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Fantasy Trading and Legality Thereof

Paper Type: Free Essay Subject: Law
Wordcount: 4346 words Published: 7th Sep 2017

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ABSTRACT

Regulators are at a crossroads. On one hand, innovation in businesses should not be stifled by excessive and outdated regulation. On the other hand, there is a real need to protect the users of these services from fraud, liability and unqualified service providers. This predicament is far more complex than it seems, since regulators are confronted here with an array of perplexing questions. Firstly, can these practices be qualified as “innovations” worth protecting and encouraging? Secondly, should the regulation of these practices serve the same ends as the existing laws for equivalent commercial services? Thirdly, how can regulation keep up with the evolving nature of these innovative practices? The answer to these questions has a single answer – Very little is known about the socially effective ways of consistently regulating and promoting innovation. This article deals with the legality of fantasy trading using tests, various schools of thought and a comparative analysis, among other things. Additionally, the article also seeks to delve into the question of ‘regulation’ per se. That is to say how much regulation, if any, is just and apt keeping in mind that the world is now brimming with innovation than ever before.

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In a global context, are fantasy trading and especially fantasy sports trading a harmless distraction or an unregulated business area poised to be a multibillion-dollar industry or both? Do fantasy trading and illegal betting fall in the same moral spectrum? These questions, among others, are pertinent to note because of this simple reason – Demographics. Nearly 57 million people play fantasy sports in the U.S and Canada alone[1].

Backdrop: The issue of legality

In early October 2015, the biggest scandal to hit the young fantasy sports industry was reported by the New York Times. An employee at Draftkings, a Boston-based daily fantasy website, released ‘privileged fantasy draft information’ before the start of the third week of the National Football League (“NFL“) season. This employee won $350,000 that same week at FanDuel, a rival daily fantasy website hailing from New York.[2] FanDuel and DraftKings have become the two biggest entities in the fast-growing daily fantasy sports industry. DraftKings alone expected to pay out $1.2 billion in cash prizes in 2015.[3] Industry estimates anticipate that $2.6 billion in contest entry fees will be paid this year across the industry and that by 2020 partaking will rise up to $14.4 billion. In July, Fox Sports, one of the biggest TV Networks, led a $300 million funding round for Draft Kings.[4]

Despite this, not all was hunky dory for the fantasy sports industry as the events of October had a tremendous impact on daily fantasy sports websites. Eric Schneiderman, Attorney General of New York demanded DraftKings and FanDuel to stop accepting New York-based players, as their games constituted illegal gambling under New York state law. Joining the bandwagon, Attorney Generals in five other states declared that the daily fantasy games are a form of gambling or illegal under state laws. The states include Texas, Illinois, Hawaii, Vermont and Mississippi. Offering a differing view, Rhode Island’s attorney general declared the activity legal but said it needs to be regulated. On October 8th, a class action lawsuit was instituted in a New York federal court alleging that the two companies “fraudulently induced” players to pay money for contests without proper acknowledgement that company employees could play the contests with ‘privileged information’ giving an impression of Insider Trading[5]. Nevada has banned both sites from operating in-state until the companies, and their employees, receive state gambling licenses – an action that would officially mark daily fantasy sports as gambling operations in the US[6]. This presents a challenge to legal scholars and policy makers as under federal sports betting laws in the U.S, sports gambling is deemed illegal in all states except four[7]. Even under the Interstate Wire Act of 1961, it is illegal for sports gambling information to be transferred across state lines unless both states have a legalized sports gambling regime.

In Australia, there is a segregation between fantasy trading games which are permitted by Australian Securities and Investments Commission (“ASIC“) and the ones operating without any such license provided by ASIC. Such games are warned by the ASIC[8]. According to the ASIC, fantasy stock trading firms could be flouting the law if they incentivize or reward real trades. Additionally, firms facilitating such trading must obtain an Australian Financial Services license.

