Are Daily Fantasy Sports Companies Playing the Odds Against Future Regulations?
| Publication year | 2016 |
Are Daily Fantasy Sports Companies Playing the Odds against Future Regulations?
Lauren Paine
In 2006, Congress passed the Unlawful Internet Gambling Enforcement Act ("UIGEA"), which prohibits transactions from banks or financial institutions to online gambling sites.1 While the UIGEA bans online gambling of any kind, it contains a clear exception for "participation in any fantasy or simulation sports game or educational game or contest . . . ."2 But, this exception only applies where certain conditions are met, including:
All winning outcomes reflect the relative knowledge and skill of the participants and are determined predominately by accumulated statistical results of the performance of individuals (athletes in the case of sports events) in multiple real-world sporting or other events.3
Thus, the fantasy sports exception applies where the outcome of the fantasy sports contest rests on a participant's skill, not chance.4 At the time UIGEA was passed, fantasy sports referred to the traditional season long fantasy leagues that have been a mainstay among friend groups and co-workers for years.5 However, the UIGEA's fantasy sports exception created a loophole and ultimately allowed creative entrepreneurs to modify a time-tested platform to adhere to modern society's "instant gratification" desires.6 The result of this modification of traditional fantasy sports is a new type of fantasy sports,
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commonly referred to as daily fantasy sports ("DFS"). DFS was a nonexistent concept prior to the passage of the UIGEA.7 In DFS, a participant competes for prizes on a daily—or weekly—basis, allowing for greater opportunities to win. Recently, the media and politicians have heavily scrutinized popular DFS companies FanDuel and DraftKings, calling into question the legality of the companies' operations.8 DFS companies maintain that their operations are protected by the UIGEA because DFS is a fantasy sports game based on skill rather than luck.9 Arguably, the loophole exemplifies a common problem in the sharing economy: innovation out-pacing regulation. 10
This perspective seeks to explore possible regulatory and compliance measures that could help quell much of the controversy surrounding DFS. However, this piece will not examine the question of whether DFS constitutes gambling, but will instead operate under the assumption that DFS can continue to be protected under the exception in UIGEA if additional regulatory and compliance measures are instituted.
A basic understanding of how DFS works and the differences between DFS and traditional fantasy sports are the first steps in formulating potential regulation and compliance standards. The goal of all fantasy sports is to create a team that scores more fantasy points than the opposing participants.11 A fantasy point is the scoring measurement utilized by both traditional fantasy sports and DFS, where point values correspond with particular plays.12 In traditional fantasy sports, a participant chooses a league—that may consist of friends or random opponents—and drafts players at the beginning of a sport's season in hopes of scoring more fantasy points than opposing participants.13 Usually, the draft involves all participants in the particular league, ensuring
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that participants do not all pick the same players.14 The players the participant drafts will constitute his team for the duration of the season—with exceptions for trades and substituting alternates.15 At the end of the season, the participant with the most fantasy points wins the league and may collect the prizes agreed upon prior to the beginning of the season.16
DFS is essentially an evolved version of traditional fantasy sports tailored to our society's craving for "instant gratification."17 The most obvious difference between DFS and traditional fantasy sports is emphasized in their names. DFS begins and ends in the course of a day—with the exception of NFL games and golf tournaments, which last the entire weekend—while traditional fantasy sports span the length of a season.18 Perhaps the most enticing aspect of DFS is the chance to win money on a daily basis instead of waiting until the end of the season.19
In DFS, participants engage in an independent draft, allowing for the possibility of drafting an identical team to another participant.20 Typically, DFS sites assign each player a "price tag."21 The DFS participant must then take into consideration the price of the player with respect to the player's perceived and anticipated impact on the game because, generally, the selection of players is subject to a pre-determined salary cap.22 For example, if a participant chooses to play in an NFL contest, the participant would draft nine players23 that he believes would earn the most fantasy points.24 After all of the games scheduled for that weekend have concluded, the participant's fantasy points will be tallied and compared to the totals of the other participants in the contest.25 The type of contest he enters and the amount of the buy-in
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determines the amount the participant can win.26 The most appealing aspect of DFS is also the most controversial.
