Fantasy sports drives US to review gambling laws

Those who monitor online gambling predict that daily fantasy sports, such as FanDuel, the most visible current iteration of online betting, may very well win wide legal acceptance in the foreseeable future. - Photo: Andrew Harrer/Bloomberg

By Frank Bentayou

Urged by hordes of sports fans throughout the country, the United States is struggling, legal jurisdiction by jurisdiction, over whether to loosen gambling rules tracing back to North America’s Puritan settlement almost four centuries ago.

Just 18 months after the Puritans established the Massachusetts Bay Colony in 1629, pious leaders issued the continent’s first recorded gambling edict:

“It is … ordered that all persons whatsoever that have cards, dice or tables in their houses, shall make away with them before the next court under pain of punishment.”

Ever since, the United States has been alternately rejecting and embracing the culture of wagering. First the colonies, then the young nation, permitted but then outlawed horse racing and betting parlors through the 18th and 19th centuries. In the 20th century, it both celebrated and abhorred the “numbers racket” as well as the high- and low-rollers’ mecca of Las Vegas.

“We’ve had a constant push-pull since the beginning,” says Colorado-based gambling expert Charles Humphrey, whose blogs on gambling-law-us.com, draw thousands of devotees. (In 2006, Humphrey sued CBS, ESPN and other sponsors of fantasy sports games, which he claimed were illegal online gambling. The case was dismissed.)

Humphrey and other online gambling experts can point to decades of back-and-forth acceptance and rejection in the country of wagering, from religious, social and moral forces, business interests and, especially, government and law enforcement.

America’s historical uncertainty about gambling is mirrored worldwide, as Humphrey points out, now that a new wagering juggernaut sits in the room – the Internet. Online betting looks like the latest force driving the U.S. to accept a more laissez-faire stance toward what the Puritans sought to quash.

Based on his and others’ close monitoring of federal and all 50 states’ laws – many of them now under scrutiny – Humphrey predicts that daily fantasy sports, the most visible current iteration of online betting, may very well win wide legal acceptance in the foreseeable future.

Beyond that, the seemingly unstoppable success of companies like FanDuel and DraftKings will probably guide many other kinds of now-forbidden online betting models toward success in the future. As the U.S. grows more tolerant of the alliance between technology and wagering, look for the notion that instant wealth stands as close as the nearest keyboard, to sweep across time zones and seize the world’s attention.

Many roadblocks remain

For historical and political reasons, gambling laws in the U.S. are mostly a function of state preference. That means that even among the more populous states, say New York, Illinois and California, online betting confronts completely different legal realities. Virginia, Florida and Texas, for example, have quite different legal interpretations and politics. The state and regional differences make firm predictions about the shape of future laws all but impossible.

Virginia, for instance, in March became the first state to rule daily fantasy sports legal. At the same time, Nevada’s Gaming Policy Committee, which arguably has the most experience overseeing gambling operations, made it known that it would relish the role of leader in future U.S. regulatory policy. The committee is made up of state government officials and gaming company executives.

In response, DraftKings CEO Jason Robins said, “Now the fantasy sports industry is ready to join hands with Nevada to figure out a common-sense regulatory framework to allow companies to safely and responsibly operate” in the state most connected to wagering.

The Associated Press reported that small businesses providing fantasy sports are lobbying to prevent legislation in New York that would make licensing there too expensive for everyone but giants DraftKings and FanDuel.

The group Small Business of Fantasy Sports says the $500,000 licensing fee in pending legislation would keep out the “mom and pop type businesses” that make up most of the industry.

They also object to a proposed 15 percent tax on revenue, suggesting 5 percent instead.
Meanwhile, DraftKings and FanDuel agreed with the state attorney general to stop taking bets in New York while lawmakers consider legalizing the games.

Whatever individual states decide to do, the federal government retains some legal jurisdiction over the medium (the Internet) that permits gambling opportunities to reach every village. The federal government has exercised that power, to the point of once convicting and jailing a high-tech gambling entrepreneur, Jay Cohen. From his office in Antigua, Cohen operated World Sports Exchange, or WSEX.com, an online sports gambling site.

