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Fantasy sports vs. illegal gambling: Where's the line?

Fantasy sports — from football to college basketball to baseball – are big business, with billions of dollars wagered every year. But there is a thin line between legal, skill-based gaming and illegal gambling — and many fantasy sports contests may have already crossed the line.

Masahiro Tanaka of the New York Yankees
Getty Images
Masahiro Tanaka of the New York Yankees

Promoters often say that all fantasy sports are legal under a 2006 federal law, the Unlawful Internet Gambling Enforcement Act (UIGEA). But while the UIGEA exempts fantasy sports from the act's definition of a "bet" or "wager," it does not exempt fantasy sports from running afoul of other state and federal laws. The UIGEA does not legalize fantasy gaming or otherwise immunize its operators from potential criminal prosecution. Rather, it defers to other federal and state laws — especially state law — to determine what counts as illegal online gambling.

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There are two ways in which pay-to-play fantasy sports contests for real money prizes, especially daily contests, may already violate the laws of many states: (1) the degree of "chance" involved in the contests; and (2) the dependency of the contests' prizes on the number of contest participants.

Every state defines illegal gambling as involving three distinct elements: stake, chance, and prize. In every state, illegal gambling involves staking something of value, typically money, on the outcome of a game or contest involving chance, with the winner receiving a valuable prize. But state laws differ dramatically with regard to the level of chance necessary to turn a legal game into illegal gambling.

Degree of chance

When it comes to the element of chance, state laws generally fall into one of three categories. The majority of states require that chance predominate over skill before a game may be considered illegal gambling. A handful of states prohibit all games and contests that involve any degree of chance no matter how slight. And within 12 states, including New York, the degree of chance must be "material" (significant) relative to the degree of skill for a contest to cross the line into illegal gambling.

All fantasy sports games and contests involve at least some element of chance. As a result, in those few states (e.g., Iowa) where any chance makes a contest illegal, fantasy sports are illegal. Many but not all fantasy sports websites recognize this and prohibit residents of these states from participation in their contests.

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While all fantasy sports contests involve some chance, "traditional" contests — those played out over an entire season — like their real sports counterparts are predominated by skill. These traditional fantasy sports would likely withstand legal scrutiny in the majority of states, which only prohibit pay-to-play participation for prizes in contests which involve more chance than skill. But traditional fantasy sports may be at risk in the 12 states that prohibit pay-to-play in games with a material element of chance. And daily fantasy sports, where the element of chance is inevitably greater may well run afoul of gambling prohibitions in all 50 states.

There is little question that many popular fantasy sports contests are operating illegally in many states today.

Prizes and participants

Many states distinguish between entry fees and bets, and have a clear law stating that paying to play in a game or contest for a prize is perfectly lawful, provided the prize has nothing to do with the number of entrants. Where a game's prize is set in advance and does not turn on how many individuals enter the game, these states permit the game to proceed. But where prizes consist of a percentage of the entrance fees or are otherwise dependent in whole or in part on the number of participants, the laws in these states treat the otherwise benign entry fees as illegal bets or wagers.

All pay-to-play fantasy sports websites that offer real money prizes set them in advance. But many of these websites reserve the right to cancel games and reimburse entry fees if a certain number of individuals fail to enter the game by a set time.

Consider DraftKings' non-guaranteed contests, where DraftKing makes it clear up front that each contest will be canceled and the buy-in amount refunded if the contest "is not filled when it begins." Non-guaranteed contests like this run the risk that state prosecutors will see the entry fees as thinly-disguised, illegal bets.

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Just as fantasy-sports operators should not take comfort in the UIGEA, they should not assume that past law is precedent, and that the lack of past state enforcement means that their games comply with state law. Many do not.

As fantasy-sports games grow in popularity, and operators become wealthier and wealthier, fantasy-sports websites will become increasingly inviting and easy targets for state and federal prosecutors. Contest operators who think that their past successes are a harbinger of things to come are very much like turkeys who believe survival through October and the first several weeks of November are a sure sign that they will make it through the year. But Thanksgiving always arrives. And it's not a feast for all.

Commentary by David J. Apfel and Andrew Kim. Apfel is a litigation partner at Goodwin Procter, specializing in white-collar criminal defense and gaming law. He is the founder and co-chair of the firm's Gaming, Gambling & Sweepstakes Practice. Andrew Kim is a litigation associate at Goodwin Procter. Follow the division on Twitter @GoodWinGaming.