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Are Daily Fantasy Sports Really a Gamble?

A False Dichotomy

On its face, it may seem to be a rather preposterous claim: According to the fantasy sports industry, their legions of customers—those football fanatics who plunk down millions of dollars each year in hopes of striking it rich on the backs of NFL stars—are not, in fact, gambling.

They are not, metaphorically speaking, spinning the roulette wheel, or testing their luck at the horse track, or directly wagering on the outcome of any particular game. Those activities, the industry says, quite clearly are gambling—and fantasy sports quite clearly are not.

For now, the courts seem content to accept that argument. But Matthew Melone wonders how long that will hold true. Melone, professor of law and finance, has in recent years undertaken an exploration into the unique and in some ways odd legal standing of so-called daily fantasy leagues, which arrived on the scene in the late 2000s and very quickly gained an extremely loyal—and surprisingly large—audience. Not surprisingly, that rapid growth caught the attention of regulators at both the state and federal levels, and attorneys general in several states soon launched inquiries into the legality of daily fantasy. But even despite these legal challenges, daily fantasy continues to thrive.

The reason why, Melone explains, comes down to the industry's successful contention that the millions of of players who engage in daily fantasy are not participating in a game of chance, as government officials have argued, but rather one of "skill." It's an argument that has thus far held up to legal scrutiny, thanks in large part to a 2006 law called the Unlawful Internet Gambling Enforcement Act.

That law, passed in large part to stop credit card companies from funding offshore online gambling, included a specific exemption for certain forms of wagering—fantasy sports included. Specifically, the law gave its blessing to any activity that had "an outcome that reflects the relative knowledge of the participants."

The federal exemption for fantasy sports does not affect state laws that define gambling but it buttressed the industry's argument that its games are not gambling activities. Indeed, the Fantasy Sports Trade Association (FSTA) uses the law as justification for its stated claim that fantasy sports are at their core "games of skill."

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Government officials, meanwhile, continue to make their counter-argument. Putting the merits of those claims aside, however, Melone says he believes both sides would be better served to move beyond that debate. Doing so would not only benefit the industry, but society as a whole.

"We need to stop hiding behind this false dichotomy of skill vs. chance," Melone says. "We should admit what this actually is, and regulate it appropriately." The key characteristic of gambling activities is risk-creation. Fantasy sports shares this characteristic.

What daily fantasy is, Melone says, is gambling—and it's easy enough to explain why: specifically, he says, it's "almost impossible" to find any activity that is entirely skill based. "For example, take calculus," Melone says. "How a student does on any given exam is predominantly skill-based, yes, but there's also an element of chance. Were you sick the night before the test? Did something happen to your family? All of these random events that you don't control can and do have an impact on performance."

However, it is beyond dispute that calculus is a predominately skill-based activity. Does this mean a math professor can run an operation whereby calculus students wager against each other with respect to their grades and the professor takes the "house" cut? Of course not.

Moving forward, then, Melone believes a common sense regulatory approach should be adopted. Rather than continuing the chance vs. skill debate, Melone believes both the industry and government should recognize that daily fantasy, just like casino gambling and sports wagering, is a form of gambling regardless of whether success depends predominantly on skill or chance. And then, just as with those activities, daily fantasy should be regulated in a way that the states see fit.

"[Fantasy sports] are fun and people like playing these games—and there's nothing wrong with that," he says. "We do this with other things all the time. Why do we allow casinos? Obviously, we do so for revenue and budget reasons but also because they are fun for people. There are a lot of things in our society that may have some negative impacts but that we allow because we believe those negative effects are outweighed by the pleasure people take from it. So let's call it what it is, and stop hiding behind the niceties."

This story appears as "A False Dichotomy" in the 2017 Lehigh Research Review.

Story by Tim Hyland

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