Fantasy Sports Legal Issues

There’s a lot of money in fantasy sports. But lately, that money is accompanied by a world of legal issues. (Shutterstock)

There’s a lot of money in fantasy sports. But lately, that money is accompanied by a world of legal issues. (Shutterstock)

From time to time, we like to check in on the current status of the fight to attain nationwide legal sports betting. There have been times when we thought it might be going well, and times when we were not so confident. But one irritating fact always seems to pop up: regardless of the issues facing those who wish to legally place traditional sports bets, only fantasy sports seem to be maintaining any type of legal credibility in the United States. However, lately we have been forced to ask…are fantasy sports legal?

Well, the short answer is yes. But recent events have complicated the issue a bit. For those who may not be in the loop, we’re going to talk a bit about the current fantasy sports legal status, as well as the fantasy sports legal issues that might have a negative impact on the industry. While fantasy sports leagues are not always our personal cup of tea, we understand that they can be a fun pastime for those who wish to make a bit of extra side cash. This being the case, you’ll want to know whether or not the current fantasy sports legal issues stand to hurt the industry. As always, we will do our best to look at the issue from both sides.

Fantasy Sports Legal Status

Legislation less than ten years old is largely what’s keeping fantasy sports legal. (Thinkstock)

Legislation less than ten years old is largely what’s keeping fantasy sports legal. (Thinkstock)

Believe it or not, it might actually be a lot tougher to verify the fantasy sports legal status if not for a bit of semi-recent legislation that helped establish fantasy sports as 100% legal. The legislation to which we refer is the Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA). While the UIGEA aimed to prevent internet wagers from being placed on a regular basis, they targeted traditional sports betting in a way that made ample room for fantasy sports betting to thrive.

The UIGEA specifies a number of criteria; however, for the purposes of differentiating fantasy sports from traditional sports betting, we will divide the bulk of these criteria into two overarching points. The first point is simple: online betting is only to be legal when it constitutes a game of skill. Some believe that this criterion is meant to block out not only traditional sports betting, but also online poker. Since fantasy sports arguably requires a great deal of knowledge regarding various players, this criterion helps keep fantasy sports legal. This may sound wrong, since many consider poker to be a game of skill. In addition, anyone who has read our beginners’ guide to sports betting knows that handicapping a game is not an easy process. Nonetheless, from a legal standpoint, these arguments are shaky at best.

The second criterion which helps to keep fantasy sports legal is the criterion that betting may not be based on an existent amateur or professional sports team. If fantasy sports leagues enabled you to simply draft entire rosters to your fantasy team, then they would arguably violate this rule. This is why traditional sports betting is still questionable under the UIGEA, as the results are clearly very much based on the performance of an existing team. Fantasy sports only rely on existing players, which gives them some wiggle room on this one.

Here’s where it gets tricky. We live in the United States, where state laws and federal laws do not always blend too well. Jim Leach, a former representative who helped draft the UIGEA, has gone on the record as saying that it wasn’t supposed to promote daily fantasy sports betting to the extent that it has. Even if the UIGEA could be said to make fantasy sports legal, individual states still have the right to outlaw it. In fact, approximately five states currently have laws against it. Sites such as DraftKings and FanDuel believe that daily fantasy sports betting is 100% legal. “But what is self-evident,” Leach told The Associated Press, “is that UIGEA exempted fantasy sports from one specific law enforcement mechanism but not from the broad sweep of law itself.”

Basically, fantasy sports betting sites are able to commence their activities on a somewhat tenuous basis in about 45 states. But since the fight for legal sports betting has not been going our way, there is no reason to suspect that fantasy sports might be the next target. Certain characters within the federal government appear eager to classify all wagering activities as gambling, even when it feels wrong to classify them as games of chance rather than games of skill. Heck, even traditional sports betting has been referred to as a game of skill in previous legal cases.

