Michael McCann and Will Green
Tuesday November 10th, 2015

Editor’s note: FanDuel is a sponsor of Sports Illustrated. This piece was pursued and executed independent of that business relationship. Sports Illustrated also has a partnership with DailyMVP, another daily fantasy sports provider.

In the wake of a so-called “insider information” scandal involving a DraftKings employee in late September, controversies involving the daily fantasy sports industry seem to occur daily. Legal and legislative inquiries as well as increased consumer awareness increasingly implicate the NFL and other professional sports leagues in their contradictory stances on sports wagering and DFS, while Congress, individual states and independent bodies are trying to lead the push for transparency in a faceless digital industry. Meanwhile, emerging data about DFS participation indicates an industry that just weeks ago was growing exponentially might now be plateauing.

Here are several key storylines to follow: 

The potential of Congressional hearings on DFS regulation

New Jersey Rep. Frank Pallone has become a leading voice in the U.S. House of Representatives on reforming laws regulating sports gaming and DFS. Pallone, who advocates for policies that would legalize and subsequently regulate sports gambling, has been deeply critical of how professional sports leagues simultaneously repudiate sports gambling and embrace daily fantasy sports. If Pallone is successful, Congress will hold hearings that would reassess the legal treatment of sports gaming. Under current federal law, 46 states are barred from licensing, sponsoring or authorizing sports betting (Nevada, Delaware, Oregon and Montana are the four exceptions).

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Certain types of fantasy sports games, however, are lawful under federal law, even when those games involve daily entry fees and cash rewards. Pallone has consistently expressed doubt as to why sports betting and fantasy sports are treated so differently when both offer cash prizes and both involve a mixture of skill and luck. Along with other New Jersey politicians, Pallone also hopes his state prevails in an ongoing federal litigation against the NCAA and the major pro leagues that, if successful, would allow New Jersey casinos and racetracks to offer sports waging.

No Congressional hearings in either body have been scheduled, and any hearings likely wouldn’t take place for at least several months. A recent report from BuzzFeed News indicated the U.S. Senate’s Commerce and Judiciary Committees would have jurisdiction over the issue, and that while both are aware of the controversies surrounding the industry, neither has a specific course of action planned. That same report cited longtime senator Lindsey Graham as saying he’d “like to deal” with fantasy sports. Rep. Fred Upton, the chairman of the House Energy & Commerce Committee, of which Pallone is a ranking member, has said a hearing on DFS is likely.

The impact on the NFL and other leagues of Rep. Pallone’s letter to DraftKings and FanDuel

Pallone has requested on behalf of his Democratic committee members that DraftKings and FanDuel disclose monies paid to NFL players, owners, referees, coaches, and trainers over the last 12 months. This information could prove significant in light of the NFL’s rule dictating players and personnel are forbidden from accepting prizes in excess of $250 in any fantasy football game. The NFL’s rule on fantasy football participation is part of a broader league policy to prevent players and personnel from having a betting interest in the game. Other leagues have adopted similar, and in some cases stricter, rules: the NBA, for instance, prevents players and personnel from betting “money or anything of value” on the outcome of an NBA game.

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At this stage, it is unknown if the Big 2 will provide the information sought by Pallone. The letter is only a request and does not carry the force of law, as a subpoena would. In potentially rejecting Pallone’s request, the two DFS companies could cite privacy concerns and insist that sharing membership information would cause the companies to violate their customer contracts. If DraftKings and FanDuel do not comply with Pallone’s request, they are at risk of being subjected to the Energy and Commerce Committee’s power of the subpoena. But since that power is firmly in control of committee chairman Upton, and not Pallone, it’s unclear if the committee would be willing to authorize the use of subpoenas against the DFS companies.

