United States: Daily Fantasy Sports Contests – Illegal Gambling Or Not?

Nationwide, the Daily Fantasy Sports ("DFS") Industry, including heavy hitter players DraftKings and FanDuel, is growing exponentially but not without controversy. The debate is burgeoning – are DraftKings and FanDuel running blatant illegal gambling operations or are the two giants innovatively capitalizing on acceptable traditional fantasy sports league competitions?

Several State Attorney Generals are tackling this question head on. On January 19, 2016, the Texas Attorney General ("TAG") in an advisory opinion concluded that DFS and the contests being run by DraftKings and FanDuel amount to illegal gambling under Texas state law. The TAG cuts to the chase: "...Simply put, it is prohibited gambling in Texas if you bet on a performance of a participant in a sporting event and the house takes a cut." See TX AG Press Release issued January 19, 2016. On November 10, 2015, the New York Attorney General ("NYAG") sent "Notice to Cease and Desist and Notice of Proposed Litigation" letters to both DraftKings and FanDuel. As a result of an investigation commenced in October 2015 by the NYAG, the letters demanded that the two DFS companies "cease and desist from illegally accepting wagers in New York State..." The NYAG denotes a "critical distinction between DFS and traditional fantasy sports." And in its argument that the DFS contests being run by DraftKings and FanDuel are illegal gambling operations, the NYAG states that the "...bettors make bets (styled as "fees") that necessarily depend on real-world performances of athletes and on numerous elements of chance...." Furthermore, the NYAG vigorously contends "the DFS contests are neither harmless nor victimless. Daily Fantasy Sports are creating the same public health and economic concerns as other forms of gambling, including addiction. Finally, DraftKings' [FanDuels'] advertisements seriously mislead NY citizens about their prospects of winning."

On November 17, 2015, the NYAG commenced suit against DraftKings (Index No. 453054/2015) and against FanDuel (Index No. 453056/2015). On December 11, 2015, the situation further escalated as a NY State Court Judge granted the NYAG's Motion for a Preliminary Injunction, enjoining DraftKings and FanDuel from operating in NY. And, then, hours later the Appellate Division of the NY Supreme Court issued an Emergency Order, staying the preliminary injunction and thereby allowing DraftKings and FanDuel to continue to operate but only thru January 4, 2016. The final ruling on all of this has yet to be seen but it will undeniably be a costly battle for the two DFS companies who have spent tens of millions of dollars in advertising in the past 6 months. (See Complaint Index No. 453054/2015 and Complaint Index No. 453056/2015).

The State of Washington, the State of Michigan, and the State of Illinois either by formal or informal opinion have similarly denounced the activities of DFS. Id Complaint No. 453054/2015. The Gaming Control Board of Nevada has termed DFS "gambling" and the Office of the Nevada Attorney General rendered a formal opinion concluding "pay to play daily fantasy sports cannot be offered in Nevada without licensure." See October 16, 2015 NV AG Opinion.

NY Penal Law 225 [2]'s defines "gambling" as – "...stak[ing] or risk[ing] something of value upon the outcome of a contest of chance or future contingent event not under his control or influence..." The NYAG adamantly urges that each DraftKings' and FanDuel bet "represents a wager on a 'contest of chance' where winning or losing depends on numerous elements of chance to a "material degree.'" But is the NYAG correct in its assessment? DraftKings and FanDuel vehemently think not. DraftKings' Terms of Use state: "Contests offered on the Website are contests of skill." See www.draftkings.com FanDuel's Terms of Use state; "FanDuel is a game of skill." See www.fanduel.com These statements beg the question – what is a contest and/or game of skill? The Courts have historically agreed that in "contests of skill"...it is 'the element of chance' that is eliminated." Sweepstakes and Skill Contests – The Basics, Enns & Archer, www.ennsandarcher.com It is difficult to accept DraftKings or FanDuels' mere denotation of its contests as contests/games of skill when on their face, their sites inject several elements of chance that can affect an entrant's ultimate score. The DraftKings' site and the FanDuel site specifically list several elements of chance that can reduce/adjust one's score, hence one's ability to win relating to "Postponed Games" "Traded Players' and "Scoring Revisions." See FanDuel's Rules and Scoring and DraftKings Terms of Use These specified elements of chance coupled with the inherent risks associated with human performance or a combination of human performances severely undermine DraftKings and FanDuels' assertions that their contests are "contests of skill." It will be interesting to see where Tennessee lands in the debate. In Tennessee, T.C.A. 501 (1) states "Gambling...means risking anything of value for a profit whose return is to any degree contingent on chance, or any game of chance associated with casinos..." Interestingly, the Tennessee Statute does not vary much from NY Penal Law and Jason Robins, the owner and CEO of DraftKings has termed the DraftKings' concept "almost identical to a casino." Id NV AG.

If DFS contests are not in fact "contests of skill" then on what grounds do DraftKings and FanDuel purport to continue operating in states like TX and NY and ultimately in Tennessee and other states where gambling is similarly defined ? Draft Kings and FanDuel argue that pursuant to the Unlawful Internet Gambling Enforcement Act ("UIGEA") enacted by U.S. Congress in 2006, there is an exception which carves out their operations and whereby makes their contests legal. DraftKings and FanDuel rely on UIGEA 31 U.S.C. Sections 5362 and 5363 arguing the Act excludes as illegal internet gambling activities " ...any fantasy or simulation sports game or educational game or contest in which...no fantasy or simulation sports team is based on the current membership of an actual team that is a member of an amateur or professional sports organization." The NY lower State Court found this argument to be non-compelling in its decision to grant the initial preliminary injunction requested by the NYAG. The Court looked to additional statutory language in the UIGEA which aims to keep state gambling laws intact and which addresses the foregoing fantasy sports exception. The Court in its decision cites 31 U.S.C. Section 5362 [2][10][B][1][ii] stating that the specific statutory language upon which DraftKings and FanDuel rely "does not apply to '...placing, receiving or otherwise transmitting a bet or wager where:...(1) the bet or wager is initiated or otherwise made exclusively in a single state; ....'"

In conclusion, the different states' and governmental entities' stances that have been voiced up until now do not paint a very promising future for DFS contests. Nevertheless, in many states, the entrance fees will continue to add up with each entrant's hopes of that big WIN !!!

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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