Author: ZEN, PANews

Recently, the National Football League Players Association (NFLPA) accused digital sports entertainment and gaming company DraftKings of evading its payment obligations for the Non-fungible Token player license protocol. After abandoning the Non-fungible Token business, DraftKings, which is alleged to have sold unregistered securities, is facing another lawsuit.

Interestingly, in the dispute with the NFLPA, DraftKings' position seems to have changed from refuting to actively acknowledging that "Non-fungible Token is a security".

Abandoning Non-fungible Token Business: Motion to Dismiss Class Action Lawsuit Denied

At the end of July this year, Draftkings stated in an email to users: "After careful consideration, DraftKings has decided to terminate Reignmakers and our Non-fungible Token market, effective immediately. This decision was not made lightly, and we believe it is the right thing to do."

During the period of the Non-fungible Token craze, Draftkings' Non-fungible Token strategy quickly achieved great success. Its platform released 116 NFT collectibles in about half a year, with total sales reaching $44 million, and the first batch of Tom Brady-themed NFT series sold out immediately upon launch.

And when the hype subsided, like other Non-fungible Token platforms, Draftkings also faced legal troubles. In March 2023, Draftkings was sued, claiming that DraftKings Non-fungible Tokens constituted investment contracts and should therefore be regulated as securities under federal law. DraftKings argued that its Non-fungible Tokens were not securities and attempted to dismiss the case by filing a motion to dismiss the class action. On July 2nd of this year, a federal judge in Massachusetts denied DraftKings' motion. In a 24-page ruling, the court noted that the plaintiffs had sufficient grounds to allege that DraftKings Non-fungible Tokens met the legal definition of investment contracts under the Howey test, as defined by the Supreme Court.

The court also distinguished this case from the Dapper Labs case involving NBATopShot, pointing out that DraftKings actually created a playable fantasy sports game through its Reignmakers product. However, because Reignmakers was launched months after the initial sale of Non-fungible Tokens, this does not negate the reasonable accusation of investment intent.

DraftKings' subtle position: Should Non-fungible Tokens be considered securities or not?

After deciding to abandon the Non-fungible Token business, DraftKings also decided to no longer adhere to the protocol with NFLPA and informed the latter that it would no longer make payments from July 30. Upon hearing this, NFLPA immediately initiated a lawsuit seeking compensation for 'anticipated breach of contract.' The lawsuit also emphasized that the total compensation for the company's five executives since 2021 is $261 million, which is approximately four times the compensation owed to NFLPA's authorized persons. As a result, NFLPA is seeking approximately $65 million from DraftKings.

When canceling the protocol, DraftKings emphasized a provision in the contract that allows termination of the transaction 'in the event that a government, regulatory, or judicial authority ‘determines’ that Non-fungible Tokens constitute ‘securities’.' DraftKings believes that the rejection of its motion by the Massachusetts court is evidence of this situation.

On the other hand, the NFLPA stated that the court's ruling did not determine that Non-fungible Tokens are securities, and its lawyer pointed out, "The motive for DraftKings' decision to refuse to continue to perform the licensed protocol with the NFLPA is simple: the once booming Non-fungible Token market has cooled off." He also added, "Despite DraftKings' best efforts to confuse the public, ultimately this case is very simple. DraftKings cannot use its authorized intellectual property for commercial gain, and this cannot be an excuse for failing to fulfill its obligations. DraftKings must pay the fees it owes."

Blockchain platform Flow and NBA Top Shot developer Dapper Labs were sued in 2021 for allegedly selling Non-fungible Tokens as unregistered securities. After a lengthy legal process, they successfully reached a settlement protocol with the plaintiff and paid 4 million dollars. The plaintiff waived the right to claim that Top Shot Non-fungible Tokens are securities in the future.

However, there is still much controversy over whether Non-fungible Tokens are unregistered securities. Recently, the Non-fungible Token market OpenSea received a Wells notice from the U.S. SEC, which believes that the Non-fungible Tokens on the platform may fall under the category of securities and threatens to sue OpenSea. OpenSea believes that Non-fungible Tokens are essentially creative goods and should not be regulated under securities laws. They have promised to provide $5 million to help Non-fungible Token creators and developers who have received Wells notices to pay legal fees and vowed to defend the interests of the industry.

And for DraftKings, which has already exited the Non-fungible Token industry, it may be more cost-effective to admit that Non-fungible Tokens are unregistered securities, and to learn again from its 'template' NBA Top Shot, and to compensate the collective lawsuit in a certain way, rather than paying tens of millions of dollars to NFLPA. The collective lawsuit against DraftKings is currently entering the investigation stage, and the outcome may become a precedent for whether Non-fungible Tokens are ultimately considered securities and may impact future litigation.