The Securities and Exchange Board of India (“SEBI“), on August 30, 2016 issued a press release[9] warning investors about such schemes. It further clarified that these schemes are neither approved nor endorsed by SEBI or any other SEBI recognized exchange. Furthermore, in its caveat, it also stated that the benefits generally available to an investor such as the dispute resolution mechanism as well as the grievance redressal mechanism would not be available to the concerned participant. Similarly, even the Bombay Stock Exchange issued an advisory against such leagues/competitions and schemes etc.[10]

ANLYSIS AND EXAMINATION OF ITS LEGALITY

It is the author’s submission that it is detrimental to declare a budding and more importantly an innovative industry illegal without qualification. Unfortunately, there are currently no laws for fantasy trading and fantasy sports companies.

In the US, if a website qualifies as a fantasy sports provider under the Uniform Internet Gambling Enforcement Act (“UIGEA“), so long as the website fulfills three statutory obligations, it is notconsidered to be a gambling transaction and is therefore free from all of the regulations and restrictions gambling law provides[11]. An evergreen comparison in the spheres of law, public policy and economics is at of securities trading and sports gambling. “Many investors buy stock for the same reasons that gamblers may choose certain slots machines, lottery numbers, or squares on a roulette table, or choose to bet or fold a certain poker hand.”[12] Findings by scholars like Christian Hurt conclude that, despite being structurally different, sports betting and the securities market are not very different when it comes to the balance of chance and skill required to be successful in either.

It is the submission of the author that it is conceivable to place fantasy football into a comparison between sports betting and securities exchanges. At this juncture, it is imperative to note that the business model of fantasy stock trading is largely similar to fantasy sports trading.

The position of law in the USA with regards fantasy trading is fascinating. Fantasy trading is legal in the US but is largely unregulated by the Securities Exchange Commission (“SEC“). The process of creating a regulatory framework for this industry is underway[13]. Despite a strict prohibition on sports betting in the US, the Congress has not touched upon, rather intentionally, online fantasy sports. To illustrate, in 2006 Congress passed the UIGEA. The Act made it illegal for those “engaged in the business of betting or wagering” to “knowingly accept” funds connected to illegal internet gambling. But the Act creates an explicit exception for “fantasy sports games”[14]. The exception enunciates:

(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.[15]

Hence, games based upon the performances of several individuals/teams over several games, set prizes and the “relative knowledge and skill” of participants prevent fantasy trading from being deemed as gambling operations and illegal.

It is the opinion of the author that it is paramount to examine whether fantasy trading constitutes illegal online betting. Erick Lee, for example, opines that fantasy games do not constitute illegal betting, nor are such games plagued with the same public policy problems as traditional gambling – only “restricted statutory regulation within hypercompetitive [high payout] fantasy leagues” should be enacted.[16] On the contrary, Nicole Davidson distinguishes between “Games of Chance” and “Games of Skill” – and determines that fantasy sports rely on chance more than skill. This, tied with the entrance fee ‘consideration’ most participants pay, may put fantasy trading in conflict with federal and state laws, Davidson argues.[17]

For sake of our analysis, reference has been made to a particular framework computed by scholar Christine Hurt. To Hurt, attempts to distinguish most any kind of gambling from most any kind of investing are ‘illusory’.[18] She thus rejects the traditional distinction, still used by courts today, of ‘games of chance’ versus ‘games of skill’ and replaces it with a ‘spectrum of speculation’ ranging from games of pure chance to games of pure skill.[19] According to Hurt, Sports Betting, Stock Trading, and Insider Sports Betting all sit right in the middle, between Pure Chance and Pure Skill. She also finds trading in derivatives markets, and day-trading, to be more based in chance than sports betting; meanwhile, illegal insider sports betting and insider stock trading are more based in skill than individual stock trading.[20] In an analysis of where fantasy sports, particularly daily fantasy sports, sits on this spectrum, the answer falls lies between sports betting, stock trading, and insider sports betting.

It is difficult to come up with many legitimate reasons to ban sports gambling on one hand, but allow stock trading on the other. Hurt points to dated arguments for paternalism, social order, and morals as reasons for history’s disdain for gambling. “Arguments against gambling may focus on the immorality of either striving to achieve something without earning it or worshiping luck and therefore straying from monotheistic Judeo- Christian teachings.”[21] Truth be told, determining figuring out a regulatory environment for fantasy trading through the lens of social policy and moralistic arguments is a messy affair.

