DraftKings and FanDuel Accused of Systemic Fraud and Civil Conspiracy in Class Action Lawsuit

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As I have written on a few occasions, DraftKings and FanDuel, the two heavy hitters in the multi-billion dollar fantasy sports industry, are facing increasing pressure from lawmakers who are finally realizing that these daily fantasy leagues are really unregulated, government sanctioned gambling. But now they also have to worry about the lawyers. And the lawyers are coming in waves.

A number of lawsuits have recently been filed in response to allegations that a DraftKings employee used insider information to win a $350,000 playing fantasy football on the rival FanDuel website.  Each of these lawsuits alleges that executive level employees at DraftKings’ and FanDuel’s exploit their access to confidential customer information to win large sums playing fantasy football for their own account.  Put simply, the lawsuits allege that DraftKings and FanDuel employees are lining their own pockets at the expense of their paying (and quite gullible) customers.

In a recent proposed class action filed in federal court in the Southern District of New York, class representative Adam Johnson made some pretty heavy handed allegations against DraftKings and FanDuel.  The Complaint starts off by alleging that the two daily fantasy giants spent more than $100,000,000 million this year alone to advertise their fantasy platforms.  Although this is not a necessarily a relevant fact (and probably not shocking considering you can’t visit a website or turn on a TV without seeing a fantasy football advertisement), it does highlight just how massive and profitable the fantasy football industry has become.

After briefly describing how DraftKings and FanDuel make money (customers pay a fee to play and the businesses pay out in winnings less than they take in . . . sounds suspiciously like a casino), the Complaint quickly gets down to the brass tacks.   The attorneys for Johnson smartly led off with a strong salvo meant to drive home the theme of the lawsuit – that DraftKings and FanDuel exploit the naiveté of the vast majority of their customers to make money for themselves and few of their best and most favored customers.

The Complaint alleges that DraftKings refers to its new fee paying users as “fish” and “relies on these new users who lack skill to keep its most active users – and therefore profitable” customers happy.  In other words, daily fantasy leagues entice the unsuspecting and unskilled masses to essentially fork over money to play a rigged game they can’t win and that money is split between DraftKings and FanDuels and a few of their top players.  To buttress this claim, the Complaint cites to fantasy baseball statistics and uses these statistics to insinuate that 91% of the profits made playing daily fantasy football are won by just the top 1.3% of players.

Building on its allegations that the vast majority of daily fantasy players are being snookered, the Complaint then turns to the recent scandal involving a DraftKings employee who is alleged to have used inside customer information to win large sums playing fantasy football at rival FanDuel.

The Complaint notes that “Because the goal is to beat other players, a player with statistical data about ownership percentages of competitors would have an edge over players without this data.”  It then points out that in Week 4 of the NFL season, a DraftKings employee “accidentally” released confidential player ownership information and, as it would happen, that very same week another DraftKings employee beat out 229,883 other competitors and won $350,000 playing fantasy football with FanDuel.

Again, the theme being insinuated here is that these daily fantasy leagues are a fraud and employees are given a huge advantage over paying customers by exploiting inside information.  To give some additional meat to this allegation, the Complaint alleges that the daily fantasy performance of the employee who won $350,000 improved dramatically after he took a job at DraftKings, specifically stating: “An analysis of this employee’s previous [daily fantasy] history shows a remarkable increase in winnings since moving from a job with rotogrinders.com . . . to . . . DraftKings.”  In fairness to the employee, the Complaint did not divulge the purported source or methodology underlying the “analysis.”

Ultimately, the Class Action Complaint alleges that the proposed class representative never would have spent money playing fantasy football if he had known he couldn’t win.  If he had known DraftKings and FanDuel operate and exist for the sole purpose of exploiting the gullibility (and pocketbook) of the little guy.  In essence, the Complaint alleges that DraftKings and FanDuel are fraudulent enterprises that use a rigged game to make a few select people a lot of money while taking everyone else for a ride.

It’s not clear if the Johnson Complaint will ever survive a motion to dismiss.  It looks like DraftKings and FanDuel were smart enough to make their users sign mandatory arbitration provision, essentially waiving their right to access the court system.  The Complaint tries to avoid this issue by claiming that it would be unconscionable to allow DraftKings and FanDuel to enforce the arbitration agreement considering the agreement was premised on a fraud.  But, federal courts have been extremely aggressive in enforcing arbitration agreements and it seems like a longshot that District Court judge ruling on the Johnson Complaint would make an exception here.

Even so, DraftKings and FanDuel are now facing mounting pressure on all fronts.  How they navigate these challenges will likely determine if they can continue to operate as independent enterprises, or whether by legislative edict they will be swallowed up by Las Vegas casinos. Either way, change is coming and coming soon.

Photo credit: FreeImages.com Nikki Johnson

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