staff of the Journal of Law, Technology & Policy for their efforts. I would also like to thank my wife, Catherine, for her continuous support. This work would not have been possible without her. Finally, many thanks are owed to my parents, family, and friends for their unwavering support.

[1] Marc Weber, Where to? A History of Autonomous Vehicles, Computer History Museum, http://www.computerhistory.org/atchm/where-to-a-history-of-autonomous-vehicles (last visited Apr. 8, 2017).

[2] Id.  This was because much of the danger from driving during that time period was from ill-marked roads rather than the automobiles themselves.

[3] Id.

[4] Id.

[5] Id.

[6] 33 Corporations Working on Autonomous Vehicles, CB Insights (Aug. 11, 2016), https://www.cbinsights.com/blog/autonomous-driverless-vehicles-corporations-list.

[7] John Villasenor, Products Liability and Driverless Cars: Issues and Guiding Principles for Legislation, Brookings (Apr. 24, 2014), http://www.brookings.edu/research/papers/2014/04/products-liability-driverless-cars-villasenor.

[8] Sherry Baxter, Reasonable Doubt: The Road to Regulation for Self-Driving Vehicles, Ga. Straight (Jan. 22, 2016, 2:17 PM), http://www.straight.com/news/622601/reasonable-doubt-road-regulation-self-driving-vehicles.

[9] See, e.g., Bodin v. City of Stanwood, 927 P.2d 240, 249 (Wash. 1996) (stating basis for negligence action).

[10] David G. Owen, The Five Elements of Negligence, 35 Hofstra L. Rev. 1671, 1674 (2007).

[11] Id. at 1675.

[12] Palsgraf v. Long Island R. Co., 162 N.E. 99, 99 (N.Y. 1928).

[13] Id.

[14] Id.

[15] While adults are held to a reasonable person standard, children and disabled people are held to a standard of reasonableness for a person with similar characteristics.  Restatement (Third) of Torts § 10 (2010); see also Stevens v. Veenstra, 573 N.W.2d 341 (Mich. Ct. App. 1997) (holding that a fourteen-year-old driver education student is not held to a reasonable person standard for adults, but instead to a standard reasonable for fellow fourteen-year-olds).  However, people with greater levels of skills, such as doctors and other medical professionals, are required to exercise a greater amount of care they reasonably possess.  See Helling v. Carey, 519 P.2d 981, 983 (Wash. 1974) (finding that defendant was negligent in failing to conduct a simple pressure test that other optometrists would reasonably have done).

[16] Id.

[17] Id.

[18] Id.

[19] Id.

[20] Id.

[21] Id.

[22] Id.

[23] Greenman v. Yuba Power Products, Inc., 377 P.2d 897, 901 (Cal. 1963).

[24] Restatement (Second) of Torts § 402A (1965).

[25] Villasenor, supra note 7.

[26] Derek H. Swanson & Lin Wei, McGuireWoods, United States Automotive Products Liability Law (Oct. 2009), https://www.mcguirewoods.com/news-resources/publications/us-automotive-products-liability.pdf.

[27] Restatement (Third) of Torts: Prod. Liab. § 2(a) (1998).

[28] Id.

[29] Jeffrey K. Gurney, Sue My Car Not Me: Products Liability and Accidents Involving Autonomous Vehicles, 2013 U. Ill. J.L. Tech. & Pol’y 247, 258 (2013).

[30] See 68 Am. Jur. 3d Proof of Facts § 8, at 333 (2002) (“[N]o cases have been found applying [manufacturing defects] to software.”).

[31] David G. Owen, Manufacturing Defects, 53 S.C. L. Rev. 851, 873 (2002).

[32] Id.

[33] Restatement (Third) of Torts: Prod. Liab. § 2(b) (1998).

[34]Dennis W. Stearns, An Introduction to Product Liability Law, Marler Clark L.L.P., http://www.marlerclark.com/pdfs/intro-product-liability-law.pdf (last visited Apr. 8, 2017).

[35] Barker v. Lull Eng’g Co., 573 P.2d 443, 457–58 (Cal. 1978).  The California Supreme Court in Barker set out two tests to establish defect in the product design: the consumer expectation test and the risk/benefit test.  Id.  For the consumer expectation test, a plaintiff must prove that the defendant’s defective product did not perform as safely as an ordinary consumer would have expected it to perform when used or misused in an intended or reasonably foreseeable way, and that the product’s failure to perform safely was a substantial factor in causing plaintiff’s harm.  Id.  The consumer expectation test is reserved for cases where plaintiff’s everyday experience permits a conclusion that the product design is defective and not safe.  Pruitt v. General Motors Corp. 72 Cal. App. 4th 1480, 1484 (1999).  For the risk/benefit test, the plaintiff has to prove that the defendant’s product design was a substantial factor in causing harm to the plaintiff, and the defendant must fail to prove that the benefits of the product’s challenged design outweigh the risks of the design.  Barker, 573 P.2d at 457–58.

[36] David H. Canter et al., California Products Liability Law: A Primer (Jan. 2012), http://trialattorneysofamerica.com/documents/Primer2012.pdf; see also Anderson v. Owens-Corning Fiberglas Corp., 810 P.2d 549, 553 (Cal. 1991) (holding that strict liability has been invoked for three different types of defects: manufacturing, design, and inadequate warnings).

[37] Barker, 573 P.2d at 457–58.

[38] Id.

[39] Restatements (Third) of Torts § 2(c) (1998); see also Villasenor, supra note 7.

[40] Villasenor, supra note 7.

[41] In Livingston v. Marie Callenders, Inc., the court found Marie Callenders liable to a plaintiff who suffered an allergic reaction to a Marie Callenders product on a strict liability failure to warn theory.  72 Cal. App. 4th 830 (1999).  The product contained an ingredient (MSG) to which a substantial number of the population is allergic.  Id. at 832–33.  Also, the ingredient was one whose danger was not generally known, or if known was one which the consumer would reasonably not expect to find in the product, and where the defendant knew, or by the application of reasonable developed human skill and foresight should have known, of the presence of the ingredient and the danger.  Id.

[42] Villasenor, supra note 7.

[43] A product is defective because of inadequate warnings if the foreseeable risks of harm posed by the product could have been reduced by reasonable warnings by the seller or other distributor, and the lack of warnings renders the product not reasonably safe.  Restatement (Third) of Torts: Prod. Liab. § 2(c) (1998).

[44] Id. § 10.  The Supreme Court of Michigan ruled in Comstock v. General Motors Corp. that a manufacturer of an automobile (GM), the brakes of which were defective, had a duty to warn of the vehicle’s inherent danger, not only at the time of sale but any time shortly after the product entered the stream of commerce if a defect became known to the manufacturer and if a failure to give prompt warning of the known, latent defect imperiled life and limb.  99 N.W.2d 627, 636 (Mich. 1959).  In Hasson v. Ford Motor Co., the Supreme Court of California stated in its dicta that the manufacturer was negligent in failing to take into account (in designing its braking systems and advising on their maintenance) foreseeable brake abuse by drivers resulting in overheating of brakes.  564 P.2d 857, 870 (Cal. 1977).

[45] Villasenor, supra note 7.

[46] Owen, supra note 10, at 1677.

[47] Nev. Rev. Stat. § 482A.070 (2013).

[48] Id. § 482A.080.

[49] See Cal. Code Regs. tit. 13, § 227.44 (2014); Fla. Stat. §319.145 (2012); D.C. Code §50-2352 (2012) (outlining some vehicle and driver requirements for testing and/or operating autonomous vehicles).

[50] Nev. Rev. Stat. § 482A.080 (2013).

[51] Id. § 482A.070.  Autonomous vehicle drivers are required to be (a) seated in a position so that he can take immediate control of his vehicle, (b) able to monitor safe operation of the vehicle, and (c) capable of taking control over the autonomous vehicle in case of emergency.

[52] James M. Anderson et al., RAND Corp., Autonomous Vehicle Technology: A Guide for Policymakers 44–47 (2016), http://www.rand.org/content/dam/rand/pubs/research_reports/RR400/RR443-1/RAND_RR443-1.pdf.