If the lines between traditional sports betting and fantasy sports betting become too blurred in the eyes of the government, one of two things will happen. Either traditional sports bettors will finally get to bet offline in all fifty states, or fantasy sports sites will have to start closing down. Either way, expect the law to change in one direction or the other in the semi-near future.

The Insider Trading Scandal

It’s not exactly insider trading, but information gained by employees working for fantasy sports sites has made them a fortune on other sites. (401(k) 2012/Flickr)

It’s not exactly insider trading, but information gained by employees working for fantasy sports sites has made them a fortune on other sites. (401(k) 2012/Flickr)

If you’re wondering why we’re suddenly discussing the legislation that makes fantasy sports legal, this is it. At the beginning of this month, a new scandal came to light that many have referred to as insider trading. Of course, this isn’t a fully accurate term. In fact, insider trading by its most common definition is impossible in the fantasy sports industry, which is almost completely unregulated due to the industry’s reliance on its own trade association.

The scandal in question involves both DraftKings and FanDuel. A midlevel content manager for DraftKings stated that they had accidentally let slip important data on their fantasy sports betting prior to Week 3 of the current pro football season. That same week, the manager in question placed a bet at FanDuel that resulted in $350,000 in profits. While this may not be insider trading by any traditional definition of the term, the evidence certainly seems to imply that the DraftKings employee who placed the bet was working with information to which the general public did not have access.

This points to a major issue with the very concept of making fantasy sports legal. One of the common arguments for the legalization of traditional sports betting is that it would allow us to better regulate the industry. But alas, here you have the fantasy sports industry, completely legal yet totally unregulated. These companies are already pulling billions of dollars for the services they provide. If their employees are able to use inside information on betting trends to stack the odds in their favor, then we have a serious problem on our hands.

Of course, we cannot be certain that anyone from either company is guilty without more proof. But this is precisely why the fantasy sports industry should be regulated by an outside body rather than by their own trade association. Companies within any industry may be prone to some wrongdoing when held accountable to no one but themselves. That’s just human nature. Hopefully, this scandal will cause people to rethink the legislation that makes fantasy sports legal, and realize that the only reason to fear the legalization of any type of sports betting is when the betting in question is not being monitored by an organization of authority. If traditional sports betting venues are willing to allow their business dealings to be looked over by outside governance, then we should hold fantasy sports sites to the same standard.

Of course, some will inevitably make the opposite argument, that we cannot trust traditional sports betting in light of the new revelations within the fantasy sports industry. If this becomes the popular opinion, then we can say goodbye to the notion of legal sports betting until the insider trading scandal has died down enough to fade from public memory. The whole thing is really a crapshoot at the moment. To gain any insight into the effects this may have on traditional sports betting, we will have to take a closer look at the likelihood that this scandal will affect fantasy sports industry. We will examine the potential negative and positive sides in the following sections.

Why This Might Hurt Them

Above, we made it sound like the only major issue facing fantasy sports sites such as DraftKings and FanDuel would be the potential strict enforcement of new laws and regulations. Slate seems to agree that the government may step in, but let’s forget about that for a moment. Because at its heart, this issue is about far more than keeping fantasy sports legal. In fact, there is a very real possibility that the average bettor may never trust fantasy sports sites—or any sports betting sites—again.

Let’s talk a bit more about Ethan Haskell, the DraftKings employee who leaked information on betting habits. He had tried to reassure the public that he was restricted from using this information on DraftKings, but remember that no one is accusing him of that. The bet that made him so much money was placed with FanDuel. And while DraftKings maintains that there was no wrongdoing on Haskell’s part, they’re basing this on their own internal investigation. It’s not like they have no reason to lie. Even if they fired Haskell immediately, they would still look pretty sketchy. They look a lot better if we simply believe that leaked bettor information is not a problem that occurs on their site. But, hey, wait a minute…recent information shows that Haskell’s been making money hand over fist ever since he started working for DraftKings in the first place. It’s possible that he just got really good at fantasy sports betting the moment he took a job with a fantasy sports site, but it isn’t likely.