If DraftKings and FanDuel comply with Pallone’s request, the information they provide could raise important policy questions. For instance, if the DFS companies reveal that more than $250 has been paid out to an NFL player or personnel, Pallone would question exactly how the NFL enforces the $250 rule. The rule would not offer much deterrence if those subjected to it know the rule is not enforced. One DFS expert, Dustin Gouker, of the influential website LegalSportsReport.com, is skeptical of NFL’s efforts in enforcing this rule. “I find it highly doubtful,” Gouker told SI.com, “that the NFL is doing a whole lot of work to make sure that players aren't doing XYZ in fantasy sports.”

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​Pallone could also inquire as to whether and how players and personnel in violation of the rule are punished. If the NFL only assigns nominal penalties or altogether declines to issue punishment, Pallone might openly wonder whether the NFL’s rule on fantasy sports participation is merely for appearance. He could stress that the NFL has the capacity to levy harsh penalties. Why, for instance, would the NFL cite concerns about fair play in severely punishing the New England Patriots over a scientifically uncertain controversy involving deflated footballs, and yet effectively permit players and personnel to wager money in the form of an entry fee on NFL games? Keep in mind, coaches and players have access to “insider information” that could provide them with a substantial advantage over consumers who play the same DFS games.

The gradual emergence of data possibly signaling a tapering of DFS industry growth

While fantasy sports have existed for the better part of two decades, the meteoric rise of their popularity and subsequent revenues can be confined to 2015. Now that more money is being spent—by participants in the form of entry fees, investors in form of venture capital, and DFS companies in the form of advertising and legal expenditures—independent agencies are racing to fill the information void and add financial context to the industry.

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One such clearinghouse is SuperLobby.com, which last week released its NFL mid-season report detailing the revenues and payouts DFS sites are generating week over week. The data is incomplete, but even partial results aren’t entirely encouraging. Factoring in data from this past NFL Sunday, SuperLobby notes that total tournament entry fees for DraftKings declined for four weeks from Oct. 11 to Nov. 8, and that similar fees for FanDuel declined between Oct. 25 and Nov. 8, the first such declines of the 2015 NFL season for both operators. As of Nov. 8, DraftKings had 3.76 million total tournament entries, while FanDuel had 3.07 million, a week-over-week reduction for both operators, according to SuperLobby data.

DFS contests can be broken down into two types: 1.) Grand prize pools, such as DraftKings’ Millionaire Maker tournament, with hundreds of thousands of entrants, and 2.) cash games, such as head-to-head match ups between two people. While most DFS companies report GPP numbers only, FanDuel reports both GPP and cash game numbers bundled together. This allows for a more holistic view of FanDuel’s revenues and expenditures, but does not provide an apples-to-apples comparison across all companies.

Signaling perhaps a more conservative approach by DFS companies, total payouts in both of the Big 2's premier grand prize pool tournaments have also steadily decreased. On Oct. 11, DraftKings paid out $7 million in its largest tournament, the Millionaire Maker, but payouts declined to $6 million and now, for Nov. 15’s Millionaire Maker, $5 million, according to data compiled by LegalSportsReport.com. Payouts for FanDuel’s Sunday Million have experienced similar declines, from $5 million on Oct. 11 to $3 million for the Nov. 15 tournament.

While major tournament payouts have declined, the Big 2 have still experienced a net profit margin off of them, taking in roughly 10 cents for every entry fee dollar. This is a major differentiator from smaller operators like DraftPot, Yahoo! and FantasyDraft, which currently pay out more in tournament prize money than they bring in.

“All of the media attention — good and bad — has likely helped establish DFS in the public consciousness. FanDuel and DraftKings appear to be in good health, and Yahoo has shown consistently impressively user numbers despite a low media spend,” SuperLobby CEO David Copeland told SI.com.

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Perhaps the most telling industry metric would be the number of unique users. This would illuminate how many new people are playing DFS from week to week, and what proportion of entries in large tournaments are made by the same person. It doesn’t appear that we’ll get this information any time soon. DraftKings, FanDuel and other DFS operators are private companies and cannot be compelled — absent of the power of subpoena — to provide any information they do not wish to.

