Three DFS Industry Regulation Models States are Considering

The daily fantasy sports industry is currently facing a myriad of legislative battles in statehouses across the country. There are the handful of frontline states where along with legislative efforts the states’ Attorneys General have weighed in on the subject: New York, Massachusetts, Illinois, Florida, and most recently Texas, and while these states get the most publicity, it’s important to note that DFS bills are under consideration in about 40% of the country’s statehouses.

Currently 19 states are considering daily fantasy sports legislation. For the most part, these proposed legislative actions are in favor of legalization, but a lot of questions remain unanswered when it comes to how these states would actually go about legalizing and regulating DFS.

In this column I’ll put the current state level efforts to legislate DFS into one of three general categories, and attempt to explain the differences with each approach, as well as the hurdles these different approaches might create.

The three categories are:

  1. States seeking to prohibit DFS
  2. States seeking to classify DFS as a skill game
  3. States seeking to legalize DFS but regulate it like gambling

States with prohibition in mind

There are two ways DFS can become illegal in a state:

  1. Either an existing bill already exists, or the legislature passes a bill that explicitly makes DFS illegal, such as is the case in Washington State, Louisiana, and few other states.
  2. Or, as was the case in Nevada and New York, the attorney general could issue a decree that DFS is illegal under existing state law.

There’s not much the DFS industry can do if a state makes any game, including DFS, illegal, and they simply have to take their medicine and not accept customers in these locales – which they have by and large done. Given the current attitudes towards DFS, it seems unlikely outside of a couple states that a DFS bill would be passed expressly prohibiting the game.

On the other hand, if the state attorney general steps in, and interprets a somewhat ambiguous state law as making DFS illegal, DFS companies could accept it (as they did in Nevada) or challenge it (as they are in New York).

This is an extremely messy way to deal with DFS. Fortunately, because of the way state laws are worded, it seems fairly limited to the 12 states that use the use the material element of chance test to determine what is and isn’t gambling. New York is one of the states that uses the material element test.

Since state gambling laws can be rather unique, there are other states where DFS could face legal challenges, such as in California due to their pool-selling laws, or in Florida where state law seems to make DFS, and virtually any wager on virtually anything, including contests of skill, illegal:

Unlawful to bet on result of trial or contest of skill, etc.—Whoever stakes, bets or wagers any money or other thing of value upon the result of any trial or contest of skill, speed or power or endurance of human or beast, or whoever receives in any manner whatsoever any money or other thing of value staked, bet or wagered, or offered for the purpose of being staked, bet or wagered, by or for any other person upon any such result, or whoever knowingly becomes the custodian or depositary of any money or other thing of value so staked, bet, or wagered upon any such result, or whoever aids, or assists, or abets in any manner in any of such acts all of which are hereby forbidden, shall be guilty of a misdemeanor of the second degree, punishable as provided in s. 775.082 or s. 775.083.

States trying to classify DFS as a skill game

The second category of legislative efforts are states looking to carveout DFS from existing gambling laws and classify it as a game of skill. Under this approach the state would have very little oversight of the industry and would be unlikely to license DFS companies.

This is the most industry-friendly approach, and although it would be a relatively easy fix, it’s a tough sell to legislators as it’s unlikely to bring in any new revenue to the state as it’s unlikely to tax gross revenue or call for substantial licensing fees.

States trying to classify DFS as gambling

The final method being considered in some states, most notably in California, is to take a heavy-handed approach to regulating daily fantasy sports companies. Under this model the state would more or less classify daily fantasy sports as a form of gambling, or something very close to it, and set up a strict licensing, regulatory, and taxation structure.

This approach opens the proverbial can of worms. As Daniel Wallach has pointed out on many occasions, state oversight by gaming regulators could lead to potential PASPA challenges, particularly if the state simultaneously classifies DFS as gambling.

Similar Posts