[53] Nev. Rev. Stat. § 482A.080 (2013); D.C. Code §50-2352 (2012); Cal. Veh. Code § 38750(c) (2013); Fla. Stat. §319.145 (2012).

[54] Technology Law & Policy Clinic Autonomous Vehicles Team, Autonomous Vehicle Law Report and Recommendations to the ULC, U. Wash. Sch. L., https://www.law.washington.edu/Clinics/Technology/Reports/AutonomousVehicle.pdf, at 5 (last visited Apr. 8, 2017).

[55] Cal. Code Regs. tit. 13, § 227.44 (2014).

[56] Id. § 227.46.

[57] Nev. Admin. Code §482A.130 (2012).

[58] Id. § 482A.090.

[59] Id.

[60] “A manufacturer of automated technology is immune from civil liability for damages that arise out of any modification made by another person to a motor vehicle or an automated motor vehicle, or to any automated technology . . . .”  Mich. Admin. Code r. 257.817 (2013).  “The original manufacturer of a vehicle converted by a third party into an autonomous vehicle shall not be liable in any action resulting from a vehicle defect caused by the conversion of the vehicle, or by equipment installed by the converter, unless the alleged defect was present in the vehicle as originally manufactured.”  D.C. Code §50-2353 (2013).

[61] “One who sells any product in a defective condition unreasonably dangerous to the user or consumer or to his property is subject to liability for physical harm thereby caused to the ultimate user or consumer, or to his property, if (a) the seller is engaged in the business of selling such a product, and (b) it is expected to and does reach the user or consumer without substantial change in the condition in which it is sold.”  Restatement (Second) of Torts § 402A(1) (1965) (emphasis added).  However, a question remains: what constitutes a substantial change?  The Restatement leaves that question to the courts to decide.  See id. § 402A(1) cmt. p (commenting on varying degree of changes that can be made to a product without shifting the liability from the seller or manufacturer of the product to the party that made the changes).

[62] Villasenor, supra note 7.

[63] Davis v. Pak-Mor Mfg. Co. 672 N.E.2d 771, 775 (Ill. Ct. App. 1996); see also Woods v. Graham Eng’g Corp., 539 N.E.2d 316, 318  (Ill. Ct. App. 1989) (ruling that when a change or modification by a third party is foreseeable, liability will still be imposed on the original manufacturer); Hoyt v. Wood/Chuck Chipper Corp., 651 So.2d 1344, 1351 (La. Ct. App. 1995) (holding engine manufacturer not liable since it could not have anticipated plaintiff’s material alteration of the power unit).

[64] See Lavoie v. Power Auto, Inc., 312 P.3d 601, 608 (Or. Ct. App. 2013) (holding that changing a floor mat of a vehicle was a reasonably foreseeable modification/alteration that was a substantial contributing factor to the personal injury).  So in some states, automobile manufacturers will have to consider changing floor mats as one of the foreseeable “substantial” modifications that can cause automobile accidents.

[65] Cal. Veh. Code § 38750 (2015); see also Anderson et al., supra note 52, at 47.

[66] Gary E. Marchant & Rachel A. Lindor, The Coming Collision Between Autonomous Vehicles and the Liability System, 52 Santa Clara L. Rev. 1321, 1339 (2012).

[67] Bill Vlasic & Neil E. Boudette, Self-Driving Tesla Was Involved in Fatal Crash, U.S. Says, N.Y. Times (June 30, 2016), https://www.nytimes.com/2016/07/01/business/self-driving-tesla-fatal-crash-investigation.html.

[68] Id.

[69] Restatement (Third) of Torts § 10 cmt. a (1998).

[70] Sven A. Beiker, Legal Aspects of Autonomous Driving, 52 Santa Clara L. Rev. 1145, 1147–48 (2012).

[71] Bryant Walker Smith, Proximity-Driven Liability, 102 Geo. L.J. 1777, 1794 (2014).

[72] Id. at 1778.

[73] FAQ, Waymo, https://waymo.com/faq/ (last visited Apr. 8, 2017).

[74] 68 Am. Jur. 3d Proof of Facts § 8, at 333 (2002).

[75] Frances E. Zollers et al., No More Soft Landings for Software: Liability for Defects in an Industry that Has Come of Age, 21 Santa Clara Computer & High Tech. L.J. 745, 746 (2005).

[76] Id.

[77] Michael Ballaban, Mercedes, Google, Volvo to Accept Liability when Their Autonomous Cars Screw Up, Jalopnik (Oct. 7, 2015, 11:47 AM), http://jalopnik.com/mercedes-google-volvo-to-accept-liability-when-their-1735170893.

[78] The factors closely mimic that of the reasonable-person standard that reflects a cost-benefit approach supported by principles of utility and efficiency.  Owen, supra note 10, at 1677.  It also resembles the “Hand Formula” that uses a risk-calculating approach of judging one’s decision making.  United States v. Carroll Towing Co., 159 F.2d 169, 173 (2d Cir. 1947).

[79] John Gardner, The Many Faces of the Reasonable Person, N.Y.U. Sch. L., at 7­–8, http://www.law.nyu.edu/sites/default/files/upload_documents/The%20Many%20Faces%20of%20the%20Reasonable%20Person.pdf.

[80] Id.

[81] See Alex Davies, Obviously Drivers Are Already Abusing Tesla’s Autopilot, WIRED (Oct. 22, 2015, 7:00 AM), http://www.wired.com/2015/10/obviously-drivers-are-already-abusing-teslas-autopilot/ (noting that some drivers of autonomous vehicles are driving recklessly by pushing the limit of the autonomous vehicle technology).

[82] Federal Motor Vehicle Safety Standards and Regulations, Nat’l Highway Traffic Safety Admin., http://www.nhtsa.gov/cars/rules/import/FMVSS (last visited Apr. 8, 2017).

[83] The Hawaii House of Representatives’ bill for autonomous vehicle operation only includes safety requirements, minimum insurance coverage, and necessary equipment and performance standards that ensure safe operation.  H.R.B. No. 1458, 28th Leg. (Haw. 2015).  In addition, Nevada’s statute has not set forth autonomous vehicle requirements for operations, insurance, and minimum safety standards.  Nev. Rev. Stat. § 482A.100 (2013).

[84] 14 C.F.R. § 25.1329 (2016).

[85] Waymo, supra note 73.

[86] Your Autopilot Has Arrived, Tesla (Oct. 14, 2015), https://www.teslamotors.com/blog/your-autopilot-has-arrived.

[87] Neal E. Boudette, Tesla’s Self-Driving System Cleared in Deadly Crash, N.Y. Times (Jan. 19, 2017), https://www.nytimes.com/2017/01/19/business/tesla-model-s-autopilot-fatal-crash.html.

[88] See Sam Levin & Nicky Woolf, Tesla Driver Killed While Using Autopilot Was Watching Harry Potter, Witness Says, Guardian (July 1, 2016, 1:43 PM), https://www.theguardian.com/technology/2016/jul/01/tesla-driver-killed-autopilot-self-driving-car-harry-potter (noting that driver negligence may have contributed to the first fatal Tesla crash).

Patent Transaction and Patent Financing in China: The Difficulties and Opportunities for Third-Party Service Providers

By: Runhua Wang*

I. Introduction

The Chinese government has strongly encouraged patent application and patent protection in the past decade.[1]  As a result, China contributed 89% of the worldwide growth in patent applications in 2014, whereas the United States contributed 6%.[2]  Statistics from the World Intellectual Property Organization (WIPO) show that China has received the most patent applications since 2012 and that Chinese domestic patent applicants are filing more applications than applicants from any other country.[3]  This Paper introduces how third parties, referring to various types of patent service providers, are involved in the increasing patent market of China.

