Fantasy Sports Legislation by States May Run Afoul of PASPA

The emerging popularity of daily fantasy sports has focused increased attention on whether such activity--which many equate to sports betting--is legal. The question is unsettled under federal law, despite the enactment of the Unlawful Internet Gaming Enforcement Act. To date, no federal or state court has answered the question of whether a daily fantasy sports league is contest of "skill" or a game of "chance," which is central to the UIGEA exemption. The issue has been addressed only in the context of "season-long" leagues, with one federal court acknowledging that such leagues are "skill-based." But even the resolution of that issue under federal law does not necessarily lead to a similar result under state law. For example, five states--Iowa, Louisiana, Montana, Washington, and Kansas--expressly prohibit fantasy sports (either through an express statutory prohibition, as in the case of Montana, or through an advisory opinion from the state's attorney general, as in the case of Iowa and Louisiana, or because of an adverse interpretation by state gaming regulators, as with Washington and Kansas). Additionally, the legality of fantasy sports (of all types) is especially murky in those states (such as Arizona, Illinois and Arkansas) in which even a modicum of "chance" would transform the contest into an illegal lottery, and, thus, run afoul of that state's gambling prohibitions.

As a consequence, many fantasy sports operators do not accept entries from residents of Iowa, Louisiana, Montana, Washington and Kansas (where there are express prohibitions in place). Some fantasy sports sites, such as Star Fantasy Leagues, take it one step further and do not accept entries from residents of the so-called "any chance" states. In response, legislators in several of these states (Iowa, Washington and Kansas) have proposed legislation that would explicitly legalize fantasy sports. Previously, Maryland was the only state that had passed such legislation. While bills in Arizona and Montana failed last year largely due to opposition from segments of the gaming industry, the Iowa legislation has cleared one significant hurdle--approval by the Iowa Senate.

But are such state legislative efforts in direct and express conflict with the Professional and Amateur Sports Protection Act of 1992 ("PASPA")? While PASPA is commonly understood to prohibit state-regulated sports betting on the outcomes of professional and amateur sporting events, it also contains language that is arguably (and perhaps inarguably) directed at fantasy sports. Section 3702 of PASPA states in pertinent part:

It shall be unlawful for -- 

(1) a governmental entity to sponsor, operate, advertise, promote, license, or authorize by law or compact, or

(2) a person to sponsor, operate, advertise, or promote, pursuant to the law or compact of a governmental entity, 

a lottery, sweepstakes, or other betting, gambling, or wagering scheme based, directly or indirectly (through the use of geographic reference or otherwise) on one or more competitive games in which amateur or professional athletes participate, or are intended to participate, or on one or more performances of such athletes in such games.

Focusing on the above-bolded language, PASPA plainly prohibits a "governmental entity" (defined to include a state) or a "person" acting pursuant to state law from sponsoring, operating or promoting any betting or wagering scheme based directly or indirectly on "one or more performances of . . . athletes" in games in which amateur or professional athletes participate. Fantasy sports are inherently tied to the individual performances of athletes in a game rather than on the final score of the game itself.

Thus, a state which expressly legalizes fantasy sports (such as Maryland, and, soon, Iowa) would arguably be doing so in direct violation of PASPA's express prohibition against state sponsorship of sports wagering schemes that are based on the individual performance (e.g., statistics) of athletes participating in an amateur or professional sporting event. Likewise, "persons" that promote or advertise fantasy sports contests to residents of those states would also arguably be violating PASPA. Who might potentially fall into this latter category? Fantasy sports operators are the obvious one. What about professional sports leagues (such as the NBA) and teams that have lucrative sponsorship arrangements with daily fantasy sports operators? How about media outlets? An argument could be made that each of these entities would be violating PASPA by promoting fantasy sports contests in states that have expressly legalized such activity.

I am surprised by how little attention has been paid to this last sentence of PASPA. The sports legalization debate has focused largely (if not entirely) on the language pertaining to state-sponsored wagering schemes that are based on "one or more competitive games." In other words, single-game sports wagering. But as states move to expressly legalize fantasy sports, increased attention should be paid to PASPA's prohibition against wagering on an athlete's individual performance, which is at the core of fantasy sports. To date, no one in the fantasy sports or sports betting legalization space has raised this issue (not even the opponents of state legalization efforts). Time will tell whether this arcane provision of PASPA will hamper ongoing state legalization efforts. So far it hasn't.

Surprisingly, this issue has yet to emerge in the ongoing federal litigation between New Jersey and the professional sports leagues (and the NCAA) over New Jersey's latest attempt to legalize sports wagering. The leagues have argued that New Jersey's partial repeal of its state-law prohibition against sports wagering violates PASPA because it leaves state-regulated casinos and racetracks free to offer sports wagering to its patrons. The leagues maintain that anything short of a complete repeal of the state law ban on sports wagering contravenes PASPA. New Jersey has countered by arguing, among other things, that the leagues have "unclean hands" because they are embracing (and, indeed, investing in) daily fantasy sports, while using federal law as a "hammer" to block states from decriminalizing sports betting. But perhaps the better argument is that the leagues are "selectively enforcing" PASPA because they are fighting New Jersey's decriminalization efforts (which do not explicitly "authorize" sports betting), while giving a pass to those states that seek to expressly authorize activity that is plainly prohibited under the last sentence of PASPA. New Jersey could argue that the leagues are "estopped" from invoking PASPA against New Jersey because they are not enforcing PASPA against those states (such as Maryland) that have expressly legalized wagering based on the individual performance of athletes, activity which is plainly prohibited by PASPA. While this specific argument has not been made in the New Jersey sports betting case (which is set for oral argument before the Third Circuit on Tuesday), it may be viewed through the lens of "unclean hands," and, perhaps, may yet play a critical role in the outcome of the case.