An Arbitration Fantasy in the World of Fantasy Sports: Plaintiffs Compelled to Arbitrate with Defendants They Did Not Enter into Arbitration Agreements With

An addendum to the old adage that “bad facts make bad law” may be in order, with the addendum to be: “the sheer size and manageability difficulties of complex class actions make bad law.”  In the fantasy sports multidistrict litigation pending in the United States District Court for the District of Massachusetts, the Court grossly exceeded the limits on arbitration law by compelling plaintiffs to arbitrate claims against parties they did not enter into arbitration agreements with.  The decision has been touted as following logically from existing arbitration law and as demonstrating a “tactical defense” and element of a “litigation strategy” for defendants.[1]  To the contrary, the decision is a dangerous, unsupported, and erroneous extension of arbitration law both because it is not supported by the caselaw it relies upon and more fundamentally, because it crosses the line into a deprivation of plaintiffs’ constitutional rights.

Background

The In re Daily Fantasy Sports Litigation MDL centralizes more than eighty individual and class actions for pretrial proceedings.  The defendants consist of DraftKings, Inc., FanDuel, LLC, and entities that provided payment-processing services to DraftKings and FanDuel.  The plaintiffs consist of players on the sites and the players’ family members who did not play but assert claims under various state gambling laws.  Some of the plaintiffs played on only one site but assert claims against the other site on the basis of an alleged conspiracy between the two sites, and these plaintiffs were referred to as “crossover plaintiffs.” 

The defendants all moved to compel arbitration.  For a player plaintiff who played on a particular site, that site moved to compel arbitration based on an arbitration provision in the terms for registering to play on the site.  For the crossover plaintiffs, players who asserted claims against a site but had not played on that site and therefore had not entered into an arbitration agreement with that site, DraftKings and FanDuel moved to compel arbitration with them based on an argument that their claims were intertwined with the other claims subject to an arbitration agreement.  Similarly, despite the lack of an arbitration agreement between any plaintiff and any payment-processing defendant, the payment-processing defendants moved to compel arbitration based on an argument that the claims against them were intertwined with the claims against DraftKings and FanDuel.

The District Court found that all of the player plaintiffs’ claims against DraftKings, FanDuel, and the payment-processing defendants were “intertwined” so the player plaintiffs were equitably estopped from refusing to arbitrate any of their claims.  In doing so, the Court acknowledged that arbitration is contractual and there was no arbitration agreement for the crossover claims.  However, the Court found that there are circumstances where a plaintiff can be required to arbitrate a claim despite the lack of a contract with the defendant where the claims against that defendant are “intertwined” with claims that are subject to an arbitration agreement.

The Court stated that this is a “species of equitable estoppel” whereby “under the unique facts of the case at hand, it would be inequitable to allow the party not contractually bound to arbitrate to avoid participation in an arbitration in which the issues and interests of both the bound are unbound parties are affected.”  The Court found that the claims were intertwined because they were the same claim (i.e., the same civil conspiracy claim against the two parties with one subject to an arbitration agreement and the other not).

The Decision Doesn’t Follow Precedent

While true that courts have, in very limited circumstances, compelled arbitration with a non-signatory, the Daily Fantasy Sports decision goes far beyond the law recognized in those decisions.[2] 

The Court relied on First Circuit, Second Circuit, and Massachusetts Supreme Court opinions, but those opinions do not support the Daily Fantasy Sports outcome.  In the first decision relied upon, Sourcing Unlimited, Inc. v. Asimco Intern., Inc., 526 F.3d 38 (1st Cir. 2008), the non-signatory entity that the plaintiff sued was a subsidiary of the parent corporate entity that the plaintiff entered into the arbitration agreement with.  The Sourcing Unlimited Court held the plaintiff was compelled to arbitrate the claims against the non-signatory entity.  However, the court only arrived at that result because of the relationship between the signatory and non-signatory entities and because the claims the plaintiff refused to arbitrate with the non-signatory were claims that “essentially arise from the terms of” and “either directly or indirectly invoke the terms of” the contract at issue.  Therefore, the Sourcing Unlimited decision was a special set of circumstances and does not support the Daily Fantasy Sports result.

In the second decision relied upon, Thomson-CSF, S.A. v. American Arbitration Ass’n, 64 F.3d 773 (2d Cir. 1995), a supplier entered into an agreement with a distributor for the exclusive purchase and supply of a component.  A new parent entity then purchased the supplier.  At the time the new parent entity began contemplating the purchase of the supplier, the distributor informed the new parent that the distributor would hold the new parent to the exclusive supply portion of the contract requiring it to sell the component only to the distributor.  The new parent entity asserted it was not bound by the agreement, and the distributor filed a demand for arbitration against the supplier and the new parent entity.  The new parent entity filed suit seeking a declaration that it was not bound by the agreement, and in response, the distributor filed a motion to compel arbitration.  While the trial court granted the distributor’s motion to compel arbitration based on the new parent voluntarily becoming an affiliate of the supplier, on the degree of control the parent exercised over the supplier, and on the interrelatedness of the issues, the Second Circuit reversed holding that there was no relationship sufficient to compel the non-signatory new parent to arbitrate.  The Second Circuit recognized that non-signatories can be compelled to arbitrate, but only in the limited circumstances where “dictated by the ordinary principles of contract and agency.”  The Second Circuit recognized five theories for binding non-signatories to arbitration agreements, all of which “arise out of common law principles of contract and agency law” and which consist of “1) incorporation by reference; 2) assumption; 3) agency; 4) veil-piercing/alter ego; and 5) estoppel.”  The Second Circuit held none of those five theories applied.  As to the estoppel theory, the Second Circuit found it inapplicable because estoppel requires that the party to be bound have derived a direct benefit from the contract and the new parent entity did not derive any direct benefit from the contract.  The Second Circuit also found the estoppel theory inapplicable because estoppel requires that the claims to be arbitrated are “integrally related to the contract containing the arbitration clause” whereas the claims against the new parent entity were not integrally related.  In arriving at that result, the Second Circuit expressly rejected the position that claims with a non-signatory being intertwined with claims with a signatory is sufficient to compel the non-signatory to arbitrate.  In doing so, the Court emphasized: “Arbitration is strictly a matter of contract; if the parties have not agreed to arbitrate, the courts have no authority to mandate that they do so.”  Therefore, in the Thomson-CSF decision the Second Circuit explicitly rejected the Daily Fantasy Sports’ Court’s rationale for compelling arbitration.

Finally, in the third decision relied upon, Sokol Holdings, Inc. v. BMB Munai, Inc., 542 F.3d 354 (2d Cir. 2008), the plaintiff entered into a contract to purchase a majority shareholder’s interest in an oil and gas company.  The agreement to purchase the shareholder’s interest provided for the arbitration of all disputes.  The plaintiff sued a corporation and its officers and directors that the plaintiff alleged tortuously interfered with the plaintiff’s contract to purchase the majority interest.  The defendants moved to compel arbitration pursuant to the plaintiff’s contract with the shareholder and argued the plaintiff was estopped from refusing to arbitrate due to the claims being intertwined with the contract containing an arbitration provision.  The trial court and then the Second Circuit rejected the defendants’ argument due to the fact that “[i]t is black letter law that an obligation to arbitrate can be based only on consent.”[3]  The Second Circuit acknowledged the plaintiff’s claims were “intertwined” with the contract containing an arbitration provision because the plaintiff would have to prove the breach of that contract to prevail on its tortious interference claim.  The Second Circuit emphasized that “in addition to the ‘intertwined’ factual issues, there must be a relationship among the parties of a nature that justifies a conclusion that the party which agreed to arbitrate with another entity should estopped from denying an obligation to arbitrate a similar dispute with the adversary which is not a party to the arbitration agreement.”[4]  The Second Circuit held the estoppel basis for compelling a party to arbitrate with a nonsignatory requires that there be a relationship between the party, the signatory, and the nonsignatory such that the party would have known of the nonsignatory’s role in the transaction at the time the party entered into it and that it would be “unfair” for the party to claim that the arbitration agreement extended only to the signatory and not to the nonsignatory.  The Second Circuit also explained that its refusal to compel arbitration as resulting from the fact that compelling a party to arbitrate with a nonsignatory through estoppel is a finding the party consented to arbitrate with the nonsignatory, and absent a party’s consent, the party cannot be compelled to arbitrate.  Therefore, the Sokol decision by the Second Circuit also explicitly rejected the Daily Fantasy Sports rationale for compelling arbitration.

In both the Thomson-CSF and Sokol decisions, the Second Circuit held that much more is required to compel arbitration with a non-signatory than just claims intertwined with a contract containing an arbitration provision.  The Sourcing Unlimited decision recognizes the same law finding arbitration with a non-signatory required only because of the relationship between the parties and the nature of the claims as arising from the contract. 

Reliance on Potential for Duplicative Proceedings and Inconsistent Outcomes

The court also found that arbitration should be compelled as to the crossover claims because absent arbitration there would be “pointless duplication of proceedings” and “likely some risk of inconsistent outcomes.”  However, courts routinely acknowledge that arbitration can lead to duplicative proceedings and inconsistent outcomes but that these issues are not a basis for refusing to compel arbitration.[5]  Rather, courts acknowledge that the disfavored duplicative proceedings and inconsistent outcomes are accepted in exchange for the purported benefits of arbitration.  Therefore, the duplication of proceedings and risk of inconsistent outcomes is not a valid basis for compelling arbitration.

