US lawyer who put Big Tobacco on trial takes aim at DraftKings

The US law professor who masterminded the litigation strategy that led to a $206bn settlement from Big Tobacco is backing a class-action lawsuit against sports betting operator DraftKings over an “unfair and deceptive” promotional offer.

The lawsuit, filed in the Massachusetts Superior Court on Friday, alleged that the US company, which operates the second most popular sports betting app, “knowingly and unfairly designed” a $1,000 sign-up bonus with the aim of misleading new customers into joining the platform to “maximize” the money wagered. Two Massachusetts residents are plaintiffs in the class action.

The case is funded by the Public Health Advocacy Institute (PHAI), a Boston-based advocacy group chaired by Professor Richard Daynard, who spearheaded litigation against the tobacco industry in the 1980s. DraftKings’ Boston headquarters are located a mile from Northeastern University, where Daynard teaches.

The class action comes on the heels of a 2018 Supreme Court verdict liberalising the industry. Massachusetts legalised online sports betting this year, bringing the number of US states that have done so to 27. The market is expected to generate $8.5bn in gross revenues this year in the US, according to Eilers & Krejcik Gaming.

Daynard said that the nascent US online betting industry had faced little pushback since its inception. “There’s been a monologue from the industry,” he told the Financial Times. “We want to change that, we want to make it a dialogue.”

The lawsuit outlined how DraftKings advertised a bonus for first-time users of “up to $1,000” through a range of social media, third party, TV and radio promotions. But in order to ever receive $1,000 in additional bets, customers had to make a $5,000 initial deposit, risk $25,000 in real money within 90 days and bet on events with odds steeper than 1-3, according to the lawsuit. The bonus would also be paid out only in non-withdrawable credit.

DraftKings should have known its promotion “was deceptive to its target customers, who were customers new to sports betting and who were extremely unlikely to understand the details of the promotion”, the lawsuit alleged.

“In other words, the ‘$1,000 bonus’ is structured so that it is inordinately expensive to obtain $1,000, and the new user is, instead, statistically likely to lose money by chasing the bonus,” it added.

DraftKings was engaging in “a particularly unfair business practice because of the addictive nature of the underlying product”, according to the lawsuit, which is requesting the award of damages, including the promised $1,000 bonus.

DraftKings did not immediately respond to a request for comment. But in a response to a letter from PHAI putting DraftKings on notice about the lawsuit, seen by the FT, lawyers for the company said it “respectfully disagrees with all of the claims and allegations”.

One of the plaintiffs — Melissa Scanlon — deposited only $25 and did not complain to DraftKings at the time, DraftKings’ lawyers noted in the letter from mid-November.

“Although Ms Scanlon received exactly what she was promised, your letter now claims that the promotion deceived her because she reasonably expected to receive a $1,000 cash bonus for depositing $25,” said the letter. “We respectfully submit that claim is not credible.”

In August, DraftKings’ nationwide market share of gross gaming revenues overtook industry rival FanDuel for the first time. In Massachusetts, DraftKings’ sportsbook accounted for nearly three-fifths of the $571mn generated in gross gaming revenues as of October, according to data submitted to the regulator.

Before Daynard provided a blueprint for litigating against Big Tobacco through his legal-resource group, the Tobacco Products Liability Project, “there was complete consensus among almost all legal authorities that suing tobacco companies was impossible”, he recalled.

“We made the impossible possible as a matter of perception in the legal community,” said Daynard.

Rolling litigation against cigarette makers from the early 1980s onwards led to payouts and culminated in the 2000 master settlement in which four tobacco companies paid out $206bn to 46 states for suppressing smoking’s link to lung cancer.

Daynard began paying attention to the fast-growing US sports betting market after meeting gambling addict-turned-campaigner Harry Levant three years ago. Levant was previously sentenced for stealing money from clients while practising as a lawyer to spend on gambling, but he now works as a counsellor for patients with gambling addiction. Mark Gottlieb is lead counsel on the case.

Chad Beynon, a Macquarie Group analyst, said betting apps had recently cut back on bonus offers, with few giving away bonuses of more than $200. US gambling companies are focusing on safer gambling “because they understand how far the pendulum has swung in other markets”, such as the UK and Australia, where regulations had tightened, he said.

“We’re going to change the discourse [around sports betting],” said Levant, who advises PHAI. “We’re bringing an entire new way of looking at the industry, as criticism since [the 2018 Supreme Court verdict] has been entirely shut out. It’s not going to be shut out much longer.”

DraftKings is likely to push for the case to be dismissed. “In general, though putative class action complaints often garner much attention when filed, there are significant obstacles that must be overcome in order for a class to be certified, let alone secure meaningful recoveries for members of the class,” said Peter Tomczak, a partner at law firm Baker McKenzie who is not involved with the case.