The WIPO statistics show that only a fraction of Chinese patents were filed abroad and that most of the patents only enrolled one foreign country, which indicates that the patents filed by China’s domestic applicants do not have a very wide geographical coverage.[4]  This may also imply that the average quality of Chinese patents is still low.[5]

Empirical evidence confirms this inference of low quality;[6] still, some scholars believe there is a trend of Chinese patent applicants improving the quality of the patents.[7]  This Paper discusses the difficulties, such as moral hazard, created by the different quality of patents in innovation commercialization, especially in patent transactions and patent financing, and how Chinese patent law exacerbates the difficulties.  The goal of this Paper is to encourage third parties to rethink their service for overcoming these difficulties.

Section II introduces the main categories of patent services provided in China.  Section III discusses the problems of the patent service and the paradox of promoting patent transaction and patent financing by policies and patent law.  Section IV suggests the opportunities for patent service providers in China.

II. Background: Service Map of the China Patent Market

Most patent applicants are represented by a registered patent agent when they apply for patents.[8]  Patent agents facilitate patent applicants by drafting patent applications and dealing with patent prosecution, such as conducting a prior-art search, drafting and filing patent applications, and answering examiners’ questions.[9]  As the number of patent applications increases in China, the demand for patent procurement also increases.[10]

The State Intellectual Property Office of the People’s Republic of China (SIPO) received 6.06 million (utility) patent applications from domestic applicants in 2016.[11]  The statistics by the All-China Patent Agents Association (ACPAA) show that China had 1,457 patent agencies and 14,795 patent agents in 2016.[12]  One patent agent deals with an average of eight new patent applications every month, which is much higher than the rates in the United States, Japan, and Korea,[13] which suggests an insufficient supply of patent procurement in China.[14]

At the same time that the number of patent agents has been increasing in China, the average level of their education has also been increasing.  In 2013, 29% of Chinese patent agents held a master’s degree and 3% of them held a Ph.D. degree.[15]  In the first-tier cities of China, such as Beijing, Shanghai, and Guangzhou, most patent agents held a master’s degree.[16]  Peking University Law School even established a graduate training program for patent agents.[17]

After patents are granted, they can be deployed to secure financing as intangible assets.[18]  For example, patentees can invest their patents for firm shares.[19]  Statistics by SIPO show that 34.3% of patents produced by universities are assigned to firms as investments in 2013.[20]

It is also common to use patents as collateral for loans in China.  Loans of 25.4 billion RMB were collateralized by patents in 2013 and increased to 48.9 billion RMB in 2014.[21]  Moreover, China’s patent market also provides patent insurance in more than fifty cities.[22]  Even though some international insurance carriers, such as AIG, IPISC, and Willis, have developed some mature patent insurance policies, the patent insurance policies provided in China do not exactly follow those carriers since patents are “jurisdiction-specific.”[23]  Two major types of patent insurance provided in the Chinese market are patent-infringement liability insurance for firms, as potential patent infringers, and patent-enforcement issuance for patentees.[24]  However, patent insurance has not been completely accepted by the market: the insurance coverage accumulated only 0.27 billion RMB between 2012 and mid-2015.[25]

Innovators expect monopoly rewards for their innovation.[26]  However, some scholars argue that innovators cannot be directly rewarded or compensated enough because their trade secrets related to the patents are more likely to be explored by their rivals through reverse engineering when they disclose the technology of the patents.[27] More scholars believe that innovators have strong perspectives on commercializing and improving their innovation after the monopoly rights exist.[28]  In addition to selling the patented products and generating revenue, licensing patents for expanding commercialization of products or co-inventing is also a critical measure that patentees use.[29]  Meanwhile, firms can license universities, public research institutes, or other firms for joint-R&D to share risks and profits, rather than independently develop technology.[30]  The statistics by SIPO show that smaller firms are more likely to license or transfer patents.[31]

There are patent agencies, such as CHOFN, and specialized patent transaction platforms that supervise patentees to transfer or license patents.  Gaohangip is the largest intellectual property transaction platform, which is like Amazon, where patentees can put their patents up for sale.  Patentees or Gaohangip lists the patents along with their prices, which are available to be searched by interested licensees for potential patent transactions.  Gaohangip functions as an agent and provides legal services for the patent transfer.

However, the statistics by SIPO show that in 2015 only 8.2% of patents were licensed by patentees and 5.2% patents were transferred,[32] suggesting an insufficiency in the business of patent transaction and patent transfers, as discussed in Section III.

III. Analysis

A. Difficulties for Patent Transaction

Out of the total firm patent owners surveyed, 62.1% believe that the major restriction of their profitability is that they cannot effectively prevent others from imitating the patents.[33]  On one hand, regardless of the arguments over the strength of patent protection in China, this relates to the low quality Chinese patents that are less competitive.  On the other hand, this concern suggests a mixed culture of copycat and innovation in China,[34] in which the competition increases as the follow-on innovation and downstream innovation raises in the market.  In this increasingly competitive market, moral hazard of patent transactions arises and grows too big to ignore because those licensed patents and any potential patents from the patentees are more likely to be circumvented.[35]

As a result, when the innovation ability of the licensees is high, patentees are less likely to transfer their valuable technology to avoid increased competition.[36]  Patentees may agree to transfer core technology only if the license includes a grant-back clause so that patentees are allowed to freely use further inventions by the licensees.[37]  However, given the low transaction rate, the moral hazard issues are not successfully mitigated in practice.

As a result, only 9.4% of the surveyed firms license patents or buy patents from domestic or foreign inventors.[38]  Out of the total number of firms surveyed, 19% invest R&D mainly in digesting the existing technology, while 54% invest R&D mainly in technology transformation.[39]  Even though firms are interested in purchasing technology instead of investing in learning, in this moral hazard scenario, licensing patents per se are not enough to learn core technologies from the patentee.  This is also a challenge for third parties to successfully bridge the parties in patent transactions when both sides do not have strong incentives to make a deal given the high cost of moral hazard.

While it is convenient to purchase and sell patents through an agency or a platform like Gaohangip, the agency or platform usually does not facilitate licensing.  Those agencies and platforms usually only facilitate drafting legal documents after parties enter into a patent transaction; they do not help with bargaining for the agreement.  Bridging the parties of patent transactions through those platforms with basic legal services effectively decreases the searching costs, but they cannot fill the moral hazard gap in patent transactions.

B. Difficulties for Patent Financing

Patent validity in China is stable: SIPO only received 3,724 invalidity petitions including utility patents, utility models, and design patents.[40]  With regard to litigation, the district courts in Shanghai decided 526 patent cases between 2002 and 2015.[41]  Only 15.97% of plaintiffs argued patent invalidity, while only 2.85% of third parties argued patent invalidity.[42]  Even though 20.7% of the plaintiffs in Beijing argued patent invalidity, for 487 patent cases between 2004 and 2015, only 2.04% patents were invalidated by courts.[43]

Nevertheless, this low invalidity rate does not provide patent owners strong incentives to purchase patent insurance.  They try to avoid litigation when they claim the insurance and when they do not have strong confidence in their patents’ validity.[44]

Therefore, the low patent invalidity rate does not mean a high quality of patents in China.  Indeed, lenders still hesitate to adopt patents per se as collateral.  Bank lenders usually ask for a loan guarantee in addition to patent collateral,[45] and they even prefer a combination of patent collateral, insurance, and guarantees to minimize risks.[46]  A loan guarantor in this circumstance is usually provided by the government or a government-funded mutual fund or incubator.[47]

Due to the high and complex thresholds, patent owners still have material difficulties in securing finance through loans.  The survey by SIPO shows that 45.3% of the firms that own patents rights complained about cash flow problems that can lead to a failure to finance patent commercialization.[48]  This could also be a result of the inevitable high cost of moral hazard in the loan market for patents.  Weak patent enforcement[49] in this litigation-averse society[50] exacerbates moral hazard issues.  These issues cannot even be mitigated by an emerging market of patent valuation in China, in which lenders can estimate patent value through economic analysis by patent valuation institutes.[51]

C. Paradoxes in Promoting Patent Transaction and Financing by Policies and Patent Law

1. Policies that Promote Patent Transaction and Patent Financing

In order to encourage patent applications and minimize the transaction costs in patent transactions and patent financing,[52] both the central government of China and the local governments have adopted various favorable policies for patent applicants, patent holders, and patent service providers, [53] such as the patent transaction platform—Shanghai United Assets and Equity Exchange.

