New York Tells DraftKings and FanDuel to Stop Taking Bets
New York's Top Regulator Steps In
The cease-and-desist order is the most recent in a string of setbacks for the burgeoning multi-billion-dollar industry that intertwines betting with fantasy sports.
Critically for DraftKings and FanDuel, the move by Attorney General Eric T. Schneiderman could create a domino effect, leading other states to take similar action. For their part, fantasy sports companies say the games are not gambling because they involve skill and are legal due to a 2006 federal law that exempts fantasy sports from a ban against processing online sports betting.
How Did We Get Here?
What are “Fantasy Sports”?
Luck or Skill?
Given the increase in daily games, the US Department of Justice and the Federal Bureau of Investigations are investigating the legality of daily fantasy sports leagues under UIGEA, the federal law regulating gambling by prohibiting persons in the “business of better or wagering” from accepting certain payment methods in connection with “unlawful Internet gambling.” Fantasy sports have been challenged in the past (see our 2006 alert here); but, at that time, the court came out in favor of the leagues. That said, despite UIGEA’s exemption for the more popular version of fantasy sports from the definition of “unlawful gambling,” the uptick of daily games may cause the whole castle to crumble—or at least succumb to stricter regulation.
And, to be clear, the “castle” brings in a lot of money. Reports state that DraftKings and FanDuel bought nearly $200 million in television commercials since August of this year, outspending even pizza chains and beer brands. The investors to these websites are industry giants like Robert Kraft, owner of the New England Patriots, Jerry Jones, owner of the Dallas Cowboys, in addition to Major League Baseball and television networks. One research firm estimated that daily games will pull in around $2.6 billion in entry fees this year alone, grow at a 41 percent annual rate, and eventually reach around $14.4 billion in 2020.
With this enormous amount of financing, popularity and influence, at first glance it seems as though DraftKings and FanDuel are here to stay. However, the DOJ is not an agency that is likely to be swayed by popularity. As you may recall, it was only a decade ago that the online poker industry faced a similar explosion in popularity, only to be nearly outlawed by UIGEA, the same act on which daily fantasy sports leagues currently rely.
The DOJ and FBI investigations are likely only the first in many challenges that daily fantasy sports leagues will face. Enough questions have been raised about this booming industry to indicate that both congressional and state action may be on the horizon, and that a brighter line may be drawn between what will be considered a game of skill and one of chance.
Arent Fox regularly assists clients with compliance with state and federal laws governing games of chance and skill. We will be watching closely and working with our clients to ensure their interests are protected and that “no foul” is called on the play.