We recently reported about the decision by DraftKings to discontinue its NFT Marketplace business. At the time, DraftKings said the decision was due to “recent legal considerations.” Although DraftKings did not elaborate, conventional wisdom was that this was a reference to a decision in July, in federal district court in Massachusetts in Dufoe v. DraftKings, that refused to dismiss a proposed class action suit against DraftKings claiming that the NFTs that DraftKings sold on its Marketplace were unregistered securities.
On August 26, 2024, the NFL Players Association sued DraftKings in federal court in New York for breaching a license agreement it had with DraftKings that allowed the latter to use the name, image and likeness of NFL players, which DraftKings wanted in order to help build its portfolio of NFT products. The NFLPA contextualized the dispute against the following backdrop. The premise of the DraftKings business is that, if a customer places a losing paid, it must pay. But, here, DraftKings placed a big bet on the NFT market and, now that this market has cooled down, it does not want to pay what appears to have been a losing bet.
The license agreement required certain minimum annual payments. It also gave DraftKings the right to terminate “if any governmental, administrative, or adjudicatory body (e.g., the Securities and Exchange Commission or state regulatory authorities) determines that the Licensed Product is a security.” A few weeks after the Dufoe decision, DraftKings said it was terminating the license agreement based on this clause.
The NFLPA disagreed that Dufoe triggered the clause. It did not, according to the NFLPA, “determine” anything, but merely held that the class action claim could survive a motion to dismiss, which black-letter law recognizes “is not a decision on the merits that ends the litigation.” The NFLPA also pointed out that DraftKings understood this because its Answer in the Dufoe case denied the allegations that its NFTs are securities.
DraftKings also invoked its right to terminate “in the event that the performance of such other Party’s obligations under this Agreement would be in violation of any law, rule, regulation, or order applicable to such other Party (whether now known or hereafter adopted) and the failure to comply with such law, rule, regulation, or order would have a material adverse effect on the terminating Party.” The NFLPA argued that this clause would apply to a law applicable to the NFLPA and the Dufoe decision did not apply to it. Furthermore, even if the clause were applied to DraftKings, “its obligations under the Amended License Agreement—that is, its payment of royalties to the NFLPA Licensors—is not precluded by the order in Dufoe or any other ‘law, rule, regulation or order’.”
The amount of damages the NFLPA is seeking was redacted in the publicly-filed complaint. However, the complaint did say that the collective compensation of five DraftKings executives since 2021, which totaled roughly $261 million, “is approximately quadruple of what DraftKings owes” to the NFLPA. That would equate to about $65 million.
