Shortly before Thanksgiving, the New York Times ran a series of articles that criticized state gaming agencies for failing to enforce their own rules against licensed sports gambling operators. These New York Times articles pointed out that certain state regulators were licensing companies of questionable pedigree, including certain companies that were purportedly targeting college students.
But as much as there is a bona fide reason for concern about the behavior of licensed and regulated sportsbooks, there should perhaps be an even greater concern about another form of sports gambling operators—those that operate on the web without a license, and thus without any regulation whatsoever.
Like their regulated counterparts, unlicensed domestic sportsbooks allow prospective gamblers to bet against-the-house on a wide range of sports props, including whether a player, or series of players, will finish over or under an expected statistical output. However, unlike their regulated counterparts, unlicensed sportsbooks operate across state lines (potentially in violation of the Federal Wire Act), allow participants to bet as young as 18 (rather than 21), and do not pay gambling license fees or taxes to most states. In many cases, they also operate absent any regulatory oversight.
While it may seem surprising that companies can get away with advertising and offering unlicensed sports betting on the web, regulatory miscategorization may help to explain the phenomena. Many of these companies that offer against-the-house prop without a license publicly call themselves “fantasy sports” (a category that is typically less regulated than sports gambling), even though it is doubtful that against-the-house prop betting websites could fall within even the broadest definition of “fantasy sports.”
Even as the colloquial definition of fantasy sports has been expanded to include a wide range of daily fantasy sports companies such as FanDuel, DraftKings and Yahoo, the legal definition in most state statutes has remained unchanged. And statutes including the Unlawful Internet Gambling Act define “fantasy sports” as requiring “winning outcomes [that] reflect the relative knowledge and skill of the participants.” The term “relative” means comparative to one another. But, against-the-house contests do not have participants competing against other participants. Instead, they compete against the host site.
This distinction between fantasy sports operator sites and against-the-house prop betting operators is important for reasons beyond mere semantics. Against-the-house prop betting sites normatively need heightened regulation as compared to fantasy sports operators. This is because while a classic fantasy sports operator that properly segregates entry fees will always have positive net revenue to pay out contest winners, ‘against the house’ websites reasonably might not have sufficient funds to pay winners because their revenues do not necessarily reflect evenly both sides of each given bet.
Curiously, the recent proliferation of against-the-house prop betting sites on the web is not an altogether first. Back in 2015, a number of niche companies such as BetAmerica, DraftDay, FantasyUp and HotRoster briefly attempted to operate against-the-house contests under the “fantasy sports” moniker. For the most part, these companies either failed to obtain the funding or went out of business during the period of state investigations of fantasy sports in late 2015 and early 2016. But, like many questionable business plans, their idea did not altogether tie.
This time around, companies that are offering against-the-house prop betting are again pretending to be fantasy sports, even though this time they could theoretically attempt to secure sports betting licenses, operate on intrastate basis, increase their minimum age of entry, and thereby operate legally. And, yet, still they are not.
It is odd that no state gaming authority has yet attempted to take action against these emerging against-the-house prop betting sites. It is even odder still that those companies that pay hefty licensing fees to state regulators and limit their operations to an intrastate basis have not legally targeted their unlicensed, tax-avoiding competition.
In the highly competitive and sometime adversarial world of sports betting operators, perhaps it is only a matter of time.
Marc Edelman (Marc@MarcEdelman.com) is a Professor of Law at Baruch College’s Zicklin School of Business and the founder of Edelman Law. He has advised hundreds of entities on legal issues pertaining to launching and operating fantasy sports contests and authored the law review article, “Regulating Fantasy Sports.“
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