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FEATURED ARTICLE
12/08
cecile park publishing
Head Office UK Cecile Park Publishing Limited, 17 The Timber Yard, Drysdale Street, London N1 6ND
tel +44 (0)20 7012 1380 fax +44 (0)20 7729 6093 info@e-comlaw.com
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US
Application of US law to
fantasy sports betting
Participants in fantasy sports leagues
typically pay a fee to participate,
which is then used to allocate a cash
prize to the ‘winner’ of that league,
after points have been allocated to
participants based on the
performance of ‘real life’ players.
Linda J. Shorey, Dennis M.P. Ehling,
Robert A. Lawton and Anthony R.
Holtzman of K&L Gates LLP examine
if US law - which prohibits wagering
on sport - applies to the operators of
fantasy sports leagues.
Fantasy sports is big business in the
US, with more than 27 million
players and annual revenues in the
range of $800 million to $1
billion1. The majority of the players
participate in traditional fantasy
leagues such as football and
baseball; however, fantasy leagues
have gone beyond the traditional
sports and now extend to bowling,
darts, NASCAR and fishing. With
such heavy participation, it is easy
to forget a key question - are
fantasy sports leagues legal? There
is no straightforward answer to
that question. This article explores
some of the issues surrounding the
question with respect to US federal
law2.
Nature of the game
Initially, it is necessary to
understand the nature of the
activity. Although many websites
offer a ‘play for free’ option3,
participants in fantasy sports
leagues typically pay an entry fee to
join the league. The fees range
from a nominal amount to several
thousand dollars. In exchange for
the fee, participants have an
opportunity to win prizes that, in
some cases, are quite substantial.
For example, Sportsline.com offers
participants the opportunity to
enter into a 12-team fantasy
football league4. The team with the
08
highest points total in the 12-team
league wins the prize. The prize
level depends upon the amount of
entry fee paid. At the highest level
prize, the participant pays an entry
fee of $499.95 for the opportunity
to win $3,500 in cash. The next
highest level has an entry fee of
$249.95 and a prize of $1,6005.
Once in a league, a participant
creates a fantasy team from among
the current professional athletes
playing the sport the league features.
For example, a US fantasy football
team would be comprised of
athletes currently playing in the
National Football League (NFL),
such as the fantasy teams in
Sportsline.com’s fantasy football
leagues. The fantasy teams in a
league compete weekly against each
other by comparing the actual
statistical performance of the
athletes on each fantasy team. In
most leagues, the participants have
the option to select players on their
‘team’ to ‘play’ and which to ‘sit’ each
week, i.e., selecting which players’
statistics will be counted for their
fantasy team each week. At the end
of the season, the fantasy team with
the best record wins. The participant
who owns the team winning the
league will receive a prize - either
cash, as with the Sportsline.com
winner, or other prizes. In effect, to
win the prize, participants ‘bet’ on
the week-to-week performance of
the professional athletes they
selected for their fantasy team and
the participants own the ability to
select the ‘right’ athletes to ‘play’ for
their fantasy team each week.
The query explored below is
whether the league operators that
accept fees for these games (fees
that ultimately will fund the prizes
awarded) are legally any different
from a person, entity, or operator
of a website that accepts wagers on
a weekly NFL game (which, with
limited exceptions, is illegal in the
US)? While many believe there is a
difference, reality is that the issue is
largely unresolved under US
federal law6.
Underpinnings of the
perception of legality
Those associated with the fantasy
sports industry focus much
attention on the US Supreme
Court decision not to review the
decision in ‘C.B.C. Distribution &
Marketing, Inc. v Major League
Baseball Advanced Media, L.P.’7.
Some commentators believe this
decision supports a conclusion that
wagering on fantasy sports is legal.
Other ‘evidence’ that is often
offered to support the legality of
wagering on fantasy sports include
the exception for fantasy sports in
the definition of ‘unlawful internet
gambling’ in the Unlawful Internet
Gambling Enforcement Act
(UIGEA) and the decision in
Humphrey v Viacom, Inc.8 While
these three items do provide
‘evidence’ of legality (i.e., support
an argument), they are by no
means conclusive. A careful look at
this ‘evidence’ and a review of the
Wire Act9, shows that a
counterargument can be made.
