Antitrust Law Daily Wrap Up, ADVERTISING NEWS: FanDuel, DraftKings charged with using inside information to compete with fantasy sports players, (Oct 9, 2015)

By Linda O’Brien, J.D., LL.M.

FanDuel and DraftKings, the operators of the two leading fantasy sports games websites, failed to disclose that their employees had access to confidential, non-public information that was used to compete against fantasy sports users and obtain an unfairly increased chance of winning, according to a complaint filed in the federal district court in New York City (Johnson v. FanDuel, Inc., October 8, 2015).

The plaintiff, Adam Johnson, alleged that FanDuel and DraftKings falsely advertised that their contests were fair games of skill; willfully failed to disclose that employees, agents, and others had nonpublic information, giving them an increased chance to win; were aware that players acted in reliance of the false and misleading statements; and induced players to pay entry fees and deposited money, causing them financial injury and damage. This conduct constituted fraud and misrepresentation, violation of the Kentucky and New York deceptive practices laws, and violation of the New York false advertising law, the complaint alleged.

Daily fantasy sports (DFS) is an unregulated industry in which individuals compete against other individuals in fantasy sports games on a daily basis. FanDuel and DraftKings operate tournaments where individuals accumulate points based on real-life statistics of players in professional sporting events that occur on a particular day. Individuals can play for free or pay an entrance fee to compete for cash prizes. Johnson has deposited and risked money on DraftKings tournaments and contests.

The complaint states that the defendant website operators earn revenue from the fee for each entry into their contests. While the prize pools for the contests are funded from entry fees, the defendants often guarantee prize pools and will pay the difference (called an “overlay”) between the guarantee and entry fees. The overlay gives the defendants an incentive to attract as many users and entries as possible to avoid paying this overlay. Furthermore, the defendants rely on new users who lack skill to keep its most active users —the most profitable entry fee generators— on their site. According to one analysis, the top 1.3 percent of players paid 40 percent of the entry fees and most active 6.3 percent of players paid 76 percent of the entry fees.

According to the complaint, the defendants market DFS as a game of skill, similar to chess or the stock market. DFS customers play against each other by choosing a lineup of players at certain positions until they reach a “salary cap” for their team and entering tournaments with entry fees. The players whose fantasy teams score the most points win the most money.

The biggest advantage any player can have is having analytical data and information. DraftKings performs analytics to determine winning strategies, return on investment, and how lineups on FanDuel would do if they were entered into DraftKings contests. DraftKings is aware that statistics on win rates of various strategies would create an unfair advantage and should not be shared. However, employees of FanDuel and DraftKings have access to such nonpublic information, the complaint states.

The complaint also alleges that data on optimal strategies give the defendants’ employees a large advantage over even the most skilled DFS players. These employees also have real-time access to data on current line-ups of every player in every contest, and the overall ownership percentage of every player. Additionally, the defendant companies set player pricing through certain proprietary models and this data provides details about the value of certain players that other contestants do not have.

Because the goal is to beat the other players, a player with statistical data about the ownership percentages of competitors would have an edge over players without the data, including the ability to make rosters with enough players different from the competitors’ rosters. In all, DraftKings employees allegedly have won at least $6 million playing at FanDuel. The ability of the defendants’ employees to calculate the information before it becomes public knowledge shows that they can track players on the other DFS sites. The defendants are aware that some of their employees are playing on other DFS sites and receiving large winnings on those sites. The defendants’ misrepresentations and omissions fraudulently induced the plaintiff to pay the defendants money, which ultimately went to the defendants and their employees through fees and contest prizes, the plaintiff claimed.

The case is No. 1:15-cv-07963.

Attorneys: Paul C. Whalen (Law Office of Paul C. Whalen, P.C.) and Jasper D. Ward IV and Alex C. Davis (Jones Ward PLC) for Adam Johnson.

Companies: FanDuel, Inc.; DraftKings, Inc.

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