Outkicking Its Coverage: How DraftKings’s Aggressive Terms of Use May Leave It Vulnerable to Class Action

By Andrew Lewis*

Over the last 20 years, fantasy sports have evolved from a niche pastime involving a group of fans informally scoring competitions by hand to a multibillion dollar industry.  The institution of daily fantasy sports (DFS) is the most recent phenomenon involving fantasy sports.  One need only look at the money spent on advertising to recognize the prevalence of DFS. During the first nine months of 2015, industry leaders DraftKings and FanDuel spent more than $205 million on more than 60 thousand advertisements.[1]  As its popularity and bottom line have swelled, so too has the number of DFS’s legal issues.

In April 2015, DraftKings faced a false advertising claim based on its dubious “100% deposit bonus,” which required players to participate in a certain number of contests before recovering the bonus.[2]  Further, critics of DFS have voiced concerns over its status as a “game of chance” rather than a per se gambling operation subject to stringent prohibitions and regulations.[3]  In early November, New York Attorney General Eric Schneiderman sent a cease and desist letter to the two DFS companies on the grounds that their operations constituted “gambling.”[4]  In response, the companies filed suit against Schneiderman and requested a temporary restraining order.[5]  In light of the New York issues, FanDuel has paused operations in the state until the resolution of the suit.[6]  DraftKings, on the other hand, will continue its operations in New York.[7]  While these issues are certainly troubling for the DFS giants, a scandal garnering the attention of federal prosecutors is perhaps the industry’s biggest threat.

In the first week of October 2015, DraftKings and FanDuel faced allegations of impropriety, akin to an insider trading scandal.  The issue was bad publicity for the DFS giants to be sure, but without an analogous securities regulation framework, the legal ramifications of the episode were unclear.  In order to understand the nature of the scandal, one must first understand how DFS works and the strategy top players use to win the contests.

DFS is a game in which participants pay an entry fee in order to compete in daily or weekly competitions.  In a given competition, participants could compete against hundreds of other individuals for the allure of a cash prize for top performers.  DFS participants choose a different fantasy team for every competition.  Each player is assigned a dollar amount based on their expected performance, and teams must stay below a certain dollar “cap.”  The object of the game is to have the players with the best statistics on your team throughout the duration of the competition.  Thus, at its heart, DFS forces participants to make economic calculations based on the expected return on investment of the athletes: choose the best players, score the most points, win the most money.  Or so it would seem.

Some argue that a more sophisticated strategy is to attempt to take the road less traveled, and choose players that relatively few other league participants choose.[8]  DFS allows players to be chosen by multiple participants, so any number of teams could look remarkably similar.  The more similar teams look, the less variance there is among those teams’ scores, and the less likely that those participants win a top prize.  While Tom Brady might be projected to have a better week than Andy Dalton, for example, in the event Dalton outperforms Brady, Dalton owners gain an advantage over a significant portion of the market.  Meanwhile, if Brady outperforms Dalton, Brady owners only gain an advantage over a miniscule portion of the market.  To this end, the best players are those that are (1) expected to perform well, (2) are relatively cheap, and (3) are unpopular.[9]  While DFS participants can use their sports expertise and economic acumen to make wise choices based on the first two variables, they are left guessing on the relative popularity of a given player.  If a participant happened to have knowledge regarding a player’s popularity, it would give him a significant advantage over his competition. Enter the scandal.

THE SCANDAL

On October 5, DraftKings and FanDuel each released statements regarding alleged impropriety in their games.  The allegations surrounded a DraftKings employee who inadvertently released DraftKings ownership statistics on a message board prior to the third week of NFL games.[10]  That information is not available until all lineups are final.  The same employee also happened to beat 229,882 other entrants in a FanDuel competition the prior week.  Critics were suspicious of the employee’s second place finish, along with his $350,000 prize—the implication being that he used his access to DraftKings ownership statistics, unavailable to the general public, to gain an advantage over FanDuel DFS participants.  Garnering attention from the media, the FBI, and disgruntled DFS players, the episode has been compared to insider trading.  On October 8, just three days after the DFS giants released their statements, the two DFS giants faced a class action complaint.

