While March Madness has cooled down, the news around fantasy sports keeps heating up.  We recently wrote about the National Advertising Division (NAD) decision in the dispute between the two leading daily fantasy sports sites, DraftKings and FanDuel.  ESPN is reportedly in talks with DraftKings to invest $250 million in the company.  For years, the “Worldwide Leader in Sports” has offered free-to-play fantasy baseball, football, and the popular NCAA bracket challenge, among many other games.  Now, under the reported deal, ESPN would receive a 20% stake in DraftKings, while DraftKings would sign a three-year, $500 million advertising commitment with ESPN, giving DraftKings priority advertising placement on ESPN’s platforms.

Although fantasy sports appear to be widely accepted by the public (and most regulators) nationwide, this move represents a significant step in the legitimization of monetized fantasy sports.  However, fantasy sports operators, especially daily fantasy sports sites, continue to face legal questions, most prominently whether fantasy sports are permissible under state and federal law and whether certain advertising used in connection with the sites is false and deceptive.

We often hear the question, why aren’t fantasy sports illegal gambling,” when real money is being exchanged or “wagered” during play?  The Uniform Internet Gambling Enforcement Act (UIGEA) criminalizes the knowing receipt of money by a person “in the business of betting or wagering” in unlawful internet gambling.  However, the UIGEA includes an exemption for fantasy sports games that meet the following standards:

  • All prizes and awards must be made known to participants in advance and their value cannot be determined by the number of participants or amount of fees paid by participants;
  • All winning outcomes must reflect the relative knowledge and skill of the participants and be determined primarily by accumulated statistics;
  • No winning outcome is based on the score, point spread or performance of any single real-world team; and
  • No winning outcome is based solely on the single performance of an individual athlete.

Any fantasy games that stray too far from the above criteria run the risk of being considered unlawful sports wagering.  At the time the UIGEA was passed, daily fantasy sports providers were not contemplated.  Daily sites, which break from the traditional season-long model by offering users the opportunity to build a new team of players every day, arguably do not rely as much on the relative knowledge and skill of the participant, because the results are not based on the player’s strategic moves over an entire season of work.  It thus comes as no surprise that plaintiffs’ lawyers have seen the timing issue as a potential opportunity.  For example, in Langone v. DraftDay, the plaintiff unsuccessfully challenged the legality of daily fantasy sports. Although the suit was dismissed, the decision did not address the merits of the case, and thus future attacks on daily fantasy providers may still be a possibility.

In some states, statutory language or attorney general opinions mean that fantasy sports operators cannot operate monetized games in the state.  In particular, Arizona, Montana, Louisiana, and Washington have clear statutory or state AG opinion prohibitions against fantasy sports, while other states may raise concerns due to the breadth of their gambling laws.  Fantasy sports providers should work closely with their attorneys to determine the states in which to operate.

In addition to the gambling challenges, daily fantasy providers, such as DraftKings, have been sued in class actions for false and deceptive advertising. The complaints in these cases allege that the companies advertise their bonus or incentive programs to new members deceptively, using terms such as “dollar for dollar,” “match,” and “free” in a misleading manner.  The complaints also allege that their advertising is misleading because the true parameters of the bonus program are not revealed to players until after they make their initial deposit.  These cases illustrate that there is enough money in fantasy sports to make them a lucrative target for the plaintiffs’ bar.

Despite lingering legal complications, fantasy sports are growing, and there are reasons for excitement over the business opportunities.  ESPN’s potential move, as a dominant figure in sports, may signal that any effort to resist the widespread acceptance of monetized fantasy sports may now be futile, while making the pockets of the daily fantasy providers a little deeper.  Certainly, it appears that this popular activity has truly become part of the mainstream – and that regulators and the class action bar are keeping close tabs accordingly.