Bloomberg Law
Oct. 8, 2015, 6:10 PM UTC

A Storm is Coming to Daily Fantasy Sports and Lawyers are Needed

Nellie Drew
University at Buffalo

Editor’s Note: The author of this post is a sports law professor at the University at Buffalo Law School and has served as outside counsel for the NHL.

By Nellie Drew, Sports Law Professor, University at Buffalo Law School

“Free Entry to a Fantasy Football Contest! Win Real Cash!” “Pay out Expected $2 Billion in Real Cash Prizes this Year.”

As P.T. Barnum famously said, “There’s another sucker born every minute,” referring to the universal penchant for scoring the quick buck, winning the big prize and realizing the dream of a big payout. One of the most successful recent ventures to exploit this inherent mortal failing is Daily Fantasy Sports (DFS). This week, however, the dream became a nightmare when DraftKings, the largest of the two primary DFS companies, confirmed that an employee had released proprietary information from its operations which he had used to achieve his own lucrative dream — to the tune of a $350,000 payout from rival FanDuel. Further details revealed that, while employees of both companies were prohibited from gaming on their employer’s sites, they were not restricted from using a competitor’s — despite potentially having “insider information” such as aggregate selection rates for specific players chosen by the participants of their employer’s games in any given week. Instantly, the credibility of DFS was called into question, followed by widespread demand for regulation of a nascent industry which has experienced exponential growth over the past few years.

DFS has flown under the radar of federal regulation because of a distinction drawn under the Unlawful Internet Gambling Enforcement Act (UIGEA) between Internet gaming — which is banned — and games that require an element of skill by the participants. So, for example, online poker is prohibited, while fantasy sports, which arguably require some information, analysis and intellectual ability, rather than simply random luck, are exempt from regulation under the Act. The UIGEA does not apply to games in which the prizes are established prior to participation and are not based upon the number of participants or the fees paid by the participants. Similarly, games which are not based upon the score or point-spread of any specific real-world teams or the performance of any specific athlete are not subject to regulation. The UIGEA allows state regulation of fantasy sports. To date, Arizona, Iowa, Louisiana, Montana and Washington have chosen to ban DFS, while Delaware and Tennessee have imposed regulations upon DFS.

In the wake of this week’s events, there have been calls by Congressman Frank Pallone, Jr. (D-NJ) for Congressional hearings into DFS regulation. Congressman Pallone has been blunt in his critique of the DFS industry, calling it gambling which should be subject to restriction. Meanwhile, New York Attorney General Eric Schneiderman has directed that a letter of inquiry be addressed to FanDuel requiring the disclosure of information about the company’s policies on the collection and access to participant data, as well as any restrictions upon employee use of such data for personal advantage in DFS. In Massachussets, home to DraftKings, Attorney General Maura Healey has refused to initiate an investigation.

Both FanDuel and DraftKings have now permanently banned their employees from participating on any DFS sites and have instituted internal investigations utilizing outside law firms. Given the extraordinarily popular nature of the industry and the potential for deceptive if not abusive practices that harm consumers, these efforts are not likely to be viewed as sufficient to evade external regulation.

In fact, this week’s events may well give rise to a re-examination of the Professional and Amateur Sports Prohibition Act (PASPA), which generally prohibits gambling on sporting events across the country. It is no coincidence that Rep. Bob Menendez (D-NJ) along with Rep. Pallone have requested that the FTC determine whether it has authority to regulate DFS. The Representatives are engaged in a pitched battle with professional sports leagues in an effort to rescind or revise PASPA to allow New Jersey casinos to offer sports betting. Additionally, the barrage of DFS television advertising which accompanied the opening of the NFL regular season has attracted the attention of the FCC. Finally, of course, there is the prospect of taxation on DFS winnings at the federal and state levels.

Clearly, the DFS industry will be spending almost as much on legal advice as on advertising in the months to come. Legal assistance will be required to save the industry, which is dependent upon its credibility with consumers in order to survive. Expert counsel in the specifics of consumer protection law across numerous jurisdictions, gambling law and federal and state taxation will be required to help rescue the fantasy industry as it strives to mold and ultimately maintain compliance with the regulatory restrictions which are inevitable. The fantasy sports business which has invested so much in its own vision — at substantial losses to date — needs immediate, substantive legal support to avoid becoming a real world horror show.

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