Don't bet on it: Allowing a fantasy sports league may be gambling with legal trouble

February 2016
Ryan B. Frazier
Westlaw Journal

Sports and athletic competitions have been a part of human interaction for thousands of years. From early chariot races and the original Olympic Games in ancient Greece to the modern Super Bowl, the spirit and challenge of competition have motivated people to engage in sports and other athletic events.

In the last decade or two, participation in sporting events has moved from the playing field to the computer screen. Not only have sports video games become popular, but people have found ways to use technology to make real professional and amateur games part of their personal entertainment
experience. Many people are familiar with Las Vegas-style wagering on game outcomes.

Modern technologies, such as computers, the Internet and smartphones, have also facilitated vicarious involvement by allowing sports fans to become “part of the action” by engaging in fantasy sports.

Fantasy sports are contests where participants compete against one another using fictional teams. These imaginary teams are arranged in virtual leagues and are comprised of actual athletes who are deemed to “play” for them. Outcomes are determined by predetermined scoring arrangements that are tied to the statistical performance of the players in real sporting events.

Most fantasy sports are played online. Computers have unlocked seemingly instantaneous access to information, metrics  and data about particular games and players, and they have accelerated and simplified the task of calculating scores from such data.

With these advances in technology, participation in fantasy sports in the United States has exploded. Thousands have joined the fantasy football fad in particular. Further, anyone listening to sports radio or watching ESPN will be bombarded by advertisements from fantasy sports organizations soliciting participants and promoting involvement. Many participate for cash prizes or other rewards.

Of course, most fantasy leagues offering rewards to the victors require an up-front cash payment or “in-kind” contribution to take part. In many respects, fantasy sports — particularly fantasy football — have become
big business.

Some employers have contemplated allowing this sideline-participation contest in the workplace. Allowing or operating fantasy sports leagues can boost employee morale and foster camaraderie among workers. Some employers may see it as just plain fun. Undoubtedly, fantasy sports leagues can have benefits for the workplace and the employer.

Whatever the motivation, however, legal and practical issues should cause employers to think twice before jumping into or permitting a fantasy sports league for their employees. In spite of their popularity, the legalities
of pay-to-play fantasy sports have been questioned and, in some cases, challenged.

The primary legal concern is whether hosting a fantasy league where participants put money or other valuable items at risk may constitute illegal gambling. Employers must consider the very real risks and harms
associated with an onsite league.

FEDERAL LAW AND FANTASY SPORTS

Federal law does not prohibit pay-to-play fantasy sports. They are specifically exempted from restrictions placed on online gambling

under the Unlawful Internet Gambling Enforcement Act of 2006, or UIGEA, as long as these three criteria are met:

  • The participants must not “bet” on the outcome of a particular game or a

single player’s performance. Outcomes based on a “point spread” or the
specific performance of any particular team either constitutes or too closely
resembles illegal betting.

  • The value of the prize or reward must be established and clearly communicated to participants in advance and must not be tied to the number of participants or the amount of fees received.
  • Winning should reflect the comparative skill, talent and expertise of the participants.

The rationale for the exemption is that fantasy sports are considered games of skill, not games of chance. Assembling a fantasy team or “drafting” (i.e., selecting) players for a fantasy team is thought to require some skill, knowledge and engagement of  the participant. Thus, under this exception, many fantasy leagues do not run afoul of the federal Internet gambling laws.

At present, there is no other federal law that directly restricts or governs fantasy sports, including those played for money. Accordingly, states have been left to enact their own laws governing whether pay-to-play
fantasy sports are legal.

STATES DON’T SEEM TO AGREE

State laws are not always friendly to pay-to-play fantasy sports. Many states prohibit gambling where participants pay to receive winnings based entirely on chance.

In states where gambling is legal, it is usually highly restricted to ensure that it does not get out of hand and to protect gaming industries. For example, in Nevada, where gambling is most widely accepted, it is also highly regulated.

Whether fantasy sports are covered by these laws is the question. This depends on the state in which the league is being operated.

States allowing pay-to-play fantasy sports

Generally, fantasy sports, even pay-to-play leagues, are probably legal in most states, at least as long as “winning” is not dependent on the results of actual games or the statistical performance of a single player.

Some states have followed the approach of the federal government, concluding that pay-to-play fantasy sports are not per se illegal. Fantasy sports are typically seen as games of skill — largely devoid of chance —
in these jurisdictions.

Although pay-to-pay fantasy sports are typically considered legal in most states, only two have passed laws specifically legalizing them. Maryland was the first state to pass legislation legalizing pay-to-play fantasy sports, and Kansas followed suit in 2015.

The Maryland law specifically carves fantasy  sports out of the state’s gambling restrictions, paralleling the exception found in the UIGEA.
Generally, as long as the prizes are made known in advance and are not based on the number of participants, winning is largely the result of statistical performance of several players and the results stem from the relative experience and knowledge of participants, the pay-to-play league is probably on safe footing. Outcomes must not be determined  by chance; otherwise, the league may be deemed impermissible gambling.

In most states, fantasy sports are considered legal due to the absence of an express prohibition.

Utah is a classic example of a state where fantasy sports openly operate despite strict gambling laws. The state, which has outlawed virtually every form of gambling, has not specifically targeted fantasy sports.

Companies within Utah and other states that do not expressly prohibit fantasy sports operate leagues on the assumption that gambling restrictions do not reach fantasy sports. But this assumption has not been tested, and it may rest on shaky ground.

