Massachusetts Commission Recommends Reclassifying DFS As Online Gaming

Massachusetts Commission Recommends Reclassifying DFS As Online GamingThe Massachusetts Special Commission on Online Gaming, Fantasy Sports Gaming and Daily Fantasy Sports lived up to its name with a vote late Monday, recommending that daily fantasy sports (DFS) should be classified as “online gaming.”

That’s a definition DFS operators, not least of which is the Boston-based industry leader DraftKings, have disagreed with since their inception for obvious reasons: more taxes, higher overhead costs and more regulatory restrictions. Being classified as “online gaming” means DFS can legally be treated the same as any other form of internet-based gambling like online poker, table games and even, theoretically, like online sports betting, which is currently prohibited by federal law. Although the Commission’s recommendation would still need to be approved by the Massachusetts state legislature to have any legal teeth, the mere prospect of its approval isn’t a good look for the DFS industry as a whole.

In 2016, Massachusetts became the first state to regulate DFS and it clarified the legal standing of the industry last year, with Attorney General Maura Healey issuing a ruling good for two years afterward in which DFS was recognized as a “game of skill.” Other states followed suit, basing their own rulings on Massachusetts, so a reversal on DFS’ legal classification could set a precedent for states like California, Florida and Texas (three of the nation’s most populous states, and markets ripe for DFS expansion) that haven’t yet codified daily fantasy laws. Additionally, no court has ruled that DFS is in the same category as online gaming and no state has passed a law definitively to that effect either, and now it looks like Massachusetts could be the first.

DraftKings Director of Public Affairs James Chisholm issued a statement early Tuesday morning urging legislators to reject the “ill-advised recommendations” when they pass their finalized legislation on gaming expansion. Chisholm said the Commission’s decision to approve the report lumping DFS in with online gambling runs counter to Massachusetts’ standing economic development law that aims to promote innovation in the state. Should DFS be reclassified as online gaming, the results could be disastrous for the entire industry, and not just DraftKings, which would likely find itself priced out of its home market due to higher taxes and the need for gambling licenses. That higher cost of doing business could mean a not-insubstantial hundreds of Massachusetts workers would be out of a job.

But some individual members of the Commission, and indeed some lawmakers, don’t see the recommendations in that light. In fact, much of the debate that led to the middling 5-3 final vote in favor of approving the report revolved around the steps to be taken to keep DFS legal in Massachusetts after the current daily fantasy law sunsets in 2018. The office of the attorney general was against the recommendation of the Commission on these grounds because it sees the report as embracing the proliferation pf online gaming in general, and of sports betting in particular if pari-mutuel horseracing and eSports wagering are also thrown in the mix.

The DFS industry, as it is set up now, is primarily funded through venture capital investment, and the swirl of discussion about the industry’s future legal status could make those investors pull back, said Representative Mark Cusack, one of the recommendation’s opponents. The commissioners who voted to go ahead with the recommendation are pushing for the legislature to put a law on the books within the next year. They say such a law is needed to bring “19th century” gaming codes in line with present-day realities.

However, if such a law is passed it would not only run counter to the state’s existing laws, it could also jeopardize regulation on the whole DFS industry, which has, up to this point, looked to Massachusetts for leadership. Back in February, one of the big three fantasy sports operators, Fantasy Aces, declared bankruptcy after failing to secure sufficient investment funding. When Fantasy Aces couldn’t keep its doors open through revenues, nearly all available player pay-out funds were used to cover operational expenses and, as far as anyone knows, none of the money has been recouped by the website’s users.

That’s just one example of what can happen when the regulatory framework for the DFS industry breaks down. If Massachusetts doesn’t want to risk either a DraftKings pullout from the state – which would be of no advantage to either party – or the possibility that smaller fantasy operators might choose to operate illegally rather than be regulated out of business, the state’s legislators ought to tread carefully from here out. Once again, this whole development reiterates the significance of New Jersey’s upcoming Supreme Court case on the constitutionality of the Professional and Amateur Sports Protection Act (PASPA), which, if overturned, could make online gambling of all kinds legal everywhere.

If that ends up being the case, then Massachusetts will be off the hook for whatever happens next. If PASPA remains the law of the land then Massachusetts could be setting itself up to put a kill shot on one of the state’s biggest start-up success stories along with a damper on other sports betting states.