Is daily fantasy sports legal? An analysis of the debate in Nevada, New York and Illinois - Part 1

Daily fantasy sports touts itself as a “legal” alternative to sports gambling in the US. In fantasy sports, players select “teams” of various professional athletes competing in sports competitions that may or may not play on the same team. Those players’ statistics are boiled down into a singular point total for each player, which is added together for each “team.” The player with the highest team point total wins the fantasy competition.

While traditional fantasy sports involves pools that cover multiple fantasy “games” and last the duration of an entire sporting season, daily fantasy sports, as the name implies, involves more instantaneous pools, which award winners of fantasy pools that involve generally a single match-up and last for a period of days, or at most a week. The two biggest operators are FanDuel and DraftKings.

Recently, however, the practice has faced a series of challenges.¹ The Federal Government is investigating both FanDuel and Draftkings for insider trading.² And reports have emerged that that 1.3% of players win about 40% of the winnings, making it a “loser’s game” for casual players, which may be causing many to abandon the practice.³

Perhaps the most significant challenge, however, relates to daily fantasy’s legality. Readers will likely be familiar with the headline arguments:

• Those arguing that it is lawful assert that it takes advantage of a loophole for fantasy sports in the Unlawful Internet Gambling Enforcement Act (“UIGEA”), which exempts fantasy sports from its definition of a “wager,” meaning that they can process and transmit payments and payouts of winnings online without violating the law;⁴
• Those arguing that it is unlawful disagree, asserting that the UIEGA loophole doesn’t apply and was never intended for activities such as daily fantasy, and that accordingly the activity breaches the Professional and Amateur sports Protection Act of 1993, which effectively bans sports gambling in the United States.⁵

While the arguments above are being played out at a Federal level, individual states are also seeking to assert their own views on the legality of the practice.⁶ Perhaps most notably, Nevada, New York, and Illinois have all sought bans on the practice of daily fantasy within their borders for violating their respective states gambling laws.

These actions arguably represent a more pressing concern for the daily fantasy industry, and may be a harbinger of potential further actions by other states and ultimately the Federal government.

Accordingly, this article investigates the key challenges to the legality of daily fantasy now taking place at state level in the US. Part 1 will focus on Nevada, where traditional sports gambling is legal; and Part 2 on New York, the home state of Fan Duel and the major US sports leagues and Illinois, a state whose gambling laws do not differentiate between games of skill and chance, before briefly touching on other states and offering comment.

Nevada’s Attorney General Daily Fantasy Memo

Background

The Nevada Gaming Control Board (NGCB) directed the state’s attorney to draft a memo (Nevada AG memo) regarding the question of whether the NGCB should classify daily fantasy as gambling and thus require Daily Fantasy operators to obtain a license to operate in the state.

On October 16, 2016, the Nevada Attorney General advised the NGCB that under Nevada gaming law, daily fantasy constituted gambling, and therefore, the companies are required to apply for a Nevada gaming license.⁷ The Nevada Gaming Commission accepted findings of the AG memo and banned daily fantasy sport sites in the state, pending the application for gambling licenses by daily fantasy companies.⁸

Las Vegas Hacienda v. Gibson: Game of Skill or Chance?

Daily fantasy proponents’ arguments against a gambling classification is rooted in the holding from Las Vegas Hacienda v. Gibson.⁹ In Gibson, a resort offered $5,000 award to anyone who, after paying $0.50, could shoot a hole-in-one on one of the resort’s golf course’s holes.¹⁰ The resort refused to pay, and the player sued.¹¹

At trial, the, the court determined that the contract in question was not a gambling contract and that shooting a hole-in-one was predominantly a feat of skill.¹² The resort appealed, arguing that the trial court erred in those determinations.¹³

On appeal, the Court found that the fact that a participant had to pay an entry fee was not in itself enough to establish that the agreement was an impermissible gaming contract, but rather the underlying conduct and whether the terms of the payment rested on the result on an instance of chance or a feat of skill.¹⁴

According to the court, “the test of the character of a game is not whether it contains an element of chance or an element of skill, but which is the dominating element.”¹⁵ Because of this, the issue was a matter of fact, and therefore, was “within the province of the trial court.”¹⁶

The problem with a Gibson analogue, the Nevada AG memo points out, is two-fold. First, in the Gibson scenario, the person hitting the golf ball has the ultimate control on the underlying result of the contract —they hit the ball— unlike daily fantasy where the underlying athletes, not the daily fantasy participants, have the ultimate control.¹⁷ Secondly, the case predates changes to Nevada gaming law, which use a significantly different test to determine whether something constitutes “gambling” under Nevada law.¹⁸