Why This Daily Fantasy Sports Hearing Raised More Questions Than Answers

May 11, 2016, 10:01 PM UTC
DraftKings Inc. And FanDuel Inc. Applications As Ad Spending Increases
The DraftKings Inc. app and FanDuel Inc. website are arranged for a photograph in Washington, D.C., U.S., on Monday, Oct. 5, 2015. Fantasy sports companies DraftKings Inc. and FanDuel Inc. raised a total of $575 million in July from investors including KKR & Co., 21st Century Fox Inc. and Major League Baseball to attract players to games that pay out millions of dollars in cash prizes in daily contests. Photographer: Andrew Harrer/Bloomberg via Getty Images
Photograph by Andrew Harrer—Bloomberg via Getty Images

The first U.S. Congressional hearing on daily fantasy sports raised more questions than it did answers on Wednesday morning as the House of Representatives began the belated process of forging a path of clarity through the gaming industry’s murky legal landscape.

Wednesday’s dialogue did little to signal any impending federal action or hope that Congress would lead a regulatory charge on DFS, which is instead currently being waged at the state level. The hearing often featured confused questioning from several representatives who were clearly unfamiliar with the concept of daily fantasy sports, in which competitors curate lineups of real-world athletes and can win real-money prizes based on those athletes’ statistical performances. At one point, Oklahoma Rep. Markwayne Mullin asked the panel of witnesses if there was a regulatory body for the industry—the absence of which largely justified the hearing in the first place.

The House Energy & Commerce Committee’s Subcommittee on Commerce, Manufacturing and Trade took up the issue of DFS eight months after New Jersey Rep. Frank Pallone requested a hearing in the wake of a multi-million dollar television advertising barrage from the industry’s two largest operators, DraftKings and FanDuel. Further industry tumult, spurred on by the inadvertent publishing of player ownership information by a company employee, led to the scrutiny of attorneys general in key states, including Texas and Illinois. In New York, a tentative settlement between AG Eric Schneiderman and the operators hinges on the passage of a bill in that state’s assembly by the end of the current legislative session.

“The hearing was a chance to start a discussion about daily fantasy sports and sports betting at the federal level,” said Dustin Gouker of industry website Legal Sports Report.

“I think it’s pretty clear nothing of substance is going to come out of Congress on either front in the short term, based on this hearing. But having the conversation at all is better than ignoring it.”

Gaming attorney and DFS expert Daniel Wallach said that the hearing ended not with a bang, but with a whimper, and questioned whether any measurable results will come of it.

In the absence of federal action, some including Wallach foresee the development of a consumer protection framework that states could either opt in or out of. Earlier this year, Massachusetts—where DraftKings is based—became the first state to develop comprehensive consumer protection regulations in the absence of a law, and is seen as a potential model for other jurisdictions to follow.

Several members of the subcommittee expressed disappointment that representatives from both the operators and the leagues were not present to answer their questions. The NBA, NFL, MLB and NHL have a complicated relationship with the fantasy companies; several leagues and teams have partnerships with each of the operators (and in some cases, team owners have investment stakes in the companies) but have traditionally advocated against sports betting out of fear it could impact the integrity of their sports. Representatives from DraftKings and FanDuel were also not present Wednesday. The only witness who even tangentially represented the operators’ interests was Peter Schoenke, the chairman of the Fantasy Sports Trade Association, which has been one of the key actors in the state-by-state legislative push.

Rep. Pallone looked to Schoenke as a proxy for the two companies. The congressman pointed out what he viewed as the hypocrisy of the sports leagues, who partner with DFS operators and see increased fan engagement from DFS games, but also condemn sports wagering.

He told Schoenke to get back to him in writing regarding several questions for the operators, including why the full contents of an investigation into the DraftKings “insider information” scandal was never released to the public. He also asked Schoenke to explain how the DFS companies can argue their product doesn’t constitute gambling while they’ve simultaneously applied for a gambling license in the United Kingdom to offer their games there. When Schoenke countered that the terminology the companies are forced to use has to do with the way laws and other requirements are written, Rep. Pallone appeared unconvinced and stressed that the game was the same in all jurisdictions.

“I think the difference is in one country they have a lot of smart lawyers and lobbyists that are defining things a certain way, and in another country they’re not,” he said.

Rep. Pallone’s request for a hearing came back in September and endeavored to “level the playing field” between DFS, fantasy sports and gambling. While most federal legislators have remained silent on the issues of DFS and sports betting, several from the New Jersey delegation, including Sen. Robert Menendez, have rattled federal cages over the past year. They’ve gone so far as to request the Federal Trade Commission’s involvement in investigating the industry and protecting consumers from unfair practices. New Jersey is also in the midst of a yearslong effort to skirt around one federal gaming law—the Professional and Amateur Sports Protection Act—and offer legalized sports betting. An appellate court ruling in New Jersey’s case is expected this Summer.

And yet, discussion of the regulation of traditional sports wagering was scarce on Wednesday, underscoring the absence of a related issue that could even dwarf DFS. The American Gaming Association estimates that $149 billion was wagered illegally by Americans in 2015, compared to the $4.2 billion Nevada sports books took in legally that year. Even that smaller figure is larger than the $3 billion in estimated DFS entry fees in 2015.

An existing patchwork of state and federal laws have muddled the idea of whether DFS is allowed in certain jurisdictions. Four federal laws, all of which were crafted before the rise in popularity of daily fantasy sports, do not expressly address DFS’ legality, leaving individual states to decide how they want to allow or disallow the contests. Tennessee, Indiana, and Virginia have signed bills into law in 2016 that expressly legalize DFS, and Mississippi and Colorado have also sent bills awaiting signature to their governors. DFS is explicitly banned in a handful of other states, like Washington, Iowa and Louisiana. Other states like Kansas have simply exempted DFS from existing gambling restrictions, while Nevada, which defines DFS as gambling and requires operators to apply for gambling licenses in the state before offering the product, have established processes for registration.

Witness Steve Brubaker, the executive director of the Small Business of Fantasy Sports Trade Association, echoed the ideas of several on the panel when he warned of the dangers of a 50-state legislative solution to DFS. He said the organizations representing the DFS community were eager to work with federal lawmakers to establish more industry clarity.

Pointing at the elected officials, he said, “We have companies that are relying on you guys and went out and started their businesses. You won’t see DFS companies balk at regulations.”

Meanwhile, John McManus, the executive vice president and general counsel for MGM Resorts International, warned that continuing to marginalize the gaming industry by not addressing its legality will only result in further illegal gambling.

“These forms of entertainment will not go away if they’re made unlawful and you will develop a black market. As soon as you take money from citizens and are paying them back, you should be regulated,” McManus noted.

Exactly when, or how, that regulation comes about in the near term remains to be seen.

This post has been updated.