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Daily Fantasy Sports Games Come Under Fire in Some States

January 26, 2016
Fantasy Sports

Fantasy sports giants FanDuel and DraftKings are stepping up lobbying efforts at the state level in an effort to continue to expand their business. The two largest and best-known fantasy sports sites dramatically increased the amount of money they allocated for lobbying in the fourth quarter of 2015. The changes come about as an increasing number of states are looking into shutting down the games.

Fantasy sports have been around for several years. Participants used to choose a team at the beginning of the season, picking favorite players from around the league. The performance of the fantasy team was based on the performance of the players in real life. Once chosen, the fantasy team was locked in for the full season. Often, little or no money was required for participation, and people paid for bragging rights rather than a big payoff.

FanDuel and DraftKings changed this model by introducing short, usually one day, teams. Participants have a budget, and each player is assigned a dollar value. Each time the participant plays they have the option of putting together a new team. It’s possible to join a pool of players for as little as 25 cents though buy-ins of up to $1,000 and more are also possible. The more money the participant pays, the bigger their payout, although most participants are more likely to lose.

These fantasy league web games have become a billion dollar industry, one that has little or no regulation. The governments in several states are looking into the idea that companies like FanDuel and DraftKings are really gambling that is disguised as a game of skill. Most states have laws that prohibit gambling while games of skill are permissible.

Because DraftKings and FanDuel presented themselves as games of skill, they initially flew under the radar of state governments. In fact, neither company is known to have spent any money in government-lobbying efforts prior to the third quarter of 2015. However, FanDuel spent approximately $20,000 in lobbying expenses in both the third and fourth quarters of 2015 while DraftKings reportedly spent $10,000 in lobbying in the third quarter and $80,000 in the fourth quarter. The sudden activity suggests that company owners are concerned about being able to continue doing business in certain states.

In Texas, Illinois and New York, the various Attorneys General are already making inquiries into the legality of the activities of companies like DraftKings and FanDuel. They say that the companies are engaged in illegal gambling activity and efforts are underway to curtail these activities.

FanDuel and DraftKings are responding by beginning focused lobbying efforts. Their goal is likely to change state laws to allow for their operations to continue. For now, both companies are focusing on remaining functional in Texas, Illinois and New York, but they appear to be making inroads in other states as well.

The companies may be particularly vulnerable in states like Florida, New Jersey, Tennessee and Arkansas where gambling thresholds are lower. Each state defines the difference between games of chance and games of skill independently. Accordingly, what is an acceptable game of skill in one state may be considered outright gambling elsewhere. Public disclosures indicate that DraftKings and FanDuel are spending thousands of dollars on lobbying in states that seem most likely to accuse them of illegal gambling next.

Lobbying efforts are also being made at the federal level. Currently, the federal government has not taken a stance for or against the daily fantasy league industry. If they do decriminalize it, then states would still be able to take a more restrictive stance.

Legal analysts like Marc Edelman, a law professor at Baruch College who has previously offered consulting services in this area, believe that the companies may ultimately need to insist on regulation that would allow them these fantasy sports sites to operate legally.