Although there are several DFS sites, the two largest and most widely discussed are FanDuel and DraftKings.27 FanDuel was created in 2009, debuting in the South by Southwest Interactive Festival.28 The founders of FanDuel sought to simplify the traditional fantasy sports game, describing FanDuel as "a new way to play fantasy—fan vs. fan in a test of sports knowledge and fantasy knowhow—where winners can taste victory on any given day. Not just once a year."29 FanDuel is now valued at over $1 billion dollars30 with investors including the National Basketball Association, Comcast Ventures and NBC Sports Ventures.31 DraftKings was founded in 2012 and acquired DFS competitor DraftStreet in 2014.32 As of December 2015, DraftKings has raised over $626 million dollars33 , and counts Major League Baseball, Twenty-First Century Fox and the National Hockey League as investors.34 Both companies gained traction from their high profile investors, and as of July 2015 appeared poised for IPOs.35 But, the hype surrounding DFS was not all positive; in fact, the influx of attention brought to light some questions about the future of DFS.36
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DFS companies are hardly unfamiliar with resistance to their existence. From the very beginning, DFS was prohibited from operating in Arizona, Louisiana, Iowa, Montana, and Washington.37 High profile investors allowed DFS companies FanDuel and DraftKings to launch massive marketing deals and advertising campaigns,38 catapulting DFS from the relatively unknown to a household name.39 Nevertheless, with increased notoriety came increased scrutiny, entangling the fantasy sports industry in controversy. October 2015 saw an influx in negative press about DFS, specifically focusing on the legality of DFS. The inherently controversial nature of DFS was exacerbated after reports surfaced that an employee from DraftKings leaked data containing information about player lineups and—in the same week—won $350,000 off a $25 buy in.40 In response to the data leak and employee participation in DFS, the New York Attorney General's office announced that it was launching a probe into FanDuel and DraftKings, citing concern over "reports that employees may have misused inside data, 'rais[ing] legal questions relating to the fairness, transparency, and security,' of fantasy-sports companies.41 The troubles for DFS did not end there. By mid- october, the Wall Street Journal broke a story that the Department of Justice and the FBI were beginning investigations into the legality of FanDuel and DraftKings.42 As of late
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January, the number of lawsuits against DFS sites continues to climb, with estimates of over thirty lawsuits in ten different states.43
DFS legal woes are a catalyst for a host of different problems. For example, FanDuel has gone through two different rounds of layoffs.44 The most recent layoff occurred in early February, with the DFS company letting go "a group of developers in the Orlando office that were focused on R&D for ancillary games and applications that the company said it will not be investing in moving forward."45 In addition to the layoffs, the DFS industry was dealt another serious blow when payment processor, Vantiv, announced it would "suspend all processing for payment transactions related to daily fantasy sports in the United States and its territories on Feb. 29."46 Although an attorney for DraftKings denies that Vantiv will cease processing their payments, citing a court order mandating that Vantiv must carry out its contractual obligations,47 the processor's announcement nonetheless illustrates the growing doubt about the future of the industry.
A. Calls for Regulation
Amidst the controversy and scrutiny surrounding DFS, FanDuel CEO Nigel Eccles conceded that DFS companies need regulation in order to continue to evolve.48 In a letter posted on FanDuel's website in late October 2015, Eccles stated:
It has become apparent to me that our industry has grown to a size where a more formal, industry-wide approach is needed. To be clear,
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our industry needs strong, common sense, enforceable consumer protection requirements to ensure its continued growth and success.49
But even before the controversy and increased negative attention began to surround the DFS industry, FanDuel took precautionary measures, including increasing its lobbying efforts in specific states and consulting a former attorney general regarding concerns over its current business model.50 In addition to DFS company executives calling for regulation of the industry, the Fantasy Sports...
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