The rapid rise of fantasy sports in the last 15 years is well documented. In 2013 alone, an approximately 30 million Americans spent an estimated $11 billion on fantasy football. In the past year, the hottest trend in fantasy sports has been the growth of daily fantasy sports websites, such as FanDuel and DraftKings. These websites allow customers to draft unique teams each day in whichever sports they choose, then compete in tournaments against up to thousands of individuals at stakes of their choosing.
The two aforementioned companies have enjoyed immense early successes – as of last month, DraftKings and FanDuel were allegedly working on funding deals with various investors that would result in company valuations of over $1 billion each. Many American professional sports leagues and individual teams have entered into contracts with the companies, as reflected here. However, recent lawsuits against both companies concerning truth in advertising laws have created issues that could take years to resolve.
Last week, a group of plaintiffs filed a class action federal lawsuit against DraftKings in Illinois. The plaintiffs consist of a group of customers who deposited money to DraftKings after learning of the company's promise to provide a 100% match of their deposits. While DraftKings advertises this promotion across many platforms, in reality it does not provide a 100% match of customers' deposits at the time of deposit.
According to the DraftKings website itself, "Deposit bonuses release in increments of $1 for every 100 Frequent Player Points (FPPs) that you earn by playing in paid contests. All deposit bonuses expire four months after they are created." As alleged in the plaintiffs' Complaint, "a consumer who had deposited $600 would have to spend at least $15,000 on contests, and do so within four months, to obtain what was promised as a "100% First-Time Deposit Bonus" or 'DOUBLE YOUR CASH' bonus of $600; that would be $14,400 more than his or her initial payment." The plaintiffs also allege that DraftKings Terms of Use are "a maze of fine print that consists of nearly 6,000 words in single-spaced tiny print."
Two additional truth in advertising class action lawsuits against DraftKings are pending in federal courts. FanDuel, which also promotes a match deposit bonus yet requires customers to "unlock" the bonus by entering paid contests over time, has recently faced three class action truth in advertising lawsuits, but each of those cases has resolved through a voluntary dismissal (presumably via settlement).
It is difficult to evaluate at this stage whether the companies will significantly suffer from these lawsuits, though the recent valuation estimates after some of these lawsuits were filed indicate that they will continue to prosper. In fact, the companies may even have already determined that the increased business from their deposit bonus match promotions is greater than the cost of defending and settling the lawsuits. Regardless, it will be interesting to see how courts across the country adjudicate the actions that are still pending.
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