By: Andrew K. Gonsalves//October 19, 2015
By: Andrew K. Gonsalves//October 19, 2015//
The popularity of online fantasy sports leagues has grown steadily over the last decade, with most leagues using the “season-long” format. Under this format, participants select their entire roster of players at the beginning of a season, and then earn fantasy points based on how their players perform over the course of that same season.
More recently, the newer “daily” online fantasy sports format has caught fire, particularly due to the media blitz by the two largest daily online fantasy sports sites, FanDuel and DraftKings. In general, “daily” online fantasy sports services allow participants to select players and receive cash prizes in a single day or week, rather than over a full season.
In its most recent television ad, FanDuel boasts that it will award about $75 million in payouts each week of the current National Football League season. The same ad states that winnings are in the form of immediate cash payments, with no season-long commitment, and features a winner who purportedly won over $2 million after paying a measly $35 fee.
Indeed, online fantasy sports is a high growth business, with FanDuel and DraftKings each being valued at amounts greater than $1 billion, according to a New York Times report. A third daily online fantasy sports company, DraftOps, is also making inroads and gaining licensing deals with major sports teams and sporting event venues.
Even university generated start-ups are beginning to test the waters. For example, in September 2015, Forbes.com reported that Draftpot, a daily online fantasy sports start-up that was founded by several students at Columbia University, raised $2.2 million.
The economic rewards extend beyond the online fantasy sports providers and to their customers, as well as to the various professional sports leagues, teams, and live sporting venues who partner with them. However, as with any business enterprise involving high volumes of transactions and quick cash payouts, legal scrutiny of the “daily” online fantasy sports industry is beginning to heat up.
In the past few weeks, the daily online fantasy sports model has taken a few high profile hits in the media. First, The Wall Street Journal online recently reported that the Federal Bureau of Investigation was investigating whether any insider trading or predatory tactics were being employed at various daily online fantasy sports sites.
As reported, an employee at DraftKings admitted to prematurely releasing certain data before line-ups were set for the start of a new week of NFL games. The employee went on to win $350,000 at another daily online fantasy sports site the same week. While DraftKings proclaimed its employee gained no advantage in this circumstance, the report still raised red flags countrywide.
Second, just last week, the Nevada Gaming Commission ruled that “daily” online fantasy sports fall under the legal definition of gambling and, therefore, must be regulated like gambling. According to this report, the Nevada Gaming Commission also specifically banned FanDuel and DraftKings from operating in Nevada, effective immediately, thereby requiring these and other daily online fantasy sports providers to become licensed by the state’s gaming regulators. While a handful of other states had already prohibited these daily online fantasy sports sites from operating, none of these other states carries the weight of Nevada in the gaming field.
Is daily online fantasy sports a game of skill or a game of chance?
Gambling is governed by state laws and federal laws. State laws vary from state-to-state, and can include codified and common law. Federal laws that have been or remain relevant to gambling or fantasy sports include the following: (i) the Interstate Wire Act of 1961; (ii) the Illegal Gambling Business Act; (iii) the Professional and Amateur Sports Protection Act (PAPSA); and (iv) the Uniform Internet Gambling Enforcement Act (UIGEA). (Marc Edelman, “Short Treatise on Fantasy Sports and the Law: How America Regulates its New National Pastime,” Harvard Journal of Sports & Entertainment Law, 1-53, at pages 34-38 (2012).)
Online fantasy sports activities must comport with the various state and federal gambling laws. While individual states have their own gaming laws, one generalization is that “gambling” is viewed as a “game of chance,” where someone pays for a chance of winning a greater prize or cash payout than what was paid in. This definition of “gambling” factors in the unpredictability of the outcome, rather than the skill or judgment of the participant.
Whether a particular online fantasy sporting activity constitutes “gambling” under a state or federal gaming law will depend on the structure and rules of the game. Therefore, individuals and companies involved with or interested in operating, starting or funding online fantasy sports sites must first be aware of the relevant state and federal gaming laws.
