Fantasy Baseball and the Sign-Stealing Scandal: Court Dismisses Class Action Lawsuit Brought By Fantasy Baseball Fans

• Posted on: Apr 17 2020

As baseball fans know, Major League Baseball (“MLB”) was rocked by the sign-stealing scandal involving the Houston Astros and, to a somewhat lesser extent, the Boston Red Sox. Not only did opposing players feel cheated by the Astros’ conduct – just ask any player on the Yankees how he feels about losing to the Astros in the playoffs, but so did the fans. Indeed, during spring training (before the league shutdown because of the COVID-19 pandemic), fans could be heard booing and jeering certain Astros for no reason other than their participation in the scandal.

Some fans found a different outlet for their anger – the courts. These fans, also participants in daily fantasy baseball contests hosted by DraftKings Inc. (“DraftKings”), sued Major League Baseball, MLB Advanced Media, L.P. (MLB’s marketing entity), the Houston Astros, LLC, and the Boston Red Sox Baseball Club, L.P., in connection their efforts to conceal the sign-stealing scandal from sports bettors who wagered on fantasy baseball. See Olson v. Major League Baseball et al., Case No. 20-cv-632 (JSR) (S.D.N.Y.) (here).

[Ed. Note: The scandal involved the use of cameras to relay the signs the opposing team’s catcher was giving to his pitcher by sending the signs to a player or coach situated behind the dugout. The recipient of the video would then convey the pitch to the batter. While sign-stealing is not itself illegal (after all, baserunners always try to steal the signs being given by the catcher so that they can convey them to the batter), MLB’s rules and regulations prohibit using electronic devices to view or convey information about the opposing team’s signs.

MLB officially determined and 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.]

In Olson, plaintiffs alleged that defendants knew of the sign-stealing scheme but did nothing to stop it in order to protect their financial interest and investment in DraftKings. Plaintiffs further alleged that defendants made various false statements and omissions designed to conceal the fact of the sign stealing in order to deceive plaintiffs into believing that DraftKings’s daily fantasy sports baseball (“MLB DFS”) competitions were a game of skill based on fair and legitimate player performance statistics. Such deception, plaintiffs claimed, was intended to induce them and other DraftKings players to play MLB DFS, which they would not have done had they “known that the honesty of the player performance statistics on which [their] wagers were based and the results of [their] wagers were determined was compromised by MLB teams’ and players’ electronic sign stealing.”

Plaintiffs brought a nationwide class action alleging fraud, negligence, and unjust enrichment, well as violations of state consumer protection statutes.

In a 32-page decision by Judge Jed Rakoff, the Court rejected plaintiffs’ claims that the league had committed fraud in addition to other torts. Judge Rakoff found that most of the allegedly false statements were not in fact false. And, as to the statements that might have been false or misleading, which, according to the Court, were close calls, Judge Rakoff found that plaintiffs failed to adequately allege that they relied on those statements when deciding to participate in the fantasy baseball competitions. 

A Closer Look at The Court’s Decision

As readers of this Blog know, to state a claim for common law fraud, a plaintiff must allege (1) a material misrepresentation or omission of fact; (2) that the defendant knew to be false; (3) that the defendant made with the intent to defraud; (4) upon which the plaintiff reasonably relied; and (5) that caused injury to the plaintiff. The failure to allege any of the foregoing elements will result in dismissal.

With regard to the falsity element, plaintiffs based their claims on defendants’ affirmative misrepresentations (i.e., misrepresentations about fantasy baseball and maintaining the integrity and honesty of the game), as well as defendants’ omissions (i.e., failing to disclose the existence of the sign-stealing schemes). Slip Op. at 16.

