RISKY BUSINESS
Scandals encircling fantasy gaming in the U. S. are provoking calls to clear up legal grey areas by tightening Canada’s Criminal Code
Trade groups, lawyers and doctors warn the lack of legislative clarity concerning the legality of daily fantasy sports in Canada could leave the industry susceptible to the scandals now making headlines in the U. S. and that risks abound if the industry is not regulated.
“The scandal in the U. S. has only heightened the need for changes to the Criminal Code and for clarifying of the law,” said Paul Burns, vicepresident of the Canadian Gaming Association, a lobby for the regulated gaming industry.
Burns adds that “provincial lottery corporations are hugely frustrated. They’ve watched the rise of daily fantasy sports over the past two years. Other folks have access to the market with no repercussions.”
The CGA estimates that offshore sports betting sites attract $4 billion to $5 billion from Canadians each year. Meanwhile, Canadians spent only about $ 500 million on the legal sports lotteries run by the provinces.
Daily fantasy sports operators allow customers to draft virtual teams of professional athletes under a salary cap. Teams compete against each other and accumulate points based on athletes’ real- world performance. It typically costs from 25 cents to $ 1,000 to enter a single game, but ubiquitous television advertisements, especially during the first half of the 2015 NFL season, promise to make millionaires out of even the most casual fans.
The Fantasy Sports Trade Association estimates that close to 57 million people now play fantasy sports games in North America, up from 41.5 million people in 2014.
In Canada, only provincial lottery corporations are allowed to offer gaming products. Canadians are barred from paying for any other games that include an element of chance or randomness.
This i s where the l egal status of daily fantasy sports becomes murky: Operators argue that picking players is a skill and therefore legal. But others assert that sports contests are riddled with elements of chance: athlete injuries, dropped passes, referees’ decisions and the weather are all random or unforseeable occurrences that affect sporting outcomes.
“No court has had to interpret the Criminal Code to give us an answer one way or another,” says Chad Finkelstein, a partner at Dale & Lessmann LLP in Toronto. “We’re just having educated guesses.”
Last month however, the CGA asked Don Bourgeois — the former general counsel to the Alcohol and Gaming Commission of Ontario — to examine the legal status of daily fantasy sports.
“The gist of the opinion,” Burns says, “is that they are games of mixed chance and skill, making them illegal under the Criminal Code.”
Burns says that while he has shared the opinion with the provincial lottery corporations, the CGA has yet to receive any feedback. Getting the provinces on board is important because the CGA hopes to persuade the federal government to reconsider legalizing single- event sports betting. The provincial lotteries offer only “parlay” sports betting, where customers can bet on multiple contests.
A private member’s bill that would have legalized this type of betting languished in the Senate this year and eventually died. Passing this type of legislation is seen as a first step towards getting some clarity on the status of fantasy sports.
“Last time, ( the provinces) wrote letters to the government asking it to add an amendment to the Code,” Burns says.
“We’ve started that process again and we’re hoping everyone will recommit to the cause.”
Brian Masse, t he NDP member of parliament for Windsor West, told the CBC in late October that his party plans to bring the private member’s bill forward again when the House of Commons is recalled.
The provinces are tightlipped on whether they plan to bring daily fantasy sports under their purview.
“We’ve been keeping a close eye on the recent investment and growth in daily fantasy sports, as well as the potential market size in British Columbia,” says Angela Koulyras with the British Columbia Lottery Corporation.
The Ontario Lottery and Gaming Corporation is in the process of rolling out iGaming, under which it will license private operators of Internet gaming sites. But so far, fantasy sports have not been included.
The growing calls for regulatory clarity in Canada are occurring against the backdrop of a scandal that has rocked the world of daily fantasy sports south of the border. The American industry is on tenterhooks as it awaits a definitive court ruling on whether DraftKings and FanDuel — the industry’s behemoths — can remain in business in New York.
