Daily Fantasy Game Errors in Legal Article

An article in Gaming Law Review and Economics tries to describe the future of the daily fantasy format as an "unsure bet."  The title of the article also tries to portray daily fantasy games as exchange wagering.  This article by and large is weak and a poor attempt to challenge the legality of the daily fantasy game format.  The article is biased and references are "stretched and tortured" in order to fit the article's bias.

I'll discuss just a few of the errors.  The first is that the UIGEA created or enabled the daily game format.  The evidence used was that the UIGEA was passed, then the daily format appeared after.  The daily game format could have easily been fielded before the UIGEA and the UIGEA doesn't impact the daily game format.  If the length of time the multiple games that constitute the basis of a fantasy sports game could entail an entire season, post-season or in the daily game format, either a day's games or week's worth of games.  In all of these cases, multiple games are used as a statistical foundation for the fantasy games and it can be argued that the UIGEA took its cues from the reality of how fantasy sports games were played to create their definition and contouring of the safe harbor.

Another error is the so called admission by a fantasy sports operator that by not offering their games in certain states that is an admission of the uncertain legality of the daily fantasy sports format.  Baloney.  There are certain states in the US where there really isn't enough of a distinction between skill games, sweepstakes and gambling such that even the season-long fantasy sports operators avoid offering games in those jurisdictions.  If those states' laws are very strict as to what they define as gambling, no rational fantasy sports operator, daily or season-long, operates there.  To use that as an admission of the uncertainty of the legality of the daily game format is more than a stretch, it is basically dishonest and again shows the bias of the authors.

The last issue I'll discuss is the authors' "fantasy" about the daily games using mark to market accounting.  The daily games operate like the season-long games.  You select some players that have a fictional "salary" constraint such that you craft the fantasy team of players where the total "salary" fits within the constraint.  The actual games are played and the statistics generated by the players the fantasy sports contestant chose are converted to a single numerical metric or score, with the contestant whose team has the highest score wins.  To call that mark to market accounting in order to try and make a case that daily fantasy games are radically different from season-long games in dimensions other than just the timeframe is just wrong.

There is a saying that everyone is entitled to their own opinion but not entitled to their own facts.

For those interested, the article can be found here.

Appeals Court Ruling Against New Jersey Shows Path To Sports Betting

The United States Court of Appeals for the Third Circuit yesterday ruled against New Jersey in its attempt to implement sports betting by a 2-1 decision.  The case is now clear for New Jersey to appeal to the US Supreme Court.  Although a defeat at this stage, New Jersey can actually see very good news.  For the first time, a judge did side with New Jersey and against the US and the sports leagues.  The dissenting judge put forward a very well reasoned dissent that picked apart the majority opinion and showed in detail how PASPA was unconstitutional.

New Jersey does have the option of asking for the full Third Circuit to hear the case.  The information I received is that it doesn't do much for New Jersey to do that.  The first thing is that the full court could side with the majority, which doesn't help.  The second thing is that the loser is going to go to the US Supreme Court anyway, so why not go there now and save time and money?  That appears to be the path New Jersey will take.

The opponents of sports betting will take this as a great victory - not so fast.  From the majority opinion, this sentiment I found interesting:

We are cognizant that certain questions related to this case—whether gambling on sporting events is harmful to the games’ integrity and whether states should be permitted to license and profit from the activity—engender strong views. But we are not asked to judge the wisdom of PASPA or of New Jersey’s law, or of the desirability of the activities they seek to regulate. We speak only to the legality of these measures as a matter of constitutional law. Although this “case is made difficult by [Appellants’] strong arguments” in support of New Jersey’s law as a policy matter, see Gonzales v. Raich, 545 U.S. 1, 9 (2005), our duty is to “say what the law is,” Marbury v. Madison, 1 Cranch 137, 177 (1803). “If two laws conflict with each other, the courts must decide on the operation of each.” Id. New Jersey’s sports wagering law conflicts with PASPA and, under our Constitution, must yield. We will affirm the District Court’s judgment.

