Abstract
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During the live hearing, each witness provided a five-minute oral statement and then responded to questions from members of the subcommittee. Additionally, each testifying witness was required to submit written materials for inclusion in the Congressional Record. My written materials included three items: i) a pre-hearing statement; ii) a transcript of my oral statement to the subcommittee; and iii) a post-hearing response to follow-up questions from the subcommittee.
Below, in a single, sequential-ordered document, is the entire written work product I completed in connection with the May 2016 congressional hearing focused on daily fantasy sports. Totaling about 6,500 words, my emphasis was on federal gaming law, state gaming law, and consumer protection concerns.
Pre-Hearing Statement
Introduction
Chairman Burgess and other honorable members of the Subcommittee on Commerce, Manufacturing, and Trade, I am pleased to be invited to testify at the hearing entitled “Daily Fantasy Sports: Issues and Perspectives.” I appreciate the opportunity to be on this panel with distinguished representatives and experts connected to the daily fantasy sports industry. Although I work as a professor and freelance author, this prepared statement and my remarks during the hearing reflect only my personal views and do not necessarily reflect the views of my employer Florida State University or any of the media outlets for whom I have written articles as a freelance writer.
While daily fantasy sports contests have existed for almost a decade, 9 only within the past few years have such contests garnered widespread media attention and increased legal scrutiny. Indeed, the still-evolving life cycle of daily fantasy sports somewhat mirrors other innovative, technology-driven enterprises such as online ticket resellers, mobile ride-sharing services, and certain Internet-based bed and breakfast providers. As set forth in Figure 1, daily fantasy sports' current legal status lies at the intersection of three overlapping regulatory circles in a Venn diagram—i) federal gaming law; ii) state gaming law; and iii) consumer protection policies. With daily fantasy sports representing only a small portion of the overall American sports gaming market, any substantive discussion of daily fantasy sports must take place in the context of a simultaneous examination of traditional sports wagering. 10 Accordingly, I discuss each of Figure 1's three components in detail below. 11
Daily fantasy sports legal status Venn diagram.
Federal gaming law
Congress has a considerable history of enacting sports-specific legislation in the gaming realm. 12 Two federal statutes are most often discussed in connection with daily fantasy sports. The most relevant statute in this space is the Professional and Amateur Sports Protection Act (PASPA) of 1992. 13 PASPA aimed to stop the spread of state-sponsored sports gambling via injunctive relief, with the Department of Justice or “a professional sports organization or amateur sports organization whose competitive game is alleged to be the basis of such violation” deputized to enforce it. 14 PASPA resulted in a small number of states—Nevada, Delaware, Montana, Oregon, and perhaps others—being exempted under the law's grandfathering provision. 15 For grandfathered states, PASPA supposedly “freezes” the scope of that state's legal sports gaming offerings to then-existing options. 16 For non-grandfathered states, PASPA paradoxically provides states with the option of either retaining their sports gambling prohibitions or repealing such prohibitions in their entirety, with ongoing federal litigation that may set the parameters of a permissible “partial repeal” under PASPA. 17 Supreme Court Justice John Paul Stevens, writing for a unanimous court in a 1999 decision, opined that PASPA “includes a variety of exemptions, some with obscured congressional purposes.” 18
PASPA's apparent scope vis-à-vis daily fantasy sports is important. Under PASPA, in relevant part, it is unlawful for state governments to “sponsor, operate, advertise, promote, license, or authorize … [a] betting, gambling, or wagering scheme based … on one or more competitive games in which amateur or professional athletes participate … or on one or more performances of such athletes in such games.” 19 The plain language of PASPA impacts the ability of governments to regulate both daily fantasy sports and traditional sports wagering. To date, no court has directly evaluated daily fantasy sports under PASPA.
The second federal statute with connections to daily fantasy sports is the Unlawful Internet Gambling Enforcement Act (UIGEA) of 2006. 20 While UIGEA remains critically important for payment processors servicing the daily fantasy sports sector, 21 UIGEA is of questionable importance for daily fantasy sports more generally. As recent state attorney general activity has revealed, such uncertainty is ironic given that UIGEA was, at one time, frequently pointed to as establishing and validating the legality of daily fantasy sports.