CBC Distribution v Major
League Baseball
In the ‘CBC Distribution’ decision,
the Eighth Circuit Court of
Appeals addressed the issue of
whether fantasy sports leagues are
required to pay a license for the
right to use Major League Baseball
player names and statistics in
fantasy games. The original
plaintiff in the case, CBC
Distribution and Marketing, Inc.
(CBC Distribution), operated
fantasy baseball leagues through its
website. From 1995 through 2004,
CBC Distribution licensed the use
of players’ names and statistics
from the Major League Players
Association. In 2005, after the
license agreement expired, the
Players Association licensed the
exclusive right to use players’
world online gambling december 2008
US
names and statistics to Advanced
Media, not CBC Distribution. As a
result, CBC Distribution was no
longer authorized to use the
players’ names or statistics in its
fantasy sports league. CBC
Distribution filed a lawsuit for a
declaratory judgment to establish
its right to use Major League
players’ names and statistics
without a license.
The federal district court granted
summary judgment to CBC
Distribution, concluding that CBC
Distribution did not infringe on any
rights of publicity that belonged to
Major League Baseball players. The
district court further held that, even
if CBC Distribution did infringe on
a player’s rights to publicity, CBC
Distribution’s First Amendment
rights preempted those rights. On
appeal, the Eighth Circuit agreed
with the district court and
concluded that CBC Distribution’s
First Amendment right to use a
player’s statistics outweighed any
Major League Baseball player’s or
team owner’s right to publicity in
that information.
Neither the Supreme Court’s
denial of certiorari nor the Eighth
Circuit decision addressed the
legality of wagering on fantasy
sports. The Eighth Circuit decision
simply and solely permitted the use
of players’ names and statistics by
fantasy sports leagues without a
license. Moreover, the Eight Circuit
decision is binding only in the
states of the Eighth Circuit, which
includes, i.e. Arkansas, Iowa,
Minnesota, Missouri, Nebraska,
North Dakota, and South Dakota.
UIGEA
The UIGEA10 was signed into law
on 13 October 2006. Under the
UIGEA, an entity commits a
crime11 if it:
● is engaged in the business of
betting or wagering;
● accepts money or a money
substitute in connection with
world online gambling december 2008
The UIGEA
definition is
just one
source that a
court might
take into
account when
construing
‘bets or
wagers’ for
purposes of
the Wire Act
another’s participation in ‘unlawful
internet gambling’; and
● acts ‘knowingly’ in connection
with the conduct described in the
prior elements12. The UIGEA
defines ‘unlawful internet
gambling’ as ‘to place, receive, or
otherwise knowingly transmit a bet
or wager by any means which
involves the use, at least in part, of
the internet where such bet or
wager is unlawful under any
applicable Federal or State law in
the State or Tribal lands in which
the bet or wager is initiated,
received, or otherwise made’13.
In elucidating the definition of
‘unlawful internet gambling’, the
UIGEA14 defines ‘bet or wager’ and
then excludes, among other things,
participation in a fantasy sports
league from the term, if certain
criteria are met:
‘(1) Bet or wager. The term ‘bet or
wager’ (A) means the staking or risking by
any person of something of value
upon the outcome of a contest of
others, a sporting event, or a game
subject to chance, upon an
agreement or understanding that the
person or another person will receive
something of value in the event of a
certain outcome;
(B) includes the purchase of a
chance or opportunity to win a
lottery or other prize (which
opportunity to win is predominantly
subject to chance); [but]
(E) does not include (ix) participation in any fantasy or
simulation sports game or
educational game or contest in
which (if the game or contest
involves a team or teams) no fantasy
or simulation sports team is based
on the current membership of an
actual team that is a member of an
amateur or professional sports
organization ... and that meets the
following conditions:
(I) All prizes and awards offered to
winning participants are established
and made known to the participants
in advance of the game or contest
and their value is not determined by
the number of participants or the
amount of any fees paid by those
participants.
(II) All winning outcomes reflect
the relative knowledge and skill of
the participants and are determined
predominantly by accumulated
statistical results of the performance
of individuals (athletes in the case of
sports events) in multiple real-world
sporting or other events.
