With new laws and legislative proposals, states try to tackle legality, regulation of daily fantasy sports

To understand just how different the environment for daily fantasy sports operators and participants can be from one U.S. state to the next, the Midwest is a good place to start.

In Minnesota, fantasy sports of some kind are being played by upward of 1 million people, and that includes participation in the shorter-term, “daily” versions of games run by leading operators such as FanDuel and DraftKings.

“We have this reputation of being straight-laced in Minnesota, but we like our charitable gaming and we like our fantasy sports,” Rep. Joe Atkins says. “Minnesota is tops in the country in terms of participation.”

Perhaps the state’s long, cold winters explain the games’ popularity, he adds.

But neighboring Iowa has plenty of months of snow and ice, and few if any residents in that state are playing daily fantasy sports. The reason: The operators of these contests don’t offer them as a result of Iowa’s statutory language on gambling.<--break->

“Something like fantasy sports is considered illegal until we expressly authorize it,” explains Sen. Jeff Danielson, who introduced legislation this year to do just that.

With fantasy sports, players typically select a “virtual team” of athletes from a particular sport and then compete against one another, with the outcomes based on the statistical performance of those chosen athletes. The playing of fantasy sports has been going on for decades, but for much of that time, it mostly involved competitions among friends, family and co-workers.

The rise of daily fantasy sports has changed the game.
Through the websites and mobile apps offered by various game operators, players can compete against strangers from across the country, and around the world, in shorter-term contests. A Minnesotan, for example, famously won $1 million this past fall on a $25 payment that he made in a contest based on a single week of play in the NFL. His huge win raised some important questions about Minnesota law.

“We have ambiguity in our statute about whether this is gambling or not, and depending on who you talk to, you get different answers,” Atkins says.

There are big stakes in the answer, for daily fantasy sports operators and players alike.

“If it’s not legal, you can’t collect,” notes Atkins, who has backed a measure this year to remove that ambiguity (by legalizing fantasy sports in Minnesota) and to add new state regulations.

The legality of daily fantasy sports is unclear in many other states as well, and that uncertainty has led to numerous legislative proposals across the country. In March, Indiana became one of the first U.S. states to take the two-step approach of legalizing and regulating.

“First, you see how many people are really playing this, and then you realize there are no consumer protections,” says Sen. Jon Ford, the author of Indiana’s SB 339. “Then it becomes clear that you have to do something. That’s how I came at this — looking at this as a way to protect consumers.”

In the months leading up to this year’s state legislative sessions, there were high-profile stories of “insider trading” (an employee of one daily fantasy site using confidential information to win games offered by another operator) and of smaller operators closing their businesses and not being able to pay players.

Many of the proposed bills in 2016 try to address these concerns, while protecting game participants in other ways as well. Indiana’s SB 339, for instance, prohibits the employees of a fantasy game operator from competing in contests with cash prizes that exceed $5. Game operators must also contract with a certified public accountant for annual financial audits, and they must segregate their operational funds from the funds of game participants.

Another provision in the Indiana law requires that game participants be at least 18 years old, and a newly created fantasy sports division, housed within the Indiana Gaming Commission, will handle oversight responsibilities.

Operators will have to pay an initial licensing fee of between $50,000 and $75,000, as well as a yearly fee of $5,000. Ford says these fees were included to offset the cost of oversight and regulation; proposals in some other states have included these provisions as well.

But Marc Edelman, an associate professor of law at Baruch College’s Zicklin School of Business, warns that if a state establishes high licensing fees, it could be “in essence excluding all but the largest daily fantasy sports companies.”

Without new laws, daily fantasy sports stops in some states

As of early April, Indiana was one of only a few states where daily fantasy sports legislation had become law. If this inaction persists, one potential consequence is that daily fantasy sports activity gets shut down in more jurisdictions. (According to Legal Sports Report, as of March, there were already 10 states, including Iowa, where most or all daily fantasy sports operators did not take customers.)

In late 2015, Illinois Attorney General Lisa Madigan issued a legal opinion that daily fantasy sports were illegal under her state’s current criminal code, which prohibits the playing of “games of chance or skill for money.”

A handful of other attorneys general have reached similar conclusions about the legal status of daily fantasy sports in their states.