Notably, the UIGEA includes an exemption for “fantasy sports games” if they comply with three requirements: (i) the prize payouts are not dependent on the number of participants or the amount of fees paid by them; (ii) the winning outcomes must be based on the relative knowledge and skill of the participants and based primarily on the accumulated statistical results of the athletes in multiple real-world sporting events; and (iii) the winning outcomes cannot be based on the score of a game or a single performance of a particular athlete in a single, real-world event. This “fantasy sports games” carve-out is what the daily online fantasy sports providers are banking on to allow them to remain outside of the “gambling” rules. (31 U.S.C. § 5362(1)(E)Iix)(I)-(III) (2006); see also Edelman, at pages 37-38 (2012).)
Due diligence and intellectual property laws
With entry fees for the popular daily online fantasy sports sites expected to top $2.6 billion in 2015 and then grow to about $14.4 billion in 2020, according to Forbes.com, investors and entrepreneurs are lining up to get a piece of the action. For those companies and individuals looking to invest in or start online fantasy sites, it is important that the proper due diligence analyses be conducted.
While the legal question of whether an online fantasy sports service constitutes gambling is a cloud hanging over the entire industry, due diligence with respect to any venture involving an online fantasy sporting activity must consider the associated intellectual property. Online fantasy sports touch on all forms of major IP, including patents, copyrights, trademarks and rights of publicity.
Permission to use the copyrights, trademarks and rights of publicity owned by a sports league, sports team, live sporting venue or individual athlete is often dealt with in licensing and sponsorship types of agreements between the owners of these forms of IP and the different online fantasy sports providers. Because these deals are ordinarily structured to cover just the life of a single season or at most a period of 2-5 years, bidding wars between the major online fantasy sports providers is commonplace.
Utility patents constitute one form of IP that has flown under the radar among the public, but which could have a major impact on the daily online fantasy sports industry. While logos, trademarks and images of the sports teams, leagues and athletes are widely recognized aspects of fantasy sports, the underlying and peripheral technology that make online fantasy gaming possible is mostly technical in nature, often operating out of plain view.
Utility patents, which are issued in the United States by the U.S. Patent and Trademark Office, protect inventions from being made, used or sold without the inventors’ or owners’ permission. In relation to the fantasy sports field, these patents can cover a wide range of inventions, including gaming interfaces, methods of collecting and analyzing statistical sports data, systems and methods of administering an online fantasy sports league, and many other useful technologies used in online gaming.
With regard to daily online fantasy sports, it is widely known that success in these games revolves around the statistics of the athletes selected by gamers. In other words, while gamers will pick their teams, the outcomes are based on how well the selected athletes perform. With the power of modern computers, access to sports statistics and analytics has become a crucial part of online fantasy sports. This is the sort of technology that is protected by utility patents.
Because of the highly technical nature of the subject matter contained in utility patents and the complicated legal rules for interpreting patent claims, due diligence into patents covering online fantasy sports should be conducted with the aid of competent legal patent counsel. A simple search of the USPTO database for patents or patent publications containing the terms “fantasy sport” or “fantasy sports” in their claims uncovered at least 80 issued U.S. utility patents and 232 published U.S. patent applications.
A sampling of some of the titles of the issued patents include the following:
A quick analysis of some of the owners of the U.S. patent documents shows that Yahoo! Inc. and other prominent gaming companies own several of the issued patents. The prospect of having a patent enforced by a large company that can afford the high costs of patent litigation is but one reason for potential investors and company founders to be diligent in looking into what patents may cover the technology they are using.
Fantasy sports has long been an activity done for fun. Due to the well-advertised prospects of becoming a millionaire in one day, daily online fantasy sports sites like FanDuel and DraftKings are changing this perception. While the daily online fantasy sports industry appears to be here to stay, there are significant risks that go along with the monetary rewards of this relatively new form of fantasy gaming.
For example, insider trading and the heightened push to consider daily online fantasy sports as a “gambling” activity are important issues of which current fantasy sites, investors and entrepreneurs should be aware. However, lurking out of the public view, but just as important to the development and growth of the industry, are the intellectual property rights associated with online fantasy sports, particularly utility patents.
While rewards of this relatively new business model seem to be worthy of the hype, its risks are only beginning to come to light to the public. Therefore, proper due diligence and understanding of the laws affecting this growing business are important.
Andrew K. Gonsalves is a senior attorney at the intellectual property law firm of Heslin Rothenberg Farley & Mesiti P.C. He can be reached by email at [email protected], or by phone at (585) 288-4832.