(III) No winning outcome is based (aa) on the score, point-spread, or
any performance or performances of
any single real-world team or any
combination of such teams; or
(bb) solely on any single
performance of an individual athlete
in any single real-world sporting or
other event.’
An entity cannot violate the
UIGEA unless it commits a
‘predicate offense’, such as a
violation of the Wire Act.
Nevertheless, the UIGEA does not
expressly purport to define what
actually constitutes an ‘offense’
under the Wire Act. Rather, the
UIGEA defines a separate offense
for the use of financial
mechanisms in connection with
certain activities that otherwise
violate the Wire Act.
Humphrey v Viacom
Humphrey represents the first and,
at this time, only major challenge
to the legality of fantasy sports.
Humphrey, however, was decided
by a federal district court
attempting to construe New
Jersey’s qui tam statute. Under the
qui tam statute, a stranger may
seek the recovery of gambling
losses of others. In Humphrey, the
plaintiff was a Colorado attorney
who filed a complaint against ten
defendants, including CBS Corp.
and Walt Disney, seeking to recover
damages in excess of $75,000. The
Plaintiff admitted that he did not
engage in fantasy sports games, but
09
US
demanded the recovery of losses
suffered by unnamed individuals.
The court dismissed the case,
concluding, among other things,
that entry fees paid by participants
in fantasy sports leagues were not
‘bets’ or ‘wagers’ because ‘entry fees
do not constitute bets or wagers
where they are paid
unconditionally for the privilege of
participating in a contest, and the
prize is for an amount certain that
is guaranteed to be won by one of
the contestants (but not the entity
offering the prize)’.
Why care about the Wire Act?
The Wire Act15 is perhaps the most
important federal criminal statute
that must be considered when an
online fantasy sports league has
participants who are located
outside the state where the
operator of the website is located.
The Wire Act provides, in its
pertinent part: ‘whoever being
engaged in the business of betting
or wagering knowingly uses a wire
communication facility for the
transmission in interstate or
foreign commerce of bets or
wagers or information assisting in
the placing of bets or wagers on
any sporting event or contest...shall
be fined under this title or
imprisoned not more than two
years, or both’. This language is
ambiguous in a number of
respects, including with regard to
what constitutes a ‘bet or wager’
and whether the Act covers bets or
wagers placed on things other than
sporting events and sporting
contests16.
Bet or wager?
The Wire Act does not define ‘bet
or wager’. While the definition of
‘bet or wager’ in the UIGEA - as
discussed above - excludes fantasy
sports, that does not mean the
term ‘bet or wager’ in the Wire Act
will be construed to have the same
meaning as it does under the
10
The Wire Act’s
coverage is
not limited to
bets or
wagers
placed on
sporting
events or
sporting
contests
UIGEA. There is ‘evidence’ that
would support the opposite
conclusion.
The Internal Revenue Code (IRC)
and a regulation promulgated
pursuant to it indicate that, for
federal taxation purposes, a ‘wager’
includes the payment of money to
enter a contest that is structured
like a fantasy sports league. Section
4401(a) of the IRC17 subjects
certain ‘wagers’ to a federal tax.
Both section 4421(1) and the
regulations define ‘wager’ to
include ‘[a]ny wager placed in a
wagering pool with respect to a
sports event or a contest, if such
pool is conducted for profit’18. The
regulations include two relevant
definitions:
● ‘wagering pool conducted for
profit’ is defined as ‘any scheme or
method for the distribution of
prizes to one or more winning
bettors based upon the outcome of
a sports event or a contest, or a
combination or series of such
events or contests, provided such
wagering pool is managed and
conducted for the purpose of
making a profit’19; and
● ‘contest’ as ‘any type of contest
involving speed, skill, endurance,
popularity, politics, strength,
appearances, etc., such as a general
or primary election, the outcome
of a nominating convention, a
dance marathon, a log-rolling,
wood-chopping, weight-lifting,
corn-husking, beauty contest, etc.’20
Although by no means certain, the
definition of ‘contest’ could be read
to include an individual player’s
performance in a given team event.
If so, then a ‘scheme or method for
the distribution of prizes’ based
upon the outcome of such contest
would meet the definition of a
‘wagering pool’, and bets on such
pools would constitute ‘wagers’
under the tax regulations’
definition.
