Sketching out a regulatory framework for DFS

Sketching out a regulatory framework for DFS

While watching the NFL this season, you may have wondered why ads for DraftKings and FanDuel are occasionally interrupted by actual football.

The meteoric rise of Daily Fantasy Sports (DFS) has taken the sporting world by storm. Eilers Research, which studies the industry, estimates that DFS will generate around $2.6 billion in entry fees this year and grow 41 percent annually, reaching $14.4 billion in 2020. Not only has the industry grown, but it has also become grafted onto professional sports. ESPN owns a stake in DraftKings and runs a co-branded segment with DraftKings and ESPN’s flagship program, SportsCenter. DraftKings has also partnered with NFL owners Jerry Jones and Robert Kraft, and has partnership deals with 16 NFL teams. As for FanDuel, the NBA has taken an equity stake alongside FanDuel’s 14 NBA team partnerships. Both DraftKings and FanDuel have raised hundreds of millions in venture capital funding and are each valued at over one billion dollars. With regard to those ubiquitous ads, DraftKings was the biggest purchaser of advertising time on television from August 1st to September 14th of 2015, spending just north of $80 million.

To paraphrase Jordan Belfort: Is all this legal?

The FBI, Nevada, New York and a host of other states have their doubts. In the beginning of October, The New York Times reported that the FBI was investigating the DFS industry. On October 15th, Nevada regulators ruled that DFS is gambling and that DraftKings and FanDuel be shut down. A few weeks later, on November 10, the New York State Attorney General issued a cease-and-desist order to DraftKings and FanDuel, ordering them to stop accepting bets in New York and declaring that DFS is illegal gambling. And on November 17th, The New York Times reported that the New York State Attorney General has also subpoenaed Yahoo for information about its DFS offerings.

Two events brought the scrutiny of regulators down on DFS. First, an employee at DraftKings released data on lineups that players used before lineups were set for the third week of the NFL season. That same employee then won $350,000 at a rival site. Accusations of using proprietary knowledge to gain an advantage flew and comparisons to insider trading were made. A study of the first half of this year’s Major League Baseball season found that 91 percent of player profits in DFS were won by just 1.3 percent of the players.

DFS was born under an exception to the Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA). The act, which regulates online poker and sports betting, offered guidelines for how DFS as game of skill, not chance, would not be illegal. The current deadlock in Congress and the need to address more pressing issues probably means that regulating DFS through new legislation is low on Congress’s agenda.

Currently, DFS is largely unregulated. Although safeguards are required for membership in the Fantasy Sports Trade Association. One scenario for regulating DFS is that the FBI investigation will paralyze the industry just like the online poker industry. In the 2011 decision United States v. Scheinberg, colloquially known as “Black Friday,” the Department of Justice (DOJ) shut down the three most popular online poker sites and froze millions of dollars in players’ accounts. It was not until February 2014, on “Green Friday,” that the money in players’ accounts was unfrozen. In Scheinberg, the DOJ alleged that the poker sites had violated the UIGEA and committed bank fraud and money laundering.

A case brought by the DOJ resulting in the freezing of players’ accounts would put a serious dent in the future of DFS. However, there is reason to think that the DFS industry will not suffer the same fate as online poker. No accusations of bank fraud or money laundering have been made and DFS is generally considered to be excluded from the UIGEA’s regulation. DFS’s exemption from the UIGEA is being challenged by New York’s cease-and-desist order which contends that DFS is gambling because it is a “‘contest of chance’ where winning or losing depends on numerous elements of chance to a ‘material degree.’”

 DFS regulation is most likely to come from the state level. Only six states ban DFS, but bills to regulate the industry have sprung up in 15 more states since the FBI investigation was reported. One of the main drawbacks of state regulation of DFS is its piecemeal nature. Laws from different states will most likely be different and cause operators to adapt accordingly. For instance, a proposed bill in California would require DFS sites to apply for a license to operate, while a bill in New York would give the state gaming commission jurisdiction over DFS. Finally, there is a question about whether state regulation of DFS would run afoul of the Professional and Amateur Sports Protection Act.

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