Is Daily Fantasy Sports Really Legal in the United States?

September 18, 2015
Is Daily Fantasy Sports Really Legal in the United States?

Daily fantasy sports companies and industry advocates love to tout the game’s legal standing in the United States, claiming DFS contests are 100% legal. The latest example came today in the Washington Post, on A1:

DraftKings’ chief executive, Jason Robins, defended the games, for which entry fees range from 25 cents to more than $5,000, as a legitimate, skill-based and legally protected way for fans to show their love for the game.

For “anyone who has taken the time to understand the law as it relates to DraftKings’ offerings, and anyone who has seen the data . . . on the skillfulness of the game, it’s really, honestly not a debate,” Robins said. “It’s clearly legal. And we have a team of great lawyers who watch everything we do.”

But is this really the case?

What these people touting DFS’s legality (We have an Unlawful Internet Gambling Enforcement Act exemption! PayPal processes our transactions. Therefore DFS is legal in the U.S.) fail to mention is that even though DFS may not be illegal under federal law (some lawyers actually argue it is), this doesn’t necessarily make it legal.

This is evidenced by the fact there are several states where DFS companies won’t operate, and several other states where some DFS sites will operate and others will not. (You can read the complete list of blocked/allowed states compiled by Legal Sports Report here.)

So what’s the real story? Is DFS legal in the United States?

Like so many Facebook relationship statuses, the answer to this question is often, it’s complicated. And it all starts with the UIGEA fantasy exemption.

What UIGEA’s fantasy exemption actually does

Online poker analysts and pundits understand UIGEA did not make online poker illegal. What UIGEA did was make it illegal for financial institutions to process online gambling transactions.

The legality of playing online poker, or operating an online poker site, was no different before or after UIGEA was enacted, and as much as some interested parties like to use it as a bright line for so-called “bad actors,” it’s nothing of the sort. It’s a narrowly focused law that simply grants U.S. law enforcement agencies the capability to disrupt the business of the online gaming sites (by prosecuting U.S.-based financial institutions) whose offshore locations had kept them outside the reach of U.S. law enforcement.

UIGEA was mischaracterized as an online gambling ban right out of the gate, and now, a decade later, the DFS industry is mischaracterizing what the fantasy sports exemption in UIGEA confers unto them.

It does not make DFS legal in the U.S., it simply exempts fantasy sports transactions from being prosecuted under UIGEA.

Legally, what UIGEA’s fantasy exemption does is kick the can down the road to the states. The federal government has effectively said fantasy sports do not violate any of their laws (The Wire Act, IGBA, PASPA, and UIGEA), which is far different than saying fantasy sports, and more specifically DFS, is legal.

When it comes to fantasy sports, and by extension DFS, the federal government has decided to let the states make that determination for themselves. Currently, DFS is believed to be illegal under some states’ laws, expressly legal in a couple others, and in almost every other state its legality is simply unaddressed due to the industry’s novelty.

The bottom line is this: Even though DFS appears to have a federal exemption, this only extends to the federal government prosecuting financial institutions who process DFS deposits and withdrawals. The legality of DFS is decided at the state level, and as such, it’s more or less an unregulated industry, operating in what are essentially gray markets.

Michigan is a prime example of a gray market

Not everyone agrees with the “gray market” designation, but it’s a pretty apt way to describe DFS’ tenuous legal position in many states.

Just how tenuous is DFS’s standing in individual states? Look no further than Michigan, where recent comments by the executive director of the Michigan Gaming Control Board led to three sites (and counting) pulling out of the market. That’s all it took to scare these sites away: comments. Not a new law or a change to existing law… just comments.

And Michigan isn’t the only state where DFS’ legality has been challenged. Most sites refuse to operate in five other states: Arizona, Iowa, Louisiana, Montana, and Washington. And as Marc Edelman outlined in a 2011 paper in the Harvard Law School Journal of Sports and Entertainment Law, different states (not on that list) present a number of potential legal problems for DFS sites as well.

In his paper, Edelman notes that some states have gambling laws that consider any element of chance as gambling, while other states are overly strict with their interpretation of “considerations,” or the prizes offered. In these “considerations” states (Edelman lists Vermont,  Delaware, Michigan, Ohio, Wisconsin, and Washington state) even the absence of an entry fee might not be enough to move DFS out of the gambling column according to Edelman.

This “unknown” legal standing reeks of gray market status. As does the lack of oversight and regulation of the industry.

If it looks like a duck and quacks like a duck

DFS also has a hard time passing the gray market smell test.

Earlier this week I signed up at a DFS site (the second time I have done so, strictly for research purposes of course) and I must confess that I was a bit alarmed to discover the only player verification check they did was having me check a box indicating I’m of the appropriate age.

No Social Security number. No address or phone number. No credit card required. All I was asked was: What’s your name; what screen-name do you want; and how are you going to fund your account.

To make matters worse, I funded my account using my wife’s PayPal, which is under her maiden name. Quite frankly, I could have been anyone, of any age, and the DFS site I registered at would have happily approved my account.

This is problematic on several levels, but I’ll just stick to this column’s main point, which is, DFS sites are operating in many gray markets.

For anyone who thinks DFS sites aren’t operating in gray markets, might I remind you this lack of regulation and oversight is the exact situation online poker sites were in before they were legalized and regulated by European countries and a trio of U.S. states.

Like online poker sites pre-Black Friday, DFS sites have:

Where is DFS legal?

There are only two states where fantasy sports have been legalized expressly: Kansas and Maryland. Although it should be noted neither state’s law specifically mentions DFS contests, just “fantasy sports.”

Because of this, it could be argued that Maryland’s law, passed in 2011 well before DFS exploded in popularity, doesn’t necessarily apply to DFS contests, as it uses very similar language to UIGEA (which was crafted before DFS came into existence).

Kansas’s law, passed earlier this year, seems less ambiguous when it comes to accepting DFS.

Here are the differences in how the two state’s classify fantasy sports:

Kansas: ‘‘Fantasy sports league’’ means any fantasy or simulation sports game or contest in which no fantasy or simulation sports team is based on the current membership of an actual team that is a member of an amateur or professional sports organization and that meets the following conditions:”

Maryland: “Participants own, manage, or coach imaginary teams;”

However, even in these two markets, there are no regulations in place that would safeguard players at DFS sites.

Final thoughts

Is DFS illegal in the United States? For the most part, no. It could be argued that 10 or more states have laws prohibiting daily fantasy sports contests.

Is DFS legal in the United States? The answer to this question is, it depends; or perhaps, “we don’t really know” is a better way to put it.

Considering the growing popularity of DFS, and the number of legislatures (Michigan and California to name two) looking into legalization and/or regulation, we’ll probably have a clearer answer to those two questions in the coming years.

My feeling is most states will legalize and regulate the industry. But for now, DFS will have to deal with continued scrutiny and questions of its legality.

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