Legal Issues in Fantasy Sports

Fantasy sports once represented a seasonal hobby among friends and coworkers. However, it has now undeniably blossomed into a force in both the American culture and, more important, the U.S. economy. According to the Fantasy Sports Trade Association, some 42 million Americans now play some form of fantasy sports contest. Moreover, additional estimates indicate that fantasy sports represented a $4 billion to $5 billion industry in 2014. The number of unique users that visited just the two leading daily fantasy sports websites, FanDuel and DraftKings, increased by over 800% on mobile devices, and nearly 500% on the Internet from 2013 to 2014, according to Nielsen's “The Year in Sports Media Report 2014.”'

In addition to these staggering statistics is the fact that traditional media sources, including NBC, CBS, FOX and ESPN, air dedicated fantasy sports-related television shows incorporated into their regular sports programming, and that the FX network has aired the popular fantasy football sitcom The League since 2009. Likewise, professional sports organizations themselves, including the National Football League (NFL), the National Basketball Association (NBA), Major League Baseball (MLB) and the National Hockey League (NHL), have each, to varying degrees, negotiated and made deals with daily fantasy sports websites, including the NHL's recent exclusive deal with DraftKings.

While the professional sports leagues recognize the implicit benefits that fantasy sports generally, and daily fantasy sports contests particularly, provide by virtue of their ability to drive fan interest in their respective sports, perhaps no league has embraced daily fantasy sports recently quite like the NBA. In the fall of 2014, the NBA signed an exclusive deal with industry leader FanDuel and will become a direct investor in the site. Additionally, many individual NBA franchises also have signed partnership agreements with daily fantasy sites, seeing the arrangements as an opportunity to further engage their respective fan bases.

The rise in popularity of fantasy sports has not gone unnoticed by large investors and venture capitalists. Reports indicate that FanDuel received some $70 million in investments last fall from NBC Sports Ventures, Shamrock Capital Advisors and others, while DraftKings also received some $40 million in investments from Atlas Ventures, Redpoint Ventures, GGV Capital and Raine Group. Additionally, the Walt Disney Co. has recently agreed to invest $250 million in DraftKings.

Federal Regulations

The explosion of fantasy sports and the related acceptance of, and association with, these gaming ventures by professional sports leagues and media alike can be directly traced to the favored status bestowed upon fantasy sports contests by federal anti-gaming laws ' specifically the Unlawful Internet Gambling Enforcement Act (UIEGA).

The UIEGA, enacted by Congress with the intention of prohibiting transfer payments in connection with unlawful Internet gambling in the United States, provides a statutory carve-out specifically exempting fantasy sports contests. In order to fall within this UIEGA exception: 1) all fantasy sports league prizes must be established and made known to the participants in advance of the game or contest, and the value of the prizes cannot be influenced by the number of participants or the amount of fees they pay; 2) all winning outcomes must be determined predominantly by accumulated statistical results of the performance of athletes participating in multiple real-world sporting events; 3) no winning outcome may be based solely on any single performance of an individual athlete in any single real-world sporting event; and 4) no winning outcome may be based on the score, point spread or performance of any single real-world team or combination of such teams.

Separately, the Interstate Wire Act, 18 U.S. Code '1084, prohibits the use of wire communication facilities for transmitting wagering information or bets. Specifically, the prohibitions pertain to activity that contains the following elements: 1) being engaged in the business of betting or wagering; 2) knowingly using a wire communication facility; and 3) transmitting in interstate or foreign commerce bets or wagers, or information assisting in their placement, on any sporting event or contest.

The Wire Act contains an exemption for the “placing of bets or wagers on a sporting event or contest from a state or foreign country where betting on that sporting event or contest is legal into a state or foreign country in which such betting is legal.” In other words, the Wire Act exempts from prohibition those transactions where the act of wagering on an event is legal in both the jurisdiction from which the wager is placed and the jurisdiction in which the wager is received. Recently, the U.S. Department of Justice's office of legal counsel issued a letter opinion concluding that the Wire Act is limited only to sports betting. Accordingly, absent some future determination that the type of fantasy sports contests that are currently exempted under the UIEGA are considered sporting events, the Wire Act will not prohibit such contests.

