SMITH BRAIN TRUST — Yahoo, DraftKings and Fan Duel made news this week in their high-profile feud with New York prosecutors. All three operators of fantasy sports contests agreed to stop taking bets in the state, which joined Texas, Illinois and four other jurisdictions that already classify the activity as an illegal form of gambling. Maryland might go the same direction with a proposed ballot measure in November.
Steve Heston, a finance professor at the University of Maryland’s Robert H. Smith School of Business, traces the growing feud to the Interstate Wire Act of 1961 — pushed by former U.S. Attorney General Robert F. Kennedy long before fans started assembling their own teams and tracking daily statistics. Kennedy’s original intent was to cut off the mob’s revenue from horseracing and sports gambling by prohibiting interstate transmission of bets via telephone and telegraph.
The Internet joined the list of regulated media in the 1990s, but two loopholes emerged. First, the courts determined that the Wire Act applied only to sports betting. Online casino-style games were largely immune from prosecution. And second, the Internet made it easy for offshore bookkeepers to operate outside U.S. jurisdiction.
In one high-profile case that stretched from 2003 to 2007, the World Trade Organization ruled in favor of World Sports Exchange, which flaunted the Wire Act from the safety of Antigua. Among other findings, a WTO appeals panel determined that the United States lacked moral authority to block the offshore venture because the Interstate Horseracing Act of 1978 and other measures made exemptions for at least one type of domestic gaming.
“There was protectionism of one industry,” says Heston, an expert on the mathematics of gaming and author of two books on tournament poker. Although prosecutors typically frame gaming as a vice similar to prostitution, domestic interests in Las Vegas and elsewhere benefit when competition is stifled. “It’s all a fight over gambling profits,” Heston says.
Congress addressed some of the loopholes in 2006 with the Unlawful Internet Gambling Enforcement Act. Online casino-style games took a hit, but fresh loopholes emerged. Some observers compare the process to a game of whack-a-mole. “Gambling addicts will always find their activities,” Heston says.
Among other things, the 2006 act included an exemption for “fantasy or simulation sports.” Heston says the decision made sense because fantasy teams do not compete in reality, which reduces problems such as point shaving. “Fantasy teams are not about individual games,” he says. “They are about aggregated statistics.”
The clarifying language, however, created a new opening for gaming companies to exploit. Fan Duel emerged in 2009, DraftKings joined the field in 2012, and Yahoo entered in 2015. “They turned it into something that was not envisioned initially for fantasy sports,” Heston says.
Read more: Fantasy Sports and Other Strange Gaming Tales
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About the University of Maryland's Robert H. Smith School of Business
The Robert H. Smith School of Business is an internationally recognized leader in management education and research. One of 12 colleges and schools at the University of Maryland, College Park, the Smith School offers undergraduate, full-time and flex MBA, executive MBA, online MBA, business master’s, PhD and executive education programs, as well as outreach services to the corporate community. The school offers its degree, custom and certification programs in learning locations in North America and Asia.