Fantasy sports probably originated in

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1 GAMING LAW REVIEW AND ECONOMICS Volume 20, Number 5, 2016 Ó Mary Ann Liebert, Inc. DOI: /glre Articles Daily Fantasy Sports Frank Catania and Joseph Kelly Fantasy sports probably originated in 1980, but became popular as a result of the Internet and a federal appellate decision concluding that any professional sports player s right to publicity in their names was outweighed by the First Amendment right to freedom of expression. 1 Most importantly, major league professional teams, while opposing online sports gambling, strongly supported legalization of seasonal fantasy sports. Daily fantasy sports (DFS) became popular after After years of growth, the DFS market has been revised downward for 2016 and subsequent years. The Eilers and Krejcik Gaming 2016 report has estimated that the previous forecast for 2020 of $18 billion in entry fees is now out the window. Instead, Eilers projects estimates that range from $3 plus billion in 2020 entry fees, the worst scenario, to $14 billion in entry fees, the best scenario. The $3 billion worst-case scenario would approximate the 2015 level. 2 Presently, DraftKings, founded in 2011, and Fan- Duel, founded in 2009, control the overwhelming share of the DFS market. New entrants, such as Poker Stars (Amaya), Yahoo, and CBS will soon obtain a sizable market share by offering new programs, such as head to head fantasy contests. 3 The Fantasy Sports Trade Association (FSTA) Market Study estimates that 20% of Americans (51.6 million) now play fantasy sports. 4 Frank Catania is senior partner in Catania Gaming Consultants, and counsel to the law firm of Catania & Ehrlich of New Jersey. He is a former director of the New Jersey Division of Gaming Enforcement and a founding member of the International Masters of Gaming Law. He has been active in gaming issues for over three decades. Joseph Kelly is a professor of business law at SUNY College at Buffalo in Buffalo, New York, an associate of the Law Offices of Catania & Ehrlich, and co-editorin-chief of Gaming Law Review and Economics. FEDERAL LAW It must be stressed that federal law exceptions did not legalize fantasy sports in any state. A 1999 congressional report interpreted the Wire Act as follows: Section 1085 does not make a fantasy sports league game or contest illegal in all States simply because it is illegal in one State. Conversely, section 1085 does not make a game or contest legal in all States simply because it is legal in one State. 5 It is doubtful whether existing federal law prohibits online fantasy sports. The most relevant law is the Unlawful Internet Gambling Enforcement Act (UIGEA). 6 UIGEA was enacted, with little notice or analysis in 2006, during the last days of that Congress. UIGEA is a poorly drafted statute that has yet to be definitively construed in all its aspects. Section 5362(1)(E) of UIGEA specifically excludes from the scope of the term illegal bet or wager online seasonal fantasy sports, which are therefore exempted from federal prohibition. The UIGEA exception did not exempt weekly or daily fantasy sports wagers, but it did lead to an explosion of parties and players. The House Subcommittee on 1 C.B.C. Distribution and Mktg., Inc. v. Major Legal Baseball Advanced Media, 505 F.3d 818 (8th Cir. 2007), cert. denied, 553 U.S (2008). 2 Dustin Gouker, Daily Fantasy Sports Market Size Forecast: Revise Down, with Cloudy Prospects, LegalSportsReport, (Feb. 22, 2016), < 3 James Kilsby, New Entrants Bid to Disrupt America s DFS Duopoly, Gambling Compliance, Sept. 1, Fantasy Sports Trade Ass n (FSTA), Fantasy Sports Market Study (2015). Dustin Gouker, Nowhere to Go but Up? New Data About Daily Fantasy Sports Points to Positive Trends, LegalSportsReport ( June 30, 2015), < 5 S. Rep. No (1999) U.S.C et seq. 378

