By Steve Masur and Sarah Siegel
How the distinction between skill and chance gave rise to a billion-dollar industry
In daily fantasy sports games, players are not placing “wagers” on the odds of winning based on the number of people playing; they’re paying “entry fees” to compete in a guaranteed prize pool where the prize is set and made well-known to players before the game begins. These players are not “taking a chance” by playing Brandon Marshall against the Cardinals defense; they’re “skillfully selecting” Brandon Marshall based on statistics and past performance of both wide receiver Brandon Marshall and the top-rated Arizona Cardinals’ defense.
This distinction between game of chance and game of skill is what separates illegal gambling from a legally-recognized daily fantasy sports exception under the Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA), the federal law that regulates online gambling.
Under the UIGEA, a carve-out was created for fantasy sports sites as a legal exception to gambling, as legislators believed that success in fantasy sports was based on skill rather than chance. While this Act crippled the online poker industry, it created the basis for the operation and legitimization of the interactive daily fantasy sports (DFS) industry in the United States.
The legal status of DFS sites is determined on a state-by-state basis, based on each state’s gambling laws and regulations. As of 2017, nine states have passed legislation legalizing and regulating DFS sites in their respective states, and about twenty states have pending legislation on the matter. However, in certain states, such as Washington, Alabama, and Nevada, DFS is considered a form of gambling per their states’ laws. As a result, DFS sites have created self-imposed technological barriers to block these residents from accessing DFS sites and prohibit people in those states from participating in these sites’ online games.
This lack of uniformity in the legal status of DFS across the country, as well as the novelty of the industry itself, has created a large, murky gray area for the industry’s laws, rules, and regulations.
Daily Fantasy Sports Sites in New York
New York is one of the nine states that have legalized and regulated DFS. While other states had previously passed legislation to legalize DFS, New York’s legislation brought with it the most controversy and attention.
The DFS bill (S 8153) was passed by the New York Senate in June 2016, and signed into law by Governor Andrew Cuomo in August 2016. This bill came after a seven-month legal battle that began in October 2015 when Attorney General Eric Schneiderman announced that he was investigating sites such as DraftKings and FanDuel as unregulated gambling sites.
Cease and desist letters were sent to DraftKings and FanDuel in November 2015, which prompted the DFS site giants to file a lawsuit against the state of New York. In December 2015, a Supreme Court justice granted the Attorney General’s request for a preliminary injunction, but soon after, the Appellate Division granted a stay and allowed the DFS sites to continue to operate in New York until a final decision was reached. In June 2016, the Senate passed the legislation to legalize and regulate the DFS industry in New York—a massive victory for the DFS industry.
What Does the New York DFS Bill Mean for New York?
New York’s DFS legislation explicitly states that interactive daily fantasy sports games do not constitute gambling; they are games of skill. This distinction is important to note, as gambling is a game of chance, not a game of skill, and is therefore illegal under the New York Penal Law. However, if DFS is considered a game of skill under New York law, then it can legally exist and operate in New York.
The New York DFS legislation regulates DFS sites by requiring operators to prohibit games based on high school or college sports events, register with the state, and implement a range of consumer protection measures. Some of these consumer protections include restricting players under the age of 18 from participating, ensuring that the accurate odds of winning are represented in all advertisements, and identifying highly experienced players on the platform. Additionally, New York aggressively taxes DFS revenue at a rate of 15% of gross revenue generated by players in New York, which the State then uses to fund education.
It’s not yet clear what impact New York’s DFS law will have on other states. However, New York is home to an estimated 10 percent of active DFS players and is the largest state thus far to pass legislation to legalize DFS, which will likely provide momentum for states with pending DFS legislation.
The Future and Impact of the DFS Industry
The subsequent state-by-state legalization of DFS operations has given rise to a legitimate industry, rather than one that survived on the graces of legal loopholes. The DFS market, once dominated by the giants FanDuel and DraftKings, is now in the company of startups that see an opportunity to become new key players in a developing DFS industry.
While the legalization has helped fortify the foundation of the DFS industry, the regulations have also created problems for these newer DFS companies. Some states’ regulations require DFS operators to pay hefty taxes to operate in the state. For a newer DFS business, this financial burden can make it difficult to operate a profitable business at anything less than a massive scale, creating large barriers to entry for new DFS companies and curtailing innovation in the industry.
While the DFS industry gains its footing in North America, legislators in states where DFS is not legal will be watching closely. Like the eSports industry, which has faced similar criticism as a result of its nationwide growth and popularity, all eyes will be on the DFS industry and similar industries as it takes shape within this new regulatory landscape.
*We would like to thank our intern Sarah Siegel for her contribution to this article.