[toc]Florida gaming attorney Marc Dunbar tells a story about a law school class that he taught a few semesters ago.
On the first day, he told students that they would be graded on an open-book take-home essay. The question? “Are single-day fantasy leagues conducted by DraftKings and FanDuel legal in Florida?” He said he gave no opinion one way or another, he just the taught the class on the law.
The result? Only two students argued in their essays that DFS is legal; the rest came to the conclusion that daily fantasy sports are clearly illegal.
The bottom line? Dunbar believes that a federal investigation into daily fantasy sports and its intersection with Florida law could have serious repercussions.
Top-level takeaway: Operating in Florida is likely a big problem
Dunbar is a partner in Jones Walker’s Government Relations Practice Group and specializes in working with gaming clients, encompassing both lobbying and litigation for casinos, gaming suppliers, pari-mutuels, Native American tribes, sweepstakes and charities. He regularly testifies on legislative and administrative panels regarding Florida’s gaming laws.
There have been reports of a Florida grand jury investigation as well as the FBI and the Department of Justice looking into DraftKings, FanDuel and the DFS industry. The Florida case reportedly invokes the Illegal Gambling Business Act via a violation of state law in Florida. Here is Dunbar’s takeaway on the implications of a federal investigation:
“This federal investigation that is underway has the potential to be an absolute death sentence for the daily fantasy sports industry. Because of the way the federal gaming laws are structured, the investigators only have to prove that a minor state gambling law has been broken. The federal penalties are very steep and can include imprisonment and forfeiture of all property related to the company – including intellectual and real property as well as all proceeds from the illegal gambling activity.”
“It is very clear that some of these daily fantasy sports companies are violating Florida law.”
Legal Sports Report talked with Dunbar to get a breakdown of the law in Florida and federally for fantasy sports operators. We’ve provided links to relevant laws or explanations when deemed necessary. Things Dunbar did not say are included in [brackets].
Questions and answers with Dunbar
Can you give us an overview of what’s in play in Florida?
Dunbar: We have a law that addresses games of skill. Not many states have it. That’s been the big problem that has always been facing fantasy sports down here. Then in ’91, our attorney general wrote an opinion which was pretty clear on what you can and can’t do relative to fantasy sports. And while they acknowledge that it’s a game of skill, it said: if you’re playing for other people’s money, you can’t do it under Florida law.
I’ve been in conferences and things like that over the last year, and I have a tremendous amount of respect for the lawyers that represent FanDuel and DraftKings. They are colleagues, many of them are friends I’ve known for a long time and been in organizations with. We’ve been on panel discussions over the last year where we’ve debated these issues around. I just told them “Look, I don’t have any problem with what you’re doing, I just know Florida law, and it could be a real problem.”
In March of last year, I had to reperesent a client, under a federal investigation, in the Middle District of Florida, involving the Illegal Gambling Business Act and a state law violation, and how the feds used that. And having gone through that firsthand, they do not mess around. When they’ve got you, they’ve got you, and they take everything they can take. And that’s the worry I see in all of these things that are our there in the press about the Middle District investigating, and now the FBI and the Department of Justice, and New York. Usually, by the time you find out these investigations are going on, you’re done. You’re the frog that just realized that the water just got turned to boil.
We don’t know the target of the Florida grand jury, but is it fair to guess that it is DraftKings and FanDuel, and possibly other operators?
Dunbar: If you look at the structure on both big sites, FanDuel and DraftKings, you understand you and I can go in there and put up ten grand up against each other and play for each other’s money today, if we wanted to. And they take their rake off the top, but we’re playing for each other’s money. That’s not hidden in any way, shape or form when you go onto their websites. That is a problem. That is a big problem under Florida law, the fact that we can do that. And the UIGEA [the Unlawful Internet Gambling Enforcement Act] does not trump state law. It expressly doesn’t trump state law, there’s a rule of construction in the first section of the act.
So, our 849.14 [a Florida statute governing games of skill] and all of the interpretive opinions around it going back to the 1920s through the attorney general opinion, it’s really bad if you’re playing a game of skill for each other’s money. Now if I put up a billion dollars as a disinterested third party, and a whole bunch of people could play and they don’t pay me anything for doing it? Sure, you can do that. That’s a legal game of skill. But when you’re playing for each other’s money? That’s “Do not pass go, do not collect $200.”
If the attorney general in Florida were to come out right now and offer a favorable opinion, would that change anything?
Dunbar: Definitely it could change things. But the problem is, she (AG Pam Bondi) already said she won’t. They’ve already been in there and she’s told folks, I don’t know if it’s been reported, but she’s told people in Tallahassee, politicians and lobbyists, that she has no intention of backing up on that. She’s not at all pro-gaming, not even a little bit. You’re not going to find any friend of gambling in the attorney general’s office right now.
