There is a lot of talk surrounding the solvency and growth potential of Daily Fantasy Sports (DFS), but there are also some lingering questions about the future legality of DFS.

As it currently stands, DFS is on firm legal footing:

1. UIGEA has a clear Fantasy Sports exemption, and DFS conforms to all stipulations;
2. PayPal, (who since 2002 has prohibited all online gambling transactions) is willing to process DFS transactions;
3. DFS is clearly a game of skill, and therefore not gambling.

These are all strong arguments for the legality of DFS contests. However, these arguments only work in the present, not in the future.

Where DFS is headed

While I don’t believe DFS will ever be universally prohibited in the U.S., at present, DFS is not legal, it’s simply not illegal, and as the industry continues to grow it may find itself in the crosshairs of legislatures who will be looking to regulate and tax the industry, or in some cases prohibit it.

DFS is essentially a self-regulated industry at this point,  , and as Adam Krejcik of Eilers Research pointed out, while you need a gambling license in the UK to operate a DFS site, you don’t in the U.S.:

In the UK you need a gambling license to operate DFS w/$, In the US the FSTA website has section called "Why DFS Its not Gambling"..hmm

— Adam Krejcik (@akrejcik)

Because of the lack of laws and regulations dealing specifically with Fantasy Sports, and DFS in particular, and as the industry continues to grow towards a 10-figure revenue generator, some analysts and pundits feel DFS is heading towards a day of reckoning, and future date with regulators to alleviate any concerns.

The general feeling is DFS’s legal future will likely be decided state by state, although federal action is not entirely out of the question.

The roots of DFS legality

The multi-billion-dollar industry that is Fantasy Sports received an exemption from the Unlawful Internet Gambling Enforcement Act (UIGEA) of 2006, and it’s this exemption that Daily Fantasy Sports industry piggybacks when touting its own legality, such as this statement found on the DraftKings website:

The legality of daily fantasy sports is the same as that of season long fantasy sports. In 2006, the US Federal Government passed a law called the Unlawful Internet Gaming Enforcement Act (or UIGEA), which was designed to prevent gambling over the internet. The law included a carve out that clarified the legality of all fantasy sports.

Daily fantasy sports is a skill game and is not considered gambling.

When it comes to Fantasy Sports, UIGEA is pretty clear. The contest must have “an outcome that is determined predominantly by accumulated statistical results of sporting events, including any non-participant’s individual performances in such sporting events.”

UIGEA stipulates that the outcome of a fantasy game must be dependent on the following:

 (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, pointspread, 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. 

DFS certainly seems to fall under all of these categories. That being said, DFS was not in existence when UIGEA was crafted, and lawmakers may, at some point, decide to revisit the Fantasy Sports exemption and/or separate DFS.

Florida State University Assistant Professor of Sports Law Ryan Rodenberg, is one person who feels UIGEA’s Fantasy exemption could be reevaluated. Rodenberg  last year, “on the spectrum of legality to illegality, they’re getting pretty close to the line.”

I personally feel a UIGEA revision is a long shot and expect the states to decide this matter.

Some state laws are more clear cut than others

While DFS appears 100% legal under federal law and does not appear to be illegal under current law in 44 states, that legality is not on as solid footing as some would have you believe and could change in the future.

The legality of DFS stems from the state’s not having applicable laws on the books that govern the industry. As noted above, technically speaking, DFS isn’t legal, it’s simply not illegal in most states.

At least one state is working towards removing these grey area concerns, Iowa. As was reported by the local press, Iowa State Representative Jake Highfill is trying to legalize Daily Fantasy Sports in Iowa through legislation.

On the flipside, DFS is illegal in at least one state and resides in enough of a grey area in several others that DFS sites restrict players from these states.

FanDuel Daily Fantasy Sports contests are currently restricted from residents in four states where any involvement of luck places a game into the gambling category: Arizona, Iowa, Louisiana, and Montana. A fifth state, Vermont falls into a grey area. And then there is Washington State where online gambling is strictly forbidden.

For the most part DFS sites stay away from these states.

The current trend favors DFS

Fortunately, the U.S. is in the midst of a period of gaming expansion, both land-based and online.

As gambling, particularly on the Internet, becomes more normalized, and as more and more state legislatures look to online expansion I expect DFS to follow in its wake and switch from being not illegal to legal in a number of locales.

However, this legitimatization of the industry comes with a price, regulations and oversight.

If and when this occurs DFS companies will likely be required to submit to strict licensing requirements such as those currently imposed on other gambling operators, particularly if major casino interests get involved in the industry… have already begun to take shape.

In the coming years, I expect DFS’s legal questions to be resolved, and strict regulations to be put in place.