No Question, PASPA Applies to Daily Fantasy Sports

No Question, PASPA Applies to Daily Fantasy Sports
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The recent controversy surrounding daily fantasy sports (“DFS”) has highlighted both the need to regulate the industry and also to clarify its legal status. State legislatures are now attempting to shore up the legal status of DFS while proposing regulations aimed at protecting consumers. Since the beginning of 2015, nearly 20 states have weighed in with some form of proposed DFS legislation. These bills run the gamut: several of the bills “authorize” DFS as legal (one even proposes an amendment to that state’s constitution); some propose a “licensing” regime (whereby operators are required to pay substantial annual sums for the privilege of doing business in that state); others simply “regulate” DFS without explicitly authorizing or licensing the activity, whereas, at the other end of the spectrum, a few states “exempt” fantasy contests from the ambit of those states’ gambling codes. 

While these are legislative proposals are laudable, and, perhaps, even necessary to protect consumers, they may be in violation of the Professional and Amateur Sports Protection Act (“PASPA”), a 1992 federal law which prohibits state-sponsored sports betting in every state except for those states (such as Nevada) that had conducted a sports wagering scheme at any time between January 1, 1976 and August 31, 1990.

A. The Plain Language of PASPA

While PASPAis commonly understood to prohibit state-sponsored sports betting on the “outcomes” of professional and amateur sporting events, it also contains language that is arguably (and perhaps inarguably) directed at fantasy sports. In its recently-released white paper, the Massachusetts Gaming Commission cautioned that PASPA "potentially presents the greatest constraint to state action to address DFS," adding that "at first glance, PASPA may constrain the Legislature from any legislation that directly or indirectly permits or regulates DFS."

Section 3702 of PASPA states in pertinent part:

“It shall be unlawful for – 

(1) a governmental entity to sponsor, operate, advertise, promote, license, or authorize by law or compact, or

(2) a person to sponsor, operate, advertise, or promote, pursuant to the law or compact of a governmental entity, 

a lottery, sweepstakes, or other betting, gambling, or wagering scheme based, directly or indirectly (through the use of geographic reference or otherwise) on one or more competitive games in which amateur or professional athletes participate, or are intended to participate, or on one or more performances of such athletes in such games.”

28 U.S.C. § 3702 (emphasis added)

Fantasy sports are inextricably tied to the individual “performances” of athletes in a game rather than on the final score of the game itself. Without the underlying performance statistics of the real-world professional or amateur athletes, there are no "winners" or "losers" in a DFS contest. As the Massachusetts Gaming Commission explained in its comprehensive white paper, "the success of the individual athletes that make up a participant's team, when filtered through the scoring rubric set up by the DFS operator, will result in the win or loss of the participant." While acknowledging that a DFS participant is not "betting" that a specific player will achieve a specific statistical milestone, such as scoring a certain number of touchdowns in a single game, the Massachusetts Gaming Commission observed that the DFS participant is nonetheless betting that "the aggregate performance of the individual athletes on his [fantasy] team will exceed the aggregate performance of the individual athletes on his opponents' [fantasy] teams." "Simply stated," as the MGC's white paper concludes, "if there were no underlying athletic performances, there would be no DFS."

Thus, a state legislature considering whether to expressly legalize daily fantasy sports must be cognizant of PASPA's prohibitions. As the statute makes plain, states may not "sponsor, operate, advertise, promote, license, or authorize by law or compact" any lottery, sweepstakes or other betting, gambling or wagering scheme based directly or indirectly on . . . one or more performance of athletes in such games."

PASPA's ban on state-sponsored sports wagering also applies to private parties acting "pursuant to the law or compact of a governmental entity." See National Collegiate Association, Inc. v. Christie, 730 F.3d 208, 216 (3d Cir. 2013) (“The prohibition on private persons is limited to any such activity conducted ‘pursuant to the law or compact of a governmental entity.'”). These private persons would theoretically include DFS operators, professional sports leagues and teams, and media companies. To date, only two states (Kansas and Maryland) have expressly legalized fantasy sports. However, this "private person" language may take on greater significance in 2016, as a number of other states move to legalize DFS.