Affirmative Misrepresentations

Plaintiffs alleged that defendants, through public statements by MLB Commissioner Manfred, repeatedly misrepresented that defendants were committed to “making sure that appropriate safeguards were in place to insure that fantasy baseball wagering competitions were fair.” Id. at 11. “But these are the words of the complaint, not of Commisioner Manfred,” observed the Court. Id. at 9. The Court found that “plaintiffs fail[ed] to allege actual statements by Manfred that plausibly support the existence of such a misrepresentation.” Id. In fact, noted the Court, “the actual statements by Manfred particularized in the complaint [were] directed to his commitment to preventing gambling from impacting the integrity of live action baseball games and his concerns about whether fantasy organizations were properly self-regulating.” Id. at 9-10. “None of these statements,” concluded the Court, “plausibly indicate[d] defendants’ commitment to safeguarding fantasy baseball from MLB rules violations.” Id. at 10.

The Court rejected plaintiffs’ attempt to cure the foregoing deficiency by pointing to a statement defendants allegedly made that fantasy baseball is a “game of skill”. Id. “Even drawing all inferences in plaintiffs’ favor,” the Court held that “this statement cannot support [plaintiffs’] claim that the defendants repeatedly ‘promoted and induced participation in [fantasy] contests as games of skill.’” Id. (citation omitted). “Taken in context,” explained the Court, “the statement simply addresse[d] Manfred’s lay opinion that fantasy baseball contests qualify as “games of skill” under existing federal law relating to gambling.” Id. Thus, concluded the Court, “Plaintiffs have … failed to allege that the defendants made any misrepresentations about fantasy baseball contests themselves.” Id. at 10-11.

Plaintiffs also alleged that Manfred, on behalf of all defendants, falsely represented “that maintaining the integrity and honesty of the game of baseball was MLB’s most important priority.” Id. at 11. However, said the Court, plaintiffs failed “to plausibly allege that these statements were false.” Id. The Court explained that plaintiffs undermined the strength of their assertion by identifying various investigations undertaken by MLB. Id. “More importantly,” noted the Court, “even accepting as true plaintiffs’ contention that defendants inadequately investigated player misconduct, such a fact is not inconsistent with a ‘commitment’ to integrity.” Id. at 11-12.

The Court noted that plaintiffs did allege “a few particularized statements” that each defendant made “that are plausibly false.” Id. at 12. These misrepresentations included statements by (a) Astros President of Baseball Operations and General Manager, Jeff Luhnow, and Astros Field Manager A.J. Hinch denying that the Astros were involved in any sign stealing, even though, both allegedly knew of the sign stealing at the time they made the statements; (b) Manfred claiming to have performed a “thorough investigation” of reports that the Astros had sent an individual to take pictures of an opponent’s dugout for purposes of sign stealing, when it later became clear they were guilty of wrongdoing; and (c) the Red Sox and the Astros stating that they would adhere to MLB’s rules and regulations when they agreed to the Major League Baseball Constitution. Id. at 12-13. 

Though plaintiffs pleaded some falsity, albeit some of which Judge Rakoff considered to be “a bit of a stretch,” those misrepresentations could not support plaintiffs’ fraud claims because plaintiffs failed to adequately allege reasonable reliance on those statements. Id. at 14 (citing Ramiro Aviles v. S & P Glob., Inc., 380 F. Supp. 3d 221, 291 (S.D.N.Y. 2019) (plaintiff “must allege with particularity that it actually relied upon the [defendant’s] supposed misstatements”) (quoting In re Bear Stearns Companies, Inc. Sec., Derivative & ERISA Litig., 995 F. Supp. 2d 291, 312 (S.D.N.Y. 2014)). See also Fed. R. Civ. P. 9(b) (providing that “a party must state with particularity the circumstances constituting fraud”). The complaint did not “even allege that the plaintiffs ‘saw, read, or otherwise noticed’ any of the few actionable misrepresentations noted above, and thus completely fail[ed] to meet this standard,” said the Court. Id. at 15 (quoting In re Fyre Festival Litig., 399 F. Supp. 3d 203, 217 (S.D.N.Y. 2019) (finding that such a failure does not meet even the general pleading requirements of Fed. R. Civ. P. 8(a)).

