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Within a matter of weeks, the question has shifted from not “if” daily fantasy will be regulated, but “how” it will happen. While the specter of doom might linger in the form of U.S. Attorney Preet Bharara (whose prosecution led to the downfall of online poker in 2011), the more realistic scenario appears to involve a varying form of regulation of companies like DraftKings and FanDuel, while allowing for their survival.
Of course, little has emerged in terms of what the regulation might look like. How would it be done? And, more importantly, what would it mean for the hitherto burgeoning industry of daily fantasy itself?
In a recent interview with BostInno, Mark Hichar, Chair of the Gaming Law Group at Hinckley Allen, explained how sees the future of daily fantasy as it moves into the world of government regulation. Essentially, Boston-based DraftKings stands a decent chance of survival, though its flagship “contest,” the “Millionaire Maker,” could take a potentially fatal hit.
State vs. federal
One of the fundamental questions re: regulation has centered on where it will come from. Will it be a federal matter, or left to the states? Hichar’s answer reflects the usual pattern of how the U.S. government has handled the gaming industry.
“I think this will be handled on a state-by-state basis,” Hichar explained. He offered a glimpse at the possible regulation that has been building for months:
For example, California and Pennsylvania, even before the scandal broke, they had pending and still have pending legislation that would require licensing of the operators. It would require registration of the players in California and would permit only registered players to play against other registered players. California, then, would be segregated off from the rest of the country because everybody would have to be registered. Unless you were registered, you wouldn’t be allowed to play.
The legislation that Hichar is referencing is AB 1437, which would enact in California the Internet Fantasy Sports Game Protection Act. As Hichar explained, it would cordon off California daily fantasy players from the rest of the country. And it would mean that daily fantasy would be taxed by the state.
Pennsylvania’s legislation even has a specific target of 14-percent taxation on daily fantasy.
“The prerogative of the states”
The reason why states will most likely be left to regulate it on their own has to do with gaming precedent. Hichar elaborated:
Usually gaming legislation has been left to the prerogative of the states. There are very few federal statutes that apply to gaming that don’t require a underlying state law violation. So for example, in Tampa, the U.S. Attorney General is believed to have convened the grand jury to look into whether or not fantasy sports violates the Illegal Gambling Business act. It is only violated if there is an underlying state law violation.
And Hichar went into further detail explaining how this relates to the 2006 Unlawful Internet Gaming Enforcement Act, which is regularly cited by companies like DraftKings as the reason for their legality. Again, the theme is that federal laws merely set a basic course, deferring most of the time to local levels:
Similarly the 2006 statute is not breached unless there is an underlying violation of state law, or a different federal law. So it doesn’t itself create a prohibition on anything. And even the fantasy sports exception that has been famously quoted by many operators, it of course doesn’t create an exemption from state laws.
The result is that states that might even border each other have wildly different laws. This is what Hichar sees as being a possibility with daily fantasy:
So you would have situations like we have today, where Nevada has almost any gaming is allowed under license next to Utah where no gaming is allowed under license or not. So when it comes to gaming, the federal government has left it to the states to decide for themselves.
What it could mean in the long term for daily fantasy
However the regulation happens, it’s critical for daily fantasy’s own survival that it does. At a certain point, it will help restore a crucial aspect of the daily fantasy business model.
“It all comes down to perception,” said Hichar. “If people don’t perceive that the games are fairly run, that’s a big problem.”
And if Hichar is correct about states taking the lead, then the outcome will likely be a varying level of regulation, ranging from state to state. That already appears to be happening, given the Nevada ruling and others that are brewing (including Massachusetts’ own route to regulation, where Attorney General Maura Healey has said she won’t act to shut down daily fantasy but will regulate it).
The segregation of daily fantasy players in individual states would probably prevent the pooling of a enough entries to create the “Millionaire” prize.
As the California legislation shows, certain states could regulate to the point where they are cordoned off from the rest of the country.
That would have a potentially dramatic effect on DraftKings, for example. The company’s crown jewel contest, the NFL “Millionaire Maker,” could potentially be a victim of regulation. This would be the case because the segregation of daily fantasy players in individual states would probably prevent the pooling of a enough entries to create the “Millionaire” prize.
In other words, it would profoundly affect the current model of daily fantasy, decentralizing it. So while daily fantasy could be granted survival if states are allowed to regulate it individually, the victory might come with a cost.