Although PASPA has not yet surfaced as an obstacle to state legalization of DFS, it may emerge as an important issue in 2016 as new state legislative measures are introduced. Any analysis of a DFS legalization bill will undoubtedly center on two key issues: (1) whether DFS is a "lottery, sweepstakes or other betting, gambling, or wagering scheme" based, directly or indirectly, on "one or more performances" of amateur or professional athletes; and (2) whether a state's explicit legalization of DFS rises to the level of "promoting," "authorizing," or "licensing" for purposes of PASPA.

B.  PASPA’s Legislative History

Some might argue that DFS is not a “lottery, sweepstakes or other betting, gambling or wagering scheme" within the meaning of PASPA because DFS is a "contest of skill” (with skill predominating over chance), whereas traditional single-game sports betting (the main focus of PASPA) entails more “chance” than “skill." But PASPA’s legislative history suggests that the “skill vs. chance” distinction has no bearing on the applicability of PASPA.

To that point, the Report of the Senate Judiciary Committee (Senate Report 102-248) accompanying PASPA states as follows:

The prohibition of section 3702 applies regardless of whether the scheme is based on chance or skill, or a combination thereof.  Moreover, the prohibition is intended to be broad enough to include all schemesinvolving an actual game or games, or actual performance therein, including schemes utilizing geographic references rather than formal team names (e.g., Washington vs. Philadelphia), or nicknames rather than formal names of players”) 

Sen. Rep. 102-248, reprinted in 1992 U.S.C.C.A.N. 3553 (emphasis added)

This language could not be any clearer. It states that PASPA is  is “broad enough” to include "all schemes" involving an actual game or games, "or actual performance therein." The Massachusetts Gaming Commission similarly observed in its white paper that PASPA's legislative history "clearly demonstrates that the statute was designed to have a broad scope applying to a wide swath of 'schemes' regardless of the balance between chance and skill." While there is no need to even resort to the statute's legislative history given that the plain language of PASPA is clear and unambiguous, the legislative history nonetheless belies any argument that PASPA is inapplicable to fantasy sports contests.

C.  Does the Later-Enacted UIGEA Override PASPA?

Some have also posited that PASPA was “superseded” by the Unlawful Internet Gambling Enforcement Act (“UIGEA”), which was enacted nearly 15 years earlier. In fact, one DFS payment processing company (which shall remain nameless) specifically requires a legal opinion from operators on this point before it will agree to process DFS transactions. Presumably, lawyers drafting legal opinions for the use and benefit of DFS payment processors have opined that UIGEA "implicitly supersedes" PASPA. But any such conclusion or opinion would be a huge stretch, in my view.

UIGEA, which generally outlaws internet gambling, contains an exemption for fantasy sports contests that meet certain criteria.PASPA, on the other hand, prohibits states from authorizing sports gambling schemes based on the “performance” of athletes in amateur or professional sporting events.

Under the interpretive principle known as lex posterior derogat legi priori, “a later statute takes away the effect of the prior one.” But, as the governing case-law makes clear, the later statute must either "expressly repeal", or be "manifestly repugnant to," the earlier one.

This rule of interpretation cuts against the notion that UIGEA supersedes PASPA. There are several reasons for this. First, UIGEA does not expressly repeal PASPA. Neither the UIGEA statute nor the legislative history preceding its enactment makes so much as even a passing reference to PASPA. Second, UIGEA is not “manifestly repugnant” to PASPA. The two federal statutes have entirely different aims: UIGEA targets the “recipients” of payments associated with unlawful internet gambling transactions, whereas PASPA simply forbids "governmental entities" (including states and recognized Indian tribes) from “authorizing” new sports gambling laws. They are simply not in conflict.

Further, UIGEA’s “Rule of Construction” makes clear that UIGEA does not supersede other federal or state laws:

No provision of this subchapter shall be construed as altering, limiting, or extending any Federal or State law or Tribal-State compact prohibiting, permitting, or regulating gambling within the United States.

31 U.S.C. 5361(b)

This statutory language should put to rest any contention that UIGEA superseded, altered or supplanted PASPA. Thus, state legislative bodies which are weighing whether to legalize daily fantasy sports need to be cognizant of the constraints imposed by PASPA. As I will explain in a future piece, several state legislatures (most notably, those in Florida, California, Minnesota, Indiana and Pennsylvania, to name just a few) have not heeded this message and may unwittingly expose their prospective fantasy sports legislation to a future legal challenge under PASPA.