BILL ANALYSIS Ó
AB 1437
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Date of Hearing: January 21, 2016
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Jimmy Gomez, Chair
AB
1437 (Gray) - As Amended January 12, 2016
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Urgency: No State Mandated Local Program: NoReimbursable: No
SUMMARY:
This bill establishes the Internet Fantasy Sports Game Consumer
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Protection Act (Act) and requires DOJ to license and regulate
internet fantasy sports. Specifically, this bill:
1)Defines "Internet fantasy sports game" as a game of any
duration conducted on the Internet in which a registered
player does all of the following:
a) Competes against other players or a target score as the
owner or manager of an imaginary or simulated team of in an
imaginary or simulated game.
b) Uses the statistics accumulated by athletes in
real-world sporting events to determine the scores of the
imaginary or simulated game.
c) Plays for a predetermined prize; and
d) Pays a charge to the licensed operator providing the
game in order to participate.
1)Requires a person or entity to receive a license from DOJ
prior to offering an Internet fantasy sports game for play in
California.
2)Requires DOJ to issue a license if the applicant meets
specified eligibility and suitability criteria. Allows DOJ to
establish regulations to implement the licensing criteria and
process.
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3)Requires the licensed operator to identify itself on its
website and to comply with specified requirements for Internet
fantasy sports gaming. Establishes content requirements for
websites including notification and links to DOJ's Responsible
Gambling Internet Web page.
4)Requires the licensed operator to hold funds in the account of
a registered player, as defined, in trust. Requires the
licensed operator to prevent unauthorized withdrawals,
comingling of funds and prohibits the licensed operator from
issuing credits to registered players.
5)Requires the licensed operator to implement data security
standards and ensure players are at least 21 years old and
physically located in California. Prohibits a registered
player from having more than one account on each website.
Authorizes DOJ to assess civil penalties and establishes a
graduated civil penalty structure ranging from $1,000 to
$10,000 based on prior violations.
6)Requires a DOJ to develop and provide an online self-exclusion
process to licensed operators by regulation as specified.
Prohibits licensed operators from advertising to persons under
21 years of age or who have self-excluded.
7)Prohibits licensed operators, officers, contractors, and
employees from participating in Internet Fantasy Sports and
disclosing proprietary or nonpublic information as specified.
8) Requires licensed operators to facilitate the collection of
income tax from registered players and requires state agencies
to treat proprietary information, including the social
security numbers of registered players, as confidential.
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9)Requires each licensed operator to pay a regulatory fee to be
determined by DOJ. Requires fees to be deposited in the
Fantasy Sports Fund, established by the bill, and continuously
appropriates funds to DOJ in amounts necessary to perform its
duties.
10)Imposes a one-time tax on licensed operators in an amount yet
to be specified to be deposited in the General Fund. Upon
depletion of the one-time tax, DOJ is required to notify
licensed operators to commence quarterly tax payments in an
amount equal to a yet to be determined percentage of gross
income.
11)Preempts local governments from regulating, taxing, or
contracting with respect to anything governed by the Act, but
allows investigation and prosecution of violations of the Act.
Exempts the Act from fines and punishment associated with
pool selling, bookmarking and other forms of illegal gambling.
12)Makes various legislative findings and declarations.
FISCAL EFFECT:
1)Unknown ongoing potential increased GF revenue resulting from
the unspecified tax and potential penalty fines.
2)Unknown increased administrative and enforcement costs to DOJ
likely offset by the regulatory licensing fee (special fund).
3)Unknown potential increases in income tax collection from
registered players (GF).
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COMMENTS:
1)Purpose. According to the author, Californians participate in
Daily Fantasy Sports (DFS) games on a daily basis on
unregulated Internet Websites. Despite a lack of regulation,
participation in DFS still remains very popular. This bill
establishes a framework to license and regulate to ensure
consumers are playing on websites with comprehensive consumer
protections.
2)Background. A fantasy sport is generally a type of online
game in which players assemble imaginary or virtual teams of
real athletes from amateur or professional sports and compete
based on the statistical performance of the individual
athletes in actual games. DFS games are played over
short-term periods rather than over the entire season as with
traditional fantasy sports.
DFS websites have been operating for years but have recently
increased in popularity following a major advertising campaign
launched by FanDuel and DraftKings prior to the 2015 National
Football League (NFL) season. DFS games are typically played
as contests subject to an entry fee that funds the advertised
prize pool and the operator's cut, also called a raking fee.
