United States: Fantasy Sports: The Rapidly Developing Legal Framework

Last Updated: September 23 2015
Article by David O. Klein, Jonathan E. Turco and Joshua R. Wueller

Although fantasy sports competition – the act of building and competing with imaginary sports teams comprised of real-life athletes – had meager beginnings as a hobby and pastime among friends and coworkers, fantasy sports has exploded in recent years into a wildly popular, multi-billion-dollar industry. This June, the Fantasy Sports Trade Association reported that over 56.8 million individuals now compete in fantasy sports competitions in North America (a 20% increase from 2014), including one-fifth of all U.S. residents.

The popularity and integration of fantasy sports into the fabric of American culture is impossible to overstate. Fantasy sports contests today are assembled around such diverse sporting events as football, baseball, basketball, hockey, soccer, golf, cricket and auto racing. Traditional media networks, such as NBC, CBS, FOX and ESPN, have incorporated dedicated fantasy sports-related television shows into their regular rotation of programming. Likewise, professional sports organizations themselves – including the National Football League (NFL), the National Basketball Association (NBA), Major League Baseball (MLB), the National Hockey League (NHL) and NASCAR – have each, to varying degrees, negotiated deals with fantasy sports enterprises.

As the burgeoning fantasy sports industry continues to grow at an exponential rate, so too do the regulatory efforts of federal and state governments. While some jurisdictions have welcomed fantasy sports contests with open arms, others have implemented regulations aimed at restricting the industry.

Federal Regulations

The overwhelming recent success of fantasy sports is largely due to the favored status bestowed upon such competitions by federal anti-gaming laws – specifically, the Unlawful Internet Gambling Enforcement Act (UIGEA). Congress enacted UIGEA in 2006 to combat transfer payments associated with unlawful Internet gambling in the United States.

UIGEA provides a carve-out that expressly exempts fantasy sports contests. In order to qualify for this exception:

  • all fantasy sports league prizes must be established and made known to the participants in advance of the game or contest, and the value of the prizes cannot be influenced by the number of participants or the amount of fees they pay;
  • all winning outcomes must be determined predominantly by accumulated statistical results of the performance of athletes participating in multiple real-world sporting events;
  • no winning outcome may be based solely on any single performance of an individual athlete in any single real-world sporting event; and
  • no winning outcome may be based on the score, point-spread or performance of any single real-world team or combination of such teams.

Additionally, the Interstate Wire Act (Wire Act) prohibits the use of wire communication facilities to transmit certain wagering information or bets. Generally, an individual violates the Wire Act by:

  • being engaged in the business of betting or wagering;
  • knowingly using a wire communication facility; and
  • transmitting in interstate or foreign commerce bets or wagers, or information assisting in their placement, on any sporting event or contest.

A Wire Act exemption exists, however, for the "placing of bets or wagers on a sporting event or contest from a state or foreign country where betting on that sporting event or contest is legal into a state or foreign country in which such betting is legal." More simply, transactions steer clear of the Wire Act where the act of wagering on an event is legal in both the jurisdiction from which the wager is placed and the jurisdiction in which the wager is received. In a 2011 memorandum opinion, the U.S. Department of Justice's Criminal Division concluded that the Wire Act is limited only to sports betting. Accordingly, absent some future determination that UIGEA-exempt fantasy sports contests are considered sporting events, the Wire Act should not prohibit such contests.

State Regulations

Although UIGEA's exemption for fantasy sports and the government's interpretation of the Wire Act are always susceptible to future amendment or revocation, the legality of full-season fantasy sports contests on the federal level is a relatively settled matter for now. It is important to note, however, that even with the exemption afforded to fantasy sports under federal law, such contests must still comply with state-specific prohibitions against gambling. Given the patchwork legal framework that states apply when regulating fantasy sports contests, it is not uncommon for operators of such competitions to run afoul of state laws.

To date, Kansas and Maryland are the only two states that have expressly legalized fantasy sports contests, with statutory language closely resembling the UIGEA carve-out. Conversely, Montana is currently the exclusive state with a statute specifically prohibiting fantasy sports games that are played for entry fees and prizes over the Internet. Between these two extremes, some states have not yet written laws that address fantasy sports directly. Other states, such as Arizona, Iowa, Louisiana, North Dakota, Vermont and Washington, apply a "strict chance" test, in which a game or contest including even a slight element of uncertainty (e.g., where injury or weather may affect the outcome) will be deemed a game of chance. As such, the legality of fantasy sports contests in "strict chance" states is not always entirely clear.

More Oversight on the Horizon

Nearly every month, as additional pieces of the fantasy sports legality puzzle fall into place, new legislative battle lines are drawn throughout the country. This September, for example, the California State Assembly proposed a bill entitled the "Internet Fantasy Sports Game Protection Act," which would require operators of fantasy sports contests to obtain a license from (and pay a variety of fees to) the State, as well as abide by a number of restrictions related to contest rules and prizes, among other things.

Many critics have also called into question the legality of daily fantasy sports competitions, which take place over a period of days or weeks rather than an entire season. Some have questioned whether daily fantasy competitions should be considered games of skill like their season-long counterparts, while others worry that daily fantasy may entice athletes to adversely affect games' outcomes for personal gain. Just last week, Congressman Frank Palone, Jr. of New Jersey delivered a letter to the House Energy and Commerce Committee requesting a hearing to consider how daily fantasy sports are distinguishable from sports betting and other forms of gambling. Likewise, the Michigan Gaming Control Board announced in September that daily fantasy competitions may violate Michigan State law, although legislative efforts are under way to expressly legalize all fantasy sports gaming in the State.

As fantasy sports contests – and the regulations that govern them – continue to grow and evolve, it is essential that fantasy sports enterprises, as well as participants, keep abreast of the developing legal landscape. Sponsors of such competitions should carefully review their respective contest platforms, entry fees and prize structures with an experienced fantasy sports attorney in order to effectively navigate this rapidly changing regulatory framework.

Originally published by Law360.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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