Does Liability Insurance Cover Fantasy Sports Disputes?

For years, people have been getting together to prove that they can draft and field a team of real-life athletes better than their friends. It used to be that fantasy sports had to be a season-long commitment. But some people (either on their own or at the urging of their significant others) did not want to take on that type of time commitment or incur the cost of competing in a full-season league. Enter daily fantasy sports (DFS), which has given sports fans a more efficient outlet to achieve the fantasy adrenaline rush by providing competitors with daily or weekly competitions open to almost everyone with an Internet connection.

The exponentially greater number of participants has led to an exponentially greater prize pool and the huge, multimillion dollar checks winners are shown receiving in the seemingly ubiquitous DFS commercials aired during sporting events and late-night infomercials. But the greater number of participants in DFS games is actually what makes those games so hard to win.

Every participant in a DFS game can select almost any athlete on any team to fill their roster, typically subject to a $50,000 salary cap, regardless of whether other DFS participants have also selected those athletes. (In DFS competitions, each available player is assigned a salary based on their perceived value. For example, it cost $8,500 to draft New England Patriots quarterback Tom Brady for DFS DraftKings' slate of Week 9 NFL games. New Orleans Saints backup quarterback Luke McCown, in contrast, has been available for $5,000.) DFS success, then, is based not only on drafting athletes who provide the greatest dollar-for-dollar return on investment, but also on drafting high-performing athletes whom other competitors do not select.

Daily Fantasy In the Spotlight

It was recently widely reported that a DraftKings employee accidentally published data revealing which athletes were selected by the competitors in one of DraftKings' biggest NFL games before the real-life games started. That alone might not have been all that newsworthy except for the fact that the same employee who leaked the information ended up finishing second ' and winning $350,000 ' in a weekly NFL game run by DraftKings' competitor, FanDuel. (Apparently, nothing prevented DraftKings' and FanDuel's employees from competing in each other's games.) Immediately after news of the employee's victory broke, speculation began swirling that he set his FanDuel roster using information that he had access to only as a DraftKings employee, such as the percentage of Draft Kings users selecting certain players and those players' projected fantasy performance. (Allegedly, information such as the values assigned to players, the number of users who select a particular player, and the salary of each player transfers closely across DFS platforms such as DraftKings and FanDuel.)

The backlash was immediate: government investigations into DFS companies' operations; legislative action proposing to regulate DFS; DFS-player class-action litigation alleging the DFS companies defrauded players into competing based on unfulfilled promises that games are fair; and Washington Redskins wide receiver Pierre Gar'on filed a lawsuit against FanDuel alleging improper use of NFL player likenesses. (Allegedly, FanDuel paid Gar'on last year to promote the company's games, but the two no longer have a working relationship. Also, the suit allegedly does not name DraftKings because DraftKings has a marketing and licensing agreement with the NFL Players' Association.)

Officials in various states (including Nevada and New York) also declared DFS to be a form of gambling, with DraftKings and FanDuel filing suit to challenge that determination by New York Attorney General Eric Schneiderman. Each of these developments alone has the potential to significantly impact the DFS industry, including the potential to shut it down altogether, at least in its current form.

Insurance Coverage

In the face of potential losses, it would be a surprise if DraftKings, FanDuel, and other DFS companies have not placed their insurers on notice. Some of those insurers may have issued DFS companies cyber or employee dishonesty policies, but those types of policies generally will not provide coverage because there has not been any allegation either of unauthorized access to DFS sites or systems or that any DFS company suffered a direct financial loss as a result of its employees doing anything dishonest or unlawful.

But what about DFS companies' other types of coverage? More often than not, courts addressing coverage for costs incurred as a result of government investigations do so under directors' and officers' liability (D&O) policies. Some courts have found that the cost of complying with government investigations may be covered. In MBIA v. Federal Insurance, 652 F.3d 152 (2d Cir. 2011), for example, the insurance/financial services company MBIA was investigated by the federal Securities and Exchange Commission and the New York State Attorney General in connection with certain transactions entered into so that MBIA could “avoid recognizing a loss.” Notably, the New York Attorney General's office commenced its investigation of MBIA through the issuance of a subpoena.