Now they did recently hire a political consultant to try to move her (opinion), and they’ve been throwing money around like crazy. [Reference to this story]
You talked about the IGBA, but are there any other federal laws that could be in play?
Dunbar: If there’s interstate gambling, you could pretty easily back into a Travel Act violation. And when it involves sports gambling, you’ve got the Wire Act. And in this instance, if in fact they have them violating Florida’s law, it takes them out of any UIGEA protection, which means they don’t have a Wire Act safe harbor in the UIGEA. So, you have that statute as well.
But you only need one of those, to back into what’s so scary for these companies, which is the Civil and Criminal Forfeiture act, which is in 18 U.S. Code. And that’s what I had to deal with and I had a client that ran a very innocuous — and by all outward measurements not controversial — lottery that had internet entries. It was done in a way, kind of the only equitable way to apportion a limited supply of entries into their very popular race. But it didn’t matter, it was a technical violation of Florida’s lottery law. And under the civil forfeiture statute, all proceeds were subject to forfeiture. Now, we were able to negotiate an out, because there were some aspects of it that they created some vulnerability in the case, so we were able to negotiate the number down. But you know, it’s a misdemeanor statute that you can go to federal prison on, and you can lose everything. The civil forfeiture statute, says all proceeds, all property related to the enterprise. Everything.
Why do you think everyone took the risk of operating in Florida?
Dunbar: Twenty million people. It’s the third-largest state. It’s too big of a market to stay out of, I guess. I’ve been asking that question for over a year: Why do you insist on facing Florida? You know, you have the majority of the country is gray, the states that had come out remotely black, most of the players stay out of. And take the Sports Illustrated website, their lawyers appear to be pretty conservative, if there’s even a sniff, they stay out. I think it’s just too big of a marketplace, they obviously have insight and analytics, and they know where the players are, and they think there’s a lot of money to be made.
[As of this writing, LSR is aware of five operators that have pulled out of the state: StarsDraft, Draft Ops, Star Fantasy Leagues, Fantasy Score, and Fantasy Draft.]
Is there any benefit to an operator pulling out of Florida?
Dunbar: That mitigates things significantly. A lot of it is notice. Should you have known it was an illegal activity, and what was your behavior? And those that got some sort of inkling that there was a problem and they pulled out, that’s very smart. If I was a general counsel, that would have been the first thing that I did.
Internally, I would be organizing all of our Florida activities, so that if requested it was there, and we would know what our potential exposure is. I would be reaching out proactively to the U.S. attorney, if you need anything from us, just call us. We just wanted to let you know that we pulled out. And the U.S. attorney couldn’t confirm anything to you. But I would be bending over backwards to give deference to anything that is being expressed about why law enforcement thinks operating in a state is legal or illegal.
All these statutes that we’re talking about, in particular the state statute, have “aiding or abetting” provisions to them. So that goes to those that knowingly promote an illegal activity. So you take ESPN for example. ESPN decides we’re going to pull ads. And then they come back and unlock it after a few days. You get to the point where people inside the legal department have to make the evaluation on whether or not they could potentially be running afoul of an aiding and abetting statute, by continuing to do it when it’s been reported over and over again that it’s been a problem.
I have been trying to figure out if those reports in the New York Times and the Wall Street Journal today, that if there’s a real government official that’s saying we’re investigating, or it’s still kind of this rumor mill out there that’s going on. But if you have a government official that comes out and says that “We are in fact investigating, so we believe there is a state law violation in Florida,” anybody that continues to play in this space and promote it after that day, you start to get to running the risk of aiding and abetting. Because you’ve been told that it’s being investigated. You’re now on notice to do your own due diligence.
I take it you’re surprised DraftKings and FanDuel are still operating in Florida?
Dunbar: If there’s any scintilla of truth to everything we’re reading, there’s another lawsuit today, you have the New York attorney general, you have some level of confirmation of the Department of Justice and what’s going on in Florida. You have all these layers of potential problems, and they put out this statement [referring to DraftKings] that ‘We’re not surprised that some law enforcement is jumping on incorrect reports…” That’s sort of like the Iraqi communications minister during “shock and awe” saying “The Americans are on the run, we will defeat them within a week.” It was a pretty tone-deaf statement in my opinion. I think FanDuel is being smarter than that.
Update on Nevada
In the wake of Nevada saying DFS sites needed to withdraw from the state late in the day Thursday, Dunbar offered this:
Dunbar: They run into the same problem if they keep playing Florida. A violation of a state law or state regulation could be actionable by federal law enforcement under the Illegal Gambling Business Act, the Travel Act or the Wire Act. Financial intermediaries involved in transferring funds involved in these operations could also find themselves under federal exposure under UIGEA and other laws prohibiting the movement of money interstate related to illegal activities.