Nevada is in a unique position to regulate DFS because it is the only state in the country that is authorized under federal law to regulate sports wagering in its casinos.

Visitors to Nevada can place wagers on single games in every major sporting event, parlay wagers on multiple games, and proposition bets on individual performances in games (e.g., who will score the first touchdown in the Super Bowl).

Given the current environment for the DFS industry, one in which the legality of its business model is being challenged by the New York attorney general and consumer protection issues hold a prominent place in news headlines, efforts to regulate the DFS industry make sense. Regulation of the gambling industry has traditionally been handled at the state level, with the United States federal government not playing a major role.

Gambling regulation has been viewed as most appropriately addressed by state and local jurisdictions, and enforcement has also been generally left to the individual states.

With the primary exception of the Professional and Amateur Sports Protection Act, rather than preempting state gambling laws, federal laws that govern gambling crimes have been designed to aid individual states in the enforcement of state gambling laws. Examples of such federal laws are the Federal Wire Act, the Illegal Gambling Business Act, the Interstate Transportation of Wagering Paraphernalia Act, and the Unlawful Internet Gambling Enforcement Act.

Even with regulation of the gambling industry primarily occurring at the state level, an important question lingers — are state statutes that enable regulation of the DFS industry in direct conflict with PASPA?

Overview of PASPA

PASPA makes it unlawful for any governmental entity to “sponsor, operate, advertise, promote, license, or authorize by law or compact” a betting or wagering scheme based on one or more games involving amateur or professional athletes or “on one or more performances of such athletes in such games.” (28 U.S.C. § 3702.) Under PASPA, the United States attorney general or any professional or amateur sports league whose games are the basis of the regulated wagering scheme are authorized to enjoin such activity.

States that offered a lottery, sweepstakes or other wagering scheme related to sports between January 1976 and August 1990 are exempt from the prohibitions of PASPA. During that time period, Nevada was the only state that had full sports betting. Delaware, Montana and Oregon had sports gambling games tied to their state-run lotteries. Delaware, Montana and Oregon offered very limited sports betting, which is still offered in Delaware and Montana today.

PASPA is understood to prohibit state-regulated betting on the outcome of professional and amateur sporting games. In fact, the statute has been used by the major professional sports leagues and the NCAA in two court cases over the past few years to enjoin New Jersey’s attempts to offer sports betting at casinos in Atlantic City.

On its face, PASPA appears to prohibit a state from authorizing, licensing, and regulating DFS because PASPA prohibits a state, acting pursuant to state law from sponsoring, operating, advertising, promoting, licensing, or authorizing by law a “betting, gambling, or wagering schemed based, directly or indirectly … on one or more performances of such athletes in [competitive] games” in which amateur or professional athletes participate. (28 U.S.C. § 3702.)

DFS is directly tied to the individual performances of athletes in a game rather than the outcome of the particular game in which the athletes are playing, and, therefore, state legislation to authorize or regulate DFS may be prohibited under PASPA.

Efforts at Regulation

After the Nevada notice related to DFS was issued, the Fantasy Sports Trade Association announced plans to have the industry self-regulate via a newly formed Fantasy Sports Control Agency.

Additionally, FanDuel Inc.’s CEO Nigel Eccles called for regulation; in an email he sent to FanDuel’s users on Oct. 29, 2015, Eccles noted that the DFS “industry has grown to a size where a more formal, industrywide approach is needed.

To be clear, [the DFS] industry needs strong, common sense, enforceable consumer protection requirements to ensure its continued growth and success.”

In his email, Eccles noted that various state legislatures have started to explore how to regulate the DFS industry and shared his belief that the proposals “can serve as the basis for the sensible regulation of the fantasy sports industry.”

Effort to regulate the DFS industry at the state level is occurring and such efforts appear to be in direct contravention of PASPA, with the exception of Nevada. Some state legislation has specifically legalized fantasy sports, whereas other proposed legislation establishes a framework to regulate the fantasy sports industry.

Maryland enacted a law in 2012 that exempted certain online fantasy sports games from the state’s gambling prohibitions. Kansas did the same thing earlier this year. Over the last two months, numerous states, including California, Florida, Illinois, Massachusetts and New York, have proposed legislation to authorize or regulate the DFS industry.

Assemblyman Adam Gray in California has proposed legislation (Assembly Bill 1437) to license and regulate DFS in California with an informational hearing about the DFS industry before the Assembly Governmental Organization Committee scheduled for Dec. 16, 2015. Assembly Bill 1437 would require licensing of DFS operators; the applicable licensing fees and taxation rates are still to be determined.

