By Brad Hubbard | @bradhubbard

Like many of you out there we wondered it ourselves, ‘how is FanDuel and DraftKings legal?’ They advertise winning money off of sporting events. That sure looks and smells like gambling. It is however not gambling according to federal law and these two entities look like they are here to stay.

Fantasy Sports Guys

Some outlets have asked this question and a Forbes article from September pretty much nailed itEssentially these companies are walking the fine line between ‘skill’ and ‘chance’. In other words, you have to have some skills and knowledge to win one of their daily contests while gambling is perceived as pure chance (or so says the law).

Screenshot 2015-10-03 14.07.04

We can imagine that there will be legal challenges sooner rather than later. In fact last month Rep. Frank Pallone called for hearings on the daily fantasy sports organizations We figured that he was just annoyed by the amount of ads he had to endure during the kickoff of the 2015 football season. The Representative from New Jersey should know, as Adam Kilgore states in his article for the Washington Post:

In 2006, the Unlawful Internet Gaming and Enforcement Act (UIGEA) specifically defined fantasy sports and carved out a law protecting them. The lawmakers behind the act did not consider daily fantasy sports, because they did not exist at the time.

Laws do outlaw sports gambling online but as we all know, if you want to gamble online, you can. You can still do it legally in Nevada too.

FanDuelThis can really go one of two ways; first these daily fantasy sports sites find legal protection and this paves the way for the lifting of the ban on sports gambling nationwide or some conservative legislatures try to move these sites under the gambling label and outlaw them on a national level. There would be some very wealthy people who would have a vested interest in seeing these sites go away. Some of them donate a lot of money to politicians too.

We’re leaning to the former here at Sideline Signals and here is why, they have influential well financed backers.

The backers for DraftKings and FanDuel include the following according to Crunchbase:

MLB Ventures, Major League Soccer, NBA Ventures, Google Ventures, Comcast Ventures, 21st Century Fox, Time Warner Ventures, NBC Sports Ventures and the Kraft Family. Not to mention VC firms like Atlas Venture.

Not every sports entity is excited about the rise of the daily fantasy sports leagues. The Power 5 conferences have asked the leagues to pull back from collegiate sports. Not the NCAA but the Power 5 conferences. They will take their sponsorship money, but apparently don’t want them promoting betting on college athletics during their games. Sounds American enough.

Capitalism shows us time and time again that if there is a loophole in a law people will find a way to drive a truck through it. In this case it’s a very public loophole with some big, deep pocket people driving semi’s through it. Could these two daily fantasy sports sites lead to lifting the nationwide ban on sports gambling? Only time will tell. What we do know is that you will be seeing ad’s for these two sites for the foreseeable future.

Further Reading:

NY Times

NPR

Business Insider

 

UPDATE:

It looks like legal inquiries will be happening even sooner for daily fantasy sports companies. The New York Times is reporting what amounts to insider trading at DraftKings. As the article by Joe Drape and Jacqueline Williams states:

The statements were released after an employee at DraftKings, one of the two major companies, admitted last week to inadvertently releasing data before the start of the third week of N.F.L. games. The employee, a midlevel content manager, won $350,000 at a rival site, FanDuel, that same week.

This is the first major PR and legal hurdle for the industry. It will be interesting to hear how it plays out and if this means government restrictions for the industry.

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