In late 2015, I undertook a detailed archival examination of UIGEA's oft-referenced fantasy sports exemption. 22 Using publicly available documents, my take-away was twofold. First, I could not find any evidence that the drafters of UIGEA explicitly considered daily fantasy sports in the course of creating the statutory carve-out. The closest any congressional hearing got to addressing short-duration fantasy sports was a brief, non-conclusive exchange on March 23, 1999 between Senator Jon Kyl and Major League Baseball Players Association representative Marianne McGettigan that referenced fantasy contests involving “… a week of activity or a month of activity or a couple of days of activity … ” 23 Second, the opening section of UIGEA explicitly states that the law does not alter, limit, or extend “any Federal or State law or Tribal-State compact prohibiting, permitting, or regulating gambling within the United States.” 24 A frequently cited subsequent section of UIGEA provides a multi-prong safe harbor for fantasy sports in connection with UIGEA's restrictions for payment processors.
Beyond PASPA and UIGEA, Congress has enacted a number of other statutes that could possibly touch on daily fantasy sports and traditional sports wagering. 25 Examples include the Wire Act, 26 the Sports Bribery Act, 27 the Illegal Gambling Business Act, 28 and the Dodd-Frank Wall Street Reform and Consumer Protection Act. 29 The federal wire fraud statute could also apply in cases involving “any scheme or artifice to defraud.” 30 Even the so-called “Quiz Show scandal” statute could attach if deception is found in a fantasy sports competition broadcast to viewers. 31
No federal court case has squarely decided whether daily fantasy sports contests constitute illegal gambling under federal law. However, two cases provide guidance. First, the Third Circuit Court of Appeals touched on the issue in a 2013 footnote: “We note, however, the legal difference between paying fees to participate in fantasy leagues and single-game wagering as contemplated by [New Jersey's] Wagering Law.”
32
Second, a New Jersey-based federal judge wrote the following in 2007:
Courts have distinguished between bona fide entry fees and bets or wagers, holding that entry fees do not constitute bets or wagers where they are paid unconditionally for the privilege of participating in a contest, and the prize is for an amount certain that is guaranteed to be won by one of the contestants (but not the entity offering the prize).
33
The Department of Justice has opined on fantasy sports too. 34 In a 1999 letter, the Justice Department raised concerns about certain exemptions in a UIGEA precursor bill: “Specifically, the Department of Justice opposes the exemptions for parimutuel wagering and fantasy sports leagues, because there is no legitimate reason why bets or wagers sent or received by gambling businesses on these activities should be exempted from the ban while bets or wagers on other activities are not.” 35
A year later, a Justice Department attorney testified before Congress and said: “There is considerable debate we found in our research over whether or not fantasy sports leagues constitute gambling or whether they are simply a contest … ” 36 In a letter responding to follow-up questions after an April 5, 2006 congressional hearing, a different Department of Justice attorney wrote: “The [Justice] Department does not maintain information about regulatory regimes for fantasy sports, which would be a matter of state law.” 37
State gaming law
Every state has gambling statutes on the books. Some states are restrictive (Utah and Hawaii) and some states are more permissive (Nevada and New Jersey). Other states fall somewhere in between these two extremes. 38 But in all cases—as the Department of Justice explained multiple times—states seemingly have the right to regulate (daily) fantasy sports, if in compliance with PASPA.
A number of jurisdictions have already moved to explicitly legalize (and regulate) daily fantasy sports under state law. 39 As of May 6, 2016, examples include Massachusetts, Indiana, Tennessee, and Virginia. However, there are open questions as to whether some state statutes may permit certain player-level proposition bets that extend beyond what is currently considered mainstream daily fantasy sports. 40 Beyond these states where daily fantasy sports are permitted, there are: i) about a dozen states where the legality of daily fantasy sports is currently being contested; ii) five states where cash-based fantasy sports have historically been banned; iii) upwards of fifteen states where legislation is pending; and iv) about a dozen states where there does not appear to be any current legislation under consideration. 41
The skill versus chance debate has dominated recent daily fantasy litigation in New York and elsewhere. While issues pertaining to relative levels of skill exhibited by successful daily fantasy sports participants are important and have a strong historical anchor under both federal and state laws, 42 they are not necessarily dispositive. For example, in legal filings, both the Department of Justice and the National Football League (NFL) have posited that traditional sports betting is skill-based. 43 But these positions did not instantly remove such sports betting from existing prohibitions on the activity. Beyond skill versus chance issues, other state law considerations potentially relevant for daily fantasy sports include provisions related to bookmakers 44 and betting pools. 45
Consumer protection
Consumer protection concerns in daily fantasy sports and oft-mentioned “integrity of the game” considerations are best analyzed on two levels. The first level pertains to the real-world sporting events to which daily fantasy sports are tethered. While daily fantasy sports are unlikely to result in widespread corruption of the underlying sporting events, the possibility of manipulation is not completely absent, as an analogy to spot-fixing can be made. It is likely for this reason that the National Basketball Association (NBA), National Hockey League (NHL), and Major League Baseball (MLB) prohibit players and certain team/league personnel from participating in cash-based daily fantasy leagues, 46 and the NFL does not allow its players, coaches, or executives to win more than $250 in fantasy contests. 47
The second level of integrity-related analysis focuses on the fantasy contest itself. 48 The (mis-)use of non-public information—whether derived from insiders working for fantasy companies or athletes, coaches, trainers, or executives privy to such information—could influence the results of lucrative payouts from daily fantasy contests. Likewise, the integrity of the fantasy contest could be impacted by software vulnerability, the accuracy of statistical results received from data dissemination firms whose employees may be participating in fantasy leagues themselves, biased game scorekeepers working at the underlying real-world sporting events, opaque fantasy game mechanics, or uneven enforcement of contest rules in response to allegations of policies being violated.
