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Nevada's gambling license ultimatum creates high stakes for daily fantasy sports sites

In this Sept. 29, 2015 file photo, Jason Robins, center, CEO of DraftKings website, speaks on a panel at the Global Gaming Expo in Las Vegas. (AP Photo/John Locher, File)

WASHINGTON (SBG) Nevada's decision to require daily fantasy sports sites to obtain gambling licenses was described as "perhaps the most significant setback yet for a booming, unregulated industry," by The New York Times.

The lack of regulations mentioned by The New York Times is the result of a loophole in the Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA).

The Act, which was designed to prohibit the acceptance of any payment instrument for unlawful internet gambling was called a "spectacular failure" by The New York Times.

"By allowing entrepreneurs to exploit a legal, if suspect, exemption, the law unwittingly opened the way for the now-ubiquitous fantasy sports games that increasingly resemble gambling," The Times wrote.

UIGEA included a "carve out for fantasy sports," which said fantasy sports sites are not illegal, explained Professor Joseph Kelly, who teaches Business Law at SUNY College Buffalo and serves as co-editor of Gaming Law Review and Economics.

"UIGEA specifically exempts fantasy sports wagering from federal prohibition as long as certain requirements are met," Kelly explained in a speech he made to the American Bar Association.

"DraftKings and FanDuel maintain their contests are legal in most states because of an exemption in the Unlawful Internet Gambling Enforcement Act of 2006, which distinguishes between games of chance and fantasy sports that 'reflect the relative knowledge and skill of the participants,'" Boston Globe's Callum Borchers and Shelley Murphy explained.

"Gambling generally requires the presence of three elements: prize, consideration, and chance," Kelly described.

For example Kelly said "we all agree chess is almost entirely" a game of skill, so "wagering isn't gambling." Poker however, has been ruled to be more contingent upon chance opposed to skill, which makes wagering on it gambling, a classification Kelly disputes.

Kelly described that lawmakers were thinking of fantasy sports "on a seasonal basis," when UIGEA was conceived.

"Fantasy sports sites were a low-key competition in which bettors assembled their own teams, then watched how their players performed over an entire season," The Times explained.

"Then various entities began to push the envelope closer to monthly, then weekly games, then daily," Kelly said.

"There's a big difference between fantasy sports and daily fantasy sports," Kelly explained because "daily fantasy sports is really close to straight sports betting."

Nevada's demanding Fantasy Sports sites to obtain gambling licenses to operate in the state forces them to define their practices as gambling, or else.

"DraftKings and FanDuel now confront what would appear to be a no-win proposition: Acknowledge what the casino industry has said all along, that their system of paid entries and cash prizes is, in fact, gambling, or get out of Nevada," Borchers and Murphy wrote.

"The two sites released separate statements Thursday night in which they said they disagreed with the gaming commission's decision but they would temporarily suspend operations in Nevada." In an attempt to sway opinion, the organizations launched a petition Friday, the Associated Press reported.

Even though the companies are leaving, Nevada's classifying their sites' activities as gambling may impact DraftKing and FanDuel outside of the state.

"What Nevada deems as gambling matters a lot to gaming commissions through the U.S.," explained Marc Dunbar, a partner in the Jones Walker Law Firm's Government Relations Practice Group.

Dunbar, whose practice focuses on gaming and governmental law, said that there are many states with gaming commissions who "have essentially adopted in total Nevada's gambling regulations."

"When Nevada comes down and says there's sufficient chance," in the competitions on fantasy sports sites to classify them as gambling, most of the states with similar regulatory structures will follow suit, Dunbar said.

"It has the potential to have this massive echo effect," Dunbar warned.

Describing Nevada as the "bastion of legal gambling," The New York Times explained that five states already prohibit the operation of fantasy sports sites.

FanDuel and DraftKings, Kelly explained, exclude, "residents of Arizona, Iowa, Louisiana, Montana and Washington. Arizona law, for example, penalizes the operator with a Class 5 felony. Montana law is so complicated that all operators avoid the state."

By contrast, Maryland and Kansas have passed legislation saying that fantasy sports are "not illegal gambling."

