Dismissal of Fantasy League Gambling Case

In a decision of critical importance to the fantasy sports industry, a federal judge in New Jersey dismissed a complaint alleging that pay-to-play fantasy leagues operated by CBS Sportsline, The Sporting News and ESPN were unlawful gambling. Humphrey v. Viacom, Inc., et. al., Case No. 06-2768 (DMC) (D. N.J.).

The plaintiff had claimed that the entry fees paid to participate in these fantasy leagues constituted illegal bets or wagers and sought to recover these entry fees under the “qui tam” gambling loss recovery statutes of eight different states. These statutes allow the loser of an illegal bet to recover his or her losses from the winner and then, if the loser does not do so within the required time period, allow any third party to step in and recover the wagered money from the winner. In the Humphrey case, plaintiff (who had never participated in any fantasy league himself) essentially sought to recover all of the entry fees paid to the Defendants – potentially hundreds of millions of dollars – on the grounds that these fees were gambling losses.

In dismissing the case, the court noted that plaintiff had brought his action under statutes which were enacted centuries ago for the purpose of preventing gamblers and their families from becoming destitute by providing a method for the gambler’s family to recover gambling losses from the winner. The court concluded that these statutes must be interpreted and enforced narrowly and that plaintiff had failed to demonstrate that fantasy sports league entry fees fell within their scope.

In particular, the court noted that the statutes allowed for the recovery of “bets or wager” but concluded that entry fees paid for right to participate in fantasy sports leagues and compete for a prize did not constitute a bet or wager where (i) the entry fees were paid unconditionally, (ii) the prizes offered by the Defendants were for set amounts and were guaranteed to be awarded, and (iii) the Defendants did not compete for prizes. The court noted that there was a clear distinction between a bet, in which two parties have a chance of gain and risk of loss based on the outcome of some event, and a prize or premium, in which the party offering it must pay it and has no chance to win it. The court also found that Defendants did not “win” anything from the fantasy league players because they did not participate in the fantasy leagues themselves or risk anything on the outcome of the leagues.

Finally, the court noted that the recently enacted federal Unlawful Internet Gambling Enforcement Act – which contains an express carve out from its definition of bet or wager for fantasy leagues – confirmed that the fantasy leagues operated by Defendants do not constitute unlawful gambling and are not subject to the various state qui tam loss recovery statutes cited by plaintiff.

The significance of the decision to the fantasy sports industry cannot be overstated. A finding that pay-to-play fantasy leagues constituted unlawful gambling would not only have exposed the individual defendants to untold millions of dollars in damages, it would quite possibly have signaled the end of the industry as we know it.

Manatt successfully defended CBS Sportsline and The Sporting News in this action.