Though there aren’t many $2 bills in circulation anymore, Thomas Jefferson’s beloved Virginia just made spending money on daily fantasy sports (“DFS”) contests legal. On March 7, 2016, Virginia enacted the “Fantasy Contests Act” (the “Act”), making it the first state law to affirmatively address the legal issues plaguing the DFS industry.
Beginning in 2009, operating under an exemption in the federal Unlawful Internet Gambling Enforcement Act (“UIGEA”), DFS companies took the country by storm. Companies like Fanduel and DraftKings deployed aggressive advertising campaigns and cemented incredible sponsorships with professional sports leagues like MLB and teams in the NFL. The industry’s uncanny growth was visible to anyone who turned on a sports channel.
When I wrote about the daily fantasy sports industry in September 2015, I said the industry was in the hot seat. DFS leagues—short term, easy entry and play games—turned our perception of fantasy contests upside-down. That is, when word got out about how DFS companies moved away from season long tournaments where the winner won a few bucks (arguably what the UIGEA exemption contemplated) to one-day million dollar prizes, allegations of unlawful gambling followed. A congressman held committee discussions on the industry’s legality and a few attorney generals launched investigations.
But now the industry is on fire. From New York to California (and what seems like everywhere in between), DFS companies are staving off allegations of illegal sports betting while trying to maintain important partnerships with payment processors and sponsors.
Yet as companies like Fanduel and DraftKings continue to defend their business practices across the country, one state may have doused the flames. Virginia’s first-in-the-country Fantasy Contests Act establishes what appear to be workable parameters for DFS companies to continue operating in the state. With precedent in place, it seems to follow that the industry will advocate for similar legislation across the country. Here are some of the new law’s key components:
- Defining a legal “Fantasy Contest” – “[A]ny fantasy or simulated game or contest in which (i) the value of all prizes and awards offered to winning participants is established and made known to the participants in advance of the contest; (ii) all winning outcomes reflect the relative knowledge and skill of the participants and shall be determined predominantly by accumulated statistical results of the performance of individuals, including athletes in the case of sports events; and (iii) no winning outcome is based on the score, point spread, or any performance of an individual athlete or player in any single actual event.”
- Registration – Fantasy contests operators must register with Virginia’s Department of Agriculture and Consumer Services. Registration costs $50,000 and obligates the operator to set procedures that prevent against harms like insider trading (i.e., DFS operators’ employees should not participate in public games for prize money), Pete Rose-ing (i.e., professional athletes should not participate in fantasy contests where their statistical performances impact the outcome), and comingling player and operational funds.
- Audits – DFS operators in Virginia must agree to an independent audit that will be submitted to the Department of Agriculture and Consumer Services annually.
- Civil Penalty – $1,000 per violation of the Act by any “person, firm, corporation, association, agent, or employee.”
Companies pursuing ventures with DFS operators should still heed caution. The wave of litigation in federal and state courts throughout the country seems to suggest that distance from the industry is best.
And since we do not know how aggressively Virginia will enforce the Act, those considering business relationships with DFS companies need to appreciate the risk. Ad agencies, for example, could fall within the crosshairs of an enforcement action as agent of a DFS company that fails to comply with the Act.
Bottom line: Only time will tell whether Virginia’s Fantasy Contests Act is the real deal and whether similar legislation will take hold throughout the country. Until then, my money’s on red.