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The Gambling Wire: DraftKings AI Scrutiny Deepens With New Lawsuit

By jili tutorial · October 3, 2026

The Gambling Wire: DraftKings AI Scrutiny Deepens With New Lawsuit

The gambling landscape is facing a multi-front assault this week. DraftKings is hit with a proposed class action lawsuit over its alleged use of artificial intelligence to target vulnerable bettors, while FanDuel reveals details about personalized VIP marketing. Meanwhile, prediction markets are under fresh legal and tax scrutiny, a federal judge deals another blow to a tribal casino project, and Pennsylvania reports a significant rise in self-exclusion enrollments. This article provides a deeper look at each development, with context, explanations, and implications for the industry.

The Proposed Class Action Lawsuit

On September 24, 2024, a proposed class action lawsuit was filed against DraftKings in the U.S. District Court for the District of Massachusetts. The plaintiff, Daniel Vest, a customer from West Virginia, alleges that he received at least 70 promotional messages—including emails, texts, notifications, and other forms of communication—from DraftKings in a single month. Vest contends that DraftKings employed a machine-learning model to analyze customer betting records and predict how promotions would affect individual users’ eventual wins and losses. According to the lawsuit, DraftKings then used that model to identify customers most likely to lose money or leave the platform, and targeted those users with additional promotions and incentives to keep them betting.

Background: The New York Times Investigation

The lawsuit draws heavily on a September 2024 investigation by The New York Times, which reported that DraftKings had developed a sophisticated machine-learning model that used historical betting data to forecast each customer’s “promotional sensitivity.” The model allegedly allowed DraftKings to determine which customers would generate the most net losses after receiving bonuses or free bets. The Times investigation sparked immediate concern among regulators and consumer advocates, and this class action is the first major legal fallout.

Privacy Breach Allegations

At the heart of the lawsuit is a breach-of-contract claim rooted in DraftKings’ own privacy notices. The company’s privacy policy states that customer data “may be used to assess responsible play and to provide resources when potentially problematic behavior is identified.” Vest argues that DraftKings violated that commitment by using personal information “for the exact opposite purpose”—namely, to identify and exploit customers who are likely to generate additional losses. This allegation strikes at the core of the tension between data-driven marketing and responsible gambling obligations.

Regulatory Reactions in Massachusetts and Michigan

The New York Times report has already prompted reviews by gaming regulators in Massachusetts and Michigan. Both states are examining whether DraftKings’ use of AI to target heavy bettors violates state laws on deceptive practices, responsible gambling, or data privacy. The outcome of these reviews could lead to fines, operational restrictions, or new regulatory guidelines for all operators using AI in customer targeting.

Personalized VIP Marketing Under Fire: FanDuel’s Disclosure

The Bryce Harper Video Incident

FanDuel has come under fire after it was revealed that the company sent a personalized video from MLB star Bryce Harper to a customer who later entered treatment for gambling addiction. The video, described as a “token of appreciation” for customer loyalty, was one of approximately 30 personalized videos featuring athletes and entertainers that FanDuel sent to customers over the past two years, according to a September 24 letter to federal lawmakers from FanDuel SVP Cory Fox.

The incident drew sharp criticism from lawmakers and addiction experts, who question whether VIP managers use personalized relationships and incentives to encourage continued betting by high-value customers. Lawmakers have also urged Major League Baseball and the MLB Players Association to prohibit players from participating in such personalized gambling promotions.

FanDuel’s Response and Responsible Gaming Training

FanDuel has pushed back against the characterization of its VIP program as predatory. In its letter, the company stated that the videos were generally arranged through public services and were not intended to induce continued gambling. FanDuel also noted that its VIP managers are trained to identify signs of problem gambling and are instructed to intervene when behavior raises red flags. The company argues that personalized engagement can be part of a legitimate loyalty program, but the Harper video case has cast a long shadow over the practice.

The broader issue highlights the fine line between customer retention and exploitation, particularly when celebrities are used to create emotional bonds with gamblers.

Kalshi’s Preemption Battle in the Second Circuit

Arguments for Federal Exclusivity

Prediction-market platform Kalshi has filed an appeal with the U.S. Court of Appeals for the Second Circuit, seeking to overturn a Connecticut federal judge’s denial of its request to block state enforcement against its sports event contracts. In its September 30 filing, Kalshi goes beyond arguing that its sports contracts qualify as swaps under the Commodity Exchange Act (CEA). Instead, the company makes a broader preemption claim: that the CFTC’s exclusive jurisdiction extends to all agreements traded on a designated contract market (DCM), regardless of their classification as swaps. Kalshi also argues that the CEA “field-preempts” state regulation of on-DCM trading, meaning Congress intended to occupy the entire regulatory space, leaving no room for states to apply their own laws to contracts traded on federally regulated exchanges.

Counterarguments from Gaming Attorney Daniel Wallach

Gaming attorney Daniel Wallach has challenged Kalshi’s preemption framing. He argues that field-preemption analysis should focus on what the state law is actually targeting. In Connecticut’s case, the state’s enforcement action targets sports wagering specifically, not event contracts more broadly. Wallach contends that sports event contracts—while traded on a DCM—function as sports betting in practice, and states retain authority to regulate gambling within their borders. This legal battle could set a critical precedent for how state and federal authority intersect in the fast-growing prediction-market sector.