Apart from the heightened pleading requirements, the Court found the “complaint’s generalized allegations of reliance” to be insufficient to support plaintiffs’ fraud claims. Slip Op. at 15-16. Plaintiffs claimed that they would not have entered DraftKings’ MLB DFS contests but for defendants’ representations that fantasy baseball contests were games of skill, the integrity of which defendants would ensure by protecting the integrity of major league baseball. The Court held this theory of reliance was divorced from the allegations in the complaint, noting that “no such specific representations concerning fantasy baseball [were] actually set forth in the complaint.” Id. at 16.  “Absent such a misrepresentation,” concluded the Court, “plaintiffs’ generalized theory of reliance must fall.” Id.

Misrepresentation by Omission

Under this theory, which plaintiffs asserted as an alternative to their theory of affirmative misrepresentations, plaintiffs claimed that they were deceived by defendants because they failed to disclose the existence of the sign-stealing scheme, thereby making “the statistics on which the MLB DFS contests were based … illegitimate and unreliable.” Id. at 16. The problem with this theory, said the Court, was plaintiffs’ failure to allege a duty to disclose the true facts. Id. at 16-17 (citing, inter alia, Adams v. Nissan N. Am., Inc., 395 F. Supp. 16 3d 838, 849 (S.D. Tex. 2018)). 

The Court rejected plaintiffs’ attempt to “manufacture such a theory”. Id. at 17. The Court explained that Section 551 of the Restatement of Torts, on which the theory was based, was inapplicable “on its face” because “it applie[d] only between “[o]ne party to a business transaction” and “the other.” Id. (noting “[t]he plain language of Section 551 thus appears to contemplate imposing a duty to disclose only in the context of a business transaction”) (citing 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.’”)). “Because plaintiffs have not alleged the existence of any transaction — or any other comparable business relationship — between themselves and the defendants,” concluded the Court, “the Restatement does not support imposing a duty to disclose here.” Id. at 18.

Aside from the foregoing, the Court found that there were no facts on which to base a finding that the relationship between the parties was so close as to warrant imposing a duty on defendants. Defendants did not make misrepresentations “specifically designed for the plaintiffs’ use in deciding whether to” participate in the DraftKings’ MLB DFS contests, instead, noted Judge Rakoff, “defendants made representations to the public at large unrelated to the fantasy baseball transaction plaintiffs entered.”  Id. at 18-19.

The Court also rejected plaintiffs’ attempt to demonstrate the existence of a duty through a purported joint venture between DraftKings (with whom plaintiffs had a relationship) and MLB. Id. Aside from not being pleaded, the theory failed because the essential elements of a joint venture were lacking. Id. at 18-19.

In sum, the Court held that plaintiffs failed to offer any “basis for imposing a duty to disclose on any of the defendants.” Id. at 21.  “As such,” continued the Court, “they have failed to plead any actionable omission by the defendants that could give rise to a fraudulent misrepresentation claim.” Id. “Because plaintiffs’ affirmative misrepresentation claims also fail,” concluded the Court, “plaintiffs’ common law fraud claims against all defendants must be dismissed.” Id. 

Takeaway

As this Blog has noted in previous posts, every element of a fraud claim must be satisfied to withstand a motion to dismiss. While many of our posts have focused on the reliance element of a fraud claim, Olson shows that plaintiffs can get tripped up on the falsity element as well. In Olson, this meant both affirmative misrepresentations and misrepresentations by omission. And, as to the latter, the Court’s decision illustrates the difficulty a plaintiff encounters in trying to establish a duty to disclose in the absence of statements by the defendant speaking directly to the plaintiff on the subject, a fiduciary relationship between the plaintiff and defendant, and “special facts” about the matter known to the defendant but not the plaintiff. [Ed. Note: This Blog wrote about the duty to disclose here.]

Because the Olson plaintiffs failed to state a claim upon which relief could be granted, the Court dismissed the complaint with prejudice, even though Judge Rakoff noted that a few of the identified “deficiencies might conceivably be cured by giving plaintiffs another chance to amend their already amended complaint.” It will be interesting to see if plaintiffs appeal the decision to the Second Circuit. As baseball fans, and students of fraud actions, this Blog will continue to monitor the action.