Judge Keeps NFT Sale Suit Against DraftKings Alive

A federal judge recently ruled that a proposed class action lawsuit against DraftKings will proceed. The lawsuit alleges that DraftKings “violated federal securities laws by not properly registering its non-fungible tokens (NFTs),” according to Bloomberg.

Judge Denise Casper of the US District Court for the District of Massachusetts presided over the hearing. Plaintiff Justin Dufoe had engaged in buying and selling NFTs on the DraftKings Marketplace from February 2022 to February 2023. Dufoe claimed that he and others “expected to make a profit off of the NFTs,” but many of his NFTs either sold at a loss or became worthless.

Dufoe argued that DraftKings’ NFTs were investment contracts and therefore securities under the Securities Act of 1933 and the Securities Exchange Act of 1934. He is seeking restitution for his losses, claiming that the NFTs should have been registered as securities.

DraftKings’ Defense and Judge’s Decision

DraftKings countered that its NFTs were not securities and filed a motion to dismiss the case. However, Judge Casper denied the motion, emphasizing that NFTs are “a digital asset whose ownership, including history of purchases and sales, is reflected in a blockchain.”

The judge further noted that DraftKings’ NFTs “feature a static or dynamic image of a professional athlete.” She stated, “Dufoe has sufficiently alleged the pooling of assets requirement because the revenue generated by the sale of NFTs was reinvested into DraftKings’ business, including through the promotion of the Marketplace.”

Judge Casper highlighted that although NFTs are non-fungible assets with prices that do not uniformly rise and fall, it remains plausible for the court to infer, and for plaintiffs to expect, that if DraftKings increased demand for its NFTs while limiting supply, the value of most NFTs in the ecosystem would rise. This decision means that the class action lawsuit will proceed, potentially setting a precedent for how NFTs are treated under securities laws.

This case underscores the growing legal scrutiny surrounding NFTs and their classification under securities regulations. As the digital asset landscape evolves, companies like DraftKings may face increased regulatory challenges regarding their NFT offerings.