2 DAILY FANTASY SPORTS 379 Commerce, Manufacturing, and Trade held hearings on DFS and online gambling on May 11, 2016, but it is not expected that those hearings will result in new legislation. In fact, DrafKings and FanDuel chose to not participate in the event. When the United States Department of Justice (DOJ) declared on December 23, 2011 that the 1961 Wire Act 7 only applied to sports wagering, Nevada, New Jersey, and Delaware enacted legislation that legalized some forms of online non-sports gambling. This online gambling resulted in Sheldon Adelson, chairman and chief executive officer (CEO) of the Las Vegas Sands Corporation, becoming the primary backer of the Restoration of America s Wire Act (RAWA). 8 RAWA would make all state online gambling illegal except for specific exceptions, such as online horseracing and seasonal fantasy sports. Adelson, however, has stated that he does not consider DFS as something that should be prohibited under RAWA. 9 Presently, there at least three federal investigations into DFS, viz., the U.S. attorney offices in the Southern District of New York (home of FanDuel), the District of Massachusetts (home of DraftKings), and the Middle District of Florida. The federal investigations may have been stimulated when an employee of DraftKings won $350,000 at a rival site, perhaps by using inside information. A grand jury in the Middle District of Florida has issued a subpoena to the FSTA, the leading trade representative of 300 members. 10 In explaining the federal action at a gambling seminar, former U.S. attorney Paul Kelly stated: A couple of things you should know about the Justice Department. The first thing I will tell you is that when multiple offices of the Justice Department are looking at the same alleged crime, they don t always play nice in the sandbox. There s often a race to be the first office to come out with charges. Sometimes the Justice Department in Washington headquarters has to kind of sit people down and have them make nice. 11 STATE LAW Geoff Freeman, CEO of the American Gaming Association, gave an excellent analysis of states need to clarify DFS law. We want regulators across the U.S. to take DFS out of that legal gray zone and make it either black or white,. We believe legal clarity can accomplish two important public policy goals: ensure that the highly-regulated gaming industry isn t prevented from entering into new and innovative opportunities and encourage new entrants and fresh innovations. Further, greater consumer protections will safeguard customers from unscrupulous operators and unfair games. 12 Two states have passed legislation stating that fantasy sports is not illegal gambling, viz., Maryland (12-114), Online Fantasy Completion (2012), and Kansas (H.R [2015]). Maryland is now considering whether to legalize DFS. Four states, Virginia, Indiana, Mississippi, and Tennessee have legalized DFS and many others have bills in their legislatures that would legalize DFS. The Virginia Fantasy Contests Act ( et seq.) requires registered applicants to pay an initial $50,000 fee, submit to extensive regulatory requirements, and maintain self-exclusion policies. 13 The Indiana legislature, effective March 24, 2016, established a Paid Fantasy Sports Division (Act no. 339) that would regulate fantasy sports under the yet to be formed Indiana Gaming Commission. On April , Tennessee became the third state to legalize DFS. The bill mandates a 6% adjusted revenue tax, an independent audit, a cap of $2,500 per 7 18 U.S.C H.R. 707, S Dean Chambers, Sheldon Adelson Says Spare One-Day Fantasy Sports from Internet Gambling Ban, Patriot Update (Nov. 4, 2015), < 10 Joe Drape, Fantasy Sports Trade Group Is Subpoenaed by Federal Grand Jury, N.Y. Times, Oct. 17, Transcript of Paul Kelly, Here s Where The Federal Investigations Into Daily Fantasy Sports Might Be Focused, LegalSports- Report (Mar. 18, 2016), < 9053/dfs-federal-issues/>. 12 Press Release, American Gaming Association, At Nevada DFS Hearing, Casino CEO Urges Officials to Embrace Innovation (Mar. 7, 2016), < press-releasess/nevada-dfs-hearing-casino-ceo-urges-officialsembrace-innovation>. 13 Dustin Gouker, Virginia Fantasy Sports Bill Creating Split in Industry, LegalSportsReport (Mar. 2, 2016), <

