Traditionally, fantasy sports have existed as a sport only amongst a handful of hardcore sports fans who scavenged box scores in newspapers and kept track of scoring by hand. These “leagues” consisted of small groups, due to the time-consuming nature and limited reach of the hobby. With advancements in the field of information technology, participation in fantasy sports has skyrocketed. But this boom carries with it increased scrutiny from the regulators and also increases the risk of being characterised as gambling. In this article, we take a look at the evolution of fantasy sports and analyse the same through the regulatory lens in different jurisdictions such as the United States of America, the United Kingdom and India.

History

The term “fantasy sports” describes a wide range of contests in which participants construct virtual teams to compete against other participants’ teams, using statistics generated by real-life athletes in individual and team-based sporting events.[1] Traditional fantasy sports contests extend for the duration of a single professional sports season, if not longer. Some contests are played entirely among friends, while others charge participants an entry fee and pay out cash prizes to the winners.

The origins of fantasy sports date back to the early 1960s, sprouting within academic circles, when Professor Bill Gamson, a psychology professor at Harvard University, created “The Baseball Seminar”—a contest among esteemed college professors who “paid a ten-dollar entry fee to ‘draft’ a team of baseball players.” Gamson declared the winner of his “seminar” to be “the participant who, over the course of an actual Major League Baseball season, selected players who earned the most points in a pre-determined set of statistical categories.”

As interest in fantasy competitions increased, the practice evolved into a league called the ‘Rotisserie League’, named after the French restaurant in Manhattan, where these fantasy team league discussions were held. This led to the creation of Rotisserie baseball, which is a popularized precursor to today’s fantasy sports. Participation in Rotisserie leagues took place in private until 1994. Then, the internet came along and changed the game.[2]

While the earliest fantasy sports contests were played primarily among friends, the advent of the internet transformed fantasy sports from an in-house hobby into a global enterprise with a commercial dimension. Not only did the internet successfully establish a nexus between fantasy sports enthusiasts from around the world, but it also made available instantaneously downloadable statistics and third-party services for collecting entry fees and paying out prize money. The commercialization of fantasy sports began in the mid-1990s when ESPN Inc. (“ESPN”) became the first major media company to provide fantasy sports games to consumers on the internet.[3] Many of ESPN’s contests charged users an operating fee for management of team data, although ESPN’s fantasy sports contests never paid cash prizes to their winners.[4] Initially, these contests did not attract much legal attention. The one case to look at the legal status of full season fantasy sports indirectly was Humphry v. Viacom[5], a case that noted that these contests were games of skill and therefore legal in most states in the US.

Fantasy Sports in the United States

Sports occupies a special cultural role in the U.S. Society. In the U.S., fantasy sports legislation is subject to both state and federal laws. Although the Interstate Wire Act of 1964 could be interpreted to include internet transmissions, the U.S. Congress enacted the Professional and Amateur Sports Protection Act in 1991, to combat the surge in U.S. states attempting to legalize sports-related betting. However, they realized that other forms of legalized gambling may not fall under the Act’s expanded interpretation. Hence, the Unlawful Internet Gambling Enforcement Act (“UIGEA”) was enacted in 2006 to specifically counter illegal internet gambling sites. The UIGEA specifically exempted fantasy and simulation sports from the ambit of a bet or a wager.[6]

This exemption strengthened the arguments by pro- fantasy sports stakeholders that fantasy games were no more gambling than buying shares in the security markets. However, the subsequent cautious and often negative reaction of U.S. states to fantasy sports proved that the UIGEA exemption was not intended to shield fantasy sports, especially because it could not be foreseen to be a future legal issue at that time.

