Coverage: DraftKings, FanDuel banned from Nevada

After an onslaught of growing criticism and questions surrounding their legality, online daily fantasy-sports websites DraftKings and FanDuel received a major blow Thursday. Nevada regulators ordered both sites to shut down until they receive a gambling license to operate in what is unarguably considered the country’s gambling capital.

Sharon Terlep of The Wall Street Journal had the day’s news:

Nevada regulators have ordered daily fantasy-sports sites to shut down and to get a gambling license if they wish to operate in the state.

The move comes as daily fantasy companies, namely industry giants DraftKings Inc. and FanDuel Inc., face growing scrutiny over the legality of their business model and the oversight of their operations.

Daily fantasy, because it “involves wagering on the collective performance of individuals participating in sporting events,” must adhere to regulations that govern sports pools in Nevada, A.G. Burnett, chairman of the Nevada Gaming Control Board, said in a notice on Thursday. “[Daily fantasy sports] constitutes gambling under Nevada law.”

FanDuel and DraftKings both said they would cease operations in Nevada as a result of the decision.

FanDuel said the decision “stymies innovation and ignores the fact that fantasy sports is a skill-based entertainment product loved and played by millions of sports fans.”

DraftKings called the move an “exclusionary approach against the increasingly popular fantasy sports industry” in a state where gaming is an important industry.

Joe Drape of The New York Times discussed the Nevada Gaming Commission’s opinion on the discussion:

DraftKings and FanDuel, each valued at more than $1 billion, have operated under an exemption to the Unlawful Internet Gambling Enforcement Act of 2006, which outlawed online poker and sports betting. Five states have prohibited them from operating, but none are as powerful and influential as Nevada, which has long been a bastion of legal gambling, operates under strict regulation, and has the nation’s only active sports betting.

“The Nevada Gaming Commission concluded that daily fantasy is gambling and needs to be licensed here,” said David Gzesh, a Nevada lawyer specializing in gambling and sports law. “It should give other state’s pause because if it’s perceived as sports gambling here, no other state can offer it when it violates federal law.”

Nevada also seemingly has the most to lose; its casinos have lacked the ability to stretch across state lines on the Internet, as daily fantasy sites have, to attract a wider, younger audience.

“It’s self-serving, but that is what the agency is designed to do — ensure an environment where the state’s licensed operators have the best chance of success, and part of that mission is to address forms of alternative gambling that fall outside the umbrella of regulation,” said Chris Grove, who writes the influential blog Legal Sports Report.

The Nevada commission said operators of the state’s sports books may offer daily fantasy games if they wanted, but warned about their associations.

“Although Nevada gaming licensees who have received approval to operate a sports pool may expose D.F.S. for play themselves in Nevada (in compliance with all applicable statutes and regulations), such licensees should exercise discretion in participating in business associations with D.F.S. operators that have not obtained Nevada gaming approvals,” the group said in a statement.

The Associated Press broke down why the considered were ever even considered legal:

DraftKings and FanDuel say the sites provide games of skill and not chance and are therefore protected by the 2006 Unlawful Internet Gambling Enforcement Act, which carved out a specific exemption allowing fantasy sports.

The distinction has been an important one for the industry, which has dodged the type of regulation that governs traditional casinos and sports books. Avoiding being labeled “gambling” also has made the contests palatable to professional sports leagues that have partnered with the sites or, in some cases, invested directly.

Until now, the sites have been available in all but five states where their legality has been called into question.

“If you’re licensed in Nevada, you’re good to go,” said A.G. Burnett, chief of the state’s Gaming Control Board. That includes traditional sports books where gamblers generally wager on the outcome of a given game.

No daily fantasy sports sites are licensed in Nevada, but the sites can apply for licenses.

A notice issued by the Gaming Control Board said the sites must stop offering their contests to Nevada residents immediately, and until they are granted a license. Operators face felony fines and 10 years in prison for running an illegal gambling site. The board said it worked with the state attorney general’s office for several months to look into the sites’ legality.

Joe Asher, CEO of sports book William Hill’s U.S. operations, has repeatedly said daily fantasy sports is gambling and should be treated like all other legal gambling operations. He said the board’s decision speaks for itself.

“It shouldn’t come as a surprise,” Asher said.

Brent Schrotenboer of USA Today explained how the two companies have been under growing criticism:

The spotlight on these companies has grown since last week, when they were forced to react to questions about the integrity of their games after a data breach involving a DraftKings employee. The same employee won $350,000 in a FanDuel contest, leading to questions about whether he had used that information to game the system.

The companies say he did not and that there was no wrongdoing. But New York Attorney General Eric Schneiderman is among many who want to know more. Last week, he sent letters to both companies asking for a host of information, including a list of employees with access to insider data and how they control for potential fraud.

Both companies said they have since banned employees from playing on rival sites for money.