Just before Thanksgiving, New York Times published a series of articles criticizing state gambling agencies for failing to enforce their own rules against licensed sports gambling operators. These New York Times articles indicated that some state regulators had licensed companies with dubious origins, including certain companies that purportedly targeted college students.
But as much as there is conscientious A cause for concern about the behavior of licensed and regulated sports betting, perhaps there should be even greater concern about another form of sports gambling operators – those operating online without a license and therefore without any regulation.
Like their regulated counterparts, unlicensed local sportsbooks allow would-be gamblers to bet against the house on a wide range of sports odds, including whether a player or series of players will finish above or below the expected statistical output. However, unlike their regulated counterparts, unlicensed sportsbooks operate interstate (potentially in violation of the Federal Transfer Act), allow participants to bet at age 18 (instead of 21), and pay no license fees or gambling taxes most states. In many cases, they also operate without regulatory oversight.
While it may seem surprising that companies can get away with advertising and offering unlicensed online sports betting, regulatory miscategorization may help explain the phenomena. Many of these companies that offer unlicensed anti-gambling betting publicly call themselves “fantasy sports” (a category that is generally less regulated than sports betting), although it is doubtful that anti-gambling betting websites would could fall under even the broadest definition of “fantasy sports.”
Even after the colloquial definition of fantasy sports has been expanded to include a wide range of daily fantasy sports companies such as FanDuel, DraftKings and Yahoo, the legal definition in most state laws remains unchanged. And laws, including the Unlawful Internet Gambling Act, define “fantasy sports” as requiring “winning results [that] reflect the relative knowledge and skills of the participants.” The term “relative” means comparative to each other. But competitions against hosts do not have participants competing against other participants. Instead, they compete against the host site.
This distinction between fantasy sports operator sites and home betting operators is important for reasons that go beyond simple semantics. Betting sites typically need more regulation than fantasy sports operators. This is because while a classic fantasy sports operator that properly splits the entry fees will always have positive net income to pay the winners of the contests, the “against the house” websites may reasonably not have enough funds to pay the winners because and their earnings do not necessarily equally reflect both sides of any given bet.
Curiously, the recent proliferation of anti-home betting sites on the web is not the first time. Back in 2015, a number of niche companies such as BetAmerica, DraftDay, FantasyUp and HotRoster briefly attempted to run contests against the home team under the moniker “fantasy sports”. For the most part, these companies either failed to get financing or went out of business during the period of government investigations into fantasy sports in late 2015 and early 2016. But, like many questionable business plans, their idea didn’t quite stick.
This time, the on-site betting companies are once again pretending to be fantasy sports, although this time they could theoretically try to secure sports betting licenses, operate on an intrastate basis, raise their minimum entry age, and thus acting legally. And yet they still aren’t.
Strangely, no state gambling authority has yet attempted to take action against these new proprietary betting sites. Even stranger, these companies, which pay hefty licensing fees to state regulators and limit their operations to an intrastate basis, have not legally targeted their unlicensed, tax-dodging competition.
In the highly competitive and sometimes competitive world of sports betting operators, perhaps it is only a matter of time.
Marc Edelman ([email protected]) is a professor of law at the Zicklin School of Business at Baruch College and founder of Edelman Law. He has advised hundreds of legal entities on legal matters related to the initiation and conduct of fantasy sports contests and authored the law review article “Regulating Fantasy Sports.”