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Patchwork of Daily Fantasy Sports Regulations Will Increase Costs and Frustrations for Emerging Industry

Insight
05.02.2017
Aalok Sharma

Arkansas has become the most recent state to enact legislation aimed at regulating the Daily Fantasy Sports marketplace. Daily Fantasy Sports, or more commonly known as DFS, is a form of online entertainment where users play in matches against one another. In DFS, users select individual athletes for their lineup and match them against their opponent's lineup of individual athletes. The scoring is tied to real world statistics and generally, whoever earns the highest points wins the match. For example, when Tom Brady throws a touchdown, or when Buster Posey dings a homerun, a user will be awarded points towards their respective team. These games, however, are becoming increasingly difficult to win for novice players as publications have noted that the majority of winnings are earned by only a handful of elite players. The Sports Business Journal noted that causal players are at a disadvantage because they do not possess the historical data or analysis of expert players:

For example, a casual player might pick Mike Trout, Hanley Ramirez and Paul Goldschmidt in an MLB contest because they are star sluggers. A sharp player might instead choose Curtis Granderson, Wilmer Flores and Lucas Duda because choosing players from the same team creates covariance, the Mets are at Wrigley, the Cubs have a right-handed fly ball pitcher on the mound, the wind will be gusting out to right field, and the Mets are a road favorite.

In 2016, DFS came under scrutiny when employees from one DFS website began playing against other players on competing DFS platforms. Some consumers alleged they were disadvantaged when confidential information, such as player statistics and algorithms, were used against consumers. Indeed, some compared this to insider trading. Many state attorneys general began investigating these complaints because DFS matches frequently resemble gambling – an area of law frequently outlawed or heavily regulated. As a result, DFS became the target of litigation and the industry has slowly struggled in a post litigious environment.

Almost a dozen states have enacted legislation aimed at regulating the DFS marketplace, as the federal government continues to withhold its opinion on the legality of DFS. As a result, a patchwork of regulations has been installed by several states.

It's unclear when the federal government will clarify whether DFS constitutes unlawful sports gambling. Nonetheless, under the Federal Unlawful Internet Gambling Enforcement Act (UIGEA), a wager is defined as something of value based on the outcome of a "game subject to chance". As a result, the UIGEA prohibits the use of the internet with these types of wagers. Proponents of DFS, however, argue that the contest is more akin to a game a skill and is not subject to the provisions of the UIGEA. DFS proponents state that skill predominates DFS to such extent, that is essentially renders chance to a nullity. To bolster their claims, proponents point to statistics that highly rated players dominate novice players as evidence that DFS is not a game that is subject to chance. State attorneys general, however, disagree with this assertion.

In January of 2016, Texas Attorney General, Ken Paxton, issued an opinion that DFS was illegal under Texas law. In his legal opinion, Paxton concluded that "[i]t is beyond a reasonable dispute that daily fantasy leagues involve an element of chance regarding how a selected player will perform on game day." Paxton pointed to scenarios where a player may become injured, or where a referee has unfavorable rulings which could negatively impact a player. Accordingly, in Paxton's opinion, DFS was illegal under Texas law because it was akin to gambling. Texas was not alone, as several states, including New York and Maryland, declared that DFS was illegal under state law.

In April of 2017, the Texas legislature began discussing the regulation of the DFS economy. Like many states, Texas understands that there may be benefits to regulating the DFS marketplace. How Texas will regulate DFS is yet to be decided, but other states that have enacted varying degrees of legislation.

At one end of the legal spectrum is Colorado, which last year enacted the Fantasy Sports Act. Under Colorado law, the Director of the Division of Professions and Occupations is tasked with creating rules, regulations, and licensing for DFS operators within the state of Colorado. More importantly, Colorado's Fantasy Sports act prescribes certain actions that are centered on consumer protection. For example, a DFS entity in Colorado is required to enact reasonable procedures in order to prevent employees from sharing confidential information from third parties or family members. In addition, DFS entities must account for funds in a distinct manner, by keeping operating funds separate from gaming funds. Finally, DFS entities must distinguish "highly experienced players" and make them conspicuously identified to the remaining players. As demonstrated above, Colorado has taken significant steps in enacting a regulatory framework for DFS.

On the other end of the legal spectrum are those states that have taken a more relaxed approach to regulating the DFS marketplace. In April of this year, Arkansas enacted HB2250. Unlike its Colorado counterpart, HB2250 does little in terms of consumer protection with no designation for "highly experienced players", no segregation of funds, and no licensing or background check requirements. Instead, HB2250 finds that paid fantasy sports does not constitute gambling, and allows for DFS to exist in exchange for an 8 percent tax on gross revenue based on Arkansas proceeds.

These two states demonstrate some examples how states are evaluating the DFS economy. It's unclear which approach, if any will, be widely adopted or whether significant regulation will hamper growth in the DFS marketplace. Nonetheless, one thing is certain: A patchwork of regulations will increase the legal complexity and expense of DFS enterprises.

If you have questions about the regulations governing Daily Fantasy Sports, contact Aalok Sharma or the Stinson Leonard Street contact with whom you regularly work.

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