Why Pennsylvania Should Follow Nevada’s Lead and Regulate FanDuel and DraftKings

Silver: Pennsylvania should legalize and tax the fast-growing industry.

fanduel-draftkingsNevada is rarely a pillar of morality or model lawmaking.

However, the state’s decision last week to shut down daily fantasy sports operators such as DraftKings and FanDuel until they obtain gaming licenses is a path Pennsylvania should emulate.

By classifying daily fantasy sports as gambling — because that’s what it really is — rather than a game of skill, Nevada determined that a proper license from the Gaming Control Board is necessary to do business in the state. Nevada is now the sixth state to outlaw or limit daily fantasy sports — and there are plenty of others seeking to regulate or ban the increasingly popular contests. Currently, New York, Delaware, Illinois, and even the U.S. Congress are investigating the legality of daily fantasy sports.

Meanwhile, news broke last week that DraftKings and FanDuel are allegedly engaged in consumer fraud through unlawful insider trading.

Pennsylvania is in a particularly unique position to follow Nevada’s lead and create a framework to license, regulate and tax daily fantasy sports as it does with other forms of gambling. For starters, Pennsylvania should have no moral qualms about embracing the daily fantasy sports industry. Daily fantasy sites are currently operating here and almost every inch of Philadelphia’s subways are plastered with ads for DraftKings or FanDuel. In addition, Pennsylvania currently allows a lottery, horse betting, tavern gaming and casinos. Tacking on daily fantasy sports is not a giant leap.

Secondly, Pennsylvania is mired in a particularly grim budget crisis. Harrisburg was supposed to have passed a budget by June 30. Yet it’s now almost Halloween and public schools might actually shut down because there is still no budget. This political fiasco has put new options on the table to create revenue including the legalization of Internet poker, an online lottery, and slot machines in airports. Fantasy sports should also be in the mix.

Currently, daily fantasy sports operates in a carve-out of the Unlawful Internet Gambling Enforcement Act (UIGEA) that exempts most fantasy sports from the federal ban of Internet gambling.

The key question in determining the legality of daily fantasy sports is whether winning is based predominantly on skill or chance (a.k.a luck). If the latter is true, as Nevada determined, then fantasy is just another form of gambling.

Rather than an outright ban, Pennsylvania should follow Nevada’s lead and classify daily fantasy sports as a form of gambling. By doing so, daily fantasy sports operators would need a license from the Gaming Control Board — and those licenses never come cheap. For example, casinos like Harrah’s Philadelphia and the forthcoming Live! Hotel and Casino in South Philly paid $50 million for their licenses.

A bill pending in the PA House sponsored by Rep. George Dunbar (R. – Westmoreland), HB 1197, proposes a licensing fee for daily fantasy sports operators of $50,000 with a tax of 5 percent of monthly gross revenue. However, Dunbar’s bill would limit daily fantasy sports contests to existing gaming license operators, which essentially means only casinos can operate daily fantasy sports tournaments.

Although HB 1197 is a step in the right direction, the Commonwealth should allow broader licensing with stricter regulations for user age verification, addiction monitoring, and overall fairness to guard against insider trading or game-rigging.

While treating daily fantasy sports as gambling, rather than a game of skill such as chess, could provide much-needed licensing and tax revenue, federal law might actually handcuff Pennsylvania’s freedom to do so.

The same law that prevents Pennsylvania from offering sports betting, the Professional and Amateur Sports Protection Act of 1992 (PASPA), could also preclude most states from sanctioning and regulating daily fantasy sportsF.

PASPA states that it shall be unlawful for a governmental entity or person to “sponsor, operate, advertise, promote, license, or authorize by law or compact, a lottery, sweepstakes, or other betting, gambling, or wagering scheme based, directly or indirectly . . . on one or more competitive games in which amateur or professional athletes participate, or are intended to participate, or on one or more performances of such athletes in such games.”

That last line about athlete performances would seem to apply to fantasy sports in which millions of dollars are “wagered” each weekend on individual athlete performances in a game rather than on the final score of the game itself.

Accordingly, if Pennsylvania expressly legalizes fantasy sports as a form of gambling, which it should, it might do so in violation of PASPA. However, testing the boundaries of PASPA, as New Jersey is attempting to do in its fight to legalize sports betting, would be in everyone’s best interest.

The UIGEA and PASPA are no longer workable in their current forms. The incoherency in this nation’s gaming laws has allowed daily fantasy sports to become a billion-dollar unregulated industry while forcing sports betting to underground bookies and offshore websites.

Pennsylvania should not overreact to the growing number of scandals surrounding the daily fantasy sports industry by outright banning it. Rather, Pennsylvania should seize this opportunity to regulate and generate revenue from these lucrative contests. By doing so, it might help lead to an overturn of PASPA and the allowance of real sports books in the state, which would be a giant boon to the economy.

Steve Silver is an associate in the Philadelphia office of McBreen & Kopko.

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