A recent appellate court opinion from New Jersey could serve as the basis for civil and criminal proceedings against fantasy sports operations. The case styled New Jersey v. Amboy National Bank, 2016 WL 4488162, was handed down on August 26, and involved the civil forfeiture of accumulated funds in a bank account on deposit for use in conjunction with sports “survivor” pools. While the rules of the actual contest were not discussed in the published opinion, a typical survivor pool proceeds as follows:

• A player deposits funds at the beginning of a series of sports contests.

• Each pool member chooses one team each week.

• Picks typically are made “straight up”, not using a point spread system.

• If their pick is correct, they survive until the next week.

• An incorrect pick eliminates the player from the pool for the remainder of the season.

• The goal is to be the last member standing at the end of the season.

• Funds are distributed based on player standings at the end of the season.

The survivor pools in this case involved football, baseball, golf, and basketball. The State of New Jersey took the position that this activity was a form of gambling and that the purveyor of the pools was engaged in the promotion of a gambling activity and bookmaking under state law.  As a result, the funds deposited by the players were proceeds of illegal activity and subject to civil forfeiture.

The participants and the Bank argued that the funds should not be subject to forfeiture claiming that the activity was not gambling, and the players had no knowledge of the illegality of the activity. The trial and appellate courts rejected these defenses. To the players, the courts found that they had no standing, as their funds were surrendered and commingled in such a manner that they did not have a segregated fund for which they were entitled to notice of the forfeiture proceedings. More importantly, the court rejected claims of “innocence,” stating that “it is beyond cavil that the players who paid entry fees to participate in [the] sports pools were unaware of the unlawful activity that provided the basis for the forfeiture.”

As it relates to the activity itself, the court also rejected and deemed “of no consequence” claims of skill involved in selecting the teams each week or that the outcome was based on the skill of the athletes involved in the sporting contests. The court found that the transaction was gambling in that the weekly sports games were “future contingent events not under the actor’s control.”  The receipt of money, which was to be distributed according to the pre-established rules of the contest, was deemed gambling for the purpose of the New Jersey Criminal Code and its corresponding civil forfeiture statute.

Although not cited, the rationale behind the New Jersey case is not unlike the logic of the Supreme Court of Washington in Internet Community & Entertainment Corp. v. Washington State Gambling Commission, 169 Wash.2d 687 (Wash. 2010).  In that case, the court deemed an internet-based service which, for a fee, connected people who were interested in wagering on various events a “bookmaker” and that the activity was prohibited under Washington law.

Applying this same logic to the popular fantasy sports leagues could present somewhat of a problem for this burgeoning industry which finds itself fighting for its life in nearly every state Capitol building across the country. In New Jersey, a federal trial judge Dennis Cavanaugh was thought to have provided a safe harbor to the industry in the unreported opinion of Humphrey v. Viacom, 2007 WL 1797648 (D.N.J. 2007). In that case, Judge Cavanaugh ruled that fantasy sports operations were not subject to civil Qui Tam actions because they did not involve illegal gambling. His basis was an Arizona state court case, State v. Am. Holiday Ass’n, Inc., 727 P.2d 807 (Ariz. 1986), from which he subscribed to a three-part test to determine whether fantasy sports pools involved gambling for a prize. Specifically, to determine if the activity was gambling under New Jersey law, he looked to whether (1) the entry fee was paid unconditionally; (2) whether the prizes were guaranteed; and (3) whether the game operator or pool creator participated in the contest. If each of these elements was satisfied, he opined that the activity was a non-gambling contest regardless of whether the activity involved chance or skill.  He found that the fantasy sports operations at issue met the three-part test and thusly were not gambling under New Jersey law.

Here is the potential conflict now facing fantasy sports operators. The newly minted New Jersey appellate case involved the same fact pattern. The entry fees paid into the sports survivor pools appear to have been paid unconditionally. The prizes similarly appear to have been set forth at the outset of the game and were guaranteed by the pool operator who testified that he did not reduce the payouts if collections were not sufficient to cover the advertised pot.  Finally, the pool operator did not participate in the contest. Despite satisfying the three-part test, the New Jersey state court has not found the activity to be criminal gambling and bookmaking with the proceeds subject to civil forfeiture.

The two cases appear to be irreconcilable. Unlike a handful of other states, the New Jersey State Legislature has not passed legislation creating a safe harbor for fantasy sports operations. These points beg the question as to whether this new court case will serve as the basis for a comparable forfeiture action levied against the bank accounts of commercial fantasy sports operators.  Further to this point, could this court case spur other states with similar gambling and forfeiture laws to seek their own actions against these operations?