A Kings Duel: Law vs. Fantasy Sports
By Anthony Bianco, Staff Writer and Cognoscenti of Sports
Unless you do not watch television, you have almost certainly seen an advertisement for either DraftKings or FanDuel. Both of these companies have spent millions upon millions of dollars advertising as they each fight to become the top dog in the daily fantasy sports industry. In fact, DraftKings spent 81 million dollars between August 1st and September 15th. [1]. DraftKings vows to hand out one billion dollars in 2015, while FanDuel expects to payout two billion dollars this year. [2]. However, unfortunately for DraftKings and FanDuel, it’s not just their overbearing marketing campaigns and million dollar guarantees that have both of them under the spotlight.
Through my personal experience and thankfully, success, I know that both sites have the same general rules for their daily fantasy games. For instance, if I enter into an NFL daily fantasy game, I must pay the entry fee and then proceed to select my team. Each site assigns a dollar value to every NFL player, loosely based on that player’s recent performance. I must select a full roster for my entry while remaining under the designated salary cap. While it can be easy to simply select the elite players, the difficulty is finding the cheaper players who will score the most points and provide the highest return on their value.
While both of these companies are growing at extreme rates, their success comes with responsibility. The primary responsibility for these companies is ensuring the customers an equal opportunity to win the games they have entered. Many lawmakers are now calling for a federal regulation of DraftKings and FanDuel’s amid an accusation of “insider trading.” [3].
Before the third week of the NFL season began, a DraftKings employee admitted to prematurely releasing player data that would give any customer an unfair advantage in selecting their players for the high stakes tournaments. [4]. Coincidentally, this DraftKings employee won $350,000 the exact same week in a high stakes tournament on FanDuel. Id. The player data released was the player ownership percentages, which customers do not have access to until after their lineups locked and could not be changed. Id.
Access to player ownership values before lineups lock is particularly useful in high stakes tournament because these tournaments can have upwards of 100,000 entries. The main strategy of the high stakes tournaments is to select the highest scoring players who are least owned by other customers. Therefore, with so many entries, a person who has access to the ownership values could use the best players with the lowest ownership value to potentially maximize their place in the standings. While this access certainly does not guarantee success, it without question gives the person with access a better chance of finishing higher in the standings because his or her lineup contains players who are not owned by the majority of other entries.
This scandal forced both DraftKings and FanDuel to investigate not only the accusation that the DraftKings employee used the player percentages to win $350,000 on FanDuel during week 3 of the NFL season, but also what other employees from either company had access to this data, and could they have been using it to their benefit. [5]. Darren Rovell, an established business sports reporter for ESPN, reported that FanDuel’s data demonstrated that employees of DraftKings have won a total of 0.3% of FanDuel’s total prizes. Id. While 0.3% does not sound that much, FanDuel has issued two billion dollars in prizes, therefore 0.3% is equal to six million dollars. Id. After DraftKings concluded their investigation, it defended its employee and denied any accusation of wrongdoing. [6]. However, in the aftermath of defending its employees, both DraftKings and FanDuel permanently banned their employees from playing daily fantasy sports on competitors’ sites. Id. Obviously there are still skeptics of the regulations, or lack thereof, within this industry.
Both DraftKings and FanDuel have hired law firms not only to investigate this scandal, but a general investigation into each company’s internal regulations. [7]. FanDuel has hired former United States Attorney General, Michael Mukasey and DraftKings’ investigation will be led by former United States Attorney John Pappalardo. Id. These independent investigations are more than just a public relations ploy; both companies are looking to avoid a congressional investigation into their companies. Federal regulation of the daily sports industry could be right around the corner if both companies do not tighten up their controls. Id.
The Unlawful Internet Gambling Enforcement Act of 2006 carved out a specific provision to legalize fantasy sports because it was determined to be a game of skill rather than chance. [8]. Nevertheless, New York Attorney General Eric Schniederman has sent letters to both companies in which he requested the list of employees with access to player data before the public has access and how each company is currently preventing potential employee fraud. [9]. Both DraftKings and FanDuel have until October 15th to respond to Schniederman’s inquiries. Id. It will be interesting to see Schniederman’s next step once he receives the responses as many lawmakers are already urging federal regulators to review the daily fantasy industry as a whole. Id.
A class action complaint was filed October 8th in the Southern District of New York against DraftKings and FanDuel. [10]. The complaint, among other things, alleges negligence, fraud, and misrepresentation. Id. However, this class action may not last long in federal court due to each company’s terms of use, which call for arbitration at an individual capacity. [11].
