6 Dec 2015

Fantasy sports fiasco in USA and lessons for Indian poker and rummy websites

There has been a raging debate in USA over the past few months about the legality of daily fantasy sports (DFS) websites such as Draftkings and Fanduel. For the uninitiated, DFS websites allow players to create their own teams based on real life matches or athletic events. Teams created by players compete amongst each other and are awarded points based on the performance of the athletes or sportspersons in real life events.

Players’ stake real money on the performance of their teams and are given cash winnings minus the commission or rake of the website. Of course the exact model and structure of competitions varies, but broadly, the DFS industry is based on the prediction of real life events. DFS websites in America have enjoyed tremendous popularity over the past few years, although the recent unprecedented booking of prime-time advertisement slots and tie-ups with national sporting leagues and teams brought them into the limelight.

The online fantasy sports industry in USA is now said to be worth at least a couple of billion dollars, with top venture capitalists and investors actively pouring in money on DFS companies, particularly, Draftkings and Fanduel, the two biggest websites. Despite backing from top sporting leagues and media companies, a relatively small incident: leak by a Draftkings employer releasing information about participants predictions boomeranged into a major controversy.

The Nevada Gaming Commission recently held DFS to be illegal and the New York Attorney General also giving an opinion that fantasy games were violating the state’s gaming statutes. Additionally, a class action suit has also been filed against the two DFS companies in Florida and several other states are now contemplating either imposing stricter regulations or banning the activity altogether.

US skill game laws

Indian and American gaming laws are similar in two respects: first, in both countries, gambling and betting is a state subject and therefore a gaming operator has to comply with at least 51 different laws in USA and 36 different laws in India. Of course, there are some federal regulations in both countries: for instance in USA there is the Wire Act as well as Unlawful Internet Gambling Enforcement Act (UIGEA) which prohibits telegraph or telephone use for the purpose of betting or wagering and prohibits banks from allow gambling or wagering transactions.

Similarly in India, rules laid down under the Information Technology Act bar Internet Service Providers (ISPs), hosting websites or other intermediaries from allowing content relating to or promoting gambling. Additionally, there are foreign exchange regulations prohibiting transmission of foreign currency for the purpose of gaming. However, the issue of criminal liability for running a gaming operation in both India and American hinges on the wording of the specific state legislation.

The second similarity between the two countries is that most states differentiate between games of skill and chance. However, some states do not create that distinction- for instance Assam and Odisha in India.

DFS websites started their online operations, while disallowing residents from states like Washington, Louisana, Montana, Arizona etc. on the assumption that their business models would fulfil all criterion laid down for being classified as a game of skill. These websites argue that the federal UIGEA created an exemption for fantasy sports and therefore the same wording would be imported to state legislations.

It is important to note though that UIGEA only prohibits banks and other financial institutions from accepting payments in connection with gambling and has nothing to do with gaming operators or participants’ criminal liabilities. Presumably, DFS operators’ strategy while commencing operations was to brazen it out and be prepared for legal battles when the time comes.

Legal situation in India

In India as well, a large number of online poker, rummy and fantasy sports websites have mushroomed under the assumption that all these are games of skill. The burgeoning online skill games industry is said to be collectively raking annual revenues of more than US$100 million and is expanding at a rapid pace.

However the legal situation is not entirely clear. While most states exempt games of skill, there is no clarity on what games constitute games of skill and secondly whether commercial online models profiting through rake or commission from such games would be granted the benefit of this exemption.

Nevertheless there have been some favourable judicial precedents and legislative guidelines which online gaming operators rely on. For instance, West Bengal clearly exempts the games of poker, rummy, bridge and nap from the ambit of gambling. A Karnataka High Court order also indicates that playing poker might be legal while High Courts and Supreme Court precedents indicate that the game of rummy is one involving substantial degree of skill.

Clouds of uncertainty still loom large for the online skill games industry despite some piecemeal reliefs. Earlier this year, the Supreme Court declined to get into the exact modus operandi of online rummy websites and dismissed their petitions, stating that the websites have to first approach lower courts. Nagaland has already initiated the process of introducing a new law to regulate and license online skill games, including rummy, poker and fantasy sports and some other states may soon follow suit.

Lessons for Indian skill game operators

The entire DFS controversy has important lessons for the online skill game operators: a single and unimportant incident can lead to a massive controversy and crackdown by regulators- especially in an industry which is perceived to be associated with gambling, a vice frowned upon in Indian society.

One never knows when the controversy could erupt or what could be the spark for such controversy (to give just one recent example, top Swiss packaged food producer Nestle is engaged in a protracted legal battle over the suitability of its billion dollar noodle brand Maggi after a food officer in the far-flung district of Barabanki ordered a routine test).

The fantasy sports controversy has made one thing clear: online skill games cannot permanently continue to operate in a legal and regulatory vacuum, especially after it grows significantly and starts large-scale marketing activities. Online skill game operators need to collectively start approaching governments of each state and demand regulation or legal clarity. Creating a positive perception and collectively engaging with legal and regulatory authorities is the only way for the operators to survive.

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