Federal Law, DFS Stakeholders And Gaming Interests In State Are Important Variables
Legal Sports Report

What Will Happen To Daily Fantasy Sports And Sports Betting In California Once The Smoke Clears?

California DFS
This essay attempts to discuss the present and future of daily fantasy sports, as it applies to the California market and California state law. It attempts to do so without tears, and assumes the reader understands the basics of the law and politics of the matter.

The issue many DFS players seem to stress over is the future. That’s probably something not to stress about. While the product will likely change slightly in the short term, who the major players are could change as the industry becomes regulated in the long term.

That’s just in the interim; the endgame to all of this is what happens to DFS if and when legalized sports betting comes to the U.S. (outside of Nevada), which could possibly happen within 2 to 3 years. There will still be a place for DFS even then, but with more betting options.

DFS Version 1.0: The Present

It’s an interesting time for DFS. The legality of it is being questioned by attorneys general from coast to coast. There are allegedly at least two separate federal investigations underway regarding the DFS industry. Statistically speaking, when there is a federal investigation, it will lead to an indictment over 99 percent of the time.

There is really no such thing at this time as a status quo; the industry seems to change literally on an hourly basis. As far as California goes, it’s my opinion (without any inside info whatsoever) that it will remain status quo for a bit longer.

The current law in California

In California, Penal Code Section 337(a) is pretty explicit about what is called “pool selling.” Pool selling is offering a parimutuel pool; there need be no consideration element present to sustain a conviction. It is part of California’s bookmaking statute because it is distinguished from bookmaking, which is taking action on a bet itself.

In California, DFS activity squarely and unequivocally falls squarely under 337a, in my opinion.

Legislation and stakeholders in California

In December, the California Assembly held an informational hearing on DFS, and then passed  a bill out of the Government Organization committee this month. It’s currently in the Appropriations Committee.

It’s probably safe to assume that the committee is fully aware of the law — even though 337a wasn’t included in an analysis of the bill. But being present at the December hearing, from my point of view, lawmakers don’t seem to be too concerned about it at this time.

Consider for a minute who the stakeholders in DFS likely are:

  • Entertainment companies (generally, “The Industry”, or Hollywood if you’re old school; TV networks, and perhaps video game manufacturers. Remember, California is the entertainment capital of the world.)
  • Professional sports franchises (representatives from five pro sports teams testified at the hearing).
  • Holders of gaming licenses in California (specifically tribes, cardrooms and racetracks; none of them has offered testimony in front of the GO committee).

You have a number of politically powerful entities, all with an interest in DFS.

While it is safe to say that the gaming licensees would prefer not to have DFS if they cannot monetize it, it’s still early in the process. At the same time, almost no politician is going to alienate a TV network or a sports team by calling for prosecution of a DFS company if the law can colorably appear to be murky at worst.

DFS Version 2.0: The Near Term

I think there’s a very good chance that legislation will pass in 2016 in California that will regulate DFS.

Also consider that there are two bills in the California Assembly, AB 1437 (which pertains to DFS) and AB 1441 (which pertains to legal sports betting, subject to a couple of conditions, one of which is the Professional and Amateur Sports Protection Act being held unconstitutional or repealed by Congress).

But the context of the two bills are different. In 1437, a provider can apply for a license through the California Gambling Control Commission. In 1441, a provider would have to partner with a track, a tribe or a cardroom.

It’s my belief that 1437, if passed, will look more like 1441 in this regard if and when the bill is enacted; I believe a DFS provider will be required to partner with a gaming licensee when the smoke clears on legislation. There are lots of moving parts on this issue, and many of them rest outside of California:

Federal investigation of DFS

There are allegedly two separate investigations of DFS by the U.S. Attorneys in Tampa, Fla., and Manhattan. In my experience with how the federal government goes about its business, if there’s an investigation going on, chances are the U.S. Attorney probably has almost evidence to sustain a conviction right now. My sources tell me the investigation is likely not about something that has already been reported in the media.

Let me also point out that there is a very large difference between a state prosecution and a federal one. Federal prosecutors generally take their time; they’re very thorough and usually are very good lawyers. If you didn’t graduate in the top 25 percent of your class in law school, chances are the U.S. Government won’t hire you.

When the feds indict, they generally have the goods. A state prosecution historically is less reliable as to result than a federal one.

So, there’s a very real possibility that the future of DFS will not involve either of the two biggest names. One scenario could have the NBA, which currently owns a portion of FanDuel, end up owning all of it.

That leads to the other reason why California may require DFS operators to partner with licensees:

UIGEA, PASPA, and the New Jersey sports betting case

There are two myths that DFS proponents like to foist upon the public. One is that the Unlawful Internet Gambling Enforcement Act had a carveout for DFS; the other is that UIGEA trumps PASPA. Both could not possibly be further from the truth.