Patent issuance in China was initiated by SIPO and the People’s Insurance Company of China (PICC).[54]  Meanwhile, local governments subsidize patent insurance to encourage the innovation firms to purchase the insurance.[55]  For patent collateralization, local governments actively provide interest subsidies or guaranties to facilitate innovative firms to acquire loans.[56]

The government also actively intervenes in patent applications and patent management by firms.  SIPO supervises local governments’ training for firms on patent management and patent strategies.[57]  Local governments provide subsidies and grants to fund firms to apply for patents and establish a patent management department.[58]  Many local governments also subsidize patent agents to improve the quality of patent applications.[59]

Most of the policies are enacted through economic instruments to decrease the transaction costs in patent applications, patent transactions, and patent financing.  However, even though the government can subsidize the application cost with SIPO, those current economic instruments cannot fully offset the cost of moral hazard that arises from the issues like low patent quality, weak patent enforcement, and the copycat culture.  Indeed, Chinese patent law is designed to prohibit patent transaction and patent financing to some degree.

2. Increased Cost in Patent Transaction and Financing by Patent Law

I am the first to argue that there are two main articles in Chinese patent law that could impede innovation commercialization, including patent transaction and financing.  First, Article 24 limits the scope of publication before the effective filing date of a claimed invention: the six-month grace period for novelty is only for the inventions that are disclosed in the exhibitions hosted or approved by the Chinese government, published at a specified academic or technological conference, or divulged by a person without consent by the applicant.

The exceptions of lack of novelty in 35 U.S.C. 102(b) regulating the one-year grace period does not restrict the manner of publications, including patentees’ sales and uses before the filing date, so inventors can test their market and consumers at an early stage.[60]  Moreover, Japan even has an Extensive Experimental Use Doctrine, which is not limited by a grace period, which helps with the understanding of the advanced technology and assisting with faster investing decisions.[61]

By contrast, Article 24 does not only provide a shorter term for inventors understanding the advancement of technology, but also does not provide a chance for inventors to test the market and consumers.  Therefore, it is not surprising to observe deficiencies in innovation commercialization in China.  Some patents may not have commercial value at all, but the law does not allow patentees to understand the practice before they file the applications.

Second, Article 69(2) defines broad prior user rights.  While western scholars often argue that trade secret owners should have relatively narrow prior user rights to promote innovation,[62] prior user rights are relatively broad in China.  “Prior” means the time prior to the patent filing date rather than the publication date or the beginning of the grace period as under U.S. patent law.[63]  The scope of “user” is also vague, which could suggest a person who has manufactured identical products, utilized identical methods, or is fully prepared to do so.  Article 69(2) does not mention a person who conducts an arm’s length sale or other arm’s length commercial transfer or uses with respect to the technology, which confuses many judges and legal scholars in China.[64]  Accordingly, Chinese patentees, most of whom are follow-on inventors rather than initial inventors, may be unwilling to enforce their patents since they do not know whether the infringers are excluded from patent infringement for prior user rights that may also threaten their patent validity for lack of novelty.[65]

Overall, these two articles include an underlying notion that patents should be filed at an early stage.  As the government provides many subsidies and grants to encourage patent applications, it is not surprising to observe a dramatic increase of patent applications and a strengthening mechanism of patent agencies in the recent years in China.  However, the law may also raise the cost of patent commercialization, patent transaction, and patent financing.  In this patent regime, it is hard to accurately estimate the patent value, so lenders cannot completely rely on patent valuation reports to adopt patents per se as collateral.  Firms also hesitate to license patents or conduct joint-R&D with potential licensees.

VI. Recommendation: Opportunities for Third Parties

The most solid business of patent service in China is patent procurement, which assists inventors in drafting and applying for patents.  Both the market demand and the government support are great in this area.  Even though the government heavily funds patent commercialization, patent transaction, and patent financing, the limited technology value, the culture of copycat and litigation-aversion, the strength of patent protection, and the design of some articles in patent law are the main barriers to conquer.  These barriers increase the cost of moral hazard in patent transactions and financing when the government instructs inventors to file more patents, and manage and commercialize their patents through subsidies and grants.  While there are agencies or platforms bridging patentees and potential buyers or licensees, the decrease in the transaction costs does not effectively eliminate the high cost of moral hazard when bargaining for an agreement.

Also, this cost cannot be reduced when the government directly or indirectly provides guaranties for patent loans.  These guaranties from third parties are used as substitutes for patent collateral rather than as supplementary to the patents.  Loans are offered for those guarantees or other financing packages in the name of patents, which shifts the risk burdens to those third parties.  Even though there are institutions evaluating patents’ economic value and even though SIPO provides patent evaluation reports for patents’ validity, lenders who ask for financing packages in addition to patent collateral do not completely rely on these reports.  Then, we cannot conclude that these reports are enough to eliminate the risks for those third parties.

V. Conclusion

Even though China has emerged as the country with the largest number of patent applications, there are material difficulties for Chinese patentees to commercialize, transfer, license, or finance their patents.  As the business of patent procurement and other supplementary service of patents grows, the market demands more third parties to fill in the gap effectively reducing the moral hazard to promote patent transaction and patent financing, such as promoting joint-R&D, facilitating inventors to improve patent quality, educating patentees to license their patents at an early stage, establishing reliable patent quality evaluation mechanisms, efficiently managing patent licenses, or monitoring the follow-on activities of licensees or patentee lenders.


* Post-Doctoral Research Associate & J.S.D., University of Illinois College of Law.  I thank professor Thomas S. Ulen and Professor Jay P. Kesan for cultivating the ideas of this Paper, Carlos Delvasto Perdomo for his suggestions, and Zishu Wang and Samuel Branum for the editing.

[1] Shiwu Shiqi Woguo Zhishi Chanquan Shiye Da Fazhan (十五时期我国知识产权事业大发展) [The Career Development of Intellectual Property in the Tenth Five-Year Economic Plan] (July. 19, 2006), http://www.sipo.gov.cn/ztzl/qtzt/sywgh/hgyzw/201310/t20131029_872884.html.

[2] WIPO, World Intellectual Property Indicators 23 (2014).

[3] Id. at 7–8.

[4] Id. at 14–15.

[5] Dietmar Harhoff et al., Citations, Family Size, Opposition and the Value of Patent Rights, 32 Res. Pol’y 1343, 1343 (2003) (“Patents . . . representing large international patent families are particularly valuable.”).

[6] Song Hefa & Li Zhenxing, Patent Quality and the Measuring Indicator System: Comparison Among China Provinces and Key Countries (IPSC Paper, 2014), https://www.law.berkeley.edu/files/Song_Hefa_IPSC_paper_2014.pdf.

[7] Michael Li, Patent Quality in China, IPWatchdog (Mar. 27, 2014), http://www.ipwatchdog.com/2014/03/27/patent-quality-in-china/id=48720/.

[8] Zhuanli Fa (专利法) [Patent Law] (promulgated by the Standing Comm. Nat’l People’s Cong., Mar. 12, 1984, effective April 1, 1985), art 19, (China).

[9] Herbert F. Schwartz, Patent Law and Practice 7–21 (2nd ed. 1996).

[10] Wang Suyuan (王素远), Zhuanli Daili Shichang Xuqiu Fenxi Shangpian (专利代理市场需求分析上篇) [The First Half Analyses of the Market Demand in the Market of Patent Agencies], 的博客 [IPRdaily] (Dec. 28, 2016), http://blog.sina.com.cn/s/blog_e0f474c10102wy1i.html.

[11] SIPO, http://www.sipo.gov.cn/tjxx/tjyb/2016/201701/P020170124439120249793.pdf (last visited Mar. 3, 2017).