MBIA's D&O policies covered “securities claims,” defined to mean “a formal or informal administrative or regulatory proceeding or inquiry commenced by the filing of a notice of charges, formal or informal investigative order or similar document.” (The policies also covered costs “incurred in defending or investigating Securities Claims.”) The court concluded that the New York Attorney General's investigation qualified as a “securities claim” despite being initiated by a subpoena because “[t]he outward-facing form that investigation takes is the service of a subpoena, which, on its face, commands the production of documents and threatens criminal penalties for noncompliance. ' Backed by the enforcement authority of the state, the subpoena is at least a 'similar document' to a 'formal or informal investigative order' that commenced a regulatory proceeding, as stated in the policies.” (See also, ACE Am. Ins. v. Ascend One, 570 F. Supp. 2d 789 (Md. 2008). Notably, some D&O policies expressly provide that investigations commenced by subpoena qualify as “claims.”)

Other courts disagree that service of a subpoena qualifies as a “claim” under D&O policies. (See, Employers' Fire Ins. Co. v. Pro-Medica Health Sys, 524 Fed. Appx. 241 (6th Cir. 2013); cf. Ctr. for Blood Research v. Coregis Ins., 01-10708, (D.Mass. 2001).) Accordingly, whether DFS companies' D&O policies provide coverage for costs attributed to government investigations will depend on the specific language of those policies and the law that governs their interpretation and enforcement.

DraftKings and FanDuel Lawsuits

Turning to the purported class actions filed against DraftKings and FanDuel, a lawsuit filed by the DFS participant likely would not trigger coverage under DraftKings' and FanDuel's commercial general liability (CGL) policies because of the absence of covered “bodily injury,” “property damage,” or “personal and advertising injury.”

The lawsuit filed against FanDuel by Pierre Gar'on, however, presents a different issue. Gar'on v. FanDuel Inc., 8:2015cv03324 (D.Md.). Gar'on's lawsuit alleges FanDuel “knowingly and improperly exploits the popularity and performance” of Gar'on and other NFL players without their permission, and uses the names and likenesses of NFL players in television ads without their authority. If this type of claim potentially triggers coverage under CGL policies at all, it would be under the section of those policies insuring against “personal and advertising injuries.”

“Insuring Agreement B” in the standard CGL policy form provides coverage for “those sums that the insured becomes legally obligated to pay as damages because of 'personal injury and advertising injury' to which this insurance applies.” (Notably, the coverage applies only to “'personal injury and advertising injury' caused by an offense arising out of the insured's business but only if the offense was committed in the 'coverage territory' during the policy period.”) Relevant to Gar'on's claims, “personal and advertising injury” is defined as the “[o]ral or written publication, in any manner, that violates a person's right of privacy.” Standard CGL policies, however, preclude coverage for “'personal and advertising injury' arising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights” (the IP exclusion).

There is support for concluding that claims related to misappropriating one's identity for commercial purposes are really claims for “right of publicity” as opposed to claims for “right of privacy” and therefore should not be covered under CGL policies as “personal and advertising injuries.” (See, Comedy III Productions Inc. v. Gary Saderup Inc., 25 Cal. 4th 387 (2001); Lugosi v. Universal Pictures, 25 Cal. 3d 813 (1979) (Bird, C.J., dissenting).) There also is support that the IP exclusion alternatively precludes coverage for “right of publicity” claims. (See, Aroa Marketing Inc. v. Hartford Ins. Co. of the Midwest, 198 Cal. App 4th 781 (2d Dist. 2011). That being said, like any other insurance policy, whether and the extent to which CGL policies provide coverage for claims like Gar'on's depends on the policy terms and which state's law governs those policies' interpretation and enforcement.

Conclusion

As the foregoing discussion demonstrates, there is a lot at stake for DFS companies in the coming months and years. Even if DFS companies are ultimately cleared of any wrongdoing and permitted to continue operating either as is or as a regulated form of gambling, the costs to DFS companies to achieve that result could be staggering. If they have not received them already, insurers of DFS companies can expect to receive notice of claims seeking to recoup losses those companies suffer as a result of the fallout from the revelation that DFS company employees are playing the same game as DFS competitors. It is as sure a bet as the house winning even when its paying customers do.

Lawrence Klein is Managing Partner of the New York office of the law firm Sedgwick LLP. Aaron F. Mandel is an associate at the firm.

