DraftKings has filed a motion in Massachusetts District Court to dismiss a proposed class action lawsuit that accuses the casino and sports betting operator of selling NFTs (non-fungible tokens) as unregistered securities.
The motion, filed at the US District Court in Boston on Sept. 25, argues collectibles are not securities. As a result, DraftKings requested the court dismiss with prejudice, which would prevent the plaintiff from refiling the same case in that court.
A memorandum of law accompanying DraftKings’ motion makes the company’s position clear:
The digital images of professional athletes that Plaintiff purchased are collectibles and trading cards, some of which may be used in online fantasy sports-style contests. They are plainly not ‘securities’ under well-established law. This case should be dismissed.
With the filing, DraftKings (DraftKings 38,30 -1,16%) also requested oral arguments to “assist the Court’s consideration of Defendants’ Motion.”
If permitted, parties could address Judge Denise J. Casper on Dec. 19. According to the memo, it’s the next scheduled hearing.
Suit: DraftKings Operates Unregistered Exchange
Filed initially in March 2023 and amended in August, Justin Dufoe vs. DraftKings, Inc. posits the sports collectibles sold through DraftKings’ digital marketplace are, in fact, unregistered securities.
The complaint reads:
Defendants had actual knowledge of facts indicating that the NFTs they promoted and sold were ‘securities’ under federal and state securities laws and further that they had failed to register their NFTs as securities.
Defendants reaped, or will reap, hundreds of millions of dollars in profits from their unregistered securities sales.
Undoubtedly, the suit is one response to growing losses reported by collectors since the NFT market peaked in early 2022.
Indeed, in the filing, lead plaintiff Justin Dufoe alleges a loss of more than $14,000 since first buying NFTs via DraftKings Marketplace.
Those purchases, claim the suit, came with an expectation that plaintiffs could later sell those NFTs for profit.
The profits would be realized when Plaintiffs and the Class would sell their NFTs on the secondary market platform that DraftKings solely owned and managed, with DraftKings receiving exchange-like fees and commissions from the purchases and sales on its secondary market platform.
Thus, Plaintiff and the Class were entirely dependent on the managerial efforts of DraftKings, both when they initially purchased the NFTs and when they later sold them on the DraftKings’ controlled secondary market.
Ultimately, it’s those unexpected losses driving the court challenge.
This is a federal securities class action on behalf of a class consisting of all persons other than Defendants who purchased or otherwise acquired DraftKings’ non-fungible tokens (“NFTs”) between August 11, 2021 and the present (the “Class Period”).1 The NFTs constitute unregistered securities, and Defendants are operating an unregistered securities exchange.
In remedy, Dufoe is seeking rescission or an end to the NFT contracts and payment of damages caused by DraftKings’ “violation” of federal securities laws.
DraftKings Asks for Dismissal ‘With Prejudice’
In its motion, DraftKings moved to “dismiss, with prejudice, all claims asserted.”
With its supporting documents, DraftKings challenges the lawsuit’s claims, at times using the plaintiffs’ own arguments.
First, Plaintiff fails to plead that, by purchasing NFTs on the Marketplace, he invested in a ‘common enterprise’ with DraftKings. Plaintiff bought goods with unique utility and intrinsic value, not instruments entitling him to share in DraftKings’ profits or giving him other rights common to a security.
Second, the claims here fail for the separate reason that Plaintiff does not establish that DraftKings led purchasers of Marketplace NFTs to expect that they would realize investment profits on NFTs due to the managerial efforts of DraftKings.
Plaintiff cites no example — because there is none — where any Defendant promoted Marketplace NFTs as securities or investments in DraftKings such that they might have induced NFT owners reasonably to expect profits based on the managerial efforts of DraftKings.
Instead, Plaintiff’s own allegations establish that DraftKings promoted the NFTs as collectibles (similar to baseball or Pokémon cards) or Reignmakers game pieces that would depreciate in value correlating to their declining utility in contests over time, not as a means to participate in future DraftKings profits as an enterprise.
DraftKings argues because Dufoe’s case depends on the incorrect premise that Marketplace NFTs are securities, the court should dismiss the suit entirely.
Plaintiff does not plausibly allege that any Marketplace NFTs constitute securities under federal or state law. As such, all of Plaintiff’s claims are subject to dismissal with prejudice.