THE COMPLAINT[11]

The class action complaint filed in the Southern District of New York is comprised of seven claims, including negligence, fraud and misrepresentation, a violation of Kentucky’s Consumer Protection Act, a violation of the New York Deceptive Acts and Practices Law, false advertising, and unjust enrichment.  A significant portion of the complaint is devoted to the arbitration provision in DraftKings’s terms of use.  The provision states:

[A]ny and all disputes, claims or controversies arising out of or relating to this Agreement, the breach thereof, or any use of the Website . . . except for claims filed in a small claims court that proceed on an individual (non-class, non-representative) basis, shall be settled by binding arbitration . . . . In agreeing to arbitrate all Claims, you and DraftKings waive all rights to a trial by jury in any action or proceeding involving any Claim.[12]

If the above arbitration provision is enforced, then the Southern District of New York will dismiss the case pursuant to the agreed-to provision.  Those DFS participants seeking redress for their losses could still bring their claims on an individual basis, but given that individual losses may be modest relative to the cost of pursuing complex litigation against large corporations, DraftKings and FanDuel’s potential liability in arbitration would be much smaller than it would be in the class action context.  Thus, the DFS giants have a strong incentive to enforce their arbitration provision.

Arbitration provisions of this kind are not uncommon and are generally enforced.  In American Express Co. v. Italian Colors Rest., merchants sued American Express over alleged violations of the Sherman Act.[13]  However, the agreement between the merchants and American Express contained an arbitration provision.[14]  Similar to the provision in DraftKings’s terms of use, the American Express agreement required disputes to be resolved through arbitration and expressly prohibited class suits.  The restaurateurs argued that the cost of litigating the claims on an individual basis would have been prohibitively high relative to their potential recovery, effectively barring the merchants from seeking vindication of their rights.[15]  Because of this, the restaurateurs claimed, an exception should be made to the Federal Arbitration Act in order to preserve access to remedies.  The Supreme Court disagreed.  In the majority opinion, Justice Scalia reasoned that “the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.”[16]  Essentially, then, arbitration provisions remain enforceable in situations where individual suits are economically unfeasible.  However, all is not lost for DFS participants—indeed, the perceived strength of the DFS terms of use may be their own undoing.

OVERREACHING TERMS OF USE

In light of the American Express decision, and the likely enforceability of the arbitration provision, the class action complaint advances a number of arguments claiming that DraftKings’s Terms of Use is not a valid, enforceable contract.  Among these is DraftKings’s right, “without prior notice,” to “revoke any or all of [the participants’] rights granted” under the terms of use and DraftKings’s ability to deny participants the ability to partake in its head-to-head contests.  Notably, one of the most aggressive provisions in DraftKings’s terms of use is absent from the complaint.  The DFS giant reserves for itself “the right to amend these Terms of Use at any time and without notice, and it is [the participants’] responsibility to review these Terms of Use for any changes.”[17]

A similar provision was at issue in Harris v. Blockbuster Inc.[18]  There, like in the DFS case, Blockbuster claimed the arbitration clause in its online terms and conditions protected the now-defunct company from class action exposure.[19]  The problem for Blockbuster, however, was that it reserved the right “at its sole discretion, [to] modify these Terms and Conditions of Use . . . with or without notice.  Such modifications will be effective immediately upon posting.”

The court sitting in the Northern District of Texas took issue with Blockbuster’s unfettered ability to “change the rules of the game,” especially given that there was no provision stating that once enacted, the changes would not apply to disputes arising prior to the amendment.[20]  Additionally, the Blockbuster court stated that it did not matter that a retroactive modification had not actually been attempted—the mere fact that the provision was in the contract rendered the entire contract, including the arbitration provision, illusory.  As mentioned above, DraftKings’s terms of use contains a nearly identical modification provision without any clause suggesting that modifications would only apply to subsequent disputes.  If the court determines that the modification clause renders the contract illusory, DraftKings will be vulnerable to class action litigation.