[12] Li Shulian (李淑蓮), Nianxin 15 Wan Renminbi Zhaobudaoren! Dalu Zhuanli Dailiren Quekou Da? (年薪15萬人民幣招不到人! 大陸專利代理人缺口大? ) [0.15 Million RMB Revenue But Failed in Recruitment! The Mainland China Has a Big Gap in Patent Agents?], Beimei Zhiquan Bao (北美智權報) [North Am. Intell. Prop. News] (Nov. 2, 2016), http://www.naipo.com/Portals/1/web_tw/Knowledge_Center/mainland/IPNC_161102_0801.htm.

[13] Id.; see also Qingsheng, infra, note 16.

[14] See Shulian, supra note 12.

[15] SIPO, Zhongguo Zhuanli Daili Hangye Nianbao (中国专利代理行业年报) [The Annual Report of the Industry of Patent Agency in China] 10 (2014).

[16] Miao Qingsheng (苗青盛), Sikao: Ruhe Chengwei Yige Youxiu De Zhuanli Dailiren (思考:如何成为一个优秀的专利代理人) [Thinking: How to Become a Great Patent Agent], Zhiren Wang (Apr. 22, 2015, 10:25 PM), http://www.wipren.com/html/2015/redian_0422/231.html.

[17] Zhuanli Daili Zhuanye Fangxiang (专利代理专业方向) [The Major Direction of Patent Agency] (2015), http://www.law.pku.edu.cn/docs/2015-04/20150427171829618046.pdf.

[18] See Richard Hall, A Framework Linking Intangible Resources and Capabilities to Sustainable Advantage, 14 Strategic Mgmt. J. 607 (1993).

[19] Huang Pulin (黄璞琳), Gudong Nengfou Yi Zhuce Shangbiao Huo Zhuanli Shiyongquan Chuzi (股东能否以注册商标或专利使用权出资?) [Can Shareholders Use Registered Trademarks or Patent Rights to Invest in the Firm], Zhongguo Gongshang Bao (中国工商报) [China Industry & Com. News] (Aug. 24, 2015), http://www.saic.gov.cn/gsld/gztt/xxb/201508/t20150824_160956.html.

[20] SIPO, Zhuanli Tongji Jianbao (专利统计简报) [Patent Statistic Bulletin] 2 (2014), http://www.sipo.gov.cn/tjxx/zltjjb/201509/P020150911515451537791.pdf.

[21] Dingjian (丁坚), Zhongguo ZhongxiaoQiye Zhishi Chanquan Zhiya Rongzi Chengwei Yizhong Qushi (中国中小企业知识产权质押融资成为一种趋势) [A Trend of Intellectual Property Collateral by Small and Medium Sized Enterprises in China] (July 5, 2015), http://www.chinacpv.com/index.php/Home/Xinwendongtai/show/lx/gsxw/id/34.

[22] Jili Chu, Recent Developments in Patent Insurance in China (Jan. 26, 2017), http://en.naipo.com/Portals/0/web_en/Knowledge_Center/Feature/IPNE_170126_0702.htm.

[23] Id.

[24] Wang Yu (王宇), Zhuanli Baoxian: Zhuqi Chuangxi Chuangye Baohu Weiqiang (专利保险:筑起创新创业保护围墙) [Patent Insurance: Structuring the Walls for Protecting Innovation and Entrepreneurship], Zhishi Chanquan Bao (知识产权报)[Intell. Prop. News] (Dec. 2, 2015), http://www.sipo.gov.cn/ztzl/qtzt/zscqzldzcywzcx/fxjd/201609/t20160901_1289578.html.

[25] Id.

[26] See Edmund W. Kitch, The Nature and Function of the Patent System, 20 J.L. & Econ. 265 (1977).

[27] Fritz Machlup & Edith Penrose, The Patent Controversy in the Nineteenth Century, 10 J. Econ. History 1 (1950).

[28] Mark A. Lemley, Ex Ante Versus Ex Post Justifications for Intellectual Property, 71 U. Chi. L. Rev. 129 (2004); see also Steven N. S. Cheung, Property Rights and Invention, in 8 Research in Law and Economics: The Economics of Patents and Copyrights 5, 18 (John P. Palmer & Richard O. Zerbe, Jr. eds., 1986).

[29] Shubha Ghosh, Richard S. Gruner & Jay P. Kesan, Transactional Intellectual Property: From Startups to Public Companies 3 (3rd ed. 2015).

[30] See Klaus Kultti, Tuomas Takalo & Juuso Toikka, Cross-Licensing and Collusive Behaviour, 23 Homo Oeconomicus 181 (2006), http://economics.mit.edu/files/5914.

[31] SIPO, Zhongguo Zhuanli Diaocha Shuju Baogao (中国专利调查数据报告) [China Patent Data Research] 14 (2016), http://www.sipo.gov.cn/tjxx/yjcg/201607/P020160701584633098492.pdf.

[32] Id. at 13.

[33] Id. at 16.

[34] Alexandra Harney, China’s Copycat Culture, N.Y. Times (Oct. 31, 2011, 11:37 PM), https://latitude.blogs.nytimes.com/2011/10/31/chinas-copycat-culture; see also Peter Guy, China Never Really Stopped Being a Copycat, and That’s Why Its Tech Companies Aren’t Changing the World, S. China Morning Post: Mind the Gap (Apr. 10, 2016, 10:00AM), http://www.scmp.com/business/article/1934779/china-never-really-stopped-being-copycat-and-thats-why-its-tech-companies.

[35] See Jay Pil Choi, Technology Transfer with Moral Hazard (Discussion Paper Series No. 745, 1994–95).

[36] See id.

[37] See id.

[38] See Kultti, Takalo & Toikka, supra note 30, at 6.

[39] Id.

[40] Tuwen Zhibo: 2015 Nian Faming Zhuanli Shenqing Shouquan Ji Qita Youguan Qingkuang Xinwen Fabu Hui (图文直播:2015年发明专利申请授权及其他有关情况新闻发布会) [Live of Pictures and Words: Press Conference About 2015 Invention Patent Application, Issuance, and Other Issues], SIPO (Jan. 14, 2016, 10:00 AM), http://www.sipo.gov.cn/twzb/2015ndzygztjsj/.

[41] Gao Rongying (高荣英), Shanghaishi Zhuanli Qinquan Anjian Dashuju Fenxi Baogao (上海市专利侵权案件大数据分析报告) [Big Data Analysis of Shanghai Patent Infringement Cases] (2015), http://inews.ifeng.com/yidian/45985691/news.shtml?ch=ref_zbs_ydzx_news.

[42] Id.

[43] Gao Rongying (高荣英), Beijingshi Zhuanli Qinquan Anjian Shuju Fenxi Baogao Dashuju (北京市专利侵权案件数据分析报告大数据) [Big Data Analysis of Beijing Patent Infringement Cases] (2016), http://www.rensheng2.com/1120000/1110837.shtml.

[44] Donghui Juan (董慧娟), Zhongguo Zhuanli Zhixing Baoxian De Zuixin Jinzhan Zhanghai Ji Duice (中国专利执行保险的最新进展、障碍及对策) [The Latest Progress, Obstacles, and Solutions for Enforcing Patent Insurance in China], in 7 Zhongguo Keji Luntan (中国科技论坛) [China Tech. Forum] 88, 91–92, (2015).

[45] Guanyu Shangye Yinhang Zhishi Chanquan Zhiya Daikuan Yewu De Zhidao Yijian (关于商业银行知识产权质押贷款业务的指导意见) [Instruction Opinions on Loans with Intellectual Property Collaterals in Commercial Banks] (promulgated by China Banking Regulatory Comm’n, SIPO, St. Admin. for Industry & Commerce, Jan. 21, 2013) 2013 (China).

[46] Zhuanli Diya Daikuan De Qingdao Moshi (专利抵押贷款的青岛模式) [The Qingdao Model of Patent Collateral for a Loan], http://www.haodai.com/zixun/97995.html (last visited Mar. 4, 2017).

