Does playing fantasy sports amount to gambling? Debate intensifies

Anyone watching sports on television can see that the business of daily fantasy sports contests has exploded.

Fueled by incessant TV advertising, the daily fantasy sports market — led by the two privately held online giants of the sector, FanDuel Inc. and DraftKings Inc. — has swelled into a multibillion-dollar business in just a few years.

Now the U.S. government and some state authorities, responding in part to a recent scandal involving a DraftKings employee, are taking a closer look at the legality of daily fantasy sports. That’s raising the specter of more regulations and a slowdown in the games’ soaring popularity.

“Right now most legal observers have viewed fantasy sports as falling on the side of being a game of skill” and thus legal and largely unregulated, said Jodi Balsam, an associate professor of law at Brooklyn Law School and a former lawyer with the National Football League.

“But this latest scrutiny is leading people to reevaluate if it’s truly a game of skill,” she said.

The daily fantasy sports business is expected to generate $3.7 billion in players’ entry fees this year, with the figure skyrocketing to $17.7 billion in 2020, according to Eilers Research, an Anaheim Hills firm that tracks the market.

Eilers also estimates that 3 million to 4 million people compete in daily fantasy sports contests.

A key recruiting tool has been the massive advertising. DraftKings and FanDuel together have spent $235 million on national TV ads so far this year, much of it after Aug. 1 in tandem with the start of the NFL season, according to the research firm ISpot.tv.

Fantasy sports leagues have been around for decades, of course. Fans draft professional athletes for their virtual teams and then, using points based on the athletes’ real-world performances, calculate how the teams finish after the season ends.

But with daily fantasy sports contests, contestants pay entry fees and build teams that can compete daily if they like, with prize money for winners that can reach hundreds of thousands of dollars.

Big-name investors have flocked to the sites, as have most of the major sports leagues. FanDuel has raised $363 million from investors including Alphabet Inc.’s Google Capital, KKR & Co., Shamrock Capital Advisors and NBC Sports Ventures.

In July, DraftKings said it raised $300 million from a group including Fox Sports, Major League Baseball, the National Hockey League and Major League Soccer.

There has always been a debate about whether daily fantasy sports amounts to gambling, and that debate has intensified lately.

DraftKings, FanDuel and other proponents say it’s a game of skill, not chance, and thus isn’t gambling. Daily fantasy sports has been allowed at the federal level because it was left untouched by the Unlawful Internet Gambling Enforcement Act of 2006.

“We strongly believe the games on our site — and daily fantasy sports in general — are legal,” Janet Holian, DraftKings’ chief marketing officer, said in a statement to The Times.

California and 44 other states allow daily fantasy games; five states don’t: Arizona, Iowa, Louisiana, Montana and Washington.

This month Nevada ordered a stop to daily fantasy sports in that state on the grounds that it “involves wagering” on sports and “constitutes gambling under Nevada law.” The state said DraftKings, FanDuel and others would need to obtain a gambling license to continue there.

“Everybody knows that daily fantasy sports is gambling; the contestants are wagering something for a chance to win money,” said Marc Edelman, an associate law professor and sports-law expert at Baruch College in New York.

“The question is whether this is illegal gambling, and the definition of illegal gambling varies by state,” Edelman said.

It’s a question other authorities are increasingly asking. Consider:

• The FBI and the Justice Department are investigating the industry to see whether daily fantasy sports violates federal gambling laws, the Wall Street Journal reported, citing unidentified sources.

The Justice Department team includes New York federal prosecutor Preet Bharara, who shut down the U.S. online poker industry in 2011, the Journal said. Both agencies told The Times that they would not confirm or deny whether the probes were underway.

• New York’s attorney general is seeking more information from DraftKings and FanDuel about their business practices and oversight of their employees to ensure that customers are treated fairly.

• Massachusetts’ attorney general reportedly also is investigating but declined to comment. In California, a spokeswoman for state Atty. Gen. Kamala Harris would not confirm or deny whether California is looking into daily fantasy sports operators.

The regulators’ interest increased this month when it was alleged that a DraftKings employee, Ethan Haskell, had used nonpublic data about contestants’ player choices to help win $350,000 when he played in an NFL contest at rival FanDuel.

DraftKings said last week that an independent probe of the matter revealed the allegation was untrue — that Haskell did not improperly use the data for his benefit — but both companies nonetheless promptly barred their employees from playing on either site.

The scandal deepened the belief among many observers that the daily fantasy sports business is akin to the stock market, albeit with less regulation. Fantasy sports lingo includes talk of entrants “buying” and “selling” players at certain price points for the entrants’ “portfolios.” The Haskell affair added the phrase “insider trading” to the discussion.

Regardless, DraftKings’ Holian said her company was “committed to making sure our industry operates in a manner that is completely transparent and fair for all consumers.”

FanDuel declined to comment beyond its recent public statements, including one in which the company said it would protect the “integrity of every game, every day” and that “the way fans have embraced our games is a clear sign that fantasy sports is here to stay.”

Still, everyone in daily fantasy sports, dubbed DFS, is watching to see whether authorities will demand more oversight, perhaps slowing the industry’s remarkable growth.

On DraftKings’ website, under the “frequently asked questions” page, is this question: “Does DraftKings support the regulation of DFS?”

DraftKings’ answer: “We are open to the discussion.”

james.peltz@latimes.com

Twitter: @PeltzLATimes

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