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.