David Clifton – Licensing Expert – Will the fantasy sports explosion cross the Atlantic

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David Clifton

Gambling  industry legal expert David Clifton, examines the fast growing US daily fantasy sports market, and considers whether Europe’s diverse regulatory conditions will allow for fantasy sports to gain  traction and new market entry

Fantasy sports have exploded in a big way in the US. My inbox seems saturated with emails informing me that this is the fastest growing segment in the online gambling industry with claims that 41 million Americans spent an estimated $11 billion total in fantasy sports leagues last year. If accurate, this is an extraordinary increase from the 2 million Americans thought to have participated in fantasy sports before the internet became generally accessible.

Excited industry commentators have forecast a similar explosion this side of the Atlantic Ocean. That is not to say that there is not already an established season-long model over here, but the suggestion is that the UK and the rest of Europe could experience the same remarkable growth in daily fantasy sports that has occurred in the US. I certainly know from the increasing number of new clients approaching us for advice that they have witnessed the runaway success of the US market leaders FanDuel and DraftKings and hope to replicate that success here in the UK, with a belief that daily contests and in-play opportunities will provide a far more attractive customer proposition than the traditional season-long format.

However, what may have been overlooked by many of those commentators is that the recent growth in the US of fantasy sports has been an unintended but direct consequence of the Unlawful Internet Gambling Enforcement Act. Fantasy sports are exempted from the prohibitions on online gambling imposed by UIGEA because they are viewed as being skill-based games. That view has yet to be tested in the US courts and it has been suggested that, in political terms, little prospect of any such challenge exists whilst the professional sports leagues in the US continue to receive very substantial income from fantasy sports operators in exchange for use of the leagues’ statistics and other intellectual property.

However, UIGEA does not exempt fantasy sports from the effect of individual state laws and not all US states regard fantasy sports as games of skill, with an estimated twelve or so states taking the view that even if it does not predominate, the element of chance involved in fantasy sports renders it an illegal gambling activity. Some states also take the view that if the prizes are based, wholly or in part, on the number of participants (rather than being fixed prizes known in advance) then the entry fees constitute illegal wagers. It is no surprise then that currently both FanDuel’s and DraftKings’ Terms of Use disqualify residents of Arizona, Iowa, Louisiana, Montana and Washington.

Operators targeting Europe will similarly need to take careful account of the differing laws relating to fantasy sports applicable in different European countries. They will also need to bear in mind that in many of those countries gambling laws share the same characteristics as shifting sands. For instance, whilst such operators may have taken encouragement from the October 2013 decision of the German Federal Administrative Court that a Bundesliga manager game, in the format of a fantasy league, was not to be classified as a game of chance under the Inter-State Treaty of Gambling, they need to take account also of last month’s reported criticism of that Treaty as being “incapable of achieving its objectives” made by none other than the Minister of the Interior and Sport for the German state of Hesse, whose department is responsible for issuing Germany’s 20 sports betting licences.

In the UK, any remaining doubt about the true character of fantasy sports was removed by section 11 of the Gambling Act 2005. Before then, different examples of fantasy “competitions” had been the subject of UK court proceedings brought by the tax authorities to determine whether they were liable to betting duty, culminating in a 1998 case when the Court of Appeal decided that the “Fantasy Fund Manager” competition run by News International Newspapers constituted pool betting.

Section 11 provides that a person makes a bet (despite the fact that he does not deposit a stake in the normal way of betting) if:

  • he participates in an arrangement in the course of which participants are required to guess (which includes predicting using skill or judgment):
    • the outcome of a race, competition or other event or process,
    • the likelihood of anything occurring or not occurring, or
    • whether anything is or is not true,
    • he is required to pay to participate, and
    • if his guess is accurate, or more accurate than other guesses, he is to—
      • win a prize, or
      • enter a class among whom one or more prizes are to be allocated (whether or not wholly by chance).

The Government’s Explanatory Notes to section 11 underline the intention behind section 11, as follows: The effect of making such schemes subject to regulation as betting is to ensure that all the relevant protections provided by the Act in respect of betting apply. Therefore, schemes such as “fantasy football” competitions or the Racing Post’s “Ten to Follow” competition will be regulated in the same way as bets placed on single events”.

As a result, anyone wishing to provide “pay to participate” fantasy sports online will require an operating licence from the Gambling Commission. This requirement, coupled with the accompanying point of consumption tax regime and the fact that, unlike the US, the UK has a very long-established and well serviced sports betting market, must surely make it questionable whether a similar explosion in daily fantasy sports is about to erupt on this side of the Atlantic Ocean or, at the very least, in the UK.

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David Clifton – Director – Clifton Davies

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