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Catching up with Daily Fantasy Sports

11 July, 2016

The Daily Fantasy Sports (DFS) industry, spearheaded by billion dollar companies FanDuel and DraftKings, grew massively over the last couple of years. However, their meteoric rise was not without growing pains, as conversations cropped up around the companies over the potential legality of the daily fantasy sports industry.  The main concerns centered around whether or not Daily Fantasy Sports constituted gambling or not and sparked debate as to whether or not one could claim that these games operated more off luck or skill. Proponents pointed to the fact that only 2% of DFS players typically won over 90% of DFS competitions, saying that this clearly indicated that they were games of skill and as such could operate legally online. Opponents argued that the fact that these Fantasy Sports competitions were daily, rather than monthly or weekly like previous iterations of the game, meant that the sheer amount of factors involved (such as injuries in game or freak events) and the new quicker daily timeframe meant that these games required much less skill than the monthly versions, that winning derived primarily from luck and that as such DFS constituted online gambling. This would of course be problematic as online gambling is only fully legalized in New Jersey and Delaware, with online poker legal in Las Vegas. As such, a number of states took steps to either restrict/put controls on DFS, or indeed ban them outright. Currently, DraftKings and FanDuel are banned in 10 different states across the country, though in some they are in discussion with local authorities to come to an understanding.

 

 Daily Fantasy Sports are a subset of fantasy sports games where players compete against others by building a team of professional athletes from a particular league or competition while remaining under a salary cap, and earn points based on the actual statistical performance of the players in real-world competitions. Daily fantasy sports are an accelerated variant of traditional fantasy sports that are conducted over short-term periods, such as a week or single day of competition, as opposed to those played across an entire season. Daily fantasy sports are typically structured in the form of paid competitions typically referred to as a "contest"; winners receive a share of a pre-determined pot funded by their entry fees. A portion of entry fee payments go to the provider as rake revenue.  

 

New York State has been a frontrunner for DFS legislation and framework, and as such is being focused on in this piece. Combined with the fact that NY makes up such a large part of the DFS market is why we are focusing on this state in detail.   

 

Although the start of this furor saw DFS banned primarily in smaller states, the companies took a big hit when they were shut down in New York. The central reasoning behind this was whether the sites awarded prize money generated from entrance fees based on a participant's knowledge of sports, or whether winners essentially got lucky. In March of 2016, after a months-long public, and at times bitter, fight with New York Attorney General Eric Schneiderman, the companies agreed to cease their operations in the state of New York. This was a massive blow to the companies, as New York represented a huge chunk of their market share. For example, in 2014 the state was second in terms of revenue for DraftKings. According to the Wall Street Journal, New York had approximately 300,000 players actively playing on DFS sites when the order to shut down came in. Furthermore, and as previously stated, only California generated more revenue when tallying up the states. 

 

As an industry slowly recognizing its new-found size and the power that can bring, the two companies were slow to embrace lobbying and fight the states through state legislatures. A move towards doing so was a more mature step for the companies, especially after somewhat embarrassing public spats and insults with Eric Schneiderman following his original declaration that DFS constituted gambling in the state of New York. This new focus on lobbying has paid dividends in a number of states, including now New York. As of the 18th of June, the New York Legislature came to an agreement to allow DFS sites to resume operations in the state. This new legislation taxes the sites at 15% of gross revenue, limits the games it offers to professional sports only (no college or high school games) and has a minimum age requirement of 18. In addition, employees of the two companies are prohibited from playing on the sites. This in no small part stems from an incident from 2015, where employees of the sites were caught using privileged insider data to play on each other’s websites and win hundreds of thousands of dollars. In fact, it was this case that originally bought DFS (which has previously flown somewhat under the radar) to the attention of the New York Attorney General, which in turn resulted in their suspension.   

 

It is important to note that at this time the bill hasn't been delivered to the Governor, and so technically speaking DFS activities have yet to resume in New York State, though there is nothing to be concerned about. A big part of this is the fact that Governor Cuomo was involved in some aspects of the bill- changing some language and lowering a licensing fee that would have priced out smaller DFS operators- and it's somewhat counterintuitive that a Governor would veto a bill he was somewhat involved in shaping. A potential reason for the delay could simply stem from legal matters, as under the original terms of the deal that suspended DFS operations the companies agreed not to resume operations before the first of July.  

 

There are some who look at the recent actions of Eric Schneiderman with some bewilderment and are confused that any legal repercussions are potentially still on the cards. This stems from the fact that although the New York State Legislature has now created legislature that states DFS is not illegal gambling, their previous actions prior to this mean there is a case to be made for false advertising and consumer fraud, and Schneiderman plans on pursuing these charges. Jeff Ifrah- founding partner at Ifrah PLLC- finds this bemusing, stating in a recent article that “Everything in there about how DraftKings and FanDuel presumably deceived consumers rests entirely on the notion that DraftKings and FanDuel were illegal gambling enterprises- a notion that the legislature has flatly repudiated".  Although critical of the AG's position, he takes time to stress that he understands where Schneiderman is coming from, writing; "I'm not taking the DFS side wholesale. Whether it's a jackpot you're giving away or just a big bundle of cash, there's no question that DFS involves a big element of chance; as such, some transparency about the odds is, and was, in order. Insofar as the complaints imply that, I agree with Schneiderman 100% and the DFS sites would do well to keep that part of the marketing in check from now on".  Ifrah's overall takeaway from this seems to be along the lines of no harm no foul, and letting bygones by bygones. Both FanDuel and DraftKings eventually took the proper path to recognition by pushing through legislation and Schneiderman had valid complaints in making them cease activities last year. However, Schneidermans’ current actions seem somewhat desperate considering the prospective new legislature, and despite the important regulation that has come to the industry in NY State as a result of this there shouldn’t really be any further action.

 

 The DFS industry cleaning up its act and maturing as an industry has been a trend during its legal battles over the last few months. As different states have grappled over the legality of the industry, many have ended up encouraging more regulation and consumer-protective measures to ensure that DFS is found viable. Important features such as geolocation checks and stricter checking on age requirements have been implemented, showing that the industry recognizes that it can no longer operate like the Wild West. On top of these age requirements in many states the DFS companies have increased the minimum age of play to 21 to placate lawmakers and pressure groups concerned about the potential for gambling addiction with teenagers. Also, following the scandal of industry employees winning money of each other's products, many states have introduced rules that bring more scrutiny and stricter regulation vis a vis industry members enjoying DFS; most of the time they are prohibited period.  

 

In summary, following the shock of being banned in New York the last few months have been very positive ones for the daily fantasy sports industry. The banning in such a large market acted as somewhat of a sharp shock to the system, leading FanDuel and DraftKings to realize that they could no longer operate as they did during their meteoric rise. Schneiderman identifying areas where the companies were potentially negligent led them to clean up their act, and now we have an online industry which is answering many of the questions its detractors had for it. Any substantive process with online movement we see as a positive and believe that it helps tangentially push conversation over the legalization of online gambling as well. However despite this progress Attorney General Schneiderman does not yet see this saga as finished, and there are potentially more twists and turns in this tale to come. We will continue to follow this story as it develops and look forwards to Governor Cuomo signing the bill legalizing daily fantasy sports in New York in the near future.  

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