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Is FanDuel Legal? The Fantasy Sports Exception to Online Gambling

FanDuel

FanDuel is the greatest invention in American business since the iPhone. Don’t kid yourself – it shares a lot of the same business fundamentals.  FanDuel is a market maker. It took something we didn’t know we needed to spend money on and created a multi-billion dollar industry with it. FanDuel’s product has high demand, affordable price-points, and costs little to produce – all of which translates into huge profits.

I don’t even like team sports and I am TOTALLY hooked.  But before you empty your 401k, pawn your jewelry, or crack into your child support money… read this article to the end.

Is FanDuel legal? Doesn’t Federal law prohibit online sports gambling? Will the $2 Billion dollar payout machine eventually get sacked by law enforcement?  We will answer all of these questions and more…

First Things First

The first thing to keep in mind is that laws in the United States are divided into two categories: Federal law and State law. This article will ONLY address certain Federal laws as they relate to online sports gambling. You need to look at other laws before making your own decision to play.  I am in no position to write a dissertation on every state’s gambling laws in this article.

If you want that information, you can hire me at $550 an hour to do the project for you.

That said, Federal law is the supreme law of the land.  Under the Supremacy Clause of the U.S. Constitution, Federal law overrides any conflicting State law.  You may recall our recent article on this very topic (Kim Davis, George Wallace, and the Ghosts of Racist Past).  For more detail, read the article.

State law is very different and varies from state to state.  Conduct that is legal in one state may not be legal in another, such as possession of cannabis. To Determine if FanDuel is legal, you have to look at both Federal and State law for answers.

Is Internet Gambling Illegal Under Federal Law?

YES! Online gambling is 100% illegal under Federal law and you should not do it. In 2006, Congress passed the Unlawful Internet Gambling Enforcement Act (“UIGEA”) which made internet gambling and associated activities, illegal. This act was codified into law and can be found in 31 U.S. Code §§5361-5367. In fact, 31 U.S. Code 5366, makes a violation of the UIGEA a crime that can be punished by up to 5 years in Federal prison, per count.

Rather than write new law to render Online Sports Gambling illegal, the UIGEA incorporated 28 U.S. Code §3702, which generally prohibited sports gambling. Moreover, UIGEA was not intended to override other Federal, state or tribal laws that regulate gambling. So, existing state rules remained in effect. Section 3702 states:

Internet Gambling

It shall be unlawful for –

1) A governmental entity to sponsor, operate, advertise, promote, license, or authorize by law or compact, or; 

2) A person to sponsor, operate, advertise, or promote, pursuant to the law or compact of a governmental entity, a lottery, sweepstakes, or other betting, gambling, or wagering scheme based, directly or indirectly (through the use of geographical references or otherwise), on one or more competitive games in which amateur or professional athletes participate, or are intended to participate, or on one or more performances of such athletes in such games.

FanDuel is Designed to Qualify for an Exception

Like a lot of rules in this country, there are exceptions to the law.  Specifically, 31 U.S. Code §5362(1)(E)(ix) states that FANTASY SPORTS GAMES are not included in the UIGEA’s prohibitions. However, the exception is not automatic. To qualify, a fantasy sports game must be designed according to very strict criteria.

Lets start with the language of the exception:

Participation in any fantasy or simulation sports game or educational game or contest in which (if the game or contest involves a team or teams) no fantasy or simulation sports team is based on the current membership of an actual team that is a member of an amateur or professional sports organization (as those terms are defined in section 3701 of title 28) and that meets the following conditions:

(I) All prizes and awards offered to winning participants are established and made known to the participants in advance of the game or contest and their value is not determined by the number of participants or the amount of any fees paid by those participants.

(II) All winning outcomes reflect the relative knowledge and skill of the participants and are determined predominantly by accumulated statistical results of the performance of individuals (athletes in the case of sports events) in multiple real-world sporting or other events.

(III) No winning outcome is based—

(aa) on the score, point-spread, or any performance or performances of any single real-world team or any combination of such teams; or

(bb) solely on any single performance of an individual athlete in any single real-world sporting or other event.

Applying the Fantasy Sports Exception to FanDuel

First, we have to be talking about a fantasy sports game, which we obviously are.

Second, the fantasy team played in the game cannot be based on the current membership of an actual team that is a member of a professional sports organization. Since, all FanDuel fantasy teams are comprised of current members of actual NFL, MLB, and NBA teams, one might think this is a deal breaker, but it isn’t.

