Case 1:15-cv-09902 Document 1 Filed 12/18/15 Page 1 of 30 IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK RYAN FRANCO, individually and on behalf of himself and all others similarly situated, CLASS ACTION COMPLAINT Plaintiff, JURY TRIAL DEMANDED v. Case No. 15-cv-9902 FANDUEL, INC., DRAFTKINGS, INC. and FANDUEL DEPOSITS, LLC, Defendants. Plaintiff Ryan Franco (“Plaintiff”), individually, and on behalf of all others similarly situated, by and through counsel, brings this action against FanDuel, Inc. (“FanDuel”), FanDuel Deposits, LLC (“FanDuel LLC”), and DraftKings, Inc. (“DraftKings”), (collectively “Defendants”), and states as follows: NATURE OF THE CASE 1. This is a class action complaint against FanDuel and DraftKings, as well as their subsidiary companies: companies operating daily fantasy sports (“DFS”) websites in a manner that violates New York law. 2. Defendants operated DFS contests in which entries were made by competitors with access to advantageous, non-public information or data. 3. Defendants advertised their contests as “fair” and skill-based despite allowing employees from other DFS websites and others to also compete while in possession of material, Case 1:15-cv-09902 Document 1 Filed 12/18/15 Page 2 of 30 non-public information. Defendants operated their contests without disclosing to competitors that it allowed such participation. 4. DFS is an industry in which individuals compete against others for prize money. Defendants operate such contests, which are won when competitors accumulate a large number of points based on the real-life statistics of athletes in professional sporting events—for example baseball, football, basketball, and ice hockey—that occur on a particular day or week. 5. DFS is a multibillion-dollar industry dominated in the U.S. by DraftKings and FanDuel, which account for 95% of the market. At the start of the 2015 NFL season, DraftKings and FanDuel spent more than $100,000,000 on television ads and became two of the top television advertisers in the United States. As a result of this advertising blitz, Defendants added millions of new users. 6. For years, the DFS industry operated without regulation. Once the unlawful actions of Defendants, detailed herein, were recently exposed, Attorneys General, Federal Agencies, and States initiated efforts to regulate Defendants’ operations. 7. Defendants generate revenue and profit by taking a fee—known as a “rake”— from contest prize pools. While the prize pools are funded from competitors’ entry fees, Defendants often guarantee prize pools and will pay out the difference between the guarantee and the entry fees. The difference between the entry fees in the prize pool and the guarantee is called the “overlay.” The overlay gives Defendants additional incentive to attract as many entries as possible into contests to avoid having to pay out the overlay. 8. New competitors are referred to as “fish,” and Defendants rely on their participation to fund the prize pools and keep their most active users—so-called “whales” who generate the most entry fees—on their websites. According to one analysis, the top 1.3% of 2 Case 1:15-cv-09902 Document 1 Filed 12/18/15 Page 3 of 30 players paid 40% of the entry fees, and the most active 6.3% of players paid 76% of entry fees. During the first half of the recent Major League Baseball season, these whales swallowed 90 percent of all winnings. 9. The CEO of FanDuel recognized the need to attract as many new, inexperienced competitors as possible to keep its whales happy. 10. Unknown to Plaintiff and proposed class members, many of the whales were, in fact, DraftKings and FanDuel employees. DraftKings allowed its employees to participate in contests hosted by FanDuel and vice versa. Defendants allowed their employees to use material, non-public information obtained in the course of their employment to gain an unfair advantage over competitors who did not have access to such information. 11. Employee competitors enjoyed tremendous success in competitions while armed with non-public data. One employee in particular exploited his access to DraftKings’ non-public information to win a three-hundred-fifty-thousand-dollar ($350,000) cash prize in a FanDuel contest. 12. DraftKings promoted its contests as skill-based and fair despite high levels of participation and unusual levels of success in the same contests by employees of FanDuel and vice versa. Both Defendants concealed employee participation in contests from Plaintiff and proposed class members, and they conspired with each other for mutual unlawful profit. 13. Defendants fraudulently induced Plaintiff and the proposed classes to pay to compete in their contests. Defendants profited from inflated levels of participation from “fish” who were devoured by “whales” and others armed with access to advantageous, non-public information. 