These tax regulations went into
effect three years before the Wire
Act was enacted. For purposes of
construction of the terms ‘bet or
wager’ and ‘contest’ under the Wire
Act, the US Congress would be
presumed to have been aware of
these regulations at the time of the
Wire Act’s enactment21. Thus,
arguably, Congress might be
presumed to have intended to
adopt the IRC’s broad definitions
of ‘wager’ and ‘contest’ when it used
the same terms in the Wire Act.
Just because the participants who
‘wager’ in an internet fantasy
sports league place their wagers
against one another (as opposed to
the house), with the only
involvement of the sponsoring
business being to facilitate the
transactions and collect a fee for
doing so, does not mean the
activity might not be classified as
wagering. Nor is it necessarily true
that the Wire Act does not prohibit
wagers based on ‘contests’ between
the participants themselves (such
as an individual’s skill in predicting
who will have better statistics in a
given week’s game).
While the UIGEA definition of
‘bet or wager’ defines ‘bet or wager’
as ‘the staking or risking by any
person of something of value upon
the outcome of a contest of others,
a sporting event, or a game subject
to chance’, the Wire Act definitions
of ‘bets or wagers’ and ‘contest’ does
not specifically exclude wagers
placed in a player-to-player setting
based on the relative ‘skill’ of the
participants. Thus, even to the
extent that participants in a fantasy
game are said to be placing wagers
on their respective skill in
predicting the performance of a
given professional athlete in a given
game, it is conceivable that the Wire
Act might be interpreted to regulate
that conduct as well. The Wire Act
simply proscribes anyone in the
business of betting or wagering
from knowingly using the internet
or another wire communication
facility ‘for the transmission’ of ‘bets
world online gambling december 2008
US
or wagers’ or related information on
‘sporting events or contests’ in
interstate or foreign commerce. An
internet-gaming operator that
facilitates the placement of online
wagers by US-based persons in a
player-to-player setting might be
considered to ‘transmit’ those
wagers by receiving and processing
them22. As noted above, the UIGEA
definition is just one source that a
court might take into account when
construing ‘bets or wagers’ for
purposes of the Wire Act.
What events are covered?
The only federal appellate court to
directly address the issue of which
betting and wagering activities are
covered by the Wire Act - the US
Court of Appeals for the Fifth
Circuit in In re Mastercard Int’l,
Inc.23 - concluded that the Wire Act
does not extend to bets or wagers
placed on things other than actual
sporting events and sporting
contests. The US Department of
Justice, however, disagrees with the
Fifth Circuit and publicly takes the
position that the Wire Act’s
coverage is not limited to bets or
wagers placed on sporting events
or sporting contests24. The
magistrate judge overseeing
proceedings in United States v
BetonSports supports the DOJ
position25. The District Court Judge
responsible for ruling on the report
has not yet done so, and it is
possible that the District Court
Judge will not even address the
question of what events are
covered by the Wire Act’s wagering
prohibition.
Conclusion
All told, there are a number of
persuasive arguments for and
against the proposition that an
internet gaming operator violates
the Wire Act if the operator accepts
online entry fees paid by US-based
persons to participate in a prizebased fantasy sports league. Only
world online gambling december 2008
time will tell whether the issue will
be addressed by the courts or
resolved through new federal
legislation.
Linda J. Shorey Partner
Dennis M.P. Ehling Partner
Robert A. Lawton Associate
Anthony R. Holtzman Associate
K&L Gates LLP
linda.shorey@klgates.com
dennis.ehling@klgates.com
robert.lawton@klgates.com
anthony.holtzman@klgates.com
1. See http://www.fsta.org/
2. While this article does not address the
laws of the states that comprise the
United States, wagering in connection
with fantasy sports leagues, in the
opinion of the Attorneys General of
several states, is illegal in those states.
See, e.g., Fla. Atty. Gen. Op. No. 91-03;
1991 Fla. AG LEXIS 3 (1991); La. Atty.
Gen. Op. No. 1991-14, 1991 La. AG
LEXIS 133 (1991); 1998 Ariz. AG LEXIS
1 (1998). While Montana has explicitly
legalized fantasy sports leagues, its
statute makes it ‘unlawful to wager on a
fantasy sports league by telephone or by
the internet’. Mont. Code §23-5-802.