The State of Nevada declared daily fantasy sports illegal last month and a number of civil lawsuits seeking the recovery of gambling losses are pending across the country. But the New York decision could be a landmark event for the industry, says Daniel Wallach, a sports and gaming attorney with Becker & Poliakoff in Fort Lauder- dale, Fla. “Draft Kings and FanDuel have argued that a ruling against them could theoretically put them out of business.”
On Friday, the two sides in the dispute went back and forth again in the New York courts. A judge granted an injunction sought by the state’s attorney general to stop FanDuel and DraftKings from operating immediately. Later in the day, an appellate judge allowed the companies to keep operating in New York at least until Jan. 4.
New York is important to the two companies — which together control more than 95 per cent of t he North American market — because it makes up nearly 10 per cent of the overall player pool, which is the largest in the U. S. Most important, Wallach says, a ruling against the companies could set the stage for criminal prosecution under both federal and state law.
Lawrence Walters, an att orney with Walters Law Group in Longwood, Fla., said in an email that “in any ‘ grey area’ business model, the first major legal decision is often of substantial importance.” Others are more likely to initiate civil and criminal actions when they “smell blood in the water.”
The possibility of criminal prosecution could have heavy costs for Canadians who play on the U. S. sites.
“From a purely legal standpoint,” Walters says, “if the court rules that daily fantasy sports is a form of illegal gambling activity, seizure of player funds placed on account for wagering purposes is permissible under numerous legal theories.”
There is precedent f or such seizures. In 2011, the FBI, acting on behalf of the U. S. government, shut down three popular online poker websites, freezing millions of dollars in players’ accounts. It took years before they got the money back.
“If you are dealing with someone who is unregulated, you have no recourse against the company if something goes wrong,” Finkelstein says. “There is no government body that is going to back you up. You actually have to start a private civil action against that company, and good luck doing that.”
Wallach says that no matter the outcome of the New York court case, the judge’s ruling will most likely be appealed, so the risk of forfeiture is not imminent.
Both Draft Kings and FanDuel have a number of high- powered friends in the world of sports and media. Major League Baseball and the National Hockey League, which have both been highly opposed to gambling, have investment deals with the companies. So, too, do the National Basketball Association, Major League Soccer and media giants like Fox, Comcast and NBC . Jerry Jones and Robert Kraft, who own the Dallas Cowboys and the New England Patriots respectively, own equity stakes in DraftKings.
Sports leagues are keen to leverage the popularity of daily fantasy sports into increased fan engagement and viewership numbers.
Still, Walters says he has been “bemused” at the speed at which mainstream interests have established such close business relationships with relatively untested online gaming business models.
A ruling against DraftKings and FanDuel in the New York court could impact these relationships as well, Wallach says. “We could very well see the NFL forcing Jerry Jones and Robert Kraft to divest themselves of any holdings,” he says.
Gambling addiction experts have also joined the chorus to regulate fantasy sports more tightly, warning of potential psychological harm.
Jeff Derevensky, a psychology professor at McGill University, studied 23,000 student athletes across the NCAA in 2012. He found that students — predominantly young men — with gambling problems are more likely to be drawn to fantasy sports.
“There is ample reason to suggest that college students in Canada are no different from college students in the U. S.,” Derevensky says. “The 18- to-25 group has the highest prevalence of gambling problems.”
Having provinces offer fantasy sports contests would make the industry safer, Derevensky argues, because they have a number of responsible gaming tools for problem gamblers. One tool offered by the OLG allows individuals to set both the amount of time they wish to spend playing and the amount of money they wish to spend daily. Once these limits are exceeded, they are kicked off. Provincial gaming sites also check multiple forms of ID before allowing young people from registering — a control not offered by many of the fantasy sites in operation. There is nothing to stop 13 year olds from lying about their age and opening up accounts on unregulated sites, Derevensky says.
“For an industry that easily preys on the vulnerable, the weak and the poor, regulatory oversight — as much as possible — is really critical,” Finkelstein says. “There are lots of bad people in the industry.”
If you are dealing with someone who is unregulated, you have no recourse