In 1988, a federal prosecutor in New York charged Cohen and others with violating a 1961 U.S. law called the Wire Act, which aimed at regulating international gambling sources that used electronic means to reach American consumers. While “the Wire” originally focused on using telephone or telegraph communications to facilitate betting, courts included the Internet in the same category.

Cohen was not the only enforcement target, and some of those indicted with him brazenly ignored the charges and remained abroad, mostly in the Caribbean. Others traveled to New York, surrendered, pleaded guilty and paid modest fines. Cohen sought to challenge the U.S. government and went to trial.

His decision cost him almost 18 months of incarceration, as it happens, in a federal prison in Las Vegas, the gambling capital of North America, and months more of probation.

Later, after Cohen had served his sentence, Congress passed a more specific federal law that addresses Internet transmission of gambling sites.

A shortcoming in that law, called the Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA), is that legal opinions vary as to what constitutes “gambling.”

Ryan Huss, left, and Rishi Nangia, co-founders of Syde, a fantasy sports platform. Smaller companies in the exploding fantasy sports industry say they could be shut out of doing business in some states by legislation that is actually intended to recognize the games’ legality. - Photo: AP
Ryan Huss, left, and Rishi Nangia, co-founders of Syde, a fantasy sports platform. Smaller companies in the exploding fantasy sports industry say they could be shut out of doing business in some states by legislation that is actually intended to recognize the games’ legality. – Photo: AP

Win by skill or chance, that is the question

Marc Edelman, an associate professor of law at City University of New York’s Baruch College and one of the nation’s preeminent experts on online gambling and fantasy sports, points out that “the legal situation is somewhat different in every state in the U.S.”

Among the states that regulate or outlaw betting, most use distinct descriptions of what they are rendering illegal. Games of pure chance – like lotteries, for instance – unless the states themselves operate them, are less likely to pass legal muster than games of pure skill – like athletic competitions in which participants stand to win cash or valuable rewards.

Edelman, who like Humphrey closely monitors the wording of each state’s gambling laws, also notes that some statutes establish an almost mathematical ratio of skill to chance to determine legality. This much skill, this much chance, and it’s not gambling. Add a little more randomness, and the activity becomes an unlawful act. There’s no evidence state legislators are working together to jointly define where to draw the line between skill and chance.

Legal Sports Reports, a fantasy sports industry periodical, published a U.S. map on March 29 that showed only three states, Virginia, Indiana and Kansas, have legalized daily fantasy sports betting. Seven – Georgia, West Virginia, Wisconsin, New Mexico, Arizona, Washington and Hawaii – had their legislative initiatives to legalize stalled or rejected. And some 18 have active bills to legalize wagering moving through their legislatures.

That final category included large states like New York, Massachusetts, Florida, Illinois and California. The issue of whether skill or chance remains the prominent role is a key consideration in those states.

Daily fantasy sports certainly require of winners that they exercise skill in choosing a team’s competing personnel and then managing their rosters. Participants are known to spend weeks reviewing the statistical profiles of each team player they draft, so they can put the most skillful on their figurative fields of play.

But no one can predict player injuries, suspensions or other interruptions that occur simply because humans are human. “So chance always plays some kind of role,” Edelman says.

Irrespective of their vagueness about chance vs. skill, the two big daily fantasy sports companies got themselves in a pickle last fall. Just as they were spending millions on TV and print advertising in 2015, as they fought to climb higher in public awareness, news of a scandal broke. A DraftKings employee won big – $350,000 – placing second in FanDuel’s National Football League Sunday Millions competition.

Media immediately questioned the integrity of businesses whose own insiders could freely compete against the paying customers each company was seeking. The average FanDuel gamer might ask, “What chance do I have if a DraftKings employee, with all his access to information, wins a big prize?”

“It made it seem like the game was rigged,” Humphrey says. But did that scare away participants in the following Sunday’s football games competition? Not in the least. Both companies actually recorded their best weekend ever financially following what was widely expected to be a public relations nightmare for the fantasy sports outfits.

