Breaking down the class action lawsuit filed against DraftKings and FanDuel, and what it means for daily fantasy sports and its consumers.
Editor’s note: FanDuel is a sponsor of Sports Illustrated. This piece was pursued and executed independent of that business relationship. Sports Illustrated also has a partnership with DailyMVP, another daily fantasy sports provider.
And so it has begun.
Only a few days after a so-called “insider trading” scandal rocked the daily fantasy sports world, a DFS participant on Wednesday filed a federal lawsuit against FanDuel and DraftKings. According to a complaint filed in the U.S. District Court for the Southern District of New York—coincidentally, the same court where U.S. District Judge Richard Berman recently heard Tom Brady v. NFL—Adam Johnson contends that FanDuel and DraftKings have conspired to commit negligence, fraud and deception against him.
Explaining the DFS lawsuit
Johnson, a Kentucky resident who claims that he “deposited and risked at least $100 on DraftKings tournaments and contests,” points mainly to FanDuel and DraftKings neglecting to inform him that, until a few days ago, FanDuel and DraftKings employees were allowed to play the other company’s DFS games. According to Johnson, DraftKings employees have won “at least $6,000,000” playing FanDuel games over the last few years, a pattern of success that Johnson attributes to crooked business practices. As explored on SI.com, a DraftKings writer named Ethan Haskell appeared to use “inside” information about the frequency of drafted players on the DraftKings “Millionaire Maker” game to gain an advantage in a similar FanDuel game in which he won a $350,000 prize.
Johnson asserts that FanDuel and DraftKings have misled consumers into believing that they have a fair chance to defeat other participants so long as they are “smarter than the average fan.” Rather than being “smarter,” Johnson insists, FanDuel and DraftKings employees win because they have inside information that makes it easier to defeat those without such information. Johnson’s attorneys contend that these allegedly deceptive practices prove that FanDuel and DraftKings have violated multiple areas of law. Johnson’s complaint raises seven counts, including those for unlawful conspiracy, negligence, false advertising, deceptive practices and consumer fraud.
Johnson seeks to have his lawsuit become a class action on behalf of millions of other DFS participants. If a federal judge certifies Johnson’s proposed class, Johnson v. FanDuel and DraftKings would become a frightening case for the DFS industry. Any DFS participant who has lost money at DFS games could feel similarly aggrieved as Johnson. He or she might feel that the “loss” occurred not because of mistaken choices in drafting players but because the games were fixed. The number of such aggrieved DFS participants could be considerable, especially given that several million Americans play DFS games each week. Conceivably, they could all join Johnson’s lawsuit and collectively seek massive damages from FanDuel and DraftKings.
How FanDuel and DraftKings will wage a legal defense
Although Johnson’s lawsuit is threatening, FanDuel and DraftKings are well prepared to seek its dismissal.
For starters, both companies require DFS participants to contractually accept an arbitration clause as a condition of playing. The clause dictates that any disputes between DFS participants and DFS companies must be resolved out-of-court and in arbitration. Arbitration is different from a trial in numerous ways, including in that an arbitration award is normally confidential, unlike a court decision. Partly because of its confidential nature, an arbitration award is not precedent in future cases, meaning that even if Johnson “wins” in arbitration, his award would not be usable against FanDuel and DraftKings in future cases and in future arbitrations. While the enforceability of arbitration clauses is a complicated topic, judges normally enforce them in accordance with the Federal Arbitration Act. When such a clause is enforced, the judge dismisses a lawsuit and tells the disappointed plaintiff that he or she needs to go to arbitration to seek recovery. If such a dismissal were to occur with Johnson’s lawsuit, FanDuel and DraftKings would be poised to obtain the same favorable outcome for any similar lawsuits.
Even if FanDuel and DraftKings fail to convince a court to dismiss Johnson’s lawsuit due to the arbitration clause, they will maintain that none of his legal claims are meritorious. For instance, watch for FanDuel and DraftKings to insist that the success of their employees playing the other company’s DFS games reflects the atypical expertise required of someone who works for a DFS company—not inside information. In other words, if you work for DraftKings or FanDuel, the odds are higher than normal that you ought to be good at playing DFS.
The two companies can also assert that statistical findings that reveal only small percentages of DFS participants win the vast majority of DFS prizes do not prove that any law has been broken. While perhaps excessively encouraging and too often occurring, FanDuel and DraftKings advertisements during NFL games and other shows never promise or assure that DFS participants will actually win prizes. Moreover, data on DFS prizes compiled by Sports Business Daily, Bloomberg and other publications has been publicly available for some time. Those who play DFS, therefore, had the capacity to learn before they ever played that they would probably lose.
Why Johnson v. FanDuel and DraftKings could damage the DFS marketplace
While a court might ultimately dismiss Johnson v. FanDuel and DraftKings, the lawsuit nonetheless represents another source of legal concern for the freewheeling and entrepreneurial DFS industry.
Over the last two days, the attorneys general from two states with particularly robust consumer protection laws—New York and Massachusetts—have signaled a desire to learn more about the impact of “insider trading” on the integrity of DFS games. New York Attorney General Eric Schneiderman has launched a formal inquiry and Massachusetts Attorney General Maura Healy has expressed a desire to meet soon with FanDuel and DraftKings officials. This is not good news for the two DFS giants, especially given the possibility of Congressional hearings and Federal Trade Commission probes on DFS and sports betting.
Even if the law ultimately fails to punish DFS, consumers might do so. To the extent DFS participants believe DFS games are rigged, they are less likely to play. The same is true of potential DFS participants—the very kinds of consumers targeted by those incessant DFS commercials aired during NFL games. Indeed, the worst consequence to the FanDuel and DraftKings legal controversy may simply be if consumers decide to spend money that they would have spent on DFS on the many other choices at their disposal.
Michael McCann is a Massachusetts attorney and the founding director of the Sports and Entertainment Law Institute at the University of New Hampshire School of Law. This fall he is teaching an undergraduate course at UNH titled “Deflategate.” McCann is also the distinguished visiting Hall of Fame Professor of Law at Mississippi College School of Law and he teaches “Intellectual Property Law in Sports” in the Oregon Law Sports Law Institute.