Category Archives: Class Actions

Class Actions

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

Class Actions

Uber’s “Class” Problems

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Over the past few years, a substantial number commuters have come to rely on Uber as an important mode of urban transportation.  Many commuters prefer Uber over traditional taxi cabs and are willing to pay a premium for the service. There is no question that Uber provides distinct advantages over traditional cabs, albeit at a higher cost.  One primary advantage is Uber’s mobile application platform that makes it breeze to coordinate and pay for a ride.  A credible argument can also be made that Uber cars are, generally speaking, better maintained and more comfortable than traditional cabs.

Uber’s business model has been described different ways by different people.  In essence, however, Uber is simply a market maker.  It’s mobile application connects customers looking for rides for a predetermined fare to drivers willing to provide rides for the same predetermined fare.  The application uses the GPS function on mobile devices to coordinate the pickup and drop off location. Uber gets a percentage of the ultimate fare with the remainder paid to the driver. As with most elegant solutions, brilliance lies in simplicity.

But Uber’s business model is facing some serious legal trouble.  From Uber’s perspective, it does not employ the drivers who utilize its software program.  Rather, according to Uber, the drivers are independent contractors who simply utilize its software for a fee.  This approach has a number of advantages.  One significant benefit is that by classifying drivers as independent contractors Uber is able to avoid some state and federal labor laws.  The social propriety of Uber’s business model has often been questioned, but it is now facing legal challenges by drivers who believe they should be considered “employees” under California law.

A class action lawsuit captioned O’Conner v. Uber Technologies, Inc. is currently pending in the Norther District of California. The class representatives are bringing claims on behalf of a class of California drivers alleging, among other things, that Uber has wrongfully classified them as “independent contractors” rather than “employees.”  According to the class representatives, Uber drivers in California are really “employees” under California law and, as such, are entitled to certain benefits including a “tips” paid by fare paying customers.

Uber’s defense of the class action suit took a serious blow this week when Northern District of California Judge Edward Chen granted class certification for certain claims made by the representatives. (You can read the full opinion here https://s3.amazonaws.com/pacer-documents/N.D.%20Cal.%2013-cv-03826%20dckt%20000341_000%20filed%202015-09-01.pdf).  Importantly, Judge Chen certified the class for purposes of (1) determining whether, under California law, Uber drivers were improperly classified as “independent contractors” and (2) determining whether the drivers were entitled to receive the “tips” charged to fare paying customers.

Analyzing the issue of class certification under Rule 23, Judge Chen noted that the “cardinal” issue was whether the drivers’ working relationships with Uber were “sufficiently similar so that a jury can resolve the Plaintiff’s legal claims at once.”  In other words, could a jury, considering a uniform set of facts, reach a conclusion that all of the drivers were either “employees” or “independent contractors.”   If a jury could make that determination based on a uniform set of facts the suit could be properly certified as a “class action.”  Otherwise each driver would have to bring an individual suit.  It is increasing rare for class actions to be certified, but Judge Chen concluded that this case fit the mold and granted certification.

Judge Chen began his analysis by observing that there was no real dispute under Rule 23 as to the ascertainability or numerosity of the the putative class of California drivers.  Indeed, the class would include over 160,000 members and could be easily identified from Uber’s business records.  As is normally the case with a proposed class action, the rubber meets the road with respect to issues commonality and typicality. But Judge Chen did not have trouble in concluding that the putative class met these requirements as well.  He noted that for purposes of commonality, “the lawsuit must call upon the court or jury to decide at least one factual or legal question that will generate a common answer ‘apt to drive the litigation.'”  Here, that question was whether the drivers were miss-classified as “independent contractors” under California law.

Judge Chen concluded that the central question as to whether drivers were “contractors” or “employees” not only would “drive the litigation” but that it “could in fact be outcome determinative.”

The upshot of Judge Chen’s decision is that Uber is now facing serious financial exposure to a class action lawsuit that could fundamentally change the way it does business.  Of course, it is up to the jury to decide whether or not the class members are “employees” or “independent contractors,” but jury trials are extremely risky and it seems unlikely that Uber would take such a big gamble.  Stay tuned.