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Multi-Billion dollar practice owes much to Minnesota Law and Lore

By

The battle over fantasy sports gaming has its roots in Minnesota, specifically right here in Hennepin County.

The practice of seeking financial gain from the statistical advancements of professional athletes selected by paying participants has taken on huge monetary, legal, and even political ramifications. They all stem from seeds planted in Hennepin County more than four decades ago. 

'Publicity' Proclaimed

Minnesota courts have played a prominent role in the birth and growth of fantasy sporting, which has shown a Darwinian tendency to survive and multiply. Its status as a multi-billion- dollar enterprise has grown from modest roots in this state. 

The fantasy frenzy of today dates back more than 45 years to a ruling by the Federal District Court in Minnesota (Minneapolis) dealing with a different sport. In Uhlaender v. Hendricksen,1 U.S. District Court Judge Phillip Neville adjudicated a dispute between the nascent Major League Baseball Players Association (MLBPA), which sought to protect the pecuniary value of its members in their identities and statistics, against a table board manufacturer who was using both in its game. The lawsuit was brought in the name of Ted Uhlaender, a former centerfielder for the Minnesota Twins, who asserted that the use of the identities and statistics of ballplayers constituted tortious violation of their rights. The cause of action was termed “right of publicity.” This is an incipient legal tenet providing protection for pecuniary interests of celebrities from impermissible commercial exploitation. 

While the doctrine had been developing over the years, it was an issue of first impression in Minnesota jurisprudence. In his ruling, Judge Neville proclaimed that the right existed, reasoning that because the players have a “legitimate proprietary interest” in their publicly reported productivity, their names and statistics constitute “property subject to legal protection from unauthorized use.” The identities of the players and their statistics could not be used for commercial purposes without compensation for the economic value of their “right of publicity.” 

The decision ushered in later Minnesota court rulings upholding the right of publicity for celebrities to protect their names, identities, and other features from unauthorized commercial exploitation. In McFarland v. E&K Corp.,2 a former child movie star of the Depression Era was entitled, more than 50 years later, to injunctive relief and damages from a St. Paul bar and nightclub known as “Spanky’s Saloon,” which used his name and visage without authorization. Picking up where Judge Neville left off four decades earlier, Judge James Rosenbaum, also in Minneapolis, upheld the right of publicity, for the “cherubic” former star of the “Our Gang” movie shorts of the 1930s. These movies were later widely distributed a generation later on television in the 1950s under the “Little Rascals” appellation. 

Minnesota state courts did not get around to recognizing that right, a form of privacy law, or any other privacy rights for that matter, for nearly 40 years after the Uhlaender ruling, and nearly a decade after the McFarland case. In 1998, the Minnesota Supreme Court proclaimed a right of privacy for Minnesotans in Lake v. Wal-Mart Stores, Inc.,3 Writing for the Court, Chief Justice Kathleen Blatz declared that the “right to privacy is an integral part of our humanity, … worthy of protection by common law.” 

The right of privacy enunciated in the Lake case, which, incidentally, later resulted in a defense verdict at trial in Clay County District Court, consisted of three prongs: right to seclusion against trespass-type intrusions, right against revelation of truthful but offensive or embarrassing facts, and the “publicity” component designation as commercial “misappropriation.” This was a principle previously recognized in Uhlaender and progeny. 

Tide Turns


By the time that common law privacy rights began flowing from Lake, the fantasy sports practice had developed. Starting out as a cottage industry involving mostly major league baseball players, the arrangement consisted of participants wagering small amounts on the productivity of particular players or teams. Aided by technological advances, it expanded from minor league stakes among friends and colleagues to a more robust commercial practice, utilizing the Internet as its core instrumentality. 

As those commercial features grew, so did revenues and the financial gain component. This is when organized professional sports started to take notice and stepped into the fray. Rather than the players, this time it was the teams and leagues that sought to prevent the practice  by third parties and cash in on it themselves. They claimed that the fantasy arrangements constituted a violation of the “right of publicity” and sought to enjoin private parties from exploiting it for their own pecuniary gain. 