At the federal level, the legality of full-season fantasy sports contests is a relatively minor concern, although there is always the risk that a future Congress will revoke the exemption under the UIEGA. Nevertheless, the expansive economic growth and the rising popularity of fantasy sports contests would seem to suggest that this likelihood is remote.

State Regulation

The increasing acceptance of fantasy sports as a legitimate form of entertainment and investment has created a sense of optimism among those who want to see a friendlier legal environment for paid fantasy sports games on the state level. However, the fantasy sports exemption provided by UIEGA does not make every fantasy sports contest for money legal. Even with the exemption afforded to fantasy sports under federal law, the contests still must comply with each specific state's particular prohibitions on gambling. Given the patchwork legal framework that the states apply to regulate fantasy sports contests, there is no doubting that some contests routinely run afoul of a handful of the states' laws.

To date, Maryland is the only state to have enacted a law expressly legalizing fantasy sports contests, closely tracking in statutory language the UIEGA carve-out. At the other end of the spectrum, Montana is the only state that has a statute specifically prohibiting fantasy sports games that are played for entry fees and prizes over the Internet. In between these two extremes lies a hodgepodge of states that do not have laws that directly address fantasy sports, as well as states that apply a “strict” chance test in which a game or contest will not be deemed to be one of skill if it includes even a slight element of chance (i.e., where injury or weather affect outcomes). How states ' including Arizona, Iowa, Kansas, Louisiana, North Dakota, Vermont and Washington ' that employ these “strict” chance tests, treat the legality of fantasy sports contests is a matter of some debate.

On the ground, however, legal battles continue to be waged in the states, where the legality of paid fantasy sports contests is being debated in several jurisdictions. Unlike at the federal level, where the deemed absence of significant chance shields fantasy sports games from prohibition, the states are free to define skill and chance on their own terms, and some that use stricter skill standards present unique challenges to fantasy sports businesses.

These challenges are likely to include careful, intensive reviews of each contest's platforms, entry fees and prize structures, as well as an analysis of the degree to which chance may influence the outcome of the contests.

David O. Klein is a partner and Neil E. Asnen is an associate with the law firm Klein Moynihan Turco in New York, where they practice fantasy sports law, promotions law, sweepstakes law, gaming law and Internet marketing law. The authors can be reached at [email protected] and [email protected].

Fantasy sports once represented a seasonal hobby among friends and coworkers. However, it has now undeniably blossomed into a force in both the American culture and, more important, the U.S. economy. According to the Fantasy Sports Trade Association, some 42 million Americans now play some form of fantasy sports contest. Moreover, additional estimates indicate that fantasy sports represented a $4 billion to $5 billion industry in 2014. The number of unique users that visited just the two leading daily fantasy sports websites, FanDuel and DraftKings, increased by over 800% on mobile devices, and nearly 500% on the Internet from 2013 to 2014, according to Nielsen's “The Year in Sports Media Report 2014.”'

In addition to these staggering statistics is the fact that traditional media sources, including NBC, CBS, FOX and ESPN, air dedicated fantasy sports-related television shows incorporated into their regular sports programming, and that the FX network has aired the popular fantasy football sitcom The League since 2009. Likewise, professional sports organizations themselves, including the National Football League (NFL), the National Basketball Association (NBA), Major League Baseball (MLB) and the National Hockey League (NHL), have each, to varying degrees, negotiated and made deals with daily fantasy sports websites, including the NHL's recent exclusive deal with DraftKings.

While the professional sports leagues recognize the implicit benefits that fantasy sports generally, and daily fantasy sports contests particularly, provide by virtue of their ability to drive fan interest in their respective sports, perhaps no league has embraced daily fantasy sports recently quite like the NBA. In the fall of 2014, the NBA signed an exclusive deal with industry leader FanDuel and will become a direct investor in the site. Additionally, many individual NBA franchises also have signed partnership agreements with daily fantasy sites, seeing the arrangements as an opportunity to further engage their respective fan bases.

The rise in popularity of fantasy sports has not gone unnoticed by large investors and venture capitalists. Reports indicate that FanDuel received some $70 million in investments last fall from NBC Sports Ventures, Shamrock Capital Advisors and others, while DraftKings also received some $40 million in investments from Atlas Ventures, Redpoint Ventures, GGV Capital and Raine Group. Additionally, the Walt Disney Co. has recently agreed to invest $250 million in DraftKings.

