By Danny Restivo
The word “fantasy” may elicit images of children’s games, but in the sports world it has become synonymous with profit. For the past decade, fantasy sports leagues for football, baseball, basketball and hockey have generated $3 billion in annual revenue. Since 1988, fantasy sports participation has grown exponentially, from roughly 500,000 to nearly 57 million in 2016, according to data from the Fantasy Sports Trade Association.
Fantasy sports leagues are organized by informal groups of friends or strangers. Each league member selects their own players, creating an imaginary team that competes against other participants. In recent years, sites like DraftKings and FanDuel—known as Daily Fantasy Sports—allow players to compete with each other online. These sites charge fees for all users and doles out money to the respective winners. Both FanDuel and DraftKings hold roughly 90 percent of the DFS market in the United States. In late October, ESPN reported that both companies intended to merge by 2017.
In 2006, Congress exempted fantasy sports from an online gambling ban, saying skill was the primary factor for success. However, FanDuel and DraftKings came under fire last year for breaking state gambling laws and advertising misleading information. In November 2015, New York Attorney General Eric Schneiderman ordered FanDuel and DraftKings to cease all operations within the Empire State. Schneiderman cited a failure to obey gaming laws while promoting competition that relied heavily on chance rather than skill.
Under Schneiderman’s order, New York became the sixth state to ban both FanDuel and DraftKings (Arizona, Iowa, Louisiana, Montana and Washington have all banned DFS). The attorney general’s decision highlights the major challenges of DFS, as well as the friction between state and federal gambling laws. With 600,000 users, there is more DFS participation in the Empire State than anywhere else in the United States. Schneiderman said the companies had raked in nearly $200 million from customers, but only 12 percent of its customer base had made any money, which ran contrary to FanDuel and DraftKings’ marketing and advertising.
Both FanDuel and DraftKings had limited their operations in other states when legislative pressure heated up, but they decided to fight Schneiderman’s order in New York.
With the enlistment of lobbying efforts, their persistence ultimately paid off. The New York Assembly introduced a legislative measure that was eventually signed by Governor Andrew Cuomo in August, while the Attorney General litigated with FanDuel and Draft Kings. The approved regulation enforces taxes, controls advertisement, and implements safeguards to keep experienced players from competing with inexperienced amateurs. The state taxes are projected to add $4 million to New York’s education fund.
In October, the New York Attorney General reached a court settlement with FanDuel and DraftKings. The settlement forced both companies to pay $6 million for advertising false information. The agreement stipulates that each company must now “maintain a webpage that provides information about the rate of success of users in its contests, including the percentage of winnings captured by the top 1 percent, 5 percent or 10 percent.”
While the settlement did cost DraftKings and FanDuel $6 million, New York’s new regulations are a boon for DFS companies, who see the regulatory model as an example for other states to follow. In light of these regulatory pathways, rumors of a merger between DraftKings and FanDuel have surfaced. If a merger does occur, it would eliminate the statehouse battles each company has to fight separately. The Fantasy Sports Trade Association, in conjunction with DraftKings and FanDuel, has supported legislative efforts in 16 states that carve out legal protection for DFS operators.
However, DFS laws around the United States remain decidedly diverse:
- Similar to Schneiderman’s order, Attorney Generals in Alabama, Delaware, Hawaii and Illinois have made statements labeling DFS illegal under state law.
Meanwhile, representatives in those states have introduced DFS-friendly legislation:
- The Attorney General’s office in Texas and Georgia have both issued opinions stating DFS as “potentially illegal.” As a result, FanDuel left the Lone Star State while DraftKings remains, but both companies still operate in Georgia after the attorney general decided not to pursue legal action.
- In New Jersey, legislators have classified DFS as a “game of chance,” but have not pursued legal action against any company.
- While legislators approved DFS in Florida, federal prosecutors in the Sunshine State have convened grand juries to investigate certain sites for illegal gambling activity.
As of September, eleven states permitted DFS while thirteen have proposed legislation. However, there are 10 states that have approved DFS, but currently face scrutiny from lawmakers. “This regulatory patchwork could strengthen support for uniform DFS policies around the country” says Eric Martins, DMGS Managing Director, “As fantasy sports enthusiasm continues to rise, state legislators and lawmakers throughout the country are likely to further modify gaming regulations.”
Sates with Approved DFS Legislation
House Bill 1404, which was approved in May, allows 18-year-olds to participate in DFS. However, Colorado law does not allow DFS for college sports. The bill also creates a Colorado Office of Fantasy Sports, which aims to set guidelines and prevent an illegal gambling outfit.
Governor Mike Pence signed SB 339 in March, which permits DFS for professional sports, but restricts participation in high school or college sports. The law also establishes the Paid Fantasy Sports Division of the Indiana Gaming Commission. The law require DFS operators to pay a $50,000 registration fee before they can operate within the state. Critics say the registration fee will give Draft Kings and FanDuel a monopoly within the Hoosier State.
In May 2015, Governor Sam Brownback signed HR 2155 into law. The regulation stipulates that DFS is a game of skill. Prior to the law, there was no mandate differentiating DFS and other forms of gambling.
In March, Attorney General Maura Healey announced a series of regulations for DFS. Players must be 21 years old and interactions between experienced and inexperienced players are strictly limited. The law also bans college sports and enforces a monthly cap of $1,000 on all players.
In May Governor Phil Bryant signed Senate Bill 2541, which legalizes DFS until July 2017. Bryant’s signature overrules an earlier state law that bans DFS. The measure also creates a task force that will deliver regulatory recommendations to the Governor.
Governor Jay Nixon signed House Bill 1941 in June. The bill exempts daily fantasy sports from state gambling regulations, while enforcement falls under the jurisdiction of state gaming officials. DFS operations must pay the Missouri Gaming Commission an application fee of $10,000 and an annual fee of 11.5 percent of the operator’s net revenue in Missouri from the previous year, or $11,500 annually.
In February 2016, Rhode Island Attorney General Peter F. Kilmartin announced daily fantasy sports were legal under state law. Kilmartin recommended legislators create a regulatory framework, but the state assembly has yet to send one to the Governor’s desk.
In April, Governor Bill Haslam pushed through a bill that exempts DFS from anti-gambling laws. Haslam’s law legalizes cash-based fantasy contests and overrides a ruling made by the previous attorney general.
Attorney General Patrick Morrisey issued an opinion in April stating that DFS was permissible under state law because fantasy sports are a game of skill, not chance. The West Virginia Lottery Commission said it would oversee DFS, but would wait to recommend any regulations or laws.
In March Governor Terry McAuliffe signed the Fantasy Contests Act, which requires DFS operators to pay a $50,000 licensing fee and register with the Department of Agriculture and Consumer Services. Furthermore, DFS operators must undergo two independent audits every year, while banning DFS employees from participating in public contests.
States with Proposed DFS Legislation
Connecticut, California, Florida, Kentucky, Michigan, Minnesota, Nebraska, New Jersey, New Mexico, Oklahoma, Pennsylvania, South Carolina and Wisconsin.
States with No DFS Legislation
Alaska, Arkansas, Maine, New Hampshire, North Carolina, North Dakota, Ohio, Oregon, Utah and Wyoming.
States with Contested Legislation
Alabama, Delaware, Georgia, Hawaii, Idaho, Illinois, Nevada, South Dakota, Texas and Vermont
States that Have Banned DFS
Arizona, Iowa, Louisiana, Montana and Washington