Whether at the federal or state level, consumer protection considerations could take many forms beyond already-implemented post-scandal measures barring daily fantasy companies' employees from playing cash-based fantasy contests. 49 A non-exhaustive list of potential consumer protection-oriented policies includes: i) advertising restrictions; ii) prohibiting fantasy play by minors via age verification procedures; iii) making available compulsive gambling and addiction resources (and implementing data-driven procedures to identify problematic behaviors); iv) geo-location tracking; v) availability of self-exclusion lists; vi) restricting or eliminating the use of algorithms, scripts, and bots; vii) limiting the number entries in certain daily fantasy contests; viii) including special protections for “head-to-head” daily fantasy contests; 50 ix) requiring the adoption of “know your customer” guidelines; and x) mandating explicit accounting procedures to ensure that fantasy player funds are in segregated accounts and not commingled in general operating funds.
During the past 12 months, the vast majority of daily fantasy companies have moved from a policy stance of resisting regulation to one that is now open to governmental regulation. Whether such oversight is federal, state, or both, regulation in this space seems inevitable. 51 But only reasonable regulation would allow the industry to remain viable and meet consumer demand. Unreasonable regulations could possibly result in an illegal daily fantasy sports market similar to that currently in place for traditional sports gambling. 52 Both the Department of the Treasury's FinCEN division and the Department of Justice have recently expressed concerns about illegal Internet gambling and sports betting. 53 These concerns may apply to daily fantasy sports as well.
Inferences and outlook
The unique characteristics of daily fantasy sports are different than traditional sports wagering. 54 However, as over a dozen ongoing or recently concluded federal and state probes have demonstrated, such differences are not enough to completely remove daily fantasy sports from the broad umbrella of federal/state gaming laws and consumer protection concerns. This overlap leads me to a number of inferences about possible near-future developments.
Integrity of the game considerations—for both real-world sporting events and the daily fantasy contests connected thereto—are paramount. If sports fans come to believe that honest athletic competition has been replaced by corrupted or pre-scripted entertainment, spectator sports will likely wither away. Likewise, if the millions of Americans who participate in (daily) fantasy sports come to believe that the pay-to-play fantasy contests are illegitimate, it is difficult to see how consumer interest could be retained. These game integrity concerns, whether related to real-world sporting events or accompanying fantasy contests, lend themselves to an opportunity. Congress and/or state legislators have the opportunity to enact reasonable regulations and meaningful enforcement mechanisms. Indeed, game integrity is one issue where the interests of legislators, law enforcement, sports leagues, and reputable fantasy/gaming operators are allied.
Prominent American sports leagues, a group that includes the National Collegiate Athletic Association (NCAA), NHL, NBA, MLB, and NFL, recently posited that they have a proprietary interest in “the degree to which others derive economic benefits from their own games.” 55 More narrowly, the same quintet of sports leagues argued that they “have an essential interest in how their games are perceived and the degree to which their sporting events become betting events.” 56 Consistent with these positions, it is plausible to infer that certain sports leagues may: i) seek to memorialize certain gaming-related intellectual property rights through litigation or legislation; ii) move to license so-called “official data rights” to third party gaming operators; and/or iii) create gaming platforms themselves to offer (exclusive) wagering options directly to consumers and, in turn, cut out competitors.
