Why Playing Fantasy Sports is Legal (For the Most Part) Part II
January 15, 2014 | By Kevin Vela
Previously, I wrote a blog, Why Playing Fantasy Sports is Legal (For the Most Part), about the legality of gambling in Fantasy Sports Leagues. Given the considerable growth of this industry over the past few years and the number of new entrants and innovators looking to share a piece of the revenue pie, like FantasyPlayerProtect, which allows Fantasy Sports participants to purchase insurance coverage for player injuries (seriously it exists), we thought it would be helpful to dig a little deeper into the federal laws affecting the Fantasy Sports gambling industry over the course of two more posts.
In this post we’ll discuss the relationship between state and federal gambling laws, as well as two characteristics of legal Fantasy Sports gambling under the Unlawful Internet Gambling Enforcement Act (the “UIGEA”). In the next post we will tackle the last two characteristics of legal Fantasy Sports gambling under the UIGEA and wrap up everything discussed over these three posts.
The Relationship Between Federal and State Gambling Laws
This isn’t meant to be a course in federalism and we won’t spend too much time here. However, to fully understand how federal gambling laws function we have to consider them in relation to state gambling laws. The most important thing to recognize about federal gambling laws is that they are meant to serve as a supplement to, and not a usurper of, state gambling laws. In fact, the UIGEA explicitly states that none of its provisions “shall be construed as altering, limiting, or extending any Federal or State law . . . prohibiting, permitting, or regulating gambling within the United States.” In this regard, federal laws serve an important role in preventing individual states from having their anti-gambling laws circumvented by gambling businesses that operate outside of state lines. Prior to the passage of the UIGEA it was possible for a resident of state A to participate in online gambling through a website hosted in state B even though such gambling was illegal in state A. The UIGEA changed things so that individuals participating in online gambling, and websites hosting the gambling, would be subject to the laws of their respective states.
The Uniform Internet Gambling Enforcement Act
While there are a few laws that affect Fantasy Sports gambling, one law, the UIGEA, receives the most attention because of its direct reference to Fantasy Sports gambling,. As Kevin previously wrote, the UIGEA makes it illegal for those “engaged in the business of betting or wagering” to “knowingly accept” funds “in connection with the participation of another person in unlawful Internet gambling.” “Unlawful Internet gambling,” in turn, means knowingly transmitting a bet or wager, by means of the Internet, where the bet or wager is otherwise illegal under the laws of the place where the bet or wager is “initiated, received, or otherwise made.” The UIGEA creates an explicit carve-out, however, for “fantasy sports games” that meet four criteria: (1) no fantasy sports team is based on the “current membership of an actual team that is a member of an amateur or professional sports organization;” (2) the “value of the prizes is not determined by the number of participants in the game or the amount of fees paid by the participants;” (3) “[a]ll winning outcomes reflect the relative knowledge and skill of the participants and are determined predominantly by accumulated statistical results of the performance of individuals . . . in multiple real-world sporting events” and (4) no winning outcome is based on the outcome of the score of games or on the single performance of an individual athlete in a single, real-world event.
Today, let’s look a little closer at two of these four criteria.
1. No Fantasy Sports Team is Based on Current Team Membership
Remember that Fantasy Sports gambling is legal in some jurisdictions because it is considered a game of skill. Though Kevin still argues that I was lucky in winning the VW 2013 fantasy league, this first requirement simply reaffirms that in order for a Fantasy Sports gambling league to be legal it must actually be a game of skill. If Fantasy Sports participants were able to fill their roster by simply choosing the current membership of an existing team, say the Cowboys, their winnings would be determined solely by the performance of that team and not by the knowledge and skill required to put together a fantasy team roster consisting of 15 to 18 players from across the league.
Also, notice that the UIGEA includes amateur sports teams. That means that even if your Fantasy Sports gambling league is comprised entirely of local pee-wee football teams competing for the Pigskin Cup it would still be subject to the requirements of the UIGEA.
2. The Value of the Prize(s) is Not Determined By the Number of Participants
This requirement is pretty straight forward. In order to operate a legal Fantasy Sports gambling league, prizes awarded through the league must be made known to participants before each contest starts. The interesting aspect here is that various Fantasy Sports gambling sites have become creative with their prize offerings, pushing the limits of this facially simple requirement. Most of these new prize innovations are the result of a reluctance to offer an outright, guaranteed prize, though prize minimums remain commonplace.
There has been some pushback against these new prize structures from industry participants. With this pushback will surely come new developments and, hopefully, some clarification on how far one can go before his proposed Fantasy Sports prize structure becomes illegal.
The last two characteristics of legal Fantasy Sports gambling will be discussed at length in our third and final post in this series.
Micah Brooks is an associate in the transactional section at Vela | Wood PC. He focuses his practice in the areas of startups, corporate law, and capital raises. You may reach Micah at email@example.com.
Posted in Fantasy Sports
Kevin Vela is the managing partner at Vela Wood. He focuses his practice in the areas of venture financing, mergers & acquisitions, corporate law, capital raises, and real estate investment activities. You can see Kevin’s attorney profile HERE.