Fantasy sports leagues that charge entry fees and award cash prizes are a largely unregulated industry. Internet sites that sponsor these leagues, however, are coming under scrutiny: according to the Wall Street Journal, the Department of Justice has announced it may investigate these sites’ operations, and sites offering one-day fantasy-league contests in Nevada must now obtain a gaming license.
The obvious question is what types of fantasy sports contests are legal when they involve the exchange of money, given the many laws against gambling. The question is important not only for the Internet sites under investigation, but for the people who participate in them and for those who would like to operate their own competing league.
This post summarizes the federal and California law governing contests in the fantasy sports world. That law is a patchwork of statutes and court decisions, and requires a separate analysis of each contest. There are certain hallmarks of legal games, however, that can guide the structuring of fantasy sports contests so that they comply with California and federal law.
Federal Gambling Law and Fantasy Sports Leagues
Two federal statutes are of immediate importance in determining whether a fantasy sports league can award prizes to the winners of an online contest. These statutes are the Professional and Amateur Sports Protection Act (“PASPA”), and the Unlawful Internet Gambling Enforcement Act (“UIGEA”). Because both statutes rely on state definitions of what constitutes unlawful gambling, however, neither statute provides definitive guidance on whether a particular fantasy league contest is legal.
PASPA prohibits any “lottery, sweepstakes, or other betting, gambling, or wagering scheme” that is based on (1) one or more actual professional or amateur games; or (2) “one or more performances of such athletes in such games.” 28 U.S.C. § 3702(2). Fantasy sports leagues obviously rely on the results of the games or the performances of the participating athletes. To escape liability under PASPA, then, a fantasy sports league that awards prizes must do so without conducting a “lottery,” a “sweepstakes,” or a “betting, gambling, or wagering scheme.”
For better or for worse, PASPA does not define these important terms. Instead, PASPA relies on state law to provide these definitions. This is in fact true for most federal statutes that regulate gambling. See, e.g., United States v. DiCristina (2d Cir. 2013) 726 F.3d 292 (Federal statue known as IGBA relies on state-law definitions of gambling activities); Schwartz v. The Upper Deck Co. (S.D.Cal. 1997) (state-law definitions of gambling are used in federal RICO statute). A review of the law in each state is therefore required to determine whether a fantasy league is generally lawful under PASPA. Of course, the review is limited to California law if the league operates only in California and its participants are all California residents.
At the core, UIGEA prohibits the transfer of funds in connection with “unlawful Internet gambling.” 31 U.S.C. § 5363. The prohibited conduct is the placing of a “bet” or “wager” with the help of the Internet, when that bet or wager is illegal where “initiated, received, or otherwise made.” Id. § 5362(10). Since state law determines if a particular form of gambling is illegal, the application of UIGEA turns on what the states say is illegal or not. More particularly, if a particular bet is legal in the relevant locations under state law, it is legal under UIGEA.
Many fantasy sports leagues point to a critical exception in UIGEA regarding the definition of a “bet” or “wager.” That definition specifically excludes “participation in any fantasy or simulation sports game or educational game or contest” if certain conditions are met. Id. § 5362(1)(e)(ix). If the game or contest involves one or more teams, for example, then it cannot be based on any team’s current membership. Id. All winning outcomes must “reflect the relative knowledge and skill of the participants,” and must be “determined predominantly by accumulated statistical results of the performance of individuals” in real world sports or other events. Id. Finally, (1) all prizes must be established and announced in advance; (2) the value of a prize may not be determined by the number of participants or the amount of fees paid to participate; (3) a winning outcome cannot be based on a score, a point spread, or the performance of any real world team or group of teams; and (4) a winning outcome cannot be based on the performance of a single individual in any single real-world event. Id.
This exception, however, does not necessarily make it legal for a fantasy sports league to charge entry fees and award prizes. It simply means that UIGEA does not make a federal crime out of using the Internet in connection with certain types of contests. As a result, the contest could theoretically escape liability under UIGEA, but still be unlawful under state law and PASPA.
