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Do Fee-Based Daily Fantasy-Sports Pay Off?

Fantasy-sports have become a billion dollar industry, exposing the industry to potentially large payouts as plaintiffs “gamble” on legal contests and raising the question – do fee-based daily fantasy-sports really pay off?

Fantasy sports operators allow customers to draft virtual teams of professional athletes and compete against each other based on the athlete’s real-world performances that day or week. While many fantasy-sports offerings are free to use, some companies require contest entry fees and/or users to pay for players placed on a fantasy roster (different players having different dollar values). These fees are put toward cash prize pools, while the company retains a commission (typically around 10%). Two of the biggest companies in the fee-based daily fantasy market are, surprisingly, startups – FanDuel, Inc. and DraftKings, Inc. However, these entities are not your typical startup. According to a Wall Street Journal article published before the beginning of the NFL season, these two companies together control approximately 95% of the North American daily fantasy market (forecast to have 3.9 million paying customers by the end of the year). Last year, each of these companies made at least $30 million (FanDuel made more) in revenue and awarded at least $300 million in prizes (FanDuel gave out more). However, according to reports neither company has made a profit due to heavy advertising expenditures.

The month of October was rough for FanDuel and DraftKings. FanDuel alone was named as a defendant in over 20 lawsuits in October. In addition, a DraftKings employee won $350,000 on a daily FanDuel contest, sparking an insider information sharing scandal which was followed by an investigation by the DOJ and FBI into whether their daily fantasy games constitute unlawful gambling. Regulatory risk is a potential gamble in this industry. Currently, these entities operate under a fantasy sports carve-out from a 2006 federal law. However, in addition to the DOJ/FBI investigation (and investigation by state attorneys general in a number of states), casinos and sportsbook operators are also calling for regulations similar to their own.

In addition to the insider information sharing scandal, FanDuel was hit with the first of several intellectual property lawsuits. On October 30, 2015, Pierre Garcon, a wide receiver for the Washington Redskins, filed a lawsuit against FanDuel alleging that FanDuel is misappropriating the names, images and likenesses of NFL players in offensive skill positions to promote fantasy contests. In doing so, it attracts users and collects entry fees, depriving the players of the value of their publicity rights. Garcon’s lawsuit is an attempt to begin a class action on behalf of the players. Garcon argues that FanDuel runs national advertising campaigns using Garcon’s and other NFL players’ names and images. Garcon’s position is based upon a right of publicity, namely, the use of his name, image and likeness without his consent in connection with a commercial activity. Interestingly, Garcon previously endorsed FanDuel contests, which raises the question, is Garcon reacting to FanDuel’s failure to renew a previous endorsement contract? In comparison to FanDuel, DraftKings recently reached a licensing deal with the NFL Players Association and so does not currently face this issue.

In November, the drama has continued as patent holder Virtual Gaming Technologies LLC placed its cards on the table, filing patent infringement lawsuits against DraftKings, FanDuel, and several others in the Eastern District of Texas. Virtual Gaming Technologies LLC asserts two patents, United States Patent Nos. 5860862 and 6193610 which generally claim interactive gaming systems including real time score values indicative of performances of players. After all of the other lawsuits and investigations DraftKings and FanDuel must manage, if these entities have the stomach and the financial means to continue with patent contests on the rocket docket of Texas (which presumably they will based upon the hockey-stick-like financial projections for the coming year), the current state of software patent law may stack the deck in their favor. Due to the popularity of fantasy-sports, and seemingly endless plaintiffs’ desire to take a piece of the pie, these cases are sure to continue to receive lots of attention. Stay tuned!    

DISCLAIMER: The information provided is for general informational purposes only. This post is not updated to account for changes in the law and should not be considered tax or legal advice. This article is not intended to create an attorney-client relationship. You should consult with legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.

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