Legislation to protect and legalize fantasy sports is gaining traction around the country. State legislators in Florida, Indiana, Michigan, Minnesota, Missouri, Nebraska, Vermont and Virginia are currently pushing for a law ensuring that fantasy sports remain legal. Many of these proposed statutes clarify that fantasy sports are considered games of skill and therefore do not violate state gambling bans.

Some of the proposals are akin to Maryland’s law in that they track the UIGEA’s language. While legalizing fantasy sports, some of these proposals include strict regulations and licensing requirements for fantasy sports operators. Residents of these states will need to keep their eyes on the legislature to see if proposed legislation gets any traction.

Despite the fact that fantasy sports may be legal, it is probably not advisable for an employer to host a pay-to-participate league.

If a league too closely resembles gambling by being based largely on “chance,” it may be determined to be illegal. For example, any league in which something or someone other than the participant (using his own
skill) selects the participant’s “team” may be deemed to be based on chance and therefore illegal.

Further, the lack of a specific prohibition in most states does not mean that fantasy sports will not be deemed illegal in the future. As recently reported in high-profile situations, regulators, attorneys general or other officials may abruptly issue a proclamation stating that pay-to-play fantasy sports are considered illegal under the state’s gambling prohibitions.

STATES DISFAVORING PAY-TO-PLAY FANTASY SPORTS

Other states appear to have outlawed fantasy sports as games of chance. Arizona, Arkansas, Florida, Iowa, Louisiana, Nevada, North Dakota and Tennessee have (or have had) laws or legal opinions from state

authorities that prohibit or strictly regulate fantasy sports for money in most cases, subject to a few exceptions.

Similarly, the attorney general of New York recently concluded that daily fantasy sports, meaning fantasy sports with “seasons” of only one or two days or a weekend, also constitute illegal gambling.

Nevada, where gambling is generally legal, recently declared daily fantasy sports to be gambling and subject to the state’s gambling regulations. In October, Nevada gaming regulators banned unlicensed daily fantasy sports websites, concluding that they host illegal sports betting. As such, operators of pay-to-play fantasy sports must apply for a gaming license and comply with the state’s strict gambling laws and regulations. These
requirements almost certainly apply to any employer-sponsored league.

Although Arizona has not adopted a per se ban, fantasy sports have generally been identified as illegal games of chance. The law that expresses the state’s position, Ariz. Rev. Stat. § 13-3302, is nuanced and not entirely clear. Accordingly, most nationwide leagues have simply taken the position that Arizona residents are not permitted to participate or, at the very least, not able to win prizes. Employers within Arizona worksites would be wise to follow suit.

Despite these prohibitions, the law in this area is uncertain and in flux.

Arizona, Iowa and Louisiana have contemplated changing their laws in the
past. Likewise, Florida is currently considering changes to its law.

In 1991, the Florida attorney general issued an advisory legal opinion, AGO 91-03, stating that a fantasy sports league in which participants pay a fee to participate violates Florida’s gambling laws.

A bill in the Florida Legislature aims to immunize fantasy sports, including “daily” fantasy sports, from the state’s gambling laws. The bill would establish regulations applicable to those conducting fantasy sports operations. Among other things, it would set steep licensing fees for operators of fantasy sporting events involving more than 750 members and a cash prize. There are doubts, however, as to whether the bill will pass.

PRACTICAL PROBLEMS FOR EMPLOYERS

Putting aside the legal troubles that employers may encounter if they decide to operate a league, hosting a league may present other issues as well...

There are management costs to administer the league, such as time- consuming decisions related to how to operate it. These decisions have little benefit to the business  of the company. Management also may have to arbitrate employee disputes and grievances related to the league. Such disputes undermine the intended benefits of employee camaraderie and morale.

Even if an employer tries to avoid legal risks by choosing not to be the league host, simply permitting a league to operate at the workplace during business hours will likely have other adverse consequences.

Losses in employee productivity can be significant and should not be overlooked. Employees may spend too much time focusing on their “team” and smack-talking with other participating co-workers.
According to an Aug. 13, 2014, report by the Heather Draper with the Denver Business Journal, a global employment consulting firm has estimated that employees may waste up to two hours of “on the clock” time per week managing their fantasy teams.

DON’T BET ON IT

All told, if the practical problems do not dissuade employers, hosting or allowing pay-to-participate fantasy sports in the workplace is probably too much of a legal gamble. The safest course is for an employer to simply stay out of the pay-to-participate fantasy sports universe. Although worksite leagues are legal in most states and a crackdown is unlikely in states where they are illegal, employers may still risk criminal prosecution by hosting a pay-to-play league.

Any fantasy sports league that closely resembles impermissible gambling (such as being entirely based on the performance of a single player or on the outcome of a game) is likely illegal even in states allowing fantasy
sports.

Employers need to monitor the current status of their state’s gambling laws if they allow pay-to-play fantasy sports at their worksites. The law in this area is rapidly changing. States that currently allow fantasy sports leagues may ban them as illegal gambling in the future.

If an employer chooses to operate a fantasy league, the only sure way to avoid violating the law is to operate the league without an entry fee and ensure that participation is not conditioned on putting something at risk.

Simply put, as long as your employees do not put any money or other items of value at risk, their participation in fantasy sports is not gambling. An even more cautious approach would be not to offer rewards or monetary
prizes to the winners.

Further, it is advisable for employers to implement and enforce a written policy to protect themselves from an employee-operated league for cash. Employers should regularly remind their employees of Internet use and gambling policies. Before an employer chooses to operate or allow fantasy
sports to become a part of the workplace, it should understand the consequences and recognize that, although the game may be fantasy, the legal risks are not.

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