DraftKings agrees to $10 million settlement in NFT class-action lawsuit, resolving claims over unregistered securities

DraftKings has agreed to pay $10 million to settle a class-action lawsuit brought by purchasers of its non-fungible tokens (NFTs) sold through the now-closed DK Marketplace. The settlement, which received preliminary approval from Judge Denise Casper in a Boston federal court on February 28, aims to resolve all claims against the gambling company, its Co-Founders Jason Robins and Matt Kalish, and Chief Transformation Officer Jason Park.

The lawsuit, filed by lead plaintiff Justin Dufoe in March 2023, alleged that the NFTs sold by DraftKings were unregistered securities under U.S. law, violating the Howey Test, a standard used to determine if a financial transaction qualifies as an investment contract. Dufoe claimed to have lost $14,000 by selling DraftKings NFTs at a loss and holding others that had depreciated in value.

DraftKings attempted to have the lawsuit dismissed in September 2023, arguing that its NFTs did not meet the criteria of investment contracts. However, Judge Casper denied the motion in July, stating that the NFTs could indeed be considered securities. Shortly after, DraftKings shut down its NFT marketplace, citing "recent legal developments."

The settlement will see the $10 million divided among the members of the class action, which includes all individuals or entities who purchased, held, sold, or transacted in NFTs within a DraftKings account during the class period from August 11, 2021, until the judgment date.

The settlement fund will also cover attorneys' fees, litigation expenses, and administration costs, which are capped at $300,000, approximately 3% of the total fund. Dufoe is also seeking a $50,000 award for his "time and effort litigating the case", along with attorneys' feesamounting to up to one-third of the settlement fund.

The class group justified the settlement as a strategic move to avoid "continued and costly litigation", which could have drained resources over a prolonged period.

The lawsuit indicated that realistic and supportable damages ranged from $18 million to $58 million, with the settlement representing 26% of the midpoint of potentially recoverable damages, a figure described as an "excellent recovery under the circumstances."

DraftKings has recently faced other legal challenges related to its NFT offerings. In January, the company reached a settlement with the National Football League Players Association (NFLPA) over a lawsuit that alleged DraftKings had not paid for using NFL player likenesses in its NFTs. While the exact terms of that settlement were not disclosed, the case was stayed until March 28 to finalize the agreement.

The $10 million settlement comes after an 18-month legal battle, marking an end to claims against DraftKings' NFT Marketplace and its Reignmaker product, a fantasy-based gaming platform that utilized NFTs. The settlement discussions began after the company closed its marketplace and were finalized following "an all-day mediation" with a neutral third party.

Attorney Sarah Flohr, representing the class group, described the settlement as an "outstanding result", achieved through "rigorous and extensive negotiations". The settlement ensures relief for thousands of DraftKings customers who invested in the platform's NFTs, with over 175,000 class members estimated to receive compensation.