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January 16, 2016

Legalese Column: Fantasy Sports Goes Viral—Now What?

This article originally ran in the January 2016 issue of AVN magazine. Click here for the digital edition. Since the dawn of the World Wide Web, the entrepreneurs who created what was initially its driving force—porn—have been salivating about the idea of cashing in on what must be America’s second most popular vice: gaming. So far, the small guys have never been able to wedge their way into it. Because of that fascination, though, this column periodically updates readers on the interrelationship between the internet and America’s love-hate relationship with gaming. The latest phenomenon, now that poker seems to be fizzling out, is fantasy sports. This monthly column cannot bring readers up to date on the fantasy sports betting phenomenon because it changes every day. However, a little background might help readers put the daily news on fantasy sports in perspective. Gambling—especially sports gambling—is a fact of mainstream American life. Bookies, office pools and the like are everywhere, whether legal or not. For example, odds are (pun intended) that as many of your acquaintances as not will have some kind of bet on the Super Bowl. Yet the penalties for illegal gambling are Draconian. Under federal law and that of many states, illegal gambling has been a RICO and money laundering predicate for decades, subjecting violators to huge prison sentences and asset forfeitures. The Unlawful Internet Gambling Enforcement Act of 2006 can subject bankers to prison sentences for accepting deposits arising from illegal gambling. The latter, by the way, stopped online poker cold, at least legally. Now, analyzing this requires an understanding of the framework of gaming laws. The most fundamental concept involved is that the laws against gambling—every state has some—are somewhat like the Infield Fly Rule; unlike laws against assault, murder, rape, robbery and so on, gambling is illegal only where the governing body issues an edict saying as much. Going back to before the 1970s, the general rule was that most forms of gambling were illegal in every state except Nevada, which legalized gaming almost across the board in 1931. For the rest of the country, gambling was illegal, although it took place everywhere. Now, legalized gambling in Nevada didn’t automatically translate into anything approaching what now is the Las Vegas strip, or even downtown. In the decade after 1931, most of Nevada’s legal gambling joints were sawdust-on-the-floor saloons in the small towns that dotted what then was primarily a mining and railroad state, Las Vegas being one of those towns. In 1941, the El Rancho was the first place to go beyond the sawdust joints. World War II sort of interrupted things, though. The obstacle to developing what you now see in Vegas was that, like most business ventures, a casino needed a source of capital. Banks, concerned about being accused of sin, very rarely were an available source. So, if you saw the movie Bugsy, you know what happened: the Mob provided the capital. What a deal! That group had been involved in gambling for years, always living in the shadows; now they could do it legally—and they did. In 1950, politically ambitious Tennessee Senator Estes Kefauver created the Kefauver Committee (officially, the Senate Special Committee to Investigate Crime in Interstate Commerce), which went around the country putting on dog-and-pony shows about organized crime, subpoenaing many of the more colorful Mob bosses. The Las Vegas version of that runout, not surprisingly, focused on the Mob’s involvement in gambling. (The senator would be Adlai Stevenson’s running mate in their unsuccessful Democratic presidential bid in 1956.) Concerned that the federal government would rain on its exploding gambling mecca, Nevada created, in 1955 and 1959 respectively, the Gaming Control Board, which promulgates regulations, screens applicants and enforces gaming laws, and the Gaming Commission, which has the final say on all things gaming, other than the Nevada Legislature. If you saw the movie Casino, which has reasonable historical accuracy (with some name changes and a little artistic license thrown in), you know that the Wise Guys continued to run the resorts from the shadows, until they finally were taken over by Howard Hughes’ mid-1960s purchase of a handful of properties and the late-1960s legislative amendments allowing public corporations to acquire gaming licenses. (Before that, each owner was required to be licensed.) After Vegas really came into its own, popularized by the Rat Pack, Oceans Eleven, Elvis, Viva Las Vegas and other post-war social phenomena—along with the first mega-resort (considering the era), Caesars Palace—American attitudes about gambling (amongst many other things) evolved. In 1976, New Jersey became the second state to legalize casino gambling, although only in Atlantic City. And seeing what a great form of revenue gaming taxes were for Nevada, states followed by creating state lotteries: gambling was illegal unless you were the government. (There were a few exceptions in a few states, such as thoroughbred racing, dog racing and charity raffles.) That leads the story to events relevant to sports betting—the good stuff. In 1992, New Jersey Senator and former NBA star Bill Bradley pushed through the Professional and Amateur Sports Protection Act of 1992 (PASPA). In a nutshell, PASPA outlawed all betting on