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OCTOBER 2014 ENTERTAINMENT, MEDIA & SPORTS >> ALERT RISE OF DAILY FANTASY SPORTS PRESENTS OPPORTUNITIES AND RISKS TO COMPANIES It is likely that anyone who turns on a television (or tablet or smartphone) to watch some football this weekend will see numerous commercials for the websites “FanDuel.com” and “DraftKings.com.” These two sites provide “daily fantasy sports” services and are inundating the airwaves with commercials. Some say these services look quite similar to online gambling, but the recent explosion of their advertising is just one indication that views in the United States about online sports gambling are softening for the first time since the passage of restrictive legislation in 2006.

THE 2006 UIGEA BANNED FINANCIAL TRANSACTIONS IN SUPPORT OF ILLEGAL ONLINE THE BOTTOM LINE GAMBLING The rapid growth of daily fantasy sports presents challenges not contemplated by Gambling regulations in the United online gambling regulations of UIGEA and a step into the unknown for media States affect a much broader array companies, marketers, sponsors and others looking to leverage this growing business. of businesses than just those directly But, recent developments show a softening of attitudes toward the daily fantasy accepting bets. The Unlawful Internet business and online gaming in general. Now may be the right time for companies, Gambling Enforcement Act of 2006 agencies, and even sports organizations to take a cautious step into this field. (the UIGEA), among other things, prohibited financial transactions that supported unlawful online gambling. unlawful online gambling, and online gambling, for fear of being The law took an expansive view of launched a civil suit against several subject to similar fees or prosecution. unlawful online gambling, defining major internet companies, alleging that Processing payment transactions for it as placing, receiving or otherwise they had accepted fees for displaying online gambling is also a violation of knowingly transmitting a bet “by ads for unlawful online gambling. UIGEA, and since the law’s passage means that use, at least in part, of the the Department of Justice has seized In 2007, Microsoft, Yahoo and Google Internet where such bet or wager is more than $100 million in bank funds paid a combined $31.5 million to settle unlawful under any applicable federal deposited by payment processors. As these claims. In the intervening years, or state law.” a result, major credit card companies media agencies have been reluctant such as MasterCard and Visa have As part of the enforcement of UIGEA to handle purchases for (and major taken significant steps to guard and other anti-gambling legislation, the purveyors of traditional and online against unknowingly processing such Internal Revenue Service (IRS) and advertising space have been reluctant transactions. Federal Bureau of Investigation (FBI) to accept) ads for any services that went after companies that facilitated could be construed as unlawful

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DAILY FANTASY SPORTS – and required skill of traditional fantasy daily contests on MLB.com, and the UNLAWFUL ONLINE GAMBLING, games but compressing it in a more chief executive of MLB Advanced OR A TEST OF SKILLS? “Twitter-friendly” timeframe. Media, the league’s internet company, has hinted in news reports that it Though UIGEA significantly restricted The courts have not yet weighed in is exploring ways to broaden that online poker and other similar forms of on the issue. In 2013, a suit against partnership. gambling, the law contains an explicit FanDuel.com seeking to have the carve-out for fantasy sports games site’s operating profits disgorged Shortly after receiving the $70 million in which winning requires knowledge was dismissed by an Illinois federal investment, FanDuel.com became the and skill superior to that of users’ court, but the court did not address first official daily fantasy sponsor of an opponents. This has allowed fantasy the question of whether daily fantasy NBA team, and will display their logo sports to become the multi-billion is a game of skill or unlawful online on the sidelines of the Orlando Magic’s dollar industry it is today. In fantasy gambling and instead made its home court. The NBA has created a sports, a user joins a league with other decision on unrelated legal grounds. new sponsorship category for daily users to draft real-life professional fantasy, so it appears likely that others athletes and receive points based on RECENT DEVELOPMENTS will have similar opportunities for how well the real athletes perform. SHOW SIGNS OF INCREASING sponsorship. And, the networks airing Generally, fantasy sports services ACCEPTANCE OF DAILY FANTASY NFL games have welcomed daily last an entire season, with trades, fantasy companies as new, and But even in the absence of a definitive substitutions, and a high degree zealous, buyers of advertising time. of dedication and skill required to court opinion or piece of legislation succeed. (daily fantasy did not exist when Congress passed UIGEA), there IS NOW A SAFE TIME TO GET But sites like FanDuel.com and are numerous signs throughout the INVOLVED WITH DAILY FANTASY DraftKings.com have introduced a new marketplace that daily fantasy is GAMES? twist: fantasy leagues that last as little becoming an acceptable off-shoot of There are numerous opportunities to as one day. Did a user’s team of hand- the fantasy sports genre. participate in the daily fantasy sports picked players lose tonight? The player ecosystem. For media outlets, daily In September, FanDuel.com raised can buy in again the next day, draft a fantasy sports offers revenue potential $70 million from a variety of investors, different roster, and watch to see if he as a growing advertiser. For media including Shamrock Capital Advisors or she fares better. Some claim that planners and buyers, daily fantasy and Kohlberg Kravis Roberts. this new rubric looks too much like sports businesses are clients in growth DraftKings.com raised $41 million in a gambling – if the extent of the choice mode. For marketers, daily fantasy similar round of financing in August. At is “will Player A have more rushing sports offers new ways to engage with least two of the major sports leagues yards than Player B?” the fantasy consumers, from advertising on have recently embraced daily fantasy, game may be functionally equivalent fantasy sports properties to sponsoring a stark about-face from their anti- to a prop bet. But others have pointed and partnering with daily fantasy gambling stance only a few years out that most daily fantasy games sports companies on new games and ago. Major League Baseball now currently on the market are much more programs. The firm cannot say for partners with DraftKings.com to offer complicated, mirroring the intricacy certain that the regulatory enforcement OCTOBER 2014

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of 2006 and 2007 will not resurface. fantasy games may be dispelling. Now However, based on the numerous may be the time to cautiously step FOR MORE INFORMATION changes in the field that have taken onto the field. And, will fantasy sports James L. Johnston place in the span of only a few weeks be the Trojan horse that allows full- Partner this summer, it appears that some of fledged sports gambling to enter the 212.468.4867 [email protected] the “unlawful online gambling” toxicity mainstream? It’s too early to tell, but surrounding advertising for daily many wouldn’t bet against it. Josh J. Gordon Associate 212.468.4834 [email protected] or the D&G attorney with whom you have regular contact.