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Fan Duel-DraftKings merger could face legal hurdles




On Friday the #1 and #2 fantasy sports companies announced a merger that may face legal hurdles, especially with a new administration taking office in January.

Will the Federal Trade Commission allow the merger of the two top fantasy sports companies?

On Friday, a merger deal was announced by DraftKings and FanDuel. The merger rumors were bandied about for some time, but the announcement of the deal was still met with disappointment by many fantasy sports players who hoped the companies could both co-exist in the marketplace, since each company has their own advantages.

FanDuel tends to have some sharper players and higher buy ins, particularly with head to head and league play, while DraftKings offers more for the casual player. Moreover, FanDuel contests stick to the main team sports while DraftKings offers NASCAR, UFC, eSports and golf. FanDuel management has always contended that they believe that the rules of the UIGEA only permit fantasy sports on multiple team sport games, while DraftKings have been willing to take a chance on individual sports arguing that multiple laps in NASCAR and multiple rounds in the other sports makes those sports permissible under the rules of the UIGEA. Most legal experts contend that DraftKings is likely incorrect in their interpretation, but thus far the U.S. Department of Justice (DoJ) and state attorneys have had no interest in pursuing the legality of that option. Now the two CEOs, Jason Robins and Nigel Eccles will have to decide whether to offer those sports in the new merged company or not.

Exact terms of the agreement aren't known, but according to ESPN.com, there will be an equal partnership between the two sites, with each company having three seats on the board, with one independent director. According to the report, DraftKings CEO Jason Robins will be the CEO of the new company, while FanDuel CEO Nigel Eccles will become the chairman of the board. Until the merger is finalized both companies will continue to run independently.

The merger has been deemed as necessary by many industry analysts since both companies have become unprofitable for some time and there is very little hope for profitability in the near future. Without the merger, it is uncertain whether the companies can continue operating much longer.

DraftKings Fan Duel mergerThe losses can be attributed to several factors, including the withdrawal of the companies from states which deemed the product illegal, a $6 million settlement to the state of New York relating to a lawsuit by State Attorney General Eric Schneiderman, who contended the company was involved in false advertising, legal costs relating to a challenge by the state of Illinois and the regular costs of doing business, including advertising and payments to venture capitalists and sports league partners. In an effort to increase revenue both companies have boosted their commissions for the contests in recent months, but that decision has resulted in a fair number of large fantasy sports players to abandon the product.

In announcing the merger, DraftKings CEO Jason Robins stated in a press release:

"Joining forces will allow us to truly realize the potential of our vision, and as a combined company we will be able to accelerate the pace of innovation and bring a richer experience to our customers than we ever could have done separately."

The question that many are asking, however, is whether the Federal Trade Commission (FTC) will allow the merger considering the two sites generate close to 90% of all action on daily fantasy sports. Yahoo is the next largest fantasy sports provider with less than 10% of the market. The sites seem to believe they can overcome that hurdle and convince the FTC to approve the merger, since, in their opinion, a merger would open the marketplace. And many smaller fantasy sports companies agree. A relatively new in-play daily fantasy sports site has stated that if they only have to compete with one behemoth instead of two they could probably make greater inroads into the market. But Larry Walters, a first amendment lawyer specializing in the online gambling industry was not so certain:

"I believe that regulators with the FTC or DOJ would almost certainly review, and likely challenge, any attempted merger between FanDuel and DraftKings. The relevant inquiry is whether the merger would substantially lessen competition or create a monopoly. Given the substantial market share owned by the #1 and #2 providers in the fantasy sports field, any merger would have a direct impact on competition and consumer choice. Satisfying antitrust regulators will be the most significant legal roadblock to the anticipated merger."

It's likely that one ally who will come to the defense of FanDuel and DraftKings are the sports leagues and the sports lobby is huge.

The teams make a great deal of money from sports sponsorships and except for the NFL, it seems that the leagues are exploring the possibility of petitioning for not only nationwide legal daily fantasy sports, but also legal sports betting. To date only Adam Silver of the NBA has issued a statement indicating support for legal sports betting but there are unconfirmed rumors that the NHL and MLB are on board as well.

While the FTC is the biggest hurdle for the two sites there is also some concern that the newly elected Republican party could try and change legislation that has allowed DFS to exist in the first place and make the product illegal. Newly appointed AG Jeff Sessions has been an opponent of gambling from the outset, even adding his name to the original bill to ban online gambling, and there is fear that he might try to overturn 2010 DoJ opinion that deemed the wire act applies to all forms of gambling and not just sports. Sheldon Adelson who contributed millions to Donald Trump's campaign has been the impetus for implementing RAWA which aims to reverse that decision and there is a fear that Sessions may make that one of his first acts as a thank you to the billionaire casino magnate.

And while that decision won't have a direct impact on DFS, there is a good chance that Sessions may make it his mandate to stop all forms of non-land based casino gambling, which could entail re-examining the UIGEA to see whether DFS was actually intended to be part of the carve out in the rules adopted for that legislation. There are several Republicans who have demanded the government do exactly that, following all the interest that was focused on daily fantasy sports after the scandal involving the DraftKings leak and the insinuation of insider trading that allowed DraftKings workers to make a great deal of money from FanDuel contests. If that indeed happens, then all the concern about the merger may be a moot point. It's no secret that Donald Trump has been a proponent of both land based and online gambling in the past, even suggesting that it should be legalized since the U.S. was losing out to other countries, but it's questionable whether this is an issue Trump cares enough about to take on his new team if they try to make it illegal.

The one saving grace for the DFS sites with the new government is that both Trump and Sessions have been ardent supporter of states rights. And there is no question that Trump will likely see gambling as a state's right issue and not one to be decided at the federal level. In the recent 60 Minutes interview Trump indicated that abortion was an issue to be left to the states and he previously suggested marijuana was another decision left to the states, so it's only logical that he would deem all social issues should be decided at the state level and that includes all forms of gambling.

So the deal has been inked and both DraftKings and FanDuel will now wait to see if the FTC will simply rubber stamp the merger or fight it. And they will also anxiously wait to see if that decision will be made now or after January 20th when a new administration takes power. If the merger is allowed to take place and if the new AG has no interest in pursuing the legality of DFS, then the future looks quite bright for the newly merged company. If, however, there is opposition to the merger that results in the deal not going forward, then one or both sites may have to fold, unless the political climate changes greatly in the very near future.

Either way, these are nervous times for both fantasy sports companies and players.

Read insights from Hartley Henderson every week here at OSGA and check out Hartley's RUMOR MILL!