Fantasy Sports Uncertainty Brings Business to Gaming Lawyers

What’s challenging for the companies operating fantasy sports sites may be beneficial to the lawyers who practice in the gaming space.

Federal and state regulators are reportedly investigating whether an employee of DraftKings Inc. made $350,000 by using the company’s internal information to play at rival FanDuel. Those questions led DraftKings to retain John Pappalardo at Greenberg Traurig LLP and FanDuel to hire Michael Mukasey at Debevoise & Plimpton LLP internally to investigate the conduct.

While an internal investigation by lawyers at Greenberg Traurig LLP found no evidence of wrongdoing by the employee, according to the report which the company released on its website Oct. 19, it has led companies in the space to revisit their own codes of conduct and, more importantly, the current regulations and legislation that govern these sites.

But apart from investigations, attorneys who practice in the gaming area have been answering inquiries from prospective clients who want to know whether fantasy sports games are legal.

Because the regulations are unclear, many companies, including licensed gaming operators, may seek to enter the space. Companies who operate casinos and other land-based gaming businesses may try to expand into this relatively new area.

As a result, according to Pat Agnellini, a shareholder in the Atlantic City office of Brownstein Hyatt Farber Schreck LLP, fantasy sports sites are “creating opportunity in the sense that licensed operators are curious and want to know what they can do and can’t do with fantasy sports.”

It’s easy to see why there’s so much interest. According to the Fantasy Sports Trade Association, there are 56.8 million players in the U.S. and Canada, up from 41.5 million last year. The amount, on average, spent annually: $465 per player.

Major League Soccer, 21st Century Fox Inc. and Madison Square Garden have invested in DraftKings Inc.; while KKR & Co. and Comcast Corp. have invested in FanDuel,according to Bloomberg News .

But lawyers have so far been very cautious in encouraging entry.

As Kate Lowenhar-Fisher, a member of Dickinson Wright in Las Vegas, explained, “Many of us who are gaming lawyers had always been under the impression that fantasy sports are risky businesses governed by gambling laws. Other lawyers generated a lot of business by coming to less conservative positions.”

Being cautious doesn’t generate fees, she added. “Nothing shuts down a teleconference faster than saying ‘I think this is illegal gambling.’ It’s a full stop.”

What may have been a gray area of delineating between games skill and chance became clearer on Oct. 15. That’s when the Nevada Gaming Control Board said that fantasy sports sites are gambling subject to that state’s rules and regulations. The state is one of four — the others are Delaware, Montana and Oregon — that permit any betting on sports. And of the four, Nevada’s law is the most expansive, allowing the broadest range of sports gambling.

As Lowenhar-Fisher, explained, “We’re the only state with real sports betting so we know it when we see it.”

Other jurisdictions are also considering how to treat the sites, especially with so much potential tax revenue at stake.

But the specter of regulation is tamping down more entry. Canadian gaming company Amaya Inc., which had purchased the assets of PokerStars, the online company that had been shuttered in 2011 following charges that it had run afoul of U.S. gambling laws, also owns fantasy site Stars Draft.

Amaya announced on Oct. 19 that it was limiting the operation of StarsDraft “following a review of recent developments in a number of jurisdictions.”

Their actions are consistent with the cautious advice that both Agnellini and Lowenhar-Fisher give their clients. As Agnellinin put it, “If a casino wants to partner with an existing fantasy company to offer a contest on their website, we have to tell them that at it this point, the regulatory landscape is unclear. We need to figure out what’s happening across the country before they start engaging in this.”