Legal Developments

Daily Fantasy Sports See Victory in Alabama and Defeat in North Carolina

It has been a busy couple weeks for the Daily Fantasy Sports (DFS) industry in the United States. The industry logged a big win in Alabama and suffered a minor setback in North Carolina for what was overall a very good week for fantasy players.

First of all, we turn to Alabama. The state has finally completed a major about-turn on its policy regarding DFS contests. There, Governor Kay Ivey signed into law a bill to finally legalize fantasy sports, establish regulations and collect some tax money at the same time. After blocking the state for years, sites such as DraftKings and FanDuel will soon reenter the Alabama market.

Things didn’t go quite as well in North Carolina, where a bill that would have formally legalized daily fantasy was nixed by the House Judiciary Committee. However, this isn’t such a major loss as the major DFS sites already operate in North Carolina. If anything, DFS operators probably saved a little money in licensing fees they would have had to cough up had the law passed.

Alabama’s Rocky Love Affair with DFS

In 2016, the US saw a surge of attorneys general issuing formal opinions on the legality of DFS according to state law. In April of that year, Alabama AG Luther Strange became the ninth of his colleagues to opine that DFS constitutes illegal gambling under state law.

Cease and desist letters were sent to DraftKings and FanDuel shortly thereafter. Both sites left Alabama and haven’t returned since.

“As Attorney General, it is my duty to uphold Alabama law, including the laws against illegal gambling,” Strange wrote at the time. “Daily fantasy sports operators claim that they operate legally under Alabama law. However paid daily fantasy sports contests are in fact illegal gambling under Alabama law.”

He added that the results of paid DFS contests depend to a large degree on chance.

“This is the very definition of gambling under Alabama law,” he concluded.

Over the years, legislatures proposed several bills seeking to legalize the industry to no avail.

The tide began to turn last month when after the Alabama legislature finally passed a bill to legalize, regulate and tax DFS operators.

HB 361, introduced by Rep. Kyle South (R-Fayette), was finally approved by Governor Ivey on May 31st.

Rep. South told Bloomberg that the fees and taxes from legal and regulated DFS could generate around $4 million in annual revenue for the state.

Key points from the new Alabama DFS law:

  • DFS operators such as FanDuel and DraftKings must register with the Office of the AG.
  • Operators must pay a 10.5% tax on entry fees from state residents to play the games.
  • Large operators with more than $10 million in revenue nationwide need to pay an annual registration fee of $85,000 to the AG.
  • Smaller operators need only pay $1,000 annual fees.
  • Players in Alabama need to be at least 19 years old.

Unfair Advantage to DraftKings and FanDuel?

Marc Edelman of Forbes.com penned an article last week pointing out something that had escaped the notice of many: the new law seems to give an unfair head-start of up to 180 days to companies that operated fantasy contests in Alabama prior to the 2016 AG opinion.

Edelman shows that Section 3(a)(1) of the new bill bars companies from offering DFS “without first being registered with the Office of the AG.” He further points out that the applications for registration for companies will be made within 180 days of the Act.

“However, Section 3(a)(2) of the Alabama bill then creates a special carve-out to exempt from this waiting period any DFS companies that operated in Alabama before May 1, 2016,” he wrote. “Such companies include FanDuel and DraftKings.”

“Let’s just hope the Alabama Office of the Attorney General decides to do the morally right thing and roll out DFS applications simultaneously with the bill’s effective date, and not 180 days later,” Edelman concluded.

The Sad State of North Carolina

North Carolina wasn’t so successful with its attempt to regulate the DFS industry last week. House Bill 929 was filed in April and made some early progress but was shot down by the House Judiciary Committee on Wednesday.

The bill would have:

  • Created a state gaming commission to regulate fantasy sports, the State Lottery and professional boxing matches held in North Carolina.
  • Classified DFS as non-gambling.
  • Charged license fees to online gambling sites offering DFS.
  • Required that DFS operators register with the Gaming Commission.
  • Banned under-18 year olds from playing.
  • Required operators to submit annual financial audits.

Last month, the House Commerce Committee cleared HB 929 with sponsor Rep. Harry Warren (R-Rowan) telling members this:

“Fantasy sports has been going on in North Carolina for some time. It will continue to go on with or without this bill. The question before you is, do you want it to continue unregulated, or under the direction of the North Carolina Gaming Commission?”

Despite cautious optimism, the bill was defeated in the House Judiciary Committee by a vote of 12-16 against.

Last minute efforts were made to amend the bill and remove language that defined DFS as not a form of gambling. Instead, lawmakers called on the Gambling Commission to conduct a year-long study to examine the issue.

The bill’s sponsors opposed both amendments. They wanted to definitively exempt DFS from existing gambling laws and refused to wait another year just to study the issue. The bill’s supporters also argued that DFS is already being played in North Carolina, and that all they ask is for the industry to be regulated.

Opposition to HB 929 was heard from several quarters. The North Carolina Family Policy Council said the new bill would “represent a massive expansion of online gambling in this state.”

The Christian Action League compared gambling to sex trafficking. Rev. Mark Creech, speaking for the League said:

“They say, ‘It’s already happening. Therefore we need to regulate and capitalize on the revenue.’ Sex trafficking is already happening. Should we legalize it, too, and capitalize on it?”

“Is not the state taking onto itself the role of a pimp?” asked Creech. “Prohibiting [DFS] won’t stop all violations. That’s understood. Nevertheless, it will hem it in, and its harms will be minimized.”

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