Fantasy Sports Regulation – Always Look on the Bright Side of Life

Published On February 8, 2017 | By Marc Zwillinger | Uncategorized

These days, it’s getting harder for some of us to follow the instructions in Monty Python’s The Life of Brian, and to “always look at the bright side of life.” But I’m going force you to do it. Notwithstanding the angst some of you – especially season-long operators – are feeling over the new fantasy sports regulatory regimes in many states, there’s a bright side too. The new regulatory regime will likely allow more innovation than ever before in the Fantasy Sports Industry. That’s right, you read it correctly – regulation can lead to innovation rather than stifling it. “Explain that to me,” you are saying. And I will.

Until states passed fantasy sports regulation, to do business with a payment processor or bank, fantasy sports operators often needed to obtain a legal opinion from counsel regarding their compliance with state and federal law to satisfy their obligations under Regulation GG. Many of you operators will be familiar with that obligation, and have spent a lot of money to get a legal opinion.  These opinions were required because UIGEA prohibited banks and other financial institutions from funding transactions related to illegal gambling. But UIGEA contained a carve-out, or safe harbor, for fantasy sports contests that were conducted under the definition in UIGEA. Thus, legal opinions from counsel were necessary under Regulation GG for the payment processor to determine that “the commercial customer’s Internet gambling business does not involve illegal gambling transactions,” and hence qualified for the carve-out.

This way of operating made sense due to the uncertain application of state gambling law to fantasy sports. Without an opinion, processors had no other way to conclude that a fantasy sports operator was acting consistent with state law and thus had to rely on the federal carve-out for assurance that the contests were not illegal. Thus, an opinion that the game met the criteria for the safe harbor in federal law was needed and sufficient. But now – because states have passed new regulations – all of that has changed. A legal opinion regarding UIGEA compliance is no longer necessary for games that are conducted in accordance with, and authorized by, state law. Instead, a payment processor is allowed to rely solely on a license issued by a state authority. As it says on FederalReserve.gov:

Alternatively, if the commercial customer engages in an Internet gambling business, the commercial customer should provide further documentation to show that the Internet gambling business is lawful, such as a license issued by a U.S. State or Tribal authority that authorizes the commercial customer to engage in an Internet gambling business.

Even though fantasy sports is not “gambling” under federal law, a state fantasy sports license, under whatever designation the state gives it, should be sufficient.

Once a fantasy operator has a license to conduct fantasy operations in one or more states, payment processors and other partners can comfortably do business with that operator, relying solely on the license issued under state law. There’s no need for a legal opinion.  The license is sufficient—even if the license allows activity that the UIGEA carve-out for fantasy sports does not. Operators can create unique and novel games if the state licensing body allows it, because the license by itself is enough, at least for residents of that state, and other states with license regimes.

See how a little regulation can be a wonderful thing?

 

About The Author

Marc is the founder and managing member of ZwillGen PLLC and has been regularly providing advice and counsel on issues related to the increasingly complex laws governing Internet practices, including issues related to Electronic Communications Privacy Act (“ECPA”), the Wiretap and Communication Acts, privacy, CAN-SPAM, FISA, spyware, adware, Internet gambling and adult-oriented content. He also helps Internet Service Providers and other clients comply with their compliance obligations pertaining to the discovery and disclosure of customer and subscriber information.

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