Principles of Federalism Are At Play In Fantasy Sports

The Arcade 2.0™: Video Game Law Blog

Ian Ball
Thursday, 31 March 2016

Although the undisputed leaders of the daily fantasy sports industry, DraftKings and FanDuel, routinely compete against one another to acquire participants for their respective daily fantasy sports contests, they now find themselves on the same team in a different fight: the obstacles of federalism. Each state has differing regulations concerning the operation of daily fantasy sports within their borders. Due to the heightened scrutiny now on daily fantasy sports following legal action by the New York Attorney General, Draftkings and FanDuel are now in the midst of fighting various other state attorneys general to continue to operate the daily fantasy sports industry in various parts of the country. Now, more than ever, it is important to have an accurate survey of fantasy sports law. The following is the general state of the law of several states.

DraftKings Sues Texas After Daily Fantasy Sports Were Declared Illegal Gambling

Texas Attorney General Ken Paxton recently issued an advisory opinion concluding that daily fantasy sports constitute illegal gambling because paid participants compete for a monetary prize in a contest that involves partial chance regarding how a paid participant’s selected player will perform on game day.

DraftKings responded to the advisory opinion by suing the Texas’ Attorney General and arguing that the advisory opinion violates state and federal equal rights and due process protections. In comparison, FanDuel responded to the advisory opinion by promising their customers to lobby for legislative changes in 2017 and by entering into a settlement agreement with the Texas Attorney General’s Office. Under the agreement, after May 1, 2016, FanDuel will no longer accept paid entries from Texas’ daily fantasy sports users.

Daily Fantasy Sports Will Not Return to Nevada Due to Gambling License Requirement

In October 2015, Nevada also declared daily fantasy sports as a form of gambling, which means that it may exist in the state only if companies such as DraftKings and FanDuel comply with Nevada’s existing gambling regulations. In response to Nevada’s declaration, DraftKings and FanDuel have simply ceased operations in the state altogether, citing two reasons for this decision. First, the very act of applying for a gambling license could be seen as impliedly admitting that daily fantasy sports constitute gambling instead of a game of skill. The fear, of course, is that this “admission” might be used across state lines as a persuasive argument by an aggressive legislature to apply the same gambling label. Second, current regulations in Nevada are designed for high-volume gaming, and the daily fantasy sports business model is tailored towards smaller fees or wagers.

New Jersey Senator Proposed New Regulations Governing Daily Fantasy Sports

In New Jersey, new regulations may soon govern the daily fantasy sports industry. Senator Jim Whelan introduced the proposed regulations in order to bring oversight to the daily fantasy sports industry but not impede participant’s ability to play daily fantasy sports. The proposed legislation, Bill S-1927, would require daily fantasy sports entities to acquire a permit from the New Jersey State Department of Law and Public Safety. Further, the proposed regulations would not allow employees of daily fantasy sports entities to play in daily fantasy sports contests or share any insider information with others. The regulations will have no effect on season long fantasy sports and will not place any geographical restriction on New Jersey daily fantasy sports user’s opponents.

Virginia Passes New Regulations Governing Daily Fantasy Sports

In Virginia, the Fantasy Contests Act is now the law of the land. Under the Act, daily fantasy sports operators must verify that users are at least 18 years old, prevent employees from using insider information in daily fantasy sports contests, and hold user’s funds in an account separate from the companies’ funds. In response to the news of the Fantasy Contests Act, DraftKings and FanDuel applauded Virginia for establishing the thoughtful and appropriate regulatory framework that will allow the states’ 1.2 million daily fantasy sports users to continue their participation in the Act. At least in their view, this appears to be the model of choice as other states become interested in fantasy sports legislation.

The foregoing shifts in the way state legislatures are viewing fantasy sports is a classic example of federalism at work. This makes operating a successful daily fantasy sports business all the more difficult, for fear of running afoul gambling laws, which are currently evolving at an exponential rate. If you are in the daily fantasy sports business and are concerned with the legality of your business model, please Contact Us.

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