I would now analyze the structure of fantasy trading in order to determine its legality. The determination would be based on three facets – operational, contractual and regulatory. The author would also look into the legalities of gambling as it falls in the same domain as the securities market and fantasy trading. It is pertinent to note that fantasy stock trading closely mirrors the Securities Market. The service provider manages the information they receive, publishes it selectively and profits based off the information they provide. Let’s analyze fantasy trading using a three prong test. First, an examination of the operational structure of a fantasy trading transaction shall be done- who participates, who aids the transaction, in whose control the information is, timeline, expenses and changes made to the contract etc. Second, the contractual consideration is perused. Thirdly, the regulatory framework surrounding the transaction and the industry shall be looked into. We would be looking into the fantasy trading industry and regulations of the US, as there exists little legal literature on this subject matter in India.

The Competition

When it comes to stakeholders, there exist four of them. Participants are the ones who compete in the fantasy leagues. Host sites are the websites where information, news updates and statistics are stored and released. Commissioners oversee the league rules and solve disputes amongst players. Treasures collect money from the participants. However, due to multiple roles assumed by one stakeholder, effectively, there exist only two stakeholders – the participants and the hosting website. Needless to say, the structure of the competition bears a resemblance to internet gambling and stock trading.

The Consideration

All participants pay entry fee. Participants can be denied at the behest of the commissioners/treasurers. The participant provides money “in exchange for the chance of greater winnings”. This is problematic as this is what makes one instantly compare illegal gambling with fantasy trading. In exchange, the website, provides as consideration the information available on their website, a stake in the prize and other website functions. Under ‘terms of use’ websites also require participants to agree to all terms, including age limits, refund policies and conditions of participation. This generally exists by way of Standard Form Agreement.

The Regulatory framework

Much of the current controversy surrounding daily fantasy sports is centered on the exceptions that allow fantasy sports sites to operate despite federal antigambling laws.[22]

Other laws that have put a blanket ban on online sports gambling have not been applied to fantasy sports. Despite the 1961 Wire Act, it has not been applied to fantasy sports leagues. There is no indication that any fantasy sports companies are banned under the Illegal Gambling Business Act.

MEASURES: THE BEST FOOT FORWARD

A complete ban is strict no-no because of its economic consequences. Banning, I believe, sends across a specious message to innovators. However, the author does understand the number of challenges these innovative practices poses on regulators. The first question to be asked here is when should fantasy trading be considered economically and legally relevant? How can the regulators strike the balance between the advancement of innovation and protection of customers from fraud and liability? A monstrous problem with any regulator across the world, I believe, is the misapplication of legal tools in innovative practices. Ex: Fixing tariffs by way of regulations for disruptive business models such as Ola and Uber is counterproductive to the innovation ecosystem.[23] To conclude, the formula has been: Changed Game + Same Rules = Game Over

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Other option, albeit risky, is that of self-regulation. The fantasy sports trading industry is the US is largely self-regulated. This is depicted in the age restriction and other terms of use. Furthermore, employees of the company or immediate family members of said employees; employees of any competing fantasy sight and any immediate family member; employees of any sports governing body that has access to privileged information or is barred from participating in sports bets; and more are prohibited from entering a contest.[24] There are a few rules designed to protect participants from frauds. But, the problem with self-regulation is that in a country like India this form of governance is unprecedented. More so, we do not know how the industry enforces these rules. For example: When it comes to enforcing the employee ban on participation, the scandal in the world of fantasy trading was created by an employee who won $350,000 by playing at another, rival site.

CONCLUSION

An important facet to fantasy trading that places it in the legal gamut is ‘negotiability’. Without negotiability which means the ability to raise the stakes or change the nature of the investment, any skill the participant may bring on the table is futile. They are left to the fancies of chance. For example: Stocks are negotiable. That is to say while the terms of the stock may be fixed at any time they can buy more stock or sell stock. They can even wield influence over the company. Likewise, in fantasy sports trading, participants can trade athletes with other with other participants or auction for new athletes. They exercise a lot of influence over negotiating their stake in the league.

