Uncertainty in Outcomes – Draft Kings Class Action Lawsuit Promotes Fair Play

October 22, 2015

Gambling

By Edward Hulshof – Thompson Rivers University 2L JD Student

Sport is a big-money industry. Players, coaches and team owners make millions. Teams are worth billions. Apparel, soft-drink and other spin-off companies make billions. Fans relish in entertaining contests of skill and talent and this fan participation is enhanced by fantasy sports. Fantasy sports date back to the early 1960s when Oakland Raiders partner Wilfred “Bill” Winrenbach helped start the GOPPPL (Greater Oakland Professional Pigskin Prognosticators League).

The .dot com boom has brought fan participation in fantasy sport contests to new levels, becoming a multi-million dollar industry. Money makes the world of sport go round, shaping the interests of stakeholders and participants. The entertainment value in sport stems from the uncertainty in outcomes. When the outcome becomes certain, aggrieved parties often head to the courts.

Indeed, class action proceedings were recently commenced against FanDuel, Inc. and DraftKings, Inc. (the “Defendants”), operators of daily fantasy sports (“DFS”) websites. The Class Action Complaint (the “Complaint”), filed October 8, 2015 in the southern district of New York, alleges the Defendants “fraudulently induced the Plaintiff and the proposed class to give Defendants money, which ultimately went to Defendants and employees through fees and contest prizes.”

“Fish,” DraftKings’ endearing name for new inexperienced users drawn to DFS contests in the hopes of winning large cash prizes, paid entry fees of varying amounts which, as alleged in the Complaint, found its way into the hands of “whales,” DFS top-earners, a significant number of whom are “employees – often executives – of other sites.” The Plaintiffs allege that as a result of misrepresentations and omissions, they were fraudulently induced to participate in the Defendants’ DFS websites, which were marketed as games of “skill.” The Complaint paints the DFS contests as nothing short of scams.

The scam works like this: the Defendants aggressively promoted their DFS contests as games of skill. The “skill” in the game is a participant’s unique exercise of analytical abilities including culling large amounts of player statistics to make informed purchases of athletes for their fantasy teams. The better informed players – those with knowledge of athlete performance statistics – create the best teams and perform best. Access to information is key: the more a player knows, the better positioned they are to win. Unfortunately, “whales” have access to more information than “fish.” They also have access to analytics tools and “years of data on optimal strategies” enabling them to better analyze and detect the purchasing patterns of “fish.” “Whales,” it is alleged in the Complaint, used this inside information to their benefit. The game of “skill” wasn’t a game of skill at all.

There are inequities in all sports. Some athletes are stronger and faster than others. Some deal with pressure better than others. Some have more time to practice The law often steps in to level the playing field by placing limits on access to unfair advantages; for example, professional golf authorities place limits on equipment technology and most sports ban performance enhancing drugs.

In the sport of DFS contests, the law can be used to promote fair play by restricting who participates and how they play. Indeed, the allegations surrounding fraudulent misrepresentation coupled with a large class action lawsuit, if successful, will surely serve as a useful deterrent against future unfair play in the DFS arena.

In order to be successful, however, the Plaintiff must satisfy the test for class action certification. In New York this consists of satisfying the elements of numerosity, commonality, typicality, adequacy, and superiority. The Plaintiff addresses each of these elements by arguing (1) the joinder of all members of the plaintiff class would be impractical, (2) the plaintiffs share questions of law and fact, (3) the plaintiffs were all induced by the Defendants’ advertisements, (4) the plaintiffs do not have any conflicts of interest and would protect the interests of the class, and (5) the class action will permit fair and efficient adjudication. A fundamental policy rationale for class actions – that is behaviour modification – is best served, however, if the Plaintiff class can keep their case in court.

Interestingly, the Complaint makes an effort to thwart any attempts by the Defendants to avoid a class action by arbitrating pursuant to the DFS website “Terms of Use,” arguing the Terms of Use are invalidated by the fraudulent misrepresentations of the Defendants. (There can be no contract if the Plaintiffs were fraudulently induced.) Arbitration, it could be argued, would not serve the interests of the plaintiff class, and the larger policy rationale of behaviour modification, by potentially sheltering the legal claims behind closed doors. If the class action is to have its intended benefit, avoiding arbitration is an important strategic approach to pleading.

The DFS class proceeding is still in the early stages and it is too soon to tell whether it will continue. In any event, this looming lawsuit will likely cause many DFS websites to modify their Terms of Use and make efforts to level the playing field. Like all sports, uncertainty in outcome is the source of entertainment. If DFS is to remain entertaining, companies would be wise to take note of this class proceeding.

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