NBA, sports investment groups among those sued over DFS

SI.com has learned that a 132-page class action lawsuit was e-filed in Florida against 50 companies that do business with DraftKings and FanDuel.

Editor’s note: FanDuel is a sponsor of Sports Illustrated. This piece was pursued and executed independent of that business relationship. Sports Illustrated also has a partnership with DailyMVP, another daily fantasy sports provider.

The legal chaos that imperils the daily fantasy sports industry now officially threatens the professional sports leagues, media companies and financial institutions that have become partners with the two leading DFS companies, DraftKings and FanDuel. SI.com has learned that early Saturday morning, two Florida-based DFS customers—Antonio Gomez and John Gerecs—e-filed a class action lawsuit in the U.S. District Court for the Southern District of Florida against approximately 50 companies and individuals that have either invested in DFS companies or facilitated DFS gaming. The defendants include:

• The National Basketball Association, Major League Baseball Ventures, National Hockey League Ventures and Major League Soccer
• The Kraft Group (owned by New England Patriots owner Robert Kraft), Legends Hospitality (co-owned by Dallas Cowboys owner Jerry Jones and the New York Yankees), and MSG Sports and Entertainment (owned by New York Knicks owner James Dolan)
• Turner Sports, Time Warner, NBC Sports Comcast Ventures, 21st Century Fox and Fox Sports Interactive Media
• Visa, MasterCard and American Express
• J.P. Morgan, Capital One Bank, Google Capital, Piton Capital and Scottish Investment Bank
• PayPal, Paysafe and Vantiv (payment processors)
• DraftKings, FanDuel and Jason Robins

Explaining the lawsuit and its legal theories

Gomez and Gerecs are represented by well-known Florida attorney Ervin Gonzalez, who authored the 132-page complaint. Gonzalez’s basic theory of liability is that DraftKings and FanDuel have engaged in illegal gambling and deceptive practices under Florida and federal laws and that the banks, leagues and other companies negligently failed to realize that they were investing and partnering with illegal gambling operations. These other companies, according to Gonzalez, now owe damages to Gomez and Gerecs. The complaint asserts that these two men were "lured" into playing DFS by "deceptive" advertising. The complaint also portrays Gomez and Gerecs as being harmed by having to compete against DFS players who possessed "insider information." If the lawsuit is later certified as a class action, thousands of other aggrieved DFS customers would be able to join it.

Examining the implications of New York’s severe blow to DFS companies

Gonzalez takes particular aim at the NBA and Major League Baseball in the complaint. He portrays them as adopting a hypocritical stance on DFS. In regards to the NBA, Gonzalez writes, “the NBA recently held itself out as an entity that staunchly rejects betting on its games when former NBA official Tim Donaghy resigned from his job” but now, “has gone so far to legitimize FanDuel by having one of its employees, the NBA President of Global Operations, Mr. Sal LaRocca, serve on FanDuel’s Board of Directors and by becoming an official partner of FanDuel, launching the first “Official One-Day Fantasy Basketball game of the NBA.” As to MLB, Gonzalez asks why baseball would embrace DFS when “it has always held itself out as a entity that staunchly rejects betting on its games” and when it gave Pete Rose a lifetime ban for betting. Interestingly, despite the NFL’s various legal issues, the NFL is not named as a defendant in Gomez v. FanDuel. This reflects the NFL’s perhaps wise decision to not invest in DFS companies (although Kraft and Jones have done so indirectly through the Kraft Group and Legends Hospitality, respectively).

Gonzalez’s legal claims are primarily based on theories of negligence, breach of contract and—most intimidatingly—racketeering. Indeed, the complaint describes DraftKings and FanDuel as the “ringleaders” for a mafia-style operation where investors who “pumped millions of dollars into [DraftKings and FanDuel] provided legitimacy to the illegal gambling that was occurring and allowed [DraftKings and FanDuel] to conduct unprecedented advertising to attract more bettors.” According to Gonzalez, the leagues, banks and media companies that have invested in DraftKings and FanDuel “all served a common purpose: to make as much money a possible on the respective illegal Internet gambling fantasy sports betting games.” At the same time, in the view of Gonzalez, DraftKings and FanDuel, “shared the benefit derived from the profits generated by the scheme to defraud through illegal Internet gambling activities.”

• Gray Area Podcast: SI legal analyst on DraftKings and FanDuel​

Potential impact on sports leagues and other defendants

For sports leagues and team owners, Gomez v. FanDuel will likely lead to a reevaluation of their relationships with DFS companies. These sports companies have relied on a favorable yet uncertain interpretation of the 2006 Unlawful Internet Gambling Enforcement Act (UIGEA). In banning many forms of Internet gambling, UIGEA carved out an exemption for certain types of fantasy sports games—mainly those that reflect skill and knowledge of fantasy players rather than luck or chance. DFS was not marketable in 2006, which invites questions as to whether DFS ought to be considered a beneficiary of the exemption. UIGEA also permits states to ban DFS, and a handful of states have done so (for a detailed SI.com analysis of DFS and UIGEA, click here).

How a U.S. prosecutor's probe could spell doom for daily fantasy sports

As an additional concern for leagues and other DFS investors, even in those states that have not explicitly banned DFS contests, there is a significant risk that DFS could violate those states’ general anti-gambling laws. Gonzalez’s complaint highlights two states, in particular, with lower thresholds for what constitutes gambling activity. In New York, for example, “illegal gambling” occurs where “chance” plays an important role in the outcome of a contest, even though “skill” may also be a significant factor.  New York also characterizes as “gambling” the risking of something of value upon the outcome of a “future contingent event” not under the bettor’s “control or influence.” As Florida gaming attorney Daniel Wallach points out, “the New York standard is a much lower threshold than the ‘predominant purpose’ test espoused by a majority of states, which mainly look to whether ‘chance” is the dominant element in the contest.” Gonzalez also highlights Florida law, which prohibits bets or wagers even on “contests of skill.” Wallach observes that this statute “may present a more acute level of risk for the DFS industry and its business partners because it is not tied to the ‘chance vs. skill’ framework and also contains ‘aiding and abetting’ language that could be used to target those who promote and encourage illegal gambling activity.”