Whether through equity investments or advertising partnerships, a number of sports leagues, labor unions, team owners, and media outlets have embraced daily fantasy sports and the commercial benefits that derive from it in the form of increased consumer engagement. 57 The “second-screen experience” has transformed passive sports spectators into active consumers that can be monitored and monetized. The same type of enhanced consumer engagement can be gleaned from traditional sports gambling, especially the shift to in-game wagering and micro-betting while the game is taking place. Nevertheless, certain sports leagues have simultaneously resisted Delaware and New Jersey's move to offer traditional sports gaming options. Depending on the result of the on-going New Jersey sports wagering litigation, 58 discussions about nationwide legalized sports gambling may accelerate. 59
In so doing, at least one positive aspect of a regulated and transparent fantasy and gaming market could result. Data from a highly liquid market could be harnessed to probe for irregular statistical fingerprints indicative of possible integrity issues about both real-world sporting events and fantasy contests. Indeed, in a trilogy of co-authored academic papers, 60 I have demonstrated how forensic sports law analytics can be a useful tool in the detection of game-fixing or betting fraud. Similarly, there are a number of for-profit commercial entities that provide related services in partnership with sports leagues and athletic events. 61 In addition to several professional sports leagues that have adopted the practice, 62 the commissioner of a prominent college athletic conference wrote, in relevant part, that: “fraud prevention and consultative services are key tools that support preserving and protecting the integrity of our sports and sports competitors.” 63
As the daily fantasy sports industry matures and works through its current regulatory challenges, changes are likely. Most notably, the format and time-duration of fantasy contests will shift. Like options already popular in Europe and being introduced in Nevada, 64 the future of daily fantasy sports likely lies in real-time possibilities where contestants dynamically interact as the underlying sporting event progresses. Such in-game options will be available in a variety of different mobile-friendly platforms. 65
Thank you, Chairman Burgess and members of the Subcommittee on Commerce, Manufacturing, and Trade, for the opportunity to appear before you today.
Transcript of Oral Statement
Good morning, Dr. Chairman Burgess and other honorable members of the Subcommittee on Commerce, Manufacturing, and Trade, my name is Ryan Rodenberg. I work as a professor at Florida State University. One of my primary research lines pertains to sports gaming. I am pleased to be invited to testify at today's hearing and appreciate the opportunity to be on this panel. My written statement and oral testimony reflect only my personal views and do not necessarily reflect the views of my employer or any of the media outlets for whom I have written articles.
As I detail in my written statement, daily fantasy sports' current legal status lies at the intersection of three overlapping regulatory circles in a Venn diagram—i) federal gaming law; ii) state gaming law; and iii) general notions of consumer protection. Given the overlap, and recognizing that daily fantasy sports represent only a small portion of the overall American sports gaming market, I believe any substantive discussion of daily fantasy sports must take place in the context of a simultaneous examination of traditional sports wagering.
In this brief oral testimony, I focus on the most important federal statute in this realm—the Professional and Amateur Sports Protection Act of 1992, or PASPA for short.
Justice John Paul Stevens, writing for a unanimous U.S. Supreme Court in a 1999 decision, opined that PASPA “includes a variety of exemptions, some with obscured congressional purposes.” Similarly, the Department of Justice raised a number of concerns about PASPA in a September 1991 letter to then-Senator Joe Biden.
The paradoxical nature of PASPA's grandfathering scheme among states has serious implications for potential consumer protection-related regulation of daily fantasy sports, as well as traditional forms of sports wagering.
Over the course of nearly five years of litigation, three federal lawsuits against two different sitting state governors, and three Court of Appeals decisions with a fourth decision imminent, here is what we know about PASPA:
First, for grandfathered states such as Nevada, Delaware, Montana, Oregon, and perhaps a few others, PASPA seemingly freezes in time, circa 1992, those states' ability to enact sports gaming-related regulations.
Second, for non-grandfathered states, PASPA seemingly provides such states with the option of either retaining their sports gambling prohibitions as-is or repealing their prohibitions entirely. To do otherwise would apparently render PASPA unconstitutional under the Tenth Amendment. Whether any middle ground is permitted under PASPA remains the subject of still on-going litigation filed by the NCAA, NBA, NFL, NHL, and Major League Baseball against the governor of New Jersey.
Third, for all states—whether grandfathered under PASPA or not—the plain language of PASPA constrains the ability of governments to enact common sense, consumer protection legislation for both daily fantasy sports and traditional sports wagering.