" I think a significant amount of the population will not be able to take part in the games due to restrictions at the state level,” Chris Grove, publisher of Legal Sports Report, says about the near-term future for daily fantasy sports. “Across the states where the activity is allowed, there will be a patchwork of regulatory approaches that share some DNA, but differ on key points like age, level of regulation and so on. It’s also possible that we’ll see some states restrict [daily fantasy sports] to intrastate play only.”

The future of daily fantasy sports is in the hands of states because of a 2006 federal law: the Unlawful Internet Gambling Enforcement Act, an anti-gambling measure that included an exception for “participation in any fantasy or simulation sports game.”

So while the federal government currently forbids most states from allowing sports betting (under theProfessional and Amateur Sports Protection Act), this does not apply to fantasy sports. 

The 2006 federal legislation became law before the proliferation of daily fantasy sports operators, but most observers do not expect the U.S. Congress to revisit the “fantasy exception” anytime soon. “I have a hard time imagining this issue being resolved at the federal level,” Grove says.

In the state legislation introduced this year, some of the language from that 10-year-old federal law is often used — for example, defining fantasy contests as ones in which “all winning outcomes reflect the relative knowledge and skill of the participants.”

That word “skill” is especially important in states where the legal status of a game can depend on whether its outcome is predominantly based on “chance” or the “skill” of participants.

And to Iowa Sen. Danielson, understanding that distinction is also crucial to crafting smart policy — not only with regard to fantasy sports, but what he calls a broader range of “electronic prediction markets.”

“It is not all that difficult to assess the level of skill vs. chance in playing a game,” he says. With fantasy sports, Danielson believes skill clearly determines outcomes more than mere chance.

“It’s basically peer-to-peer, variable-in-market predictions,” he says. “It gives you the opportunity to do your homework and come up with better predictions than your peers.”

Last year, Danielson introduced a bill to not only legalize fantasy sports, but to authorize fantasy prediction markets in politics (contests based on the race for president, for example). Rep. Atkins, too, says the debate this year in state capitols over fantasy sports reflects a larger policy issue that legislators likely will be tackling for years to come.

“It’s this entire area of online participation of games that have participation fees and payouts,” he says. “We’ve only seen the tip of the iceberg.”

He adds that some key lawmakers in Minnesota, Republican and Democrat, have expressed interest in exploring the legalization of sports betting.

“It’s somewhat akin to the arguments for fantasy sports,” Atkins explains. “It’s already occurring, and yet there’s no oversight and no assurances for players that they’re going to get paid. They are very similar arguments.

“But the one difference is that there is no ambiguity about sports bookmaking: It is illegal.”

At least for now. 

According to Edelman, bigger changes might be coming sooner rather than later. “I would not be surprised if five years from now, state and federal laws change substantially to allow for widespread sports gambling of all types,” he says.

Traditionally, professional sports leagues have been among the leading opponents of legalized sports betting (in contrast, they have supported fantasy sports).

But what if the NFL expands to England, a country with legalized sports betting? Edelman asks. Would the league’s stance soften or change? Could that, in turn, change the minds of members of U.S. Congress? 
Or what if the state of New Jersey prevails in its current legal fight (now pending in federal court) to legalize sports betting? Would more states see legalization as a way to tax and regulate this activity?

Wording of state laws on fantasy sports can make big difference

Of the various state regulations on daily fantasy sports, Edelman points to Massachusetts as having among the nation’s strongest. Those provisions (established by the Massachusetts attorney general) include:

  • setting the minimum age for playing in fantasy sports games at 21 and not allowing operators to promote the activities on schools and college campuses;

  • requiring any advertising of daily fantasy sports that mentions average individual winnings to also disclose the average net winnings of all players;

  • limiting deposits of game players to $1,000 (unless the operator can verify that an individual player can sustain losses higher than that amount); and

  • setting aside games for beginners only (excluding experienced players who tend to win most of the prizes).

But the first step in most of this year’s state proposals is to legalize, and that can be tricky. Based on the wording of the bills or the types of daily fantasy sports being offered, Edelman says, a state’s intent to legalize may or may not withstand legal scrutiny. If these new laws only allow for games of skill, for example, that still leaves open the question of whether a particular fantasy contest meets this definition.

“If it can be shown that a particular format does not meet the necessary state threshold of skill,” he says, “the game remains illegal.”

Edelman points in particular to certain “against the house” games for individual sporting events (contests involving a golf tournament or a NASCAR race) that could remain illegal, depending on a state’s statute on gambling and how its lawmakers ultimately define fantasy sports.





Stateline Midwest: April 20162.25 MB