Why Daily Fantasy Sports Is Redefining Gambling

What is gambling? It's a new question with an old-aged answer. The creation of daily fantasy sports necessitates a change in our country's legal definition of gambling.
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What is gambling? It's a new question with an old-aged answer. The creation of daily fantasy sports necessitates a change in our country's legal definition of gambling. Ever since DraftKings and FanDuel attracted the attention of politicians looking to get a slice of their multi-billion dollar businesses for state funds (free money off of someone else's idea!), the companies have had to hire high-priced lawyers to defend the legality of their businesses. In court, the debate centers around one key issue: does daily fantasy sports involve more skill or more chance? If it is predominantly chance, then under most state laws it constitutes gambling and states have the authority to outlaw or regulate it. However, if it is predominantly a game of skill, as the companies contend, then it is not gambling and federal law exempts it from state regulation.

Here is the problem. Gambling should NOT be narrowly defined as a game dominated by chance. Just look at the varying categories of gambling. There is a clear continuum of games that are almost entirely chance, games that require greater levels of skill and games that fall in the middle of that spectrum. Lotto, for example, is clearly chance-dominated. How on earth can anyone predict what Ping-Pong balls will pop out of that oscillating hamster wheel? Roulette is also mainly chance. The same goes for backgammon and most dice-dependent games. Now how about horse racing? Racing requires a little more skill because players are selecting horses. Bettors factor in past performances and weigh probabilities and circumstantial factors. But, horse racing also involves a fair amount of chance. The bettor is at the mercy of the outcome and athletic performances in that one race. Poker, on the other hand involves a sophisticated level of skill. However, in poker there is still a good deal of chance because cards are randomly dealt. In fact, the initial hand dramatically impacts subsequent play and outcome. As we move up the ladder, consider chess, which undoubtedly involves more skill than chance. Chess involves so much skill that it is not considered gambling. Rather, it is a tournament that often requires an entry fee and results in a prize. So we see that varying levels of skill can be integral to "gambling" games, but when a certain level of skill is reached, as in chess, the game falls off the gambling spectrum.

Operators of daily fantasy sports want to make the argument that there is so much skill involved in their business, that it is not gambling. Hence, they call the money staked on the outcome, an "entry fee," and the resulting win "a prize," masquerading it as a tournament. In contrast, critics say, there is so much chance involved that daily fantasy sports is flat out unlawful gambling. I would propose that neither is true. In fact, both are true. Daily fantasy sports is merely a new category of skill-dominant gambling, skillful enough to place it on the high -end of the gambling spectrum but not skillful enough to remove it from the gambling classification altogether. Skill, rather than chance dominates, but there is enough chance involved and money staked to label it gambling.

Here's why. There are two forms of gambling: passive gambling and active gambling. If you bet on a horse race or a sports game, you are a third party passive bettor waging your money on the outcome of an event that you have little to no control over. If, however, you are a poker player, you are actively playing. You have a degree of control but the randomness of the cards counterbalances your control. We see that in chess there is so much skill directly exerted by an active player, and so little chance, aside from who moves first, that it is not gambling. Now consider DFS. It is a unique hybrid. You are both actively and passively playing to an almost equal degree. You start as an active player in that you are role playing as the team manager and selecting your players under the restrictions of a set salary cap. In choosing players it is standard to do research and review statistics, recent performances, weigh the value and cost of one player up against another, so on and so forth. However, at some point you fall into a third party bettor role or a passive role, when the real world game begins. At that point, you have no control over the player's ultimate performances and you have to sit back and enjoy the game. Those real-world games may be influenced by the weather, a bad call by a referee, a mid-game injury, an impassioned rivalry, a coach's decision not to put certain players in the game, etc. So, there is skill in the selection of the players but chance when it comes to their ultimate performances. It is a game that facilitates role-play in real-world events, active play and passive observation. It is a coalescence of fantasy and reality. Thus, it is entirely original.

Under the law, the application of personal creativity and artistry is frequently used to claim ownership over a work. Unlike betting on a real-life sporting event, you are betting on a "fantasy team" that you created, which makes this wholly different from simply choosing whether the Jets or Giants will win a game or whether Alex Rodriguez will hit a certain number of home runs. There is no point spread betting or parlay betting. The points accumulated are based off of a unique combination of performers that you have chosen for strategic reasons. In fact fantasy sports are legal under the federal Unlawful Internet Gambling Enforcement Act. The UIGEA however allows states to regulate gambling regardless of its federal fantasy sports exemption.

The problem is that most states have to first prove that DFS is gambling in order to regulate it and many states only define gambling as a chance-dominant game. Thus, the narrow definitions in their own laws are preventing them from regulating this novel form of skill-dominant gambling.

The invention of DFS requires legislators go back to the drawing board and update their archaic state laws. The contentious lawsuit in New York illustrates the dilemma. The Attorney General is trying to shutdown both companies, saying DFS violates the criminal laws in NY. Does it? No. Why? Because NY law defines gambling as staking or risking something of value "upon the outcome of a contest of chance or a future contingent event not under his control." DFS requires too much skill to be a contest of chance. DraftKings submitted affidavits from some of the top statisticians in the country. These renowned professors analyzed the games and one of them determined that the top 1.3% of players win about 90% of the DFS profits. He concluded that when the same "expert" players win at marginally higher percentages than the novices, the game is skill-dominant. DraftKings also submitted a sworn affidavit from one of its repeat winners: Peter Jennings. Jennings says he won a $1 million dollar jackpot and admitted he spends in excess of 70 hours per week preparing for his DFS contests. Prior to selecting his lineups, he watches countless hours of pre-recorded games and creates complex statistical charts that factor in weather conditions, possibilities of poor referee calls, home team advantages, emotional rivalries, you name it, he assigns it a numerical value. Those dozens of variables are mathematically computed into advanced algorithms, which govern his eventual player selections. Yes, these are the types of people you are up against in these contests, in case you were wondering. Contrary to popular belief, fantasy sports isn't for the face painting, chest baring sports enthusiast - you essentially have to be "Rainman" to win big. Calling all mathematicians, wizards and soothsayers. Everyone else, stick to tailgating, nachos and beer.

However, even if you look at it from a merely common sense perspective, average players are also exerting considerable skill. Even non-poindexter players must strategize over which combinations of players will yield the most points. Players make skill-based decisions such as, stacking a team with both a quarterback and a receiver from the same team or choosing a boom or bust player and banking on that player blasting the board with points. Furthermore, salary caps require players to choose winning combos that cannot be based on the best or most expensive players in the league. Therefore, not only do the games involve a high-degree of skill, but the players are exerting control over the composition of competing teams. In this respect, the NY statute is too restrictive in requiring that a game 1. be dominated by chance to be gambling or 2. be based on a future event where the player has no control. While the AG may be right, that DFS is gambling, he is wrong when he calls it unlawful gambling in violation of NY law.

This problem of trying to fit a square law into a circular fact pattern is not unique to NY. It exists across the country. Legislators must go to the table and create new laws to address this complex game and its unique considerations. Reformation of the laws is appropriate, not indictments, criminal charges or lawsuits. Thus, there is no need to decide whether skill or chance is more dominant. There is a weighted degree of both skill and chance, of both active participation and passive observation. It's that very oxymoronic quality that makes the games fun. There is intellectual engagement and the opportunity to sit back and let chance take over. Just like life, free will and external factors influence outcome. So, until legislators get our laws up to speed, sports fans should be free to responsibly get lost in their fantasies.

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