Mathematics as a tool has been used to build a coherent framework for constructing portfolios for fantasy sports that accurately model the behavior of other fantasy sports players. A formulation to maximize the expected reward subject to feasibility constraints has been used and such formulation can be related to mean-variance optimization and the outperformance of stochastic benchmarks. Using this connection, it can be shown as to how the risks of fantasy gaming can be reduced to the problem of solving a series of binary quadratic programs.[7] On August 3, 2016, Governor Andrew Cuomo of New York, signed into law the Interactive Fantasy Sports Bill, which was intended to license and regulate daily fantasy sports within the state.[8] The Bill called for the New York State Gaming Commission to implement a mandatory registration system for all daily fantasy sports operators, and to grant temporary licenses in advance of formal registration to companies that had entered the marketplace prior to November 2014.[9] This was a landmark change of fantasy sports regulation in the U.S., as New York is a major sporting hub that hosts numerous sports franchises, including the New York Yankees, New York Mets and New York Jets.

The New York fantasy sports case study had a significant impact. Since early 2016, several states began to introduce and pass new bills regarding fantasy sports. For instance, states like Nevada, that derive significant gambling tax revenue, chose to license rather than ban fantasy sports.[10]

Fantasy Sports in United Kingdom

Fantasy sports in the United Kingdom is regulated by the UK Gambling Commission (“Commission”). Fantasy football leagues may require a pool betting operating license because the prize values are determined by the number of playing entrants. The exception to this being if it is being run otherwise than in the course of a business. Any fantasy football league based on cash transactions that are run in the course of a business require an operating license from the Commission to operate lawfully; without it, the organizers would be at the risk of prosecution. As per the Commission, the grant of a commercial license would be dependent primarily on the following questions: [11]

  • Does it look and feel like commercial gambling?
  • Is it run for profit?
  • Is there any deduction for running costs?
  • Is the source of participants beyond a genuine circle of friends and relations?
  • Is advertising used to obtain participants?
  • Is the size of the league beyond what is normal for a private league?
  • Can any member of the public view or join the league?
  • What is the level of activity required in running the league?
  • Are there any wider revenue sources?

Fantasy Sports in India

In a country with a loyal cricket fan base and a flourishing fan base for other sports, including football, hockey, badminton, tennis and even kabaddi, the success of online fantasy sports was the most likely outcome. However, the growth of the online gaming industry in India has been restricted by frequent roadblocks, primarily in the form of public interest litigations aimed at challenging the legality of online fantasy sports and other games (including their online versions) such as rummy and poker, which are often played in private setups with real cash.

The question that Indian courts have pondered over while deciding if a game falls under the category of “gambling” is whether winning such games require skill or luck – and more of which of the two, on balance, if victory involves both. The distinction is crucial. Games of chance or luck, such as betting arrangement or a lottery, clearly fall under the ambit of gambling, thereby attracting restrictive provisions of law. However, games involving a substantial degree of skill do not fall within the purview of Indian gambling laws.

The Supreme Court, in the case of The State of Bombay v. R.M.D. Chamarbaugwala[12], held that, “if even a scintilla of skill was required for success, the competition could not be regarded as of a gambling nature”. While determining whether a game involves skill or chance, courts in India have consistently adopted the “predominance of skill” test, i.e., checking if the game mostly involves skill, even if there is an element of chance at play. Whether a fantasy sport is a game of chance or a game of skill is based on the modalities of each game.

The question of whether the fantasy sport offered by Sporta Technologies Private Limited (“Dream11”) is a “game of skill” was first discussed by the Punjab and Haryana High Court in the case of Varun Gumber v. Union Territory of Chandigarh[13] (“Varun Gumber judgment”). In this judgment, it was upheld that the fantasy sports offered by Dream11 is a “game of skill” as it is based on the following format:

  • The drafting of a virtual team involves the exercise of considerable skill as the participant must first access the relative worth of each athlete/sportsperson as against all athletes/sportspersons available for selection. Participants have to choose a team consisting of the same number of players as the real-life sports team.
  • The fantasy sports team needs to have a mix of players from both the participating real-life sports team. This stipulation ensures that the participant has to exercise greater skill in acquainting himself with the athletes of both participating real-world teams in a single match, preventing the participant from creating a circumstance resembling the act of betting on the performance of a single team to win the match/league.
  • All contests are run for at least the duration of the relevant real-life match
  • No team changes are allowed by participants after the start of the relevant real-life match.

