Last month we published a story in our newsletter about Daily Fantasy Sports (DFS), labelling DFS “flavour of the month”. Subsequent events suggest “a month” may have been an over optimistic time frame.
Things began to unravel quickly for DFS in early October 2015 when a DraftKings’ content manager, Ethan Haskell, published a list of athletes arranged by “owned percentages” while some of that week’s daily fantasy sports contests were still ongoing. Owned percentages show how many participants in the contest picked certain athletes for their rosters. Haskell collected US$ 350k from FanDuel’s site, another DFS operator, that weekend. Other employees of DFS sites also seem to be doing well in the contests. FanDuel’s spokesman, Justine Sacco, even said that 0.3% of total money won on their website had been won by DraftKings’ employees. This percentage is worth around US$ 10m. However, the method used to identify the employees and their winnings remains uncertain.
But FanDuel employees are also doing well from DFS. FanDuel’s employee in charge of product operations, Matthew Boccio, is one of the top 50 players on DraftKings’ website, despite only having entered the competition on 16 June 2015. Employees of DraftKings were reportedly encouraged to participate in FanDuel’s games. Other fantasy sports companies also allegedly encouraged their employees to participate in daily fantasy sports.
A few days after the DraftKings’ story, a player from Kentucky accused DraftKings of negligence and fraud in a lawsuit filed in the Southern District of New York. The lawsuit states that players were “fraudulently induced into placing money onto DraftKings because it was supposed to be a fair game of skill without the potential for insiders to use non-public information to compete against them”. DraftKings and FanDuel eventually banned their employees from participating in DFS contests.
In wake of recent events, many are calling for tighter regulation of the industry. The New York Attorney General opened an inquiry into the insider trading case, and his Massachusetts counterpart is reportedly “reviewing the sector”. Many congressmen cited the need to regulate the industry, while a New Jersey Congressman called for a federal probe into daily fantasy sports. Additionally, the FBI and the Department of Justice are investigating whether the business model of DFS sites violates federal law.
If we look at the prospects of regulating the fantasy sports industry, it would likely occur sooner than allowing sports betting or online gambling on a federal level. Fantasy sports are exempted from the Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA). Many argue that UIGEA unintentionally paved the way for daily fantasy sports. Former Iowa Representative, Jim Leach, one of the creators of the legislation, said that UIGEA was meant to stop online gambling, not encourage it. He also emphasised that “carve out does not provide DFS operators the immunity against federal and state laws”.
There is also the question whether fantasy sports are a game of skill or a game of chance, an issue that would have to be addressed in future legislation. A season-long fantasy league game could be considered a skill game, since drafting a perfect team requires knowledge of sport and players. But with the appearance of daily fantasy sport games, the lines between a skill game and a game of chance are becoming more blurred. In daily fantasy drafts users have a salary cap, and are required to form an athlete roster in accordance with a set of salaries for each athlete. These athlete rosters play on a daily or weekly basis, and one can re-draft a team as frequently as the real-world games take place.
Even though DFS is in a legal grey area, Major League Baseball (MLB) has established a marketing partnership with DraftKings, and has an undisclosed equity stake in the company. There are 27 MLB clubs that have partnership or sponsorship agreements with daily fantasy sports companies. The question is whether MLB should be involved in such business practices with DFS companies, especially when leagues are lobbying against legalisation of sports betting in the US. But MLB is not alone. Daily fantasy sports sites have partnership/ sponsorship agreements with 28 National Football League clubs, 25 National Basketball Association clubs, 11 National Hockey League clubs, even with the National Association for Stock Car Auto Racing (NASCAR). It is precisely because many sports leagues have some kind of interest in the fantasy sports websites that a ban on a federal level is unlikely.
A state-by-state approach into legality of fantasy sports also shows that US states do not have a clear idea on how to regulate the industry yet. Only two states – North Carolina and North Dakota – allow participation in DFS. Arizona, Iowa, Louisiana, Montana and Washington, on the other hand, prohibit participation on DFS sites. Nevada is the most recent state that banned unlicensed DFS sites. The Nevada Gambling Control Board said that the activity constitutes sports betting, and that companies can apply for a sports pool licence. A clear stance on the issue is yet to be set in the remainder of the US.
Regulating the industry would undoubtedly lead to certain negative effects for the companies in the short term. Presumably certain taxes, fees and levies would be imposed on the industry. Bearing in mind that DFS companies do not make much profit due to high payouts, the companies would make even less profit after contributing to state coffers. Operators would likely resort to mergers and acquisitions in order to save on costs. Furthermore, restrictions are likely in respect of permissible contest types operators would be allowed to offer.
The fate of DFS does at least show that UIGEA has had unintended consequences, as much ill-thought out regulation does, and that the US really needs to get a grip on its out-dated and unworkable gambling laws.