Law Uncategorized

Fascinating legal history of fantasy sports

The multi-billion dollar fantasy industry continues to grow, but how exactly is this form of gambling legal and unregulated?

Source: Enthusiast Print
Source: Enthusiast Print

National fantasy draft day weekend has come and gone, lineups are set, league fees paid. Every year, millions of football fanatics put up hard cash for the opportunity to manage a fictional team to glory — and, often, a hefty payout.

The multi-billion dollar fantasy industry continues to grow steadily, especially with the development of new single-week pay-to-play fantasy football websites such as Fanduel.com and Draftkings.com. Unlike traditional private fantasy leagues on free sites such as Yahoo! and ESPN, where participants only exchange money between themselves before the season begins (like a March Madness office pool), these new fantasy format companies take a direct cut of every weekly payout.

So on plain surface, fantasy football is a channel for participants to go online and bet on actual player production in real football games.

How exactly is this legal and unregulated? Let’s start at the beginning.

Legal History

The rotisserie draft structure of fantasy sports was developed by a group of baseball stat rats and sports journalists in the 1980s. As a result of the Internet boom, fantasy games blew up in the ’90’s and expanded to other major sports including football and hockey. But the stability of the fantasy industry and its ever-increasing value thereafter would not have been possible if not for two major legal cases.

National Basketball Association v. Motorola Inc., 105 F.3d 841 (2d Cit. 1996) – [Westlaw link]

In 1996, the NBA filed an injunction against Motorola Inc., prohibiting Motorola from sending “real-time” updates of NBA scores and statistics to customers on their pagers (which is roughly comparable today to push notifications from sports applications on smart phones). Motorola gathered this information at its own expense and without the help or consent of the NBA.

The central issue at hand was whether or not game statistics/scores are “factual” by nature, and thus would be unprotected by copyright law. A secondary copyright issue was whether Motorola’s actions constituted a misappropriation of “hot news” from the NBA. The Second Circuit Supreme Court vacated the standing injunction, holding that Motorola did not infringe on the NBA’s copyright protected television broadcast or unlawfully misappropriate any proprietary information because the information provided (stats and scores) was purely factual and was gathered at Motorola’s own cost.

The specifics of NBA v. Motorola are a bit outdated today, and while the court did not actually consider the transmission of “real-time” statistics in relation to fantasy sports, the holding in the case helped set precedent for the next court to follow when the issue became ripe.

C.B.C. Distribution & Marketing, Inc. v. Major League Baseball Advanced Media, L.P., 443 F.Supp.2d 1077, 80 U.S.P.Q.2d (BNA) 1241 (E.D. Mo. 2006) – [Westlaw link]

Prior to the Internet boom, before access to live scores and statistics were just a mouse-click away, the majority of fantasy companies would sign licensing deals with the league players associations to avoid potential violations of the players’ right of publicity. In 2006, MLB Advanced Media (MLBAM) struck a five-year, $50 million deal with the MLB Players Association (MLBPA) for the exclusive rights to the players’ names, likeness, statistics, etc.

Predictably, MLBAM immediately sought to enforce their newly acquired rights by refusing to sub-license the statistical information to other fantasy companies, essentially forcing out all fantasy baseball competitors and giving MLBAM a monopoly on the industry. C.B.C Distribution and Marketing (CBC), which previously held a license agreement with the MLBPA until 2004, brought suit alleging that the players’ “right of publicity” does not apply to statistics used for fantasy sports.

The court agreed with CBC, and held that, “The names and playing records of major league baseball players as used in CBC’s fantasy games are not copyrightable. . . . Therefore federal copyright law does not pre-empt the players proclaimed right of publicity.”

Furthermore, the presiding Judge (Medler) ruled that even if the players did have a right of publicity in their names and individual statistics, the First Amendment right to public information would still prevent the league and the MLBPA from withholding player statistics and interfering with fantasy sports games.

The holding in CBC v. MLBAM cleared the path for the fantasy industry to flourish by granting the public free access to any and all player names and associated statistics, which are generally all that’s needed in fantasy scoring systems.

OK, so regardless of whether player stats are protected by the First Amendment, doesn’t the fact that people are still wagering money on it qualify as gambling subject to restriction?

Legislative Developments

Unlawful Internet Gambling Enforcement Act of 2006

In 2006, the U.S. government passed a bill called the Unlawful Internet Gambling Enforcement Act (UIGEA) with the primary focus being the regulation of online gambling websites. This brought into scope the issue of whether or not fantasy sports websites should be considered online gambling sites as well, and therefore subject to government regulation.

However, instead of choosing to regulate, the government laid out a specific exception for fantasy sports in its definition of online gambling and established legal refuge for any fantasy/simulation sports game so long as they meet the following requirements:

  1. 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 participants.

  2. 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.

  3. No winning outcome is based:
a. On the score, point spread, or any performance or performances of any single real world team or any combination of such teams; or b. Solely on any single performance of an individual athlete in any single real-world sporting or other event.

In layman’s terms, the government declared fantasy sport a game of skill, more so than chance. In drawing this clear distinction between fantasy wagering and online gambling, the UIGEA federally legalized fantasy sports betting so long as:

1) payouts are established up front before the season begins,

2) the scoring system is based on a ‘collection’ of individual player statistics in actual games played, not just one individual player; and

3) the scoring system is in no way based on team results (i.e. team wins and losses).

Seems simple enough right?

The pay-for-play sites like Fanduel and Draftkings may in fact bring rise to legal issue in the future, but its unlikely considering that the current law was established by legislature with precise definitions, as opposed to case law precedent established by the courts.

The Federal Supreme Court has yet to actually weigh in on the issue, and after rejecting an appeal submitted by MLB in 2008, the only way that’s ever going to happen is if someone finds legitimate standing to challenge the validity of the fantasy exception carved out in the UIGEA.

But who in their right mind would want to do that? And for what reason?

Well, I guess the NFL, MLB, NBA, and NHL might have some interest in reacquiring control over a multi-billion dollar industry.

As law and history stands now though, that market share pipe dream will have to remain a fantasy.

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