Tapering among entry fees and users could be attributable to any number of factors, from companies relenting on their massive early season ad buys, to increased legislative and regulatory scrutiny, to a natural lull in consumer fatigue. One thing does seem certain though: The DFS industry seems to be maturing out of its September and October phase of wild growth and into a secondary phase of tempered revenues and conservatism from operators.

“I was surprised that it's been a pretty consistent downward trend in entries and entry fees over the last few weeks. I don't think it goes down a ton more,” Gouker said. “But unless they do some type of advertising push, I don't see how they get a lot more money coming in the door, or a lot more people coming in the door, either.”

The potential contradiction of NFL owners investing in DFS companies, while NFL teams and players are prohibited from investing

Much has been written about the various strategic partnerships sought by the two leading DFS companies with professional sports leagues and national media companies. The NBA, for instance, owns a small equity stake in FanDuel. Other pro sports leagues and their broadcast partners have sold significant advertisement space and airtime to DFS companies. Taken together, these partnerships mean that leagues and media companies are to some degree invested in the recognition of DFS as a lawful form of entertainment rather than an unlawful form of sports betting.

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With this context in mind, the NFL has noted that neither the league nor any of its 32 franchises own equity in DFS companies. The NFL seems hopeful that an absence of equity relationships with DFS companies underscores the league’s commitment to fair play and real competition. One complicating factor for the league, however, is that at least two owners—Dallas Cowboys owner Jerry Jones and Patriots owner Robert Kraft—either directly or indirectly own stakes in DraftKings. NFL rules permit owners to purchase equity in other businesses, including DFS companies, even when owners’ NFL teams are barred from such investments.

When DraftKings successfully applied for a UK gaming license earlier this year, the NFL told Bloomberg News that Kraft’s stake in the company was not an issue under current NFL rules. But stakes by NFL owners in DFS companies could allow DFS critics to contend that the NFL’s ability to enforce fair play rules are compromised when they touch on DFS, and that the lines between an owner’s interests and a team’s interests are increasingly blurred. Gillette Stadium also has a DraftKings Fantasy Sports Zone for fans to keep up to date on their fantasy lineup during Patriots home games. The NFL has said this lounge is an option for all 32 teams to have at their stadiums, and is also “not an issue,” according to league spokesman Brian McCarthy.

The significance of DFS as a topic for the courts and presidential candidates

One way of measuring the significance of a sports controversy is considering how far it pervades other areas of society, such as the legal industry. Over the last two months, prosecutors in New York and Florida have launched criminal investigations into DFS, several states have reconsidered their regulatory stance toward the industry by drafting or introducing legislation, and plaintiffs have filed more than two dozen consumer class actions including. Most recently, Washington Redskins wide receiver Pierre Garcon filed a right of publicity lawsuit over FanDuel’s use of his name, image and likeness.

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​DFS has even entered the world of presidential politics, with candidates being asked about their views. During the Oct. 28 Republican Presidential Debate, former Florida governor Jeb Bush and New Jersey governor Chris Christie sparred over the best way to regulate DFS. Bush compared DFS to day trading and recommended that regulation of DFS should be explored at least at the state level, whereas Christie insisted that the government shouldn't be in the business regulating fantasy sports.

While fantasy sports are far from the most important topic in the 2016 presidential election, the fact that presidential candidates are being asked about regulation should concern DFS companies and the businesses that have partnered with them. DFS appears to be legal under federal law based on an exemption made in the Unlawful Internet Gambling Enforcement Act (UIGEA) of 2006.

No court has ruled on the question of whether UIGEA’s exemption covers DFS games in their current form. Should Congress hold hearings on DFS regulations and eventually pass new legislation related to sports gaming, changes to federal law could significantly impact DFS companies. Potential changes include the legalization of sports betting in all 50 states, definitions of DFS that either equate it to or differentiate it from traditional wagering, and new restrictions on DFS games. Any bill passed by both houses of Congress would, of course, be presented to the President for his or her consideration. This is why questions about DFS during presidential debates are so important to DFS companies and their partners: when whichever one of these candidates is elected president in 2016, he or she could be asked to sign legislation that would radically alter the sports betting and daily fantasy sports industries.