First, let’s discuss the “carveout.” The carveout was meant for season-long fantasy sports, in general — social gaming among friends. It was never meant for large, for-profit businesses like DraftKings or FanDuel, which didn’t exist at the time UIGEA was enacted.

The carveout fiction is so widespread that it even (for a moment) tricked California Legislative Counsel Rebecca Bitzer at the December hearing. She discussed the carveout as being meant for DFS, then immediately corrected herself to state it was meant for season-long fantasy.

Second is the myth that UIGEA “trumps” PASPA, whatever that means. General rules of statutory construction mandate that if two statutes can be read together, they will be read as if no conflict exists.

PASPA is about a professional or amateur sports association being able to maintain injunctive relief against an entity that wants to conduct wagering on those associations’ sporting events. UIGEA is about preventing money from being moved via illegal gambling enterprises. Certainly no conflict there.

The sports leagues — the plaintiffs in the ongoing court battle in New Jersey regarding legalizing sports betting — face a real dilemma regarding PASPA. The more they get involved with the DFS product, and if DFS is held to be sports gambling (as it already has been in Nevada, the leading gaming jurisdiction in the U.S.), the more difficult it is for them to sustain a PASPA-based injunction.

Also consider that the sports betting court battle cases involves New Jersey, the other leading gaming jurisdiction in the U.S.

Consider what happens should New Jersey win its case against the sports leagues. Chances are you would have similar legislation moving forward literally overnight in a dozen or more states. States are always looking at increasing tax revenue; California is desperate to increase revenue. Despite the highest state income tax and gas tax and among the highest sales taxes in the U.S., California perennially has trouble balancing a budget.

It’s my belief the Third Circuit Court of Appeals would have reversed its decision against New Jersey in the sports betting case, if the case were just about New Jersey. The Court may have understood that its decision was more about the entire U.S. and less about one state. That may explain why the court decided the way it did, and why it took so long to make that decision.

So, in short, looking at a combination of both political and legal analysis, I think New Jersey is at worst a slight favorite to get a reversal in the sports betting case, and the court could possibly go so far as to hold PASPA unconstitutional, which would open the door to legislation on sports betting in California.

Finally, with 2016 being an election year, politicians may be loath to enact statutes expanding gambling. In the same vein, early 2017 would be a perfect time to enact such legislation in California. When people like NBA Commissioner Adam Silver says legal and regulated sports betting is “inevitable” — and he’s working with a lot more information than just about anyone — I’m going to take him at his word.

The only issue is, what does “inevitable” mean? Certainly within 5 to 7 years, probably less.

DFS Version 3.0: After legal sports betting

I think there will be a place for DFS even with legal sports betting. As far as California goes, the possibilities are endless. Consider with the advent of “live” or “in-game” wagering, where you could potentially bet on dozens of propositions during the course of a game.  Another natural for live betting is the developing eSports industry.

DFS is considerably more static than the live-betting market as currently marketed — although in-game fantasy products do exist — but perhaps similar contests can gain traction as the industry progresses. The fact that DFS is parimutuel in nature gives providers opportunities to offer a product that both casual and serious players can embrace that is complimentary to contemporary sports betting.

There’s also an established comfort zone with players that DFS provides (entertainment value at a low cost, as little as a few dollars or even less) that probably will serve to keep it established.

What’s next for California?

In conclusion, as far as California goes, it seems likely that DFS providers will remain in California in the near term, unless some sort of catastrophic event happens (like a federal indictment). At the very least, a cease and desist order would likely be given first, like what happened in New York.

If a federal investigation results in indictments, you’re going to see some very drastic changes occur in the DFS industry food chain quickly. However, upon its way to being regulated, who the major players are may change.

It would also not surprise me that if a DFS bill passes in California, it will not allow B2C type-providers; strictly B2B only (in other words, the prospective licensee must partner with one holding a gaming license or compact). I would expect a bill to be passed between early 2016 and early 2017.

It’s my belief between the cardrooms, the tracks and the tribes, there’s enough political firepower to have AB 1437 — an approach to DFS that is friendly to the current model — modified to look more like AB 1441 in this regard.

Finally, should the Third Circuit reverse its finding in the New Jersey sports betting case, you may see in California sometime in 2017 consider a comprehensive online gambling bill — encompassing DFS, eSports, sports betting and, yes, event online poker.

It’s not a secret that the stakeholders in California gaming don’t like each other very much. However, that begs the question: How much money does it take to make everyone hate each other less and get a deal done? Legal sports betting should provide enough impetus to create a consensus.

Photo by Nserrano used under license CC BY-SA 3.0

Sign Up For The Grove Report – US Online Gambling Industry Insights Delivered To Your Inbox:
Vincent Oliver
- Vincent Oliver is an attorney whose primary area of practice is gaming law with emphasis on development and emerging markets. He is a member of the California bar and consults with clients in CA, NV and FL. He is based alternatively in Los Angeles and Las Vegas, and can be reached at [email protected]