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Tuesday, October 6, 2015

The Fantasy Sports Business – A Real Bet or Fantasy Fraud?

Just as daily fantasy sports (“DFS”) companies such as DraftKings and FanDuel have become huge multi-billion dollar businesses, breaking news has raised questions about whether fantasy sports is a soundly run responsible business or a clumsily disguised sham.  A recent scandal in the DFS industry arose when a DraftKings employee, Ethan Haskell, allegedly used sensitive betting information internally collected by his employer and utilizing it to his advantage, selected a fantasy lineup that won $350,000 on FanDuel, a competing DFS website. The money that Haskell collected was naturally won from the losing bets and cash of other DFS participants who were not as fortunate to have access to such information, leading some lawmakers as well as others to seriously question whether the rules of the game should change to protect consumers.

The legal background on this story begins in 2006, when the federal government created a law prohibiting internet gambling but deemed fantasy sports a game of skill and not chance, an important distinction which allowed fantasy sites to continue operation.  Classifying fantasy sports as a game of skill is a debatable notion that nonetheless survived the 2006 law thanks to aggressive lobbying from professional sports.  The fantasy sports industry as well as the technology enabling its growth subsequently exploded over the next several years, blossoming into a multi-billion dollar industry with high profile investors including lead sports figures such as Dallas Cowboys owner Jerry Jones and Robert Kraft of the New England Patriots owner Robert Kraft.  ESPN and Yahoo have also been participants in the fast growing industry.

FanDuel and DraftKings’ relentless marketing promotes users who have won millions of dollars in a single weekend, but for each user who does win, countless others walk away with nothing. For a participant to win a million dollar cash prize they must defeat hundreds of thousands of other competitors. Strategy is paramount, and salary cap limitations imposed by DFS sites means a participant cannot simply buy up all the best talent. Ideally, a participant would want to select players who few of his competitors have selected. By selecting these “under the radar” players and having those players post substantial statistics, a participant could drastically enhance his chances of victory in a mass entry contest. Information about the players that competitors have selected for their lineup are not available to the public, but having knowledge of the betting strategies of competitors would be advantageous.

The potential for abuse is more than theoretical here. Both DraftKings and FanDuel have acknowledged that Haskell won $350,000 on a $25 bet in a mass entry contest on FanDuel. Additionally, in his employment capacity, Haskell was privy to the betting information of competitors and could gain a competitive advantage by applying this information. A spokeswoman for DraftKings said that Haskell made a “mistake” and did not use information improperly, although this is probably of little solace to customers who place bets and rely on the soundness and ethics of DFS sites to operate responsibly.  DraftKings and FanDuel’s recent announcement of policies to prohibit their employees from betting may bring comfort to some, but others are not convinced that self-proclaimed policies are the best path to compliance.  As infamous companies such as Enron demonstrated, impressive looking ‘compliance programs’ are sometimes not worth the paper they are written on.  This legal backdrop explains why some legislators are now throwing the flag at the industry and suggesting it may be time for legislative hearings and new legislation.

This story will continue to evolve over the coming weeks, as DraftKings and FanDuel try to get a handle on the situation and try not to fumble their hold on an extremely lucrative industry.  In the meantime, people may wish to be cautious when placing their bets on fantasy sports, and consider whether such actions are a true bet or Hail Mary.

Seth Berenzweig is the Managing Partner of Berenzweig Leonard, who works with business executives including former professional athletes and appears on national television to discuss breaking business and sports news.  Drew Smith is the Director of Professional Sports Law at Berenzweig Leonard, LLP and also represents current and former professional athletes.