As Brad Roberts noted in his post earlier this month, if you have turned on TV in the past month you have heard about daily fantasy sports operators. With DraftKings being the one you have most likely heard of after the over 100 million dollars they have poured into advertising this year alone. Brad covered the fact that these sites operate under an exception for fantasy sports in the 2006 Unlawful Gambling Internet Enforcement Act. While these companies have a decent case that they operate legally under the UGIEA, the situation gets much stickier under state law. Especially in JETLaw’s home state of Tennessee.

The legality of these daily fantasy games comes down to the distinction between games of skill and games of chance. In even the most daily fantasy friendly states the games must be more skill than chance (at least 50.1%). States like New York have a stricter test, requiring that chance not be a ”material element” in the game. Even scarier for daily fantasy companies, five states hold that a game is illegal if it includes even a “modicum of chance.” The major daily fantasy operators choose not to operate in three of these states (Arizona, Iowa, and Louisiana). However these companies still operate in Tennessee and Arkansas. It is unclear why they choose to still operate in Tennessee and Arkansas, but there is no question as the law stands now the companies are operating at a significant risk.

The risk is heightened even further because the main operators recently added NASCAR and PGA golf daily fantasy games. This increases their risk because the contests are based more on the outcome of the event, the driver’s finish or the golfer’s score. Whereas in typical fantasy sports the games are based on the stats of the players in a game, not the actual outcome of the game. NASCAR and PGA golf fantasy are much closer to pure sports wagering which is explicitly illegal in every state except Nevada. A Tennessee court reviewing any daily fantasy game under a “modicum of chance” standard would likely hold the game to violate the law because it is fairly obvious that any type of fantasy sports involves some chance. It follows that a court reviewing the legality of a NASCAR or PGA daily fantasy game would certainly hold it to violate Tennessee gaming law. Due to the wild success of these companies in attracting venture capital and private equity funding, it seems smart money isn’t too worried about the nationwide legal risk of daily fantasy sports. However it seems these now major players are exposing themselves to huge potential liability in nation’s 17th largest state.

Ben Petitto

 

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