Government crackdowns have discouraged many potential gamblers in the United States from using online poker and sports betting Web sites. But an increasing number of people have found a legal way to play the odds online through daily fantasy Web sites.
These sites, which allow users to wager thousands of dollars on the performance of professional athletes each day, have been protected under a federal law exempting fantasy sports from restrictions on online gambling. They make up a booming industry that has taken hold among players and is beginning to attract the attention of investors. FanDuel, a popular daily fantasy site based in New York, recently raised $11 million from a group of investors including Comcast's venture capital arm.
At the same time, the legal status of these sites seems increasingly vulnerable. The distinction between fantasy sports and gambling is being challenged in federal court in Illinois and in New Jersey. And there is some indication that the patience of pro sports leagues is wearing thin with games that are significantly different from the season-long fantasy contests they have supported in the past.
"It becomes akin to a flip of the coin, which is the definition of gambling," said Robert Bowman, the chief executive of Major League Baseball Advanced Media, the league's Internet company.
Fantasy sports have existed for decades, and leagues have often included entry fees and payouts to the winners. But the Unlawful Internet Gambling Enforcement Act of 2006 finally established their legality by including an exemption for wagering on games of skill in which the winners were not determined by the outcome of a single game or the performance of a single player.
Then the Internet sped things up. The popularity of season-long fantasy sports stagnated as fans became accustomed to instant gratification and continual interaction in every walk of life. Some businesses began to experiment with games that took place over shorter time spans.
Nigel Eccles, who worked in the sports betting industry in Europe before founding FanDuel in 2009, said, "We weren't sure the game had evolved in a way that was appealing to younger players."
The online games have taken various forms. Sometimes, they operate like season-long fantasy sports, in which players enter teams and compete against one another. Other variations include "pick five," in which players are presented with pairs of players, then wager on who will perform better; and player exchanges, in which users buy and sell stock in athletes.
Free games are widely available, but the sites that allow players to risk real money have gained the most traction. The segment that includes daily fantasy is now responsible for $492 million in annual spending out of an overall fantasy industry of $1.6 billion spent, according to a study commissioned by the Fantasy Sports Trade Association.
In large part, this is because people found that other online gambling outlets were being shut down. They include Peter Jennings, who began supporting himself as a pro poker player after graduating from college in 2010.
The next year, his source of income was compromised when the federal government cracked down on the biggest poker Web sites. After briefly considering moving to Las Vegas, Jennings began work as a stockbroker. But he was soon carrying an iPad into the office and quietly spending hours each day preparing wagers on FanDuel and other sites. In a good weekend, Jennings could win tens of thousands of dollars, and last December, he won $150,000 in a weekend on a $20 outlay.
Last month, Jennings moved from Denver to Boston to join StarStreet, a daily fantasy start-up, as a statistical analyst.
"I just left my job and moved across the country," he said. "I think there's a huge opportunity."
Certain states continue to have more restrictive laws. But in the states that allow fantasy sports to be played for money, the contests are essentially unregulated.
Executives at sites like FanDuel and StarStreet say they are confident that what they are doing is legal because better players consistently beat weaker players over time.
But people who know the industry also acknowledge some troubling aspects of daily fantasy. Many sites are run by people with backgrounds in online poker or sports betting, activities that have run afoul of government regulators. For the top players, mostly young men, daily online fantasy sports are a full-time job in which they can win six figures annually.
Paul Charchian, the president of the trade association, said at a conference in January that the industry's resemblance to illegal gambling was a concern.
"The caution that I'm recommending to the daily game providers is that they do more than highlight the monetary element of fantasy sports," he said in a recent interview.
Some experts in sports law say that a shakeout is inevitable because daily fantasy games have a fundamentally different relationship to chance than season-long fantasy games. On a given day an injury, a hailstorm or a ball bouncing strangely could affect a result. In this regard, playing daily fantasy seems very similar to placing a bet with a bookmaker, said Ryan Rodenberg, an assistant professor of sports law at Florida State University.
"On the spectrum of legality to illegality, they're getting pretty close to the line," he said. "It's tough to make an intellectually honest distinction between the two."
Although Major League Baseball may be uncomfortable with the activity, Bowman said, it considers its legal options limited because the sites do not violate its trademarks.
The N.H.L. has said it opposes daily fantasy sites that allow players to use real money. The N.B.A. and the N.F.L. declined to comment.
The major pro team sports find themselves on the other side of this argument in a federal lawsuit they have filed against New Jersey, which passed a law that would legalize sports betting in the state. Lawyers for New Jersey argue that the leagues cannot say that gambling is harmful to their integrity while they simultaneously support fantasy sports.
A more direct challenge is coming from a lawsuit in federal court in Illinois, based on an obscure statute allowing anyone to sue the winners of illegal gambling games on behalf of the losers. In a suit filed against FanDuel and Patrick Kaiser, a daily fantasy player who has won significant sums of money, the plaintiffs say the games are simply exotic wagers on sports, similar to handicapping horse racing. If a judge were to agree, it would undermine the legal basis for daily fantasy sports. The suit has caused anxiety among online players, especially because it is aimed at not only a business, but also an individual. A preliminary hearing was held Monday.
The litigious history of the men behind the lawsuit, Christopher Langone and Mark Lavery, may be a factor in its outcome, say those familiar with the case. Langone once filed a class-action suit against Rush, the rock band, when it canceled a show, described as "rain or shine," because of bad weather.
The federal suit highlights the vulnerability of daily fantasy sites that operate under a law that was written to protect a different kind of activity, said Marc Edelman, a sports law professor at Barry University's law school in Orlando, Fla.
"There is no doubt that Langone is not the most sympathetic of plaintiffs," he wrote in an e-mail. "However, that does not in itself affect the case's merits."
Marc Zwillinger, a lawyer for FanDuel and Kaiser, declined to comment on the specifics of the case.
Some say daily fantasy sites would benefit most if their legal status remains cloudy. Start-ups are able to take the lead in the industry in part because the competition is limited by legal ambiguity.
"It's a barrier to entry for the big companies," said Jennings of StarStreet. "If ESPN built one of these games, it would be a huge success."
—Written by Joshua Brustein for The New York Times
Disclosure: Comcast is the majority owner of NBC Universal, the parent company of CNBC and CNBC.com.