3 Case 1:15-cv-09902 Document 1 Filed 12/18/15 Page 4 of 30 14. According The New York Times, competing in DFS while in possession of non- public information “is absolutely akin to insider trading . It gives that person a distinct edge in a contest. The single greatest threat to the daily fantasy sports industry is the misuse of insider information. It could imperil this nascent industry unless real, immediate and meaningful safeguards are put in place.” For Plaintiff and members of the proposed classes, such safeguards came too late. PARTIES 15. Plaintiff Ryan Franco is a citizen and resident of Hillsdale, Bergen County, New Jersey. 16. Defendant DraftKings, Inc., is incorporated in Delaware with its principal place of business in Boston, Massachusetts. 17. Defendant FanDuel, Inc., is a Delaware corporation with its principal place of business in New York, New York. 18. Defendant FanDuel Deposits, LLC, is a Delaware limited liability company with its principal place of business in New York, New York. 19. Upon information and belief, Defendant FanDuel Deposits LLC was created recently for the purpose of holding funds from FanDuel. JURISDICTION AND VENUE 20. This Court has jurisdiction over this action under the Class Action Fairness Act, 28 U.S.C. § 1332(d). There are at least 100 members in the proposed plaintiff classes, the aggregated claims of the individual Class members exceed the sum or value of $5,000,000, exclusive of interests and costs, and this is a class action in which Defendants and class members are citizens of different states. 4 Case 1:15-cv-09902 Document 1 Filed 12/18/15 Page 5 of 30 21. This Court may exercise jurisdiction over Defendants because they are registered to conduct business in New York; have sufficient minimum contacts in New York; and intentionally avail themselves of the markets within New York through the promotion, sale, marketing, and distribution of its contests, thus rendering the exercise of jurisdiction by this Court proper and necessary. Moreover, Defendants’ wrongful conduct (as described below) foreseeably affects consumers in New York. FanDuel is headquartered in New York, New York. 22. Venue is proper in this District under 28 U.S.C. § 1391, because FanDuel resides in this District, and a substantial part of the events or omissions giving rise to Plaintiff’s claims occurred here. SUBSTANTIVE ALLEGATIONS 23. Plaintiff, individually and on behalf of all others similarly situated, alleges the following based upon personal knowledge as to himself and information and belief as to all other matters. A reasonable opportunity for discovery will uncover substantial evidentiary support for the allegations set forth herein. Daily Fantasy Sports 24. In traditional fantasy sports, competitors create teams of athletes and manage those teams throughout a season by using their skill and knowledge to set lineups, add or drop athletes from the team roster, and/or trade with other fantasy competitors. 25. DFS evolved from traditional fantasy sports in that Defendants hold contests over the course of one week or a single day, rather than an entire season. DFS competitors compete by choosing a lineup of professional athletes at certain positions until they reach a “salary cap” for the lineup. The goal is to select the highest scoring combination of athletes in a given day or week under the allotted salary cap. Competitors then enter their lineup into contests in the form 5 Case 1:15-cv-09902 Document 1 Filed 12/18/15 Page 6 of 30 of head-to-head matchups and/or tournaments. Many contests allow multiple entries, and competitors—especially the most active “whales”—often enter numerous lineups made up of different combinations of athletes. 26. DFS contests may have entry fees as low as 25 cents and as high as $5,300. They are more akin to a casino sportsbook than traditional fantasy sports. The competitors whose lineups scored the most points—based on the real-life statistics of the professional athletes—win a share of a pre-determined prize pool, which can be in the hundreds of thousands or millions of dollars. Competitors who enter multiple lineups can win money for each lineup that places amongst winning entries. DFS competitors do not have the same ability to add/drop athletes and/or complete trades, as in traditional fantasy sports. Because DFS contests take place over a short period of time—compared to traditional fantasy sports—competitors’ skill and knowledge play a far lesser role in impacting their chances of winning. 27. DFS exists due to a loophole in the Unlawful Internet Gambling Enforcement Act (“UIGEA”), which provides that fantasy sports are exempt from its prohibition on gambling if: (1) they are not dependent solely on the outcome of a single event or a single individual’s performance; and, (2) the chances of winning are due to the skill and relative knowledge of the participants. The DFS industry was not prevalent when the UIGEA was passed.