On Tuesday, Judge Denise Casper denied a motion from DraftKings to dismiss a class action lawsuit alleging its non-fungible tokens are securities. Now, the suit will go to trial.
In her 24-page summary, Casper wrote that the plaintiff, Justin Dufoe, plausibly alleged that the DraftKing NFTs satisfied three prongs of the Howey Test: that they counted as an investment of money, pooled assets into a common enterprise with shared risks and profits, and created a reasonable expectation of profits based on the company’s efforts.
She added that Dufoe plausibly alleged that the success of the DraftKings NFTs were dependent on the company’s non-fungible token marketplace and that “it is plausible…for the Plaintiffs to expect that if DraftKings drummed up additional demand for its NFTs while limiting the supply, that the value of most NFTs in the ecosystem would rise.” DraftKings also marketed the NFTs as “good investments.”
Dufoe bought and sold DraftKings NFTs from February 2022 to February 2023 with the expectation that he would make a profit; however, he sold some of the NFTs for a loss and others are now worthless. His lawsuit demands that DraftsKings give money back to buyers of DraftKings NFTs, including himself.
The Implications of the DraftKings Lawsuit
If DraftKings were to lose the case, the result could set a precedent in the NFT space that marks the new technology, in certain instances, as securities. That could change the way companies approach the marketing of their NFT collections, to avoid possible lawsuits and payouts that reach into the millions.
Dapper Labs, the creator of NBA Top Shot, faced a similar lawsuit in 2023 where it paid out $4 million as a settlement. The key difference between Dapper Labs and DraftKings is that Dapper launched its NFTs on its proprietary blockchain Flow, whereas DraftKings used Polygon for its NFT collections. That put Dapper Labs more at risk, as the success of its own chain could influence the value of the NFTs.
Many creators in Web3 have already pivoted from the language used during the 2021-2022 bull run, likely to avoid legal trouble. When Memeland launched its memecoin, based on its NFT collections, they wrote specifically that the token was for entertainment only and that users should not expect any profit from it. The creators of the memecoin $PEPE did the same.
There is no doubt that financial incentive is part of Web3 and may always be. There are whole groups devoted to airdrop farming, after all. However, many creators are trying to protect themselves legally if things go awry and a token (or collection) fails and people get upset. Because sometimes the payouts for a lost legal battle can reach into six figures or higher.
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