Scottsdale-based fantasy sports company thrives despite legal challenges

Head2Head Sports is a Scottsdale-based fantasy sports business. (Photo by Tyler Rubin/Cronkite News)

SCOTTSDALE – The popularity of daily fantasy sports games is exploding across the country, but Arizona residents are among those who have been left out of the action.

Arizona is one of five states in which pay-to-play fantasy games are considered a form of illegal gambling.

However, that hasn’t stopped Scottsdale-based Head2Head Sports from providing such games since 1994 to residents of other states, and free “amusement” versions of fantasy games for players in Arizona.

“We walk a really fine line of allowing people in Arizona to play for free and not having to pay an entry fee but also serving other states,” said Stacie Stern, general manager of Head2Head Sports.

Unlike companies such as FanDuel and DraftKings, which offer daily fantasy games, Head2Head Sports offers only season-long fantasy contests. According to a lawsuit filed in Illinois by FanDuel and Head2Head Sports late last year, Head2Head has more than 60,000 registered users across the country.

However, it is unlikely that Head2Head will be allowing Arizona residents to pay to play anytime soon.

A 1997 opinion issued by Arizona Attorney General Grant Woods concluded that all gambling in Arizona is illegal unless it falls under one of six statutory exclusions. Then in 1998, Woods issued an opinion for the Arizona Department of Liquor License Control which concluded that fantasy sports contests do not qualify for any of the exclusions.

Last year in a letter to DraftKings and FanDuel, current Arizona Attorney General Mark Brnovich warned that Arizona has taken “a strong stance against Internet gambling, which is where daily fantasy sports betting falls” in Arizona.

And there is a so-called “poison pill” provision in the Arizona Tribal-Gaming Compacts that ensures that a change in the law is not likely.

“A provision in the compacts under section 3(H), often referred to as ‘the poison pill’ provision, prohibits any type of gaming not listed in the compact,” said Aiden Fleming, government and tribal relations manager for the Arizona Department of Gaming. “If the state allows new gaming enterprises outside of the compact, the ‘poison pill’ could be triggered by the tribes.”

If triggered, according to Fleming, regulations prohibiting tribal gaming expansion are removed, plus revenue sharing from the tribes would be reduced from between 1 and 8 percent, depending on the size of the tribe, to less than 1 percent – at an estimated cost to the state of about $80 million annually.

However, there is disagreement about whether paying to play a fantasy sports contest is actually gambling.

“You don’t bet on fantasy sports or gamble on fantasy sports,” Stern said. “You would pay an entry fee for the ability to play for prizes and services.”

Although Head2Head Sports has operated in Scottsdale since 1994, Arizona residents can only play for entertainment purposes, not prizes.

“It was started by someone who was a huge sports fan, who had heard of fantasy sports, and figured out a business model where people could pay to enter contests,” Stern said. “They could win a prize, they could get statistics and the services of news, owner’s manuals, things like that, and get the camaraderie of playing against other people who loved to play fantasy sports.”

Even with legal restrictions and the tribal pact, Head2Head tries to cater to customers inside and outside of Arizona and is working toward opening up its for-pay games to Arizona residents in the future.

“We are very careful about the people who live here and what we can allow them to do, legally,” Stern said. “But that doesn’t mean that we are not going to have a voice as a company about what we think is right for the citizens here in Arizona, what we think they should be allowed to do, why we don’t think we infringe on the compact, and what are ways we think we can work with the tribes to allow 850,000 to a million Arizonans to play fantasy sports.”

However, Head2Head is limited in what it can offer to Arizona players because of the Tribal-State Gaming Compacts.

“Arizona has a signed an exclusivity agreement with 21 federally-recognized, sovereign tribes giving them the sole right to conduct legal, regulated gaming operations,” Fleming said. “In exchange for exclusivity, the tribes share 1 to 8 percent of their revenue with the State of Arizona that totals nearly $100 million annually. That money goes to help fund our schools, tourism, healthcare and land preservation efforts.”

In 2014, an attempt to introduce fantasy sports betting to the state in SB 1468 died in the Senate Rules Committee and was never voted on.

Earlier this year, SB 1515, which would have excluded fantasy contests from the state’s definition of gambling, also failed in the Rules Committee, impacting potential fantasy game players like Shane Valleau of Tempe.

“I’ve always wanted to play daily fantasy,” Valleau said. “I’ve had friends in other states that have played it, and like it a lot. I would if I could, but I can’t.”

Stern, an Arizona native, started working at Head2Head Sports 15 years ago and has seen dramatic changes in the way fantasy games are managed.

Earlier, the company depended on recruiting players using fax machines, phone calls and advertisements placed in newspapers. There were partnerships with newspapers and even with casinos.

Results were typically entered manually from newspaper box scores.

“When I started in the business, we were entering stats manually,” Stern said. “Our website was still fairly new in 2000-2001. I had only been around for a couple of years. We would get the newspaper, enter the stats and upload them to the website.”

Improved technology doesn’t just help Head2Head manage its games. It also helps the company manage who is playing them.

The company attempts to prohibit players from Arizona from entering the for-pay contests, but it is likely that some players have slipped through the cracks, according to Stern.

“People could use another address in another state, and I know that people have done that with other services and our service,” Stern said. “That is really difficult to manage.”

To stop illegal play, Head2Head uses geotracking to pinpoint a player’s location based on his or her computer or mobile device’s IP address, blocking entries from states, including Arizona, where fantasy games are banned.

“The best we can do is audit our entries,” Stern said. “And now we can count on geolocation – which we think has gotten much, much better – to block those entries and continue to educate people that they can play the free games but they can’t play the paid games.”