CONCLUSION

The case study provided by Blockbuster should have alerted drafters of the dangers of unilateral modification clauses.  Arbitration provisions offer a strong defense for companies hoping to avoid the liability associated with class action suits, but including a modification clause like the one at issue in Blockbuster could render the entire contract illusory. Indeed, DraftKings’s may have done just that.  Blockbuster informs that if a unilateral modification clause must be included, the clause must also provide that modifications would only apply to disputes subsequently arising.  Whether or not the class will succeed in its underlying suit remains to be seen, but because DraftKings may have effectively voided its own arbitration provision, there is a chance we will find out.

 


*Andrew Lewis. University of Illinois College of Law, Class of 2015. Practices commercial litigation in Chicago, IL. Many thanks to JLTP editor Iman Naim for her help and guidance with this article.

[1] Tom Kludt, DraftKings and FanDuel Ads Seem to Be Everywhere on TV Because They Are, CNNMoney (Oct. 8, 2015, 5:23 PM), http://money.cnn.com/2015/10/08/media/fanduel-draftkings-commercials/index.html.

[2] Dustin Gouker, Nothing but the Truth? DraftKings Faces New Class-Action Lawsuit for Alleged False Advertising, Legal Sports Report, (Apr. 28, 2015, 7:28 PM), http://www.legalsportsreport.com/1205/draftkings-faces-new-class-action-lawsuit-advertising.

[3] WKYC Staff, NE Ohio Attorney Files Lawsuit, Says Fanduel, Draftkings Violate Ohio Law, WKYC (Oct. 22, 2015, 12:38 AM), http://www.wkyc.com/story/news/local/ohio/2015/10/21/ attorney-fantasy-sports-websites- fanduel-draftkings-violate-ohio-law/74352890.

[4] Rachel Axon, DraftKings Staying Open in New York until Legal Decision in Court, USA Today Sports (Nov. 20, 2015, 7:39 PM), http://www.usatoday.com/story/sports/fantasy/2015/11/20/fanduel-continue-business-new-york-ligitation/76125684.

[5] Id.

[6] Id.

[7] Id.

[8] See Jonathan Berr, Is DraftKings’ Ethan Haskell Just a Shrewd “Investor”?, CBS Money Watch (Oct. 14, 2015, 5:15 AM) http://www.cbsnews.com/news/is-draftkings-ethan-haskell-just-a-shrewd-investor (explaining that “[i]n daily fantasy sports, as in the stock market, the most widely chosen assets—or, in this case, athletes—represent a less attractive investment because the rewards of the performance are shared among many holders. By contrast, the solitary owner of an undervalued asset would reap larger rewards than those who have opted for a more obvious choice.”).

[9] Seung Lee, How to Win $350,000 on FanDuel and the Mathematics of Daily Fantasy Sites, Newsweek (Oct. 8, 2015, 2:11 PM), http://www.newsweek.com/draftkings-fanduel-mathematics-daily-fantasy-sites-381129.

[10] Joe Drape & Jacqueline Williams, Scandal Erupts in Unregulated World of Fantasy Sports, N.Y. Times (Oct. 5, 2015), http://www.nytimes.com/2015/10/06/sports/fanduel-draftkings-fantasy-employees-bet-rivals.html.

[11] Complaint, Johnson v. FanDuel, Inc., No. 15-cv-7963 (S.D.N.Y. Oct. 8, 2015).

[12] Terms of Use, DraftKings, https://www.draftkings.com/help/terms (last updated Oct. 19, 2015).

[13] American Express Co. v. Italian Colors Rest., 133 S. Ct. 2304 (2013).

[14] Id. at 2308.

[15] See Id., (“In resisting the motion, respondents submitted a declaration from an economist who estimated that the cost of an expert analysis necessary to prove the antitrust claims would be ‘at least several hundred thousand dollars, and might exceed $1 million,’ while the maximum recovery for an individual plaintiff would be $12,850, or $38,549 when trebled.”).

[16] Id. at 2311.

[17] Terms of Use, supra note 11.

[18] Harris v. Blockbuster Inc., 622 F. Supp. 2d 396 (N.D. Tex. 2009).

[19] Id. at 397.

[20] Id. at 399.