The Florida Legislature will meet in January 2016 to discuss a bill (Senate Bill 832) proposed by State Sen. Joe Negron. Senate Bill 832 proposes to establish a regulatory framework for DFS in Florida under which DFS operators would be required to register with the Florida Department of Agriculture and Consumer Services; the initial registration fee would be $500,000 with an annual renewal fee of $100,000. Consumer protection protocols such as age verification of players and prohibitions related to the sharing of insider information are included in Senate Bill 832.

In late October, Illinois State Rep. Mike Zalewski introduced the “Fantasy Contests Act” (HB 4323), which would exempt DFS from the Illinois gambling code. HB 4323 does not contain provisions related to licensing DFS operators or levying fees or taxes on DFS operators. The bill’s focus is to provide a general structure for regulation that includes age verification, preventing DFS operator employees from participating in the contests, and requiring third-party audits.

In November, Massachusetts Attorney General Maura Healey announced regulations for the DFS industry. The Massachusetts regulations are focused on consumer protection. The regulations provide that they are “designed to protect Massachusetts consumers who play [DFS] contests for prizes from unfair and deceptive acts and deceptive acts that may arise in the gaming process. The regulation is also intended to protect the families of persons who play [DFS] to the extent that they may be affected by unfair and deceptive practices that lead to unaffordable losses.” The Massachusetts regulations do not involve a licensing component.

Focusing on consumer protection issues, the regulations include provisions related to age restrictions, employee participation in DFS contests, security of data obtained by DFS operators, and adherence to “truth in advertising” standards, among other items. There is an open comment period underway for the Massachusetts regulations with a hearing scheduled for Jan. 12, 2016, to discuss the regulations.

Interestingly, given the current environment for the DFS industry in the state, New York Assemblyman Dean Murray has introduced legislation that would affect the DFS industry in New York.

In mid-November, New York Attorney General Eric Schneiderman issued letters to DraftKings and FanDuel demanding that the DFS operators cease and desist from offering their DFS contests to New York residents. Litigation involving the state of New York and the DFS operators has commenced; a preliminary injunction hearing took place on Nov. 25, 2015.

The proposed New York legislation would exempt DFS contests from New York’s penal code prohibiting gambling (AB 8588) and would amend an article in the New York Constitution pertaining to gambling to include an exception for fantasy sports (AB 8587).

AB 8587 would add the following language to the New York Constitution’s general gambling prohibition: “except for fantasy sports wagering on professional sports which may be authorized by the Legislature, in a manner prescribed by the legislature for offering and conducting gaming and wagering, provided however, that such authorizations shall be preceded by the elimination of the federal ban of professional sports wagering.”

In essence, AB 8587 recognizes and acknowledges the PASPA issue in authorizing and regulating DFS at the state level. AB 8587 states that the New York Legislature may not enact legislation to authorize DFS until PASPA has been eliminated.

Analysis Under PASPA

Whether state regulation of DFS would violate PASPA has not been analyzed by any courts in the United States. PASPA specifically prohibits a governmental entity, such as a state, “to sponsor, operate, advertise, promote, license, or authorize by law” a wagering scheme based on “one or more performances” of athletes in competitive professional or amateur games. (28 U.S.C. § 3702.)

With certain states taking varying approaches in their proposed statutes and regulations related to DFS, it is intriguing to contemplate how a court would view a challenge under PASPA to any DFS legislation.

I believe that a challenge to the proposed Massachusetts regulation would fail because Massachusetts is merely seeking to regulate the DFS industry to protect Massachusetts residents on consumer protection grounds. Additionally, the Massachusetts regulations do not contain provisions explicitly authorizing DFS in the state.

However, the proposed DFS legislation in California and Florida contemplates licensing DFS operators in the respective states and collecting licensing fees. Licensing a wagering scheme involving fantasy sports appears to violate PASPA on its face.

Additionally, the proposed New York legislation would authorize DFS by law, which appears to be a direct violation of PASPA; such a violation is the reason why New York Assemblyman Dean Murray included the requirement that the amendment to the New York Constitution could not be enacted unless PASPA was repealed.

Ultimately, any challenge to state regulation of DFS under PASPA would need to be brought by the U.S. AG or an amateur or professional sports league.

Given the professional sports leagues’ sponsorships of DFS (e.g., Major League Baseball and the National Hockey League are investors in DraftKings and the National Basketball Association is an investor in FanDuel) and the benefit sports leagues receive because of fantasy sports (e.g., increased television viewership of games), I do not believe a professional sports league would seek an injunction under PASPA if a state enacted regulations related to DFS.

Additionally, given the deference that the federal government has historically provided to states related to the enforcement of gambling laws, I do not believe that the U.S. AG would pursue an injunction to prevent a state from enacting laws or regulations related to fantasy sports or DFS.

Whether the NCAA would bring suit to enjoin a state from enacting DFS legislation is a matter of speculation at this point. However, any action taken by the NCAA under PASPA against the DFS industry could be easily remedied by removing any NCAA players from the ambit of games offered on the DFS websites.

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