States consider regulation of fantasy sports wagering

As interest in daily fantasy sports (DFS) games increases, so do questions about the role of state and federal regulation of wagering on these games. The growing popularity of the games, heavy advertising by companies offering wagering, and questions about how a prominent company was operating have fueled calls for governments to examine their approach to DFS wagering. Questions include whether the wagering should be brought under state or federal regulations or defined as illegal gambling.

Fantasy sports games allow players to form fantasy teams of professional or collegiate athletes and sometimes wager on them as they compete based on the performance statistics of real players. Wagering can be on football, basketball, baseball, soccer, and other sports. While fantasy sports leagues have long had contests that lasted entire seasons and did not require wagering, the games now growing in popularity involve online wagering on daily games for cash and prizes.

Current federal and state laws. While the federal government and most states, including Texas, do not explicitly regulate fantasy sports, current laws could affect wagering on the games.

Federal law. The federal Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA), which governs illegal Internet gambling, is sometimes cited as legalizing much DFS wagering. The law exempts from its definition of “bet or wager” the participation in fantasy or simulation sports games as long as fantasy teams are not based on current membership of an actual team and games meet certain requirements, including:

  • prizes established and known in advance with a value not based on the number of players or fees paid;
  • winning based on participant skill and statistical results in multiple real-world events; and
  • winning not based on performance of a single real-world team or solely on a single performance of an athlete in a single real-world event.

Texas law. Texas Penal Code, ch. 47, which governs offenses related to gambling, defines illegal gambling but does not specifically reference fantasy sports games. Under sec. 47.02(a)(1), it is a crime to bet on the results of a game or contest or on the performance of a participant in a game or contest. Offenses are class C misdemeanors punishable by a maximum fine of $500. However, sec. 47.02(b) provides a three-pronged defense to prosecution for gambling when:

  • the gambling was in a private place;
  • no one received economic benefit other than personal winnings; and
  • except for skill or luck, the risks of losing and chances of winning were the same for all participants.

Applying current Texas gambling laws to wagering on daily fantasy sports could raise questions about whether Texas law enforcement had jurisdiction over out-of-state companies running fantasy leagues and whether resources should be used to go after bettors.

Other states. Three states explicitly address fantasy sports in state laws, according to the National Conference of State Legislatures (NCSL). In Maryland and Kansas, fantasy sports games are exempt from state gambling laws. In Montana, fantasy sports leagues are legal, but Internet or telephone wagering on games is not. Most fantasy sites prohibit wagering by players from Arizona, Iowa, Louisiana, and Washington because laws, court opinions, and other factors make it uncertain whether it is legal in those states, according to NCSL. In mid-October, Nevada gaming regulators said that pay-to-play daily fantasy sports were gambling under Nevada law and operators had to be licensed by the state.

Proposals and debate on government regulation. As states and the federal government consider their approach to fantasy sports, proposals include licensing or regulating websites that offer wagering on the games, imposing a fee on the sites, or prohibiting the wagering by classifying it as illegal gambling. One proposal would allow a state lottery commission to operate online betting on fantasy sports.

During the regular session of the 84th Texas Legislature earlier this year, two bills addressing fantasy sports wagering websites died in committee. HB 4040 by Herrero would have required those operating sports betting websites to be licensed by the state. HB 4019 by Herrero would have created a class A misdemeanor criminal offense for operating a website that takes bets on the outcome of real or fantasy sporting events. It also would have made it a class C misdemeanor under current gambling law to make a bet through such a website.

Supporters of increased state regulation of DFS wagering say daily fantasy sports leagues are gambling that should be regulated or overseen by the state. The leagues involve commercial wagering on sporting events and competitions based largely on chance. Companies offering this wagering operate without the oversight and taxing applied to casinos, lotteries, parimutuel racing, and other gambling. Supporters of state regulation say it could ensure fair games, hold companies accountable for unethical or illegal practices, such as underage wagering, and address problem gambling related to DFS. Still others say wagering on DFS should be outlawed as illegal gambling.

Critics of increased state regulation of DFS wagering say daily fantasy sports wagering is skill-based and should not be regulated like other types of gambling. They say the wagering is legal under federal law and does not run afoul of most state laws. They say fraud or other wrongdoing could be addressed by current laws. A patchwork of state laws could make it difficult for companies running the websites to operate and for fans of the games to participate, critics say.

by Kellie A. Dworaczyk

Update: On Nov. 10, the New York attorney general sent letters to companies DraftKings and FanDuel ordering that their websites stop accepting DFS wagers inside New York, saying the operations are illegal gambling under state law and giving them five business days to show why the attorney general should not take action. DraftKings issued a statement saying DFS are games of skill and that it will pursue all legal options to ensure customers in New York can continue to play. FanDuel responded that fantasy sports are games of skill and legal under New York’s laws.

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