For years, people have been getting together to prove that they can draft and field a team of real-life athletes better than their friends. It used to be that fantasy sports had to be a season-long commitment. But some people (either on their own or at the urging of their significant others) did not want to take on that type of time commitment or incur the cost of competing in a full-season league. Enter daily fantasy sports (DFS), which has given sports fans a more efficient outlet to achieve the fantasy adrenaline rush by providing competitors with daily or weekly competitions open to almost everyone with an Internet connection.

The exponentially greater number of participants has led to an exponentially greater prize pool and the huge, multimillion dollar checks winners are shown receiving in the seemingly ubiquitous DFS commercials aired during sporting events and late-night infomercials. But the greater number of participants in DFS games is actually what makes those games so hard to win.

Every participant in a DFS game can select almost any athlete on any team to fill their roster, typically subject to a $50,000 salary cap, regardless of whether other DFS participants have also selected those athletes. (In DFS competitions, each available player is assigned a salary based on their perceived value. For example, it cost $8,500 to draft New England Patriots quarterback Tom Brady for DFS DraftKings' slate of Week 9 NFL games. New Orleans Saints backup quarterback Luke McCown, in contrast, has been available for $5,000.) DFS success, then, is based not only on drafting athletes who provide the greatest dollar-for-dollar return on investment, but also on drafting high-performing athletes whom other competitors do not select.

Daily Fantasy In the Spotlight

It was recently widely reported that a DraftKings employee accidentally published data revealing which athletes were selected by the competitors in one of DraftKings' biggest NFL games before the real-life games started. That alone might not have been all that newsworthy except for the fact that the same employee who leaked the information ended up finishing second ' and winning $350,000 ' in a weekly NFL game run by DraftKings' competitor, FanDuel. (Apparently, nothing prevented DraftKings' and FanDuel's employees from competing in each other's games.) Immediately after news of the employee's victory broke, speculation began swirling that he set his FanDuel roster using information that he had access to only as a DraftKings employee, such as the percentage of Draft Kings users selecting certain players and those players' projected fantasy performance. (Allegedly, information such as the values assigned to players, the number of users who select a particular player, and the salary of each player transfers closely across DFS platforms such as DraftKings and FanDuel.)

The backlash was immediate: government investigations into DFS companies' operations; legislative action proposing to regulate DFS; DFS-player class-action litigation alleging the DFS companies defrauded players into competing based on unfulfilled promises that games are fair; and Washington Redskins wide receiver Pierre Gar'on filed a lawsuit against FanDuel alleging improper use of NFL player likenesses. (Allegedly, FanDuel paid Gar'on last year to promote the company's games, but the two no longer have a working relationship. Also, the suit allegedly does not name DraftKings because DraftKings has a marketing and licensing agreement with the NFL Players' Association.)

Officials in various states (including Nevada and New York) also declared DFS to be a form of gambling, with DraftKings and FanDuel filing suit to challenge that determination by New York Attorney General Eric Schneiderman. Each of these developments alone has the potential to significantly impact the DFS industry, including the potential to shut it down altogether, at least in its current form.

Insurance Coverage

In the face of potential losses, it would be a surprise if DraftKings, FanDuel, and other DFS companies have not placed their insurers on notice. Some of those insurers may have issued DFS companies cyber or employee dishonesty policies, but those types of policies generally will not provide coverage because there has not been any allegation either of unauthorized access to DFS sites or systems or that any DFS company suffered a direct financial loss as a result of its employees doing anything dishonest or unlawful.

But what about DFS companies' other types of coverage? More often than not, courts addressing coverage for costs incurred as a result of government investigations do so under directors' and officers' liability (D&O) policies. Some courts have found that the cost of complying with government investigations may be covered. In MBIA v. Federal Insurance, 652 F.3d 152 (2d Cir. 2011), for example, the insurance/financial services company MBIA was investigated by the federal Securities and Exchange Commission and the New York State Attorney General in connection with certain transactions entered into so that MBIA could “avoid recognizing a loss.” Notably, the New York Attorney General's office commenced its investigation of MBIA through the issuance of a subpoena.