In law, when statutes are written, they are done so with very formal language where every word counts. Casual language that is loose is not used, at least ideally.

According to the language of this exception, a fantasy team cannot be based on an actual team. To comply with this aspect of the rule, FanDuel requires contestants to pick players from at least three teams.  Additionally, contestants are barred from picking more than four players from any one team. FanDuel’s website is programmed to prevent contestants from violating either of these rules.

Third, the prize awarded to the winner of any contest, a) must be made known to game participants in advance; b) its value cannot be determined by the number of participants; and c) its value cannot be determined by the value of any entry fees paid by participants.

FanDuel complies with this provision in two ways.  First, they post the contest prize well in advance.  In fact, it is impossible to join a FanDuel contest without knowing the prize. It is always listed.

Second, to establish that the prize is not determined by the number of participants or the entry fee, FanDuel is all over the place with the number of contestants and entry fees used in each contest.  When you do the math, sometimes their spread is near 10%, other times its near 20%. So, in that sense, the prize is not dependent on the number of contestants or value of their entry fees.

In one comparison I did of two contests, each with a prize of $300,000, I noted the following:  The first contest had 13,636 participants, paying an entry fee of $25 each, for a total of $340,900; whereas the second contest had 172,414 participants paying $2 each, for a total of $344,828.

While the numbers may seem close, they are actually very far apart.  In the first contest, FanDuel pocketed $40,900 for its costs and profit (after paying the $300,000 prize); whereas in the second contest it took $44,828 for its costs and profit – which is almost 10% more than the first. 

In business, a 10% difference is enormous.  Imagine if you walked into work tomorrow morning and were told all salaries were were being reduced by 10% or the company was randomly laying off 10% of its work force… all of a sudden 10% would be a big deal!

That said, if I was a prosecutor looking to attack FanDuel’s legitimacy, this is where I would mount my attack. I would argue that as a regular practice, you never see contests where there are less participants than are needed to raise prize money at the given entry fee.  Therefore, the value of the prize is in fact determined by the number of participants and the value of the entry fee.  As a result, the conditions required to qualify for the fantasy sports exception are not met and the whole thing is prohibited.

Either this is their partial weak link or I simply do not have a complete understanding of how they determine prize money, number of participants, and entry fees.  Maybe they will say they start with defining the desired prize and then build a game from there, thus determining the number of players and the entry fee based on the prize, as opposed to the other way around – but isn’t that just semantics?  Since I am new to FanDuel, I can’t draw any final conclusions yet.

Fourth, there is little doubt that this is a game of extreme skill.  While chance is a factor, there is an overwhelming amount of player performance data, strategies, and other considerations like managing the salary cap, assessing matchups, inclement weather, player injuries, player personal problems, coaching staff, and other considerations.

FanDuel is no roll of the dice. It takes research, thought, and skill to win. A contestant who blindly picks players and relies strictly on chance will win as often as a team of monkeys pounding away on typewriters will bolt out a Shakespearean novel.

Additionally, FanDuel’s point system, is 100% based on the statistical results of actual players.

Fifth, no winning outcome is based on the score, point-spread, or performance of any team, combination of teams, or single athlete.  As noted above, FanDuel requires contestants to pick athletes from at least three teams and are not allowed to pick more than four players from any one team.

CONCLUSION

Keeping in mind this is an analysis in light of the Unlawful Internet Gambling Enforcement Act of 2006, it appears as FanDuel passes the mark.  My only concern is whether or not they meet the qualifier to the fantasy sports exception that requires prize value to be determined independently of the number of contestants and the value of entry fees.

I have to assume lawyers far more experienced in gambling laws than myself looked at this and figured it out. Answering a question of this magnitude for a multi-billion dollar company is a massive research project that would be taken very seriously.  At that level, there is no margin for error.

That said, I am sure state gambling laws vary wildly. Local laws are as variable as the people living under them.

That said, it is exciting to see how America keeps coming up with new stuff.  We are undoubtedly the world leader in Western culture. I don’t care how much stinky cheese they eat in France – as much as I really do love stinky French cheese.  After all, it was literally born at a SXSW festival in Texas… whats more American than that?

Like the iPhone before it, a group of daring entrepreneurs showed us how desperate we are to buy something we didn’t even know we wanted.

Game on!