For Fantasy Sports Operators, Operating without a Permit Can Prove to be a Losing Bet
Many businesses that offer paid fantasy sports in New Jersey without a permit appear to be betting that the New Jersey Division of Consumer Affairs, Office of Consumer Protection (the "Division") will not enforce the provisions of the Fantasy Sports Act, N.J.S.A. 5:20-1 et seq. ("the FSA"). One such business, SportsHub Games Network, Inc. ("SportsHub"), recently lost that bet when the Division called their bluff and brought its first enforcement action for operating without a license. In doing so, according to New Jersey Attorney General Gurbir Grewal, the Division seeks to "enforce the laws in place to ensure transparency and protect consumers from hidden threats to their online privacy." On August 16, 2019, the Division and SportsHub entered into a settlement (the "Consent Order") that cost SportsHub $30,000 in civil penalties and mandated several changes to its business practices. With the Consent Order in place, paid fantasy sports operators in New Jersey and elsewhere should be on notice that continuing to operate in contravention of state fantasy sports laws can prove to be a losing gamble.
What is paid fantasy sports? Under the FSA, "fantasy sports activity" means "any fantasy or simulated activity or contest with an entry fee in which a participant owns or manages an imaginary team and competes against other participants or a target score for a predetermined prize with the outcome reflecting the relative skill of the participants and determined by statistics generated based on performance by actual individuals participating in actual competitions or athletic events…."
The FSA went into effect in New Jersey on August 24, 2017. Under the FSA, businesses that offer the opportunity to participate in paid fantasy sports activities in New Jersey must hold a permit issued by the Division. Paid fantasy sports operators who were conducting business prior to August 24, 2017 were given until February 6, 2018 to apply for the necessary permit (or else cease operations). The FSA also requires operators to, among other things, adopt procedures to ensure that participants are at least 18 years of age, disclose the number of entries participants may submit to each fantasy sports activity, take reasonable steps to prevent participants from exceeding that number and pay a quarterly operations fee in an amount equal to 10.5 percent of gross revenue attributable to fantasy sports activities.
SportsHub is a Minnesota-based company that operates a number of websites related to the paid fantasy sports activities it offers. According to the Consent Order, SportsHub failed to apply for a permit by the February 6, 2018 deadline, yet it continued to offer paid fantasy sports activities. SportsHub ultimately applied for a permit on September 18, 2018, but by operating without a permit for the prior seven months, SportsHub not only allegedly violated the FSA, but also opened itself up for the Division to "double down" and closely scrutinize the rest of SportsHub's business practices.
In addition to violating the FSA, the Division also found that certain aspects of SportsHub's business violated the New Jersey Consumer Fraud Act, N.J.S.A. 56:8-1 et seq. (the "CFA"). For example, according to the Division, SportsHub advertised itself as "the only fantasy sports consumer protection agency on Earth," a representation the Division considered misleading. SportsHub also represented that it "generally does not sell, rent or share participants' personal information with third parties for marketing purposes without participants' consent." However, the Consent Order notes that SportsHub "collected information from consumers' social media accounts, including names, user IDs, images, email addresses, dates of birth, friend lists, school names and other public profile information." SportsHub then allegedly shared that personal information with third parties and failed to clearly and conspicuously disclose to consumers how they could opt-out of such sharing of their personal information.
The Division also claimed that SportsHub failed to clearly and conspicuously disclose that it did not issue refunds to consumers, and that it limited consumers' rights by requiring that any claims or causes of action against SportsHub be brought only through binding arbitration. Finally, the Division asserted that SportsHub made it confusing for consumers to determine which set of Terms and Conditions they were agreeing to when accessing a SportsHub-operated website. For example, a consumer who visited www.fanball.com and clicked on the Terms and Conditions was redirected to a www.leaguesafe.com address, even though www.fanball.com had its own specific Terms and Conditions.
The future of enforcement, as they say, is in the cards. While SportsHub offers paid fantasy sports games, the New Jersey Attorney General appears to also be looking into unlicensed sports betting operators in order to protect the integrity of that nascent market. Given the licensing and tax money at stake, states have good reason to step up enforcement. In New Jersey, a fantasy sports permit can cost up to $50,000 per year, and a sports wagering license costs at least $100,000 per year. Moreover, having both licensed and unlicensed operators in the same jurisdiction can hit states' pocketbooks by undermining consumer confidence in the entire industry.
It is also noteworthy that the Division issued a press release to publicly announce the Consent Order, sending a message to all paid fantasy sports and sports betting operators to operate under the existing state licensing regime or else face a parlay of fines, compliance costs and government scrutiny.