professional and amateur sports in all states that had not already legalized it—which as a practical matter meant just Nevada, the only state that had full-blown sports betting. There was one exception: New Jersey was allowed an exemption from PASPA to the extent that it legalized sports betting within a year. But New Jersey blew it, so to this day Nevada is the only state with full-on sports betting. A few states, including New Jersey, have attempted to legalize sports betting of late, but federal lawsuits by the professional and amateur sports organizations (NFL, NCAA, etc.) have stopped them in their tracks. One important concept here is that betting on the outcome of a sporting event is not always illegal. If it were, professional sports would be impossible. So, for example, there is no law preventing a golf tournament where each participant pays an entry fee—and the winners receive cash prizes. The result is a function of the skill of the players who paid the entry fee, not the skill of others over which the investor had no control. Given that Congress has exhibited no appetite to repeal or modify PASPA (an approach that is wildly embraced by Nevada), emerging industries have attempted to turn gaming laws on their heads by saying that certain games are of skill. When poker became a fad in the early 2000s, they undertook to establish poker as a game of skill, actually enjoying some success. By the same token, blackjack arguably is a game of skill, too—if you know “the book,” you have a profoundly better chance of drawing a winning hand. If you count cards, your odds improve to the point that you may have an edge over the house, which will unceremoniously escort you to the door and request that you take your play someplace else if your card-counting habit is found out. That all brings on the latest wrinkle, fantasy sports, which some now are claiming is a game of skill. A few states have addressed the question head-on, by ruling that fantasy sports are, to one extent or another, illegal.  Elsewhere, it begins as an open question. Think about this, though. If you place a bet that Ohio State will beat Michigan by at least a touchdown, it clearly is sports wagering. But clearly, skill is involved. How will Michigan’s wide-outs match up against Ohio State’s defensive backs? Studying the teams is critical to learning that, along with an infinity of other permutations. Slot machines are pure luck: You push the button, whereupon a computerized random number generator decides where the electronic reels are going to stop. You win or you don’t, having nothing to do with how you might have gone about pushing the button. Las Vegas sports books always have an array of “proposition bets,” especially in the Super Bowl. For example: Will the visiting team score on its first possession? Will the home team be the first to score a touchdown? Most common, Will the total points be over or under 42½? The question is how is it any different for a group of people to each choose, say, a quarterback, a receiver and a running back and the winner depends upon the performance of each of them. The resolution of this can be in the state legislature, which can simply pass a law outlawing betting on fantasy sports, as Arizona, Iowa, Louisiana, Montana and Washington have done. The Nevada Gaming Control Board analyzed daily fantasy sports (DFS) against Nevada’s statutes and regulations, deciding that the model was gambling under Nevada law. Of course, Nevada allows gambling—if you have a license, acquiring which is a tall order. Nevada gaming license applications are hundreds of pages long, subject to the intense scrutiny of Gaming Control. The popular (multimillion-dollar) fantasy sports websites presumably would be denied a license on the grounds that they are engaging in illegal gambling in other states. How this will play out will be interesting. Proponents, putting forth their game-of-skill arguments, will claim that fantasy sports betting, Super Bowl pools and so on, which go on in offices from coast to coast, would be better regulated than operated underground. Opponents will point to the problem of gambling addiction (and it is one, to be sure) and, to some extent, the claimed immorality of it—or, as cautioned by Professor Harold Hill: An’ the next thing ya know,Your son is playin’ for moneyIn a pinch-back suit.And list’nin to some big outta-town JasperHearin’ him tell about horse-race gamblin’.Not a wholesome trottin’ race, no!But a race where they set down right on the horse!Like to see some stuck-up jockey’boySittin’ on Dan Patch? Make your blood boil? (Parenthetically, Music Man is an excellent movie/play that wonderfully illustrates the hypocrisy of the opposition to gambling.) Over 40 states now have some form of casino gambling. In fact, the only two states where all gambling is outlawed are Utah and Hawaii. You would think the proliferation of illegal gambling and the acceptance of it will sooner or later influence Congress to change things. Now, enjoy reading in the newspaper every day about the latest wrinkle in fantasy sports betting! Clyde DeWitt is a Las Vegas and Los Angeles attorney, whose practice has been focused on adult entertainment since 1980. He can be reached at ClydeDeWitt@earthlink.net. More information can be found at ClydeDeWitt.com. This column is not a substitute for personal legal advice. Rather, it is to alert readers to legal issues warranting advice from your personal attorney.

 
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