The true Congressional origin of daily fantasy sports
— -- It has been a month of tumult for the daily fantasy sports (DFS) industry. After allegations of misused inside information (later refuted by a law firm investigation) by a DraftKings employee went viral, about two dozen private lawsuits have been filed and there are investigations at the state and federal levels into the legality of the entire industry. Nevada ruled that DFS is a form of gambling and therefore requires a license to operate. Other states may follow suit.
A month-long investigation of archived public records by Chalk reveals that Congress' addition of a fantasy sports exemption wasn't the result of any last-minute inclusion by a legislator working at the behest of the NFL or another sports league, as has often been reported and speculated the past several weeks with the DFS industry under scrutiny.
On July 22, 1998, Democratic Sen. Richard Bryan of Nevada presented -- for the first time -- an amendment to pending legislation that exempted fantasy sports from what would be considered illegal online gambling. Sen. Bryan's fantasy sports amendment included many of the same elements found in UIGEA, passed by Congress eight years later.
Documents also reveal a brief discussion of short-duration fantasy contests in 1999 and an early red flag from the Department of Justice.
Concerns notwithstanding, the fantasy language stuck, becoming the foundation for the 2006 exemption in UIGEA that has repeatedly been cited as spawning daily fantasy sports.
The resulting chronological history shows how Congress viewed fantasy sports in the years leading up to UIGEA's enactment, a critical issue with daily fantasy sports now the subject of several law enforcement investigations and a potential Congressional hearing.
Fantasy's early Senate origins
As the Internet matured and the first web-based sportsbook came into existence in the mid-1990s, Congress turned its attention to the emerging issue of online wagering.
Sen. Richard Bryan took a firm stance on the issue in 1998.
"The point needs to be made that Internet gambling is a bad bet," Sen. Bryan said while explaining his proposed amendment before his fellow senators. "Let me simply say that I believe that the prohibition needs to be across the board.
"My amendment makes one exception -- and perhaps some of my colleagues have participated -- and that is in the so-called fantasy sports leagues or educational games that operate over the Internet."
Republican Sen. Jon Kyl of Arizona, whose then-pending Internet Gambling Act of 1997 originally didn't contain any mention of fantasy sports, endorsed Senator Bryan's fantasy-specific amendment.
"I must say that I totally support the amendment of Sen. Bryan to add the protections in this legislation to those who are providing the games involving, for example, baseball where you get together with other people and you create your own baseball team and you then are judged by how well those teams and players do in the future," Sen. Kyl said in the Congressional Record. "We also make clear, if they charge administrative fees rather than collecting money to pay off bets, they would be exempt."
Sen. Bryan highlighted the diverse support for his amendment. His list included consumer advocate Ralph Nader, the Christian Coalition, the National Association of Attorneys General and the NFL. Indeed, Sen. Bryan flagged a March 25, 1998, letter he personally received from representatives of the NFL, NCAA, NHL, NBA, Major League Baseball and Major League Soccer.
"Sports gambling tarnishes the integrity of athletic competition," the collective letter explained. "It taints the way fans view sports contests.
"It creates suspicion and cynicism about game and performance outcomes and degrades players in the eyes of fans."
The March 25, 1998, letter from the six sports leagues did not mention fantasy sports.
Baseball Union testifies in support
The Major League Baseball Players Association pointedly supported the exclusion of fantasy sports from any definition of impermissible "bets or wagers" under the then-current version of the Internet gambling bill. On March 23, 1999, Marriane McGettigan, an attorney, testified on MLBPA's behalf. NFL attorney Jeffrey Pash was also present at the hearing but did not address any fantasy-related issues.
McGettigan provided a detailed portrait of fantasy sports leagues and explained why the contests should be exempt.
"The willingness on the part of some individuals and public officials to subject fantasy sports leagues to the same prohibition as on-line casino gambling is, we believe, misplaced," McGettigan wrote in a prepared statement.
McGettigan's rationale was two-fold. First, she pointed to the small stakes typically involved in fantasy sports.
"It is not that anyone can ever get online and lose all this money from simply playing fantasy sports," she said.
Second, she pointed to the lack of any game integrity issues.
"We do not support gambling that in any way threatens the integrity of professional sports," McGettigan said. "But we do not think that fantasy sports threatens the integrity of those games.
"There is no incentive for anyone to attempt to change the outcome of any one game, the performance of any one player. Conversely, there is no incentive for anyone to change their performance over a season or in any particular game. So we don't think there is really any public policy that should be of concern to Congress."
McGettigan also articulated the union's financial interest in the fantasy sports issue:
While the licensing concern was somewhat addressed in a 2007 litigation involving MLB's media arm and a fantasy sports company (the fantasy operator prevailed on First Amendment grounds), McGettigan's second concern -- one of consumer engagement -- resonates as much today as it did in 1999.
Following her prepared statement, McGettigan fielded questions. Sen. Kyl presciently asked about shorter-term fantasy leagues and the integrity issues they may carry. The entire exchange is reproduced verbatim below:
Following a 5,000-page review of primary source material by Chalk, the above Q&A exchange between Sen. Kyl and MLBPA's McGettigan represents the closest any Congressional hearing got to addressing concerns specific to short-duration fantasy leagues.
Department of Justice weighs in
In a nine-page June 9, 1999, letter obtained by Chalk, the Department of Justice offered its views on Sen. Kyl's reconstituted Senate Bill No. 692 -- the Internet Gambling Prohibition Act of 1999.