3 380 CATANIA AND KELLY month by a player, a prohibition of employees playing, and problem gambling protection measures. 14 In 2016, about seven state bills that would have legalized DFS (Arizona, Florida, Georgia, Iowa, New Mexico, Minnesota, and Washington) are dead. About four states ( Michigan, Missouri, New Hampshire, and West Virginia) would exempt or carve-out DFS from state gambling laws. About 14 state bills (Alabama, Colorado, Connecticut, Georgia, Hawaii, Illinois, Missouri, Nebraska, New Mexico, New Jersey, Oklahoma, South Carolina, Vermont, and Wisconsin) would impose light restrictions on DFS operators. About six states (California, Florida, Maryland, New York, Pennsylvania, and Rhode Island) would impose heavy regulations. Some states, such as Pennsylvania, would have required operators to utilize websites of the state s licensed casinos, but now do not require it. In Massachusetts, 940 C.M.R (Final Regulations) of the Attorney General mandates DFS operators to require that certain players be clearly labeled as highly experienced; ban players under 21; enact not only self-exclusion policies, but also permit third-party exclusion; and enact monthly caps of $1,000. Any DFS Connecticut legalization might jeopardize the state tribal compacts. On April , the Connecticut attorney general cautioned state senators that there is a substantial risk that passage of [DFS] legislation could jeopardize the State s revenuesharing arrangements with the tribes. Tribes in Arizona, Florida, and Oklahoma have become more aggressive in blocking state legalization of DFS. 15 The distinction between heavy and light regulation depends primarily on a somewhat arbitrary analysis of how pervasive and extensive the proposed or enacted regulations might be. 16 The heavy Indiana law (S.B. 339), enacted into law on March 24, will require the soon to be established Indiana Gaming Commission to oversee the newly created Sports Division. This Sports Division will have the authority to conduct hearings, issue subpoenas, and establish penalties for non-criminal violation of rules. It also will require gaming operators to pay a minimum $50,000 initial fee and a $5,000 annual fee. Licensees must also undergo a complete investigation every three years ( 17(c)). Furthermore, no employee may participate in a game where the cash pay exceeds $5. Regulations would be established requiring licensees to verify players are at least 18 years of age and prevent participation of players who have self-excluded themselves. Regulations would also require annual audits of the operator by a certified public accounting firm, which would be submitted to the Division for review. Provisions would also be required for the operator to withhold winnings from a winner who is delinquent in child support. New York s heavy regulation would have required $500,000 applicant fees, but the most recent bill would allow regulatory fees as low as $ The New York bill would also require strict licensing requirements similar to Indiana. Regulation fees of over $50,000 might force smaller firms to either go out of business or avoid that state. 18 (New York, like several other states, has more than one bill before the legislature. The authors have selected the bill most likely to pass.) Virginia legislation would be considered light. S.B. 646, enacted into law on March 21, 2016 would require full disclosure of anyone with a significant interest, such as a director or 15% shareholder, selfexclusion procedures for players independent audits, and an initial $50,000 registration fee. Virginia is considered light regulation largely because of the expectation that DFS operators essentially would self-regulate. An amended Illinois bill (H.B. 4323) would require player age over 21, have a sliding scale of application and license fees ranging from $500 to $50,000, and allow some operators who are presently accepting Illinois DFS players to be licensed. A Mississippi DFS bill (S 2541) has also passed both legislative houses and was enacted into law on May 13, It would require operators to enact consumer protection measures, ban employees from entering DFS contests, to register and verify player age (at least 18). There is no licensing fee. All operators and gaming regulators should consider the broad outline suggested by Richard McGowan, 14 Dustin Gouker, A Third Daily Fantasy Sports Regulation Law Appears to Be on the Way, LegalSportsReport (Apr. 19, 2016), < 15 Tony Batt, Tribes Start to Mobilize against Daily Fantasy Sports, Gambling Compliance, Mar. 23, U.S Daily Fantasy Sports Tracker, Gambling Compliance (March 2016 Report). 17 Sara Friedman, Online Poker, DFS Removed from New York Budget Talks, Gambling Compliance, Mar. 31, State Bills to Allow Fantasy Sports Could Hurt Smaller Firms, CDC Gaming Reports (Mar. 27, 2016) < 19 Sara Friedman, Stakes High as Lawmakers Face DFS Bill Deadlines, Gambling Compliance, Apr. 19, 2016.