Their challenge reached a zenith in the Eighth Circuit Court of Appeals, which includes Minnesota and six surrounding states. The tide turned against “publicity” proponents with the decision in CBC Distributing & Marketing v. Major League Baseball.4 The appellate court ruled against the effort to prevent private fantasy activities in a case brought by Major League Baseball (MLB), which was joined by the MLBPA, the same organization that backed Uhlaender in the Minnesota case nearly four decades earlier. Their effort to prevent commercial use of names and stats of players for fantasy commercial games was aimed at barring exploitation of that data by private entrepreneurs, allowing the league and players to earn and keep revenues from fantasy sports activities or, at a minimum, receive licensing or royalty fees from others. The National Football League (NFL) filed an amicus supporting organized baseball’s position that the players’ “right of publicity” bars unauthorized use of names and statistics of players by private fantasy organizations.

The trial court found that “no right of publicity” exists, paving the way for an easy victory by the fantasy promoter. The Eighth Circuit affirmed, but on different grounds.  While  recognizing  the publicityright, well-developed in jurisprudence by that time, it deemed the First Amendment right of freedom of expression to “supersede the player’s right of publicity.” It held that the First Amendment entitles fantasy merchants and participants to use information freely “available to everyone,” namely, the identities and statistics of professional athletes. The decision effectively sacked the professional leagues and opened up the fantasy sports world to private entrepreneurs without legal restrictions. It also permitted entrepreneurs the ability to use names, identities, and statistics for profit without the need to compensate players or leagues, whose names, identities, and statistics they gleefully deployed.The ruling crippled the desire and interest of professional sports organizations to sponsor and promote their own in-house fantasy activities online. Before long, professional football rather than baseball, became the dominant focus for privately-sponsored fantasy practices. 

Fantasy Fight

Football fantasy frenzy has encountered more than its share of fights. Pierre Garçon, a veteran wide receiver now with the Washington Redskins of the NFL, revived the right of publicity in a class action lawsuit filed late last football season against one of the two major fantasy football organizations, seeking compensation for use of his name or statistics. In Garçon v. FanDuel, Inc.,5 the claim was made that the fantasy promoter was wrongfully using his likeness and athletic accomplishments to “exploit the popularity and performance” of players while “unjustly” refusing to cut them in for a share of the proceeds. 

The class action, drawing upon its roots from the Uhlaender decision 46 years ago in Minnesota, was brought against the fantasy promoter that has a license with 15 of the 30 NFL teams, although not with the players themselves. Another large fantasy football organization, which has a licensing arrangement with the NFL Players Association, was not named in Garçon’s suit. These licensing arrangements with the league raise unanswered issues regarding the rights of the players to control personally their own identities and performance data. These questions may have to await another day because the Garçon case settled for undisclosed terms shortly after the conclusion of the 2015–2016 season. 

Litigation continues in other areas notwithstanding the settlement of the Garçon case. A more recent case involves a pair of class action fantasy participants in Florida. In Gomez v. FanDuel,6  a dispute has arisen against one of the prime daily fantasy websites and outside investors seeking multi-million-dollar refunds and other damages. Although viewed by many as a form of gambling, fantasy promoters, and many participants maintain their practice is not gambling. Instead, they argue fantasy sports are a matter of skill, which harnesses knowledge and insight into the gridiron game. On the other hand, regulators in Nevada have deemed fantasy sports to be a form of gambling, which transgresses the regulatory rules in that rather libertine state.

Will It Survive?

The frenzy over fantasy sports, particularly football and baseball, the two major forums, has now turned into legal fights for survival for the industry. In addition to the class action cases, the most threatening attacks have been from state attorneys general in a growing number of states. More than a half dozen of them have raised legal challenges to the industry since the end of the past football season. DraftKings and FanDuel, who promote per-game fantasy contests online, are the main targets of these disputes. 

The state of New York has been among the most aggressive when it comes to legally comporting online fantasy sports organizations. Its activity should be of no surprise, considering the state alone accounts for $35 million to $50 million in annual revenue, along with some 1.2 million participants, representing about 13 percent of the overall industry revenue. In challenging the fantasy sports industry, New York Attorney General Eric T. Schneiderman declared the practice to be in violation of state gambling laws or regulations and is pursing litigation to close DraftKings and FanDuel, the two most prominent—and lucrative—online sites. Part of this litigation included receiving an injunction that temporarily shut down these two football sites. But the victory was short-lived, as an appellate judge reversed the matter the next day.7 The case also seeks a refund of some $100 million in fantasy fees as well as imposition of civil penalties for what the Empire State’s attorney general deems to be “repeated and persistent” fraudulent misrepresentation by those sites regarding their fee structures and prospects for success. 