No federal court case has squarely decided whether daily fantasy sports constitute illegal gambling. Relatedly, a Department of Justice attorney testified before Congress in 2000 and said: “there is considerable debate we found in our research over whether or not fantasy sports leagues constitute gambling or whether they are simply a contest.”
For all of these reasons, I think it would be difficult for Congress to address specific issues pertaining to daily fantasy sports absent a contemporaneous evaluation of traditional sports wagering.
Thank you, Chairman Burgess and members of the Subcommittee for the opportunity to appear before you today. I am happy to answer any questions that you may have.
Post-Hearing Response to Questions
Chairman Burgess and other honorable members of the Subcommittee on Commerce, Manufacturing, and Trade, thank you for your June 6, 2016 letter providing me with the opportunity to respond to an additional question for the record after the hearing. Please find below my response to the following question posed by the Honorable Gregg Harper: “What are the top three consumer protection issues you believe we should be on the lookout for during this discussion?”
The top three consumer protection issues in connection with daily fantasy sports are: i) corruption considerations involving the tethered real-world sporting events; ii) integrity of the daily fantasy sports contests being offered; and iii) preservation of customer funds held by daily fantasy sports operators. 66 Developing reasonable policies regarding these issues is an area where the interests of legislators, law enforcement, sports leagues, consumers, and reputable fantasy operators are shared.
Real-world sporting events
Unlike Broadway shows, musical concerts, professional wrestling, and other forms of live entertainment, the vast majority of sports fans desire sporting events to be comprised of unscripted athletic competition. Accordingly, it is important to ensure that such sporting events are not manipulated for (pecuniary) fantasy purposes. Likely for this reason, a number of sports organizations—all of which frequently cite “integrity of the game” considerations for a multitude of policy positions—ban or restrict athletes and related personnel from participating in cash-based daily fantasy sports. 67 Like spot-fixing concerns in single event proposition sports betting, the real-world athletic performances fueling daily fantasy sports should be monitored. While the Sports Bribery Act attaches to several forms of game-fixing, 68 the statute has never been applied to daily fantasy sports.
Fantasy contests
Results from daily fantasy contests could be influenced via the (mis-)use of non-public information. 69 This precise issue was the subject of headline-grabbing media coverage starting in October 2015, which resulted in consumer protection implications becoming a prominent focus. In addition to general consumer protection-related policies within the realm of the Federal Trade Commission, certain elements from the federal wire fraud statute, 70 securities laws, 71 and Commodity Futures Trading Commission regulations 72 may address some of the issues related to the role of non-public information in daily fantasy sports contests by analogy. Beyond inside information issues, related concerns under this broad consumer protection umbrella include: i) the use of algorithms, scripts, and automated bots in contest entries; ii) the number of entries permitted by any single individual or syndicate; iii) the soundness of the fantasy contests' computer code; iv) the accuracy of historical and real-time sports data that determine contest outcomes; v) the use of forensic sports law analytics to test for fantasy contest irregularities; and vi) the identification of problematic behavior among fantasy contestants consistent with addiction. 73
Customer funds
A small number of daily fantasy operators have had liquidity problems and been unable to return customer funds, pay out winnings, or meet certain contractual obligations. 74 Although infrequent, such problems represent an important consumer protection issue, as customer monies should be held in segregated accounts and not commingled in general operating funds. Likewise, given the Unlawful Internet Gambling Enforcement Act (UIGEA) of 2006 75 and relevant state-level bookmaker/pooling laws, funds earmarked for payments to winners should seemingly be kept separate from entry fees and other monies in customer accounts. This potential issue derives from how customer entry fees are treated under operators' internal accounting procedures. 76 Indeed, in a February 2016 court filing, a leading daily fantasy sports operator stated: “In fantasy sports as well, participants pay an entry fee to participate in a contest, and the entry fees generate the fund from which the successful contestants win prizes.” 77
The three fantasy sports-related consumer protection issues highlighted here will continue to garner attention at both the federal and state level. However, as detailed in my full written statement and oral testimony, the ability of governments to address such issues is counterbalanced by the constraints found in the Professional and Amateur Sports Protection Act (PASPA), which makes it unlawful for certain state governments to “sponsor, operate, advertise, promote, license, or authorize … [a] betting, gambling, or wagering scheme based … on one or more competitive games in which amateur or professional athletes participate … or on one or more performances of such athletes in such games.” 78 Likewise, PASPA's uneven and paradoxical grandfathering scheme among states may impact the ability to promulgate any consumer protection-leaning legislation for daily fantasy sports or other forms of sports gaming.