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Class Action To Test Daily Fantasy Sports Business Model

Industry leaders accused of allowing “insider trading”

In Johnson v. FanDuel, Inc. (filed on October 8, 2015 in the Southern District of New York), the exploding business of daily fantasy sports will be tested by a class-action lawsuit. In recent years, daily fantasy sports has attracted sports fans who bet that they can predict which professional athletes will perform the best on a given night.   The fantasy sports companies argue that gambling laws are avoided because daily fantasy sports are considered games of skill, not games of chance. Payouts for winners can be up to one million dollars.

There are two main websites for daily fantasy sports, FanDuel and Draft Kings.  Both sites prohibit their own employees from playing but employees of one company were allowed to compete on the other site, at least until this lawsuit was filed.

According to the complaint, working for one of these sites provides a huge competitive advantage for employees, because the employees have inside access to the strategies, algorithms and combinations of athletes chosen by other consumers, and can then tailor their own strategies accordingly.  This is the essence of the lawsuit: that employees have such an advantage playing on the other website that the vast majority of consumers with no access to inside information are being defrauded.  The complaint is quite specific, alleging that 1.3% of players account for 91% of the winnings.

The issue quickly became public when it was discovered that a Draft Kings employee who had access to the “inside information” won $350,000 playing on FanDuel.

One hurdle the plaintiff must overcome is that the two websites’ terms and conditions contain arbitration clauses.   These arbitration clauses will no doubt form the basis of a threshold motion to dismiss.

This dispute is rapidly multiplying beyond the New York class-action claim. The FBI and Department of Justice are said to be investigating New York Attorney General Eric Schneiderman has initiated a separate investigation into the matter Senator Robert Menendez and Representative Frank Pallone, Jr., both New Jersey legislators who support legalized sports gambling, have called for the Federal Trade Commission to implement precautionary consumer protection measures; and at least five more class-actions have been filed in Louisiana, Illinois and New York.

Takeway: Separate from the potential gambling issues with respect to such leagues, when running online contests, particularly games of skill, businesses must think forward and make every precaution to make sure insiders or others cannot find a loophole or backdoor that gives them competitive advantages over other players.  Even if permissible, the bad press can be very costly to a promotion.

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