The New York initiative has been aided by the related reluctance of fantasy industry handmaidens in the financial transactions for the websites. A large payment-processing forum, Vantiv, which handles the money  for the websites, announced a week before Super Bowl 50 that it would no longer handle transactions until it receives clarification in the law.8 Citigroup also weighed in prior to the Super Bowl by stating it would block the use of debit and credit cards by New Yorkers to pay for fantasy football fees.9 To add to the siege, MLB has threatened to end its exclusive  marketing agreement with DraftKings. 

Other jurisdictions have joined in the assault. In four other states—Texas, Vermont, Mississippi, and, ironically, Nevada, the nation’s gambling mecca—attorneys general have either deemed the fantasy activities to be impermissible gambling in violation of gaming statutes and regulations or questioned their legality.

In Texas, FanDuel agreed this winter to wind down its operations at the end of April, while still being allowed to provide gaming for free, following an opinion by the attorney general that it was running an illegal gambling operation. The site has pledged to seek legislation next year to return to the Lone Star State.10 Meanwhile, its chief rival, DraftKings, has not gone down so easily, suing the state for a declaratory judgment that it is legal in that jurisdiction.11 

The latest blow to fantasy followers came at the end of March. Two days before the Final Four college basketball championship round, FanDuel and DraftKings, announced suspension of contracts involving college sports. The cessation came as part of an agreement with the National Collegiate Athletic Association (NCAA), which regards daily fantasy sports as illegal gambling. That view had been adopted a few days earlier by Indiana, the same state where the NCAA is headquartered. The state enacted a measure, Senate Bill 339, which allowed fantasy sports to continue to exist, except for contests involving college sports. It joined Virginia as the second state to officially legalize fantasy sports this past winter. 

All of these potentially crippling blows are compounded  by  investigations  launched this winter by the Federal Bureau of Investigation and U.S. Department of Justice into possible criminal behavior by websites. This includes particular scrutiny being given to interaction with gambling addicts. These addiction angles have been described by knowledgeable observer, attorney, and gambling consultant Daniel L. Wallach as the “Achilles’ heel” of the fantasy industry, calling it the “dark side” of fantasy sports, and he notes the industry’s “vulnerability that didn’t exist a year ago.”12 Indiana Law School Professor Sarah Jane Hughes concurs that these beefed-up legal actions constitute “a game changer” for the fantasy industry.13 

Minnesota Matters

Despite the influx in litigation concerning fantasy sports nationwide, not much change has occurred in Minnesota, the doctrinal birthplace of fantasy sporting. The contention that fantasy football and other sports constitute a form of illicit gambling has not been directly addressed in Minnesota. Internet gambling, like its non- technological counterpart, is illegal in this state under Minn. Stat. § 609.755 (2), which makes a felony of participation in excess of $2,500, while wagering lesser amounts constitutes a gross misdemeanor. Prosecutions have been few and far between, a pragmatic recognition by state authorities that the strongly held desire to participate in these activities by willing participants makes it somewhat of a “victimless” crime warranting a sparse prosecutorial priority. 

The federal government has overshadowed the lack of legislative change at the state level. President George W. Bush signed the Unlawful Internet Gambling Enforcement Act. The measure was an amendment to a federal statute regulating safety at ports and harbors; the measure prohibits online gambling, but contains exceptions for “fantasy or simulation sports games” that “reflect the relative knowledge and skill of the participant.” It also regulates lawful interstate gambling and tribal gaming. 

The Minnesota Court of Appeals has upheld jurisdiction in this state over offshore Internet gambling sites. In State v. Granite Gate Resorts, Inc.,14 it ruled that sufficient contact exists between those out-of-state entities and Minnesotans who participate in the wagering. While that decision rocked the industry for a short time, and has been followed by courts in other jurisdictions, neither it nor the federal law has impeded the growth and subsequent surge of fantasy gaming in this state and elsewhere.

Paul Charchian of Plymouth is another Minnesota connection to the fantasy football frenzy. He has made Minnesota a focal point for the practice and the state supposedly with the largest per capita number of fantasy followers. Charchian is one of the founding fathers of the fantasy football craze, dating back more than two decades ago. He serves as president of the Fantasy Sports Trade Association, a Chicago-based entity that nurtures and protects the growth of the activity online and in other forums.

