Free Minds & Free Markets

Is Your Fantasy Football Squad Illegal?

A scandal sparks a new effort to regulate daily fantasy sports.

A DraftKings employeeAssociated PressIf you've been near a television anytime in the last few months, it's likely you've seen a commercial for DraftKings or FanDuel. The ads feature ecstatic real-life bros bragging about how much money their triumphant (and totally imaginary) fantasy football teams are raking in.

When the NFL season kicked off in September, buzz about the sites—which let users assemble hypothetical football squads comprised of real players and play them against other teams in day- or week-long lightning rounds—spiked, thanks to more than $200 million in television advertising in the first nine months of 2015. But the hype hit a speed bump in October, when The New York Times reported that DraftKings employee Ethan Haskell had leaked proprietary data from his company. Haskell had allegedly been using it to garner an advantage that helped him win $350,000 on their competitor, FanDuel.

The fact that betting on these lineups is legal in the first place is the result of a weird quirk in federal law. But now that the fledgling industry's first scandal is underway, the regulatory vultures are circling—much to the dismay of millions of fantasy general managers.

Insider Trading?

Many reports have described the DraftKings information leak and subsequent FanDuel payout as "insider trading," but that's not quite right. When Haskell accidentally posted a bunch of proprietary information about the frequency with which various players were being selected in lineup entries on a discussion board, he realized his error and quickly deleted the post, reassuring other readers that "I was the only person with this data and as a DK employee, am not allowed to play on site." But under industry contracts at the time, he was allowed to play on FanDuel (this policy has since been changed by DraftKings in the wake of the scandal), so when he won big later in the week, more than one eyebrow went up.

Officially, insider trading requires the trading of stocks, bonds, or other securities of a company by individuals with nonpublic access to information about that same company. That's not what happened here. What's more, the DraftKings employee received the information only after his FanDuel roster had been locked, which means that he would not have even been able to use this leaked information to tweak his entry.

But such pesky details don't seem to matter to public officials eager to grandstand. In the two weeks after the story broke, daily fantasy companies were hit with a request for a U.S. congressional hearing, nearly a dozen class-action lawsuits in five states demanding $5 billion in compensation, a probe by the New York attorney general, a review from the Massachusetts attorney general, an investigation by the U.S. attorney's office in Tampa, an investigation by the FBI and U.S. Justice Department, and proposals in dozens of states for laws to regulate or license daily fantasy operators. By the time this article is published the list is certain to be longer.

Sports attorney Daniel Wallach, in an appearance on C-SPAN a week after the news broke, declared that daily fantasy sports "will be regulated," predicting new rules would be in place by this time next year. "We're going to see regulation, and the transparency that you're looking for, the safeguards, the accountability, that apparatus will ultimately be in place, and operators will be accountable through uniform regulation. There's going to be licensing, there's going to be monitoring," he said in a jargon-laden soundbite. "This industry will thrive and survive, but it can't do so in a completely self-regulated environment."

Legal Gambling

The first major American gambling legislation came with the signing of the Federal Wire Act in 1961, which prohibited the transmission of wagers on sporting events, ushered in after a series of high-profile mob-related fixed college basketball games in the previous decade. This law remained mostly unedited until 1992, when the major American professional sports leagues and the National Collegiate Athletic Association pushed through the Professional and Amateur Sports Protection Act, which confined legal sports betting to Nevada, Oregon, Delaware, and Montana.

In 2006, with rising concerns about Internet gambling, Congress passed the Unlawful Internet Gambling Enforcement Act (UIGEA), which was intended to prohibit banks from processing payments to and from gambling websites.

It hasn't worked. Most experts estimate that legal Las Vegas sportsbooks represent less than 1 percent of all sports gambling activity in the United States.

When it comes to team sports betting, you can wager on a single event (the Cowboys will beat the Packers) or a collection of multiple events (both the Vikings and Bears will win). You can also bet on team (the Cowboys will win) or individual player performances (quarterback Tony Romo will pass for over 350 yards). When the UIGEA was written, such gambling was outlawed but an exception was carved out for just one option: Wagering on multiple individual player performances—the type of bets you make in a fantasy football league.

Fantasy football, in fact, is specifically cited in UIGEA as a legal safe harbor. The reason this type of game, and not others, is allowed under UIGEA (with the exception of five states) is its arbitrary classification as a "game of skill," while the other forms are deemed by law to be "games of chance" and thus gambling.

In reality, all of these games involve some component of both skill and luck, and there's never been any clear legal definition as to what exactly designates a game as being "of skill" or "of chance" other than ambiguous, subjective regulatory rulings. To make matters more confusing, these designations vary by state.

Traditional season-long fantasy sports, which had been around for decades, involved a collection of users drafting "teams" of individual players in a particular sport and using their stats over the course of the season to compete against other users in their league. The game mirrors actual sports management; users could add and drop players and make trades with other users. This format is still widely popular today, with over 50 million players.

Starting around 2008, however, a new form of fantasy sports started to crop up: daily fantasy. In this format, there are no season-long commitments and there's no requirement to find a group of other users to form a league. Instead, users have a salary cap of fake money they can spend on players to fill out a lineup which they enter into pools as small as two entries or as large as hundreds of thousands of totally anonymous strangers. The results play out over a short-term window (usually only one night or week).

FanDuel launched in January 2009, and a small crop of other daily fantasy sites, including DraftKings, popped up soon after. Thanks to a massive influx of venture capital money on the order of hundreds of millions of dollars, FanDuel and DraftKings grew rapidly. By the end of 2014, the two companies had signed official partnerships with the NBA, NHL, and MLB, cementing their status as establishment players in the sports world. Fantasy sports is now a $1.5 billion industry, with DraftKings and FanDuel each racking up over $300 million in funding. The two daily fantasy sports sites spent over $100 million on advertising in September and control an estimated 95 percent of the market.

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