With March Madness in full effect, sports fans are flocking to sites like Draft Kings and FanDuel, daily fantasy sports sites where users can go to wager real money on – not on sporting events per se but on the performance of the individual athletes competing in those games.
The popularity of these daily fantasy sites cannot be overstated. Just last week Fortune reported that Draft Kings is currently raising venture capital funding at a valuation of at least $1 billion. So how are daily fantasy sites flourishing while sports gambling remains illegal in the United States outside of Nevada, Delaware, Oregon, and Nevada?
The answer to this question is the distinction between games of skill versus games of chance. Whereas gambling on the outcome of sporting events are considered games of chance, fantasy sports, are considered games of skill.
In 2006 the federal government passed the Unlawful Internet Gambling Enforcement Act (the "Internet Gambling Act"), which was enacted to prevent gambling over the internet. The law, however, includes a carve out that appears to exempt these types of fantasy games.
Under the law, an illegal "bet" or "wager" specifically does not include "participation in any fantasy or simulation sports game or educational game or contest in which (if the game or contest involves a team or teams) no fantasy or simulation team is based on the current membership of an actual team that is a member of an amateur or professional sports organization and meets the following conditions:
(1) all prizes and awards offered to winning participants are established and made known to the participants in advance of the game or contest and their value is not determined by the number of participants or the amount of fees paid by participants;
(2) all winning outcomes reflect the relative knowledge and skill of the participants and are determined predominantly by accumulated statistical results of the performance of individuals (athletes in the case of sports events) in a multiple real-world sporting or other events;
(3) no winning outcome is based [either]:
(a) on the score, point spread, or any performance or performances of any single real world team or any combination of such teams; or
(b) solely on any single performance of an individual athlete in any single real-world sporting or other event."
In 2007, Judge Dennis Cavanaugh, United States District Judge for the District of New Jersey, presided over a challenge to the legality of fantasy sports in the case of Humphrey v. Viacom, Inc., Case No. 06-2768 (D.N.J., June 20, 2007). In Humphrey, an out-of-state attorney sued three "pay-for-play" fantasy sports sites under several state qui tam gambling loss-recovery statutes. The plaintiff claimed that the registration fees paid by fantasy sports league participants constitute "wager" or "bets" and that the winners are determined predominantly by chance (due to potential player injuries and other chance circumstances). In dismissing the plaintiff's complaint, however, court rejected this characterization of fantasy sports, and instead implied that fantasy sports are games of skill, depending on fantasy participants' "skill in selecting players for his or her team, trading players over the course of the season, adding and dropping players during the course of the season and deciding who among his or her players will start and which players will be placed on the bench."
Although daily fantasy sports have several differences from the more traditional season-long fantasy games (for example, in a daily fantasy game, there is no trading of players or determining which players to "start" or "bench"), these fantasy sites like FanDuel and Draft Kings continue to hang their hat on the exemption in the Internet Gambling Act and the implication in Humphrey that these fantasy games are games of skill.
The decision in Humphrey and other federal district courts, coupled with the laissez-faire approach taken by both the federal government and professional sports leagues concerning these daily fantasy sites, appear to have mitigated many of the perceived legal risks of operating or participating in these sites. Thus, while states like New Jersey attempt to legalize sports gambling, these daily fantasy sports sites should continue flourish, attracting millions of participants and increasing these sites' values.
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