Lisa Madigan outlaws fantasy sports for Illinois

Shortly before bowl season kicks off for college football and just over two weeks before the NFL playoffs begin, Illinois’ Attorney General has ruled that fantasy sports are illegal. A bill to regulate the industry was introduced in October.

Illinois has the third most daily fantasy sports players in the nation, but according to Illinois Attorney General Lisa Madigan, they are all criminals.

On Dec. 23, 2015, Lisa Madigan issued an opinion in response to an inquiry from state Reps. Elgie Sims, D-Chicago, and Scott Drury, D-Highwood, declaring that daily fantasy sports contests, offered by companies such as FanDuel and DraftKings, constitute illegal gambling under Illinois law.

Participants in daily fantasy sports compete, for a fee, by building online teams of professional athletes from a particular league or competition and earn points based on those athletes’ actual statistical performance in real-world games. Winners of these competitions can win monetary prizes, big and small.

According to the Attorney General’s opinion, the Illinois Criminal Code prohibits playing “games of chance or skill for money” unless otherwise exempted. Daily fantasy sports, which may require both skill and chance, are not exempted from the Criminal Code, according to the Attorney General, and therefore are illegal.

Lisa Madigan is not alone is finding that daily fantasy sports constitute illegal gambling under state law. As her opinion notes, at least seven other states prohibit daily fantasy sports. But as the opinion acknowledges, federal law does not consider fantasy sports contests to be illegal sports gambling.

Many states began taking action against FanDuel and DraftKings after it was reported that a DraftKings employee won $350,000 on FanDuel. According to reports, this employee had information about which athletes DraftKings users were selecting, which would have given him an advantage, since prizes are based on total users’ “ownership” percentage of a particular athlete. However, according to DraftKings, this employee only got access to such information after he set his FanDuel team, and thus did not actually have an unfair advantage. Because of this incident, both FanDuel and DraftKings now prohibit their employees from participating in fantasy sports games with other providers. The response by state governments therefore seems unnecessary.

Unfortunately, the Attorney General’s opinion has implications not just for those who play daily fantasy sports, but for anyone who plays fantasy sports. Does your fantasy football league require dues to play and provide the winner with a monetary prize? Then, according to the Attorney General’s opinion, you are involved in illegal gambling.

More striking, however, is the inconsistent treatment of gambling by Illinois law, which allows gambling for some politically favored industries but prevents other politically disfavored industries, such as daily fantasy sports.

The exceptions in the Illinois Criminal Code allow the state of Illinois to conduct a lottery. They also allow video gambling machines, riverboat gambling and horse racing; but not fantasy sports. No logical argument can be made to explain why some forms of gambling are legal, while others are not.

Legislation introduced in October would amend Illinois’ Criminal Code to exempt participants in “fantasy contests” from prosecution for illegal gambling. On Oct. 27, state Rep. Mike Zalewski, D-Riverside, introduced House Bill 4323, which he said provides needed oversight of fantasy-sports providers such as FanDuel and DraftKings. The good news is that the legislation would legalize fantasy contests after Attorney General Madigan’s opinion – although the bill was introduced prior to that opinion. The bad news is that this bill would make things worse for individuals playing fantasy sports than they had it prior to the Attorney General’s opinion.

HB 4323 would require fantasy-contest operators to adopt several policies and procedures, including:

• Preventing employees of fantasy-contest operators from competing in any fantasy contest offered by another fantasy-contest operator. But FanDuel and DraftKings, which dominate the industry, had already adopted policies to prevent their employees from participating in other fantasy contests before Zalewski introduced this legislation, making the bill’s requirement that they do so unnecessary.

• Preventing the sharing of confidential information that could affect fantasy-contest play until the information is made publicly available.

• Providing mechanisms to verify that fantasy-contest players are at least 18 years old.

• Checking for tax liens and child-support obligations greater than $10,000 prior to paying a cash prize greater than $5,000 to any fantasy-contest player. Making fantasy-contest providers act as watchdogs for tax liens and child-support obligations has nothing to do with protecting consumers, but simply provides the state one more mechanism to ensure tax compliance.

• Establishing mechanisms to ensure that the providers have sufficient funds to pay winners of such contests. There is no evidence that any fantasy-contest operator has ever had a problem paying contest winners, or that operators have commingled users’ accounts with operating funds. And it is particularly ironic for the state of Illinois to require fantasy-sports contest providers to ensure they have enough money to pay winners, when the Illinois Lottery recently was not able to pay lottery winners of over $600.

• Contracting with third parties for annual independent audits and submitting the results to the attorney general’s office. The attorney general can also seek fines against fantasy-contest operators that don’t follow the rules.

Zalewski claims these standards are necessary to protect consumers of fantasy-sports contests. But the Fantasy Sports Trade Association already announced plans to create an outside control board to ensure ethical behavior and develop industry standards. And if the consumers of these services believed they were unprotected, they would no longer participate. Indeed, Zalewski himself has participated in fantasy sports and only stopped doing so when he decided to introduce his bill.

Illinois already has a powerful consumer fraud act, which not only allows consumers to sue companies such as these for fraud, but also allows consumers to collect attorneys’ fees and punitive damages in some cases. Indeed, the Attorney General’s opinion notes at least four pending cases against FanDuel and DraftKings. The Federal Trade Commission can also investigate and prosecute fraudulent business practices, including those by fantasy-contest operators.

HB 4323 could discourage more consumer-friendly providers from entering the market. Some of the problems facing FanDuel and DraftKings could provide opportunities for entrepreneurs to offer customers better products. But the regulations in this bill may enshrine in law the way the established companies operate and prevent new operators from entering the field. This would leave consumers with fewer choices and less control over the future of the industry.

Most users know that playing fantasy sports is risky and that they are not likely to win big payouts. They play primarily for fun. These regulations could end up hurting unsophisticated players by creating a false perception that the government has made the games fairer or easier to win.

Unfortunately, some legislators don’t think this bill goes far enough. Drury, one of the state politicians who asked Lisa Madigan about the legality of daily fantasy sports, takes issue with some provisions in Zaleswki’s bill: Drury thinks the minimum age of 18 is too young and that rules are too loose on winners who owe child support or tax money. Drury’s concern about 18 year olds playing fantasy sports is particularly ridiculous, as 18 year olds can buy lottery tickets from the state and gamble on horse racing.

Illinois should make sure those who enjoy fantasy sports are not liable under any criminal laws. But the state should not regulate fantasy-sports contests under the guise of consumer protection, particularly when it could actually hurt consumers in the long run.