Daily Fantasy Sports scandal will invoke the luck vs. skill debate again

In light of the DFS scandal, the question of luck vs. skill will once again emerge and state governments like New Jersey will argue that sports betting should be considered for an exemption since it is as much a game of skill as DFS.

As a result of this month's so called scandal at DraftKings where an employee at the company inadvertently released data related to a $2 million football contest, the question of whether Daily Fantasy Sports (DFS) was intended to be a part of the UIGEA exemption or not is at the forefront of the news. Casino operators are arguing that it is clearly a form of gambling and Nevada recently announced it would be banning DFS because it is a form of unregulated gambling. As well the FBI and several politicians are looking at the same question.

daily fantasy sports bettingManagement at DraftKings and FanDuel are arguing it's not gambling but rather a form of entertainment and several people who are winning consistently call it a form of investing, no different than a person who plays the stock market. The difference of course between DFS and stock market investing is that investing is generally for the long term while daily fantasy sports, as the name indicates, is decided in one day. Moreover with investing the hope is the stock will have value whether it goes up or down, while DFS is pretty much all or nothing. But in the end the question shouldn't be and won't be about whether DFS is a form of gambling but rather whether it's a game of skill, since that's really the reason why fantasy sports was exempted in the UIGEA in the first place.

For those unfamiliar with the Unlawful Internet Gaming Enfocement Act (UIGEA), the carve out for fantasy sports is located in the Safe Port Act under Section 5362 as follows:

A bet or wager does not include:
(ix) participation in any fantasy or simulation sports game or educational game or contest in which (if the game or contest involves a team or teams) no fantasy or simulation sports team is based on the current membership of an actual team that is a member of an amateur or professional sports organization (as those terms are defined in section 3701 of title 28) and that meets the following conditions:
(I) 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 those participants.
(II) 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.
(III) No winning outcome is based—
(aa) on the score, point-spread, or any performance or performances of any single real-world team or any combination of such teams; or
(bb) solely on any single performance of an individual athlete in any single real-world sporting or other event.

The wording is important because the government at the time with this wording suggested that fantasy sports does not entail a bet or wager. Anything else including poker and sports betting does. There is nothing about the time line for fantasy sports contests, so what the DFS sites are doing is legal. I have no doubt that when the Republicans wrote the regulations for the UIGEA the exemption for fantasy sports was meant to be strictly for rotisserie leagues and season long fantasy contests provided by sites like ESPN. But that's their problem. FanDuel and DraftKings saw the loophole in the law which didn't specify that the contest had to take place over an extended period and as a result created a form of fantasy sports that is without question gambling. But within the confines of the regulations, it is not. And as a result of the loophole millions of people in the U.S. have joined the sites, the leagues have embraced them and are making a fortune off the sites and it's probably a venture that is now too big to stop even if the government wanted to.

"Like it or not, the government has made that argument by allowing one form of gambling and not another."

What will almost certainly happen now, in light of the DFS scandal is that the question of luck vs. skill will once again emerge and state governments like New Jersey will argue that sports betting should be considered for an exemption since it is as much a game of skill as DFS is and the poker companies along with their lobby group, The Poker Player's Alliance (PPA), will also make the same argument. In fact the PPA called for the exemption right away when the UIGEA was passed saying poker is a game of skill but the government ruled that poker is predominantly luck and therefore is not entitled to an exemption. And when arguing that poker was different than season long fantasy sports contests, which required contestants to pick among a group of players, trade them and adjust them throughout the year to beat a group of thousands of other players, that argument was easy. But saying that picking from a group of players within a salary cap that is decided in one day requires more skill than handicapping a sporting contest or playing at a poker table is certainly a more difficult argument.

And whether they like it or not, the government has made that argument by allowing one form of gambling and not another.

Of course sports betting is illegal because of PASPA, but several people have tried to argue that sports betting should have an exemption in the UIGEA as a game of skill, since handicapping games is difficult. And if they can win that case, then it would have to be decided if the UIGEA, as a newer law, supersedes PASPA. And while fighting PASPA is a losing battle, using the tactic that sports betting is at least as skillful as DFS may not be. In fact when Gary Kaplan was being charged for money laundering in 2006 he was defended by famed lawyer Alan Dershowitz who stated that what Kaplan was doing at BetonSports was not illegal since sports betting does predominantly require skill and provided the following argument to me as to why sports betting should not be illegal:

"Of course (sports betting is a game of skill). How can anybody doubt it is a skill game? Every major sports figure prognosticates on the outcome of games by looking at starting lineups, post-season experience, success without the designated hitter and so forth. The best prognosticators win while others lose and that is skill. It is not like dice."

Mr. Dershowitz equated sports betting to poker which he also called a game of skill. "I play against the same people all the time and we all know who the best players are. Sometimes the best players don't win but each of us can easily point out who is the best player, 2nd best, etc."

Alan Dershowitz also suggested that when compared to other endeavours, betting on sports closely resembles trading on the stock market.

"What's the difference between stock markets and sports betting?", Mr. Dershowitz asked. "Goldman Sacks makes billions by trying to get a leg up on other prognosticators. The only difference is they are speculating on stocks rather than sports teams. There was a period in time when people felt the stock market should be made illegal."

It seems pretty clear that there's too much at stake now for any to actually consider banning DFS, any more than the government was never going to disallow the horse racing industry from offering online wagering on their races, when several politicians raised a concern that online wagering was not an intended part of the Interstate Horse Racing Act. And when the suggestion was even made to amend that law to disallow online horse bets the huge horse racing lobby vowed to "fight to its death" before it would allow an amendment. And undoubtedly the Fantasy Sports trade Association (FSTA) and the millions of Americans that play DFS would do the same.

So there is now a huge opportunity to change the law, if the sports betting and poker lobbies get their ducks in a row and attract some influential politicians.

They can show that poker and sports betting is at least as skillful as DFS and force the courts to answer the question as to why DFS is different. And more importantly they can force the courts to answer why DFS legalization in the public good while online poker and sports betting isn't. The courts will also have to address why it's ok for sports leagues to approve one form of gambling (DFS) while condemning another (sports betting) other than the fact they benefit monetarily from one and not the other. No doubt the courts will look to the leagues and politicians for an answer, but it'll be tough to provide a good reason.

It's just a matter of time before these concerns are raised and with any luck the U.S. courts, state governments and the Fed will just throw up their hands and admit that it's best to simply allow all forms of wagering, so long as the leagues get their cut and taxes are collected. The DFS scandal has opened a big can of worms that could benefit all U.S. gamblers in the long run.

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

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