Dunbar explained that "every state has their own threshold," when it comes to what is a chance based or skill based competition.

"Some say any level of chance makes it chance based, some will say any level of skill makes it a skill based," Dunbar described.

"It runs the spectrum," Dunbar said.

Dunbar noted that certain states like Florida don't care about what the level of skill versus chance is.

"We have statutes that prohibit wagering on games of skill and games of chance, we cover the field," Dunbar explained.

That, Dunbar suggested, is where companies like DraftKings and FanDuel "messed up."

"They shouldn't have been so aggressive, in Florida."

"They went out and said this is a game of skill, you can tell us that it is 51% skill and you're still committing a gambling crime," Dunbar explained.

Speaking specifically about FanDuel Dunbar explained how the company had been aggressive in Florida with extensive advertising and partnerships with major sports teams in the state. Dunbar said the approach may not be more aggressive than elsewhere "but they actually went so far as to open an office here," which he said "established a very clear nexus."

Sourcing Florida Attorney Daniel Wallach, numerous media outlets have reported that "a federal grand jury has been convened in Florida to investigate whether daily fantasy sports operators have violated criminal law."

"The grand jury, as reportedly directed by the U.S. Attorney's Office in Tampa, is supposedly looking into whether DFS operators have violated the Illegal Gambling Business Act of 1970 ("IGBA")," Sports Illustrated reported.

Noting that he had no independent confirmation of the aforementioned reports, Dunbar said that if in fact a grand jury had been compiled "to look into the activities of fan duel in Florida and are evaluating an illegal gaming business act , I know what they're going to do and they're going to go after everything."

That includes the proceeds, the people involved, the intellectual property and many other elements of the daily fantasy sports industry.

"They're going to bring the same action as they did against online poker companies," Dunbar said.

"You need only prove the Florida operation to say everything is an instrument of the crime and you basically get everything. I've gone through this with these folks recently I have a pretty good idea of what they're going to seek," Dunbar explained.

"You put all that together and it has the potential to just be the death sentence," Dunbar said.

Beyond the threat of a grand jury and being kicked out of Nevada, the daily fantasy sports industry is also facing criticism for possible insider trading.

As ABC news reported, an employee of DraftKings admitted to accidentally releasing NFL data before the start of the third week of the NFL. "That same week, the employee won $350,000 at rival fantasy sports website FanDuel."

"Social media users accused the employee of 'insider trading' and both companies announced on Monday night that they were temporarily restricting employees from participating in fantasy sports for money," according to ABC.

"In that regulatory vacuum, fantasy sports now faces a federal investigation, and a ban in Nevada, amid suspicions that employees at leading sites may have used inside information to gain an unfair players' advantage," The New York Times described.

Kelly said that if states chose to regulate fantasy sports sites it could be a ""win-win situation for everybody."

States would get needed revenue, daily fantasy sports would be regulated and "the players can be assured there's no use of insider information," he said.

"I think there's going to be a trend toward regulation and taxation," Kelly speculated. Kelly said that other states may pass legislation similar to Maryland and Kansas, but added it was doubtful "because of the use of insider information."

Noting the huge amount of money being played in daily fantasy sports Kelly noted "if we could regulate and tax this it would go a long way to ameliorate" some of the financial problems in certain states. "It would raise a lot of money."

Dunbar said that the accusations of insider trading hurts the chances of daily fantasy sports sites becoming regulated, but noted they also offer a lesson. "It hurts a lot but it will also guide regulators," if a state like Nevada ultimately decides it want to regulate such sites.

"If Nevada views it as something the public wants they'll look at incidents like that and they will use the to guide them in regulations."

Even if fantasy sports sites are able to continue in some states, Dunbar warned "the biggest problem the industry faces is that much like poker it lives and dies based on an inter-state waging pool."

As Dunbar described, online poker is so small "because the population base is so small, people are in the space but it's not viable in an enterprise as DraftKings."

"If Nevada regulates it its only in the State of Nevada, you run into the same problem that online poker faced, when they cut it off from being interstate it was done."

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