BILL ANALYSIS Ó AB 1437 Page 1 Date of Hearing: January 21, 2016 ASSEMBLY COMMITTEE ON APPROPRIATIONS Jimmy Gomez, Chair AB 1437 (Gray) - As Amended January 12, 2016 ----------------------------------------------------------------- |Policy |Governmental Organization |Vote:|18 - 1 | |Committee: | | | | | | | | | | | | | | |-------------+-------------------------------+-----+-------------| | | | | | | | | | | | | | | | |-------------+-------------------------------+-----+-------------| | | | | | | | | | | | | | | | ----------------------------------------------------------------- Urgency: No State Mandated Local Program: NoReimbursable: No SUMMARY: This bill establishes the Internet Fantasy Sports Game Consumer AB 1437 Page 2 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. AB 1437 Page 3 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. AB 1437 Page 4 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). AB 1437 Page 5 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, AB 1437 Page 6 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 AB 1437 Page 7 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 AB 1437 Page 8 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. AB 1437 Page 9 Analysis Prepared by:Jennifer Galehouse / APPR. / (916) 319-2081