3. In a ‘play for free’ situation, the winner
does not typically receive a prize, but is
permitted to enjoy use of the fantasy
league without providing compensation.
4. http://www.sportsline.com/fantasy.
5. The total amount of entry fees
received in a 12-team fantasy league
competing for the second highest prize
is approximately $3,000. Sportsline.com
is awarding $1,600 in cash as the prize.
It is assumed that Sportsline.com keeps
the $1,400 difference to cover costs and,
if any portion remains, as income.
6. Although some leagues permit headto-head wagering, this article looks at the
query with respect to fantasy leagues
that: (1) require an entry fee to
participate; and (2) award the winning
participant with either cash or prizes,
where the cash or prizes are paid from
the total fees collected.
7. 505 F.3d 818 (8th Cir. 2007), cert
denied, 128 S. Ct. 2872 (2008)
8. 2007 WL 1797648 (D.N.J. 2007)
(concluding that entry fees paid by
individuals to participate in the
defendants’ fantasy sports leagues were
not ‘bets’ or ‘wagers’ under New
Jersey’s qui tam statute).
9. 18 U.S.C. §1084.
10. 31 U.S.C. §§5361-5367.
11. In addition to establishing a crime,
the UIGEA required the Secretary of the
US Treasury and the Board of Governors
of the Federal Reserve System, in
consultation with the US Attorney
General, to promulgate implementing
regulations. See 31 U.S.C. §5364(a). The
regulations are to delineate various
‘designated payment systems’ and
require each participant in such a system
to: (1) identify any message received
from a US-based bettor instructing it to
convey money or a money substitute
affiliated with the bettor’s participation in
‘unlawful internet gambling’ to an entity
in the business of betting or wagering or
to make any other type of conveyance
which, in addition to the first type, is
deemed to be a ‘restricted transaction’
by the regulations; and (2) to then block
or otherwise prevent the restricted
transaction. Final regulations were issued
on 13 November; they are effective 19
January 2009, and are to be
implemented by 1 December 2009.
12. See 31 U.S.C. §5363.
13. 31 U.S.C. §5362(10)(A).
14. 31 U.S.C. §5362(1).
15. 18 U.S.C. §1084(a).
16. This article assumes that the
operator of an internet gaming site that
offers an opportunity to enter a fantasy
sports league is ‘in the business of
betting and wagering’. This term is not
defined in the Wire Act. The authors do
not believe that all operators of fantasy
sports leagues on the internet would be
considered to be ‘in the business of
betting and wagering’. It is just one more
point that needs to be considered.
17. 26 U.S.C. §4401(a).
18. 26 U.S.C. §4421(1)(B); 26 C.F.R.
§44.4421-1(a)(2).
19. 26 C.F.R. §44.4421-1(c)(1).
20. 26 C.F.R. §44.4421-1(c)(3).
21. See, e.g., Miles v Apex Marine Corp.,
498 U.S. 19, 32 (1990) (‘We assume that
Congress is aware of existing law when it
passes legislation’).
22. See, e.g., United States v. Reeder,
614 F.2d 1179, 1184 (8th Cir. 1980) (‘the
[Wire Act] forbids the use of interstate
facilities for sending or receiving
wagering information’) (emphasis added)
(internal quotation omitted).
23. 313 F.3d 257 (5th Cir. 2002).
24. See, e.g., Letter from David M.
Nissman, US Attorney, DOJ, to Eileen R.
Petersen, Chair, Virgin Islands Casino
Control Commission (2 Jan. 2004) (‘the
Department of Justice does not agree with
the decision in In re Mastercard, 313 F.3d
257 (5th Cir. 2002) that Section 1084 is
not applicable to casino-style wagering’).
25. See 7 May 2007 recommended
report in No. 4:06CR337CEJ(MLM) at 7
(E.D. Mo.) (‘Based on the language of
the statute, the legislative history and
logical interpretation of the statute and
other related legislation, the court finds
that 18 U.S.C. §1084 is not limited to
sports betting but includes other kinds of
gambling as well’).
11
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