The Legal Attack on Fantasy Sports

by Thomas Paschalis November 9 2007, 18:32
In the last thirty years, fantasy sports have evolved from a little known hobby into a $1.5 billion industry.[1]  While historical accounts differ, CNN claims that the first fantasy league began in 1980 and involved the use of baseball statistics.[2]  Fantasy sports grew drastically during the 1990s, as internet technology gave rise to services that could conduct quick statistical updates and provide fantasy managers with up-to-the-minute league scores and standings.[3]  By 2005, there were more than 12.6 million Americans competing in fantasy sports leagues, spending nearly $500 per player.[4]  The rapid growth of the fantasy sports industry has spurred litigation that threatens viability of the industry as a whole.  In this article, I will discuss a recent case in which a federal court was asked to declare fantasy sports to be a form of illegal gambling.

The legality of fantasy sports came under direct attack in a 2007 case before the District Court of New Jersey.  In Humphrey v. Viacom, Inc., a Colorado attorney sued the proprietors of three pay-to-play fantasy sports sites, invoking several state qui tam statutes that allow for "private attorney generals" to seek the recovery of losses incurred by gamblers.[5]  The plaintiff claimed that participating in fantasy sports constitutes illegal gambling because players "wager" the entry fees and the victor is determined by chance, rather than skill.[6]

The plaintiff emphasized the distinction between games of skill, which are not prohibited by gambling laws, and those of chance, which are subject to the Unlawful Internet Gambling Act of 2006 (Gambling Act).[7]  Focusing on elements beyond the fantasy player's control, such as injuries or a coach's decision to rest a player at the end of a game, the plaintiff likened fantasy sports to illegal games of chance such as online poker.[8]  The court disagreed, however, and dismissed the case.[9]  In doing so, it indicated that fantasy sports are games of skill because players actively manage their teams, employing their sports knowledge and making strategic decisions.[10]

The Gambling Act also supports the court's decision.  When drafting the statute, Congress specifically exempted fantasy sports from its purview.[11]  Additionally, the Humphrey court cited legal precedent distinguishing entry fees from wagers.[12]  Most courts agree that when competitors pay fees to enter into a contest, the fee is not considered a wager.[13]  The legal distinction between entry fees and wagers stems from the fact that with entry frees, one player is guaranteed to win, and the size of the prize is not proportionate to the fees collected.[14]  Courts also find it significant in the evaluation of fantasy sports that the proprietors of fantasy web sites are neutral parties who do not themselves compete for the prize, as is common in many forms of gambling.[15]  Thus, pay-to-pay fantasy sports are likened to contests such as spelling bees and beauty pageants.[16]

While noting that part of the entry fee is payment for a site's statistics-gathering service, the court did not address whether the profit made by fantasy sports sites should be at issue.  The plaintiff in Humphrey asserted that fantasy sports sponsors keep between forty and sixty percent of the money players pay to compete in their leagues, a higher percentage than lotteries and home poker games that have been the subject of recent raids in South Carolina.[17]  In fact, Mr. Humphrey pointed out that pay-to-play fantasy sites do not accept entry fees from players in Montana, where state law limits the amount a fantasy sports sponsor may keep to fifteen percent.[18]

This argument may be an appeal to a factor inextricably linked to gambling laws - morality.  By making the aforementioned arguments, the plaintiff likely sought to portray fantasy sports sponsors in the same light as casinos, which are more than mere neutral parties in a competition.  Despite this effort, there does not appear to be a prevalent feeling amongst Americans that fantasy sports are immoral.  In fact, Mississippi College of Law professor Michael McCann states that the use of the word "fantasy" alone suggests an "innocence to it."[19]

Even if fantasy sports were seen as immoral, it is questionable whether such a perception would suffice as a reason to prohibit pay-to-play fantasy entities altogether.  As more localities look to casino licensing as a way to create a new source of revenue, it appears as though the modern trend is to use the tax code, rather than the criminal code, to invoke society's notions of morality.  While the passage of the Gambling Act may seem to counter this trend, the stated purpose of the statute is to prevent debt-related problems associated with internet gambling.[20]  Though some may see this as a pretext arising from the difficulties of regulating internet gambling, the Gambling Act's goal does not expressly contradict the movement to distinguish immorality from criminality.

As a result, fantasy sports players can rest easy in the knowledge that this hobby is not a form of illegal gambling.  Fantasy league sponsors may also celebrate their victory, as the industry industry has survived this potentially lethal threat.  Despite this triumph, the economic success of fantasy football will likely keep this industry in the legal spotlight, and courts are already beginning to address the intellectual property and privacy implications of fantasy sports.

Sources

[1] Michael McCarthy, Fantasy Sports Ruling Could Have Wide Impact, USA Today, Oct. 16, 2007, available at http://www.usatoday.com/sports/fantasy/2007-10-16-fantasy-ruling_N.htm.

[2] Chris Isidore, The Ultimate Fantasy - Profits, CNNMoney.com, Sept. 2, 2003, http://money.cnn.com/2003/08/29/commentary/column_sportsbiz/sportsbiz/index.htm (last visited Oct. 31, 2007).

[3] Id.

[4] Stephen Dorman, The Fantasy Football Phenomenon, The Acorn, Aug. 3, 2006, available at http://www.theacorn.com/news/2006/0803/Sports/076.html.

[5] Humphrey v. Viacom, Inc., No. 06-2768 (DMC), 2007 WL 1797648, at *3 (D.N.J. June 20, 2007).

[6] Id. at *2.

[7] 31 U.S.C. § 5361 et seq.

[8] Chuck Humphrey, Lawsuit Seeks To Recover Fantasy Sports Gambling Losses, July 9, 2007, http://www.gambling-law-us.com/Articles-Notes/fantasy-sports-lawsuit.htm (last visited Nov. 3, 2007).

[9] Humphrey, 2007 WL 1797648, at *1.

[10] Id.

[11] 31 U.S.C. § 5362(1)(E)(ix).

[12] Humphrey, 2007 WL 1797648, at *8.

[13] Id.

[14] Id. at *7.

[15] Id. at *8-9.

[16] Id. at *7.

[17] Humphrey, supra note 8.

[18] Id.

[19] Tresa Baldas, Fantasy Sports Or Real-Life Gambling?, The Nat'l L.J., Aug. 21, 2006, available at http://www.law.com/jsp/article.jsp?id=1155892475747.

[20] 31 U.S.C. § 5361(a).

 

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