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I have long held that the regulation of daily fantasy sports operations was coming -- it was not a matter of if, but when regulations would be implemented on a federal and/or state-by-state level. With the revelation that at least one DraftKings employee had access to data surrounding users' picks and competed on rival FanDuel's platform, the days of unregulated activity in the daily fantasy sports industry are coming to a close faster than most could have fathomed. I posit that it will be a long-term positive result for the daily fantasy sports industry, but may cause some bumps in the road for the largest operators in the near future.
Late yesterday, U.S. Senator Robert Menendez and Congressman Frank Pallone sent a letter to the Federal Trade Commission (FTC) Chairwoman Edith Ramirez raising "serious questions" concerning the integrity of online fantasy sports websites wherein employees were possibly using nonpublic information to place bets at third party websites. The gentlemen urged the FTC to look into and create safeguards that may provide for a more even playing field for daily fantasy sports participants. The word "integrity" was used four times in the first two paragraphs of the letter sent to Chairwoman Ramirez.
"As you know, Congress enacted the Unlawful Internet Gambling Enforcement Act (UIGEA), which prohibits companies that engage in betting from accepting payment to settle unlawful gambling debts. The bill was supported by Congress and the major sports leagues as an important way to protect the integrity of the games, to ensure that college and professional athletes did not improperly influence the game. The Act explicitly excludes fantasy sports, in which participants make virtual teams based on real athletic players and score points based on the performance of those players in real games. The exemption was made on the assumption that it would not affect the integrity of the game and would be inconsequential," states the second paragraph of the letter.
The paragraph at least implies that the integrity of the games played within the major sports leagues is at risk.
That would conflict with years of rhetoric dating back to the passage of the Professional and Amateur Sports Protection Act of 1992 (PASPA), which outlawed sports betting across the U.S., exempting four states -- Oregon, Montana, Delaware and Nevada -- with only Delaware and Nevada still offering a form of sports betting (Delaware provides for a limited type of parlay card betting, while Nevada has the most expansive sports betting permissions in the U.S.).
It also conflicts with NFL Commissioner Roger Goodell's recent statement that "the integrity of the game is the most important thing . . . the integrity of the game is something we will always protect. The rules apply to everybody. That is my job in particular, to make sure everyone from our players to our coach, to our fans and our partners, that they all recognize we're going to play by these sets of rules, and that's part of our values and standards."
The NFL vehemently argues that sports betting cannot be legalized on a nationwide basis, because it will seriously jeopardize the integrity of the games played. Yet, Congress is now concerned that daily fantasy sports, in their current form, may pose similar problems. Meanwhile, 16 NFL teams have partnerships with FanDuel while 12 NFL teams are partnered with DraftKings; the NFL Players Association has a deal in place with DraftKings that allows DraftKings to use active NFL players' names, images and likenesses for in-product and promotional campaigns; and while the NFL has not brokered a league-wide deal with any daily fantasy sports operator, it has signed a 3-year contract with DraftKings that allows the operator to advertise in conjunction with the ongoing International Series.
Goodell and the NFL have been joined by Major League Baseball in opposition to sports betting for over two decades. However, MLB felt comfortable enough to extend its exclusive partnership with DraftKings earlier this year and enhance its investment in the daily fantasy sports operation. One would assume an entity as large and prominent as MLB conducted its fair share of due diligence before investing in DraftKings. Yet, yesterday came the shocking announcement from MLB stating its surprise in learning that DraftKings allowed its employees to participate in daily fantasy games. While DraftKings may not have actively publicized its policy, it was certainly not hidden from those within the industry.
The days of daily fantasy sports being a part of the 'Wild West' are coming to a close . Senator Menendez and Congressman Pallone stated as much in their joint letter to the FTC. They have called on the FTC to determine whether it has sufficient jurisdiction to implement safeguards against deceptive behavior and asked the FTC to weigh in on potential penalties for the "insider trading" that may have been acted upon by a DraftKings employee.
This is not the first time that Congressman Pallone has raised a concern about the largely unchecked daily fantasy sports industry. On September 14, 2015, he formally requested that the Committee on Energy and Commerce hold a hearing to review the legal status of fantasy sports and sports betting. The news of a DraftKings employee having access to "insider information" has allowed Pallone to raise his voice a bit more, which is now being heard by all who have suddenly taken an interest in the legalities surrounding fantasy sports.
Congressman Pallone and Senator Menendez are joined by the Massachusetts and New York Attorneys General, who have each revealed an express interest in digging deeper into daily fantasy sports operations, in particular DraftKings and FanDuel. New York Attorney General Eric T. Schneiderman has demanded that FanDuel and DraftKings provide a sweeping amount of information, including details concerning internal investigations into their employees, by a deadline of October 15.
Expect Massachusetts and New York to be joined by other states that wish to learn more about daily fantasy sports operations and whether or not they comply with existing laws. Additionally, it is plausible that the FTC will take charge on the federal level with regard to crafting and enforcing regulations, but will that cause real change?
The FTC has been charged with enforcing the Sports Agent Responsibility and Trust Act (SPARTA) since it became law in 2004. That law seeks to regulate unfair and deceptive acts and practices in connection with contact between sports agents and student-athletes, prohibiting agents from directly or indirectly recruiting student-athletes to enter into an agency contract by giving false or misleading information or providing improper benefits. It also prohibits sports agents from predating or postdating agency contracts and entering into agency contracts without providing student-athletes with a standardized disclosure document. Despite numerous allegations of sports agents violating the Act, the FTC has not once used it against a sports agent.
If regulations are properly placed on the daily fantasy sports industry, then it will serve to provide solace to the vast number of current and potential new players as well as protections for operators. It will provide clarity to a roughly 200-word fantasy sports carve out in the Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA), which every fantasy sports operator currently relies upon as grounds for operating legally on a federal basis.
It may cause operators like DraftKings to shut its doors on certain games like fantasy golf, which provides payouts based on results from single tournaments (appearing to be a violation of a clause in the UIGEA that requires winning outcomes to be based on accumulated statistical results of the performance of individuals in multiple real-world sporting or other events), while allowing for less scrutiny surrounding more traditional game play. It should establish thorough rules surrounding the types of advertising permitted and the use of clear, overt disclaimers that warn consumers of the pitfalls of playing while providing a more clear understanding of the promotions that often seem too good to be true.
The call for regulations has seemed to cause FanDuel and DraftKings to quickly prepare defense strategies. FanDuel announced that it has asked former federal judge and U.S. Attorney General Michael Mukasey to evaluate its internal controls, standards and practices. It also revealed the creation of an internal advisory board that will focus on the integrity of its website and games. Meanwhile, DraftKings CEO Jason Robins revealed that his company hired a third party to conduct an audit of DraftKings' internal practices.
Overall, regulations should be embraced by the daily fantasy sports industry, but also not abused by legislators who may believe this is their chance to destroy something that consumers desire. It would not benefit the public to attack daily fantasy sports simply because sports betting remains illegal within a state's boundaries despite the determined effort to cause change on that front. If the daily fantasy sports industry accepts and respects meaningful regulations, it could serve as a precursor to legalized sports betting. Because after all, what integrity issues will remain?
Darren Heitner is a lawyer and the Founder of South Florida-based HEITNER LEGAL, P.L.L.C., which has a focus on Sports Law and Entertainment Law.
