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The Top Legal Issues Facing The Fantasy Sports Industry

November 19, 2015
Fantasy Sports

The fantasy sports industry has operated for years without generating newsworthy controversies. However, industry players and consumers are still reeling from a recent fantasy sports news story of murky dealings that border on illegal gambling and insider trading involving FanDuel and DraftKings, two of the biggest legal fantasy sports betting companies in the world. This has made fantasy sports so toxic the New York State attorney has issued cease-and-desist orders to both these fantasy sports companies.

Fantasy Sports by Numbers

According to data from McKinsey, the US fantasy sports industry generated tournament entry fees worth over $1 billion in 2014. These fees came from 1.5 million daily fantasy sports (DFS) players. Up to 40% of all tournament entry fees come from just 1.3% of DFS players. On average, players in this category spent $9,100 in tournament entry fees in 2014. In turn, each of these top players earned profits of about $2,400.

These figures show that a small group of hardcore DFS players account for a large percentage of the fantasy sports industry revenues. FanDuel and DraftKings have emerged as the most dominant fantasy sports companies. In 2014, FanDuel grew its active customer base by 300%. This has made the company a darling among investors including Comcast/NBCUniversal and Kohlberg Kravis Roberts & Company.

These investors have slapped a valuation of more than $1 billion on FanDuel. DraftKings has also attracted notable investors including Disney. To grow their customer base, DraftKings and FanDuel have reportedly spent more than $100 million each on TV ads during the first three quarters of 2015, according to the New York Times. These efforts notwithstanding, FanDuel reported in September 2014 that it was signing up 20,000 to 30,000 players per day. Fantasy sports uptake among Americans has made this once fledgling sector a multi-billion dollar industry.

Genesis of the Current Fantasy Sports Industry Problems

Surprisingly, the current controversy bedeviling the fantasy sports industry stems from the actions of a DraftKings employee, Ethan Haskell. Ethan, allegedly, used information unavailable to others to turn a $25 FanDuel tournament entry fee into $350,000 of prize money.An investigative article published by The New York Times states that Haskell accessed internal company data detailing athletes picked by DFS players. When the mainstream media outlets aired and published these allegations, many Americans felt that Haskell had unfairly benefited from information unavailable to others. In addition, consumers voiced concerns about DFS games rigged in favor of those with access to insider information.

Potentially Damaging Legal Suits

Extensive coverage of the industry practices by influential media outlets such as The New York Times attracted the attention of judicial authorities who promptly instituted investigations. For instance, in the state of Nevada, gambling regulators ordered fantasy sports sites to suspend operations in October 2015 until they acquired gaming licenses. Regulators in Nevada reckon that fantasy sports are forms of gambling disguised as games of skill. As such, they are subject to gambling regulations that govern traditional casinos. Nevada’s order proved to be just the tip of the legal violations iceberg looming large over fantasy sports. The US Attorney’s Office in Tampa, Florida, has started investigations to determine whether operators of fantasy sports sites breached the Illegal Gambling Business Act of 1970. What’s more, the US Attorney’s Office in Tampa has convened a federal grand jury to review testimonies and evidence gathered by investigators tasked with unraveling betting practices in this industry. The Wall Street Journal has reported that the Tampa US attorney’s office has already subpoenaed the Fantasy Sports Trade Association to provide records related to board meetings and transactions between fantasy sports companies.

New York’s attorney general, Eric Schneiderman, has gone further than simply starting investigations into illegal gambling. Schneiderman has served FanDuel and DraftKings with cease-and-desist letters in effect ordering both companies to stop taking bets from New Yorkers. According to Schneiderman, his cease-and-desist order is based on a New York law that defines gambling as any contest involving monetary payments and depends “upon an element of chance”. Moreover, Schneiderman reckons betting on an event that a player has no control or influence of is tantamount to gambling.

Besides gambling investigations at the state level, the fantasy sports industry could face criminal investigations and suits from the FBI and the Justice Department. At present, the Justice Department and the FBI are probing companies that run DFS sites to determine whether they operate illegally and have broken laws such as the Racketeer Influenced and Corrupt Organizations Act.

DFS Companies Fighting Allegations of Engaging in Criminal Activities

Of course, DFS companies are not taking these allegations lightly. They are marshaling defenses and vigorously denying charges of engaging in or abetting illegal gambling. In particular, DFS leagues say that the legal argument fronted by New York’s attorney general is flawed because skill is more important when playing fantasy sports than luck. At the same time, DFS companies say the Unlawful Internet Gambling Enforcement Act does not expressly prohibit fantasy sports.

Besides fighting back on the legal front, companies such as DraftKings are requesting DFS players to protest attempts to put the fantasy sports industry in a regulatory straitjacket. When news about the Schneiderman’s order started trickling out, DraftKings sent out emails to players in New York urging them to contact their attorney general and protect their right to play fantasy sports.

Industry analysts expect major players in the DFS industry to engage the services of lobbyists to stem a groundswell of opposition to fantasy sports betting. This is likely to happen if congress wades into the current controversy and schedules hearings on sports betting.

The Future of Sports Betting

The future of legal online sports betting in the US lies in the hands of either the state governments or the US president. States such as Louisiana, Arizona, Iowa, and Montana have expressly banned fantasy sports betting. Kansas, on the other hand, has legalized fantasy sports. This means state governments can allow or ban sports betting. The US president can also accent to legislation legalizing sports betting nationwide and nullifying/amending laws such as PASPA.

It is unclear whether the fantasy sports industry will emerge from the legal challenges mounted by states such as Florida unscathed, bruised, or mortally wounded. Sports betting opponents, including New York’s attorney general, say DFS games are skewed in favor of a few select players. DFS companies counter this argument by saying players require skill, not luck, to win fantasy sports tournaments.