A raking fee is the amount of commission the operator takes
off each entry fee, typically about 10%. DFS raking fee
percentages vary, but are usually higher for low entry fee
games. Some sites offer no raking games to entice players
with bigger awards.
Many companies have invested hundreds of millions of dollars
in DFS websites, including professional sports teams/leagues,
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media conglomerates and venture capitalists. According to the
Wallstreet Journal, FanDuel and DraftKings control 95% of the
North American market and are each valued at over $1 billion
but have not made a profit due to heavy advertising spending
to attract customers. In 2014, FanDuel generated $57 million
in revenue and awarded $564 million in prizes while DraftKings
generated $30 million in revenue and awarded $300 million in
prizes.
3)Unlawful Internet Gambling Enforcement Act (UIGEA) and DFS
beginnings. In 2006, in response to the rampant and corrupt
online poker industry, Congress passed UIGEA to ban internet
gambling. The federal law includes an exclusion for fantasy
sports if the games meet specified skill-based criteria and
were not otherwise prohibited by state or federal law. The
DFS industry emerged as the online poker industry ceased most
operations in the states. The United States Attorney General
effectively shut down internet poker on April 15, 2011, a day
gamblers refer to as "Black Friday."
In September 2015, an employee at DraftKings inadvertently
published information that may have given him an advantage
over his competitors. That same day, he won $350,000 on
FanDuel. This led to greater scrutiny of the unregulated
industry and unproven allegations of insider trading. In
response, DraftKings and FanDuel both adopted policies to ban
play by company employees and owners.
4)Regulatory and Legislative Efforts. In response to the
DraftKings information leak, many states are taking action
regarding the industry. Regulatory agencies in several states,
specifically Nevada, New York and Illinois, have determined
DFS to be illegal gambling and are attempting to shut down the
activity through cease and desist orders in their respective
states. Other states, such as Massachusetts have instead
regulated DFS and approximately 16 states are proposing
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legislation to legalize or regulate DFS.
To date, California's Attorney General has not opined on DFS
nor taken any enforcement actions. This analysis does not
address the legality of DFS under federal nor state law nor
attempts to determine if the Legislature has the
Constitutional authority to regulate DFS by statute.
On January 19, 2016, Texas' Attorney General issued an
advisory opinion that DFS is prohibited gambling in the state
and suggested a court would find the practice illegal.
5)FantasyUp Folds. On January 14, 2016, DFS operator FantasyUp
ceased operations and legally dissolved its business.
According to the Legal Sports Report, the company informed its
users by email that it would not be processing any withdrawals
due to lack of capital. It is unknown how much or how many
players are owed money. In its email, the company stated
that numerous legal issues facing the industry have increased
the cost of doing business and decreased the ability to
attract investors. Others suggest the company became
insolvent due its efforts to attract players with no raking
fees and 300% bonuses on deposits.
Players began having problems getting their withdrawals
processed in a timely fashion last summer with payments
sometimes taking weeks or months. While players struggled to
get their money, the site continued advertising and taking
deposits.
6)Discussions Continue. The author indicates he is continuing
to work on bill provisions to address the fact that DFS is
already operating in California and this bill does not contain
a grandfathering clause or temporary DFS license while DOJ is
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developing regulations. Additionally, the fees and taxes are
in unspecified amounts that need to be determined before the
bill is enacted.
Further, this bill requires state agencies to protect players'
confidential information, but does not place that same
requirement on licensed operators or prohibit the sale of
customer information to others. The author is working with
consumer protection groups to further refine these provisions.
Others have raised concerns regarding whether DOJ is the
appropriate regulatory agency and discussions with
stakeholders and other interested parties continue.
7)Remaining Concerns. The Committee is not recommending
amendments at this time, but has identified several issues
that may require clarification. The author may wish to
consider revisions including but not limited to:
a) Tightening up definitions to prevent loopholes,
particularly in the definition of "Authorized Internet
Website."
b) Defining "commercially reasonable effort" as it applies
to determining player eligibility.
c) Streamlining the civil penalties and considering
additional penalties for other violations of the Act.
d) Clarifying all funds in the Fantasy Sports Fund are
continuously appropriated.
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Analysis Prepared by:Jennifer Galehouse / APPR. / (916)
319-2081