Massachusetts could lead way in bringing DFS industry down to Earth

As state-based scrutiny of the daily fantasy sports industry grows in the wake of a major scandal, Massachusetts just might help lead the regulatory way.

Editor’s note: FanDuel is a sponsor of Sports Illustrated. This piece was pursued and executed independent of that business relationship. Sports Illustrated also has a partnership with DailyMVP, another daily fantasy sports provider.

After experiencing unprecedented popularity and financial success throughout the summer and fall, the daily fantasy sports industry, it could be said, is no longer having its moment in the sun.

In the four-week period after news broke that DraftKings employee Ethan Haskell inadvertently leaked proprietary player ownership data in a million-dollar fantasy tournament, and then won $350,000 in a similar tournament on rival site FanDuel, more than two dozen class-action lawsuits have been filed against DFS companies.

Most of the litigation in the wake of the Haskell news has focused on the games’ fairness for all participants. But one lawsuit in particular—Redskins WR Pierre Garçon’s filing Friday afternoon on behalf of NFL players alleging FanDuel has misappropriated their names and likenesses—could cast a particularly large spotlight on the issue.

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There have been other key developments in the wake of the Haskell news:

• The FBI, Department of Justice and the U.S. attorney for the Southern District of New York have opened investigations into whether DFS violates federal law.

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• The Nevada Gaming Control Board became one of the first regulatory bodies to explicitly say what many were thinking: that DFS is gambling and should be regulated as such. 

• Both DraftKings and FanDuel have prohibited employees from playing DFS for money.

• The industry's main trade association received a grand jury subpoena ordering it to turn over its meeting notes, prompting suspicion that the government is investigating fraudulent activity by the body.

• Some states have already introduced industry-friendly legislation that differentiates DFS from gambling, while others like Indiana, Florida and Delaware have opened investigations into the legality of DFS.

Each of these events have implicitly, and often explicitly, posed the larger question of whether fantasy sports should be regulated, and if so, how. So far, the answer to the first question seems to be a resounding yes.

Mass. regulation

As state-based scrutiny of the DFS industry grows, Massachusetts just might help lead the regulatory way. The state is home to Boston-based DraftKings and has been one of the most outspoken states on DFS since the Haskell incident came to light.

On Oct. 29, the Massachusetts Gaming Commission held what is believed to be the first public meeting by a regulatory body discussing DFS regulation. While the state is not yet attempting to address fantasy sports at the legislative stage like others are, and while the MGC does not believe it has the authority to unilaterally regulate online fantasy sports in the state, the hearing is likely to result in recommendations—“constructive advice,” as chairman Steve Crosby put it— that will carry weight with policymakers, according to industry website LegalSportsReport.

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At a reception earlier in the month just blocks from DraftKings’ headquarters, state attorney general Maura Healey said that no federal or state laws prohibit DFS sites from operating in the state and that she was not pursuing any criminal investigation into the industry. But just as the decision of Nevada’s gaming commission equating DFS to gambling had widespread reverberations, a decision from the home state of DFS’s second-largest company could resonate across the country.

The tone of the MGC’s discussions about unfettered fantasy contests involving large sums of money was one of concerned doubt. As one commissioner Gayle Cameron unsurprisingly noted, the consensus among regulators is that the DFS industry should be regulated. But exactly how an industry that moves at the speed of the Internet will be reigned in by rigid bureaucracies accustomed to extensive procedures and deliberations is unclear. MGC staff attorney Justin Stempeck concluded that the legal status of DFS is “in flux,” and the crux of states’ approaches to regulation going forward lies in their interpretation of whether fantasy sports constitutes gambling.

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While the Unlawful Internet Gambling Enforcement Act of 2006 does make a specific “carve out” for daily fantasy sports at the federal level, distinguishing it as a predominantly skill-based game, it is not immune to state legislation. As Stempeck noted, UIGEA is constructed to neither alter, limit nor extend any existing federal or state gambling laws. It also does not expressly legalize fantasy sports, but instead distinguishes it from gambling. Any new Massachusetts law defining DFS as gambling and regulating it therein could therefore supersede the federal law.

The MGC meeting came on the same day that FanDuel CEO Nigel Eccles sent a letter to his site’s players in which he called for government regulation of the industry, a de facto admission that priorly enacted self-policing practices wouldn’t cut it on their own. The Fantasy Sports Trade Association’s formation two days prior of a self-regulating body was met with the same reaction DraftKings received when it said it would impartially investigate Haskell’s insider information activities: cynicism and laughter. The issue even permeated the national zeitgeist when presidential candidate Jeb Bush was asked during this week’s Republican debate whether fantasy sports should be regulated. (The reply: a circuitous ‘yes’ that could have damaged his campaign.)

A patchwork solution

Five states currently prohibit DFS based on their definition of gambling, while others have either excluded (Kansas) or are attempting to exclude (Illinois) fantasy sports from a list of prosecutable gambling activities. Other states have acted in the reverse: With its Oct. 14, decision, the Nevada Gaming Control Board barred DFS sites from operating in the state until they acquired a gambling license. It’s unclear whether DFS sites will comply with the requirement.

A more old-fashioned approach some are suggesting is offering DFS contests at brick-and-mortar casino properties. Believing it could help raise $100 million in annual tax revenue, a Pennsylvania congressman introduced a bill in May that would limit DFS’s availability to one of the state’s 12 registered casinos. The legislature’s gaming oversight committee will vote on the bill in early November and hold a hearing similar to the MGC’s on Nov. 10.

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Even Massachusetts leaders who don’t believe DFS contests violate state or federal law still believe in the value of the industry’s regulation. Healey has said that any sort of self-regulatory scheme would be inadequate and called the DFS industry one “that cries out for a regulatory legal framework,” according to the Associated Press.

Boston mayor Marty Walsh said he believes fantasy games should be regulated at the federal level, not the state level. Leaders from the state legislature have said they’d like to see the industry regulated—and taxed. DraftKings has retained Healey’s former boss, former state attorney general Martha Coakley, as an advisor.

The major sports leagues’ contributions to the growing DFS conversation have been as varied as the states’. NFL commissioner Roger Goodell has repeatedly maintained that fantasy sports are not wagering, while NHL commissioner Gary Bettman has appeared resigned to the inevitability of legalized sports gambling while also expressing concern about its effect on other sports.

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NBA commissioner Adam Silver said his league will continue its exclusive partnership with FanDuel despite feeling “nervous” over the investigations into the company and has called for a regulatory framework for both legalized wagering and fantasy sports. Silver’s predecessor David Stern took that argument one step further, emphasizing at a recent conference that the answer to regulating fantasy sports is at the federal and not the state level. With a nascent patchwork of state bills yielding different interpretations of fantasy sports and with no federal consensus solidifying in Washington, Stern might not get his wish anytime soon.