Daily Fantasy Sports May Lead to Legalized Betting

As recently reported in the Wall Street Journal, Walt Disney Co., the parent company of ESPN, has agreed to invest $250 million in the fantasy sports company DraftKings Inc.

DraftKings and its competitor, FanDuel Inc., are part of a growing niche of Internet–based daily fantasy sports businesses that allow players to play for immediate cash payouts based on, as the moniker suggests, daily competitions in which participants compete against other players and/or the "house."

The Disney investment speaks volumes and serves as an indictor that the business of daily fantasy sports will only continue to grow.

This announcement is yet another example of a growing trend of partnerships between major media outlets, professional sports leagues and daily fantasy sports businesses.

In November, the National Basketball Association announced a partnership with FanDuel with the league taking an equity stake in the company. In 2013, Comcast Ventures, a subsidiary Comcast Corp., also invested in FanDuel. These partnerships continue to emerge despite the fact that daily fantasy sports lie in a relative legal gray area.

Daily fantasy sports are similar to traditional fantasy sports spanning an entire season, except that the truncated nature of the competition necessarily involves a greater element of chance and randomness. In a typical contest, players choose lineups made up of real–life athletes and are awarded points based upon outcomes in competition. Players are awarded cash payouts based upon their success relative to competitors.

Legal commentators have remarked that these sites blur the lines between games of skill (typically legal) and games of chance (typically illegal). See Marc Edelman's "A Short Treatise on Fantasy Sports and the Law: How America Regulates its New National Pastime," 3 Harvard Journal of Sports & Entertainment Law 1 (2012).

The perceived legal risks have not deterred investors, however.

Currently, several state and federal laws could apply to daily fantasy sports. At the federal level, potentially applicable laws include the Professional and Amateur Sports Protection Act (PASPA), 28 U.S.C. 3701 (1992), and the Illegal Gambling Business Act, 18 U.S.C. 1955 (1970). Of particular relevance is the Unlawful Internet Gambling Enforcement Act (UIEGA) 31 U.S.C. 5362(10) (2006), which focused specifically on Internet gambling and offshore betting sites.

UIEGA contains a carve–out for traditional fantasy sports, but it is unclear if daily fantasy sports are covered by the exception.

State laws on gambling tend to vary widely, leading to even greater unpredictability. Several states apply a "predominant purpose" test to evaluate whether a contest involves more skill than chance, which tends to be a relatively loose standard favoring the legality of daily fantasy sports.

Other states look at the material element of the contest, deeming a contest illegal if chance is a material element of a game, even if not the dominant purpose. Some states prohibit gambling on games with any element of chance, however minimal. Currently, neither FanDuel nor DraftKings operate in Arizona, Iowa, Louisiana, Montana or Washington.

In Illinois, a lawsuit challenged the legality of daily fantasy sports under the Illinois Loss Recovery Act (728 ILCS 5/28–8), but the case was dismissed primarily on procedural grounds related to the plaintiff's ability to recover a threshold amount for the suit. See Langone v. FanDuel and Kaiser, 12 C 2073 (E.D. Ill. 2002). The court did not address the issue of the legality of daily fantasy sports under Illinois law.

It would seem these legal issues would dissuade prospective investors, but that simply hasn't been the case. While legal ambiguities remain, mainstream media and professional sports leagues have embraced daily fantasy sports. Investments continue to pour in, and advertisements are ubiquitous on both the Internet and television.

These partnerships have emerged despite the fact that daily fantasy sports share similar characteristics to traditional sports gambling, particularly in fantasy sports contests that pit the participant against the house, which is not unlike a bookmaker taking a bet on the outcome of a particular game. Currently, only two states, Nevada and Delaware, offer legal sports gambling. Both states have exemptions under PASPA.

The willingness to promote daily fantasy sports signals an emerging acceptance of these sites and sports gambling in general. Not only has the NBA partnered with FanDuel, but in 2014, NBA Commissioner Adam Silver announced that he supports the legalization of sports gambling, citing a need for oversight and regulation.

The support from major media outlets and leagues, coupled with the growing prominence of daily fantasy sports sites among the general public, is likely to lead to greater clarity with respect to the legality of these contests. Daily fantasy sports companies have a vested interest in ensuring that their assets are protected, and the financial backing and legal resources of large corporations will certainly help in that regard.

With the infusion of millions of dollars, companies such as Disney, Comcast and others have a stake in ensuring daily fantasy sports companies operate in an unambiguously legal environment to ensure continued financial viability.

Pressure could be placed on lawmakers to amend and adopt laws that assure the legality of daily fantasy sports. Expect to see further clarification and liberalization of state and federal laws to ensure greater security for investors and consumers alike.

As daily fantasy sports grow and the legality of these contests becomes more transparent, the natural progression will be the legality of all sports gambling. If daily fantasy sports are legal, why not gambling?

In due time, the difference between daily fantasy sports and traditional sports gambling in the eyes of the law might be a distinction without a difference.

Team Members: