By Phillip H. Movaghar & Jeff Birren
Cheating scandals have long been part of baseball lore, including the “Black Sox” scandal when members of the Chicago White Sox took bribes to underperform in the 1919 World Series. In 1951 the New York Giants stole pitching signs, so Bobby Thomson was alerted to the expected pitch that he turned into the “Shot Heard ‘Round the World” that clinched the National League Pennant. More recently, baseball had corked bats and players using illegal steroids to bulk up and break long-standing records.
Baseball is currently dealing with yet another sign-stealing scandal involving the Houston Astros and the Boston Red Sox. Both teams’ batters were alerted to the expected pitch during home games, and both teams went on to win a World Series at the Los Angeles Dodgers’ expense. However, there is one major difference between this and past scandals and that is the plaintiffs’ class action bar. Consequently, this bunch filed class action cases against Major League Baseball (“MLB”) alleging the class lost fantasy games “caused by the defendants’ representations and conduct surrounding the by-now infamous sign-stealing scandal” (Olson v. MLB, et al, (United State District Court S.D. N.Y. Case No. 20-cv-632 (JSR) Document #55 (“Olson”), (4-3-20) at 3). It is hardly unusual today that such class-action cases would be filed, but it is shocking that cases filed in January would be dismissed that April.
Background
DraftKings is one of the major online fantasy sports platforms that allow fans to gamble based on a sports’ statistics. According to the First Amended Complaint (“FAC”) (Olsen, FACDocument #20 (2-14-20)), “DraftKings’s daily fantasy sports baseball (‘MLB DFS’) competitions require contestants to select a lineup of MLB players, each assigned a different ‘salary’ value set by DraftKings. The salary is based on the reported past performance statistics of the MLB player. DraftKings participants accrue fantasy points based on the real-life performance of the players they have ‘drafted’ on the particular day or week covered by the contest, and the participants’ total points at the end of the contest determines who wins a cash prize. Participants pay DraftKings a fee for each fantasy contest, a portion of which is kept by DraftKings and the remainder of which funds the contests’ prizes” (Olson at 4) (internal citations omitted).
The FAC states that MLB acquired equity stakes in DraftKings in 2013 and 2015. This is alleged to have become a “comprehensive league partnership” that provided co-branding and gave various national and local rights to DraftKings, including “the exclusive right to sign sponsorship deals with individual MLB member clubs, and a designation as MLB’s “Official Daily Fantasy Game,” leading to partnerships with 27 MLB clubs, including Houston and Boston (FAC at 13/14).
During games, “pitchers and catchers use a series of ‘signs’ to communicate the type of pitch being thrown, and the intended speed, movement, and location of the pitch. Keeping such signs secret from batters is critical because knowledge of which pitch is coming improves the batter’s chances of hitting the ball” (Id. at 20). MLB “prohibited using electronic devices to view or convey information about the opposing team’s signs” (Olson at 4). Furthermore, MLB’s “member clubs have entered into an operating agreement pursuant to which the teams agree to be bound by the rules and regulations of MLB, including its electronic sign-stealing rules” (Id.).
According to the FAC, during the 2017-2019 baseball seasons, officials and players of Houston and Boston, “and likely other teams engaged in repeated instances of electronic sign stealing in violation of MLB’s rules.” This was confirmed when MLB “announced in a January 2020 press release by MLB Commissioner Robert Manfred (“Manfred”) that the Astros engaged in such electronic sign stealing in the 2017 and 2018 seasons” (Id.). Furthermore, “MLB fined the Red Sox some unspecified amount in 2017 for an electronic sign stealing scheme” (Id.). The FAC asserts that Houston and Boston “significantly improved their batting performance during the class period when the sign stealing occurred” (FAC at 30/31, 36).
The FAC claimed that the Defendants were aware of these rule violations but “took no action to stop it in order to protect their financial interest and investment in DraftKings” (Id. at 59). It also alleged that Defendants made deliberately false statements to conceal the scheme. These “false statements” were supposedly made to induce Plaintiffs and other fans to play fantasy baseball, which would not have happened had they known about the electronic sign-stealing (Id. at 43/47). This concealed scheme led to the lawsuits.
In the District Court
Olson was filed on January 23, 2020 (Olson Complaint, Document #1 (1-23-2)). Kristopher Olson was the named plaintiff in a 52-page class action that began by mentioning “Shoeless” Joe Jackson and Pete Rose “who became involved in gambling” and were banned from baseball (Id. at 1). It was assigned to Senior Judge Jed S. Rakoff. Judge Rakoff then issued a Case Management Plan (“Plan”). The Plan gave Plaintiffs until February 14, 2020 to file an amended complaint without leave of court, required any Motions to Dismiss (“MTD”) to be filed by February 21, 2020, and set deadlines for oppositions and replies. It gave dates for the initiation and completion of discovery efforts and stated that the final pre-trial conference would be on July 9, 2020 ((Olson Plan, Document #17 (2-10-20).
Christopher Clifford filed a similar class action on February 5, 2020 (Clifford v. MLB et al, Case No. 1:20-cv-01000 Document #1 (“Clifford”) (2-5-20))). Clifford was sixty pages and unlike Olson included Doe Defendants. Clifford was transferred to Judge Rakoff, who consolidated the cases for pretrial purposes and ordered that the Olson Plan would apply to Clifford (Olson, Document #23 (2-18-20)).
Plaintiffs filed the FAC on February 14, 2020. It was 139 pages; longer than the Olson and Clifford Complaints combined. It had five named plaintiffs, Clifford, Olson, and a “citizen” from California, Colorado and Texas (Id. at 8), thus allowing claims under the laws of those states. There were 12 causes of action. The FAC did not ask for the moon, but close enough, as it requested judgment to be entered in favor of the class, general, specific and/or statutory damages, punitive damages, “restitution of all ill-gotten gains, together with all proceeds, interest, income, profits, and accessions thereto as a result of Defendants’ unlawful conduct… injunctive and/or other appropriate equitable relief pursuant to the state consumer protection acts cited herein…Class attorneys’ fees and costs, as allowed by law…. prejudgment and post-judgment interest, as allowed by law… such other relief as the Court deems just and equitable” and, of course, appointing these lawyers as class counsel (Id. at 136/137). No mention was made of the kitchen sink.
The claims were based on the financial connection between DraftKings and MLB, and how MLB profited from fans, using DraftKings, to bet based on the performance of MLB players. Yet even with the help provided by the cheating system, six starting players on Houston’s 2017 Championship team hit below .300. Catcher, Brian McCann, hit .241 in 2017 and without cheating in Atlanta in 2019 he hit .249. Thus, the edge may have been real, but it was certainly small.
For a description of the FAC, see Sports Illustrated, Michael McCann, “Why Daily Fantasy Players Are Suing MLB Over Sign Stealing” (2-7-20). There one learns that Olson is a gambler, an attorney in Massachusetts, a journalist at Massachusetts Lawyers Weekly and that he hoped the class would win at least 5 million dollars in damages (Id.). The article was driven by interviews with the Plaintiffs’ side.
One week after the FAC was filed, the Defendants filed three MTD’s (Olson, Documents # 27, #30 & #36 (2-21-20)) along with the usual related filings and requested oral argument. Three oppositions were filed (Olson, Documents # 42, #43 & #45 (3-6-20)) and the Defendants filed reply briefs (Olson, Documents #47, #48 & #49 (3-13-20)). That day, the Court entered a mutually agreed to Protective Order (Olson, Protective Order, Document #46, (3-13-20)). The Court informed the parties that the hearing on the MTDs would “be held telephonically” on March 20, 2020 (Olson, Memorandum to the Docket Clerk, (3-19-20)). Two weeks after the MTD hearing, the Court ruled (Olsen, Document #55 (4-3-20)).
The Ruling
Common Law Fraud: The Court began by listing the elements of common law fraud. To prevail on that claim plaintiffs must allege: (i) a material misrepresentation or omission of fact; (ii) that the defendant knew to be false; (iii) that the defendant made with the intent to defraud; (iv) upon which the plaintiff reasonably relied; and (v) that that caused injury to the plaintiff (Olson at 5).
Affirmative Misrepresentations: Plaintiffs asserted a series of statements made by Manfred and by players and officials of Houston and Boston, constituted affirmative misrepresentations (Id.). The Court found that Plaintiffs’ alleged misrepresentations should be grouped into two categories.
Misrepresentations about Fantasy Baseball: Plaintiffs claimed Manfred’s public statements repeatedly misrepresented that the Defendants were committed to “making sure that appropriate safeguards were in place to ensure that fantasy baseball wagering competitions were fair” (Id.). However, these words were not spoken by Manfred, so Plaintiffs failed to allege any actual statements by Manfred that plausibly support the existence of such a misrepresentation (Id.). Manfred’s actual public statements detailed in the FAC reflected his commitment to prevent gambling from impacting the integrity of live action baseball and his concerns about whether fantasy organizations were properly self-regulating (Id.). The Court found that none of Manfred’s statements indicated Defendants’ commitment to safeguarding fantasy baseball from MLB rules violations (Id.).
Misrepresentations about Major League Baseball: Plaintiffs alleged that Manfred falsely represented in public statements that “maintaining the integrity and honesty of the game of baseball was MLB’s most important priority” (Id. at 6). While Plaintiffs quoted Manfred to this effect, they failed to plausibly allege that these statements were false (Id.). First, this assertion is contradicted by the FACs description of various investigations and public disclosures the MLB did undertake (Id.). Moreover, accepting Plaintiff’s contention that defendants inadequately investigated player misconduct, such a fact is not inconsistent with a “commitment” to integrity (Id.).
Plaintiffs also argued that various statements made by Houston and Boston players and officials constituted misrepresentations (Id.). The Court found, however, that although the vast majority of these statements could be properly characterized as false, those statements were largely about the source of various players’ or teams’ success in a game — speculations of which could not be verifiable for their truth or falsity (Id.).
Nevertheless, the Court found that the FAC alleged a few statements made by each Defendant that were plausibly false (Id.). First, Plaintiffs alleged that Houston President of Baseball Operations and General Manger, Jeff Lehow, and Field Manager A.J. Hinch made false statements when they denied that Houston was involved in any sign stealing despite, according to the FAC, they knew of it when they made these statements (Id.). The Court noted a subsequent MLB report which confirmed Houston’s involvement in the sign stealing scandal, effectively implying Hinch and Lebow’s statements to be plausibly false (Id.).
Second, Plaintiffs pointed to one plausibly false statement by Manfred. After receiving a report that Houston sent an individual to an opponent’s dugout for purposes of sign-stealing, Manfred claimed to have performed a “thorough investigation” which concluded that Houston’s employee was monitoring the field to ensure the opposing club was not violating any rules (Id.). Plaintiffs reasoned that this investigation could not have been thorough because Houston was cleared of wrongdoing when it later became clear they were guilty. While “a bit of a stretch,” the Court found that Manfred’s statement regarding the aforementioned “thorough investigation” could have been false (Id.).
Finally, Plaintiffs plausibly alleged that Houston and Boston made false statements when they represented they would adhere to the MLB’s rules and regulations when they agreed to the Major League Baseball Constitution, pursuant to which all teams agree to be bound by all [the] rules and regulations relating to [MLB] games (Id.). While finding this claim to be a “stretch,” the Court conceded that the MLB’s findings that the Houston and Boston did not adhere to these rules using electronic sign stealing, suggests that the representation of Houston and Boston in signing the MLB Constitution was, even then, plausibly false (Id.).
Rule 9(b) and Reliance: Despite showing at least one plausibly false statement by each of the Defendants, the Court found that such misrepresentations would not support Plaintiffs’ fraud claims as they failed to adequately allege their reasonable reliance on these particular statements for two reasons (Id. at 7).
First, Plaintiffs failed to allege reliance with the particularity as required by Rule 9(b) (Id.). The Court acknowledged that the Second Circuit had yet to rule on whether Rule 9(b)’s heightened pleading requirement applies to allegations of reliance in connection with a common law fraud claim, it agreed with the view that a plaintiff “must allege with particularity that it actually relied upon the [defendant’s] supposed misstatements” (Id.). The Court did so because Rule 9(b) states unequivocally that “a party must state with the particularity the circumstances constituting fraud,” and reliance is an essential element of what constitutes fraud (Id.).
Second, even setting aside Rule 9(b)’s heightened pleading requirements, the FAC’s generalized allegations were even more fundamentally flawed (Id.). Plaintiffs theory of reliance ultimately came down to the claim that but for Defendants’ supposed representations that “fantasy baseball contests were games of skill, the integrity of which defendants would ensure by ensuring the integrity of major league baseball,” they would not have entered DraftKings MLB DFS contests (Id.). However, as mentioned above, no such specific representations concerning fantasy baseball were mentioned in the FAC, and, absent such a misrepresentation, the Court ruled that Plaintiffs’ generalized theory of reliance failed (Id.).
Misrepresentation by Omission: Plaintiffs’ also asserted an alternative theory of fraud known as misrepresentation by omission. For that claim, a plaintiff must demonstrate a relationship between the plaintiff and the defendant that gives rise to a duty to disclose (Id.). Plaintiffs argued that Defendants deceived them by failing to disclose the existence of the sign stealing schemes — thereby rendering “the statistics on which the MLB DFS contests were based [as] illegitimate and unreliable (Id.). They cited Section 551 of the Second Restatement of Torts which, in relevant part, states:
“One who fails to disclose to another a fact that he knows may justifiably induce the other to act or refrain from acting in a business transaction is subject to the same liability to the other as though he had represented the nonexistence of the matter that he has failed to disclose, if, but only if, he is under a duty to the other to exercise reasonable care to disclose the matter in question” (Id. at 8).
The Court found §551 inapplicable for several reasons. First, the language of §551, on its face, applies only between “[o]ne party to a business transaction” and the “other” (Id.). Thus, §551 seems to impose a duty only in the context of a business transaction. Here, because Plaintiffs did not allege the existence of any transaction — or any other comparable business relationship — between themselves and Defendants, the Court found the Restatement inapplicable to impose such a disclosure duty on Defendants (Id.). (See also In re Rumsey Land Co., LLC, 944 F.3d 1259, 1273 (10th Cir. 2019). “The disclosure duties described in § 551(2)(a)-(e) apply only to ‘part[ies] to a business transaction.'”).
Plaintiffs then argued several meritless theories to overcome these shortcomings, including, inter alia, a joint venture theory where Plaintiffs acknowledged that the essential elements of a joint venture include “an agreement manifesting the intent of the parties to be associated as joint ventures’” and “a provision for the sharing of profits and losses” (Id.). The Court found the joint venture theory failed as its FAC did not allege the existence of either essential element (Id.).
Plaintiffs additionally argued that the Restatement does not require a transaction between the parties to impose a duty to disclose (Id.). While Plaintiffs cited a few cases that imposed a duty to disclose on a defendant indirectly involved in a transaction, the Court distinguished those cases because all involved defendants with a much closer relationship to the transaction than the transaction alleged here (Id.).
Ultimately, the Court found that Plaintiffs offered no basis for imposing a duty to disclose on the Defendants and, thus, they “failed to plead any actionable omission by the Defendants that could give rise to a fraudulent misrepresentation claim” (Id. at 9). Moreover, because Plaintiffs’ affirmative misrepresentation claims also failed (as explained above), the Court ruled that common law fraud claims must be dismissed (Id.).
Negligence: The Court next turned to Plaintiffs’ negligence claims, one of which closely resembled their fraudulent misrepresentation claims. That requires allegations of (1) a duty, (2) a breach of such duty, (3) causation, and (4) damages (Id.). The Court found that the negligent misrepresentation claims failed because Plaintiffs failed to allege the existence of any duty to disclose owed to them by Defendants nor any reliance on Defendants’ affirmative representations (Id.).
The remaining negligence claim also failed because Plaintiffs were not able to demonstrate that Defendants owed them a duty to take more action to prevent player misconduct related to the sign-stealing scheme as Plaintiffs’ relationship to Defendants were much more attenuated than those in the cited cases (Id.). Although the Second Circuit had yet to rule on that issue, the Court found the Defendants’ line of cases demonstrated, at a minimum, that finding a duty based on the much more attenuated relationship between fantasy baseball players and the defendants in this case is not supportable. It therefore dismissed the negligence claims (Id.).
Consumer Protection Laws: Next came the allegations that Defendants’ statements and actions violated the consumer protection laws of each state where Plaintiffs reside and the “substantially similar laws” of every other state (Id. at 10). However, Plaintiffs failed to state a claim under their respective state’s consumer protection statute because they were not able to satisfy the heightened pleading requirement of Rule 9(b) (as detailed above) which alone would have justified dismissing the claims, and because Plaintiffs failed to identify a sufficient nexus between the transaction that allegedly harmed them and the Defendants to support a consumer protection claim” (Id.). Specifically, “the asserted connection between defendants and the allegedly harmful transaction plaintiffs entered into — purchasing MLB DFS entry fees — is simply to attenuated support liability” (Id.).
The Court acknowledged that while Plaintiffs were correct that the consumer statutes do not require privity to impose liability, it does require plaintiffs to demonstrate some nexus between defendants and the transaction that allegedly caused plaintiffs harm (Id.). Courts that have imposed such liability based on these statutes in the absence of privity have required at least one and usually multiple non-trivial business relationships between plaintiff and defendant, or the defendant’s production of the good or service that was the basis of the transaction, or the defendant’s misrepresentation about the good that was the basis of the transaction, or the defendant’s substantial participation in the transaction that caused the plaintiff harm. Here, no such connection is present (Id. at 11). The Court therefore dismissed Plaintiffs’ consumer protection claims (Id.).
Unjust Enrichment: The final failed claim, unjust enrichment, requires a showing “that the defendant has at the plaintiff’s expense been enriched and unjustly so.” Such a defendant “is required to make restitution” (Id.). The problem was quite simple: “plaintiffs have failed to plausibly allege that the defendants were enriched at plaintiffs’ expense” (Id.).
Plaintiffs offered three theories. First was that the Defendants benefitted through a share of the DraftKings “enormous fantasy baseball fees” (Id.). However, Plaintiffs had not bothered “to explain what these alleged fees were, how they came at plaintiffs’ expense, or how they were purportedly shared between DraftKings and the Defendants” (Id.).
Theory number two was similarly deficient. Plaintiffs alleged that the Defendants were enriched by the “increase in the value of [MLB Defendants] equity investment in DraftKings” (Id.). Left out was the explanation as to how this supposed increase in value “can properly be characterized as coming at plaintiffs’ expense” (Id.).
The third failed theory was that the Defendants “benefitted substantially from the increased involvement in the game” that the Plaintiffs claim the “wagering engenders” (Id.). Yet, even “if such attenuated assertions of benefit could support plaintiffs’ unjust enrichment claims, plaintiffs fail to allege that they personally engaged in such increased baseball-related commerce such that the defendants’ benefit came at their expense” (Id. at 11/12). Those claims “must therefore be dismissed” (Id. at 12).
The Judgment
It was in the Clerk’s Judgment that the Court took the gloves off. It stated that “the connection between the alleged harm plaintiffs suffered and defendants’ conduct is simply too attenuated to support any of plaintiffs’ claims for relief. While the verbose, rhetorical, and largely conclusory complaint does manage to plausibly allege a few misrepresentations by defendants, these statements, which are unrelated to fantasy baseball, do not plausibly support plaintiffs’ claims of reliance.” The FAC also failed to provide a basis for imposing a duty of disclosure on the defendants (Olson, Judgment, Document #56, (4-7-20)). The Court dismissed the FAC with prejudice.
And Then
District Court cases end, but life goes on. Sixteen days after the District Court entered judgment in Olson, MLB announced that it had concluded its investigation into Boston’s sign-stealing escapade. Boston lost a second-round draft choice and video operator J.T. Watkins was suspended for a year without pay. Former manager Alex Cora had already been suspended for a year due to his role in Houston’s 2017 sign-stealing endeavors, (ESPN, Joon Lee, espn.com/mlb/story/ /id28654482/did-red-sox-get-easy (4-24-20)).
Houston had previously lost two first and two second round draft choices, was fined $5 million and their general manager and manager were each suspended for a year for their sign-stealing violations. Houston’s owner dismissed the general manager and the manager (nbcsports.com/2020/01/13mlbs-punishment-for-astros-was-both-harsh-and-not-harsh-enough (-13-20)). But what owner would not agree to such sanctions in return for a World Series victory?
Even more recently, DraftKings began trading publicly on April 24, 2020 after Diamond Eagle Acquisition shareholders approved a takeover. DraftKings will now trade under the symbol DKNG, and it is expected to have a market value of $3.3 billion at closing. Wall Street Journal, Katherine Sayre, “Vote Clears the Way for DraftKings IPO” (4-24-20). April has been a great month for DraftKings.
Conclusion
The FAC insisted that all of the teams knew about the cheating but did nothing. One can only imagine what the Dodgers would have done had they known that Houston and then Boston were cheating in the World Series. Mere silent acquiescence would not have been the response, however much the plaintiffs’ class action bar stood to gain by making that assertion.
Movaghar received his B.A. from UCLA and is a full time 3L student at Southwestern University School of Law in Los Angeles and is a fellow at the Biederman Institute’s Entertainment & the Arts Legal Clinic.
Birren is the former general counsel of the Oakland Raiders and is an adjunct professor of law at Southwestern.
The authors would like, once again, to thank Dave Stern, Esq, a partner at Blaney McMurty LLP, in Torontofor his continued assistance.