On the basis of the above, the Punjab and Haryana High Court adjudged that the above format as offered by Dream11, constitutes a ‘game of mere skill’ and that Dream11 is a legitimate business activity protected under Article 19 (1)(g) of the Constitution of India which confers a right to practice any profession or to carry on any occupation, trade or business subject to Article 19 (6) of the Constitution of India which provides for reasonable restrictions that can be imposed on such fundamental rights. Later, an appeal against this decision was filed which was subsequently dismissed through an order of the Supreme Court. The expression “game of mere skill” has been interpreted by the Supreme Court to mean “mainly and preponderantly a game of skill”. In the case of State of Andhra Pradesh v. K. Satyanarayana & Ors.[14], the question before the Supreme Court was whether the game of rummy was a game of mere skill or a game of chance. It was held that the game of ‘rummy’ is not a game entirely of chance and that it is mainly and preponderantly a game of skill because the fall of the cards has to be memorized and the building up of ‘rummy’ requires considerable skill in holding and discarding cards.

Later, the Bombay High Court in Gurdeep Singh Sachar v. Union of India[15] discussed the scope of services offered by Dream11 in the light of the Central Goods and Services Tax Act, 2017 (“CGST Act”). Section 7 of the CGST Act defines the scope of the expression ‘supply’. Entry 6 of Schedule III referred in Section 7(2) of the CGST Act provides that actionable claims other than lottery, betting and gambling, shall be treated neither as supply of goods nor as supply of services. In the instant case, the amount of money pooled in the escrow account of Dream11 would be deemed as an ‘actionable claim’, as the same is to be distributed amongst the winning participants as per the outcome of the contest. As held in the Varun Gumber judgment, the activities of Dream11 do not amount to lottery, betting and gambling, and therefore, the said actionable claim would fall under Entry 6 of the Schedule III under Section 7(2) of the CGST Act. As per the ruling by the Bombay Hight Court, goods and services tax at the rate of 18% (eighteen percent) would be applicable for Dream11’s format and fantasy sports gaming service.

It was observed by the Court that success in Dream11’s fantasy sports depends upon participant’s exercise or skill based on superior knowledge, judgment and attention, and the result thereof is not dependent on the winning or losing of a particular team in a real world game on any particular day. It is undoubtedly a game of skill and not a game of chance, and thus, outside the purview of betting, gambling or lottery.

However, all fantasy sport platforms do not adhere to a sole gaming format and vary considerably from each other. The Varun Gumber judgment is specific to a particular game format provided by Dream11. Moreover, the ‘predominance of skill test’ is in itself subjective and varies depending on facts and circumstances.

While most Indian states allow the classification of skill versus chance, there are a few exceptions:[16]

  • Telengana (Telengana Gaming Act, 1974)- The amendment to the Telengana Gaming Act, 1974 in 2017 prohibits any risking of money on an uncertain event, including games of skill, and includes such risking of money within the ambit of ‘wagering’ or ‘betting’.
  • Assam (Assam Game and Betting Act, 1970) and Orissa [Orissa (Prevention of) Gambling Act, 1955]- The two states do not permit any game or sport for money or other stake.
  • Sikkim Online Gaming (Regulation) (Amendment) Act, 2015- The Sikkim Online Gaming (Regulation) (Amendment) Act, 2015 restricts the offering of “online games and sports games” under the licenses issued under the said Act to physical premises of gaming parlors within the geographical boundaries of the state of Sikkim through intranet gaming terminals.
  • Nagaland (Nagaland Prohibition of Gambling and Promotion and Regulation of Gaming Act, 2016)- Nagaland is the only state that has enacted a license regime for virtual team selection games and virtual fantasy league games when offered online.