4 DAILY FANTASY SPORTS 381 Regulating Fantasy Sports: The Ten Commandments. 20 For example, concerning consumer protection, McGowan states: III. THOU SHALL PROTECT CONSUMERS Employees shall not have access to shadow player information Customer data shall be 100% confidential; never shared with third parties Employees are prohibited to enter contests anywhere One Strike, You re Out: employee termination and penalties Last-minute automated lineup changes prohibited Employees shall not disclose player-owned percentages prior to lineup lock-in 21 STATE ACTION Fantasy sports operators at the time of UIGEA almost always prohibited players from Arizona, Louisiana, Maryland, and Vermont because their state laws were interpreted to prohibit any game or contest for money not specifically authorized by statute. Many operators also excluded Florida and Iowa residents, because of unfavorable attorney general opinions, or due to a conclusion that state law might prohibit fantasy sports. All operators avoided Montana 22 because the law, while legalizing fantasy sports, imposed onerous requirements. FanDuel and DraftKings voluntarily excluded college games from fantasy sports after the National Collegiate Athletic Association (NCAA) 2016 March Madness. 23 Until DFS began in 2007, there was minimal state interest in prohibition or regulation of fantasy sports. An exception would be Washington, where operators have excluded residents. For example, Washington s State Gambling Commission website states: bracket pools, office sports pools, and fantasy sports have never been authorized as gambling activities in Washington State and are illegal. 24 It was not until the popularization of DFS instead of season games and the consolidation of the industry into the giants DraftKings and FanDuel that state officials became interested in taking action. First, there seemed to be minimal difference between DFS and straight sports betting. Second, there was a scandal whereby a DraftKings employee used inside information to win $350,000 on fantasy football at FanDuel. The litigation concerning DFS was triggered by this $350,000 insider information scandal. In a certified letter to DraftKings and FanDuel, Eric Schneiderman, the New York State attorney general, informed the operators they must cease and desist from illegally accepting wagers in New York State in connection with Daily Fantasy Sports. The letter stressed the critical distinction between DFS and traditional fantasy sports, where players competed over a long season and operators received most revenues from administrative fees and advertising, rather than profiting principally from gambling. Schneiderman further emphasized that DFS is designed for instant gratification and is far closer to poker, and that the top one percent of Draft Kings winners receive the vast majority of the winnings. 25 In summary, it is illegal gambling. New York, with over 1.2 million players, is the largest state market and the companies would lose between $35 million to $40 million per year. 26 On November 13, 2015, DraftKings and FanDuel filed motions for preliminary injunctions and temporary restraining orders (TROs) against the New York attorney general to stop him from preventing them from operating fantasy sports. The two operators requested injunctive and declaratory relief alleging the attorney general violated, inter alia, defendants Fourteenth Amendment rights, their rights under the New York State Constitution, and 42 U.S.C (the anti- Ku Klux Klan law). On November 17, 2015, the attorney general filed a civil complaint against FanDuel and Draft- Kings alleging fraudulent conduct and requested 20 Richard McGowan, Regulating Fantasy Sports: The Ten Commandments, 20(2) Gaming L. Rev. and Econ. 145 (2016). 21 Id. at Mont. Code Ann (2)(a) (2007). 23 Daily Fantasy Sports to Stop Featuring University Sports, Focus Gaming News (March 2016) < daily-fantasy-sports-stops-featuring-university-sports>. 24 Washington State Gambling Commission, Sports Wagering (August 2015), < brochures/5-206-sports-wagering.pdf> (emphasis in original). 25 N.Y. Att y Gen. Eric T. Schneiderman, Notice to Cease and Desist and Notice of Proposed Litigation Pursuant to New York Executive Law 63(12) and General Business Law 349 (Nov. 10, 2015). 26 Joe Drape, Payment Processor to Stop Working With Daily Fantasy Sports Clients, N.Y. Times, Jan. 29, 2016.

