New York Legalizes Fantasy Sports

© Copyright 2016, all rights reserved worldwide.  Gambling and the Law® is a registered trademark of Professor I. Nelson Rose, www.GamblingAndTheLaw.com.  Published in Gaming Law Review and Economics, Vol. 20, No. 6 at pp.  (July 2016).

Gambling and the Law®:

New York Legalizes Fantasy Sports

On August 4, 2016, Governor Andrew Cuomo signed a bill legalizing daily fantasy sports (“DFS”) in the state of New York.  Senate Bill 8153 was the result of massive lobbying by FanDuel and Draft Kings.[1]  But some small amount of the credit has to go to Gov. Chris Christie of New Jersey.

Christie, as you may remember, completely killed any discussion of DFS in presidential politics with one comment during the October 28, 2015, Republican Primary Debates.[2]  Christie did not win the GOP nomination; nor will he ever be president.  But he did switch the debate over DFS away from what actions should be taken by the federal government back to discussions among state legislators, where it belongs.

And then there was former Florida Governor Jeb Bush.  When asked in the Debate about the dangers that DFS create and what the federal government should do about them, Jeb answered by discussing his own fantasy football team!  (It’s undefeated and is anchored by the Miami Dolphins quarterback Ryan Tannehill.)[3]

But, while Jeb’s comments implied that DFS is merely a harmless hobby, Christie tore into the Debate moderator for daring to raise the subject.  “We have $19 trillion in debt.  We have ISIS and al-Qaida attacking us and we’re talking about fantasy football?  Can we stop?”[4]

Christie’s  statement proved to be prescient, though not necessarily in the way he intended.  In fact, his statement can be seen as a self-fulfilling prophecy:  Although his emphasis was on how unimportant DFS is compared with issues like Islamic terrorism, his plea at the end, “Can we stop?” has come true.  Discussion of DFS on the federal level has almost completely disappeared, in part because Gov. Christie, helped by the inane comments by Jeb Bush about his fantasy team, made the issue embarrassing.  Following that Debate, there has been no discussion by any presidential candidate, in debates or otherwise, on the federal government’s role in fantasy sports.

But that has not meant that the issue has disappeared at the state level.

Fights in state legislatures often come down to which side has the most money.  Even generated grass-roots supports, like having 100,000 DSF fans contact their state representatives in the New York Legislature,[5] costs money.

As I predicted in the Gaming Law Review & Economics last year, proponents of DFS have more money, and thus more political power, than opponents and have been successful in getting state lawmakers to bail them out of their current crisis.[6]

Most of the lobbying money comes from FanDuel and Draft Kings, the two largest DFS operators, who control almost the entire market.  But they have powerful allies. The extremely rich and powerful sports leagues, with the sole exception of the NCAA, love DFS.  Even the fanatically anti-gambling NFL allows its team-owners to be directly involved with DFS operators.  Mass media companies, like ESPN, also love DFS.  Teams and broadcasters need viewers, and DFS players watch athletic events to the bitter end, even when it is a blow-out.  They want to know how the individual real-world athletes in their fantasy team do, because the statistics generated by those athletes are the only thing that matters.

Who is on the other side?  The main opponents of DFS are established legal gambling operators, who have a lot bigger things to worry about.  The other main opponents of DFS are the “anti’s”, mostly religious groups opposed to all legal gambling.  The anti’s lost that battle decades ago.

So, the proponents of DFS have the power to get laws passed, expressly making their activities legal. New York is now the seventh state this year to expressly legalize fantasy sports.  “Colorado, Indiana, Massachusetts, Mississippi, Missouri, Tennessee and Virginia — also have passed laws clarifying the legality of fantasy sports and setting consumer protection regulations.”[7]  Prior to this, there was only one state, Maryland, where the Legislature had considered the issue of DFS worthy of debate and legalization.  It took almost a half-century for state lotteries to spread across the country.  During that time, there never was a year when seven states legalized state lotteries.

The lobbying by proponents of DFS worked out, especially in New York.  SB 8153 not only sets up a system of registration, regulation and taxation, it allows DFS operators to continued to take players while the system is being put in place.[8]

The new law, like the ones preceding it, focuses mainly on consumer protection.  But it will also raise revenue for the state, through what amounts to a $50,000 registration fee and a tax of 15% on gross gaming revenue.[9]  The requirements to be found suitable, as well as the registration fee and tax, will help keep out fly-by-night operators.  Of course, these will also be barriers protecting the duopoly of FanDuel and Draft Kings from having to face competition.

The New York Legislature dealt with the tricky question of whether DFS is predominantly chance by simply declaring it a contest of skill.  The first words of the new law read:

Legislative Findings and Purpose.

  1. The legislature hereby finds and declares that:

(A)  interactive fantasy sports are not games of chance because they consist of fantasy or simulation sports games or contests in which the fantasy or simulation sports teams are selected based upon the skill and knowledge of the participants and not based on the current membership of an actual team that is a member of an amateur or professional sports organization . . . [10]

The New York Legislature could have simply authorized DFS.  No one claims that state lotteries are games of skill. But once they are made legal, sometimes requiring an amendment of the state constitution, the question of skill versus chance becomes irrelevant.

But having DFS declared to be not only legal and regulated but NOT gambling was necessary under state law.  The New York Constitution expressly forbids the legalization of gambling, with the obvious exceptions of the state lottery, parimutuel betting on horse races and racinos.  It also helps operators avoid federal laws, which are almost always limited to gambling operations.  This will be especially useful when states start pooling DFS players.

