While season-long fantasy sports leagues have long been in existence, the emergence of daily fantasy sports (“DFS”) has been relatively recent. DFS allows participants to enter daily contests for money where a salary cap is used to “draft” a team and compete against anywhere from one to hundreds of thousands of other participants. Points are allocated based on each player’s respective performance (e.g., receiving yards, touchdowns, etc.) and winners receive cash payouts that can be in the millions.
If the ever-present commercials did not make you aware already, DFS is big business. Reports indicate that the industry collected approximately $2.6 billion in entry fees this year and may reach as much as $2 billion in revenues by 2020.
On October 5, 2015, the nascent industry was rocked when the New York Times reported that an employee of Draft Kings, the current market leader, used proprietary information regarding player usage in Draft Kings’ contests to win $350,000 in a contest hosted by competitor Fan Duel. The industry, and Draft Kings in particular, have since come under a flood of criticism for a lack of internal controls and running a rigged game.
The information that was allegedly misused by the Draft Kings employee is player usage data — the percentages that particular players are “drafted” by contest participants. This information is neither public nor available by any lawful means until changes to a participant’s line-up are “locked” and cannot be changed. By having this information prior to being “locked” in, a DFS participant would get an unfair advantage by being able to calculate a line-up around the players that are owned by existing participants and thus may have a statistically higher change of winning certain large-format contests where a unique line-up makes the chances of winning much greater.
Prior to the incident becoming public, no ban was in place prohibiting employees from playing on other sites; they were only prohibited from playing in contests hosted by their employers. The amount of money at stake, however, raises significant questions about how DFS trade secrets may be misappropriated and misused. Risks include not only employees misusing insider information regarding player usage to compete in competitor’s games, but also leaks to an insider’s friends and family or an employee unfairly competing through an account set-up under an alias.
This scandal evidences the need for public-facing companies in particular to make sure that adequate measures are taken to safe guard company trade secrets and confidential information. Draft Kings in particular has come under criticism for a lack of internal controls and safeguards to prevent the unauthorized access and use of its non-public information. If sufficient safe guards are put into place, the threat of a trade secret claim against an employee or other user of player usage data may be used as another tool to prevent unfair competition and a corresponding loss in public confidence. Trade secret protection, however, is only available to those who establish sufficient safe guards to keep the information confidential in the first place.
While industry leaders Draft Kings and Fan Duel announced the retention of a third-party auditor to investigate their internal controls, only time will tell if the industry can regain the trust lost by this week’s news.