Key Takeaways

Online fantasy sports games with their gameplay, allows people to play paid games, provides an opportunity for people to indulge in monetary transactions using their knowledge of sports in a safe, legal and regulated environment, unlike sports betting.[17] In addition, while fantasy sports cannot eradicate sports betting, it can definitely help address the motivations around betting in a legal and regulated environment. It is important to educate the consumers on these nuances of fantasy sports, so that they can make an informed decisions in the future. A regulated environment, in fantasy sports platforms, ensures that players have the option of approaching a known entity in case of any dispute. Such an option is unavailable in case of unregulated sports betting, where there is no legal route available for dispute settlement. Further, fantasy sports platforms also contribute to the GST revenues as online skill games are subjected to a tax rate of 18% (eighteen percent) of the operator’s gross revenue after deducting the price pool. With increasing digital penetration in India, a favorable demographic spread and increasing investor interest in fantasy sports, this segment of online sports is set to see rapid and continued growth in the near term.

[1] See Edelman, Marc (2017) “Regulating Fantasy Sports: A Practical Guide to State Gambling Laws, and a Proposed Framework for Future State Legislation,” Indiana Law Journal: Vol. 92: Iss. 2, Article 6, available at: http://www.repository.law.indiana.edu/ilj/vol92/iss2/6.

[2] See Edelman, Marc (2012) A Short Treatise on Fantasy Sports and the Law: How America Regulates its New National Pastime, 3 HARV. J. OF SPORTS & ENT. L. 1, 11.

[3] See Edelman, supra note 1

[4] See Edelman, supra note 1.

[5] 2007 WL 1797648 (D. N.J. June 20, 2007).

[6] 31 U.S.C. §5362 (1)(E)(ix), available at, https://www.law.cornell.edu/uscode/text/31/5362.

[7] See Haugh, Martin Brendan and Singhal, Raghav, How to Play Fantasy Sports Strategically (and Win) (May 23, 2019), available at SSRN: https://ssrn.com/abstract=3393127.

[8] See https://gaming.ny.gov/ifs/IFS%20Statute.pdf.

[9] See Edelman Marc, New York Should Investigate Gaming Commission’s Failure to License New DFS Operators (June 27, 2019), available at https://www.forbes.com/sites/marcedelman/2019/06/27/new-york-state-gaming-commissions-refusal-to-license-new-fantasy-sports-operators-requires-a-serious-independent-investigation/#3ea4dede7303.

[10] See Memorandum of Law, from J. Brin Gibson & Ketan D. Bhirud to A.G. Burnett, Terry Johnson and Shawn Reed, Nevada Control Board (Oct. 16, 2015), available at, http://www.legalsportsreport.com/wp-content/uploads/2015/10/Nevada-AG-DFS.pdf.

[11] See https://www.gamblingcommission.gov.uk/for-the-public/Safer-gambling/Consumer-guides/Betting/Fantasy-football-and-gambling.aspx.

[12] AIR 1957 SC 699.

[13] 2017(4) RCR(Criminal)1047.

[14] AIR 1968 SC 825.

[15] (2019) 75 GST 258 (Bombay).

[16] See, Law Commission of India (2018), Legal Framework: Gambling and Sports Betting Including Cricket in India, Report No. 276.

[17] KPMG and IFSG, The evolving landscape of sports gaming in India, available at https://www.ifsg.in/wp-content/uploads/2019/03/The_Evolving_Landscape_of_Sports_Gaming_in_India.pdf.

 

This material and the information contained herein prepared by Algo Legal is intended to provide general information on a subject or subjects and is not an exhaustive treatment of such subject(s). Algo Legal is not, by means of this material, rendering professional advice or services. The information is not intended to be relied upon as the sole basis for any decision. Algo Legal shall not be responsible for any loss whatsoever sustained by any person who relies on this material.

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