corpcounsel.com | January 19, 2017 Daily Fantasy Sports and the Perils of Outlier Marketing James L. Johnston and Vivian Wang The daily fantasy sports (DFS) industry has been teetering on the blurry line that divides legality and illegality for some time. Regulators are certainly no strangers to the industry. Last month, the two leaders in the DFS industry, DraftKings and FanDuel, settled with New York Attorney General Eric Schneiderman’s office for $12 million for repeated false adver- tising violations. With games lasting just one day, one week or one match, FanDuel website. DFS contests appeal to the year, those forecasts were cut had consistently engaged in need for instant gratification by more than half. fraudulent and misleading driven by today’s digital and Most of the legal challenges to advertising, among other things: social media. An increasing the DFS industry have focused • Giving false and misleading number of states allow their on its legality as a gambling statistics in their marketing on residents to play DFS legally, but enterprise. But, legislation the likelihood of gamers win- the legal challenges facing the signed by New York Gov. Andrew ning cash prices. They prom- industry continue to loom like Cuomo in August 2016 legalized ised big jackpots and a positive a dark cloud over its prospects. DFS contests in the state, so the return on entry fees, when in Just 18 months ago, the forecast Attorney General’s Office nar- fact, most gamers lost money. for growth in the DFS indus- rowed its investigation. • Misleading novice gamers try anticipated entry fees alone After a year-long inquiry, about the substantial advan- generating nearly $15 billion in Schneiderman’s office found tage professional players had revenue by 2020. Earlier this both DraftKings and FanDuel over them, and allowing the January 19, 2017 professional gamers to use com- FanDuel, for example, ran com- scented cream. The Federal puter algorithms and various mercials with statements like, Trade Commission called these other strategies to repeatedly “I’m just a regular guy who goes ads extortion and, along with take advantage of novice gam- to work every day” and that states such as New York, waged ers and win disproportionate “anybody can win”. DFS is “sim- war on the weight-loss indus- shares of the jackpots. ple [...] even a novice can […] try for making fantastical, exag- • Promising to match a gam- spend $1 or $2 and win 10 or 20 gerated claims of extraordinary er’s initial deposit in marketing thousand dollars.” Chris Prince results (often without scientific promotions, failing to disclose was featured in a commercial or statistical backing). In 2014, the substantial investment saying “a little bit of time, and four companies (Sensa Products, required to fully earn those a little bit of knowledge” is all it L’Occitane, HCG Diet Direct deposit bonuses. takes to win. The ad indicated and LeanSpa) collectively paid • Marketing its contests as he won more than $760,000. It $34 million to refund consum- harmless fun and easy oppor- was never disclosed that Prince ers for false advertising. Once tunities to get rich, failing to is a professional DFS gamer a generation, it seems, regula- disclose the dangers of gaming or that professionals like him tors engage in these stings to and gambling addiction. often engage in “bumhunting” crack down on the industry’s As a result of these findings, (seeking out an inexperienced advertising antics. In 2004, the each company is expected to gamer and pillaging him for all FTC charged six companies with pay $6 million each for false he’s worth). While DraftKings false marketing in its Operation advertising and have agreed to reported that the average user’s Big Fat Lie. Before that, in 1997, marketing reforms, including winnings over a 12-month it was Operation Waistline that reforms to the disclosure meth- period was $1,263, 89.3 percent took down seven companies for ods and transparency. of players lost money during bogus weight-loss marketing The settlements with the New that period. claims. York Attorney General’s Office While the DFS industry has Additionally, weight-loss highlight the challenges of busi- been a frequent target of regu- companies have also been nesses whose marketing mes- lators across the country, the penalized for failure to make sage is based on consumers’ focus and findings of the New necessary disclosures in their ability to achieve extraordinary York settlements should come ads. Often, “typical consumers” results. When companies like as no surprise. They echo earlier would tout the amazing results DraftKings and FanDuel have regulatory actions against the of a weight-loss product, much an enormous war chest, recruit- weight-loss industry, which for like the Prince FanDuel commer- ing more gamers and increas- years focused on similar results- cials cited by Schneiderman. ing profits is often prioritized based marketing schemes in an The weight-loss industry over accuracy of information. attempt to attract consumers: attached “results not typical” It can be extremely difficult for “get a gym body without going disclaimers to their ads until it consumers to distinguish false to the gym” by sprinkling an was struck down by the FTC, advertising from credible ones, natural powder on your food, which believed that advertisers particularly when they feature or “significantly slim your thighs should not include the outlier seemly credible advocates. and buttocks” using an almond success story unless it discloses January 19, 2017 the results that an average con- participants lost money, these 4. Clearly and concisely com- sumer would achieve. The FTC expenditures had little chance municate the full range of has since put out guides like of being recouped. results in marketing materials the Guides Concerning the Use There are so many similarities (“results not typical” will not be Endorsements and Testimonials between the marketing prac- sufficient). in Advertising (16 CFR Part tices of the weight-loss industry While the prospect of contin- 255), which contain key con- and DFS industry that it should ued regulatory action looms siderations like the bona fide have been no surprise that the over the DFS industry like a use of the product or service, regulators would take notice. dark cloud, there does appear disclosures of the relationship What would be surprising is if to be something of a silver lin- between the endorser and New York is the only regulator to ing: the DFS industry has fought the marketer and the endors- make these claims. against arguments that it was er’s experience being typical Results-based marketing plays gambling since its inception. or nontypical of the average a key role in many industries The New York settlements pro- consumer. beyond weight loss and fantasy vide a roadmap for defending Further, both the weight-loss sports. The investment, health the industry. While it may have and DFS industries used hid- and fitness, education and many been promoted like a lottery, den or deceptive tactics to fina- other markets rely on success New York found that the skill, gle extra cash in various forms stories as a key element of their data, analysis and experience of from its consumers. Weight- marketing strategies. These players was a primary driver of loss product companies often settlements, no matter in what success. If DFS is a game of skill, makes promises of free-trials industry, offers valuable lessons then surely it’s legal. or “money back guaranteed” to those seeking to use results- for dissatisfaction of a prod- based marketing programs and James L. Johnston is a partner uct. But the FTC found that the risks of using outlier results in Davis & Gilbert's entertainment, consumers were being ripped to promote a brand. When pro- media and sports practice group. off by paying nonrefundable moting success stories, market- Vivian Wang is an associate in the shipping and handling charges ers must keep in mind these four firm's advertising, marketing and as high as $79.99. Similarly, principles: promotions practice group. DraftKings and FanDuel prom- 1. Ensure that the success ised in a marketing promotion story representative of the typi- that new gamers would receive cal consumer (e.g., casual inves- a “100% first-time deposit tor vs. professional day trader). bonus” if an initial deposit of 2. Ensure you have verifiable a certain amount was made. and statistically significant data The hundreds of dollars in on consumer results. bonuses required thousands 3. Understand the full range of dollars of expenditures on of results that actual consumers DFS contests, according to have achieved (Is there a long Reprinted with permission from the January 19, 2017 edition of CORPORATE COUNSEL © 2017 ALM Media Properties, LLC. Schneiderman. In an industry tail? Is there a narrow or wide This article appears online only. All rights reserved. Further duplication without permission is prohibited. For information, where nearly 90 percent of bell curve?). contact 877-257-3382 or [email protected]. # 016-02-17-01.