Implications for State Regulation

If Kalshi prevails, it could effectively shield all sports-related event contracts from state gambling laws, opening the door for nationwide operation without state-level licensing or oversight. A loss would affirm states’ rights to regulate these contracts as gambling, potentially fracturing the market and forcing platforms to navigate a patchwork of state rules.

Taxing Sports Event Contracts: A New Analysis

Current Tax Uncertainty

A new analysis from the Tax Law Center, published in Tax Notes, highlights the glaring absence of IRS guidance on how sports event contracts should be treated under the federal tax code. Unlike traditional sports betting, which is clearly classified as wagering, prediction-market contracts fall into a gray area. The IRS has not issued any specific rulings or regulations addressing these novel financial instruments.

Arguments for Treating Contracts as Wagers

The Tax Law Center’s analysis concludes that “the best reading of the code” is that sports event contracts should be treated as wagers, subject to the same federal rules as sports gambling. This would mean:

The authors argue that the economic substance of these contracts—betting on the outcome of a sporting event—aligns them with traditional gambling, regardless of the legal structure used.

Potential Impact on Prediction-Market Platforms

The analysis raises a potentially significant industry question: whether the federal wagering excise tax could fall on prediction-market platforms as operators of wagering pools, or on market makers and professional participants deemed to be accepting wagers. If imposed, this tax could fundamentally alter the economics of platforms like Kalshi and Polymarket. The authors called for immediate IRS guidance to resolve the uncertainty, as operators and participants currently have no clear tax obligations.

Statistics and Enrollment Increase

The Pennsylvania Gaming Control Board (PGCB) released its latest annual report, showing a notable rise in self-exclusion activity during fiscal year 2025-26. The state recorded 9,677 new enrollments, up from 8,197 in the prior year—an increase of about 18%. The PGCB handled approximately 14,200 total self-exclusion requests, including around 4,500 requests from individuals asking to be removed from the exclusion lists. Since the program’s inception, Pennsylvania has recorded 50,000 self-exclusion enrollments across its casino, video gaming terminal (VGT), online gaming, and fantasy contest programs. Currently, about 30,000 people are actively enrolled.

Context: Awareness vs. Prevalence

The 18% increase does not necessarily mean that problem gambling rose at the same rate. Higher enrollment can also reflect greater awareness and utilization of self-exclusion tools. Pennsylvania has invested in public education campaigns and simplified the enrollment process, which may have driven more people to take the step. Still, the sustained upward trend is a reminder of the ongoing challenge of gambling harm, particularly as online and mobile betting expands.

Tribal Gaming Setback: Scotts Valley Casino Injunction Denied

The Long-Running Dispute Over Vallejo Site

The Scotts Valley Band of Pomo Indians has suffered another legal setback in its quest to open a casino in Vallejo, California. U.S. District Judge Trevor McFadden denied the tribe’s request for a preliminary injunction that would have restored a favorable federal determination allowing gaming on the proposed site. The dispute dates back to 2016, when the tribe asked the Interior Department to take the Vallejo site into trust and determine its eligibility for gaming under the Indian Gaming Regulatory Act’s (IGRA) “restored-lands” exception.

Interior initially rejected the request, but a federal court later vacated that decision and remanded it. In January 2025, Interior reversed course and found the site eligible for gaming. The tribe moved forward, committing approximately $10 million to the project and opening a temporary casino in July 2026 with Class II bingo-style gaming devices. However, within days, Interior again reversed itself, concluding that the parcel did not qualify as restored lands. The tribe sought an injunction to block that second reversal.

Judge McFadden ruled on September 30 that the tribe failed to satisfy all four factors required for preliminary relief: likelihood of success on the merits, irreparable harm, balance of equities, and public interest. The decision was welcomed by the Yocha Dehe Wintun Nation, which had opposed the Scotts Valley casino. The ruling leaves Scotts Valley with few options; it could appeal or seek a new land-into-trust application under different legal arguments. The case highlights the complexity of tribal gaming law, especially the “restored-lands” exception, which requires tribes to show that the land was part of their original reservation or was acquired in connection with a restoration of their federal recognition.

Prediction Markets: Industry Debate and Regulatory Moves

G2E Criticism from Casino Leaders

At the Global Gaming Expo (G2E) in Las Vegas, prediction markets dominated conversation—but not in a positive way. Casino executives, regulators, tribal leaders, and the American Gaming Association (AGA) voiced strong criticism of sports event contracts, raising concerns about state oversight, taxation, and consumer protection. MGM Resorts CEO Bill Hornbuckle stated that the company had declined to enter the prediction-market sector, and Caesars CEO Tom Reeg expressed serious concerns about the lack of regulatory guardrails.

Federal Developments: CFTC Rulemakings and Investigations

Several key developments emerged from Washington, D.C.:

Commercial Expansion: CME, Kalshi, Polymarket, Novig

Despite the regulatory pressure, the industry continues to grow:

These moves show that despite the legal and regulatory headwinds, capital and innovation continue to flow into the prediction-market space.

Conclusion

This week’s developments illustrate a gambling industry under unprecedented scrutiny from multiple angles: class-action lawsuits over AI targeting, congressional investigations into insider trading, tax uncertainty, tribal gaming setbacks, and rising self-exclusion numbers. The central tension remains between innovation and regulation—a tension that will likely define the industry’s trajectory for years to come.