by David Schollenberger, Partner and Head of Gaming and Leisure, Healys LLP
Fantasy Sports play and online betting offered by companies such as DraftKings and FanDuel has become increasingly popular and visible in the US and is being slowly introduced into the UK. For those unfamiliar with online fantasy sports, contestants pay to select a roster of players and earn points based on their actual performances in real-life matches. With online sports betting on real sports events not permitted in the US, other than with some limited exceptions for horse race betting, and online casino games only permitted in three states, online fantasy sports betting is virtually the only game in town with many millions of users currently in the US.
Fantasy sports services are being advertised heavily on American television and have provoked considerable discussion and divergence of opinion recently with respect to how it should be characterised and regulated. Different states are taking different approaches. Fantasy sports businesses are currently undergoing scrutiny by state regulators and legislatures, inquiries from the US Congress, a ban in Nevada and multiple lawsuits. How are they currently regulated under federal and state laws in the US and the UK? What is the best way forward for their regulation? This article will explore these questions.
US Unlawful Internet Gambling Enforcement Act
Fantasy Sports have been given an exception to the general ban on online sports betting in the US.
The US federal Unlawful Internet Gambling Enforcement Act 2006 (“UIGEA”) prohibits gambling businesses from knowingly accepting payments in connection with the participation of another person in a bet or wager that involves the use of the Internet and that is unlawful under any federal or state law. UIGEA carves out fantasy sports provided that certain conditions are met. Online fantasy sports competitions are permitted provided that (1) all prizes and award offered to winning participants are established and made known to the participants in advance of the game or contest and their value is not determined by the number of participants or the amounts paid by those participants; (2) 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 events; and (3) no winning is based on the score, point-spread, or any performance or performances of any single real-world team or any combination of such teams or solely on any single performance of an individual athlete in any since real world sports betting or other event.
It is worth noting that the exception was carved out a time when fantasy sports competitions were taking place over an entire season. Currently, most fantasy sports are conducted on a daily basis.
Regulation by States
State laws in the US regulate what constitutes gambling and how gambling is regulated. Many states consider fantasy sports as a “game of skill” rather than a “game of chance” and as such is not caught by gambling legislation. Two states, Maryland and Kansas, have passed specific laws that legalise fantasy sports. Several states have enacted laws banning fantasy sports including Arizona, Iowa, Louisiana, Montana , Nevada and Washington state.
Currently Fantasy Sports operators are providing their services in all other states other than where it is banned. The situation may change with pressure from the public and state gambling regulators.
New Jersey, New York and Michigan are examples of several other states reviewing their position whether fantasy sports should be regulated as gaming and subject to jurisdiction of the state casino gaming regulator. A draft Bill submitted by New Jersey Senator Jim Whelan would require fantasy sports betting operators to obtain proper licensing similar to online poker licensing, pay a “permit fee” to operate within the state, and maintain its servers within Atlantic City. Public outcry for more regulation has been increased following the recent discovery that a DraftKings employee accidentally leaked non-public information about a contest and the fact that this employee previously won $350,000 on a bet at rival site FanDuel possibly using insider information.
In the UK, the legal position is more settled and clear. Under UK law, fantasy sports betting operations is considered gambling and subject to the jurisdiction of the Gambling Act 2005 with the Gambling Commission as its regulator. Specifically, it is considered to be pool betting. Fantasy sports betting operators will require a pool betting operating licence as well as a gambling software licence before they can offer their services to or advertise to the UK public and comply with the Gambling Act 2005, its regulations and the relevant provisions of the Licensing Conditions and Code of Practice and pay gaming duty. DraftKings has already received a UK Gambling Commission licence and FanDuel has an application in for a pool betting operating licence and gambling software licence. Both companies expect to aggressively enter the UK market.
Should Fantasy sports be banned, regulated as gambling or regulated otherwise in the US?
Currently there are no consumer protections in place to regulate fantasy sports in the US. There are no restrictions on age, identification and anti-money laundering checks, player funds protection, loss limitation, fraud protection or responsible gambling and gaming tax does not apply. The software algorithms that are used in their operation are not subject to any review and approval of their fairness. Currently there are no restrictions on during which hours fantasy sports advertising can be broadcast on US television and the content of such advertising. Complaints have been made about misleading television advertising showing persons who have won hundreds of thousands of dollars. Lawsuits have been also been brought alleging that the offer of initial player bonuses is misleading. Representative Franck Pallone has called for congressional hearings on the industry, claiming that the operators are “gaming the system”.
Those against regulation argue that fantasy sports are a casual family form of entertainment and that stakes and losses are quite low compared to real sports event gambling. It enhances, rather than detracts the interest and enjoyment of watching sports and players across many different teams. It is further argued that it is a game of skill and that success is dependent upon knowledge of the sport, of the athletes and the schedule of matches. It is also claimed that applying casino style regulations could kill fantasy gaming because of the high cost of compliance and taxation. Many in the industry feel that self-regulation of the industry or consumer protection legislation should be enhanced as is being done for social gaming (casino style games played for free with no prizes of value), as an alternative preferable to full scale casino style regulation. These types of consumer protection would include age verification, protection of player funds, protection user information, protecting contest information and Nigel Eccles, the CEO of FanDuel agrees that “strong, common sense, enforceable consumer protection requirements” would be good for the industry and level the playing field.
Increased regulation of fantasy sports betting by US states is inevitable and is to be encouraged. It is certainly more sensible to regulate an activity clearly enjoyed by millions than to ban it. Self-regulation and consumer protection legislation is not enough for this type of activity that is closely related to gambling and has many similar and related social issues to gambling. Regulation of fantasy sports betting can also be viewed as a first step towards introducing legalisation and regulation of broader online sports betting in the US. Transparency, fairness, prevention of crime, protection of player and contest information, player funds, protection of underage users, the vulnerable and addictive and problem users, regulation of advertising and auditing of operations is something that gaming regulators in the relevant jurisdictions have extensive experience in conducting. The argument that such regulation will create compliance and taxation costs that make these businesses unviable has been proven wrong by all the current successful online sports betting businesses in regulated jurisidictions in the UK and EU. The UK model of regulation of fantasy sports is a good one for US states going forward with regulation. The best result for the public, players and operator alike is to make the games safe, fair, transparent and under the watchful eye of an experience regulator creating a level playing field.