How the Law Treats Skill-Based Gaming - General Overview
From the outside, online competitions look simple. Players pay an entry fee, they compete, and the top performers receive prizes.
The legal analysis is more involved.
Across many states, gambling is defined by the presence of three elements taken together: prize, chance, and consideration. If a product contains all three, it is often treated as illegal gambling absent a specific exception or license.
Operators therefore try to design products where outcomes turn on skill rather than chance.
That is the premise of skill-based gaming.
Whether a product is a game of skill or a game of chance determines where it can operate, which payment processors and app stores will onboard it, and how regulators will evaluate it.
This article offers a practical overview for founders, investors, creators, and athletes considering real-money contests. It is general information only and not legal advice for any specific product or jurisdiction.
How courts draw the line
U.S. courts and regulators do not apply a single national standard. Most jurisdictions rely on one of three approaches:
1) Dominant factor test
A contest is a game of skill when skill drives the result more than chance. Classic examples include chess or a marksmanship competition. Random elements should not determine outcomes in a meaningful way.
2) Material element test
Even when skill matters, the activity may be treated as gambling if chance plays a significant role in determining the winner. A trivia product that resolves ties with a random draw is a common problem.
3) Any chance test
The strict view. If chance plays any role in the outcome, the activity can be treated as gambling. Card games that rely on shuffled decks will often fail under this approach.
These standards come from case law, attorney general opinions, and statutes. Application varies by state and can change over time. Some courts weigh additional factors.
Florida decisions, for example, have examined whether chance is inherent in the machine or device. Labels do not control the analysis - function does.
The state map and the federal overlay
There is no single federal license for skill contests. States draw their own lines.
Some permit skill contests with minimal conditions.
Others require registration or bonding, or restrict entry-fee contests altogether.
Daily fantasy may be treated as a skill contest in one state and gambling in another.
However, federal law still matters. The Wire Act and the Illegal Gambling Business Act impose criminal exposure in certain contexts. The Unlawful Internet Gambling Enforcement Act (UIGEA) creates a safe harbor for a narrow set of fantasy contests when prizes are set in advance and independent of entry fees. UIGEA does not bless all skill games. Nationwide launches without geofencing are high risk.
Entry fees and prize design
How you handle fees and prizes often determines your risk profile.
Post prizes in advance. Avoid prize pools that float with total entries.
Treat the entry fee as the price to compete, not as a wager on a random event.
Remove tiebreakers that rely on chance.
Avoid any mechanic where luck can influence who advances or who gets paid.
Designing for legal clarity
Compliance is most effective when it is built into the product. The following practices help demonstrate that outcomes turn on skill:
Minimize random mechanics such as loot-style drops or shuffled decks.
Reward decision-making, timing, strategy, and execution that can be measured.
Use rating, ranking, and matchmaking systems to show that higher-skilled players perform better over time.
Implement anti-cheat controls, audit logs, and a dispute review process.
Write clear rules, eligibility criteria, age and location requirements, and player conduct standards.
Reflect the skill classification in your terms of service and obtain user acknowledgment.
Independent testing laboratories can evaluate and document how a game functions and where skill appears in the loop. These reports are not legal opinions, but they are useful diligence materials for partners, processors, and counsel.
Processors, app stores, and other private approvals
Banks, payment processors, and app marketplaces apply their own risk policies. If your classification is unclear, expect delays, holds, or account closures. Many operators only discover this after a flagged payout. Early coordination matters. Be prepared to provide:
A clear product description and jurisdiction map
Policies for KYC and location controls
Evidence of skill-forward design and anti-cheat measures
A reasoned legal opinion from experienced counsel
Patterns from recent years
Daily fantasy sports scaled quickly, then faced coordinated state actions until settlements and new laws created clearer operating lanes.
Esports betting hybrids drew cease-and-desist letters where chance elements crept into the model.
Skill gaming arcades were removed in several states for resembling slot machines, even where online contests of skill remained lawful.
The lesson is simple. Whether something “feels” like skill is not enough. Regulators and courts make the call, and they look to how the product actually works.
Who should pay attention
Founders building real-money competitions
Investors underwriting regulatory risk
Creators and athletes licensing their names to gaming platforms
A practical compliance playbook
At Jacobs Counsel, we help clients draw the line before they cross it.
Map the state-by-state landscape for your specific game type and prize structure.
Stress-test rules, payout design, and entry fees against the three skill tests.
Build the right controls: geofencing, KYC, anti-cheat, audit logs, and dispute procedures.
Prepare a reasoned legal opinion that explains the product, the model, and the governing law.
Coordinate with processors and storefronts so onboarding does not stall.
Where useful, obtain an independent testing report that documents how skill drives outcomes.
Plan for complaints and regulator outreach before the first launch.
Pre-launch checklist
The game loop rewards skill more than chance.
Prizes are posted in advance and do not vary with total entries.
No random tiebreakers or chance-heavy mechanics remain.
Terms are clear on skill classification, eligibility, and conduct.
KYC and location controls match your jurisdiction map.
Anti-cheat and audit logging are in place.
Processor and app-store questionnaires have complete, consistent answers.
Legal opinion and supporting materials are ready for partners.
Skill-based gaming offers real upside. The difference between a platform that scales and a platform that stalls often comes down to a few design choices and how you document them.
Disclaimer
This article is for general information only and is not legal advice. Laws change and outcomes depend on specific facts.
Next step
If you are building or investing in a skill-based gaming product, we can review your model, flag high-risk jurisdictions, and design a compliant path to launch. Reach out to schedule a consultation.