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Friday, September 18, 2015
Massachusetts AG's "Review" of Daily Fantasy Sports May Have National Repercussions
On Thursday, news broke that Massachusetts Attorney General Maura Healey is “reviewing" the legality of so-called “daily” fantasy sports games (“DFS”), such as those offered by industry titans DraftKings and FanDuel. This raises troubling concerns for the DFS industry because of Ms. Healey's well-known opposition to gambling expansion (a hot-button issue in Massachusetts). During her recent campaign (she was elected in 2014), Ms. Healey said that she would be "proactive" in "combat[ing]" the challenges posed by expanded gambling and would hold the gaming industry “accountable.” She also testified before the state’s gaming commission (which she oversees) on her very first day in office, promising to make gambling enforcement “a priority.” Indeed, during her brief time in office, Ms. Healey has followed through on that promise by proposing a number of consumer protection initiatives aimed at the state’s nascent gaming industry: for example, she urged the state’s gambling commissioners to consider capping ATM withdrawals and prohibiting credit card cash advances at Massachusetts casinos. She also tried to block efforts by well-known casino magnate Steve Wynn to build a $1.7 billion casino development in Everett (near Boston) by calling for a delay in the issuance of key environmental permits.
As the commonwealth's top law enforcement officer, Ms. Healey wields considerable authority, thanks to the broad powers Massachusetts law confers upon the Attorney General. For example, the Attorney General can initiate investigations and even bring both civil and criminal lawsuits. In addition, the AG's office oversees the Gaming Enforcement Division, which is charged with investigating and prosecuting violations of Massachusetts gaming law. Alluding to her broad powers, Ms. Healey stated that her office “is committed to using its full civil and criminal authority to ensure that the gaming industry is held to the many financial and legal commitments it has made to our state, host and neighboring communities, and the people of Massachusetts.” Her upcoming "review" of DraftKings' business would certainly be consistent with that statement.
The Possibility of an Advisory Opinion
One option for Ms. Healey would be to issue a "formal opinion" or “legal advisory." Under Massachusetts law, the Attorney General is authorized to render formal opinions and legal advice to constitutional officers, agencies and departments, district attorneys, and branches and committees of the Legislature. During her brief time in office, Ms. Healey has not issued any formal opinions, and her predecessors have rarely exercised that authority (only seven formal opinions have been issued by the Massachusetts Attorney General since 1995, and none of them addressed gambling laws). However, the Attorney General has made much more frequent use of “advisories,” which are less binding than formal opinions but still persuasive (especially in a state with no specific laws governing fantasy sports). Given Ms. Healey's well-known opposition to gambling expansion (one of her key platforms when she ran for office), the prospect of a formal opinion or advisory addressing the legality of daily fantasy sports looms as a strong possibility. And such an opinion, if issued, would carry substantial weight in a commonwealth that does not have any statutes, laws, ordinances, regulations or judicial opinions addressing fantasy sports.
If Ms. Healey were to exercise her statutory authority to issue a formal opinion or advisory as to the legality of daily fantasy sports, it could have significant repercussions nationwide. In almost all states, the essential elements for a contest offered to be considered an illegal “lottery” or “gambling” are (1) prize, (2) consideration, and (3) chance. In most states, real-money DFS contests will usually satisfy the first two elements, prize and consideration, because the contests will require entrants to pay a monetary fee to participate in them and a prize or reward will be awarded to certain participants based upon the outcome of the contests. Yet, what separates gambling from non-gambling activity in many states is an incredibly subjective determination of whether an activity is one of “chance” (likely gambling if the other elements are met) or one of “skill” (not gambling).
Much ado has been made about the express fantasy sports exemption contained in the Unlawful Internet Gaming Enforcement Act (the “UIGEA”), a federal bill that was signed into law in 2006. This exemption, however, does not make every fantasy sports contest for money legal. DFS contests still must comply with each specific state’s particular prohibitions on gambling and private lotteries. Significantly, the UIGEA does not preempt state law: the UIGEA provides in its “Rule of Construction” that “No provision of this subchapter shall be construed as altering, limiting, or extending any Federal or State law or Tribal-State compact prohibiting, permitting, or regulating gambling within the United States.” 31 USC 5361(b). This provision clearly leaves state law unaltered by the passage of the UIGEA, thereby leaving states free to make their own determinations as to the legality of daily fantasy sports. This presents unique challenges to fantasy sports businesses, because the laws, and standards used by courts to decipher these laws, can vary dramatically on a state-by-state basis.