MBIA's D&O policies covered “securities claims,” defined to mean “a formal or informal administrative or regulatory proceeding or inquiry commenced by the filing of a notice of charges, formal or informal investigative order or similar document.” (The policies also covered costs “incurred in defending or investigating Securities Claims.”) The court concluded that the New York Attorney General's investigation qualified as a “securities claim” despite being initiated by a subpoena because “[t]he outward-facing form that investigation takes is the service of a subpoena, which, on its face, commands the production of documents and threatens criminal penalties for noncompliance. ' Backed by the enforcement authority of the state, the subpoena is at least a 'similar document' to a 'formal or informal investigative order' that commenced a regulatory proceeding, as stated in the policies.” (See also, ACE Am. Ins. v. Ascend One, 570 F. Supp. 2d 789 (Md. 2008). Notably, some D&O policies expressly provide that investigations commenced by subpoena qualify as “claims.”)

Other courts disagree that service of a subpoena qualifies as a “claim” under D&O policies. (See, Employers' Fire Ins. Co. v. Pro-Medica Health Sys, 524 Fed. Appx. 241 (6th Cir. 2013); cf. Ctr. for Blood Research v. Coregis Ins., 01-10708, (D.Mass. 2001).) Accordingly, whether DFS companies' D&O policies provide coverage for costs attributed to government investigations will depend on the specific language of those policies and the law that governs their interpretation and enforcement.

DraftKings and FanDuel Lawsuits

Turning to the purported class actions filed against DraftKings and FanDuel, a lawsuit filed by the DFS participant likely would not trigger coverage under DraftKings' and FanDuel's commercial general liability (CGL) policies because of the absence of covered “bodily injury,” “property damage,” or “personal and advertising injury.”

The lawsuit filed against FanDuel by Pierre Gar'on, however, presents a different issue. Gar'on v. FanDuel Inc., 8:2015cv03324 (D.Md.). Gar'on's lawsuit alleges FanDuel “knowingly and improperly exploits the popularity and performance” of Gar'on and other NFL players without their permission, and uses the names and likenesses of NFL players in television ads without their authority. If this type of claim potentially triggers coverage under CGL policies at all, it would be under the section of those policies insuring against “personal and advertising injuries.”

“Insuring Agreement B” in the standard CGL policy form provides coverage for “those sums that the insured becomes legally obligated to pay as damages because of 'personal injury and advertising injury' to which this insurance applies.” (Notably, the coverage applies only to “'personal injury and advertising injury' caused by an offense arising out of the insured's business but only if the offense was committed in the 'coverage territory' during the policy period.”) Relevant to Gar'on's claims, “personal and advertising injury” is defined as the “[o]ral or written publication, in any manner, that violates a person's right of privacy.” Standard CGL policies, however, preclude coverage for “'personal and advertising injury' arising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights” (the IP exclusion).

There is support for concluding that claims related to misappropriating one's identity for commercial purposes are really claims for “right of publicity” as opposed to claims for “right of privacy” and therefore should not be covered under CGL policies as “personal and advertising injuries.” (See, Comedy III Productions Inc. v. Gary Saderup Inc., 25 Cal. 4th 387 (2001); Lugosi v. Universal Pictures, 25 Cal. 3d 813 (1979) (Bird, C.J., dissenting).) There also is support that the IP exclusion alternatively precludes coverage for “right of publicity” claims. (See, Aroa Marketing Inc. v. Hartford Ins. Co. of the Midwest, 198 Cal. App 4th 781 (2d Dist. 2011). That being said, like any other insurance policy, whether and the extent to which CGL policies provide coverage for claims like Gar'on's depends on the policy terms and which state's law governs those policies' interpretation and enforcement.

Conclusion

As the foregoing discussion demonstrates, there is a lot at stake for DFS companies in the coming months and years. Even if DFS companies are ultimately cleared of any wrongdoing and permitted to continue operating either as is or as a regulated form of gambling, the costs to DFS companies to achieve that result could be staggering. If they have not received them already, insurers of DFS companies can expect to receive notice of claims seeking to recoup losses those companies suffer as a result of the fallout from the revelation that DFS company employees are playing the same game as DFS competitors. It is as sure a bet as the house winning even when its paying customers do.

Lawrence Klein is Managing Partner of the New York office of the law firm Sedgwick LLP. Aaron F. Mandel is an associate at the firm.