So they pretty much put blinders on and crafted an affirming opinion based on a subset of the issues.  The court also just used the "rational basis" test and took only a cursory look at PASPA to find anything to say that PASPA was a regulation of interstate commerce, as opposed to Congress using a state as a puppet, which isn't allowed.  In other words, if Congress wanted to outlaw the sale of beef jerky, Congress can do that directly, but they cannot tell the states to pass laws to prohibit beef jerky or keep them from passing laws allowing beef jerky, while declining to do so themselves.  In the case of PASPA, they allow some states to have sports betting, but not others, which is even more strange.  They later in the opinion stated a very odd way of how a state could comply with PASPA:

Thus, under PASPA, on the one hand, a state may repeal its sports wagering ban, a move that will result in the expenditure of no resources or effort by any official. On the other hand, a state may choose to keep a complete ban on sports gambling, but it is left up to each state to decide how much of a law enforcement priority it wants to make of sports gambling, or what the exact contours of the prohibition will be.

We agree that these are not easy choices. And it is perhaps true (although there is no textual or other support for the idea) that Congress may have suspected that most states would choose to keep an actual prohibition on sports gambling on the books, rather than permit that activity to go on unregulated. But the fact that Congress gave the states a hard or tempting choice does not mean that they were given no choice at all, or that the choices are otherwise unconstitutional. See United States v. Martinez-Salazar, 528 U.S. 304, 315 (2000) (“A hard choice is not the same as no choice.”); see also F.E.R.C., 456 U.S. at 766 (upholding a choice between expending state resources to consider federal standards or abandoning field to federal regulation).

What does this mean?  The court is saying that New Jersey does not run afoul of PASPA if they ban sports betting or they totally deregulate sports betting.  So, in theory, New Jersey could simply allow sports betting with no regulation or oversight whatsoever and the US Government, sports leagues and NCAA couldn't do a thing about it.  That logic is insane and was properly called out in the dissenting opinion.

The opening of the dissent is well written and sums up what I believe the essence of New Jersey's appeal to the US Supreme Court will be:

I agree with my colleagues that the Leagues have standing to challenge New Jersey’s Sports Wagering Law, N.J. Stat. Ann. § 5:12A-2, and that the Professional and Amateur Sports Protection Act (“PASPA”), 28 U.S.C. § 3702, does not violate the principle of “equal sovereignty.” I therefore join parts III and IV.C of the majority’s decision in full. I also agree that, ordinarily, Congress has the authority to regulate gambling pursuant to the Commerce Clause, and thus I join part IV.A of the majority opinion as well. Yet, PASPA is no ordinary federal statute that directly regulates interstate commerce or activities substantially affecting such commerce. Instead, PASPA prohibits states from authorizing sports gambling and thereby directs how states must treat such activity. Indeed, according to my colleagues, PASPA essentially gives the states the choice of allowing totally unregulated betting on sporting events or prohibiting all such gambling. Because this congressional directive violates the principles of federalism as articulated by the Supreme Court in United States v. New York, 505 U.S. 142 (1992), and Printz v. United States, 521 U.S. 898 (1997), I respectfully dissent from that part of the majority’s opinion that upholds PASPA as a constitutional exercise of congressional authority.

This case isn't over and it is my view that the Supreme Court will take it up.  How it turns out is a matter of debate, but my view is that New Jersey should prevail.  It should be noted that a recent statistic indicated that 60% of the rulings from the Third Circuit Court of Appeals are reversed by the Supreme Court.  I think yesterday's ruling overall wasn't too bad at all for New Jersey and those wanting expanded legal sports betting in the USA.

New Jersey Governor Optimistic In Sports Betting Legal Case

Cardplayer.com is reporting that New Jersey Governor Christie is just as confident as ever about his state's prospects in ultimately being allowed to offer bona fide sports wagering.  “I think New Jersey is going to be victorious ultimately,” Christie said Monday on the “Boomer and Carton in the Morning” show in New York, according to The Washington Times. "There is no reason why Las Vegas, the state of Nevada, should have a monopoly on sports gambling.”

The case is still winding its way through the courts and will likely end up at the US Supreme Court before finally being settled.  Given that, even if successful, don't expect sports betting in New Jersey for a couple of years.