[47] Zhongguancun Guojia Zizhu Chuangxin Shifanqu Qiye Danbao Rongzi FuchiZijin Guanli Banfa (中关村国家自主创新示范区企业担保融资扶持资金管理办法) [Admission Methods of Zhongguan-Cun Since Park] (promulgated by Zhongguan-Cun Admin., effective Oct. 1, 2011) 2011 (China).

[48] See Kultti, Takalo & Toikka, supra note 30, at 16.

[49] See Ying Zhan, Problems of Enforcement of Patent Law in China and its Ongoing Fourth Amendment, 19 J. Intell. Prop. Rights 266 (2014).

[50] See Bee Chen Goh, Remedies in Chinese Dispute Resolution, 13 Bond L.Rev. 1, 17 (2001); see also Guo-Ming Chen & William J. Starosta, Chinese Conflict Management and Resolution: Overview and Implications (Intercultural Commc’n Studies VII: 1 1997–98), http://digitalcommons.uri.edu/cgi/viewcontent.cgi?article=1015&context=com_facpubs; Cecilia Lai-Wan Chan, The Cultural Dilemmas in Dispute Resolution: The Chinese Experience (Presentation at the Conference of Enforcing Equal Opportunities in Hong Kong: An Evaluation of Conciliation and Other Enforcement Powers of the EOC, 2003), http://www.law.hku.hk/hrportal/wp-content/uploads/file/14062003a-CeciliaChan.pdf.

[51] Liu Chunjie (刘春杰), Wang Fei (王菲) & Sun Haiyan (孙海燕), Zhuanli Jiazhi Pinggu Yanjiu Jinzhan (专利价值评估研究进展) [The Research Progress of Patent Valuation], 国知动态 [Guozhi Patent News] (2016), http://www.patentwarning.com.cn/content/details41_535.html.

[52] Shiyiwu Shiqi Zhishi Chanquan Shiye Fazhan De Zongti Silu Mubiao He Zhidao Yuanze (“十一五”时期知识产权事业发展的总体思路、目标和指导原则) [The Overall Design, Goal, and Instructive Principles of the Development of Intellectual Property During the Eleventh Five-Year Economic Plan] (2006), http://www.sipo.gov.cn/ztzl/qtzt/sywgh/hgyzw/201310/t20131029_872883.html.

[53] 2016 Nian Quanguo Zhuanli Shiye Fazhan Zhanlue Tuijin Jihua (2016年全国专利事业发展战略推进计划) [The 2016 Plan of Strategically Promoting the Development of State’s Patent Development] (2016), http://www.sipo.gov.cn/gk/fzgh/201605/t20160516_1269421.html; see also Huang Yuanhui (黄远辉), Fuwu Shuangchuang Quanmian Dazao Zhishi Chanquan Yunying Shenzhen Moshi (服务双创,全面打造知识产权运营深圳模式) [Serving Innovation and Entrepreneurship, Completely Design the Shenzhen Model of Intellectual Property Deployment], http://www.sipo.gov.cn/ztzl/ndcs/zgzlznew/yypy/201611/t20161128_1303850.html (last visited Mar. 4, 2017).

[54] See Yu supra note 24.

[55] Chengdushi Keji Yu Zhuanli Baoxian Butie Zijin Guanli Zanxing Banfa (成都市科技与专利保险补贴资金管理暂行办法) [Temporary Methods of Administrating the Subsidies for Technology and Patent Insurance in Chengdu] (promulgated by Chengdu Municipal Finance Bureau & Chengdu Technology Bureau & Chengdu Intellectual Property Office, effective July 1, 2012) June 26, 2012 (China).

[56] Xie Kaifei (谢开飞) & Xu Wenbin (徐文彬), Fujian Zhuanliquan Zhiya Rongzi Tupo 32 Yi (福建专利权质押融资突破32亿) [The Loans with Patent Collateral in Fujian Exceed 3.2 Billion RMB], Keji Ribao (科技日报) [Tech. Daily], Feb. 6, 2017, at 7, http://digitalpaper.stdaily.com/http_www.kjrb.com/kjrb/html/2017-02/06/content_361336.htm?div=-1.  Another example is the establishment of Zhongguan-Cun Credit Promotion Association.

[57] Su Pin (苏品), Zhonguancun Zhuanli Daohang Gaoji Shiwu Xilie Peixun Zhi Zhuanli Bujue Chuji Shizhanban Chenggong Juban (中关村专利导航高级实务系列培训之专利布局初级实战班成功举办) [Zhongguan-Cun Patent Navigation and High Level Practice Training on Patent Geography Was Successfully Held] (2014), http://www.sipo.gov.cn/ztzl/ywzt/zldhsdgc/gjzldhcyfzsyq/201409/t20140915_1010102.html.

[58] See Shanghai Shi Zhishi Chanquan Ju (上海市知识产权局) [Shanghai Intellectual Property Office], Shanghai Shi Zhuanli Zizhu Banfa (上海市专利资助办法) [The Methods of the Shanghai Patent Subsidies] (July 1, 2012) (China).

[59] Id.

[60] See Mark A. Lemley, Ready for Patenting, 96 B.U. L. Rev. 1171 (2016).

[61] Kevin Iles, A Comparative Analysis of the Impact of Experimental Use Exemptions in Patent Law on Incentives to Innovate, 4 Nw. J. Tech. & Intell. Prop. 61 (2005); see also Jennifer A. Johnson, The Experimental Use Exception in Japan: A Model for U.S. Patent Law?, 12 Pac. Rim L. & Pol’y J. 499, 512 (2003); John A. Tessensohn, Reversal of Fortune—Pharmaceutical Experimental Use and Patent Infringement in Japan, 4 J. Int’l Legal Stud. 1, 25 (1998).

[62] David H. Hollander, Jr., The First Inventor Defense: A Limited Prior User Right Finds Its Way Into US Patent Law, 30 Aipla Q.J. 37 (2002); see also Gary L. Griswold, Prior User Rights—A Necessary Part of A First-to-File System, 26 J. Marshall L. Rev. 567 (1993); Ning Lizhi & Li Guoqing, A Problem into American Prior User Rights System, 27 J. Nanjing U. Sci. & Tech.1 (2014).

[63] 35 U.S.C. 273(a)(2) (2012).

[64] Wei Xiaoyun (韦晓云), Zhuanli Qinquan Zhong Xianyong Kangbianquan Wenti Yanjiu (专利侵权中先用权抗辩问题研究) [A Study of Prior User Rights Argument in Patent Infringement], 12 Renmin Sifa (人民司法) [People Judicature] 52 (2003).

[65] He Huaiwen (何怀文), Jingwai Zaixian Zhuanli Shenqing Qike Zhunyong Dichu Shenqing Kangbian (境外在先专利申请岂可准用抵触申请抗辩) [Prior Use in Foreign Countries Cannot Argue for Prior User Rights], 109 Zhongguo Zhishi Chanquan (中国知识产权) [China Intell. Prop. Rights] (2016), http://www.cnipr.com/yysw/qqyd/201604/t20160408_196114.htm.

Full Tilting at Windmills: How Daily Fantasy Sports Can Overcome Their Legal Hurdles

By Amartya Bagchi*

I. Introduction

Approximately 205 million Americans watched at least one NFL game during the 2015 season according to the league’s own viewership numbers,[1] and many of them likely noticed the seemingly endless stream of commercials for DraftKings and FanDuel.[2]  Research has shown there are fewer than eleven minutes of actual football action in a televised game.[3]  It is highly likely, then, that in the past few years, viewers have seen a disproportionate number of these commercials, extolling the virtues of daily fantasy football as a game that requires a “different set of skills”[4] to earn “immediate cash payouts” minus the “season-long commitments” of seasonal fantasy football.[5]

Daily fantasy football has grown very quickly in the last few years,[6] with daily fantasy sports (DFS) service DraftKings notably striking a partnership with ESPN.[7] Even tech giant Yahoo jumped into the DFS waters in 2015, launching its own proprietary service.[8]

With hundreds of millions of dollars invested in these companies[9] and virtually no regulatory oversight,[10] it should come as no surprise that in October of 2015, DFS websites found themselves at the center of a legal controversy that could radically alter or outright eliminate this fast-growing industry.[11]  In 2016, ESPN ended its partnership with DraftKings.[12]  However, despite NFL viewers getting a respite from these commercials in the 2016–17 season, the industry has continued to steadily grow.[13]  As a result, the complexities surrounding the legality of DFS have only grown. This Article aims to explain those complexities and articulate why DFS is not a form of gambling and should be allowed in the United States.

