Daily fantasy sports companies, DraftKings and FanDuel, have taken center stage in the past few weeks with a controversy surrounding potential impropriety in the form of insider trading. Adam Johnson, a Kentucky resident and DraftKings user, filed a class action lawsuit against DraftKings and FanDuel on October 8th in the United States District Court’s Southern District of New York alleging negligence, fraud, and a violation of consumer protection acts in New York, Kentucky, and Massachusetts.
Fantasy sports leagues are internet-based games that allow fans to “draft” players from a designated sports league to a team and apply a points system to the athletes’ performance in order to compete with other league members. Allowing increased opportunities to play throughout the week, season, and sporting world, daily fantasy sports leagues differ from traditional fantasy sports leagues because they begin and end on a single day.
Recreational daily fantasy sports leagues seem harmless enough, but it begs the question: why is everyone so interested in such a recreation? FanDuel projects $2.2 billion dollars in payouts for 2015 alone and recently announced $275 million in investments from companies like Time Warner, NBC Sports, Google and Comcast. DraftKings announced $300 million in investments from Fox Sports, Madison Square Garden and various professional sports leagues. Fanduel and DraftKings began in 2009 and 2012, respectively. Today, they control a multi-billion dollar industry. The potential implications of impropriety regarding an unregulated industry of this size should concern the greater American public, but more importantly concerns the powers that be on a governmental level with regard to marketplace integrity and consumer protection.
The lawsuit began when an employee of DraftKings posted information online detailing percentages of player usage. Because the information was not made public, it has raised a number of concerns about unfair business practices and conduct that might indicate insider trading. Consequently, that same employee won $350,000 playing daily fantasy sports that very weekend.
These concerns about the fairness of daily fantasy leagues also raise concerns about regulation. Many debate whether these daily fantasy sports leagues qualify as gambling, which would necessitate more stringent regulation.
Jason Robins, CEO of DraftKings, distinguishes daily fantasy sports leagues from traditional gambling as a “game of skill,” where users make decisions based on research and statistics, rather than a game of pure luck. Congresswoman Dina Titus from Nevada urges Congress to decide whether this recreation is a “game of skill,” or a gambling endeavor that requires heavy oversight. The American Gaming Association is aware of the daily fantasy sports industry and its CEO Geoff Freeman even said that he would like to partner with daily fantasy sports. And, even in the wake of the lawsuit and Congressional pushes for investigation, both companies posted record numbers of users the following weekend of October 10th. These sites yield success without presence in every U.S. state. In fact, many states, like Arizona, Iowa, Montana, Louisiana, and Washington, have prohibited FanDuel and DraftKings.
Both companies have already been affected by the lawsuit. On October 16th, the Las Vegas Review-Journal reported that the most influential gaming regulatory body in the country, the Nevada Gaming Control Board, banned daily fantasy sports. As a result, both companies have been forced to cancel large events in Las Vegas. Additionally, the U.S. Prosecutor’s Office in New York served DraftKings with a subpoena for information surrounding the employee who leaked the information which started this series of events. In another blow, the NCAA sent a letter on October 21st informing both companies that they are prohibited from advertising during championships. The letter also requests that both sites inform the NCAA if any referees or officials have participated in daily fantasy sports. The Washington Post went as far as to posit a drastic impact for both companies akin to the 2011 FBI investigation into online poker sites, which left their users with large amounts of money frozen in accounts and an overnight shutdown of the sites.
Going forward, three things will be interesting to see: first, how will FanDuel and DraftKings weather the consequences and implications of the class action lawsuit? Second, can the companies endure the potential fallout from an unfavorable ruling considering the millions that use their websites? Third, if daily fantasy sports leagues are deemed gambling associations, what are the ramifications on the user’s experience after the government begins to regulate? Could regulation effectively eliminate a multi-billion dollar industry that popped up overnight?