New Jersey Casinos Not Yet Offering Fantasy Sports Contests

Although New Jersey published regulations authorizing pay-to-play fantasy sports contests back in March, not one Atlantic City casino has of yet moved forward with an offering.  The reasons for this are discussed in the story, which can be found here.  The were two primary reasons discussed detailing why no fantasy games are yet offered.  One is that the casinos didn't see a successful path forward competing with larger, national entities such as ESPN.  The other is that this is summer and allegedly sports betting only revolves around the NCAA basketball tournament and the Super Bowl.

I'll quibble with both of these reasons, but first I do need to quibble with the article ever equating the concept of fantasy sports contests and betting.  Playing fantasy sports games is not betting.  Fantasy sports games are a game of skill and by legal definition not gambling, provided the games, gameplay and prize structures fit within the statutory safe harbors.  It is just journalistic laziness to refer to such contests as betting.

With regard to the reason that the casinos don't see an easy path to compete with a similar game to the ESPNs of the world, valid point.  The key is to find a fantasy sports game that would be attractive to players that the ESPNs of the world can't emulate.  Does such a fantasy sports game of that nature exist?  Yes.  We will discuss that later.  Not having a compelling game to draw patrons that would provide sufficient direct and indirect revenue to offset the cost of offering is a very valid point.  In my view, none of the existing fantasy games that have been considered have the hope of meeting that hurdle.

The reason for that varies on the type of game.  For the league-based season-long contests, the contests are just too long and the casinos rightly have figured out that they may be able to draw customers a few times during the year, but not on a weekly basis for an extended period.  For the short-term contests, the prize structures are such that the gross margins of these games are just too thin to satisfy the profit needs of the game operator and the casino.

Regarding the reason that the casinos aren't offering the games because this is summertime and there's no interest in sports contests for money is a crock.  Fantasy baseball is going on now and it is indeed quite popular and indeed people are playing for money.

So what kind of fantasy sports contest would have a hope of being viable for Atlantic City casinos?  Again, it would have to be something that would be attractive to fantasy sports players and perhaps even sports bettors (even though sports betting is not yet legal in New Jersey).  By attractive, that means a game that has a good prize to entry fee ratio (odds if we were talking about betting).  Also, attractive means that the margin of the games would be sufficient to satisfy the needs of the game operator and the casino with regard to profit.  No sense offering a game that costs more to offer than revenue generated, right?  The final nuance of attractive would be a fantasy game that offered some level of exclusivity, something the current large fantasy sports operators can't match.

Is there such a fantasy sport game available that can do this?  Yes.  YouGaming's pari-mutuel fantasy sports game is such a game.  Here's why:

First, the pari-mutuel fantasy sports game concept is protected by no less than 3 US Patents.  That takes care of the exclusivity element.

Second, the games can have gross margins that will satisfy the profit needs of the casinos and game operator.  For typical "daily" fantasy sports games, gross margins may vary from 5% to 10%.  Given the costs of operation, it will be practically impossible to have profitable games.  The pari-mutuel fantasy sports games can easily have gross margins in the 20% to 30% range, and can be offered in the "daily" format.  Now if you compare that to the theoretical margin on a straight sports bet, which is 4.54%, this advantage is substantial.

Third, the pari-mutuel fantasy sports games can also offer games with high gross margins while offering superior prize to entry fee ratios (odds if we were talking betting), allowing the game operator and casino to meet their profit objectives.

So given a game where one out of every five entries can win a prize, where the top prize is 100 times the entry fee, the gross margin of such a game is greater than 20%, and having a level of exclusivity for the casino(s) that offer it, one can see that this kind of game would have a level of attractiveness to Atlantic City properties.

Also, this kind of game would be attractive to offer in an online format to the casino(s)' customers.  Unlike some of the free play casino games used as a marketing tool, this game format can be offered online in a pay-to-play format, generating revenue and awarding cash prizes.  This offering of course done in a branded format.  The casino will be able to extend its brick and mortar presence with a revenue-generating game.

There is another potential advantage to such a game, but it will have to wait until New Jersey is officially allowed to offer sports wagering.  Such a game can also be offered in a wagering game format, which current fantasy sports games will have great difficulty doing, and even if they did, would not result in a superior wagering game to conventional sports betting.