The federal government is technically not bound by the decisions of the state legislatures, even official findings that DFS is a contest of skill.  For example, Nevada and the federal government do not agree on the definition of “lottery.” Nevada’s State Constitution still prohibits lotteries, yet the State Legislature has authorized the games of keno and bingo to be played throughout the state’s licensed gaming facilities.  Today, players can buy a year’s worth of keno tickets in advance.  The federal Internal Revenue Service considers those advance keno tickets as lotteries, which are subject to different tax laws from casino gaming winnings.  There is no requirement that the I.R.S. and the state of Nevada agree on legal definition of “lottery.”

If there is a conflict between how DFS is interpreted under state and federal laws, which federal statutes will come into play?  The Professional and Amateur Sports Protection Act (“PASPA”)[11] prohibits any state from legalizing new forms of sports betting.  A state like New York might declare DFS to be a contest of skill, but a federal court is free to disregard that declaration and hold that the state is actually legalizing sports betting.  This is unlikely to happen, because the suits will never be brought.  Prosecutors have no interest in pursuing operators of games that have been expressly made legal by state legislatures.  And no one else with standing is likely to bring suit.  The sports leagues, which are expressly given the power to sue states under PASPA, are almost universally enthusiastic supporters of DFS.  Only the NCAA has publicly opposed fantasy sports.  And it is easy to exclude collegiate athletic matches from fantasy leagues.

The interesting issue is whether any federal prosecutor would want to bring charges or seek injunctions under the Wire Act.[12]  Again, the federal government is not technically bound by state law.  The Wire Act in particular does not care whether the sports wagers are legal or not.  However, the UIGEA expressly allows bets across state lines, so long as the bets are legal on both ends.  And Department of Justice itself, at its highest levels, has declared that the state can offer online gambling, such as state lotteries, and not violate the Wire Act.[13]  The DOJ did not say that the UIGEA overrules the Wire Act when it comes to sports betting.  But it does indicate that it not likely that a federal prosecutor would attempt to prevent two state-licensed DFS operators in different states from pooling their players.  Of course, both states would also have to expressly allow such pooling.[14]

Although passage of the new law makes DFS officially not gambling, it does not end the ongoing suits against FanDuel and Draft Kings.  It is an interesting, theoretical question whether the NY Attorney General and state courts would be bound by the Legislature’s declaration that DFS is a contest of skill for acts that took place before SB 8153 was enacted.  SB 8153 does not expressly protect DFS operators from being charged with crimes for activities that took place prior to its passage.  A court could conceivably find that the defendants were violating New York’s state anti-gambling laws for years.  But that is extremely unlikely, especially since the state had chosen to go the civil rather than criminal route when it moved to close down DFS.

But FanDuel and Draft Kings still have to defend against the charges of misleading customers and insider trading. The New York Times quoted Attorney Eric Schneiderman as saying that “he will enforce the new law,” but adding, “The amended lawsuit will continue against Draft Kings and FanDuel alleging consumer fraud and false advertising for prior operations in New York.”[15]

Look for that suit to be settled fairly quickly.

And for more state legislatures to pass laws to legalize, regulate and tax DFS.

END

© Copyright 2016.  Professor I Nelson Rose is recognized as one of the world’s leading authorities on gambling law and is a consultant and expert witness for governments and industry.  His latest books, Gaming Law in a Nutshell, Internet Gaming Law and Gaming Law: Cases and Materials, are available through his website, www.GamblingAndTh

[1]

“EXCLUSIVE: Daily fantasy sports sites bet nearly $800G on push to make games legal in New York,” http://www.nydailynews.com/news/national/daily-fantasy-sports-sites-bet-800g-legal-push-article-1.2741112.

[2]  David Lightman, “Candidates Challenge Media’s Role in Election: Confrontations, Questions by panel driving latest debate draw criticism,” Houston Chronicle at A1 (Oct. 30, 2015).

[3]  Id.

[4]  Id.

[5]  David Purdum, “New York Senate approves fantasy sports, bill goes to governor’s desk,” ESPN http://www.espn.com/chalk/story/_/id/16300606/new-york-senate-approves%C2%A0fantasy-sports%C2%A0bill-goes-governor-desk.

[6]  I. Nelson Rose, “End Game for Daily Fantasy Sports?”  Gaming Law Review and Economics, Vol. 19, No. 9 at pp. 634-637 (November 2015).

[7] Governor Signs Law to Allow Daily Fantasy Sports in New York, http://www.nytimes.com/aponline/2016/08/03/us/ap-us-daily-fantasy-sports-new-york.html.

[8]  Https://www.nysenate.gov/legislation/bills/2015/S8153.

[9]  “Section 1407 imposes a 15% State tax on each registrant’s interactive fantasy sports gross revenue for the privilege of conducting interactive fantasy sports contests in New York State, as well as an additional 0.5% tax that is not to exceed $50,000 annually.”  Id.

[10]  Https://www.nysenate.gov/legislation/bills/2015/S8153.

[11]  28 U.S.C. §3701 et seq.

[12]  18 U.S.C. § 1084.

[13]  Virginia Seitz, Whether Proposals By Illinois and New York To Use The Internet And Out-Of-State Transaction Processors To Sell Lottery Tickets To In-State Adults Violate The Wire Act, Memorandum Opinion for the Assistant Attorney General, Criminal Division, Sept. 20, 2011.  For a more thorough discussion, see, I. Nelson Rose, “What the DoJ Announcement Means,” Gaming Law Review and Economics (2012).

[14]  For a further discussion on the interplay between federal and state laws on cross-border betting, see, I. Nelson Rose, “New Jersey and England Agree to Pool Players — Can They Do That?” 20 Gaming Law Review and Economics   (July 2016) (no. 6, 2016).

[15]  Governor Signs Law to Allow Daily Fantasy Sports in New York, http://www.nytimes.com/aponline/2016/08/03/us/ap-us-daily-fantasy-sports-new-york.html.