Poker is gambling. Everyone knows that. But if poker is a game of "chance," then why are some people so much better at it than others? For daily fantasy sports sites, that fine line between games of skill and games of chance could determine whether they stay in business.
Over the past week, regulators and law enforcement have taken significant interest in the heavily advertised and nominally regulated industry. The Justice Department and the FBI are investigating whether daily fantasy sports sites violate federal law. Nevada regulators decided that such sites constitute gambling and told them to cease operation until they secured proper licenses. In Florida, prosecutors convened a grand jury to investigate their legality. Then there’s the New York Attorney General’s inquiry, not to mention a class-action suit filed in federal court against the two biggest operators, DraftKings and FanDuel.
Daily fantasy sports sites DraftKings and FanDuel, as we’ve written, have always operated in murky territory. But they've been exposed to harsh light following revelations that a DraftKings employee inadvertently released company data on player lineups before the third week of NFL games. That same week, he won $350,000 at FanDuel, raising suspicions that he used insider knowledge to cash in.
Daily fantasy sites operate under an exemption to the Unlawful Internet Gambling Enforcement Act of 2006. The law effectively bans online gambling in the US by prohibiting banks and credit card companies from transferring money to online gambling sites. Congress made an exemption for fantasy sports sites, which lawmakers deemed a "game of skill and not chance." The thing is, most games involve skill and chance. There’s no catch-all test to quantify how much skill and how much chance are involved in a particular game—and no legal standard that identifies a threshold at which gaming becomes gambling.
The actual language of the law singles out fantasy sports and says all winning outcomes in such games “reflect the relative knowledge and skill of the participants” and are “determined predominantly by accumulated statistical results of the performance of [athletes] in multiple real-world sporting.”
This is the carve-out often bandied about as the reason why the fantasy sports industry has so far escaped regulation. When lawmakers passed the in 2006, fantasy sports were predominantly played in small groups among friends. That changed radically about a year later, when daily fantasy sports emerged. The game migrated online, where anyone could join in. Players could create multiple lineups and play daily. Some players use custom-built models and computer software to crunch data and improve their odds.
What’s so confusing about this “game of skill and not chance” line is you can argue that many games of skill also involve a degree of chance, says Ed Miller, a poker strategy author who regularly plays daily fantasy sports. You can use dice, a coin flip, playing cards, and more to add an element of chance to any game. That’s true of chess, poker, bridge, mahjong, and many others. "I would say most games have some kind of randomizing factor, and I would say in daily fantasy sports, the randomizing factor is the players' sports performance," Miller says.
And Chris Grove, an industry expert and editor of legalsportsreport.com, says there's no universal test for quantifying the distribution of skill and chance in outcomes of a given game. "It's fundamentally a matter of opinion," Grove says. "It's one of the single most frustrating points of gambling law."
FanDuel has explicitly cited the law's exemption in arguing that its activities are legal. The Wall Street Journal reported that the company has “said daily fantasy is a game of skill, not luck, and is therefore exempt under the 2006 law.” In the same story, DraftKings more loosely said it “strongly disagree(s) with any notion that our company has engaged in any illegal activities.”
DraftKings and FanDuel did not respond to WIRED requests to comment on the record.
The problem, says Daniel Wallach, a sports and gaming attorney with Becker & Poliakoff, is that the 2006 federal law doesn’t supplant state law, as the law itself spells out.
“UIGEA is not this broad, blanket exemption that provides legal clearance for daily fantasy sports to operate in any state," Wallach says. "That’s a determination that has to be made on a state by state basis."
And different states employ different tests to determine whether games are legal. There’s not some simple mathematical threshold between “chance” and “skill” that can help make a determination.
States apply any of four main gambling tests to varying degrees to determine whether games are legal. Most states follow the “predominant purpose test": If skill predominates in a game, it should be considered legal, while if chance predominates, a game should be considered illegal. Then there’s the "any chance test": If it is determined that there is any modicum of chance involved in a game, it would be considered illegal. The "material element test" says that if chance has more than an incidental effect on a game, that game should be considered illegal. The fourth category, the "gambling instinct test," simply holds that if an activity "appeals to gambling instinct," regardless of whether skill or chance is dominant, it should be illegal.
But daily fantasy sports won't likely be subjected to any of those tests in a state, Wallach says, unless that state feels pressure to apply such a standard—pressure that usually comes from legal cases. “We need a controversy,” Wallach says. “We need a court case, either a prosecution under the state’s gambling laws, or a civil lawsuit, or some live controversy, that tees up the issue for a court. We hadn’t reached that point in the evolution of our law because this technology and the industry was so new.”
That pressure is building. In April, the attorney general of Kansas determined, for all intents, that daily fantasy sports are legal. But Nevada's decision to require such sites to have gambling licenses is likely to be much more momentous, as one industry website noted. As the heart of the country's gambling industry, Nevada could be a bellwether for the future of daily fantasy sports.
It's not only the participants who have a lot riding on that outcome. Investors have bet much, much more that daily fantasy sites are here to stay. Financiers have poured hundreds of millions of dollars combined into DraftKings and FanDuel---almost $800 million in total. Google Capital, Time Warner Investments, NBC Sports Ventures and Comcast Ventures have invested in FanDuel, and the NBA has an equity stake. It has partnered with 16 NFL teams and 14 NBA teams. Major League Baseball, meanwhile, invested an undisclosed sum in DraftKings, and the startup also has partnerships with twelve NFL teams, eight NBA teams, seven NHL teams, and twenty-five MLB teams.
All of which explains two sites' massive growth—and their massive marketing campaigns. According to ad tracker iSpot.tv, taken together, DraftKings and FanDuel aired an ad on national television every ninety seconds for three weeks straight. And together they spent about $200 million on television ads in 2015. Ironically, the marketing that has raised so much awareness about these sites has also likely led to more scrutiny.
Not that this is a bad thing. "The scrutiny will ultimately lead to regulation," says Wallach, "which leads to stronger safeguards and better consumer protection."
If he’s right, that means there's still a way of bringing fantasy sports down to reality---without killing the fun.