The increasing amount of regulatory steps taken by individual states

While changing federal law on sports gaming would be challenging—especially with a politically divided Congress in an election year—individual states could experience more expedient success altering the DFS landscape in their respective jurisdictions. With lobbying efforts focused on the states, the Big 2 likely feel that their best chance for success is at the state level, where the Fantasy Sports Trade Association has lobbied throughout 2015.

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Some states, like Kansas, have already acted legislatively. A bill passed in May and signed by Gov. Sam Brownback actively legalized DFS in the state, after the state’s gaming commission had declared fantasy sports an illegal lottery.

Most states are still in the fact-finding stages, however. The gaming commission of the state of Massachusetts, the home of the Boston-based DraftKings, held one of the first open meetings by any state examining the daily fantasy sports. Members acknowledged the need for the industry to be regulated in part, and the commission is expected to provide recommendations to key policy makers in the coming months. The state’s lottery is now looking into offering fantasy sports games.

Pennsylvania and Washington state both have formal congressional committee hearings scheduled this week, while the New Jersey State Assembly's Tourism, Gaming and the Arts Committee held a similar hearing on Monday. While committee chairman Rep. Ralph R. Caputo said the group came to no definite conclusions, a general consensus from members appeared to be that DFS should be treated similarly to gambling.

Earlier this month a draft of a bill by New Jersey state Sen. Jim Whelan circulated that would define DFS games as skill-based and different from traditional gambling,  according to John Brennan of New Jersey newspaper The Bergen Record. This would likely maintain the legality of DFS for New Jersey residents. It would also define DFS as an intrastate activity and raise the minimum age requirement to 21. New Jersey is the country's No. 2 gambling state behind Nevada, however, and has a robust gaming enforcement division. If introduced and passed, Sen. Whalen’s legislation would open up DFS to the scrutiny of this enforcement division.

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Illinois became the first state to introduce legislation in the wake of the Sept. 27 insider trading scandal. The bill, which many view as friendly to the industry, would not license or tax DFS operators in the state. It would, however, establish safeguards like age verification and the prevention of athletes from participating in games. It would also compel operators to disclose the number of entries a player may make in a single contest.

Whether or not these states are successful at regulating the industry how they see fit, there is support among several states for a state-based solution to regulating DFS, as opposed to a federal one. Arizona attorney general Mark Brnovich put it bluntly in a letter to U.S. Sen. Jeff Flake, writing, “We know that not every problem warrants a federal solution. Internet gambling is a matter for the states.” And in an unprecedented move, FanDuel CEO Nigel Eccles released a letter to DFS players on Oct. 29 indicating his support for industry regulation beyond that of the newly established Fantasy Sports Control Agency. Eccles advocated for a number of “smart, but tough proposals in various state legislatures,” he believes could serve as a basis for sensible regulation.

Currently, all but five states allow some form of daily fantasy gaming. A sixth, Nevada, became one of the first to explicitly equate DFS and gambling, and has forced DFS operators to cease operations there until they obtain a gambling license. It’s unclear if any major DFS operators will attempt to acquire such a license. Such a move could be interpreted as a concession by fantasy companies that they in fact provide a gambling service, a distinction they've taken great pains to avoid. 

Michael McCann is a writer and legal analyst at Sports Illustrated. He is also a Massachusetts attorney and the founding director of the Sports and Entertainment Law Institute at the University of New Hampshire School of Law. This fall he is teaching an undergraduate course at UNH titled “Deflategate.” McCann is also the distinguished visiting Hall of Fame Professor of Law at Mississippi College School of Law and he teaches “Intellectual Property Law in Sports” in the Oregon Law Sports Law Institute. As a disclosure, one of McCann’s family members is represented in a personal matter by an attorney who represents a plaintiff in John Weaver v. FanDuel and DraftKings.

Will Green is a contributing writer and video producer at Sports Illustrated. He covers college basketball, college football, daily fantasy sports and wagering.

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