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DraftKings, FanDuel could face first significant legal challenge after hearing request

In this Wednesday, Sept. 9, 2015, photo, Devlin D’Zmura, a tending news manager at DraftKings, a daily fantasy sports company, works on his laptop at the company’s offices in Boston. (AP Photo/Stephan Savoia)
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A ranking member of the House Energy and Commerce Committee requested a hearing about the relationship of fantasy sports to gambling, potentially the initial step in what is believed to be the first direct legal challenge to the exploding daily fantasy sports industry.

Rep. Frank Pallone (D-NJ) requested the hearing in the panel that oversees professional sports and gambling Monday afternoon. He wants to scrutinize the difference in gambling on sports and playing fantasy sports and to examine the close ties between professional sports leagues and teams and the fantasy sports industry, including daily fantasy titans DraftKings and FanDuel.

DraftKings and FanDuel have received hundreds of millions of dollars in venture capital, money the daily fantasy sites used to purchase advertisements. Sports television viewers last weekend were pummeled by commercials for the sites, which in part promoted Pallone’s request for a hearing.

“Anyone who watched a game this weekend was inundated by commercials for fantasy sports Web sites, and it’s only the first week of the NFL season,” Pallone said in a statement. “These sites are enormously popular, arguably central to the fans’ experience, and professional leagues are seeing the enormous profits as a result.  Despite how mainstream these sites have become, though, the legal landscape governing these activities remains murky and should be reviewed.”

In a short period of time, daily fantasy sports have become embedded in how fans consume sports. Major League Baseball owns a small equity stake in DraftKings, and the National Basketball Association owns a share of FanDuel. Both DraftKings and FanDuel sponsor a cadre of individual professional teams.

[From March: How daily fantasy sports used a loophole to strike it rich]

“The difference is, one is legal and one is not,” MLB Commissioner Rob Manfred said in April, outlining MLB’s stance on fantasy sports compared to gambling.

FanDuel and DraftKings offer real-money contests that can last as short as a few hours. Users pay an entry fee to choose a “team” with a “salary cap” and win cash prizes or lose their entry fee based on how players perform in real-life games. DraftKings offered a $2 million first prize for an NFL contest during the first weekend.

“Fans are currently allowed to risk money on the performance of an individual player,” Pallone said. “How is that different than wagering money on the outcome of a game?”

The sites have enjoyed a remarkable rise without much questioning of their legality, because by definition they are operating carefully within a loophole of the United States’ sports gambling laws. Online sports wagering and online gambling are outlawed under the Professional and Amateur Sports Protection Act, or PASPA, which was passed in 1992.

[The origins of PASPA and New Jersey’s sports betting battle]

In 2006, the Unlawful Internet Gaming and Enforcement Act (UIGEA) specifically defined fantasy sports and carved out a law protecting them. The lawmakers behind the act did not consider daily fantasy sports, because they did not exist at the time.

Nigel Eccles, FanDuel’s CEO, helped launch the industry by designing a game based on the language in UIGEA.

“If you look at what the law says today, it is very clearly within that,” DraftKings CEO Jason Robins said in an interview last winter. “So the law would have to change. If you look at when UIGEA was first passed, there wasn’t really anything like that previously, so there needed to be some sort of clarification as to what’s legal and what’s not. I think it’s a lot easier in the absence of having that, of saying, ‘it might look this way or it might look that. Now there’s a precedence. There’s already a law in place. Most people are okay with that. It would just take a lot to reverse course right now. It would cause such a public outcry, I just don’t see how it could happen.”

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Is sports gambling too prevalent to remain illegal?