The Regulatory Path For Daily Fantasy Sports, Through D.C. Or Nevada

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Path in the woods

Recently, discussion of daily fantasy sports has heated up in Nevada.

A.G. Burnett, Chairman of the Gaming Control Board, has repeatedly taken note of the large investment in and spending by the DFS industry.

Similarly, Jim Murren, Chairman of MGM and of the American Gaming Association, expressed his personal view bluntly back in April:

“Murren said the gaming association is studying whether or how to involve its members in daily fantasy sports that have mushroomed unregulated into multimillion-dollar commerce.

“Clearly this cannot be ignored, and it is gambling,” he said. “We have not engaged in it as a commercial enterprise because we haven’t gotten comfort by our regulators that we should.”

Murren said sports officials who argue daily fantasy games are not gambling are “absolutely, utterly wrong. “I don’t know how to run a football team, but I do know how to run a casino, and this is gambling,” he said.”

He doubled down again this week in an interview this week:

“But who in the world thinks that FanDuel or DraftKings — who’s going to tell me that’s not gambling? Of course it’s gambling. But people are doing it, they are doing it all over the place. It’s not regulated.”

So we have to very thoughtfully and just be honest with ourselves, the world wants these kinds of products. They want to gamble on fantasy football, they want to play internet poker…I’m cool with that, they should be able to do that. I am not ‘Mr. Moral’ that I am supposed to impose my morals on somebody else. What I am is someone that is highly concerned that illegal activity is being undertaken today that is hurting all of us.”

Is DFS gaming, or sports betting?

It seems quite likely that the state of Nevada may determine that DFS is either:

What is at stake for DFS operators in the U.S. if Nevada declares DFS to be either “gambling” or more specifically “sports gambling?”

The best answer to what may be at stake: “DFS survival in the U.S. markets, other than as a Nevada regulated business.”

DFS is clearly based on the outcome of the real-life performance of athletes; however, such players may be drafted into combinations or “fantasy teams”.

During the explosive growth of the DFS industry, much ado has been made about the Unlawful Internet Gambling Enforcement Act’s carve-out of fantasy sports from that Act’s prohibitions on payment processing of deposits into illegal gambling businesses.

The UIGEA isn’t the only law that matters

In reality, that carveout, while instrumental in protecting the flow of payment processing, is neither an immunization shot nor a “get-out-of-jail-free” card if some other law, at the federal or state level, were found to criminalize the conduct of offering DFS without a license.

More extremely yet, federal law applicable to sports gambling prohibits even a state from authorizing or licensing any sports gambling, save and except for Nevada.

The “inconvenience” of certain states’ gambling laws alone does not threaten the DFS industry as a whole.

While most DFS discussions wax long and loudly about the UIGEA, much less attention has been paid to the Illegal Gambling Business Act, 18 U.S.C. 1955. That’s a federal law which, inconveniently for DFS, criminalizes gambling businesses deemed illegal under applicable state law. The “inconvenience” to DFS operators has led to prudent decisions to avoid certain state markets, and avoid any IGBA issues federally, reminiscent of online poker operators’ similar approach of 10 years ago.

Since the DOJ interpretation of the federal Wire Act, to clarify that non-sports gambling was not covered, there is no federal law directly prohibiting mere “gambling” absent a state or local law violation by a business.

Does PASPA come into play?

The Professional and Amateur Sports Protection Act may be an 800-pound gorilla for DFS, that no one state can stop.

More directly threatening to the survival of DFS at the state level is the federal law which prohibits any state from authorizing sports gambling — PASPA, 28 U.S.C. §§ 3701-3704. As outlined below, DFS may need relief at the federal level if it is considered “sports gambling”.

In litigation against New Jersey, the NFL and other leagues have been successful in preventing that state from legalizing sports betting, citing PASPA. There were no sports gambling operators named as parties, and perhaps the leagues or the NCAA won’t pursue DFS.

That would not clear the air however if any state other than Nevada tries to regulate DFS. Perhaps, even, a 1,600 pound gorilla might consider any payment processing for an operator in violation of PASPA to be deemed laundering money.

PASPA would prohibit any sports gambling operation under regulation by any state other than Nevada. The not-easily fixed problem is that under the PASPA, it is unlawful for any “person”:

to sponsor, operate, advertise, or promote, pursuant to the law or compact of a governmental entity, a lottery, sweepstakes, or other betting, gambling, or wagering scheme based . . . on one or more competitive games in which amateur or professional athletes participate, or are intended to participate, or on one or more performances of such athletes in such games”

It seems difficult to argue that re-packaging “one or more performances of such athletes in such games” into fantasy teams and running P2P skill contests escapes the PASPA ban. Murren likely has it right: DFS cleverly packaging skill as somehow “not sports betting” is ultimately “wrong.” Skillful sports betting is still sports betting.

Worst-case scenario?

If DFS is deemed to be “sports gambling”, there would be no state-level relief available.

PASPA prohibits any state from authorizing sports gambling. Some states authorize DFS under state law, perhaps as a non-gambling game of skill or as legal gambling, but calling DFS “not sports gambling” is unlikely to carry the day if challenged by a party with legal standing to do so.

Briefly, as the Third Circuit Court of Appeals reminded Governor Chris Christie last week, simply calling something “not sports betting” generally would not suffice to make it so:

“The Professional and Amateur Sports Protection Act (“PASPA”), 28 U.S.C. §§ 3701-3704. .. PASPA, by its terms, prohibits states from authorizing by law sports gambling,…. “

Despite New Jersey’s attempt to draft around PASPA’s prohibition, the Court concluded that “States may not use clever drafting or mandatory construction provisions to escape the supremacy of federal law”.

Is a federal law needed?

What happens in Vegas is unlikely to stay in Vegas; DFS and the various sports leagues’ hands might be forced at the federal level to seek repeal or amendment of PASPA.

If Nevada decides DFS is “sports gambling,” bet on an extensive effort by the DFS industry and its investors/suppliers/media partners and the sports leagues to act federally to protect their nest egg.

Instead of fighting New Jersey under PASPA to stop state action as in the past, the DFS folks may switch to amending that Act in favor of state-level authorization of DFS. A DFS 2016 bill passing may be more likely than the bill to ban online gambling — the Restoration of America’s Wire Act — in 2016, but do not bet against some logrolling combination of the two, with Sen. Harry Reid throwing down while he can to protect Nevada in any national “sports gambling” legalization.

The bottom line? The best resolution may be for each state to exercise a right to forego any regulation of DFS and leave DFS to get licensed in Nevada.

Nevada can clearly authorize DFS as sports gambling; it has a grandfathered right to do so.

At the extreme, under current federal law, a state like New Jersey “could” simply repeal any sports-betting prohibition. (Interestingly, New Jersey has already taken a step toward “regulating” fantasy sports, by declaring it to be “not gambling.” That effort, while ingenious, would likely not survive scrutiny under Christie II analysis, set forth by the Third Circuit.)

The problem DFS faces should any state aside from Nevada attempt DFS “authorization,” is that any “authorization” could trigger a PASPA violation for any person operating a DFS business. DFS may need to get licensed in Nevada, discourage other States’ regulation, and simply allow players to play, much like online poker did for many years.

(The 2011 Wire Act letter, which RAWA seeks to gut, should allow Nevada-licensed DFS operators and U.S. players and payment providers some comfort, provided Nevada says DFS is licensed and legal to operate from Nevada, and there is no federal or applicable state gambling law which says otherwise. That however is a different topic.)

Photo by Randen Pederson used under license CC BY 2.0.