DraftKings, FanDuel under scrutiny from N.J. congressman who wants more sports betting

DraftKings ads dominate Boston's South Station.
DraftKings ads dominate Boston's South Station.

A federal lawmaker is questioning the legality of daily fantasy sports as the two biggest companies in the fast-growing sector ramp up an advertising blitz for the NFL season.

Representative Frank Pallone Jr., a New Jersey Democrat who has advocated legal sports betting in his state, said the “deep involvement” of professional sports leagues and teams “leaves many questioning whether fantasy sports are distinguishable from sports betting and other forms of gambling.”

“Fans are currently allowed to risk money on the performance of an individual player. How is that different than wagering money on the outcome of a game?” Pallone asked in a news release.

In a letter to Republican leaders, Pallone also requested that the House Energy and Commerce Committee hold a hearing about the legal status of daily fantasy sports, a fast-growing sector of the sports media business that awards hundreds of millions of dollars in prize money.

The two biggest companies in daily fantasy sports, New York-based FanDuel and Boston’s DraftKings, are in a fierce competition to draw players to their websites and mobile apps. They each announced huge investment rounds this summer to fuel that competition: DraftKings with $300 million, led by Fox Sports, and FanDuel with $275 million, led by KKR & Co.

Although most online gambling is illegal in the United States, fantasy sports contests are specifically allowed to award prize money because of an exemption in federal law. But the huge amounts of money flooding into the new niche of daily fantasy has begun to turn heads in the business and legal worlds.

Traditionally, fantasy sports have been long-running contests that take weeks or months to span a sports season. Players “draft” an all-star roster of actual athletes and score points based on each player’s statistics.

Daily fantasy dramatically speeds up that formula by offering contests that can hinge on a single day’s worth of games. That increases the number of contests that can be held, which in turn drives up the amount of entry fees and prize money.

The number of fans playing daily fantasy games has more than doubled in the past two years to 16 million, and the amount they spend has increased from just $5 per year on average in 2012 to about $257, according to the Fantasy Sports Trade Association.

FanDuel has said it will pay about $2 billion in prizes in 2015, while DraftKings said it expects to award more than $1 billion. The companies typically keep around 10 percent of player fees as revenue.

Professional leagues and teams have gotten in on the action —the NBA is a FanDuel investor, while Major League Baseball and the Kraft Group, owners of the New England Patriots, have backed DraftKings. Individual players also have endorsement deals with the companies. On Tuesday, DraftKings announced that it has sponsorship deals with 12 NFL teams. Last week, FanDuel said it had secured similar deals with 15 NFL teams.

In his letter to Republican committee leaders, Pallone took issue with that close involvement by pro sports figures.

“Team involvement in daily fantasy sports also raises questions of whether players or league personnel, who may be able to affect the outcome of a game, should be allowed to participate,” he wrote.

Pallone’s hearing request is no guarantee that Congress would examine the issue, but it does bring a new level of intensity to the legal questions around daily fantasy sports, which were not a well-known phenomenon when Congress drafted the 2006 online gambling law that exempts fantasy contests.

DraftKings and FanDuel did not immediately respond to requests for comment on Pallone’s letter, but both companies and their investors have repeatedly insisted that they take pains to ensure their games adhere to all proper laws. The Fantasy Sports Trade Association, an industry advocacy group, said there are clear differences between fantasy sports and traditional gambling, even when played for money.

“These are skill-based games that match sports fans against each other in a contest of sports knowledge and strategy that is fundamentally different from wagering on the performance of an individual player or the outcome of a particular game. We look forward to having a constructive dialogue with Congressman Pallone,” association chairman Peter Schoenke said in a statement.

New Jersey voters agreed to legalize sports betting in their state last year, but the law was overturned after the NCAA and major professional sports leagues filed a lawsuit. Pallone has been a vocal opponent of that court ruling.

Updated 4:15 p.m. with trade association comment.