Fantasy trading is the middle grounds of share trading which is legal and online betting games like sports betting which is largely illegal. The more interested parties join in this industry, the tougher it will be to criminalize fantasy trading. The state views skill based games as legal and greater the needle points towards worshipping luck, the more chances of the game being deemed illegal. It is my opinion that Fantasy trading is completely legal so long as these games have longer timeframes, modest jackpots and smaller groups of participants. Games with short timeframes, giant jackpots and large participation come close to illegal gambling.

Final thoughts are that we need some framework of regulation. An absolute ban is a thumb down. A policing system must be put in place to forbid employees from using potential privileged information to win big, ensuring that service providers are fairly handling the entry fee and distributing awards and checking for conflicts of interests between participants among other things. A robust dispute resolution mechanism is required in order to keep fantasy trading a legitimate and benign industry.

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[1] http://fsta.org/research/industry-demographics/

[2] Joe Drape and Jacqueline Williams, “Scandal Erupts in Unregulated World of Fantasy Sports.” NYTIMES.COM, Oct. 5, 2015.

[3] Bob Hohler, “An uncertain line between fantasy sports, gambling.” BOSTONGLOBE.COM, Aug. 2, 2015.

[4] Dustin Gouker, “Are FanDuel and DraftKings Television Partnerships All Locked In After Summer Flurry?” LEGALSPORTSREPORT.COM, Aug. 12, 2015.

[5] Supra n. 2.

[6] Joe Drape, “DraftKings Continues to Operate in Nevada” NYTIMES.COM, Oct. 18, 2015.

[7] Andew Vacca, “Sports Betting: Why the United States should go all in.” Willamette Sports Law Journal.

[8] Georgia Wilkins, “Fantasy Stock trading in ASIC sights.” THE SUNDAY MORNING HERALD, March 28, 2016.

[9] http://www.sebi.gov.in/sebiweb/home/detail/34568/yes/PR-SEBI-CAUTIONS-INVESTORS

[10] http://www.bseindia.com/news_section/atten_investors.htm

[11] Marc Edelman, “A Short Treatise on Fantasy Sports” Harvard Journal of Sports and Entertainment Law 35 (2012)

[12] Christine Hurt, “Regulating Public Morals and Private Markets: Online Securities Trading, Internet Gambling, and the Speculation Paradox,” 86 B.U.L. Rev. 371

[14] Marc Edelman, “A Short Treatise on Fantasy sports and the Law: How America regulates its new national pastime”, 3 Harv. J. Sports & Ent. L. Rev. 1, 37 (2012).

[15] 31 U.S.C.A. §5362 (2006).

[16] Erick S. Lee, “Play ball! Substituting Current Federal Non-regulation of Fantasy sports leagues with limited supervision of hyper-competitive leagues”, 29 Loy. L.A. Ent. L. Rev. 53, 87 (2008-2009).

[17] Nicole Davidson, “Internet gambling: should Fantasy sports leagues be prohibited?” 39 San Diego L. Rev. 201, 228-229 (2002)

[18] Christine Hurt, “Regulating public morals and private markets: Online securities trading, internet gambling, and the speculation paradox”, 86 B.U.L. Rev. 371, 377 (2006).

[19] Christine Hurt, “Regulating public morals and private markets: Online securities trading, internet gambling, and the speculation paradox”, 86 B.U.L. Rev. 371 (2006).

[20] Id. at 378.

[21] Id. at 402.

[22] Marc Edelman, “A Short treatise on Fantasy sports and the Law: How America regulates its new national pastime”, 3 Harv. J. Sports & Ent. L. Rev. 1, 37 (2012).

[23]Akshay Deshmane, “Delhi readies policy to fix tariff ceiling for Uber, Ola” ECONOMICTIMES.INDIATIMES.COM, Aug. 11, 2016.

[24] Draftkings Terms of Use, https://www.draftkings.com/help/terms.; Fanduel Terms of Use, https://www.fanduel.com/terms.

 

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