How big is the professional football fantasy sports industry? It is even larger than the game itself and growing rapidly, according to Charchian’s group. Unofficial studies report nearly 60 million people in the United States and Canada play fantasy sports with each participant spending about $1,200 annually, resulting in revenue in excess of $15 billion. The bulk of it, about $11 billion, is spent on professional football. At that figure, fantasy football revenue tops the earnings of the NFL, which spawned it, by about $1 billion annually. These figures, however, are a couple of   years old and undoubtedly underestimate the market today, as the reports cannot keep pace with the rapidity of the rising revenue.15

The Latest 

The authorities in Minnesota have expressly refused to get into the latest fantasy fray. Pursuant to Minn. Stat. § 349.01, et seq., oversight of gambling is delegated to  the Department of Public Safety (DPS) through its Alcohol and Gambling Enforcement Division. A DPS spokesperson deferred to the federal statute by noting, “Minnesota currently follows federal law, which prevents fantasy sports.” There is no law currently on the books in the state, and Minnesota authorities envision no enforcement action unless there is “a law change that would have to happen at the Legislature.”16

While the executive branch in Minnesota stayed on the bench, the legislature got into the game. A pair of competing bills were introduced by lawmakers from different parties, imbued with different philosophies. Both would recognize the legality of the practice, but the similarities end there. A measure proposed by retiring Representative Joe Atkins, DFL-Inver Grove Heights, sought to have the Department of Public Safety license, oversee, and regulate fantasy sites with revenue in excess of $50,000 annually. Another one by Rep. Tim Sanders, a Republican from Blaine, who stated that Minnesota had the highest number per capita of fantasy participants in the country, aimed to clarify state law by deeming fantasy sports to be lawful and not subject to regulation or taxation here.17

The Sanders bill won out in early April, with overwhelming approval by a 100-28 vote in the House. It would officially deem fantasy sports to be a game of “skill,” not illegal gambling, subject to some restrictions, such as limiting participants to those 18 years and older, requiring admonitions for compulsive gamblers, prohibiting athletes and officials from wagering on themselves, requiring clear-cut accounting standards, as well as a few other protocols. Because of its strong bipartisan support, the measure seemed likely at mid-session to win passage in the Senate and probably approval by Governor Dayton, who is not believed to have taken a stand on the matter yet.

The Minnesota measure runs against the national trend, which has witnessed nine states banning daily fantasy gaming and the embattled operators pulling out of four other jurisdictions in the past six months alone.

With these rapidly moving developments, the question is, will fantasy sports in Minnesota continue to thrive in its breeding ground? You can bet on it!

  1. Uhlaender v. Hendricksen, 316 F. Supp. 1277 (D. Minn. 1970).
  2. McFarland v. E&K Corp., 1991 WL 13728 (D. Minn. 1991) (unpublished).
  3. Lake v. Wal-Mart Stores Inc., 582 N.W.2d 231 (1998).
  4. CBC Distributing & Marketing v. Major League Baseball, 505 F.3d 818 (8th Cir. 2007), cert. denied (June 2, 2008).
  5. Garçon v. FanDuel, Inc., 1-15-CV-2850 (D. Md., Oct. 30, 2015).
  6. Gomez v. FanDuel, 1:2015 cv. 23858 (S.D. Fla. 2016).
  7. Schneiderman v. DraftKings, No. 45-3054, and Schneiderman v. FanDuel, No. 45-3056 (N.Y. Sup. Ct. – Manhattan, N.Y., Nov. 10, 2015).
  8. Joe Drape, “Firm’s withdrawal shocks fantasy sports,” New York Times, Jan. 29, 2016.
  9. W. Bogdanich, et al. “Fantasy sites are dealt new rebuff by Citigroup,” New York Times, Feb. 6, 2016.
  10. Brent Schrotenboer, “Deemed illegal in Texas, FanDuel to pull out of state,” USA Today, March 4, 2016.
  11. C. Woodward, “Draftkings sues to keep operating in Texas,” Boston Globe, March 5, 2016.
  12. W. Bogdanich, et al., n. 3, supra.
  13. J. Drape, n. 2, supra.
  14. State v. Granite Gate Resorts, Inc., 568 N.W.2d 715 (Minn. App. 1997).
  15. Brian Goff, “The $70 billion fantasy football market,” Forbes, Aug. 20, 2016.
  16. J. Gonzales, “States differ on fantasy sports,” Minneapolis StarTribune, Jan. 2, 2016.
  17. id

Published in May/June 2016 Issue of Hennepin Lawyer