DraftKings, FanDuel Facing Lawsuit for Fraud, Negligence, False Advertising

Scott Polacek@@ScottPolacekFeatured Columnist

In this Wednesday, Sept. 9, 2015, photo, an employee in the software development department of DraftKings, a daily fantasy sports company, walks past screens displaying the company's online system stats in Boston. The daily fantasy sports industry is eyeing a breakout season as NFL games begin. And its two dominant companies, DraftKings and FanDuel, are touting lucrative opening week prizes to try to draw more customers as more competitors pop up. (AP Photo/Stephan Savoia)
Stephan Savoia/Associated Press

Darren Rovell of ESPN.com reported on Oct. 8 a class-action lawsuit was filed in federal court in Manhattan "accusing DraftKings and FanDuel of negligence, fraud and false advertising." On Monday, Rovell reported a second lawsuit was filed in Illinois.

Kentucky resident Adam Johnson filed the first case after it was revealed the two companies allowed employees to enter contests on the other's site for the cash prizes available. Johnson reportedly deposited $100 in a DraftKings account.

Rovell noted the suit alleges that "DraftKings performs analytics to determine winning strategies, return on investment of certain strategies and even how lineups on FanDuel would do if they were entered into DraftKings contests."

Both DraftKings and FanDuel are named as defendants, although representatives from the two companies said they have no comment on the litigation.

Massachusetts attorney Michael McCann added more context in a piece for Sports Illustrated: "According to Johnson, DraftKings employees have won 'at least $6,000,000' playing FanDuel games over the last few years."

McCann described some of the main claims behind Johnson's argument:

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Johnson asserts that FanDuel and DraftKings have misled consumers into believing that they have a fair chance to defeat other participants so long as they are "smarter than the average fan." Rather than being "smarter," Johnson insists, FanDuel and DraftKings employees win because they have inside information that makes it easier to defeat those without such information.

According to McCann, "Johnson's complaint raises seven counts, including those for unlawful conspiracy, negligence, false advertising, deceptive practices and consumer fraud." Johnson also wants his lawsuit to become class action on behalf of millions of daily fantasy site participants.

Rovell noted this development occurred after "a DraftKings employee's posting of player roster percentages and his subsequent $350,000 take in a FanDuel contest raised questions about inside information."

Rovell pointed out top prizes are often won when a daily fantasy participant has a player on his or her roster who has a big game and few other participants have that player on their rosters for that contest period. If an employee of one of the companies had access to how many people selected a certain player, the person could use that knowledge to his or her advantage.

ESPN's piece also said DraftKings' own investigation found that the employee didn't have access to advantageous information, although Rovell noted that "DraftKings co-founder Paul Liberman said at a conference last month at Babson College that some of the company's employees made more off other fantasy sites than their salaries at DraftKings."

McCann explored various response options for DraftKings and FanDuel and made sure to point out both companies require participants to accept an arbitration clause to play fantasy games on their sites. McCann said, "The clause dictates that any disputes between DFS participants and DFS companies must be resolved out of court and in arbitration."

McCann also added the following:

Even if FanDuel and DraftKings fail to convince a court to dismiss Johnson's lawsuit due to the arbitration clause, they will maintain that none of his legal claims are meritorious. For instance, watch for FanDuel and DraftKings to insist that the success of their employees playing the other company's DFS games reflects the atypical expertise required of someone who works for a DFS company—not inside information. In other words, if you work for DraftKings or FanDuel, the odds are higher than normal that you ought to be good at playing DFS.

According to Rovell, both companies announced "the hiring of third-party consultants to look into potential impropriety and review practices within the companies." DraftKings and FanDuel also said they will no longer allow employees to compete on other daily fantasy sites.