1. Many, but not all, traditional forms of fantasy sports are likely legal under federal gaming laws. The Unlawful Internet Gambling Enforcement Act of 2006 includes an explicit carve-out for fantasy sports businesses that meet three criteria: (1) the value of the prizes is not determined by the number of participants or the amount of fees paid; (2) all winning outcomes reflect the relative knowledge and skill of the participants; and (3) the fantasy game’s result is not based on the final scores of any real-world games. Based on this carve-out, many traditional fantasy sports contests ) seem to comply with federal regulations. This puts fantasy sports on a far safer basis than online poker, sports books, and many other types of online contests that involve both chance and skill. However, it does not necessarily insulate all forms of fantasy sports games that currently appear on the Internet.
2. Some states’ regulations are stricter than federal law and need to be analyzed separately. A limited number of states disallow pay-to-play fantasy contests that involve any chance at all. In these states (known as ‘any chance states’), operating most forms of play-for-cash fantasy sports contests would seem to violate state gambling laws. Thus, even if a particular fantasy sports game seems to comply with federal law, it is not advisable to keep participant out that are located within certain states.
3. It is not always safe to rely on fantasy contests’ lists of prohibited states to determine where play-for-cash fantasy sports is illegal. Although many fantasy sports hosts sites prohibit cash-game participants in the highest risk states such as Arizona, Louisiana, and Iowa, there are a number of other states in which play-for-cash fantasy sports still might be viewed as illegal, even though operation in these states may be prevalent. Three of these other states that require additional scrutiny include Arkansas, Montana and Tennessee. There may be a number of others as well.
4. New businesses should innovate with caution, as certain unique formats of fantasy sports are more risky. Even though traditional forms of fantasy sports are very likely legal in many states, any format of fantasy sports that strays from the traditional skill-to-chance ratio present greater risk. For example, fantasy football contests that give points based on the final scores of real-world sports games probably are not protected by the “fantasy sports” carve-out to the Unlawful Internet Gambling Enforcement Act, even though at least two Fantasy Sports Trade Association members ran contests of this nature as recently as 2012. In addition, fantasy sports contests that involve smaller roster sizes and shorter fantasy seasons seem to involve increased legal risk based on heightened impact of a single activity of chance on the overall result. Daily fantasy sports websites are best advised to conduct studies that attempt to prove their games are predominantly skill rather than just rely on personal intuition or hunch.
5. Even where states are not aggressively prosecuting fantasy sports, business owners should beware of qui tam lawsuits by private plaintiffs. Last year there were two attempts to private disgorge the winnings of daily fantasy sports contests under the Illinois qui tam statute. Although the more well-known case was dismissed on jurisdictional grounds, the court’s failure to resolve the underlying legal issue leaves open the possibility for more case filings of this nature in states that have such statutes. Thus, it is reasonable to expect that some of the perceived riskier forms of fantasy sports will continue to face state law challenges, by private plaintiffs, even if these games are not challenged by state governments themselves.
Marc Edelman is an Associate Professor of Law at the City University of New York’s Baruch College, Zicklin School of Business, where he has published more than 25 law review articles on sports law matters, including “A Short Treatise on Fantasy Sports and the Law.”
In addition, he is an adjunct professor at Fordham Law School, and a legal consultant on sports, antitrust, gaming and intellectual property matters. Nothing contained in this article should be construed as legal advice.
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