One month ago, allegations arose of employees at daily fantasy football websites using insider information to win big money on the sites. The scandal itself fizzled out, with both Fan Duel and Draft Kings, the companies involved, announcing after an investigation that no wrongdoing had been committed. But the unwelcome spotlight led to fears that the government would take a closer look at the legality of fantasy gaming. Those fears turned out to be well-founded.
Two weeks ago, Nevada, home to America’s gambling mecca, shut down the sites in that state, and this week New York Attorney General Eric Schneiderman drafted a cease-and-desist letter to the companies. Fan Duel and Draft Kings have been given five days to respond to the claim that they are running illegal gambling operations under New York State law. If Schneiderman isn’t satisfied with their answers, half a million fantasy players in the state will be barred from competing.
The situations in Nevada and New York are different. Because Nevada has legal sports gambling, the fantasy sites will be required to be state-licensed and -regulated, but may continue to operate. New York does not have legal sports gambling, which means that if the cease-and-desist letter is enforced, there may be no avenue to legally operate in the state.
Real-World Regulations Threaten the Internet
These actions against fantasy sites are taking place against a backdrop of increased scrutiny and legislative action around the country. The mini scandal a month ago, which appeared to be a blip in the meteoric rise of fantasy gaming, has given way to something much closer to an existential threat. It now appears as though the future of online fantasy gaming will lay in the hands of courts, legislatures, and ultimately voters.
Fan Duel and Draft Kings claim they legally operate under an exemption in the 2006 federal Unlawful Internet Gambling Enforcement Act, which specifically allows for games of skill involving aggregated statistics from sporting events. But if individual states find them in violation of their laws, that federal exemption will be irrelevant.
Part of the confusion in regard to the legality of online fantasy gaming is that state laws have been slow to react to the rise of Internet-based industries. We have seen with car service sites such as Uber and accommodation sites such as AirBnB a tension between the regulations that snare brick-and-mortar companies and the booming Wild West of Internet-based businesses. As state and local lawmakers grapple with these new entities, it is difficult to predict how much leeway they will grant.
Nobody Makes Money Unless We Get a Cut
For his part, Schneiderman doesn’t appear inclined to be charitable to this new gaming industry. In a statement he said, “Daily fantasy sports is neither victimless nor harmless, and it is clear that DraftKings and FanDuel are the leaders of a massive, multi-billion-dollar scheme intended to evade the law and fleece sports fans across the country. Today we have sent a clear message: not in New York and not on my watch.”
This is all a bit breathless. After all, it’s not like Schneiderman is taking down the mafia here, but for all his posturing the attorney general is likely on pretty solid legal ground. Even prior to last month’s scandal, several states forbid fantasy sites from operating, and it’s a stretch to believe that the companies will convince courts in New York that their games are purely skill-based and therefore legal.
The end game to all of this is incredibly murky. As hard as it might be to believe that an industry that dominates our sports advertisements could be wiped away, it is not entirely unprecedented. Online poker, which flourished for a brief period, was similarly shut down, almost overnight. It appears, at least in some states, this will be the fate of fantasy gaming as well.
Other states may take more measured approaches. In Florida, legislation has been introduced to regulate, but not end, fantasy gaming. It would give daily fantasy an exemption from gambling laws but create a new regulatory framework and fees for fantasy companies. Such legislation is a much better way to handle the legitimate concerns raised by fantasy gaming than grandstanding attempts to shut it down.
Not Too Big to Fail
There are legitimate concerns. Ensuring that the games are fair, that kids don’t have access to them, and that the money players deposit is safe is important. Moreover, regulating gambling has long been accepted as an important role of government. Citizens of many states and localities are no more comfortable with slot machines in grocery stores than they are with everyone carrying a sports betting device in his pocket.
Daily fantasy gaming has become a massive industry in a very short period of time. But it is by no means too big to fail. Just as Schneiderman should avoid overstating the parade of horribles that fantasy gaming will usher in, the companies themselves must step up and address real issues.
The best way for Draft Kings and Fan Duel to fight back against attempts to shut them down in states like New York is to work with legislators in states like Florida. The 500,000 players in New York and the professional sports leagues who have partnered with fantasy gaming sites have significant political power. These companies must use that power while committing to transparency and limited government oversight.
The debate over fantasy gaming is no longer a question of whether they are games of skill or games of chance. Daily fantasy football is gambling, at least by the definition that most states use. For any number of reasons, it may well be a form of gambling that we are comfortable with. These companies and their corporate and sports partners must now convince us of that.