iGaming Business: DFS regulation in the US: how it translates for German market

US states are gradually regulating Daily Fantasy Sports (DFS), but how will their decisions and clarifications impact the German market when DFS operators enter? Wulf Hambach, partner at Hambach & Hambach law firm, Germany, examines the potential outcomes.

Fantasy Sports has been extremely popular in the USA for decades. The introduction of Daily Fantasy Sports (DFS) however sparked a fierce debate about the legal nature of those contests.  At the heart of the debate is the question, whether success in DFS depends on chance or on the participants’ skill and if DFS is therefore a game of chance or a skill game.

The debate is still going on in the US. However there is trend noticeable, in 2016 eight US states passed DFS legislation and, as of now, twelve US states regulate DFS as a game predominantly based on the participants skill and not as a game of chance.

This assessment is shared by the legislator of Malta.

The Maltese “Skill Games Regulations of 2016” and the unique setup of the European single market might hinder history from repeating itself, when major DFS operators enter the German market.

Introduction of Online Skill Games licenses in Malta
The “Skill Games Regulations of 2016” (Regulations) came into force on January 24th 2017.

After the implementation of the Regulations the MGA, as the responsible authority for the regulation of skill based gaming in Malta, issued a ruling setting out that DFS constitutes as a game of skill under the terms of the Regulations. Operators based in Malta are now required to obtain a “Controlled Skill Games License”. The licenses are valid for five years and are renewable.

According to gaming expert James Scicluna (attorney at law, WH Partners) Malta recognised early that several games, the outcome of which is based predominantly, but not solely, on skill, vary substantially from both pure skill games (such as chess), but also from games of chance. These “Controlled Skill Games” contain an element of chance, but skill is the prevalent factor of the game.

With DFS it is harder to pursue instant gratification as with a number of other gambling products, in-play betting is not allowed, events tend to last several hours. But most importantly the game is more complex than for example a sports multiple bet, because of the larger layers and the different variables which a participant must consider, based on his understanding of the sports, the athletes of that sport and weighting attributed by the DFS provider to each performance variable of a sportsman.

All of these factors together were taken into account by the MGA, when classifying DFS as a “Controlled Skill Game”.

In line with the prevalent trend already noticeable in the US, Malta recognized that this new sector of the economy needs specific and separate treatment and regulation.

Effect on the German market
The issuing of “Controlled Skill Games Licenses” by the MGA to operators based in Malta has a huge impact on European single market especially for Germany as one of the most populous states in Europe.

Operators based and licensed in Malta can take advantage of the so called country-of-origin principle.

1. Country-of-origin principle: EU-Directive 2000/31/EC on electronic commerce (“E-Commerce Directive) stipulates, inter alia, the so-called country of-origin principle for the free movement of services in the information society. According to this Directive, online services may be offered throughout the internal market if they comply with the legal rules of the member state from which they are offered.  However, excluded from this are “gambling activities which involve wagering a stake with monetary value in games of chances, including lotteries and betting transactions”. The country-of-origin principle was implemented into German law in section 3 of the Telemedia Act (TMG).

2. Qualification as a Skill Game under German law: While German authorities are not legally bound by the MGA’s assessment of DFS as a skill game, the parameters which are used to distinguish between skill games and games of chances are similar.

According section 3 (1) of the (German) Interstate Treaty on Gambling (ITG) a game is a game of chance if remuneration is requested in exchange of obtaining a chance of winning a prize and the decision as to whether the game is won or lost is exclusively or predominantly based on chance.

Meaning that games that are predominantly based on the participants knowledge, skills and attention are not to be classified as a game of chance as defined by section 3 (1) ITG.

The most prominent case concerning Fantasy Sports was the so called “supermanager”.  The “supermanager” was a season long Fantasy Sports Contest. The Federal Administrative Court concerned itself with requirement of remuneration. The question whether the outcome of a DFS contest is predominantly based on the participants’ skill was not covered by the ruling.

The decisive aspect for being successful in DFS is, in contrast to sports betting, not the occurrence of a single event, in the case of sports betting win or loss, but the cumulative performance of all players selected for the team.

Only a participant who, based on strategic considerations, puts together the best combination of top athletes at high prices and newcomers at lower prices within the limits of the defined budget, can be successful. The budget (so called salary cap) makes it also impossible to just choose the top ranked athletes, as buying all those athletes will exceed the salary cap.

Furthermore the participant has to carefully observe the past performance and current condition of the chosen athletes, to pick those athletes that are in top form. In evaluating the individual athletes’ statistics, the player has to take advantage of his sport specific knowledge.

The distribution of points, based on objective criteria, allows the participant to set up their team under strategic aspects. Even though a specific athletes’ performance on a match day may deviate from the participants’ expectation and forecast, the set-up of a team with multiple athletes makes the participants skill and knowledge considerably more important.

This is also supported by a field study supervised by the TÜV Trust IT GmbH and analysed by Dr. Henze (Professor at the Institute for Stochastic at the “Karlsruhe Institut für Technologie” (KIT).

The study comes to the conclusion that: “… increasing experience in Daily Fantasy Soccer leads to increased success, and that the share of chance is negligible. Rather, the participants’ sound knowledge, as well as experience and skill in setting up a team will prevail.”

Because the teams have to be set up after a comprehensive analysis of the performance of individual players and the calculated strategic observation of the complex game parameters the outcome of a DFS contest is predominantly based on the participants’ skill.

Therefore DFS is a skill game and not a game of chance as defined in section 3 ITG and is subject to the country of origin principle.

As long as providers of Daily Fantasy Sports hold a license for games of skill from another EU member state, for example a Controlled Skill Games License from the MGA, German authorities do not have jurisdiction under aspects of gambling law.

Outlook
Draft bills relating to DFS are still pending in several US states, including Washington, Minnesota, Nebraska, and Illinois.[1] In Germany authorities will have to carefully examine the nature of DFS.

In line with the recent trend, these US states and the German authorities will hopefully realise that the combination of an admission fee and a prize is not tantamount to gambling[2] and that the unique nature of DFS demands a specific regulation to provide fans with a secure legal framework.

Published on iGamingBusiness