For Small Fantasy Sports Operators, Good And Bad News On Legal Front

Posted on May 6, 2016

[toc]DraftKings and FanDuel have seen both progress and regression when it comes to the legality of daily fantasy sports across the country.

And the same can be said about what’s going on for smaller daily fantasy sports operators, albeit for different reasons in some cases.

The Virginia DFS conundrum

Virginia, in many ways, has encapsulated the problems faced by the DFS industry outside of DraftKings and FanDuel.

The VA law

Earlier this year, Virginia became the first state to officially regulate the DFS industry. The only problem? The licensing fee structure — $50,000 to register — was such that it would only allow DraftKings, FanDuel, and perhaps a few others into the market.

The support of the Virginia bill by the Fantasy Sports Trade Association led to fractures in that group, to the point that a new trade group — the Small Businesses of Fantasy Sports — cropped up. (The two groups, which have a lot of the same members, are now working together on legislative efforts, however.)

After the passage of the law in Virginia, most small operators appear to have concluded they would be pulling out of the state. But Virginia’s governor, Terry McAuliffe, wrote a letter in response to the SBFSTA, promising to help the companies return to the commonwealth.

That leaves hope for the future in states like Virginia and Indiana, which passed a law with the same $50K fee.

The Syde example

The problem of the small DFS operator vis a vis DraftKings and FanDuel is captured with a startup app called Syde, which is based in Arlington, Va.

That leaves Syde in the awkward position of having offices in a state where it won’t be operating. (That’s not the only example of this, however. DraftOps pulled out of Nevada following the news that DFS sites required a gaming license to operate there. Several DFS companies are based in New York, including FanDuel, which does not serve New York customers currently.).

“We started the business in Virginia because most of our team lives in the state,” Syde CEO Rishi Nangia told Legal Sports Report via email. “We are more senior than your college dot com prodigy. We’re balancing day jobs, family, and everything else with our start-up.

“But, even if we could do it all over again, free of time encumbrances, we probably would not have opposed starting the business in Virginia.  Going into this, we thought Virginia was generally business friendly.”

Syde, like many of the small DFS operators, isn’t opposed to regulation, just to regulations that help reinforce a DraftKings-FanDuel duopoly in the industry and fees like the one in Virginia.

“The last thing states, and more so consumers, would want is an operation that cannot payout the games that they are offering,” Nangia said. “In our opinion, state-by-state registration is ideal because it forces DFS businesses to pay state-related taxes for operating in the state.

“A fee of this size is a significant barrier to entry, one that is more likely to maintain the duopoly in the DFS space and reduce competition,” Syde COO Ryan Huss added. “Without competition, there is less innovation, with less innovation there are fewer options for consumers to choose from.”

Tennessee and Mississippi

After setbacks in Virginia and Indiana for small DFS operators, things started looking up with a law passed in Tennessee and a bill that is poised to become law in Mississippi, as it sits on the governor’s desk.

In Tennessee, operators will be charged a 6% tax on revenue generated by residents in the state. That figure is — or at least should be — palatable to most if not all operators. Up-front licensing fees still could be charged by the state, however, under the language of the law.

In Mississippi, things look similarly good for small operators. While legislation prescribes that sites must register with the state, there is no licensing fee being charged as part of a stopgap measure allowing operators to stay in the state until next year. During that time, the state will take a closer look at regulation of the DFS industry.

Mississippi’s governor is expected to sign the legislation sometime in the next week.

Fantasy Sports For All? Or for some?

In an interesting twist for DFS lobbying, a grassroots advocacy effort that appeared to represent everyone in the fantasy sports industry hit a snag.

Fantasy Sports For All says on its website that it is “committed to protecting the rights of all Americans who play fantasy sports.” It offers ways for fantasy sports enthusiasts to contact government officials.

But in April, FSTA President Paul Charchian sent an email to the group’s members, saying that “FanDuel and DraftKings will now operate the Fantasy Sports For All initiative independently. All FSTA references have been removed from the website and we will no longer publicly support this initiative or ask FSTA members to do so.”

Jay Correia of the FSTA’s legislative committee later offered this statement about the group’s decision to detach from Fantasy Sports For All:

“Over the past two months FantasySportsforAll has made numerous comments that directly contradict what FanDuel and DraftKings had pledged to the FSTA as it relates to supporting legislation. They participated in a unanimous board vote that all legislation surrounding fantasy sports would always be judged against our three primary principals which are – clarification that fantasy sports are legal games of skill, common sense regulation, and fee structures that allow small operators to remain viable.

When you go off and praise new laws with $50,000 licensing fees and suggest that they be used as model states, clearly, there is a contradiction. I’m deeply troubled that the companies, most specifically DraftKings, couldn’t uphold their word and more importantly, denied repeated requests to alter their messaging. While I’m proud of the work our legislative team is doing, I am concerned that we couldn’t come to an agreement and were forced to rescind our support for FantasySportsforAll because it simply doesn’t always stand for fantasy sports for all.”

The end result? What had been a mechanism that appeared to serve the best interests of the entire fantasy sports industry appears to only serve the interests of only the largest DFS sites.

Representation in Congress?

Finally, the plight of small operators is even on the radar of Congress.

Legal Sports Report learned that a representative of the FSTA met with staff for Rep. Fred Upton, attempting to make sure small operators are included in the discussion at the federal level.

Upton chairs the committee overseeing the subcommittee that will hold a hearing regarding the DFS industry next week. It’s not known if anyone representing small operators’ interests will be included as a witness at the hearing, however.

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Dustin Gouker

Dustin Gouker has been a sports journalist for more than 15 years, working as a reporter, editor and designer -- including stops at The Washington Post and the D.C. Examiner.

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