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Entertainment, Media & Sports Alert >> Rise of Daily Fantasy Sports Presents Opportunities and Risks to Companies

October 14, 2014

It is likely that anyone who turns on a television (or tablet or smartphone) to watch some football this weekend will see numerous commercials for the websites “FanDuel.com” and “DraftKings.com.” These two sites provide “daily fantasy sports” services and are inundating the airwaves with commercials.  Some say these services look quite similar to online gambling, but the recent explosion of their advertising is just one indication that views in the United States about online sports gambling are softening for the first time since the passage of restrictive legislation in 2006. 

The 2006 UIGEA Banned Financial Transactions In Support Of Illegal Online Gambling
Gambling regulations in the United States affect a much broader array of businesses than just those directly accepting bets.  The Unlawful Internet Gambling Enforcement Act of 2006 (the UIGEA), among other things, prohibited financial transactions that supported unlawful online gambling. 

The law took an expansive view of unlawful online gambling, defining it as placing, receiving or otherwise knowingly transmitting a bet “by means that use, at least in part, of the Internet where such bet or wager is unlawful under any applicable federal or state law.”  

As part of the enforcement of UIGEA and other anti-gambling legislation, the Internal Revenue Service (IRS) and Federal Bureau of Investigation (FBI) went after companies that facilitated unlawful online gambling, and launched a civil suit against several major internet companies, alleging that they had accepted fees for displaying ads for unlawful online gambling. 

In 2007, Microsoft, Yahoo and Google paid a combined $31.5 million to settle these claims. In the intervening years, media agencies have been reluctant to handle purchases for (and major purveyors of traditional and online advertising space have been reluctant to accept) ads for any services that could be construed as unlawful online gambling, for fear of being subject to similar fees or prosecution. Processing payment transactions for online gambling is also a violation of UIGEA, and since the law’s passage the Department of Justice has seized more than $100 million in bank funds deposited by payment processors. As a result, major credit card companies such as MasterCard and Visa have taken significant steps to guard against unknowingly processing such transactions.  

Daily Fantasy Sports – Unlawful Online Gambling, or a Test of Skills?
Though UIGEA significantly restricted online poker and other similar forms of gambling, the law contains an explicit carve-out for fantasy sports games in which winning requires knowledge and skill superior to that of users’ opponents.  This has allowed fantasy sports to become the multi-billion dollar industry it is today.  In fantasy sports, a user joins a league with other users to draft real-life professional athletes and receive points based on how well the real athletes perform. Generally, fantasy sports services last an entire season, with trades, substitutions, and a high degree of dedication and skill required to succeed. 

But sites like FanDuel.com and DraftKings.com have introduced a new twist: fantasy leagues that last as little as one day. Did a user’s team of hand-picked players lose tonight? The player can buy in again the next day, draft a different roster, and watch to see if he or she fares better.  Some claim that this new rubric looks too much like gambling – if the extent of the choice is “will Player A have more rushing yards than Player B?” the fantasy game may be functionally equivalent to a prop bet. But others have pointed out that most daily fantasy games currently on the market are much more complicated, mirroring the intricacy and required skill of traditional fantasy games but compressing it in a more “Twitter-friendly” timeframe. 

The courts have not yet weighed in on the issue. In 2013, a suit against FanDuel.com seeking to have the site’s operating profits disgorged was dismissed by an Illinois federal court, but the court did not address the question of whether daily fantasy is a game of skill or unlawful online gambling and instead made its decision on unrelated legal grounds. 

Recent Developments Show Signs Of Increasing Acceptance of Daily Fantasy
But even in the absence of a definitive court opinion or piece of legislation (daily fantasy did not exist when Congress passed UIGEA), there are numerous signs throughout the marketplace that daily fantasy is becoming an acceptable off-shoot of the fantasy sports genre. 

In September, FanDuel.com raised $70 million from a variety of investors, including Shamrock Capital Advisors and Kohlberg Kravis Roberts. DraftKings.com raised $41 million in a similar round of financing in August. At least two of the major sports leagues have recently embraced daily fantasy, a stark about-face from their anti-gambling stance only a few years ago. Major League Baseball now partners with DraftKings.com to offer daily contests on MLB.com, and the chief executive of MLB Advanced Media, the league’s internet company, has hinted in news reports that it is exploring ways to broaden that partnership. 

Shortly after receiving the $70 million investment, FanDuel.com became the first official daily fantasy sponsor of an NBA team, and will display their logo on the sidelines of the Orlando Magic’s home court. The NBA has created a new sponsorship category for daily fantasy, so it appears likely that others will have similar opportunities for sponsorship.  And, the networks airing NFL games have welcomed daily fantasy companies as new, and zealous, buyers of advertising time. 

Is Now A Safe Time To Get Involved With Daily Fantasy Games?
There are numerous opportunities to participate in the daily fantasy sports ecosystem.  For media outlets, daily fantasy sports offers revenue potential as a growing advertiser.  For media planners and buyers, daily fantasy sports businesses are clients in growth mode.  For marketers, daily fantasy sports offers new ways to engage with consumers, from advertising on fantasy sports properties to sponsoring and partnering with daily fantasy sports companies on new games and programs.  The firm cannot say for certain that the regulatory enforcement of 2006 and 2007 will not resurface.  However, based on the numerous changes in the field that have taken place in the span of only a few weeks this summer, it appears that some of the “unlawful online gambling” toxicity surrounding advertising for daily fantasy games may be dispelling. Now may be the time to cautiously step onto the field.  And, will fantasy sports be the Trojan horse that allows full-fledged sports gambling to enter the mainstream?  It’s too early to tell, but many wouldn’t bet against it.  


The Bottom Line

The rapid growth of daily fantasy sports presents challenges not contemplated by online gambling regulations of UIGEA and a step into the unknown for media companies, marketers, sponsors and others looking to leverage this growing business.  But, recent developments show a softening of attitudes toward the daily fantasy business and online gaming in general.  Now may be the right time for companies, agencies, and even sports organizations to take a cautious step into this field.