Seven months after an “insider trading” scandal engulfed DraftKings and FanDuel, the two largest companies in the growing daily fantasy sports market, Congress is finally set to examine the industry.
The House Energy and Commerce Committee’s Subcommittee on Manufacturing and Trade will hold its first hearing into daily fantasy sports Wednesday morning. But with the election year, the typical slow-moving nature of Congress and especially the absence of the industry’s major players -- no representatives from DraftKings, FanDuel or any major sports leagues will be in attendance, despite invitations -- and legal experts and industry observers don’t expect much immediate concrete action to come out of the proceedings.
“My pessimism of there being any significant movement stems from the absence of key stakeholders,” said Daniel Wallach, a shareholder at Florida’s Becker & Poliakoff who specializes in sports gaming. “For Congress to have a hearing on daily fantasy sports without any of the key stakeholders is going to be a challenge. If you're going to have a hearing on sports gambling, you need the NFL, NBA, baseball, hockey, the NCAA. If you’re going to hold a hearing on daily fantasy sports, you need DraftKings and FanDuel.”
Rep. Frank Pallone (D-N.J.), the committee’s ranking Democrat, began calling for hearings into daily fantasy sports in September, around the time the scandal first broke. The scandal raised questions about consumer protections, fraud and other issues inside the daily fantasy sports industry.
But the major impetus behind Pallone’s interest was the “murky” legal landscape around daily fantasy sports and the relationships between the industry, major sports leagues and gambling.
Despite similarities to traditional sports wagering, which is banned in most states by federal law, DraftKings, FanDuel and other daily fantasy operators have argued that they are legal under a “carveout” in the Unlawful Internet Gambling Enforcement Act that protects fantasy sports as “games of skill.”
Pallone and others in Congress have sought to explore why MLB, the NBA, the NHL and several NFL teams have invested in or partnered with the companies despite the legal uncertainty around the industry and their opposition to legalized sports wagering in an ongoing federal court case involving Pallone’s home state of New Jersey. (Pallone last year introduced legislation to amend the Professional and Amateur Sports Protection Act, another major federal gambling law.)
“Fans are currently allowed to risk money on the performance of an individual player,” Pallone said in September. “How is that different than wagering money on the outcome of a game?”
Those questions will likely emerge as a key theme of the hearing even without DraftKings and FanDuel present, said Chris Grove, the editor of LegalSportsReport.com, which follows the industry.
“This really seems like an opportunity for Congress ... to point out the apparent hypocrisy in a country that has very limited legal sports betting but yet a daily fantasy sports product that is offered legally,” Grove said. “Those two don't seem to comport.”
The chairman of the Fantasy Sports Trade Association, a lobbying group that counts both DraftKings and FanDuel as members, will face those questions in their place, and both companies have said in statements that they are comfortable with the FSTA’s representation.
Aside from the gambling issue, the informational hearing could be a starting point for discussions about many of the questions that arose during the scandal, including whether the companies have adequate consumer protections, internal data and security controls, and fraud prevention measures in place. Those questions in particular, Wallach suggested, could lead to future hearings or inquiries.
Congress could also explore the potential need for federal regulation of daily fantasy sports.
At least 30 states have considered legislation to oversee daily fantasy sports operators in the last year. Four states -- Virginia, Mississippi, Tennessee and Indiana -- have already approved new laws to legalize and regulate the industry. Attorneys general and gaming commissions in other states have either declared that daily fantasy contests are illegal gambling or provided guidelines for making it legal. Another five or six states could pass laws by the end of the year, Grove said.
“The subcommittee appears to have concerns about the contradictory nature of the state legislation that has begun to emerge,” Wallach said. “The key question is whether Congress should step in.”
Opinions differ among daily fantasy observers about whether there is a need for Congress to regulate the industry. But even those who prefer federal oversight concede that the most immediate action is likely to occur on the state level, at least until Congress gains a better understanding of "the size of the industry and how the business model works," said Daniel Etna, the co-chair of the Sports Law Group at New York's Herrick Feinstein LLP.
“I think it’s crying out for federal regulation,” Etna said. “But I’m not willing to bet heavily that they’re going to take up this issue and pass federal regulation.”
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