Not long ago, daily fantasy sports (DFS) was among the most popular legal sports gambling activities among Americans.
The New York Attorney General reached a settlement agreement with DFS kingpins DraftKings and FanDuel in March 2016, which was hardly the only litigation circling the DFS industry.
Even before the settlement was reached in New York, which would eventually give way to shared DFS monopoly in the state, litigation was ramping around the country against the two major DFS companies and a smorgasbord of ancillary companies that allowed them to operate.
After more than two years of silence on the case, we received an opinion from District Judge George O’Toole on Nov. 27. Here’s a closer look at the opinion and what it means.
What were the allegations?
The complaints alleged that DraftKings and FanDuel violated several regulations, but the Judicial Panel on Multidistrict Litigation lumped the allegations into three claims:
- Insider trading allegations that DFS sites allowed employees to compete on competitors’ websites.
- Illegal gambling allegations that DFS contests violate gambling laws in “one or more states.”
- Bonus fraud allegations that the companies promise to match player deposits were “deceptive or fraudulent” because, in order to maximize the stated bonuses, players were purportedly required to deposit thousands of dollars “within a four-month period.”
This case consolidated 14 separate lawsuits and placed the case within the jurisdiction of the District of Massachusetts. Massachusetts was chosen because it was the most convenient jurisdiction for the highest number of parties.
O’Toole’s opinion
O’Toole provided background on the litigation, noting that in addition to the two daily fantasy defendants, payment processors including Vantiv were alleged intermediaries that provided the banking infrastructure to let the DFS giants operate.
O’Toole further noted that of the original plaintiffs, some opted out in a timely manner. At least one plaintiff never had either a FanDuel or DraftKings account, and is thus not bound by the decision.
What this case centered on is whether the court system is the appropriate venue for these claims or whether the plaintiffs’ route to a remedy is through arbitration, as dictated by DraftKings’ and FanDuel’s terms of service.
The daily fantasy sports terms of service
The decision notes that while DraftKings has operated since 2012 and its terms of service include a note that they are subject to unilateral changes, it was not until 2014 that DraftKings implemented an arbitration provision.
But all the plaintiffs used their accounts after the arbitration clause was included, so the fact that the terms at one time did not include them was mostly immaterial.
FanDuel’s terms of service similarly required an agreement to binding arbitration in the event of any dispute with the company, as well as a class-action waiver.
Mandatory arbitration?
Judge O’Toole cites the Federal Arbitration Act stating:
[a] written provision in . . . a contract . . . to settle by arbitration a controversy thereafter arising out of such contract . . . shall be valid, irrevocable, and enforceable.
The intent of Congress was to favor arbitration policies and to have courts enforce arbitration clauses once it was determined that they were properly established.
The Court stated:
Under Massachusetts law, a party seeking to enforce the terms of an online contract must show that the terms of the contract were “reasonably communicated and accepted.”
Four requirements
DraftKings and FanDuel were required to satisfy four conditions to compel arbitration and enforce their online agreements:
- A valid agreement to arbitrate exists.
- The movant is entitled to invoke the arbitration clause.
- The arbitration clause is binding on the other party.
- The asserted claim comes within the scope of the arbitration clause.
Is it a valid agreement?
The court notes that in order to play in DraftKings’ contests, users must click that they agree with the company’s terms of service. There is a long-standing principle that signatories are bound to contracts whether they have read them or not.
FanDuel, similarly, provided a clear link to the terms of service for users that provided the opportunity, in the eyes of the court, to view the arbitration clause and choose whether or not to continue participating in the daily fantasy sports contests.
Though the FanDuel website did not have an “I accept” button, it was sufficiently clear that users had access to the terms of service. The court further adds a footnote both complimenting the intelligence of the FanDuel plaintiffs and damning some of their legal arguments:
It bears noting that the FanDuel plaintiffs are different internet users from, say, a randomized population of potential purchasers of a common consumer product being marketed over the internet. By their own calculation, they are not ingenues when it comes to the internet.
Rather, they self-selected as having sufficient skill to be able to participate profitably in online fantasy sports contests. That they would have been actually puzzled or fooled by the FanDuel sign-in screen is highly implausible.
The ruling
Nearly all the plaintiffs’ claims went to arbitration; the Massachusetts District Court ruled that the family members seeking to recover their loved one’s gambling losses under various state laws were not bound to arbitrate and could continue through the court system. They were deemed not to be parties to the contractual agreement to arbitrate.
What to make of this?
The big takeaway is that users of daily fantasy sports sites, sports gambling sites and any other e-commerce sites should be aware of the terms of service before they participate or make a purchase.
Arbitration clauses are incredibly common and, as highlighted by Judge O’Toole, more often than not they bind both those who read the clause and those who do not, as long as users click through.
Since a 2013 Supreme Court case titled American Express v. Italian Colors Restaurant, which found that even arbitration clauses that would compel arbitration of antitrust claims are enforceable, it has been difficult for plaintiffs to defeat arbitration clauses within contracts.
Why arbitration clauses?
Arbitration clauses provide companies with several advantages over litigation.
Firstly, arbitration is cheaper and can head off costly class-action litigation where plaintiffs can pool resources to better fight against major companies.
Secondly, arbitration is quiet, unlike the public nature of the judicial system where judgments go on-record and the public can obtain most documents. Arbitration can often occur without a trace of it ever happening.
Thirdly, arbitration is generally not precedential, meaning that even if a company loses in arbitration, that decision is not binding on future ones the same way a court decision would bind other courts.
The quiet nature of arbitration often means a second case may never even know about the existence of a first claim.