And Haskell isn’t the last of his kind. More allegations are coming to light, as is data showing that DraftKings employees make less in salary than they make from bets placed on other fantasy sports sites. Why would anyone care whether or not we keep fantasy sports legal, knowing that we’re aiding and abetting employees who make money by analyzing our bets? This isn’t the same thing as Vegas bookmakers who adjust lines based on the bets being placed. This is a rash of individual employees demonstrating the flaws of handing our money to an unregulated industry. As Slate points out, one could easily make the argument that these practices put fantasy sports sites within dangerously close proximity of fraud.

These sites might not be able to maintain themselves if their reputation takes any more hits like this. Not only is there a pervading sense of distrust for the fantasy sports industry, but there has been a class-action suit that may easily lead to more of its kind (especially considering that well over 200,000 fantasy bettors lost the same week Haskell profited). DraftKings hasn’t lost all of its investors by a longshot; however, with the MLB slowly backing away from their deal with DraftKings, and with ESPN starting to turn their backs on fantasy sports in general, the initial public offerings for companies like DraftKings and FanDuel are beginning to look much less appealing.

With fantasy sports legal and numerous investors still in the game, this hardly signals an end to the industry. But bear in mind that the scandal is new. Some companies may be eyeing their IPOs right now, but they might turn coat if more class-action suits open up. This will not put an end to fantasy sports. It just won’t do much to help. And the scrutiny being cast on fantasy sports may splash over onto traditional sports betting. It’s hard to say just yet, but the fallout from this scandal could have a massively negative impact on the world of sports betting at large.

Why This Won’t Hurt Them

With this many fans, fantasy sports and traditional sports betting with both be around for a long, long time. (David Carson/St. Louis Post-Dispatch)

With this many fans, fantasy sports and traditional sports betting with both be around for a long, long time. (David Carson/St. Louis Post-Dispatch)

Oh, did we imply that fantasy sports sites are okay because they aren’t scaring away too many of their IPO sales? Yeah, well it turns out they’re actually keeping a fair number of customers as well. Both DraftKings and FanDuel received record numbers of tournament entrants this past Sunday. With 7.1 million entries between the two of them, this was the most successful weekend they have ever had. At the end of the day, their combined profits from entry fees came to $43.6 million.

True, everything is not hunky-dory in the world of fantasy sports. There are definitely states looking to crack down on fantasy sports betting while openly questioning its legality, but the news is not all bad. While there may be some potential legal issues on the horizon, business is better than ever. Not just because they had one good weekend, but because the businesses are actually growing in terms of their general consumer base. And not just DraftKings and FanDuel, either. These are the main two, but their successes tend to trickle down to other businesses as well.

It’s difficult to say why these companies would be experiencing growth in the midst of controversy. As the old adage states, all publicity is good publicity. It could be that the insider trading scandal has gotten their name out there. Perhaps those who approve of fantasy sports and do not wish to see the companies punished for the actions of a few employees are making an active push to support their businesses. We really don’t know. But for one reason or another, they seem to be doing better than ever now that there has been some controversial publicity to their name.

The growth in customers will help keep fantasy sports betting alive, but so will the law. We mentioned earlier that, while federal legislation may keep fantasy sports legal, they could still be banned at the state level. But the opposite is also true. While some states may be expressing a desire to crack down on fantasy sports, this unregulated industry will still be completely legal in most states of the union. And frankly, we believe that it should be. We have always argued that there should be no stigma against traditional sports betting. This extends to fantasy sports betting as well. The recent controversies do not show that betting industries are bad, but rather that betting sites of all types need regulations (not to mention employee discipline) in order to maintain a strong public image.

To summarize, fantasy sports betting probably isn’t going anywhere fast. While it’s possible that the industry will suffer some major consequences due to the actions of a few, it simply isn’t that likely. Hopefully, the probable push for regulations on the fantasy sports industry will be enough to show people that betting in general is quite harmless when managed professionally. This is something of a longshot, but it’s nice to think that controversy might benefit the world of sports betting at large.