Constitutional Issues

Arbitration is a matter of contract.[6]  Through a contract, the parties agree to waive their constitutional rights to a jury trial and due process in a court of law and to have disputes set out in the contract decided in private arbitration.[7]  Parties only waive their constitutional rights to the extent set out in the contract.  Therefore, if a court compels a party to arbitrate a dispute that the party did not contractually agree to arbitrate, there is no legal basis for the court to do so and the court has violated the party’s constitutional rights to a jury trial and due process in a court of law. 

The result seems indisputable that were I to get into a car crash with someone I’ve never met before and never entered into a contract with, a court compelling me to arbitrate my claims against that person arising from the car crash would be an unconstitutional deprivation of my right to a jury trial and my right to due process.  Equally clear is that were I to enter into a contract with a builder to construct a home for me with a provision that claims arising from that construction were to be arbitrated (assuming I knowingly and voluntarily agreed to arbitrate, the agreement was not the result of fraud or unconscionability, and the agreement was otherwise a valid agreement to arbitrate), I would legally be required to arbitrate a claim that the builder failed to build the home as required by the contract.  Somewhere between these two cases is the line between the waiver of a constitutional right to arbitrate and an unconstitutional deprivation of jury trial and due process rights.

The Daily Fantasy Sports decision appears to cross the line and stray into the territory of unconstitutional deprivations of constitutional rights.  The crossover plaintiffs never contractually agreed to arbitrate any claims with the gambling site they did not play on.  Assuming equitable estoppel can serve as a constitutionally permissible extension of a contractual agreement to arbitrate, the Daily Fantasy Sports decision exceeds any potentially constitutionally acceptable version of equitable estoppel.  The crossover plaintiffs did not interact with the gambling site they did not play on, had no knowledge of any conspiracy or other relationship between FanDuel and DraftKings, and could not have foreseen that there would be any link between the terms of play on one gambling site and the other gambling site on which they did not play.

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[1] Melanie Conroy, District of Massachusetts Holds that Consumers with No Arbitration Agreements Must Arbitrate Their “Closely Intertwined” Class Action Claims, (Dec. 11, 2019), https://www.firstclassdefense.com/district-of-massachusetts-holds-consumers-with-no-arbitration-agreement-must-arbitrate/?_ga=2.170766432.1910665194.1577110023-235744224.1577110023.

[2] See Sunkist Soft Drinks, Inc. v. Sunkist Growers, Inc., 10 F.3d 752 (11th Cir. 1993); J.J. Ryan & Sons, Inc. v. Rhone Poulenc Textile, S.A., 863 F.2d 315 (4th Cir. 1988); McBro Planning & Dev. Co. v. Triangle Elec. Constr. Co., 741 F.2d 342 (7th Cir. 1984).

[3] Sokol, 542 F.3d at 358.

[4] Sokol., 542 F.3d at 359.

[5] See, e.g., Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 20 (1983) (“[T]he relevant federal law requires piecemeal resolution when necessary to give effect to an arbitration agreement.”); Reliance Ins. Co. v. Raybestos ProductsCo., 382 F.3d 676, 679–80 (7th Cir. 2004) (reversing district court’s refusal to compel arbitration due to risk of inconsistent results and duplicative proceedings because FAA contains no exception for such circumstances); In re Prudential Ins. Co. of America Sales Practice Litigation All Agent Actions, 133 F.3d 225, 234 (3d Cir. 1998) (“While we share the district court’s apprehension toward inconsistent results and inefficiencies caused by arbitration, we cannot frustrate the enforcement of the arbitration clause pursuant to the Federal Arbitration Act on the basis of this concern.”); Tai Ping Ins. Co. v. M/V Warschau, 731 F.2d 1141, 1145 (5th Cir. 1984) (“While [the party opposing arbitration] asserts that permitting the claim for indemnity to go foward in arbitration will produce “duplication of effort, redundant testimony, and the possibility of inconsistent findings,” we think that these are the risks that parties to an arbitration clause must be considered to have contemplated at the time they struck their bargain.”).

[6] See, e.g., American Exp. Co. v. Italian Colors Restaurant, 570 U.S. 228, 233 (2013) (“This text [of the FAA] reflects the overarching principle that arbitration is a matter of contract.”); Rent-a-Center, West, Inc. v. Jackson, 561 U.S. 63, 67 (2010) (“The FAA reflects the fundamental principle that arbitration is a matter of contract.”); First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995) (“[A]rbitration is simply a matter of contract between the parties; it is a way to resolve those disputes—but only those disputes—that the parties have agreed to submit to arbitration.”).

[7] Jean R. Sternlight, Rethinking the Constitutionality of the Supreme Court’s Preference for Binding Arbitration, 72 Tul. L. Rev. 1, 8 (1997).