Why Playing Fantasy Sports Is Legal (For The Most Part)

October 7, 2013  |  By Kevin Vela

You’ve certainly seen or heard about them, and you may even participate in a few yourself. With tens of millions of participants per season, Fantasy Sports Leagues are a billion-dollar industry that are slowly becoming an American obsession.

Most recently, new websites have popped up allowing users to wager thousands of dollars on the individual performances of professional athletes over a season and, in some cases, over a single game. These websites make up a booming industry that has attracted significant interest from participants in fantasy sports and investors seeking to share in the profits that can be made. Overshadowing all of this activity, however, is one important question: How is wagering on fantasy sports legal?

State Level Regulation

The laws governing wagering on fantasy sports vary from state to state, but most states agree that fantasy sports are considered a game of skill and any wagering in fantasy sports is therefore legal. The issue, then, is determining what exactly constitutes a game of skill or its opposite, a game of chance. The process of determining whether or not something is a game of skill varies from state to state so we’ll use Texas as an example.

The Texas Penal Code (the “TPC”) specifically exempts from its provisions any “bona fide contest for the determination of skill . . .” Unfortunately; there is no further discussion of what is necessary to meet the skill requirement.  Moreover, while Texas courts have used the phrase “game of chance” repeatedly, none have defined it. With all of this lack of information, we are forced to rely on the ordinary or common meaning of game of chance, which means any game whose outcome is predominantly determined by chance rather than skill. Most states follow this same approach with some variation. Some states, however, like Arizona, Iowa, Louisiana, and Montana remain very unclear on the game of chance/game of skill framework.

There’s a lot of skill that goes into choosing the perfect fantasy team. To be successful in a fantasy sports league you’ll need the business savvy of a general manager, the knowledge and expertise of a pro scout, and the strategy of a head coach. As the stakes are raised with increased wagers, more work goes into scouting the opposition, considering the best match ups, and reviewing season statistics to project future performances.  All of the work that is required to successfully compete in a fantasy sports league means that, in most states, fantasy sports are considered a game of skill and any wagering involved is legal.

Federal Level Regulation

In 2006, Congress passed the Unlawful Internet Gambling Enforcement Act (the “UIGEA”), which deals with gambling over the internet. The law specifically exempts fantasy sports, providing:

Participation in any fantasy or simulation sports game or educational game of contest in which (if the game or contest involves a team or teams) no fantasy or simulation team is based on the current membership of an actual team that is a member of an amateur or professional sports organization and meets the following conditions.

• All prizes and awards offered to winning participants are established and made known to the participants in advance of the game or contest and their value is not determined by the number of participants or the amount of any fees paid by participants.
• All winning outcomes reflect the relative knowledge and skill of the participants and are determined predominantly by accumulated statistical results of the performance of individuals (athletes in the case of sports events) in multiple real-world sporting or other events.
• No winning outcome is based: a) on the score, point spread, or any performance or performances of any single real world team or any combination of such teams; or b) solely on any single performance of an individual athlete in any single real-world sporting or other event.

This specific exemption for fantasy sports has directly contributed to the exponential growth of the industry over the past few years.

A New Uncertainty

When Congress initially passed the UIGEA, it created an exemption for fantasy sports with an understanding that the fantasy league would be based on season-long performances. In recent years, however, new fantasy leagues, such as those hosted by FanDuel and StarStreet, have popped up with contests lasting as short as one day. According to a recent article in the New York Times, there is some indication that pro sports leagues are growing impatient with these new and condensed fantasy sports leagues. Additionally, some parties have begun challenging the legality of these day-long leagues in federal court. Industry experts are increasingly troubled by the similarities between day-long fantasy leagues and traditional games of chance, as on a given day an injury, a hailstorm or a ball bouncing strangely could affect a result. Executives at sites like FanDuel and StarStreet, however, continue to confidently defend the legality of their websites, noting that better players consistently beat weaker players over time.

What’s It All Mean?

As it stands, betting on fantasy sports, even on fantasy sports leagues that last only one day, is (mostly) legal. The future of the fantasy sports gambling industry is not entirely certain, however, and we here at Vela Wood will continue to actively monitor the progression and growth of this industry and the laws affecting it.

About the Author(s)

Kevin Vela

Kevin is the managing partner at Vela Wood. He focuses his practice in the areas of venture financing, M&A, fund representation, and gaming law.

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