Regulatory Categorization and Arbitrage: How Daily Fantasy Sports Companies Navigated Regulatory Categories Before and After Legalized Gambling

Forthcoming 57 American Business Law Journal ___ (2020).

Baruch College Zicklin School of Business Research Paper No. 2019-09-06

40 Pages Posted: 24 Aug 2019 Last revised: 24 Sep 2019

See all articles by John T. Holden

John T. Holden

Oklahoma State University

Christopher McLeod

Florida State University

Marc Edelman

City University of New York - Baruch College, Zicklin School of Business; Fordham University School of Law; Wharton School, University of Pennsylvania

Date Written: August 24, 2019

Abstract

This article uses the context of daily fantasy sports (DFS) to analyze how companies use strategic categorization in regulatory arbitrage. DFS is an ideal context to study this issue for three reasons. First, DraftKings and FanDuel were able to categorize themselves differently to different audiences at different times in a manner that evaded categorization as an illegal gambling activity, only to then dominate the sports betting market after the Supreme Court’s decision in Murphy v. National Collegiate Athletic Association. This type of strategic categorization, which we call “fluid categorization,” raises important questions for regulators and others concerned with regulatory arbitrage. It also provides lessons for other businesses. Second, DraftKings and FanDuel were engaged in a lawsuit with the New York Attorney General’s (NYAG) office beginning in October 2015, during which time the two companies engaged in intense lobbying efforts to change the prevailing view of their services under the law – a concerted process that provides substantial evidence of how companies avoid unfavorable regulatory categorization. Third, DraftKings and FanDuel were prominent advertisers peaking at over 10,000 advertisements a month in the lead up to the 2015 National Football League (NFL) season. By analyzing the advertisements and documents from the NYAG’s case, we examine how DraftKings and FanDuel were able to strategically categorize themselves, with different audiences. While this article has broad implications for the sports gambling marketplace, it also contributes to meaningful discourse for the broader business community, as its findings are relevant to industries, beyond DFS, that offer gray market products and seek to fight categorical labels until there is a reclassification-event.

Keywords: Daily fantasy sports, sports gambling, regulatory arbitrage, arbitrage, gaming, categorization

JEL Classification: K00, K10, K11, K19, K20, K23, K29, K30, K39, K40, K49, L50, L59, L80, L83, L89, O34

Suggested Citation

Holden, John and McLeod, Christopher and Edelman, Marc, Regulatory Categorization and Arbitrage: How Daily Fantasy Sports Companies Navigated Regulatory Categories Before and After Legalized Gambling (August 24, 2019). Forthcoming 57 American Business Law Journal ___ (2020).; Baruch College Zicklin School of Business Research Paper No. 2019-09-06. Available at SSRN: https://ssrn.com/abstract=3442178

John Holden (Contact Author)

Oklahoma State University ( email )

201 Business Building
Stillwater, OK 74078-0555
United States

Christopher McLeod

Florida State University ( email )

Tallahasse, FL 32306
United States

Marc Edelman

City University of New York - Baruch College, Zicklin School of Business ( email )

One Bernard Baruch Way
Box B9-220
New York, NY 10010
United States

Fordham University School of Law ( email )

140 West 62nd Street
New York, NY 10023
United States

Wharton School, University of Pennsylvania ( email )

3730 Walnut Street
Suite 600
Philadelphia, PA 19104-6365
United States

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