Gonzalez’s complaint seizes on these relatively low state law thresholds as the underpinning for clients’ racketeering claim. As SI previously reported, the United States Attorneys in both the Southern District of New York and the Middle District of Florida are purportedly investigating whether DFS companies are violating the Illegal Gambling Business Act, a 1970 federal law which makes it a felony to conduct or carry on an illegal gambling business. Under IGBA, a violation of a state gambling law serves as the predicate for an IGBA federal law violation, and that federal law especially targets those who “conduct,” “finance,” “manage,” “supervise, “direct,” or “own all or part of” such business. The latter language could be problematic for the sports leagues and media companies who have invested in DFS because the statute also includes “part owners” within its reach, no matter how minor their role. In Gonzalez’s complaint, the alleged violation of IGBA serves as the linchpin for the racketeering claim asserted against the sports league and media company investors.

Legal analysis of the risks facing the daily fantasy sports industry

While league officials have spoken favorably about DFS—MLB commissioner Rob Manfred (who is also an attorney) recently opined that DFS is consistent with federal law—the prospect of now litigating the legality of DFS surely makes DFS less appealing. League officials are now more likely to be subpoenaed and required to testify under oath about their business dealings with DraftKings and FanDuel. As part of the pretrial discovery process, they may also be compelled to share sensitive financial information about the league that could be made public. Further, watch for leagues to be added as defendants to the more than two-dozen class action lawsuits that have already been filed across the country against DraftKings and FanDuel. If leagues are able to exit their contracts with DraftKings and FanDuel through those contracts’ “morals clauses”—which allow one party in a contract to exit a deal if the other party encounters legal or public relations problems—don’t be surprised if those clauses are invoked.

The inclusion of payment processors, credit card companies and banks in Gomez v. FanDuel is also a significant development. In order for DFS to remain a viable business, companies that can facilitate online DFS transactions are essential partners. If those companies perceive the legal risk of working with DraftKings and FanDuel is too high, they would be poised to terminate their relationships. This could cause a ripple effect where DFS becomes an untenable operation even before a court rules that DFS is illegal.

Possible legal defenses

Allegations in a lawsuit have to be proven in court. The various defendants in Gomez v. FanDuel can turn to a number of defenses.

The most obvious defense is to contend that DFS is a lawful form of entertainment. While DFS has come under fire in several states, no court has ruled, at least yet, that DFS gaming is unlawful under a state’s law. “Yet” is obviously a crucial word. As explained in previous SI.com stories, the U.S. Attorney’s Office in Tampa has launched an investigation into whether DFS violates Florida law. Prominent U.S. Attorney Preet Bharara has launched a similar investigation in regards to the relationship between DFS and New York law. In addition, New York Attorney General Eric Schneiderman is embroiled in a high-profile legal battle with DraftKings and FanDuel and their battle will be heard in court next Wednesday. Also, as referenced above, more than two-dozen class action lawsuits have been filed against DraftKings and FanDuel. Still, none of these cases has led to a judicial determination that DFS is, in fact, unlawful. Such a determination is not inevitable. Plus, at any time, Congress and state legislatures could intervene in ways that favor DraftKings and FanDuel.

What impact will the lawsuit filed against DraftKings, FanDuel have?

The leagues and other companies can also stress arbitration clauses contained in membership contracts signed by customers who create accounts with DraftKings and FanDuel. These clauses dictate that legal disputes are to be heard out-of-court and through private arbitration. As a result, DFS customers may be contractually barred from going to court for relief against DraftKings and FanDuel. The legality of arbitration clauses is a contested matter, and some courts have found them unconscionable for certain types of claims. In addition, as Wallach observes, arbitration clauses would not be binding if DFS contracts are considered “illegal gambling contracts” under New York and Florida law. Nonetheless, arbitration clauses are a powerful form of defense, not only for DraftKings and FanDuel but for the many other companies now brought into the litigation.

The leagues and other companies can also argue that they do not have controlling interests in DraftKings and FanDuel, and thus they played no role in any unlawful conduct committed by DFS companies. This type of defense could have traction, especially since no league or team owner has a controlling interest in DraftKings or FanDuel. On the other hand, the defense could prove problematic given that DraftKings and FanDuel have seemingly worked closely with leagues and media companies on developing gaming options and in marketing strategies.

It is also possible leagues and other companies might be indemnified through their contracts with DraftKings and FanDuel. Without having seen those contracts, there could be language that says, in so many words, if DraftKings and FanDuel encounter legal problems, DraftKings and FanDuel indemnify their investors and partners from any costs and damages associated with litigation.

Michael McCann is a writer and legal analyst at Sports Illustrated. He is also a Massachusetts attorney and the founding director of the Sports and Entertainment Law Institute at the University of New Hampshire School of Law. This fall he is teaching an undergraduate course at UNH titled “Deflategate.” McCann is also the distinguished visiting Hall of Fame Professor of Law at Mississippi College School of Law and he teaches “Intellectual Property Law in Sports” in the Oregon Law Sports Law Institute. As a disclosure, one of McCann’s family members is represented in a personal matter by an attorney who represents a plaintiff in John Weaver v. FanDuel and DraftKings.