That brings us to Massachusetts. In analyzing whether a DFS contest is one of skill or chance, Massachusetts is one of the majority of states which applies the “predominant factor” test. See Com. v. Lake, 317 Mass. 264, 267 (Mass. 1944) (holding that “a game is … considered a lottery if the element of chance predominates and not a lottery if the element of skill predominates.); see also Com. v. Stewart-Johnson, 78 Mass.App.Ct. 592, 595-96 (2011) (same). The predominant factor test essentially asks whether the outcome of a particular contest is predominately within the control of a participant, or is it predominantly subject to chance. To put it another way, a contest will likely be determined to be a game of skill if the likelihood of winning is primarily determined by an application of the participant’s skills. These applied skills can be of the physical sort, such as hitting a golf ball, or the mental kind, such as playing a trivia game. See, e.g., Berckefeldt v. Hammer 616 P.2d 183 (Colo. App. 1980) (holding that golf was a bona fide game of skill); see also, e.g., Rouse v. Sisson, 190 Miss. 276 (Miss. 1941) (holding that an electronic I.Q. game was not a prohibited gambling device). With regard to DFS, the primary question is whether DFS contest participants’ application of their knowledge and judgment in analyzing and predicting the results of real-world athletes in sports competitions is such that the DFS contests are determined to be “games of skill.”
Ramifications to the DFS Industry
By our count, there are at least 20 states that also use the predominant factor test. Should the Massachusetts Attorney General choose to issue an advisory opinion concluding that daily fantasy sports is illegal, though it would not be binding on the courts, it could have a pervasive effect across the states – especially in those also applying the predominant factor test. In those states, the Massachusetts Attorney General’s advisory opinion, whether favorable or unfavorable to DFS operators, could be used as particularly persuasive authority in analyzing DFS under their own anti-gambling or anti-lottery laws. We have already seen this happen within the last year, when one out-of-state gaming regulatory body (in Kansas) cited a Florida attorney general's opinion in concluding that "if a fantasy sports league has a buy-in (no matter what it is called) for its managers and gives a prize, then all three elements of an illegal lottery [e.g., chance, prize and consideration] are present." Although the Kansas regulator's opinion was later superseded by a subsequent attorney general's opinion and a legislative enactment legalizing fantasy sports in Kansas, the risks posed by an adverse Massachusetts Attorney General's opinion are fairly obvious: the existence of such an opinion could lead attorney generals, gaming regulators and courts in other states to likewise conclude that certain (or even many common) types of daily fantasy sports contests are illegal.
Of course, Ms. Healey, despite her political leanings, could always issue a formal opinion or advisory concluding that certain DFS contests are actually legal under Massachusetts law and the predominant factor test. Such an opinion could have an analogous “unshackling” effect across the industry. And, there is support for such an opinion. For example, in April 2015, Star Fantasy Leagues (“Star”), an online DFS company, announced the results of an independent skill simulation study on its one-day fantasy football contests conducted during the 2014-15 NFL season. The study showed that, through empirical evidence, the results of Star’s fantasy football contests are predominated by skill, not chance.
Still, what makes the prospect of an adverse opinion even more disconcerting for the DFS industry is that the "predominant factor" test is considered the most lenient of the three commonly-employed state law tests for determining whether a particular contest constitutes an illegal lottery (the others being the "any chance" test and the "material element" test). Stated another way, if daily fantasy sports is deemed to be illegal under the "predominant factor" test (the most "DFS-friendly" of the three state law tests), then such contests could also presumably be considered illegal under the stricter "any chance" and "material element" tests, thereby raising the specter of daily fantasy sports being deemed illegal in many other states (the exceptions being the select states where it has been expressly made legal through legislative enactment, such as in Kansas and Maryland). This is a daunting prospect for an emerging industry that has largely operated without any state interference or regulation. The developing Massachusetts situation thus bears watching for an industry which suddenly finds itself under increasing scrutiny.
-- Daniel Wallach and Justin Fielkow
 During her election campaign, Ms. Healey penned an article outlining her position on gambling expansion. In that article, Ms. Healey wrote that she is "opposed to expanded casino gaming" and "support[s] the . . . effort to repeal" the Massachusetts law authorizing casino gambling. She spoke of the "ills" of gambling, including that it "widens the income gap because gambling proceeds are regressive taxes" and "disproportionately affect[s] poorer people who have little discretionary money to lose in the first place."
 If Ms. Healey fails to issue a formal opinion, one could also draw the inference that she reached the conclusion that there was “nothing to see here” with regards to daily fantasy sports. While legal clarity would certainly have its benefits, as it concerns the DFS industry, preservation of the status quo may actually be preferred.