II. Background

It is quite likely that if you are a fan of American football, you know someone who participates in some form of fantasy football: nearly seventy-five million Americans are likely to participate in some form of fantasy football in the upcoming 2016 season.[14]  Many of these leagues and participants partake in the traditional season-long fantasy format: each fantasy owner selects players from various NFL teams during a pre-season draft, and owners accumulate fantasy points based on the statistics their players put up.[15]  As injuries or poor performances change the landscape of the NFL, so too does it change the active fantasy owner’s roster composition: owners frequently pick up and drop players who end up hurt or underperforming as the season goes along.[16]

Daily Fantasy Sports websites differ from the traditional and well-known season-long model of fantasy football in a number of very important ways,[17] and an understanding of these differences is central to understanding the legal controversy surrounding DFS services. First, and perhaps most importantly, there is no draft or set pool of players from which fantasy owners choose.[18]  Rather, the most common format is a salary cap league[19]: DFS websites attach a “price tag” to a player depending on the player’s season-long performance, matchup, and other factors, and a DFS owner must attempt to build a competitive team within the confines of a prescribed salary cap.[20]  Many owners end up selecting the same set of elite players at each position based on that player’s opposition matchup and value in a given week.[21]  Putting a number of high priced players in a lineup often results in owners having to select less talented, fringe NFL players based solely on matchups or gut feelings.[22]  Between head-to-head and tournament style competitions, profitability is a central tenet of the game for many DFS participants.[23]  While there are a number of nuanced differences between DFS and season-long strategies,[24] ultimately DFS should be familiar to most fantasy football players.

The crux of the legal trouble for the DFS industry stems from the play of a DraftKings employee, Ethan Haskell, who released ownership percentages of players before a tournament’s lineups had locked. [25]  What Haskell failed to disclose, however, is that he continued to play DFS on rival site FanDuel.[26]  At the heart of this controversy is the important role that ownership percentage information plays in tournament style play.[27]  Knowing that most participants in a tournament are putting a particular player into their lineup allows an owner with access to this information to build a contrarian lineup.[28]  In other words, the DFS owner with the insider information is able to exploit market inefficiencies that regular players simply do not have access to.[29]  This is particularly relevant in terms of fringe lineup players, where a contrarian player having a good day can result in shooting up tournament rankings.[30]

III. Legal Challenges

When experts began exploring the impact of Haskell’s use of inside information in his DFS entries, an even more troubling pattern emerged: a small number of DFS participants won the majority of money.[31]  Were the odds stacked against new participants? A month after Ethan Haskell’s publication of DraftKings ownership data in week three of the 2015 NFL season, New York Attorney General Eric Schneiderman ordered DraftKings and FanDuel to stop accepting money from New York residents, as their games constituted illegal gambling under New York state law.[32]  Schneiderman, a noted consumer rights advocate, stated that DraftKings and FanDuel clearly intended to fleece participants by “seriously misleading” the average person into believing he had a shot at winning money.[33]  Both companies have since filed lawsuits in New York courts.[34]

Central to the legal questions surrounding the DFS industry is whether federal or state gambling laws apply. The federal Unlawful Internet Gambling Enforcement Act (UIGEA), for instance, is a point of contention specifically because the Act lists “fantasy sports” as an exception.[35]  The UIGEA explicitly states that so long as the prizes are established and known in advance of the game or contest, the value is not determined by the number of participants or fees collected, and the winning outcomes reflect the skill of participants and the accumulated statistics of drafted players, the contest meets the requirements to be exempted as a “fantasy sport.”[36]

States are still free to make their own laws regarding fantasy sports participation.[37]  However, as the authors of the bill intended to carve out an exception for season-long fantasy and “never conceived” of DFS games,[38] there is still some dispute as to whether the UIGEA even applies to these types of games.[39]  In fact, the evidence at hand in 2006 seemingly indicates that Congress had the unregulated, online poker industry in mind,[40] not fantasy sports, and certainly not DFS.

Furthermore, so long as they are not preempted by federal law, states are allowed to make determinations on specific types of gambling under the Tenth Amendment.[41]  Typically, prima facie cases of illegal gambling under state law can be proven when the activity in question satisfies three elements: consideration, reward, and chance.[42]  DFS services are likely to prevail in this dispute, so long as they successfully argue that their contests constitute games of skill rather than chance. While many states subscribe to the majority view that the “dominant element” test is best suited to determine whether a game or contest is one of skill or chance, a number of states have adopted other methods of determination.[43]  Depending on what kind of research the DFS companies will be able to produce, this may not be a significant issue at all. For instance, Seth Young, the COO of DFS service Star Fantasy Leagues, took a look at the people who were winning consistently in his company’s contests.[44]  The simulation performed by Young showed that skilled participants (who set their lineups based on previous player performance) consistently dominated unskilled participants (who set lineups primarily by attempting to use up as much salary cap space as possible given the entire player pool).[45]  The numbers were lopsided: participants who used the skilled participant algorithm in setting their rosters won 69.1% of games.[46]

IV. Recommendation and Conclusion

Given the likelihood that DFS companies will be able to prove that they are skills of chance, or in the case of federal law, that they are excepted from the current iteration of the UIGEA, these companies should be allowed to continue to operate. What states should consider instead of outright bans are strict regulations that limit who can play, how they can play, and how financial information is handled by DFS services.[47]

First, implementing a player verification system would very easily allow states and services alike to monitor who is using these DFS services.[48]  By requiring some sort of identification—be it a social security or state driver’s license number—services will be able to turn away users who are too young, or registered employees of the company itself or its competitors, thus solving the issue of information inequality between users and employees. Second, it is important for these DFS services to implement responsible gaming features that will put them in good standing within the framework of the UIGEA.[49]  Finally, financial transparency and regulation will be the most important building blocks in making DFS as supervised and trustworthy as casinos.[50]  Both DFS providers and financial institutions will be responsible for monitoring for fraud, money laundering, and procedural inconsistencies in segregation of funds.[51]  The segregation of funds—between dollars dedicated to operating costs and those used strictly to pay out participants accounts—will be highly scrutinized by internal and external financial audits.[52]

By adopting changes that protect consumers, DFS companies will be able to better convince state legislatures and states attorneys that the business is on the up and up. Secondarily, they will be able to reduce their own liability. Thus, a regulated DFS industry is simply good business for all involved parties, and it will spell the difference between a burgeoning gaming industry that will continue to grow and one that will be legislated away as part of a puritanical assault on what is ostensibly gambling.

 


* Amartya “Orko” Bagchi is a 3L at the University of Illinois College of Law. I’d like to thank my wonderful girlfriend Alexa and my parents who have supported me every step of the way, and David Johnson and Tim Hightower who helped me secure my only fantasy football titles.

[1] Michael David Smith, 34 of America’s 35 Most-Watched Fall TV Shows Were NFL Games, NBC Sports: Pro Football Talk (Jan. 8, 2014, 3:52 PM http://profootballtalk.nbcsports.com/2014/01/08/34-of-americas-35-most-watched-fall-tv-shows-were-nfl-games/.

[2] Steven Perlberg, Are DraftKings and FanDuel Bombarding Fans With Too Many Ads?, Wall St. J. (Sept. 16, 2015, 6:00 AM), http://blogs.wsj.com/cmo/2015/09/16/are-draftkings-and-fanduel-bombarding-fans-with-too-many-ads/.

