Daily-Fantasy-Sports Operator Says Federal Regulation is Necessary

Amid a glar­ing spot­light of at­ten­tion from fed­er­al and state of­fi­cials, the CEO of one of the na­tion’s largest daily-fantasy sites said Thursday that gov­ern­ment reg­u­la­tion of the in­dustry would be wel­come.

In a let­ter to cus­tom­ers, Fan­Duel CEO Nigel Ec­cles said that the in­dustry was now large enough that an in­dustry-wide ap­proach was needed to en­sure the in­teg­rity and leg­al­ity of the games.

“To be clear, our in­dustry needs strong, com­mon sense, en­force­able con­sumer pro­tec­tion re­quire­ments to en­sure its con­tin­ued growth and suc­cess,” Ec­cles wrote.

The let­ter comes just days after the fantasy in­dustry an­nounced its own self-poli­cing body, headed by former Obama ad­min­is­tra­tion Deputy Labor Sec­ret­ary Seth Har­ris. The Fantasy Sports Con­trol Agency would set in­tern­al stand­ards and es­tab­lish an audit­ing and trans­par­ency sys­tem.

But giv­en the amount of scru­tiny on the boom­ing in­dustry, it seems al­most in­ev­it­able that some state and fed­er­al reg­u­la­tion is com­ing down the pike. Demo­crats on the House En­ergy and Com­merce Com­mit­tee have been prob­ing the sites, and the com­mit­tee is ex­pec­ted to hold a hear­ing on the in­dustry.

Rep. Frank Pal­lone of New Jer­sey has called daily fantasy “an in­dustry cry­ing for con­sumer pro­tec­tion” that cur­rently op­er­ates “in a void with­in the leg­al struc­ture—without any reg­u­la­tion or the ne­ces­sary trans­par­ency.”

Earli­er this month, Nevada barred daily fantasy, say­ing that it was gambling and re­quired a li­cense to op­er­ate in the state. The Mas­sachu­setts Gam­ing Com­mis­sion is set to con­sider the is­sue as well this week, join­ing oth­er states, such asIllinois, that are re­view­ing the in­dustry. The Justice De­part­ment and the New York at­tor­ney gen­er­al have also opened up an in­vest­ig­a­tion in­to the sites after it was re­vealed that a DraftK­ings em­ploy­ee with ac­cess to the site’s data had won $350,000 on the com­pet­ing site Fan­Duel (the site claims the em­ploy­ee did not have ac­cess to the in­form­a­tion while play­ing on Fan­Duel).

The let­ter, then, would seem to be a way to get ahead of a gov­ern­ment crack­down and re­cog­nize the real­it­ies of the in­dustry, said Marc Edel­man, an as­so­ci­ate pro­fess­or at the Baruch Col­lege Zick­lin School of Busi­ness.

“Giv­en that fed­er­al and state in­vest­ig­a­tions of daily fantasy sports are not likely to stop based on new at­tempts at in­tern­al self-reg­u­la­tion, he’s plead­ing with gov­ern­ment to say, ‘Reg­u­late us; don’t shut us down,’” said Edel­man, who con­sults on leg­al is­sues in the fantasy in­dustry. “This may be a win-win for every­body.”

Ec­cles’s let­ter says that there have been “smart, but tough pro­pos­als” in sev­er­al state le­gis­latures that “can serve as the basis for the sens­ible reg­u­la­tion of the fantasy sports in­dustry.” Among the spe­cif­ic is­sues he says could be ad­dressed are age veri­fic­a­tion, pro­tec­tion of user in­form­a­tion, and re­quire­ments of third-party audits.

The in­dustry has ex­is­ted in a strange gray area of gambling law. The sites—where users pay to par­ti­cip­ate in a cash-prize con­text on a daily or weekly basis—are leg­al thanks to a loop­hole in the 2006 Un­law­ful In­ter­net Gambling Act. But even the au­thor of that carve-out has said that the daily sites aren’t what he had in mind.

The sites have de­fen­ded them­selves, say­ing that they are not gambling op­er­a­tions, but in­stead games of skill (they’ve also been de­fen­ded by ex­ec­ut­ives from leagues like the Na­tion­al Foot­ball League and Ma­jor League Base­ball, which back the daily sites). That would clear them of the reg­u­la­tions and scru­tiny re­quired of on­line gambling.

And Har­ris has said that the self-poli­cing body would fill the role of gov­ern­ment in­vest­ig­a­tion, free­ing up gov­ern­ment re­sources for oth­er mat­ters.

But the ques­tion is in­creas­ingly pop­ping up in states and the fed­er­al gov­ern­ment. It even made an ap­pear­ance at Wed­nes­day’s Re­pub­lic­an pres­id­en­tial de­bate, when Jeb Bush was asked if the daily-fantasy sites should be reg­u­lated (he said it was “day trad­ing without any reg­u­la­tion at all” and called for more scru­tiny).

I. Nel­son Rose, a pro­fess­or at Whit­ti­er Law School and an ex­pert on gam­ing law, said that with the big money back­ing daily-fantasy sites from sports leagues and me­dia com­pan­ies like ES­PN, it’s un­likely the sites will dis­ap­pear en­tirely, es­pe­cially as cul­tur­al ac­cept­ance for gambling seems to be grow­ing. He said that there could be le­gis­la­tion in the fu­ture to cla­ri­fy the defin­i­tion of fantasy sports, with stip­u­la­tions that the con­tests take place over mul­tiple days and re­quire trades.

“DFS may be get­ting hit al­most every day. But it has not, and will not, throw in the tow­el. We are still in the early rounds,” Rose wrote in a column for the journ­alGam­ing Law Re­view and Eco­nom­ics.

Ec­cles ac­know­ledged the new­ness of the daily-fantasy in­dustry, com­par­ing it to Net­flix or Stub­Hub, the tick­et-re­sale site. And with that new­ness, he said, comes scru­tiny.

Edel­man said that daily fantasy es­sen­tially faces two choices: to be a leg­al, reg­u­lated in­dustry like sports gambling in parts of Europe, or to be out­lawed like on­line poker, which is now leg­al only in a hand­ful of states.

“The reg­u­lated mod­el seems to be a win-win for every­body,” Edel­man said, adding that Ec­cles’s let­ter was send­ing the right sig­nals to the gov­ern­ment. “It’s a reas­on­able solu­tion that daily-fantasy-sports op­er­at­ors and the gov­ern­ment would likely feel fa­vor­able in­sti­tut­ing.”