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Nevada daily fantasy ruling creates legal 'flashpoint'

"This is the first formal recognition of this as gambling, coming from the most prominent gaming jurisdiction in the country," says one attorney.

The crackdown on daily fantasy sports by American's gambling capital deals a new blow to the embattled — but booming — industry.

The Nevada Gaming Control Board announced late Thursday it deemed such contests gambling, meaning that daily fantasy providers will need to get licenses to legally operate in the state. The unregulated industry's biggest operators, FanDuel and DraftKings immediately suspended service in Nevada.

The decision cuts to the core of the industry, which has long touted its contests as games of "skill" — and therefore, not gambling. It poses one of the biggest threats yet to daily fantasy sports' unique legal status as top companies in the industry are already scrambling to protect their integrity, experts said.

Nevada, America's gambling capital, banned daily fantasy sports late Thursday, dealing another blow to the booming but embattled industry.
Andrew Harrer | Bloomberg | Getty Images

"This is the first formal recognition of this as gambling, coming from the most prominent gaming jurisdiction in the country. It's a flashpoint around which states are likely to begin characterizing and classifying daily fantasy sports as gambling," said Daniel Wallach, a sports and gaming attorney at Becker & Poliakoff.

Laws vary by state, but fantasy sports generally are categorized as games of skill, so they're not regulated like gambling. The distinction has recently been questioned, particularly in Nevada, where the powerful casino industry has pushed for more legal clarity on the matter.

"Daily fantasy sports has been on a collision course with the commercial casino industry for some time now," said Legal Sports Report editor Chris Grove in a CNBC "Power Lunch" interview.

Players buy into competitions and select lineups of real players in sports like football, baseball and basketball. They can win anything from a few dollars to hundreds of thousands of dollars based on the athletes' performance.

As the industry rapidly grows — at least 40 million people are expected to play this year — more states will likely follow Nevada's precedent, Wallach said. It creates a dilemma for companies like FanDuel and DraftKings, which would effectively be acknowledging that the games are gambling if they were to apply for gaming licenses.

In statements, FanDuel and DraftKings said they disagreed with the ruling but would work to operate in Nevada again. That could mean an increase in lobbying efforts, which the companies have reportedly begun amid federal and state inquiries into their practices after allegations that employees at the two companies could use "inside" information to gain an advantage in contests.

"It seems as if Nevada will use its best efforts to keep out daily fantasy contests unless they pay a license fee and provide direct revenue back to the state," said Marc Edelman, an associate professor of law at Baruch College, who consults in fantasy sports law.

Moves to classify daily fantasy as gambling could threaten the "very survival of the industry," in certain states, Wallach added. He noted it could also prompt a change in federal rules, since only Nevada and three other states can issue licenses for sports gambling under current laws.

Rep. Frank Pallone, D-N.J., renewed his calls for a congressional hearing on daily fantasy sports after the Nevada ruling. New Jersey, like Nevada, is a major casino state. In a statement, he contended that sports betting and fantasy sports would function better if they were made legal and regulated more heavily.

"As they stand now — with illegal sports betting forced into a multibillion dollar black market and with a totally unregulated daily fantasy sports industry — both are operating in the shadows," said Pallone, the ranking member of the House Energy and Commerce Committee.

While the legal issues are being resolved, daily fantasy players in Nevada will be forced to sit out. The ruling is particularly problematic for some big-money players who make their living on the contests.

Assani Fisher, a 33-year-old Nevada resident who plays fantasy sports professionally, told CNBC he will continue to wager even if it means moving.

"I'll have to do whatever it takes to keep playing. If I have to move to a different state then that's what I'll do," he said.

Disclosure: Comcast and NBC are investors in FanDuel.

—CNBC's Jessica Golden contributed to this report.