Court Goes All In: District of Massachusetts Decision Declining to Dismiss DraftKings NFT Lawsuit Lays The Groundwork For Potential Impactful Trial

The U.S. District Court for the District of Massachusetts denied defendants’ DraftKings Inc. (“DraftKings”) and its officers Jason D. Robins, Jason K. Park and Matthew Kalish’s (collectively “Defendants”) motion to dismiss a securities class action lawsuit arising out of their alleged failure to properly register its non-fungible tokens (“NFTs”).[1]  The lawsuit was brought by lead Plaintiff Justin Dufoe (“Plaintiff”), on behalf of a class of other DraftKings users (the “Class”).[2] 

The amended complaint alleged, inter alia, that Defendants violated Sections 5, 12(a)(1), and 15 of the Securities Act of 1933 (the “Securities Act”), Sections 5, 15(a)(1), and 29(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), and Mass. Gen. Laws. Ch. 110A §§201 and 301(a) when it sold NFTs to Plaintiff and the Class on a secondary platform absent registration because the NFTs  qualify as “securities., AC ¶14.  For example, the Class’s complaint averred that Defendants “reaped, or will reap, hundreds of millions of dollars in profits”, AC ¶5, and “the profits would be realized when the Class would sell their NFTs… with DraftKings receiving exchange-like fees and commissions from the purchases.”, AC ¶5.  Thus, Plaintiff and the Class argued the NFTs 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”, Id., thereby qualifying these “investment contracts” as securities.  AC ¶92.

Defendants argued that Plaintiff and the Class failed to plead that, that by purchasing the NFTs, they invested in a common enterprise or that there was any reasonable expectation of profits such that they could be considered “securities” within the meaning of the seminal Supreme Court case S.E.C. v. W.J. Howey Co., 328 U.S. 293, 294, 66 S. Ct. 1100, 1101, 90 L. Ed. 1244 (1946)(setting forth the test for what constitutes a security). MTD at 2, 9-10, 12-13, 16.

Judge Denise J. Casper denied the motion to dismiss, finding these NFTs to be securities because the complaint sufficiently alleged that these NFTs involved (1) an “investment of money” (a point not disputed by Defendants), Order at 8; (2) investment in a common enterprise because the revenue generated by the sale of NFTs was reinvested into DraftKings’s business, including through the promotion of the marketplace, Order at 9-14; and (3) a reasonable expectation of profits solely derived from the efforts of others as plausible allegations were raised regarding DraftKings’s “promises and purchasers’ expectation of the same” and because these NFTs’ value “were impacted by ‘market forces’ including the star power of the represented athletes [in the NFT] or the [general] usefulness of the NFT.” Order at 14-21.

Now that Defendants’ motion to dismiss has been denied, the parties have moved into the discovery phase of the case heading towards a potential trial that could add to the body of law that is developing that addresses the scope of the securities laws’ application to NFTs and other new types of instruments or vehicles.