Analysis: DraftKings Scores A Win In Challenge To Cash Out Patent

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A few months ago, a federal judge in the District of Delaware ruled in favor of a motion by DraftKings to recommend canceling a patent related to the cash-out feature that had been registered by UK-based company Diogenes Ltd. and licensed to Colossus Bets.

The claim was one of several patent-related claims brought by the UK company against Boston-based DraftKings but was the only claim that DraftKings was able to successfully argue against, at least for the time being.

The written report and recommendations followed a July 8 hearing which laid out the findings orally. While this is a substantial win for DraftKings and the rest of the industry seeking to use the cash-out feature, the report and recommendation are subject to appeal, which could delay the final resolution of the matter.

What was DraftKings lawsuit about?

DraftKings was sued back in December 2021 by Diogenes Ltd, who had licensed the”cash-out” feature to Colossus Bets. In its complaint in December, Colossus and Diogenes estimated that damages could exceed $1 billion. Potentially raising the stakes higher is that willful patent infringement raises the possibility of trebling damages.

According to an earlier LSR story, Colossus contacted DraftKings back in 2018 about the alleged infringement. While some speculated that the lawsuit might prompt a settlement, that was not the route taken. At least initially, that decision appears to have paid off for DraftKings.

The Delaware district court decision

The decision was the result of a motion to dismiss the claim pursuant to federal rule of civil procedure 12(b)(6) filed by DraftKings. DraftKings sought to dismiss all eight of Colossus’s patent claims, arguing that the company failed to validly state an actionable claim, while DraftKings asserted 31 claims around the eight patents.

The first claim asserted:

[The] patent is entitled “Wagering Apparatus, Methods, and Systems.” Claim 1 of the patent is lengthy. It is a claim [to a] method of conducting a multi-outcome wagering event for one or more players, where the wagering event comprises a defined number of what are called “legs,” and where at least one player is presented with at least what the claim calls a “buy-out offer” or a “partial buy-out offer” prior to completion of all [of] the legs. The patent explains in column 4 that a leg can be any number of individual components of any type of event, such as an inning of a baseball game or a baseball [game] itself or a combination of baseball games, like the games in the World Series.

What this essentially relates to is the cash-out feature that allows bettors, prior to the end of all events on a ticket, to cash out for some amount determined by the company. The early cash-out allows bettors to hedge against a negative future event that would result in the ticket paying nothing down the road.

The Alice analysis

In order for something to be eligible for a patent, it must satisfy section 101 of the Patent Act. The Patent Act outlines that whoever invents:

any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor.

The Alice analysis asks two questions:

The cash-out analysis

The court begins its analysis by concluding that the idea of hedging financial risk is undoubtedly an abstract concept. The court also notes the plaintiffs did not dispute this fact. Indeed, the Supreme Court has previously held that the concept of being able to hedge financial risk is “an unpatentable abstract idea.”

In looking at the second step, the court agrees with DraftKings’ arguments that while there are numerous different steps taken in the process, these are largely generic and effectively mirror what takes place at a brick-and-mortar casino.

The judge articulates that the plaintiffs did not even really dispute that the buy-out is a means of hedging risk.

Analyzing a lot of factors does not change the facts

The plaintiffs argued that because of the real-time processing of multiple sources of information to always reflect accurate pay-out information, the claim should be patentable.

But that was rejected, resulting in a recommendation that the District Court find the claim ineligible for a patent.

What to make of DraftKings decision?

This was a significant win for DraftKings and those risk-averse bettors who closely watch the cash-out feature in order to lock in a sure thing. But it was not all roses for DraftKings, as the judge noted that it was premature to address the seven other patents with hundreds of claims between them, as the judge said:

Defendant specifically addressed only a very small number of asserted claims, none with any great specificity. Although Defendant asserts that any differen[ce] between claim 1 and those various claims are “minor” and “immaterial,”22 it[ has] given the Court almost no argument or way to meaningfully analyze whether those statements are truly correct.

The judge said that if the recommendations are adopted, it may streamline the case or cases involving those other claims, but at the moment, it was premature to resolve those matters. If the recommendations are adopted, as commonly occurs, an appeal seems possible.