Nevada regulators ban unlicensed daily fantasy sports sites; FanDuel, DraftKings leave state

By J.D. Morris

Published Thursday, Oct. 15, 2015 | 4:01 p.m.

Updated Thursday, Oct. 15, 2015 | 8:50 p.m.

Nevada regulators on Thursday banned providers of daily fantasy sports, a booming but controversial industry that many argue is akin to gambling, from operating in the state until and unless they are licensed to do so.

Gaming Control Board Chairman A.G. Burnett wrote in a public notice that he and his staff have concluded that daily fantasy sports constitutes gambling under state law. Operators must possess a sportsbook license in order to legally offer daily fantasy sports in Nevada, Burnett wrote, because the industry requires its customers to wager on how well individuals collectively perform in sporting events.

“Therefore, since offering (daily fantasy sports) in Nevada is illegal without the appropriate license, all unlicensed activities must cease and desist from the date of this notice until such time as either the Nevada Revised Statutes are changed or until such entities file for and obtain the requisite licenses to engage in said activity,” Burnett wrote.

In response to the gaming board’s notice, FanDuel and DraftKings, the two leading daily fantasy sports providers, announced Thursday night that they are ceasing operations in Nevada while they consider their options moving forward.

FanDuel said in a statement that it was “terribly disappointed” in the board’s action and framed it as one that only benefits “incumbent Nevada casinos,” which regulators have permitted to provide daily fantasy sports if they already have a sportsbook license.

“This decision stymies innovation and ignores the fact that fantasy sports is a skill-based entertainment product loved and played by millions of sports fans,” FanDuel’s statement said. “We are examining all options and will exhaust all efforts to bring the fun, challenge and excitement of fantasy sports back to our Nevada fans.”

DraftKings similarly cast the regulatory action as beneficial to entrenched interests and vowed to fight back.

“We understand that the gaming industry is important to Nevada and, for that reason, they are taking this exclusionary approach against the increasingly popular fantasy sports industry,” the company’s statement said. “We strongly disagree with this decision and will work diligently to ensure Nevadans have the right to participate in what we strongly believe is legal entertainment that millions of Americans enjoy.”

The Nevada gaming board’s notice follows a period of tremendous growth in the fantasy sports industry — and increased calls for regulation.

Customers of the sites assemble fictional teams of real athletes and pay fees to enter contests that, in some cases, can award million-dollar prizes based on how actual sporting events transpire. The industry’s explosive popularity has brought with it a slew of high-profile advertising and even involvement from professional sports leagues.

At the same time, public officials such as Rep. Frank Pallone, a New Jersey Democrat, have called for a review the industry’s legality. Daily fantasy contests grew out of an exemption

to a 2006 federal law, the Unlawful Internet Gambling Enforcement Act, that sought to crack down on online gaming. But the exemption predated the growth of daily contests — back then, fantasy sports contests generally lasted an entire season.

Daily fantasy sports websites faced their most intense public scrutiny recently when an employee at DraftKings accidentally released important data prior to the beginning of the third week of NFL

games. He won $350,000 on FanDuel the same week.

Though DraftKings said it did not believe the employee did anything wrong, the incident nonetheless proved to be a major scandal that prompted allegations of insider trading and cries for regulation of fantasy sports sites.

Fantasy sports companies have generally pushed back against comparisons to gambling by arguing that their product is a game of skill distinct from sports betting. And Jason Robins, the chief executive of DraftKings, said at a major casino industry conference recently that less than 15 percent of his customers gambled on sports in the traditional fashion, either at legal sports books or on the black market.

The Nevada gaming board has apparently rejected the industry’s defense.

Burnett said in an email that current daily fantasy sports operators could file applications for licensure immediately, but they would still have to suspend operations until the gaming board finds them suitable. Nevadans would not be prosecuted for betting with an unlicensed daily fantasy site, Burnett said, although the ability of state residents to continue placing bets here could be used as evidence against the offending site.

“If they want to operate (in Nevada), they’re going to have to become licensed and regulated and taxed — just like the sports books, no difference,” said Daniel Wallach, a Florida attorney with expertise in sports gambling law. “The operators have a business decision to make: Either get out, or play by the same rules as everyone else.”

Nevada casinos have so far stayed out of the daily fantasy industry while the gaming board investigated its legal status. While those who are already approved to run a sportsbook can now provide daily fantasy sports contests, the gaming board said they “should exercise discretion” in associating themselves with unlicensed operators.

Geoff Freeman, president of the American Gaming Association, stressed that the casino industry has consistently called for more clarity on the legal status of daily fantasy sports.

“We appreciate that the Nevada Gaming Control Board has provided that clarity as well as a roadmap for (daily fantasy sports) companies and casinos to provide popular fantasy sports within Nevada borders,” Freeman said in a statement. “We will continue to seek additional clarity in other jurisdictions, as eliminating ambiguity is in the best interests of all parties, including consumers.”

The Nevada regulatory action ends a period of uncertainty for casinos and sportsbooks, but it presents new challenges for the current fantasy sports operators who may be loath to submit to the state’s intense regulatory process.

Still, Seth Young, the chief operating officer of Star Fantasy Leagues, said his company will consider re-entering the state under the purview of gaming regulators.

“I’m glad that there’s clarity,” Young said. “We may not necessarily agree with the view that has been taken, but it doesn’t matter. We can’t disrespect state law. All we can do is cooperate and work to show that we continue to operate with integrity and we have a proven track record.”

Daily fantasy sports providers have faced recent pressure beyond Nevada, too, most notably from the FBI and the Justice Department, which are investigating the industry’s business model, the Wall Street Journal reported this week.

Wallach said the metaphorical wall between daily fantasy and traditional sports betting is rapidly disappearing.

“It’s crumbling, and the distinction between the two is quickly falling away in the court of public opinion and as a matter of reality,” he said. “The ultimate solution is to have a uniform federal framework that would monitor, regulate and address both fantasy sports and sports betting in one broad statutory scheme.”