The Wall Street Journal first reported on October 14th that DraftKings had officially received the attention of the F.B.I. [12]. Shy of launching a full investigation, the F.B.I. is reportedly contacting customers of DraftKings to inquire about their general experiences with the company. Id. Later that night the New York Times reported that the customers contacted were some of the industry’s most prominent and the F.B.I.’s primary focus was DraftKings. [13]. It is also being reported that the F.B.I. is concerned that DraftKings accepted deposits and entry fees from customers who reside where daily fantasy sports is prohibited by state law (Arizona, Iowa, Louisiana, Montana, Nevada, and Washington). Id.
Numerous customers must have terminated their accounts with DraftKings and FanDuel amid all of this controversy, right? Wrong. DraftKings and FanDuel each had their most successful week in their respective history. [14]. The companies combined for 45.6 million dollars in entry fees. Id. These numbers clearly indicate that the interest in daily fantasy sports is strong and will continue to grow. Even though threats of a federal or congressional investigation could change how DraftKings and FanDuel regulate their business, it will not deter customers from chasing the major cash prizes.
[1] Perlberg, Steven, Are DraftKings and FanDuel Bombarding Fans with Too Many Ads?, Wall St. J., Sept. 16, 2015 at, http://blogs.wsj.com/cmo/2015/09/16/are-draftkings-and-fanduel-bombarding-fans-with-too-many-ads/
[2] Casey, Drew, DraftKings, FanDuel Make Millions, and Give Them Away, As Fantasy Revs Up, Sept. 20, 2015 at, http://www.cnbc.com/2015/09/20/draftkings-fanduel-make-millions-and-give-them-away-as-fantasy-revs-up.html
[3] Brennan, John, N.J. Lawmakers Urge Federal Regulators to Review Daily Fantasy Sports , , Oct. 6, 2015 at, http://www.northjersey.com/news/n-j-lawmakers-urge-federal-regulators-to-review-daily-fantasy-sports-1.1426615.
[4] Drape, Joe & Williams, Jacqueline, Scandal Erupts in Unregulated World of Fantasy Sports, N.Y. Times, Oct. 5, 2015 at , http://www.nytimes.com/2015/10/06/sports/fanduel-draftkings-fantasy-employees-bet-rivals.html?smid=tw-bna&_r=1.
[5] Gaines, Cork, DraftKings Employees Reportedly Won Nearly $6 Million Playing Daily Fantasy Sports at Rival FanDuel, Bus. Insider, Oct. 6, 2015 at, http://www.businessinsider.com/draftkings-daily-fantasy-sports-fanduel-2015-10.
[6] Borchers, Callum & Woodward, Curt, DraftKings CEO Defends Ethics, Balks at Regulation, Bos. Globe, Oct. 8, 2015 at, https://www.bostonglobe.com/business/2015/10/07/draftkings-ceo-says-fantasy-sports-industry-doesn-need-regulation-ensure-fair-play/EHQ08NHXBIMAXVNhWXfxLO/story.html.
[7] Schrotenboer, Brent, DraftKings, FanDuel Each Seek Third-party Reviews, U.S. Today, Oct. 7, 2015 at, http://www.usatoday.com/story/experience/south/my-south-experience/sports/2015/10/07/draftkings-fanduel-seek-third-party-reviews-inside-trading/73515516/.
[8] 31 U.S.C.A. § 5362 (West)
[9] Drape, Joe & Williams, Jacqueline, New York Attorney General Opens Inquiry into Fantasy Sports Sites, N.Y. Times, Oct. 7, 2015 at, http://www.nytimes.com/2015/10/07/sports/draftkings-fanduel-inquiry-new-york-attorney-general.html.
[10] Adam JOHNSON, Individually And On Behalf of All Others Similarly Situated, Plaintiff, v. FANDUEL, INC., a Delaware corporation, and DRAFTKINGS, INC. a Delaware corporation, Defendants., 2015 WL 5915999 (S.D.N.Y.)
[11] https://www.draftkings.com/help/terms; https://www.fanduel.com/terms
[12] Reagan, Brad & Barrett, Devlin, FBI, Justice Department Investigating Daily Fantasy Sports Business Model, Wall St. J., Oct. 14, 2015 at, http://www.wsj.com/articles/fbi-justice-department-investigating-daily-fantasy-sports-business-model-1444865627.
[13] Drape, Joe & Williams, Jacqueline, Fantasy Sports Said to Attract F.B.I. Scrutiny, New York Times, Oct. 14, 2015 at , http://www.nytimes.com/2015/10/15/sports/draftkings-fanduel-fbi-investigation.html?_r=0.
[14] Kim, Susanna, FanDuel, DraftKings Score Record Weekend Despite Controversy, ABC News, Oct. 12, 2015 at, http://abcnews.go.com/Business/fanduel-draftkings-score-record-weekend-controversy/story?id=34423381.
