Is daily fantasy sports legal? An analysis of the debate in Nevada, New York and Illinois - Part 1
Published 22 February 2016 By: Andrew Visnovsky
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
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
Nevada Gaming Law
The Nevada AG Memo analyzed the status of daily fantasy sports both under the gambling and lotteries provisions of the Nevada Revised Statutes. Nevada Revised Statute (NRS) 463 (gambling); NRS 462 (lotteries).
Nevada Law defines “sports pools” as “the business of accepting wagers on sporting events or other events by any system or method of wagering.”19 In assessing whether Daily Fantasy constituted a “sport pool,” the Nevada AG Memo found that;
“one must determine (1) whether a wager is present; (2) whether the wagering is done on sporting events or other events by any system or method of wagering; and (3) whether daily fantasy sports operators are in ‘‘the business of accepting wagers.”20
According to the Nevada AG memo, (1) a wager is present because daily fantasy players pay entry fees to enter into fantasy games where the outcome is uncertain; (2) daily fantasy revolve around sports events; and (3) daily fantasy sports operators are in the business of accepting these wagers. 21
Specifically, the AG Memo observed that in many instances daily fantasy companies hold themselves out as place where players make bets and place wagers.22 The most damning examples were quotes from DraftKings’s CEO who states players “deposit wagers” and alt text for images on DraftKings’s website that includes “betting” to draw users.23
Gambling Games Requiring a License
Under Nevada law, gambling games that require a license by the Nevada Gaming Commission include;
“(1) any game played with cards, dice, equipment or any device ormachine for any representative of value; (2) any banking game; (3) any percentage game; or (4) any other game or device approved by the Nevada Gaming Commission.”24
If a game falls within one or more of these categories, its operators must seek a gaming license from the NGCB. Notably, this list makes no mention regarding the distinction between games of skill and games of chance. The Nevada AG’s memo notes that Senate Bill 9 passed by the Nevada Senate in 2015 does make distinctions between skill and chance games.25 However, as the AG’s memo points out, the bill does not address whether games of skill fall within the remit of the Gaming Control Act.26
Games played with cards, dice, equipment or any device or machine for any representative of value
The Nevada AG Memo reasoned that daily fantasy sports requires use of a computer and thus constituted the use of a “device or machine” under NRS 463.0152.27 The Nevada AG Memo also noted that because most daily fantasy players’ play for money, such constitutes “any representative value.” Therefore, because the game is played with a “device” for a “representative value,” the game requires licensure under Nevada law.
Nevada law defines “banking games” as a game where a player competes against a gaming establishment.28 Because daily fantasy players play in pools against each other, and not against the daily fantasy operator, the Nevada AG memo found that daily fantasy does not constitute a “banking game.”29
According to Nevada Law, a “percentage game” involves game where players play against each other and the gaming establishment takes a percentage, or a “rake.”30 As noted above, in daily fantasy, players (arguably) place wagers in pools against each other. As well, Daily Fantasy operations make their profits by taking a percentage from the entry fees from players.31 Because of this and the pooled play, daily fantasy constitutes a percentage game according to the Nevada AG memo, and therefore requires licensure under Nevada law.
Any other game or device approved by the Nevada Gaming Commission
Daily fantasy sports have not been approved by the NGCB, and accordingly cannot be assessed under this category.32
Under Nevada law, a “lottery” is:
 any scheme for the disposal or distribution of property,  by chance,  among persons who have paid or promised to pay any valuable consideration for the chance of obtaining that property, or a portion of it, or for any share or interest in that property upon any agreement, understanding or expectation that it is to be distributed or disposed of by lot or chance .33
The AG Memo points out that while chance is a key element of a lottery in Nevada law, “there may not need to be a determination of skill.”34 The AG Memo argues that the skill in a lottery is the “skill of the individuals determining the actual outcome of the event.”35 Because the daily fantasy players have no direct control over the points that the athletes they have selected can accrue, the AG Memo finds that their skill does not determine the outcome.
The AG Memo posited that, if a court decided to analyze the skill of the owners in picking their lineups and reject their interpretation, only then would the court need to analyze whether skill or chance is the prominent factor in deciding the outcome.36
Application of the UIGEA to Nevada Gambling Determination
Doesn’t the UIGEA legalize Daily Fantasy? In short, no.
As the AG memo points out, the UGEA provides that “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.”37
Because the UIGEA sets out to create enforcement mechanisms for the application of gambling laws on the Internet, the UIGEA itself did not make any forms of gambling legal or illegal.38
The UIGEA exemption of fantasy sports simply exempts it from the enforcement mechanisms it provides. Nothing more. Nothing less.
Result & Outcome
In response to the AG Memo, the NGCB banned daily fantasy operations pending the request and grant of a gambling license.39 Daily fantasy companies generally followed the order, shutting down operations in Nevada.
The bigger threat is whether other states will follow suit with Nevada, and begin making their own determinations on daily fantasy operations legal status within their borders.42
That concludes Part 1 of this article. Part 2 will investigate the legal challenges taking place in New York, Illinois and other states.
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- Tags: Daily Fantasy Sports | Gambling | Governance | New York Attorney General (NYAG) | New York Penal Law | Professional and Amateur Sport Protection Act 1993 | Regulation | The Nevada Gaming Control Board (NGCB) | United States of America (USA) | Unlawful Internet Gambling Enforcement Act of 2006 (UIEGA)
- Is daily fantasy sports legal? An analysis of the debate in Nevada, New York and Illinois - Part 2
- The growth of daily fantasy sports betting and the legal issues it faces: an interview with Shergul Arshad
- What are the top sports law issues to watch in 2016?
- The legality of daily fantasy sports betting in the US
Andrew is an associate at Landman Corsi, Ballaine & Ford P.C., where he works on a wide range of complex civil matters including employment disputes, commercial litigation, and professional liability claims. Andrew previously served as a Law Clerk to the Honorable F. Patrick McManimon, J.S.C., and a mediator in the Superior Court of New Jersey for the 2014/15 judicial term.