5 382 CATANIA AND KELLY injunctive relief to stop the two operators from doing business in New York State and he was successful. The trial court stated: Furthermore the New York State Penal Law does not refer to wagering or betting, rather it states that a person, risks something of value. The payment of an entry fee as high as $10,600 on one or more contests daily could certainly be deemed risking something of value. The language of Penal Law is broadly worded and as currently written sufficient for finding that DFS involves illegal gambling. 27 The trial court also concluded that UIGEA was irrelevant to the case at bar since its statutory language did not help the operators. In conclusion, the trial court ruled in favor of the attorney general and against the defendants. It was further ordered that the New York attorney general would have 30 days to respond to defendant s complaints and that defendants must close operations in New York State until further proceedings found otherwise. On December 31, 2016, the attorney general amended the complaint to include money damages for false advertising and deceptive acts, and for the return of consumer funds. Within hours of the trial court ruling, a state appellate judge stayed the cease-and-desist order and allowed the operators to continue accepting New York customers. After an hour-long hearing that same day, Judge Paul Feinman of the Appellate Division, New York Supreme Court (1st District), granted a temporary order allowing the operators to accept New York players. This temporary order was affirmed by the full Appellate Division on January 11, 2016, until at least May Almost immediately after the trial court decisions, payment processors ceased New York operations, with some later continuing to accept New York DFS transations when the trial court order was stayed. In March 2016, both companies, in an agreement with the attorney general, agreed to cease accepting New York customers until this matter was decided on appeal, or until New York legalized DFS. Both sides agreed to not further appeal the Supreme Court Appellate decision. The attorney general, however, insisted that the agreements would not include the attorney general s claims of false advertising and consumer fraud.. 29 On October 16, 2015, the Nevada attorney general provided a 16-page opinion to the Nevada Gaming Control Board that unregulated DFS were sports pools and gambling games and were illegal under several Nevada statutes. The Nevada Gaming Control Board earlier mandated that all DFS operators cease accepting Nevada players until they obtained the necessary license. On December 23, 2015, the Illinois attorney general reached a similar concussion regarding DFS and in a 14-page opinion cited, inter alia, the Nevada attorney general s opinion and the Schneiderman v. FanDuel opinion. Other state attorneys general also opined that DFS was illegal. So far in 2016, at least seven other state attorneys general have concluded DFS was illegal unless regulated by the state. In an interview, an assistant attorney general in Vermont stated, Daily fantasy sports violate Vermont s gambling laws.. Vermont has very strict longstanding limitations on gambling. 30 The Maryland attorney general, on January 15, 2016, in a 22-page opinion concluded that fantasy sports was authorized by Maryland statute, but that the legislature and the electorate should resolve the status of DFS. The Texas attorney general, on January 19, 2016, citing Nevada and New York attorney general opinions, stressed that Texas, Nevada, and New York did not use the predominate test in determination of what was gambling, but only required that chance be an element of the game. The Texas attorney general concluded that all fantasy sports games were illegal under Texas law. In March 2016, Fan- Duel reached an agreement with Texas to cease taking Texas players by May. DraftKings requested 27 Schneiderman v. FanDuel, Inc., 2015 N.Y. Misc. LEXIS 4521; 2015 N.Y. Slip Op (U) at 7 (N.Y. Sup. Dec. 11, 2015). 28 Sharon Terlep, Appeals Court Lets DraftKings, FanDuel Continue in New York, Wall St. J., Dec. 11, 2015; Schneiderman v. FanDuel, M-6204, Index No /15; Schneiderman v. DraftKings, M-6206, Index No / Laura Wagner, DraftKings, FanDuel Will Shut down Paid Contests in New York For Now, NPR.org (Mar. 21, 2016) < /draftkings-fanduel-shut-down-paid-contests-in-newyork-for-now>. 30 Scott Malone, Fantasy Sports Illegal in Vermont, Attorney General s Office Says, Reuters ( Jan. 15, 2016), <

