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Is This the End of the Road for DraftKings and FanDuel?

Screen Shot 2015 11 20 at 11.33.05 AM
Screen Shot 2015 11 20 at 11.33.05 AM
Source: Shutterstock

Source: Shutterstock

 

Daily fantasy sites like FanDuel and DraftKings thought they had found the balance between gaming and gambling, but some states are forcing them to shut up shop.

 

The Most Valuable Football Games May Be the Ones Off the Field

 

If you’re a red-blooded American, then you’ve probably heard of that thing called “football.” It’s kind of the most popular sport in the United States, with rabidly strong followings among Baby Boomers, Generation X and, of course, Millennials like you and me. The fan base doesn’t stop on the field however, and the off-field hobby of fantasy football has been a mainstay for fans since presumably 1969.

Across the United States 74.7 million Americans are projected to be spending $4.6 billion on fantasy football this year with about $107 million projected to be spent by fantasy football bettors. As a multi-million industry with thousands of players across the nation making bets, companies like Draftkings and FanDuel, which promote and organize fantasy sports leagues, are making huge profits by taking a cut of entry fees and prizes. Day-by-day, millions of users, who create accounts and pay registration fees, can “draft” real-life players for a virtual team, which gains or loses points depending on the individual performances of their players.

 

But Is it Legal?

 

To some states around the country, like New York, the fantasy aspect of fantasy football sounds a lot more like sports gambling and should be treated as such. With an apparent fear of a small number of apex players being able to dominate the system through the use of software and automated data – gaining an edge over other players to win lucrative prize pots.

Another broader concern in some states is that millions in untaxed, unregulated, and in some states possibly illegal funds are being transferred through prize rewards. This has certainly sent states cracking down on the capitalization of the practice, with Florida having recently joined the pack through a class-action lawsuit against both FanDuel and DraftKings.

To understand what the hubbub is all about here are two important points to consider.

First, playing fantasy football for cash is usually legal under Federal Law. The Unlawful Internet Gambling Enforcement Act of 2006 explicitly allows for fantasy sports games that meet three criteria:

-The value of the prizes is not determined by the number of participants or the amount of fees paid.

-All winning outcomes reflect the relative knowledge and skill of the participants.

-The fantasy game’s result is not based on the final scores of any real-world games.

Second, some states considers certain forms of fantasy football as illegal gambling. Under state law fantasy football can be considered illegal if it fills three criteria:

-Consideration to play (An entry fee)

-Rewards for playing (Prize pots)

-Chance (This is the tricky part for most states)

 

States, Suits and a Murky Future

 

The suit in Florida is alleging that FanDuel and Draftkings allow elite players to utilize “elaborate computer programs and algorithms” to gain an advantage over average users, and are thereby fleecing their customers. A similar suit over fantasy football in Georgia questions these companies’ ability to operate in consideration of the state’s strict gambling laws.

Significantly, the New York attorney general has deemed fantasy sites like both DraftKings and FanDuel as a form of illegal gambling, and ordered the sites to stop taking bets from New Yorkers. Of course, both major sites are now launching law suits to dispute the matter, and the industry itself is embroiled in a vicious legal battle across many states.

The usual defense in most cases is that these games operate mostly based upon the skill of individual players, thereby invoking the Gambling Enforcement Act’s clause for fantasy sports games. But the fact that some forms of fantasy football rely on the variable performance of actual players on the field means it can fall squarely into the camp of “chance” and thus provoke the wrath of states.

 

Our Take

 

When you have billions of dollars floating around in untaxed and unregulated cash over a gambling venture you can be certain the states are going to crack down on it. For most of us, our personal teams and friendly wagers aren’t going to be affected by the company versus state squabbling, but the states aren’t likely going to budge on their position over getting those bigger bucks anytime soon.

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