What the Supreme Court’s Murphy v. NCAA Decision Means for Fantasy Sports
Ever since the United States Supreme Court issued its decision striking down the federal ban on state sponsored sports betting in the Professional and Amateur Sports Protection Act (PASPA)1 this spring, there has been much discussion and speculation on what the decision means for the fantasy sports industry.
We believe there are two key takeaways.
First, the risk that fantasy sports will be considered illegal gambling will be reduced if traditional gambling that was previously deemed illegal is in fact legalized.
Second, there is serious risk that state regulators will pursue the easy road, pass a set of “one size fits all” regulations, group fantasy sports businesses together with traditional gambling businesses and thereby subject fantasy sports businesses to onerous regulation well-suited to traditional gambling but ill-suited to fantasy sports.
Fantasy sports businesses must do everything in their power to avoid that “one size fits all” result.
The Supreme Court Decision
Before the Supreme Court’s decision this May in Murphy v. NCAA2, PASPA prohibited states from facilitating betting on amateur or professional sports games. Not surprisingly, states that wished to authorize sports betting contended that PASPA was an encroachment on state sovereignty. In its decision, the Supreme Court reiterated anti-commandeering principles and held that states have the right to decide whether or not they want to legalize sports gambling. This however, does not mean that sports gambling is now legal throughout the United States. Rather, it means that absent further Federal legislation, States can legalize gambling within their borders so long as the resulting legal framework complies with existing federal laws including the Unlawful Internet Gambling Enforcement Act3 (UIGEA) and the Wire Act4. Many states will likely do just that though how many and when remains to be seen. Patently, in the states that legalize traditional sports gambling, there will be no real risk that fantasy sports erroneously will be deemed illegal sports gambling as sports gambling itself will not be illegal.
Federal Law Clearly Distinguishes Fantasy Sports from Traditional Gambling
The UIGEA defines “unlawful internet gambling” to mean “to place, receive, or otherwise knowingly transmit a bet or wager by any means which involves the use, at least in part, of the Internet.” See 31 U.S.C. §§ 5362, 5363. The statute goes on to provide a definition of “Bet or Wager,” which specifically excludes participation in any “fantasy or simulation sports game,” provided that the following criteria are met:
No fantasy or simulation team is based on the current membership of an actual team that is a member of an amateur or professional sports organization.
All winning outcomes reflect the relative knowledge and skill of the participants and are determined predominantly by accumulated statistical results of the performance of individuals (athletes in the case of sports events) in multiple real-world sporting or other events.
No winning outcome is based: (1) On the score, point spread, or any performance or performances of any single real-world team or any combination of such teams; (2) Solely on any single performance of an individual athlete in any single real world sporting or other event.
All prizes and awards offered to winning participants are established and made known to the participants in advance of the game or contest and their value is not determined by the number of participants or the amount of any fees paid by participants.
See 31 U.S.C § 5362(1)(E)(ix) (hereinafter the “fantasy sports safe harbor”).
While the UIGEA by its terms does not override state law, the fantasy sports industry should still do all they can to point out to state lawmakers and regulators the judgment inherent in Federal Law that fantasy sports is not gambling and urge that the state decision-makers follow the Federal lead.
Priority For the Fantasy Sports Industry: Emphasize the Critical Distinction Between Fantasy Sports and Traditional Gambling to Avoid Onerous Regulation
Opponents of sports gambling often point to the risk to the integrity of the game (i.e., the risk that a gambler will attempt to “fix” a game). Stated another way, they highlight the risk that a gambler with a substantial bet on a game will attempt to bribe or extort a player or referee in order to affect the result of the game. Clearly, a player who purposefully misses shots or makes mistakes can hinder his team’s chances to win one game in which he or she plays. Similarly, a referee could easily change the result of a game by making calls that favor one team over another. Fantasy sports contests pose no such integrity risk.
By their very nature, fantasy sports teams are made up of players from a variety of different real-world teams playing in a variety of real world events. Thus, there is little, if any, risk that fantasy sports contestants could, even if they wanted to, “fix” a fantasy sports contest by bribing or extorting a player or official. Thus, onerous regulation designed to insure the integrity of sporting events is inappropriate for fantasy sports companies. The fantasy sports industry must continue to work hard to educate regulators and lawmakers so that they resist the temptation to pass only one set of regulations and rather pass two – one properly suited for traditional gambling and one properly suited for fantasy sports.
