DraftKings to Pay $10 Million to Settle Class-Action Lawsuit From NFT Buyers

On Feb. 28, Boston federal court Judge Denise Casper granted a preliminary settlement motion filed days earlier on Feb. 26 by lead plaintiff Justin Dufoe and the class, which would settle all claims “for $10 million in cash.”

DraftKings has agreed to pay $10 million to settle a securities class-action lawsuit from buyers of its non-fungible tokens (NFTs) that the gambling company sold through its now-shuttered marketplace.

Boston federal court Judge Denise Casper granted a preliminary settlement motion on Feb. 28, rolling up several filings from earlier in February.

The motion to approve the settlement of the suit, which would see all claims against DraftKings, its co-founders Jason Robins and Matt Kalish, and finance boss turned chief transformation officer Jason Park settled "for $10 million in cash," was filed on Feb. 26 by lead plaintiff Justin Dufoe and the class.

The settlement would also see the $10 million split between the class action’s members. The filing also noted that Dufoe anticipates later asking for a $50,000 service award "for his time and effort litigating the case" along with attorneys’ fees of up to one-third of the settlement fund plus litigation expenses.

The nearly fully approved settlement is close to ending the suit first filed in March 2023, which alleged that the NFTs that DraftKings sold were investment contracts under US law and, therefore, were being offered as unregistered securities.

A highlighted excerpt from the class group's filing arguing to allow the settlement to avoid "costly litigation," which could take years. Source: CourtListener

The suit claimed that the NFTs were being sold as part of a common enterprise with a profit arising from the efforts of others, specifically those of DraftKings, and that the gambling firm had solicited the NFTs' purchase by touting their potential for appreciation in value.

The class action also noted that the advertised potential for the NFTs to increase in value was highlighted in an email from Robins to employees in January 2023, in which he stated that the company was "focused on building community and delivering experiences that have enduring value to our users."

In the email, which was included in the class action’s filing, he added that they were "making good progress, but we know there's more to do."

Dufoe alleged in the suit that he had personally lost $14,000 through selling DraftKings NFTs on the company’s DK Marketplace at a loss and by holding NFTs that had lost value.

DraftKings moved to dismiss the suit in September 2023, arguing that the NFTs weren’t investment contracts as claimed, specifically stating that they weren’t sold under the promise of a third party’s efforts as required by the US Supreme Court’s 1946 definition of a security in the case of Securities and Exchange Commission v. Howey Co..

However, Judge Casper rejected the motion to dismiss in July 2023, stating that the NFTs could be ruled as securities.

She added that the gambling firm’s statements about the NFTs having the potential to increase in value could be viewed as promising an investment return from a third party’s efforts.

Judge Casper also noted that the variable nature of the NFTs, which changed in response to community feedback, could be viewed as rendering them subject to the administrative, legal or solvency of a third party.

The judge's ruling came as several other US federal court judges ruled on similar cases related to NFTs being classed as securities.

In December 2023, a judge in New York tossed a class action lawsuit from buyers of Vivid Seats' NFTs that claimed the NFTs were unregistered securities.

The judge ruled that the plaintiffs hadn't adequately alleged that Vivid Seats' NFTs were investment contracts.

The judge also shut down a class action lawsuit from buyers of Optimism's tokens that claimed the tokens were unregistered securities.

Optimism is a layer-two scaling solution for the Ethereum blockchain.

The judge ruled that the plaintiffs' allegations weren't plausible and that they failed to allege facts showing that Optimism promised or implied a third party would perform the entrepreneurial or managerial role required to render the tokens into investment contracts.

Optimism raised $156 million in a token sale in May 2023.

The judge's ruling came after the US Securities and Exchange Commission sued Optimism in December 2023 for selling unregistered securities.

The regulator claimed that Optimism sold $85 million worth of Optimism tokens to US investors in a unregistered offering between December 2021 and May 2023.

The SEC also sued several other crypto firms in December 2023 for selling unregistered securities.

The regulator sued crypto exchange Binance for operating an unregistered exchange, selling unregistered securities and wilfully violating the federal securities laws.

The SEC also sued crypto exchange Coinbase for operating an unregistered exchange, selling unregistered securities and wilfully violating the federal securities laws.

The regulator had previously warned Coinbase in March 2023 that it was selling unregistered securities.

The SEC also sued blockchain startup ChainmaxX for selling unregistered securities