"We strongly support your efforts to amend federal gambling statutes to ensure that new types of gambling activities made possible by emerging technologies are prohibited," Acting Assistant Attorney General Jon P. Jennings wrote.
However, the Justice Department did have some fantasy-specific concerns about the then-pending bill.
"The Department of Justice's first concern with S. 692 is its exemption of certain forms of gambling from the ban on Internet wagering," Jennings wrote. "Specifically, the Department of Justice opposes the exemptions for parimutuel wagering and fantasy sports leagues, because there is no legitimate reason why bets or wagers sent or received by gambling businesses on these activities should be exempted from the ban while bets or wagers on other activities are not.
"[W]e do urge Congress to craft carefully legislation to ensure that gambling on fantasy sports leagues and contests is not legalized on the Internet, when all other gambling is banned."
UIGEA's enactment in 2006
From 2000 to 2005, Congress held hearings on a handful of internet gambling bills, none of which were passed into law. During this time, there were no meaningful on-the-record discussions about fantasy sports.
In 2006, recycling the language offered years earlier, certain fantasy contests that met narrow conditions, including one mandating that the contests be based on the "relative knowledge and skill of the participants," were specifically exempted from UIGEA's definition of "bets or wagers" in the final version. Inserted into an unrelated national security bill pertaining to port security, the law passed by a wide margin in the Senate and the House. UIGEA was signed into law by President George W. Bush on October 13, 2006.
There is no evidence in the Congressional Record that the final version of UIGEA was openly debated in the lead-up to the Sept. 29, 2006, vote. As a result, a small number of senators expressed dismay about how UIGEA made its way into the so-called SAFE Port Act.
"I strongly support firm regulation and oversight of the gambling industry, but this legislation is unequal in its treatment for of gambling activities creating carve-outs," Sen. Tim Johnson of South Dakota said. "At the very least, the effects of this legislation needed to be studied and analyzed by the full Senate before final passage."
On Feb. 1, 2006, several months prior to the Congressional vote, the NFL, NBA, NCAA, NHL, and MLB sent a joint letter to Congress in support of UIGEA.
"Passage of this bill is long overdue," lawyers for the sports league quintet wrote.
The fight to preserve UIGEA
Problems started for UIGEA and its fantasy carve-out quickly. Former U.S. Rep. Barney Frank, a Democrat from Massachusetts, sought to roll back portions of the statute. The title of an April 2, 2008, House hearing was self-explanatory: "Proposed UIGEA Regulations: Burden without Benefit?"
One of the witnesses at the hearing keyed in on fantasy sports.
"It is not clear whether the DOJ views any type of Fantasy Sports League Internet Gambling to violate federal and/or state laws, although such activities are exempted under UIGEA," Rick Smith of UC Group Limited said in written testimony. "The Proposed [UIGEA] Regulation does not address the issue, leaving the status of such activities unsettled, too."
The NFL, NBA, NHL, MLB and NCAA moved quickly to repel Rep. Frank's proposed bill. In no fewer than a half-dozen letters to Congress between 2007 and 2009 -- all obtained via public-record searches -- the five leagues emphasized the extensive deliberation UIGEA underwent.
"UIGEA emerged from more than a decade of Congressional consideration," league lawyers wrote on July 30, 2007. "We urge you to reject current proposals to legalize Internet gambling, such as H.R. 2046 sponsored by Rep. Barney Frank.
"This legislation reverses federal policy on sports betting and would for the first time give such gambling Congressional consent."
None of the 2007-2009 letters examined by Chalk mentioned fantasy sports.
Current implications
Whether fantasy contests of the daily variety are exempt under UIGEA, or any number of other state and federal laws, will likely be a critical question in any Congressional hearing. If such hearings happen, some sports league commissioners appear ready to defend their embrace of daily fantasy sports. "We don't look at fantasy football as gambling," Roger Goodell said on Nov. 12, 2012, while being deposed by lawyers for New Jersey Governor Chris Christie in still on-going litigation.
NFL spokesman Brian McCarthy confirmed Goodell's testimony last month.
"Fantasy games are considered legal, and we operate under the law," McCarthy wrote in an email to Chalk.
Goodell added Tuesday on ESPN Radio's Mike & Mike: "We believe daily fantasy is different than [gambling] because it's essentially a matchup of players. There is not influence so that it can influence the outcome of a game."
Recent statements by NBA commissioner Adam Silver and MLB commissioner Rob Manfred are in unison. "We believe we are following federal law in this case and are clearly on the protected side of the law," Silver told Outside The Lines.
Silver added on Mike & Mike on Tuesday: "You are putting money at risk, and so from that standpoint, I think in terms of the integrity of those businesses, the confidence that fans have, that consumers have in playing those games, I think regulation is in order."
"We spent a lot of time and money making sure the baseball games on the DraftKings sites were not involved in gambling, that they fell within the statutory exemption that we didn't create, that Congress created," Manfred said in comments to the Hollywood Reporter last week.
And on Tuesday, Manfred said, "Fantasy is not gambling, in my view ... we are very comfortable with the legality of the games that are being offered."
Manfred is right -- UIGEA's fantasy carve-out was created by Congress. Neither Major League Baseball nor any other peer sports league individually created it. And the exemption was crafted over the course of many years, not conjured up for the first time at the 11th hour in 2006 when the law was passed.