Federal Regulations

The explosion of fantasy sports and the related acceptance of, and association with, these gaming ventures by professional sports leagues and media alike can be directly traced to the favored status bestowed upon fantasy sports contests by federal anti-gaming laws ' specifically the Unlawful Internet Gambling Enforcement Act (UIEGA).

The UIEGA, enacted by Congress with the intention of prohibiting transfer payments in connection with unlawful Internet gambling in the United States, provides a statutory carve-out specifically exempting fantasy sports contests. In order to fall within this UIEGA exception: 1) all fantasy sports league prizes must be established and made known to the participants in advance of the game or contest, and the value of the prizes cannot be influenced by the number of participants or the amount of fees they pay; 2) all winning outcomes must be determined predominantly by accumulated statistical results of the performance of athletes participating in multiple real-world sporting events; 3) no winning outcome may be based solely on any single performance of an individual athlete in any single real-world sporting event; and 4) no winning outcome may be based on the score, point spread or performance of any single real-world team or combination of such teams.

Separately, the Interstate Wire Act, 18 U.S. Code '1084, prohibits the use of wire communication facilities for transmitting wagering information or bets. Specifically, the prohibitions pertain to activity that contains the following elements: 1) being engaged in the business of betting or wagering; 2) knowingly using a wire communication facility; and 3) transmitting in interstate or foreign commerce bets or wagers, or information assisting in their placement, on any sporting event or contest.

The Wire Act contains an exemption for the “placing of bets or wagers on a sporting event or contest from a state or foreign country where betting on that sporting event or contest is legal into a state or foreign country in which such betting is legal.” In other words, the Wire Act exempts from prohibition those transactions where the act of wagering on an event is legal in both the jurisdiction from which the wager is placed and the jurisdiction in which the wager is received. Recently, the U.S. Department of Justice's office of legal counsel issued a letter opinion concluding that the Wire Act is limited only to sports betting. Accordingly, absent some future determination that the type of fantasy sports contests that are currently exempted under the UIEGA are considered sporting events, the Wire Act will not prohibit such contests.

At the federal level, the legality of full-season fantasy sports contests is a relatively minor concern, although there is always the risk that a future Congress will revoke the exemption under the UIEGA. Nevertheless, the expansive economic growth and the rising popularity of fantasy sports contests would seem to suggest that this likelihood is remote.

State Regulation

The increasing acceptance of fantasy sports as a legitimate form of entertainment and investment has created a sense of optimism among those who want to see a friendlier legal environment for paid fantasy sports games on the state level. However, the fantasy sports exemption provided by UIEGA does not make every fantasy sports contest for money legal. Even with the exemption afforded to fantasy sports under federal law, the contests still must comply with each specific state's particular prohibitions on gambling. Given the patchwork legal framework that the states apply to regulate fantasy sports contests, there is no doubting that some contests routinely run afoul of a handful of the states' laws.

To date, Maryland is the only state to have enacted a law expressly legalizing fantasy sports contests, closely tracking in statutory language the UIEGA carve-out. At the other end of the spectrum, Montana is the only state that has a statute specifically prohibiting fantasy sports games that are played for entry fees and prizes over the Internet. In between these two extremes lies a hodgepodge of states that do not have laws that directly address fantasy sports, as well as states that apply a “strict” chance test in which a game or contest will not be deemed to be one of skill if it includes even a slight element of chance (i.e., where injury or weather affect outcomes). How states ' including Arizona, Iowa, Kansas, Louisiana, North Dakota, Vermont and Washington ' that employ these “strict” chance tests, treat the legality of fantasy sports contests is a matter of some debate.

On the ground, however, legal battles continue to be waged in the states, where the legality of paid fantasy sports contests is being debated in several jurisdictions. Unlike at the federal level, where the deemed absence of significant chance shields fantasy sports games from prohibition, the states are free to define skill and chance on their own terms, and some that use stricter skill standards present unique challenges to fantasy sports businesses.

These challenges are likely to include careful, intensive reviews of each contest's platforms, entry fees and prize structures, as well as an analysis of the degree to which chance may influence the outcome of the contests.

David O. Klein is a partner and Neil E. Asnen is an associate with the law firm Klein Moynihan Turco in New York, where they practice fantasy sports law, promotions law, sweepstakes law, gaming law and Internet marketing law. The authors can be reached at [email protected] and [email protected].