Fantasy Sports Leagues under California Law
California currently has no statute specifically governing fantasy sports leagues. The applicable statutes are instead those that regulate gambling in general. California Penal Code Section 337a, for example, prohibits a variety of acts in connection with the betting on contests between human beings. It also prohibits a variety of acts in connection with betting on results that are based on chance. In addition, Penal Code Section 337j prohibits the conduct of “games of chance” without an appropriate license. The question is therefore what types of fantasy sports leagues, if any, run afoul of these more general statutes, and whether they are games of chance.
The California courts have generally ruled that a game is legal if skill is the predominant factor in determining a winning outcome, despite the fact that chance can also play a factor. Under this test, the California courts have held that bridge tournaments do not constitute gambling even if they involve entry fees and prizes, because bridge is predominantly a game of skill. In Re Allen (1962) 59 Cal.2d 5. They have come to the same conclusion about pinball. Cossack v. City of Los Angeles (1974) 11 Cal.3d 726. Conversely, contests based on the winners of horse races are illegal. Finster v. Keller (1971) 18 Cal.App.3d 836. This is true even though decisions as to which horse to bet on can be based on skill and extensive knowledge about the horses, jockeys, weather conditions, and other matters. Id. Lowball poker is lawful as a game of skill. Bell Gardens Bicycle Club v. Department of Justice (1995) 36 Cal.App.4th 717. The same is not true of certain bonuses attached to a lowball poker hand, where the bonus depends solely on the cards dealt. Id.
There are no court rulings in California as to whether a specific fantasy league contest is legal. Analogizing these contests to other sorts of games, however, can be useful. The games that have survived judicial scrutiny all involve a series of tactical decisions or displays of skill throughout the play. These decisions can all be informed by knowing certain probabilities and other facts. Players in bridge must bid for a contract, for example, and make decisions as to the order in which cards will be played. Poker players must decide when to bet or fold throughout the hand. Pinball players must obviously be skilled with the flippers. By analogy, a fantasy sports contest where the participants “draft” athletes so that each athlete is associated with only one contestant, must constantly decide which athletes to “play” at any given time, and have the right to trade players or make other tactical decisions throughout, is more likely to withstand judicial scrutiny.
On the other hand, contests where skill and knowledge only play a role in initial decisions, and players have no ability to influence who wins the contest once those initial decisions are made, are much less likely to withstand scrutiny. It is beyond purview that skill and knowledge come into play in trying to predict which horse that will win a race. Betting on that race, however, is considered gambling because of the role that chance plays in determining the outcome. Finster, supra, 18 Cal.App.3d 836. It thus follows that a league where all of the contestants’ decisions are “front-loaded,” and players must simply sit back with their fingers crossed as the contest plays itself out, are more problematic. Indeed, the Nevada Gaming Commission focused on precisely this type of contest when it issued its decision to require certain leagues to obtain licenses.
Remedies for Violations
California residents should not be optimistic about recovering their losses from the operators of fantasy sports leagues that run illegal games. The California courts have a longstanding policy of not helping either party when unlawful gambling is at the core of the case. See, e.g., Kelly v. First Astri Corp. (1999) 72 Cal.App.4th 462 (refusing to intervene in dispute involving allegations of marked cards). Other possible remedies exist, however. For instance, an illegal game of chance could be considered an unlawful business practice under Business and Professions Code Section 17200. It could also be attacked for failing to comply with California law regarding sweepstakes, as set forth in Business and Professions Code Sections 17539, et seq., since those rules apply to any game involving both skill and chance. Cal. Bus. & Prof. Code § 17539.3(e). It is even conceivable that a private right of action could arise under RICO, since illegal gambling is a predicate act. See 18 U.S.C. § 1961(1).
The world is rapidly changing for fantasy sports leagues that charge entrance fees and award prizes, as those leagues draw the attention of state and federal authorities. At the same time, leagues and the contests they sponsor can be legal under existing law, provided the contests require a high degree of skill for success, and they otherwise comply with the law. Companies running these types of leagues and contests would be well-advised to ensure they know and comply with the applicable general law, even if those laws do not specifically mention fantasy sports leagues by name.