The State of New Jersey recently adopted regulations governing fantasy sports operations…
The State of New Jersey recently adopted regulations governing fantasy sports operations. The regulations implement the New Jersey Fantasy Sports Act (FSA), which was enacted in 2017. The FSA legalized internet fantasy gaming activities in New Jersey. It also established a regulatory scheme for businesses conducting such activities, specifically requiring fantasy sports operators seeking to conduct fantasy sports activities in the state to obtain a permit.
NJ Fantasy Sports Rules
The FSA tasked the Division of Consumer Affairs (Division) with oversight over the New Jersey fantasy sports industry. The Division first proposed its rules to regulate fantasy sports operators on November 18, 2018. Following a public comment period, the final rules took effect on December 2, 2019. Below are several key provisions:
Prohibited participants: Fantasy sports operators are prohibited from permitting athletes, sports agents, team employees, referees, or league officials from providing information to participants in fantasy sports activities. Fantasy sports operators must prevent their owners, directors, officers, and employees from taking part in their fantasy sports activities. Operators must also prevent individuals who regularly provide advice to participants based on an agreement or sponsorship with the fantasy sports operator from taking part in their fantasy sports activities.
Participant restrictions: Fantasy sports operators must adopt procedures to ensure that prohibited participants, and those under the age of 18, can’t participate in fantasy sports activities. Fantasy sports operators must allow individuals to restrict themselves from participating in fantasy sports activities and must take steps to prevent such individuals from participating. Fantasy sports operators must also establish limits for the number of entries an individual can submit for a fantasy sports activity, disclose this limitation, and take steps to prevent individuals from exceeding this limitation.
Player funds: Fantasy sports operators are required to segregate participants’ funds from operating funds. They must also maintain a reserve that is equal to the sum of all participants’ accounts and awards owed, or to be owed, which is protected from claims of creditors.
Annual audit: Fantasy sports operators must submit an audit prepared by a licensed certified public accountant to the Division annually. The rules set forth the information that must be in this audit.
Quarterly fees: Fantasy sports operators must submit a quarterly operations fee to the Division. This fee is equal to 10.5 percent of total entry fees less prizes paid out for players located in New Jersey. Operation fees are due on the 20th of April, July, October, and January. Fantasy sports operators that limit their fantasy sports activities to season-long, single-sport activities will be permitted to estimate operation fees based on entry fees and prizes paid out during the previous year.
Mandatory policies: Fantasy sports operators must have procedures to handle security incidents, such as system failures, loss of service, breaches of confidentiality, and malicious intrusion. They must also have testing procedures to ensure that platforms meet industry standards, have a process to close out accounts that are inactive for three years, maintain the security of participant’s identity and financial information, permit parents or guardians to exclude underage individuals from accessing fantasy sports activities, and determine the identity, date of birth, and address of individuals opening accounts.
Advertising to youth: Operators are not permitted to advertise in publications aimed exclusively at juveniles or in elementary schools, high schools, or sports venues used exclusively for student sports activities.
Complaint process: Fantasy sports operators must have a process for participants to file complaints. Operators must notify participants of this process and respond to complaints within ten business days. If a fantasy sports operator’s response to a complaint is that it needs more information from the participant, the response must clearly identify the needed information. A response based on requested information must be made within seven business days. Complaints must be kept for seven years and be made available to the Division upon request.
Recordkeeping: Fantasy sports operators must maintain records for each fantasy sports activity offered, participant transaction logs, participant account information, and advertisements. Records must be maintained for seven years and be made available to the Division upon request.
Credit extension: Fantasy sports operators are prohibited from extending credit to participate in fantasy sports activities.
Withdrawing funds: Fantasy sports operators are prohibited from allowing participants to transfer funds to other participants. Participants must be permitted to withdraw funds from their accounts and requests for withdrawal must be met within five business days. A fantasy sports operator could decline a withdrawal request if the operator believes the participant engaged in fraudulent conduct or conduct that would place the operator in violation of the law. An operator who declines a withdrawal request would have to notify the participant and conduct an investigation of the participant’s conduct with additional notices made to the participant every ten business days.
Permits: Permits must be obtained and renewed annually. The rules also forth the fees the Division will charge for fantasy sports operator permits and applications. Permit fees are based on an operator’s gross revenue.
First Fantasy Sports Enforcement Action
In August, New Jersey regulators brought their first enforcement action under the FSA. SportsHub, which operates “Fanball,” “CDM Sports,” “National Fantasy Football Championships,” “Whatif Sports,” “Leaguesafe,” and other fantasy sports games, agreed to pay a $30,000 civil penalty for unlawfully operating an online fantasy sports site in New Jersey without a permit. According to the Office of Attorney General Gurbir S. Grewal, an investigation by the Division found that despite SportsHub’s failure to file a permit application by the deadline, the company continued to conduct business in New Jersey, in violation of the FSA.
The Division also alleged that SportsHub violated the Consumer Fraud Act by failing to clearly and conspicuously disclose to consumers in its Privacy Policy and/or Terms and Conditions that it collects personal information from consumers’ social networking accounts and shares it with third parties. According to the Division, SportsHub also failed to disclose that it requires consumers to bring any claim or cause of action against the operator through binding arbitration and to waive class action rights.
Key Takeaway for New Jersey Businesses
The fantasy sports industry provides a wealth of opportunities. However, as the industry grows, it will likely attract increased attention from regulators. For assistance navigating the evolving legal landscape, we encourage fantasy sports operations to work with a knowledgeable attorney.
If you have questions, please contact us
If you have any questions or if you would like to discuss the matter further, please contact me, Ashley Brinn, or the Scarinci Hollenbeck attorney with whom you work, at 201-806-3364.
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