The way the events unfolded in October 2015 had magazines like Fortune wondering whether the industry was charmed.

Edelman, who studies daily fantasy sports like a Biblical scholar, emphatically rejects the idea that the industry possesses some magical quality. Beyond his university job, he serves as a consultant to fantasy sports endeavors (but not, he says, to FanDuel and DraftKings) and their investors, and he specifically warns them not to behave as aggressively in the online betting marketplace as FanDuel and DraftKings have.

He remembers well what happened to Jay Cohen a few years back and suggests a criminal indictment could materialize again depending upon the U.S. Justice Department’s interpretation of “what constitutes gambling,” the same issue many U.S. states cannot seem to decide.

Politics plays a role too

Just because the Internet reaches every computer, iPad or smartphone the same way does not give online gamblers the same legal rights in different jurisdictions. That’s true with fantasy sports players as well as online poker players. Edelman points out that “there’s a handful of states that allow poker, many more that consider it illegal.”

Nevada has embraced all manner of gaming for decades. Neighboring Utah permits no such thing. Most U.S. states market their own or regional lotteries – pure games of chance, where winners of huge fortunes are determined by purchasing a numbered ticket that pays off if a mechanical device randomly selects their numbers. Lotteries are big revenue sources for the states. Thoroughbred tracks and jai alai frontons also permit pari-mutuel betting in many states but are outlawed in others.

In addition, the U.S. has almost 500 lawful Native American casinos or other gaming sites in 28 states that tribes operate. The $30 billion in annual revenue they rake in comprises more that 40 percent of the gambling take in the U.S.

The political implications of those Indian casinos is significant as well. Edelman points out that the states with those facilities (and the political lobbies such high stakes interests represent) have been more likely to interpret daily fantasy sports as depending on chance, not skill, raising the gambling bar.

“Native Americans are opposed to daily fantasy sports because they see it as a competitor to their own gaming industry,” Edelman says.

Will online gambling continue to spread worldwide?

Day-to-day politics aside, Edelman considers England to be a guide to America in certain public policy, including the countries’ tolerance to gambling.

“America has a history of landing behind England,” he says. “But it’s moved far more slowly than England while going toward the same place. In England now, sports betting is available and legal in many forms.” He predicts that, in time, the U.S. will also embrace such gambling.

Humphrey also casts his vote for legal online betting in the future – he just will not venture a guess of when. He also thinks executives at the big fantasy sports companies are taking huge legal risks in continuing to operate their fantasy games as they do. In an email response to questions, he said, “I think all [daily fantasy sports] bets are illegal under many state and local and federal laws and that the executives of the companies who are the key players in this industry should be criminally charged with promoting illegal gambling.

“You ask why the government should care. The answer is simple: It is against the law. People want to bet on a game because it makes watching the game more interesting. Also, it is easy to become addicted to sports gambling.”

Humphrey’s last point goes beyond what the Puritan elders posted back in 1631. It gets at the main reasons there are laws restricting gambling at all levels of American government. It’s attractive and illegal because of its glamour, lack of transparency and, often, its corruption. Even gamblers know the industry’s “sharks” take advantage of its vulnerable “fish,” convincing them to give up their money willingly in the far-fetched hope they’ll score big.

Les Bernal, national director of Stop Predatory Gambling, a Washington, D.C., nonprofit, has noted that most daily fantasy sports winners are sports experts with intense data-processing expertise. One result: The poor, hungry “fish,” many of whom may be gambling addicts, drain their bank accounts and piddle away their resources under the delusion they will win.

In public proclamations, Stop Predatory Gambling often reminds citizens that society ends up paying for the financial collapse of losing gamblers, including the cost of social and legal services they require when they wipe out their resources. Meanwhile, a tiny few become wealthier with each wager.

That said, daily fantasy sports has continued to grow as the eagerness of fans to make bets outweighs caution, and as professional sports leagues make financial investments in the industry in the hopes gambling will strengthen their team franchises. So, 385 years after the Puritans expressed dire consequences, gambling still plays a prominent role in society.

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