Fantasy Sports: Gambling Laws Broken And Unseen

Fantasy sports is a multi-million-dollar industry, with millions of Americans drafting fantasy football teams each year, but the legality of the activity is still questionable. While federal law does not prohibit pay-to-play fantasy sports, state laws are not always so welcoming. The primary legal concern is whether hosting a fantasy league where participants put money or other valuable items at risk may constitute illegal gambling. Under most state laws, fantasy football contests are illegal if they involve three elements: consideration (e.g. an entry fee), reward (e.g. a prize), and chance. However, the precise definition of 'chance' varies by state. In a majority of states, play-for-cash contests are only illegal if they involve more chance than skill. In a handful of other states, fantasy football contests are illegal if results are based even in the smallest part on chance.

Federal law vs state law

The legality of fantasy sports in the United States is a complex issue that involves both federal and state laws. While the federal government has certain laws in place that impact the industry, individual states also have their own regulations and restrictions that companies like DraftKings and FanDuel must adhere to.

Federal Law

At the federal level, fantasy sports are exempted from prohibitions against online gambling. The Unlawful Internet Gambling Enforcement Act (UIGEA) of 2006 made it illegal for businesses to accept payments related to unlawful internet gambling. However, this law included an exception for fantasy sports, allowing them to operate without regulation.

Additionally, the Professional and Amateur Sports Protection Act (PASPA), a federal gambling ban enacted in 1992, was struck down by the U.S. Supreme Court, meaning sports gambling is no longer illegal under federal law.

State Law

Despite the federal exemptions, the legality of fantasy sports, especially daily fantasy sports (DFS), is determined on a state-by-state basis, and the landscape is constantly evolving as new legislation is introduced and challenged. As of May 31, 2016, playing DFS for money was considered illegal in 12 states, including New York, Texas, and Nevada. In other states, the legality of DFS is less clear, and the industry exists in a grey area.

Some states have passed legislation specifically addressing DFS, with some seeking to legalise and regulate it, while others classify it as gambling and restrict it. For example, in Alabama, the state Attorney General declared DFS to be illegal gambling under state law, leading to DraftKings and FanDuel leaving the state. On the other hand, states like Indiana, Virginia, and Tennessee have passed laws legalising and regulating DFS, considering it a game of skill rather than chance.

The lack of uniformity across states has led to a patchwork system, where the legality of DFS varies significantly depending on the user's location. This has resulted in a dynamic and uncertain legal environment for the industry, with companies having to navigate a complex web of state-specific regulations.

The role of the Unlawful Internet Gambling Enforcement Act

The Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA) prohibits gambling businesses from knowingly accepting payments where the money is connected to another person's participation in unlawful internet gambling. The Act requires the Secretary of the Treasury and the Board of Governors of the Federal Reserve System to designate payment systems that could be used to facilitate restricted transactions, and to issue a rule requiring these payment systems to establish policies and procedures to identify and block restricted transactions.

The UIGEA specifically exempts pay-to-play fantasy sports from restrictions placed on online gambling, as long as three criteria are met:

• Participants must not bet on the outcome of a particular game or a single player's performance.
• The value of the prize or reward must be established and clearly communicated to participants in advance and must not be tied to the number of participants or the amount of fees received.
• Winning should reflect the comparative skill, talent, and expertise of the participants.

The rationale for the exemption is that fantasy sports are considered games of skill, not chance. Assembling a fantasy team is thought to require skill, knowledge, and engagement from the participant.

However, it is important to note that the UIGEA is a narrow law and fitting the fantasy carveout does not mean that fantasy contests are automatically considered legal under federal or state law. The Act's rule of construction states:

> No provision of this subchapter shall be construed as altering, limiting, or extending any Federal or State law or Tribal-State compact prohibiting, permitting, or regulating gambling within the United States.

Therefore, while the UIGEA provides some protection for fantasy sports, the legality of these contests ultimately falls under the jurisdiction of individual states.

The any chance test

The "any chance" test is one of the three tests used by regulators to determine whether a game is based on chance or skill. The other two are the "dominant factor test" and the "material element test".

The "any chance" test is the strictest test for classifying skill games. It dictates that if chance influences the outcome of a game in any way, it will be deemed illegal gambling. In other words, if "any chance" is involved in determining the outcome of the game, then that game is gambling. For example, in the game of poker, players rely on their skill at bluffing and determining when to fold or raise. However, they also rely on a randomized deal, meaning that chance affects the outcome. Thus, under the "any chance" test, poker is considered gambling.

In the context of fantasy sports, the federal Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA) specifically exempts them from restrictions on online gambling as long as three criteria are met:

• Participants must not "bet" on the outcome of a particular game or a single player's performance.
• The value of the prize or reward must be established and clearly communicated to participants in advance and must not be tied to the number of participants or the amount of fees received.
• Winning should reflect the comparative skill, talent, and expertise of the participants.

The rationale for the exemption is that fantasy sports are considered games of skill rather than chance. Assembling a fantasy team is thought to require skill, knowledge, and engagement from the participant.

However, the interpretation of what constitutes a game of skill varies among jurisdictions, and the legality of fantasy sports is still debated, with some states allowing it, some prohibiting it, and others having no specific laws addressing it.

In summary, while fantasy sports are generally exempted from federal online gambling restrictions under the UIGEA due to the "any chance" test, the legality of these games can vary at the state level, with some states considering them gambling if any element of chance is involved.

The predominant purpose test

In the context of fantasy sports, the predominant purpose test aims to assess whether the outcome of the game is predominantly based on skill or chance. This evaluation considers various factors, including the level of control participants have over their teams' performance and the impact of their decisions on the final outcome.

The test typically analyzes the rules, structure, and mechanics of the fantasy sports game. It considers the extent to which participants can utilize their knowledge, experience, and strategic skills to influence the outcome. Factors such as player selection, team management, and strategic substitutions are evaluated to determine the level of skill involved.

To pass the predominant purpose test and be considered a game of skill, fantasy sports operators must demonstrate that the outcome is predominantly influenced by participants' skill and strategic decisions rather than mere chance or luck. This involves showcasing the elements of the game that allow skilled players to consistently outperform less skilled players over time.

It is important to note that the specific criteria and interpretation of the predominant purpose test can vary across different jurisdictions. The regulatory bodies or courts in each region may have their own interpretations and guidelines for applying this test, reflecting the varying definitions and approaches to gambling laws worldwide. Therefore, understanding the local regulatory environment is crucial for fantasy sports operators to ensure compliance with the applicable gambling laws and the predominant purpose test.

The legal status of fantasy sports operators

However, the legal landscape at the state level is more fragmented. While some states have followed the federal approach and concluded that pay-to-play fantasy sports are not inherently illegal, others have taken a more restrictive stance. As of May 2024, fourteen states have specifically allowed fantasy sports and daily fantasy sports, including Maryland, Kansas, and New Hampshire. These states have implemented regulations to oversee the industry, set minimum age requirements, and provide consumer protections.

On the other hand, states like Arizona, Arkansas, Louisiana, Iowa, and Tennessee have laws or legal opinions that prohibit or strictly regulate fantasy sports for money. The legality of fantasy sports in other states, such as Florida, is still disputed, with some arguing that it violates state gambling laws or exclusive agreements with Native American tribes.

To navigate this complex legal environment, fantasy sports operators must closely monitor the laws and regulations in each state they operate in. They may also need to obtain licenses, comply with specific requirements, and be prepared for potential legal challenges or changes in legislation. Overall, the legal status of fantasy sports operators remains in flux, and operators must stay informed and adaptable to ensure compliance with the evolving regulatory landscape.

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