DraftKings Could See Daily Fantasy Sports Operations Shut Down in California
It feels like 2015 again, as DraftKings is once again facing a lawsuit over the legality of the daily fantasy sports product that was the original core of its business. This one has real potential consequences.
According to Courthouse News Service, a federal judge said the class action suit that began last year could result in an injunction blocking DraftKings from operating in California.
DraftKings and rival FanDuel sent the betting world into upheaval in the early 2010s when their DFS products exploded in popularity. State regulators grappled with whether the products were legal or illegal, gambling or games of skill (or both), and myriad other considerations.
The repercussions of the companies’ success are still being felt to this day. Together, they control approximately 80% of the multibillion-dollar online sports betting market. Much of that success owes to the brand recognition they built with their DFS products.
While the widespread legalization of sports betting rendered DFS a distant third (after casino) in DK’s portfolio, it remains widely available and popular in many states without a legal framework for traditional sports betting.
California is one such state, and DFS players there have brought a class action suit against DraftKings. If it results in DraftKings geofencing California, that could cost the operator a sizable chunk of its DFS business.
Judge Grants California Plaintiffs Standing Against DraftKings
At the center of the lawsuit is the idea that DraftKings has misrepresented its product as legal in California. Since the customers believed that playing DFS on DraftKings was legal, they lost thousands of dollars apiece on the platform. Had they known it was illegal, the lawsuit contends, the individuals never would have lost that money.
Brandon Moore, Zhicheng Zhen, and Jonathan Smith are the named individuals in the case. They lost between $1,000 and $3,000 each, according to the lawsuit.
DraftKings, through its own lawyers, contends that the customers did not suffer economic injury because the games they participated in were fair and accurately represented to them by the company’s communications.
DraftKings filed a motion to dismiss. U.S. District Judge Charles Breyer wasn’t persuaded, though, and said the case will likely move forward. His opinion centered on DraftKings advertisements asserting that DFS is legal in California. If that wasn’t material, he said, then why would DraftKings even advertise its legality?
California Attorney General Rob Bonta released an opinion last year, just after this lawsuit was filed, that DFS products violate California gambling law. The law in question bars bets or wagers on:
“…the result, or purported result, of any trial, or purported trial, or contest, or purported contest, of skill, speed or power of endurance of person or animal, or between persons, animals, or mechanical apparatus.”
Bonta’s office can issue opinions, but those opinions don’t have the force of law. A recent legal challenge from the state’s cardroom industry reinforced that the AG’s office has no power to establish the rules that govern gaming in California.
DFS Remains Important to Betting Operators in California
If Judge Breyer declines the motion to dismiss, the case will continue. And he noted that if it does, the next step would be a possible preliminary injunction blocking California residents from accessing DraftKings.
That would be a major blow to DraftKings for a couple of reasons.
For one, DraftKings doesn’t have access to California via either of its main businesses, sports betting and casino. That means it’s still in its holding phase there, hoping it can maintain brand awareness until such time as legal betting becomes a thing in California.
Previous efforts to get legal sports betting to the finish line failed spectacularly, most notably in 2022 with Proposition 27. That garnered less than 20% of the vote.
Until that happens, DraftKings will keep peddling its DFS and prediction products, though the latter has failed to gain significant market share thus far. California is listed as a legal state by DraftKings Prediction, offering both sports contracts and other financial markets.
California’s massive population also makes it more worthwhile than any other market for DraftKings’ less popular products. The lawsuit states that the market is worth around $200 million annually. If DraftKings is pulling in a little less than half of that — it controls more than 90% of the market, along with FanDuel — then DK could be approaching nine figures in revenue there each year.
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