Estimated reading time: 5 minutes, 24 seconds

To some, fantasy sports rank on par with Dungeons and Dragons, Pokémon, and hardcore video gaming- hobbies for those on the fringe of social society, who prefer paladins and Pikachu to parties and pickup basketball.

For those who know better, though, fantasy sports has become not only a mainstream activity, occupying employee’s break-time fodder and sparking endless debates about the usefulness of avant-garde statistics, but a financially significant driver of interest in real sports. According to a widely reported American Express Spending and Savings Tracker report, nearly 75 million Americans will play fantasy football this year, nearly one-third of the population of the U.S.

As a result of the popularity of fantasy sports, websites like DraftKings and FanDuel have seen a spike in participation, and recently, scrutiny. While many websites offer season-long leagues that pit managers against each other for months at a time, DraftKings and FanDuel offer daily contests and immediate payouts. Some of the daily fantasy sports (DFS) contests offer multi-million rewards to the top finisher.

Queue interest from Congress. Anti-gambling advocates have also taken notice. Compounding the scrutiny from those who believe these sites are a dangerous form of unregulated legalized gambling, last week there were reports regarding about an employee of DraftKings who won $350,000 playing in a contest on rival FanDuel.

Some suspected the employee had insider information to help, although FanDuel issued a statement indicating there was no evidence of wrongdoing. A class action lawsuit was filed on behalf of the other competitors in a Manhattan federal court as a result, according to ESPN.

For their part, FanDuel has banned employees from playing at competing sites and hired former federal judge and United States Attorney General Michael Mukasey to conduct a review of the company’s practices. They have also created an internal advisory board, according to a statement form their site.

DraftKings has also banned their employees from playing on competing sites. They have also engaged a legal team to “conduct an investigation specific to the allegations against one of our employees,” according to their site. Both companies will not allow contestants from competing DFS operators to play on their sites.

Rep. Frank Pallone, Jr. and U.S. Sen. Bob Menendez of New Jersey sent a letter to Federal Trade Commission Chairwoman Edith Ramirez asking the FTC to look at ways to ensure the games are on the up-and-up. “We believe that fantasy sports should be legal and subject to appropriate consumer and competitive protections,” Pallone and Menendez wrote in the letter. “Consumers also expect companies to hold online contests in a fair, transparent manner.”

Prompted by the $350,000 employee payday, the Congress members called for specific action. “Allowing employees of fantasy sports websites with access to nonpublic information to participate in online fantasy games, even if the games are operated by other fantasy sports companies, could give those employees an advantage akin to insider trading,” they wrote in the letter. “Therefore, we also ask the FTC to investigate whether this constitutes an ‘unfair or deceptive practice’ as defined in Section 5 of the FTC Act.” J. Kelly Duncan, a partner Jones Walker LLP, said the recent reports of potential foul play and litigation has led to “substantial concerns regarding the integrity of how such games are operated.”

Duncan is immediate past President of the International Masters of Gaming Law and member of the International Association of Gaming Advisors, as well as Co-Chair of the American Bar Association Gaming Law Minefield National Institute.

A recent lawsuit brought by a daily fantasy player alleged contestants were “fraudulently induced into placing money onto DraftKings because it was supposed to be a fair game of skill without the potential for insiders to use non-public information to compete against them,” he said.

“Regulation of daily fantasy sports in the same way that casino gaming and other forms of legalized gaming are regulated would address the suitability of the operators, the consistency and fairness in how it is conducted, recourse for participants and protection of underage players and compulsive gamblers,” Duncan said. “The largest companies in the U.S. gaming industry are publicly traded and subject to not only oversight by the SEC but also the gaming commissions and gaming control boards in the States in which they operate. In order to provide the public confidence in the integrity of daily fantasy games, regulation should be welcomed by the companies that operate them and their owners.”

Duncan explained the circumstances that led to the fantasy landscape as it existed thus far: “The argument has been made by companies promoting daily fantasy sports that their games are allowed under the Unlawful Internet Gambling Enforcement Act (UIGEA) because the outcomes are based predominantly on the skill of the participants. This ‘exemption’ for fantasy sports, however, is subject to limitations under State law,” he said. “In Louisiana, the issue of how much skill or chance is involved in determining the outcome is irrelevant because ‘gambling’ occurs when an unauthorized or unregulated game is conducted as a business and a participant risks the loss of anything of value in order to realize a profit,” he said. “Interestingly, the NCAA, in recently announcing that any student athlete who wagers on fantasy football is subject to a loss of a year of eligibility, appears to have adopted the same definition of ‘gambling’ as Louisiana.”

Promoters, though, contested they are, in fact, offering games of skill that are not considered gambling in most states. Wagers from residents in Arizona, Iowa, Louisiana, Montana and Washington are not accepted on the DFS sites, Duncan said. “The problem is that the laws of the other States are not uniform as to what constitutes skill-based gaming. The laws range from those that say that skill must be the dominant or controlling factor in the outcome to others that say that if any chance is involved in the outcome, then the game is not a game of skill.”

He said, from his point-of-view DFS appears to “inherently share the characteristics of illegal gaming.” “There is no bright, uniform line as to what degree of skill or chance is determinative of the outcome of a game. This is significant because in most States, any game that has the three elements of consideration, chance and prize constitutes gambling which is illegal,” he said. “While the degree that chance plays in determining the outcome of any particular game is subject to argument, most agree that chance has some role in determining the outcome of any game.”

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