From Fantasy to Reality: The Evolution and Legality of Fantasy Sports - Header Photo - Franklin Law Group

From Fantasy to Reality: The Evolution and Legality of Fantasy Sports

The following article is an excerpt from The Sports Esquires: Putting Sports on Trial written by our own Justin N. Fielkow.

More than 40 million people played fantasy sports in North America last year, the equivalent of 30 percent of U.S. adult males. – Bloomberg Business

In addition to my day job as an attorney, I’ve been writing for one of the forerunners in the fantasy-sports industry, Rotowire, since 2009. As such, I’ve had a front-row seat in witnessing the popularity of fantasy sports not only sweep the nation, but also watching the industry evolve before our eyes. In this article, I will take a brief look at the history of fantasy sports; the laws governing the industry; and the recent popularity of “daily fantasy sports” and their potential legality.

A Brief History

While its popularity has lagged in recent years, no sport has impacted American culture quite like baseball, and it should come as no surprise that modern-day fantasy sports germinated from America’s Pastime. The recognized founding father of fantasy sports is Bill Gamson, a former psychology professor at Harvard University and the University of Michigan.[ii] Gamson liked baseball and wanted to find a way to interact with the game beyond his interest as a mere fan. In the early 1960s, Gamson and friends constructed a game, which he dubbed “The Baseball Seminar,” and each paid ten dollars to enter the game. Each participant was given an imaginary budget, with which they could bid on Major League Baseball players and “draft” their team, so long as they stayed within their budgetary restraints. The winner of the game was the person who selected players that earned the most points in a pre-determined set of statistical categories.

Federal and State Laws

UIGEA

Around the same time that fantasy sports leagues began popping up in every corner of the World Wide Web, the Internet was facilitating another, less-socially-accepted craze: gambling. By 1999, some offshore sportsbooks had begun to accept online bets from U.S. residents.[vi] Online poker had grown into a multi-billion dollar industry, with about two-thirds of the nearly 9,000 people participating in the $10,000 buy-in Main Event at the 2006 World Series of Poker having qualified through online satellites.

State Laws

Congress clearly intended that the traditional, full-season version of fantasy sports games not be subject to the UIGEA’s restrictions, making it safe for many fantasy sports businesses to operate across state lines. Yet, fantasy sports operators are not only required to comply with federal regulations, but, where applicable, state gambling laws as well. In fact, UIGEA’s “Rule of Construction” makes clear that the statute does not alter, limit, or extend any “State law … prohibiting, permitting, or regulating gambling within the United States.” States are therefore free to make their own determinations as to what constitutes illegal gambling activities and how they wish to regulate those activities within their borders.

Daily Fantasy Sports

While the season-long versions of fantasy sports leagues have been around since at least the 1960s, evolution was inevitable in the present Era of Attention Deficit Disorder. Enter, daily fantasy sports (“DFS”). Unlike traditional leagues, in which the final standings typically aren’t determined until an entire professional or amateur season runs its course, most DFS contests last only a day.  Rather than waiting months for a winner to be declared, gamers know the final outcome of the DFS contest as soon as time runs out in the last sporting event of the day. During a time where interest in fantasy sports is at a record-high, but participants’ attention spans run short, DFS has exploded in popularity.

While 41 million Americans played traditional, season-long fantasy sports contests last year, only about 800,000 played daily fantasy sports. Still, the industry leader, FanDuel, has raised $88 million from investors, including Comcast; private equity firms Shamrock Capital Advisors and KKR; and the National Basketball Association, whose commissioner, Adam Silver, has come out in support of legalizing sports gambling. The next-biggest site, DraftKings, has attracted $76 million in venture capital. According to a Bloomsberg Business source, FanDuel was valued at more than $1 billion during its last investment round. Further, Eilers Research, which studies the gaming industry, reports that in 2015 the DFS industry will collect more entry fees than all the sports books at Vegas combined.

Conclusion

Unquestionably, the popularity of fantasy sports is at an all-time high. Season-long leagues, which have been around for decades, continue to thrive, and with the approval of the major pro leagues, the growth of the DFS industry is likewise showing no signs of slowing down. Yet, despite this incredible wave of prosperity, there remain outstanding legal issues. Most traditional, full-season operations may have be granted safe harbor by UIGEA’s carve-out language, but both participants and fantasy sports providers must still perform legal due diligence to ensure they do not fun afoul of the ever-evolving interpretations of federal and state laws, including some of the stricter statutes and regulations found in individual states. Further, the legality of DFS remains decidedly unsettled. The format of the DFS contest has a big impact on potential legality, but so too does the potential effect that the shortened length of contests has on the ratio of skill to chance. Using legally prudent practices in complying with various state and federal laws can certainly help minimize potential liability. Notwithstanding, with rising their popularity and the pro sports leagues’ benediction, DFS are likely here to stay.

This post was last edited on January 5, 2016.

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