6 DAILY FANTASY SPORTS 383 a declaratory judgment that Texas DFS was legal and the attorney general has responded. 31 In respective opinions, the Hawaiian attorney general ( January 27, 2016) and the Mississippi attorney general ( January 29, 2016) concluded that fantasy sports were illegal, although the Hawaiian attorney general explained the difference between fantasy sports and DFS. On February 26, the Georgia attorney general informed the Georgia Lottery that DFS was illegal. In April 2016, the respective attorney generals of Alabama and Tennessee opined that all fantasy sports were illegal and the Tennessee attorney general issued cease and desist orders to FanDuel and DraftKings. 32 On May 2, the Idaho attorney general stated, My concern is that the daily fantasy sports offerings my office reviewed require participants to risk money for a cash prize contingent upon individual athletes collective performances in various future sporting events.. As I see it, this falls within Idaho s definition of gambling 33 Unlike almost all other attorneys general, the Rhode Island attorney general concluded, in a letter on February 4, 2016, that DFS was legal because skill predominated over chance. He did suggest that a regulatory scheme be adopted to protect vulnerable players, provide transparency, and raise revenue for Rhode Island. 34 The attorneys general of North Dakota and South Dakota in 2015 evaded the legality issue. FanDuel and DraftKings also have the problem of defending approximately 55 federal civil lawsuits in 20 different states. 35 The class action lawsuits usually allege three causes of action: (1) insider trading; (2) illegal gambling in violation of state law, which might allow treble damages pursuant to the Statute of Anne; and (3) bonus fraud. 36 At least 14 of the cases were transferred to the Massachusetts federal court. A different federal class action lawsuit in the Southern District of Florida includes about 50 defendants. The 132-page complaint targets, inter alia, the National Basketball Association (NBA), Major League Baseball (MLB), Turner Sports, the National Hockey League (NHL), Knicks owner James Dolan, and various financial transaction providers. 37 Pierre Garcon of the National Football League (NFL) has filed a class action lawsuit against FanDuel in Maryland federal court, alleging misuse of player names without permission. 38 This issue had been resolved against the players about a decade ago. 39 PAYMENT PROCESSING The U.S. attorney for the Eastern District of Pennsylvania stated it is possible that DFS information services, such as RotoWire, will need to be regulated. In New York, Vantiv Entertainment Solutions, the powerful processing company, informed FanDuel and DraftKings it would cease payment processing in the United States on February 29, Citigroup, on February 5, also blocked DFS payments from New York. Yahoo DFS, in March 2016, decided not to accept credit card payments, but would allow PayPal payment. Processors, such as PayPal, meanwhile are reviewing the legality of DFS services Brian M. Rosenthal, FanDuel to Leave Texas; DraftKings Files Motion to Continue Operating, MySanAntonio.com (Mar. 4, 2016), < texas/article/fanduel-to-stop-operating-in-texas-paxton-says php>. 32 Alabama AG: Paid Online Fantasy Sports Sites Are Illegal, CDC Gaming Reports (Apr. 5, 2016), < Sheila Burke, Tennessee AG: Fantasy Sports Contests Are Illegal Gambling, CDC Gaming Reports (Apr. 6, 2016), < 33 Kathryn Haake, Idahoans Blocked from Using Paid Fantasy Sports Sites, CDC Gaming Reports (May 2, 2016), < FanDuel and DraftKings have agreed to leave the Idaho market. 34 Press Release, Rhode Island State Government, Attorney General Kilmartin Finds Daily Fantasy Sports Legal In Rhode Island (Feb. 4, 2016), < 35 In re: Daily Fantasy Sports Litigation, 2016 U.S. D. Mass. Lexis ( J.P.M.L. 2016). 36 In re: Daily Fantasy Sports Marketing and Sales Practices Litigation (MDL No. 2677); In re: DraftKings Inc., Fantasy Sports Litigation (MDL No. 2678); In re: FanDuel, Inc. Fantasy Sports Litigation (MDL No. 2679), 2016 U.S. Dist. Mass Lexis ( J.P.M.L. 2016). 37 Andy Clayton, Knicks, Yankees Now Dragged into DraftKings, FanDuel Mess, N.Y. Daily News, Nov. 21, James Brady, Pierre Garcon Files Class-Action Lawsuit against FanDuel, SB Nation (Oct. 30, 2015), < 39 C.B.C. Distrib. and Mktg. v. Major League Baseball Advanced Media, L.P., 443 F. Supp. 2d 1077 (E.D. Mo. 2006), 505 F. 3d 818 (8th Cir. 2007). 40 Zachary Zagger, Yahoo Daily Fantasy Ditches Credit Cards in Favor of PayPal, Law 360, (Mar. 30, 2016), < Drape, supra note 26.

7 384 CATANIA AND KELLY CONCLUSION DFS will continue to grow state by state, and those states allowing DFS will have to decide whether to enact heavy, light, or no regulations of DFS. Admittedly, this will result in a near quagmire of laws that operators and financial transaction providers will have to follow. However, players will be assured that all operators are suitable, solvent, will engage in socially respectable policies, and will pay winners. With either light or heavy regulations we can be assured money laundering will be minimal. In the authors opinion, this is preferable to any federal law regulating DFS, or no laws at all. States will have to avoid the Montana example of overregulation, which resulted in all major operators avoiding the state.