Can fantasy sports players evade arbitration in case v. FanDuel, DraftKings?

October 9, 2015

(Reuters) – If nothing else, a new class action complaint against the daily fantasy sports sites FanDuel and DraftKings should convince everyone who doesn’t spend a good part of the day studying sports statistics that, contrary to the sites’ ubiquitous television ads, you will not suddenly become a sexually magnetic millionaire by beating your buddies at fantasy sports. According to the complaint, a small band of expert players wins almost all of the money the sites dish out. The other 90 or so percent of bettors – “fish,” in the parlance – are basically providing enough money in entry fees to keep FanDuel and DraftKings profitable despite payouts to the small number of winners.

And that’s before you even get to the allegations that DraftKings and FanDuel employees used insider betting data to win big on one another’s sites. (Employees had been barred from placing bets at their own sites; as of this week, they are also not supposed to bet at competitors’ sites.) DraftKings employees, for instance, won at least $6 million from FanDuel before this week’s rule change, according to the complaint. Some of them supposedly made more money betting at the competition’s website than they earned in salary.

The named plaintiff in the Manhattan federal court class action, Adam Johnson of Kentucky, asserted that he would not have plunked down $100 to play at DraftKings if he had known he was betting against FanDuel insiders armed with data unavailable to ordinary players. He is claiming negligence, fraud, conspiracy and violations of Kentucky and New York consumer protection laws.

But will Johnson and players like him get to litigate their claims at all? Or will they be forced into individual arbitration under the terms of DraftKings and FanDuel user agreements?

As you know (or should know), the U.S. Supreme Court has made it extraordinarily difficult for consumers to wriggle out of legitimate arbitration agreements. Most recently, in its 2013 decision in American Express v. Italian Colors, the court ruled that even if class action waivers in arbitration agreements would leave plaintiffs with no viable way to vindicate their rights, mandatory arbitration means exactly that.

Johnson’s lawyers at Jones Ward and the Law Offices of Paul C. Whalen acknowledged in the class action complaint against FanDuel and DraftKings that the sites’ online user agreements include mandatory arbitration provisions. But according to the complaint, those contracts are invalid and unenforceable. “The so-called ‘Terms of Use’ do not constitute a valid, mutual agreement because the promises made by DraftKings are illusory,” the complaint said, citing DraftKings’ unilateral right to terminate the agreement, reject the player and opt out of arbitration. The complaint also suggested players don’t have adequate notice of the arbitration clause because they only have to click a box to say they’ve read the terms of use. Cash deposits and game entries are separate transactions, according to the complaint.

The case law on adequate notice of arbitration through online user agreements is still developing. In its 2014 ruling in Nguyen v. Barnes & Noble, the 9th U.S. Circuit Court of Appeals said the bookstore’s arbitration clause was not enforceable because its online user agreement did not require customers to click a link to accept the contract. Companies have since moved away from so-called browsewrap user agreements like the one in the Barnes & Noble case, but in February 2015, a Chicago federal judge held in Sgouros v. TransUnion that even a “clickwrap” agreement, in which customers had to click a button to accept terms of use, was unenforceable because the button’s placement on the page left some doubt about what users were actually agreeing to. (That case is on appeal to the 7th Circuit.)

So it may be possible for FanDuel and DraftKings players to show they didn’t receive fair notice of mandatory arbitration clauses even though they had to click a box to accept user terms. But it won’t be easy.

Nor will it be easy for them to void arbitration provisions by arguing the user agreement was otherwise invalid, though it isn’t impossible. A federal judge in Los Angeles addressed that issue in July in a class action against in which users argued their entire agreement was void because the site didn’t notify them of cancellation rights. The judge held that in order to invalidate the arbitration provision, which under the Federal Arbitration Act is severable from the rest of the user agreement, plaintiffs would have to show both the procedural unconscionability of the entire contract and the substantive unconscionability of the arbitration clause. Because they could not meet that standard, the judge ruled could compel arbitration.

The case was decided under California contract law, and it could be that different state laws would have led to a different outcome. The complaint against DraftKings and FanDuel alleges both procedural and substantive unconscionability and seems to be angling for the application of Kentucky or New York contract law. I’m going to assume that Jones Ward, a Kentucky firm, can come up with state case law to back the complaint’s anti-arbitration arguments.

I emailed the lead lawyer on the class action, Jasper Ward, but didn’t hear back. I also left a phone message for class lawyer Paul Whalen but he didn’t return the call.

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