DraftKings Reaches $10 Million Settlement in NFT Lawsuit

• DraftKings settles 2023 class-action suit for $10 million
• Suit claimed non-fungible tokens (NFTs) were securities

DraftKings (NASDAQ: DKNG) agreed to settle a 2023 class-action lawsuit brought by buyers of non-fungible tokens (NFTs) on the gaming company’s now defunct DraftKings Marketplace.

Reached last week, the settlement calls for the sportsbook operator to distribute $10 million in cash payments to members of the class. They’re defined as customers that bought NFTs on DraftKings from Aug. 11, 2021 until the judgment is entered. DraftKings shuttered the marketplace and halted the Reignmakers fantasy sports game, which leveraged the NFTs, last July.

The settlement is the product of vigorous litigation and serious, arm’s-length negotiation,” according to a filing for the plaintiffs. “This outstanding result was reached only after a thorough investigation of the claims, fully briefing defendants’ motion to dismiss, discovery in advance of mediation, an all-day mediation, which involved rigorous and extensive negotiations before a neutral third party, and continued confirmatory discovery and information sharing.”

The suit named DraftKings co-founders Matt Kalish and Jason Robins, also chief executive officer, and Chief Transformation Officer Jason Park among the defendants.

History of DraftKings NFT Suit

The suit was originally brought by lead plaintiff Illinois resident Justin Dufoe who claimed to have lost approximately $14,000 on NFTs he bought on DraftKings Marketplace. In September 2023, DraftKings attempted to have the case dismissed on the grounds that the NFTs it sold didn’t pass the Howey Test, meaning the tokens weren’t securities.

The Howey Test is derived from the landmark 1946 Supreme Court case SEC v. W.J. Howey Co. Since then, the high court set forth four criteria to determine whether or not an asset is a security. Those benchmarks are the investment of money, expectation of profits, common enterprise, and investment success dependent upon parties beyond the individual investor. Casper ruled that plaintiffs met those thresholds in the complaint against DraftKings.

Settlement talks commenced soon after the gaming company closed the marketplace. Attorneys for the class noted “realistic and supportable damages” in the case could range from $18 million to $58 million. The $10 million settlement is equivalent to 26% of the midpoint of that range and was reached in part because efforts to extract more money from the gaming company would have been expensive for the class and taken years to litigate.

Odds and Ends

As for Dufoe, presumably the hero of the class, it’s believed he’s going to pursue a $50,000 award for his time and effort along with an amount of up to a third of the total settlement to compensate him for attorneys’ fees and legal expenses.

The settlement marks the second time this year DraftKings concluded NFT-related litigation. In January, the sportsbook operator struck a settlement with the NFL Players Association (NFLPA), which contended the gaming company skipped payments to the union for use of players’ names, images, and likenesses in the Reignmakers game.

Last August, the NFL players union filed suit against DraftKings, demanding financial compensation for what it described as an “anticipated breach of contract.” In that suit, DrafKings attempted to have it dismissed by leveraging Casper’s ruling, claiming that the NFLPA couldn’t amend the terms of its contract with the company because NFTs are securities.