Sports Legislation and Regulation in 2016: The Hot Topics (Part I)

In the realm of sports law, 2016 will provide some interesting developments as to legislation and regulation. First, many states are likely to take a stance on daily fantasy sports in 2016 — both in the courts and via state legislation. Second, the FCC will rule on “linear” online video platforms that offer sports streaming. Third, the Washington Redskins’ challenge to the cancellation of its trademark registration will face a federal bill proposing to force a name change. And finally, the bill proposal seeking to end sports blackouts will gain attention.

DAILY FANTASY SPORTS

Daily Fantasy Sports — or “DFS” — made a splash in 2015 at both ends of the spectrum. At one end, business was booming. DFS industry leaders DraftKings, Inc. and FanDuel, Inc., which collectively control 95 percent of the market, were both able to achieve massive revenue gains over the course of the year. DFS has grown at such a rate that the games were expected to generate $2.6 billion in entry fees during 2015, with the industry projected to grow at 41 percent annually, “reaching $14.4 billion in 2020.”  At the other end, DFS companies have fallen under increasing scrutiny from lawmakers and legal authorities at both the state and federal levels.

On Sunday, September 27, 2015, while the NFL’s early-afternoon games were still being played, a DraftKings employee inadvertently disclosed company data on player popularity over the internet — data pertinent to success in DFS games. In the following weeks, news broke that the employee won $350,000 on September 27th playing a DFS game on the site operated by DraftKings’ rival, FanDuel. Insider trading allegations began to fly.

The news sparked a myriad of consumer-based class action lawsuits filed against DraftKings and FanDuel. However, the companies have much larger concerns. DFS games arguably qualify as “unlawful gambling” under the definitions of existing laws in many states. Why is this concerning?

America’s states maintain the right to individually regulate gambling. DFS companies may therefore lose a significant amount of business if they are forced to cease operations in the nation’s most populous states. Moreover, several federal anti-gambling statutes allow for federal prosecution based on state law. Meaning, if the activity is illegal in a given state, one or more federal statutes may apply. As a result, DFS companies may be liable for fines, asset seizures (such as money), and even the imprisonment of officers.

To date, DFS companies are facing trouble. In the majority of states, the issue whether DFS games are illegal is ambiguous. This is because most states do not have gambling laws that expressly name DFS, or fantasy sports in general, as legal or illegal; rather, broad tests are applied to determine whether an activity constitutes unlawful gambling. The issue in each state therefore becomes factually argumentative. For instance, in New York, a person “engages in gambling when he stakes or risks something of value upon the outcome of a contest of chance or a future contingent event not under his control or influence, upon an agreement or understanding that he will receive something of value in the event of a certain outcome” (emphasis added). A “contest of chance” in New York means “any contest, game, gaming scheme or gaming device in which the outcome depends in a material degree upon an element of chance, notwithstanding that skill of the contestants may also be a factor therein.” Accordingly, in states using language similar to New York’s statutes (i.e. Illinois), the test of legality is a balance between the amount of chance and skill involved in the DFS contests. Challenges to a DFS company’s legality, such as in a lawsuit brought by a state’s attorney general, may consequently result in unfavorable rulings. And, where federal authorities can prove that a DFS transaction was unlawful in a particular state, the penalties under federal statutes can apply.

Yet, DFS companies are not dead in the water. This is where legislation comes in. It is true, of course, that state legislatures may pass adverse laws, turning those states into legal quicksand. Such a circumstance occurred in Arizona; the state expressly prohibits fantasy sports games played for money, thus precluding the acceptance of DFS wagers from IP addresses within its borders. However, many state legislators proposed bills at the end of 2015 seeking to expressly permit DFS games — even in states like New York and Illinois where the legality of DFS is currently being challenged in the courts. Although a state court may find DFS illegal pursuant to statutory definitions, the state’s legislative branch may subsequently override the decision by passing laws expressly permitting DFS activity (as well as pass legislation to prevent such a court decision). As mentioned, DFS companies are projected to grow exponentially. The potential for taxable income may become too irresistible for state legislatures, and it is possible for DFS companies to see sweeping legislation allowing them to carry on in spite of state court interpretations. Perhaps the DFS industry will be dealt a good hand.

SPORTS AND ONLINE STREAMING

During 2015, the FCC kicked around the idea of regulating online video streaming services, including those offering sports streaming. As for now, the regulation plan would not apply to on-demand services like Netflix, Hulu, or Youtube. The plan targets “linear” programming providers — those services and apps that provide pre-scheduled programs like the news or live sports. In other words, the plan applies to services and apps that are essentially an online version of a cable TV company.

As a result, the regulation plan, if enacted, will regulate live online sports streaming. Therefore, services like ESPN’s live streaming, as well as the live streaming services and apps provided by the major professional sports leagues (i.e. NHL Game Center), may be affected.

The FCC explained that the regulation plan aims to increase competition among online programming providers. The plan seeks to enforce cable network rules to internet streaming. Meaning, online streaming providers will have access to the same licensing rules that regulate cable television networks. Due to this, the FCC explained, it will be easier for non-network streaming companies to negotiate for the rights to stream network programs.

It comes to no surprise that many of the entertainment industry’s biggest players are opposed to the FCC’s plan. Gregory Barnes, general counsel to tech lobbying firm Digital Media Association, stated the following:

This is a classic example of a solution in search of a problem. Our concern is that the entire space is in the nascent stage, and we’re still tinkering with existing business models to respond to consumer demands. We don’t know where the sweet spot is yet, and our fear is that if you regulate a subset of the industry, it will eliminate our ability to experiment in the future.

Tomorrow’s post will focus on the other big issues sure to take center stage in 2016: the Washington Redskins’ trademark registration saga and the bill  seeking to end sports blackouts.

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