Don’t Bet On It: Daily Fantasy Sports Sites Facing Legal Challenges

March 29, 2016

March Madness may be in full swing, but don’t put your money on the daily fantasy sports (“DFS”) sites DraftKings and FanDuel. New York Attorney General Eric Schneider dealt the online betting sites a potentially fatal blow with his recent announcement that both sites had agreed to suspend their operations in New York state as part of a settlement with the attorney general’s office. Given that New York is the sites’ largest market, the shutdown raises serious questions about their viability going forward, especially as other states consider following New York’s lead.  Although legislation regarding DFS is still pending in New York, the announcement has already reverberated through the online betting community in less time than it takes “the wave” to pass through a crowded stadium.
Betting on sports is big business. The American Gaming Association (“AGA”) estimated that $9.2 billion would be bet on the 2016 NCAA men’s basketball tournament alone.

The broad appeal of sports gambling is understandable to anyone who has ever won big in an office bracket pool. The stakes are low, the events are themselves entertaining, and the potential gains are sometimes tremendously lucrative.

Online sports betting takes the allure of traditional gambling to the next level by making the process both easier and more widely accessible. Unfortunately for gambling enthusiasts, however, not all states look favorably upon this sort of betting, hence the legal difficulties that DraftKings and FanDuel now face.
Legal issues regarding DFS arise when individual states, which lack the constitutional authority to regulate the Internet, attempt to regulate online betting platforms. Many states consider DFS sites to be “games of chance,” while DSF providers argue that their sites actually qualify as “games of skill.” Under the Commerce Clause, only the federal government has the authority to control interstate commercial enterprises, including e-commerce carried out over the Internet. However, the federal government has historically taken a more lenient approach to gambling than the states have. Laws like the Unlawful Internet Gambling Enforcement Act of 2006 have a lot of bark, but little bite. Despite its imposing title, the Act actually specifically excludes fantasy sports sites that meet certain requirements. Absent effective federal governance, states that wish to regulate DFS must draft their own legislation to fill in the gaps.
New York isn’t the only state undertaking this sort of gap filling. Numerous other states are considering regulating daily fantasy sports contests played for cash prizes. Shortly following the shut down announcement out of New York, Massachusetts followed suit, issuing a series of regulations intended to place more stringent restrictions on daily fantasy sports companies operating in the state. Rather than attempting to ban DFS outright, the Massachusetts regulations instead restrict who can participate, how the sites themselves are designed, and where DFS companies are allowed to advertise. This sort of regulatory scheme may prove to be the most effective in the long run, enabling states to protect casual DFS participants and prevent problem gambling, while still allowing the flourishing DFS industry to thrive.
Definitive legislation is still forthcoming in the New York case.  The final outcome for companies like DraftKings and FanDuel who wish to solicit bets in that state will remain undetermined until an appeals hearing regarding underlying litigation is held in September. Until then, the safest bet may be no bet at all.