[3] David Biderman, 11 Minutes of Action, Wall St. J. (Jan. 15, 2010 12:01 AM), http://www.wsj.com/articles/SB10001424052748704281204575002852055561406.

[4] DraftKings TV, DraftKings—Welcome to the Big Time, YouTube (Aug. 28, 2015), https://www.youtube.com/watch?v=bfCm6PJuL5I.

[5] FanDuel, 2015 FanDuel Fantasy Football Preseason Commercial (Version Two), YouTube (Aug. 11, 2015), https://www.youtube.com/watch?v=-lVS87mhZQo.

[6] Jonathan Moreland, The Growth of Daily Fantasy Sports, Visualized, RotoGrinders https://rotogrinders.com/pages/growth-of-daily-fantasy-sports-719070 (last visited Feb. 12, 2017).

[7] Todd Spangler, ESPN Teams with DraftKings as Exclusive Daily Fantasy-Sports Partner, Variety (June 24, 2015, 6:58 AM), http://variety.com/2015/digital/news/espn-draftkings-daily-fantasy-sports-1201527028/.

[8] Daily Fantasy Featured Contests, Yahoo! Sports Daily Fantasy, https://sports.yahoo.com/dailyfantasy (last visited Feb. 12, 2017).

[9] FanDuel, Crunchbase, https://www.crunchbase.com/organization/fanduel (last visited Feb. 12, 2017).

[10] Ira Boudway & Joshua Brustein, How Will the Government Change the Game for Daily Fantasy Sports?, Bloomberg: Tech. (Oct. 15, 2015, 2:39 PM) http://www.bloomberg.com/news/articles/2015-10-15/how-will-the-government-change-the-game-for-daily-fantasy-sports-.

[11] John Culhane, The DraftKings Crash, Slate (Oct. 13, 2015, 4:47 PM), http://www.slate.com/articles/sports/sports_nut/2015/10/the_insider_trading_scandals_could_bring_down_draftkings_and_fanduel.html.

[12] ESPN Accepts DraftKings’ Request to Ends Its Exclusive Advertising Partnership Early, SportsBusiness Daily (Feb. 10, 2016), http://www.sportsbusinessdaily.com/Daily/Issues/2016/02/10/Marketing-and-Sponsorship/ESPN-DraftKings.aspx.

[13] Dustin Gouker, Is Daily Fantasy Sports Dying or Flourishing? The Truth Is Somewhere in the Middle, LegalSportsReport.com (Oct. 27, 2016, 11:25 AM), http://www.legalsportsreport.com/11918/daily-fantasy-sports-industry-outlook/.

[14] Gregory Bresiger, Nearly 75M People Will Play Fantasy Football This Year, N.Y. Post (Sept. 5, 2015, 4:59 PM), http://nypost.com/2015/09/05/nearly-75m-people-will-play-fantasy-football-this-year/.

[15] What Is Fantasy Football?, NFL.com, http://www.nfl.com/fantasyfootball/help/whatis (last visited Feb. 12, 2017).

[16] Id.

[17] Jonathan Bales, GrindersU UnderGraduate: Differences Between Daily and Season Long, RotoGrinders, https://rotogrinders.com/pages/grindersu-undergraduate-differences-between-daily-and-season-long-160174 (last visited Feb. 12, 2017).

[18] Daily Fantasy Sports Explained, Sports Betting Online, https://www.sportsbettingonline.net/daily-fantasy-sports/ (last visited Feb. 12, 2017).

[19] Id.

[20] Id.

[21] Bales, supra note 16.

[22] Id.

[23] Peter Jennings, Profitability in Daily Fantasy, RotoGrinders, https://rotogrinders.com/lessons/profitability-in-daily-fantasy-174279 (last visited Feb. 12, 2017).

[24] Bales, supra note 16.

[25] NFL Forum: DraftKings Ownership Leak, RotoGrinders, https://rotogrinders.com/threads/draftkings-ownership-leak-850584?page=1#reply-850635 (last visited Feb. 12, 2017).

[26] Id.

[27] Id.

[28] Id.

[29] Culhane, supra note 11.

[30] Alex Weldon, DKLeak Scandal: Why Ownership Percentages Are So Important, PartTimePoker.com (Oct. 7, 2015), http://www.parttimepoker.com/dkleak-scandal-why-are-ownership-percentages-so-important.

[31] Id.

[32] Walt Bogdanich et al., Attorney General Tells DraftKings and FanDuel to Stop Taking Entries in New York, N.Y. Times (Nov. 10, 2015), http://www.nytimes.com/2015/11/11/sports/football/draftkings-fanduel-new-york-attorney-general-tells-fantasy-sites-to-stop-taking-bets-in-new-york.html.

[33] Id.

[34] Darren Rovell, DraftKings, FanDuel Sue New York Attorney General Eric Schneiderman, ESPN (Nov. 13, 2015), http://espn.go.com/chalk/story/_/id/14119916/draftkings-fanduel-sue-new-york-attorney-general-eric-schneiderman.

[35] 31 U.S.C. § 5362(1)(E)(ix) (2012).

[36] Id.

[37] Anthony N. Cabot & Louis V. Csoka, Fantasy Sports: One Form of Mainstream Wagering in the United States, 40 J. Marshall L. Rev. 1195, 1201 (2007) (“The exemption in UIGEA for fantasy sports does not mean that fantasy sports are lawful, only that fantasy sports are not criminalized under UIGEA. In other words, conducting a fantasy contest for money still might violate other state or Federal laws.”).

[38] Dustin Gouker, UIGEA Author: “No One Ever Conceived” that Law Would Allow Daily Fantasy Sports, LegalSportsReport.com, http://www.legalsportsreport.com/1369/uigea-author-did-not-intend-daily-fantasy-sports-carveout/ (last visited Feb. 12, 2017).

[39] David Purdum, DraftKings CEO Acknowledged Some UIGEA Noncompliance in May Conference Call, ABC News (Nov. 19, 2015, 4:55 PM), http://abcnews.go.com/Sports/draftkings-ceo-acknowledged-uigea-noncompliance-conference-call/story?id=35313282 (“Jason acknowledged that Golf and NASCAR do not comply with the letter of the UIGEA, but argued that UIGEA was written when daily fantasy didn’t exist.”).

[40] Chuck Humphrey, Unlawful Internet Gambling Enforcement Act of 2006: Internet Gambling Funding Ban, Gambling-Law-US.com (Oct. 13, 2006), http://www.gambling-law-us.com/Federal-Laws/internet-gambling-ban.htm.

[41] Tim Lynch, Gambling Regulation Belongs to the States, Cato Inst. (July 23, 1998), http://www.cato.org/publications/commentary/gambling-regulation-belongs-states.

[42] Geis v. Cont’l Oil Co., 511 P.2d 725, 727 (Utah 1973) (“[T]he statutory elements of a lottery are: (1) Prize; (2) chance; (3) any valuable consideration.”); Valentin v. La Prensa, 427 N.Y.S.2d 185, 186 (Civ. Ct. 1980) (“[T]here are three elements necessary to constitute a lottery: (1) consideration, (2) chance, and (3) a prize.”).

[43] See generally D. A. Norris, Annotation, What Are Games of Chance, Games of Skill, and Mixed Games of Chance and Skill, 135 A.L.R. 104 (1941) (providing illustrations of the various tests used to determine whether an action is a game of chance across the United States).

[44] Id.

[45] Id.

[46] Id.

[47]Seth Young, Fantasy Sports Regulation: An Inclusive Way Forward, LegalSportsReport.com (Mar. 25, 2016 5:00 AM), http://www.legalsportsreport.com/9246/fantasy-sports-regulation-framework/.

[48] Id.

[49] David O. Stewart, Online Gambling Five Years After UIGEA 16 (2011).

[50] Seth Young, I Believe Daily Fantasy Sports Is a Game of Skill, and Here’s the Proof, LegalSportsReport.com (Apr. 6, 2015, 8:36 AM) http://www.legalsportsreport.com/820/view-why-dfs-is-a-game-of-skill/.

[51] Id.

[52] Id.