Fantasy Sports (Pt.2): From Afterthought to Reality -The Development of Legal Framework

Posted on 10-21-2015 by
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In part I of this series, we looked at this booming industry and the new threat it faces – insider trading. While it is a serious threat to the business, a huge reason behind its’ existence is due to federal regulations that fantasy sports are unable to adhere to. 

While some states have embraced the new business, not everyone has. In fact, some states have implemented regulations to restrict it. Here’s an outline of federal and state regulations from David O. Klein’s Law 360 Article, “Fantasy Sports: The Rapidly Developing Legal Framework.”.

Federal Regulations

The Unlawful Internet Gambling Enforcement Act’s (UIGEA) exempts fantasy sports contests, but they have to meet the following requirements to qualify:

  1. All fantasy sports league prizes must be established and made known to the participants in advance of the game or contest, and the value of the prizes cannot be influenced by the number of participants or the amount of fees they pay;
  2. All winning outcomes must be determined predominantly by accumulated statistical results of the performance of athletes participating in multiple real-world sporting events;
  3. No winning outcome may be based solely on any single performance of an individual athlete in any single real-world sporting event; and
  4. No winning outcome may be based on the score, point-spread or performance of any single real-world team or combination of such teams.

Fantasy sports also clash with is the Interstate Wire Act (IWA) , which prohibits the use of wire communication facilities to transmit certain wagering information or bets. An individual would violate this by:

  1. Engaging in the business of betting or wagering;
  2. Knowingly using a wire communication facility; and
  3. Transmitting in interstate or foreign commerce bets or wagers, or information assisting in their placement, on any sporting event or contest.

Like the UIGEA, the IWA has an exemption for:

“placing of bets or wagers on a sporting event or contest from a state or foreign country where betting on that sporting event or contest is legal into a state or foreign country in which such betting is legal.”

 

State Regulations

Despite federal exemptions , fantasy sports must still comply with state-by-state prohibitions against gambling. This usually causes conflict between operators and their respective state.

At the moment, only Kansas and Maryland have clearly legalized fantasy sports contests thanks to permitted language closely resembling the UIGEA exemption. This stance however is not shared by every state. Unlike Kansas and Maryland, Montana is the only state with a statute that specifically prohibits fantasy sports games that are played for entry fees and prizes over the Internet.

Many other states have decided to approach the issue differently. States such as Arizona, Iowa, Louisiana, North Dakota, Vermont and Washington, have decided to use the “strict chance” test, in which a game or contest that projects any slight element of uncertainty (e.g., where injury or weather may affect the outcome) will be deemed a game of chance. As  a result, the legality of fantasy sports in “strict chance” states is not always entirely clear.

Since this is a relatively-new business expect plenty of changes to the legal regulatory framework, but for now sponsors and conductors of leagues should proceed with caution when dealing in this business.

 

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