Specific “Dos and Don’ts” for Fantasy Sports Companies
There are some simple things that fantasy sports companies can do to maximize the chances for properly tailored regulations.
First, they should religiously adhere to the “safe harbor” requirements in the UIGEA including but not limited to insuring that their contests have prizes that are set in advance, involve multiple real-world events, and are not dependent on any single athlete.
Fantasy sports companies should also refrain from using careless nomenclature that appears to equate traditional gambling with a fantasy sports contest. Gambling terms like “bet” and “wager” should be replaced by “contest entry fee” or something similar. Similarly, fantasy sports companies should avoid terms like “rake” or “vig” and instead use “service fee” or something similar when referring to what a company charges to run a fantasy sports game.
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- Tags: Anti-Corruption | Fantasy Sports | Gambling | Governance | Professional and Amateur Sports Protection Act (PASPA) | Regulation | United States of America (USA) | Unlawful Internet Gambling Enforcement Act | US | Wire Act
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Rich Brand is the Managing Partner of the San Francisco Office of Arent Fox LLP, and the Chair of the Sports Practice Group. Rich's sports law practice focuses on naming rights, sponsorships, media rights, acquisitions of professional sports franchises, arena/stadium licenses, executive contracts, concession agreements, suite and club seat licenses, and financings for teams and facilities. Rich has represented numerous professional teams, including the Atlanta Hawks, Brooklyn Nets, Charlotte Hornets, Cleveland Cavaliers, DC United, Inter Milan, Los Angeles Galaxy, Los Angeles Kings, Los Angeles Lakers, Los Angeles Rams, Madison Square Garden Company (the owner of the New York Knicks and New York Rangers), Memphis Grizzlies, Miami Dolphins, Miami Heat, New York Jets, Oklahoma Thunder, Phoenix Suns, Portland Trailblazers, San Antonio Spurs, San Francisco 49ers, Seattle Seahawks, Washington Capitals, and the Washington Wizards. Recent examples of Rich's experience include representing the University of Southern California and Fox Sports in a naming rights transaction with United Airlines, the Seattle Seahawks in a naming rights transaction with CenturyLink, the Miami Dolphins in a stadium naming rights transaction with Hard Rock, the Los Angeles Lakers in a naming rights and health provider rights deal with UCLA Health, Brooklyn Sports & Entertainment in an arena naming rights transaction with New York Community Bank, Inova Health System in a training center naming rights transaction with the Washington Redskins, and the Brooklyn Nets in a media rights agreement with YES Network. In one of the more prominent recent non-sports naming rights agreements, Rich represented the Transbay Joint Powers Authority in San Francisco in a transit center naming rights transaction with Salesforce.
Glenn Colton is a partner in Arent Fox’s New York office where he focuses on white collar criminal and complex civil litigation, as well as government and internal investigations. Glenn represents clients in investigations and actions brought or conducted by Federal, State and local authorities including the US Department of Justice, US attorneys' offices, the Securities and Exchange Commission, the Commodity Futures Trading Commission, state attorneys general and local district attorneys. Drawing on his nearly 10-year tenure as an Assistant US attorney in both the criminal and civil divisions in the Southern District of New York, Glenn represents a variety of companies, ranging from Fortune 500 to private companies, and individuals in complex civil litigation in state and federal courts throughout the country.
Jennifer O’Sullivan is a partner in Arent Fox’s Sports group where she serves as a trusted advisor to sports leagues, teams, and media and technology companies. She specializes in the representation of professional sports leagues, teams, media and technology companies, investors, promoters, hospitality companies and sports, entertainment, and lifestyle agencies. Jennifer counsels sports and entertainment clients on issues ranging from mergers and acquisitions and other transactions to sponsorships, advertising, media matters, league formations and restructurings, and all forms of commercial agreements, including licensing, merchandising and promotional agreements, venue, vendor, and other special events agreements.