On Tuesday of last week, Yahoo! Inc. (“Yahoo”) submitted an updated answer in the ongoing legal proceeding surrounding its botched billion-dollar 2014 March Madness sweepstakes. Yahoo’s recent filing includes new fraud and fraudulent inducement counterclaims against SCA Promotions, Inc. (“SCA”), a prize promotion and risk management company that initiated the lawsuit early last year.

How did Yahoo’s sweepstakes promotion lead to so much legal trouble, and why is Warren Buffett involved?

Battle of the $1 Billion March Madness Sweepstakes

In 2012, Yahoo sponsored a March Madness sweepstakes in which any participant who could correctly predict the winner of all 63 games in the NCAA Men’s Basketball Tournament would win a $5 million prize. Yahoo paid a fee to SCA, who agreed to pay out the full $5 million prize in the event of a winner.

Yahoo wanted to offer a similar promotion in 2014, except with a $1 billion prize. In December 2013, Yahoo and SCA signed a contract for the new sweepstakes, which required Yahoo to pay $11 million to SCA. Yahoo made an initial scheduled payment of $1.1 million soon after signing the contract.

The agreement also required SCA to obtain coverage from another underwriter, and SCA alleges that Yahoo wanted Warren Buffett’s company Berkshire Hathaway to provide that coverage and help promote the sweepstakes. Buffett and Berkshire’s quote to do this work, however, was purportedly higher than Yahoo was willing to pay.

In January 2014, Quicken Loans publicly announced that it was teaming up with Warren Buffet and Berkshire Hathaway to sponsor a “Billion Dollar Bracket Challenge” which, according to Yahoo, was essentially identical to Yahoo’s planned March Madness sweepstakes promotion. As such, Yahoo allegedly jettisoned its original plans, stopped communicating with SCA and worked out a deal with Quicken to be a part of the Billion Dollar Bracket Challenge.

SCA’s Breach of Contract Allegations

In January 2014, SCA brought suit against Yahoo in Dallas County court, alleging breach of contract and claiming that Yahoo owes SCA $9.9 million for repudiating their agreement (or in the alternative, $4.4 million in cancellation fees).

Yahoo removed the case to a federal district court in north Texas in March of the same year. In additional to a broad range of affirmative defenses, Yahoo’s original answer featured a number of counterclaims against SCA, including:

  • breach of contract;
  • breach of covenant of confidentiality;
  • breach of fiduciary duty;
  • negligent misrepresentation; and
  • misappropriation of trade secrets.

Yahoo’s New Fraud Allegations

Last Tuesday, Yahoo submitted an updated answer in response to the second amended complaint filed by SCA in May. Yahoo’s recent filing includes six new affirmative defenses (for a total of 22), as well as new counterclaims against SCA for alleged fraud and fraudulent inducement.

According to Yahoo, SCA represented that it would procure coverage for the full prize amount. Yahoo’s new counterclaims allege that SCA’s purported failure to procure adequate coverage delayed Yahoo’s ability to announce its own March Madness sweepstakes, which ultimately prevented Yahoo from launching its promotion before that of Berkshire Hathaway, Warren Buffett and Quicken Loans.

Tread Lightly When Sponsoring a Sweepstakes or Promotional Contest

As Yahoo’s latest predicament demonstrates, sponsoring a sweepstakes or promotional contest can come with a number of legal risks – sometimes before the applicable promotion even gets off of the ground. Sponsors should ensure that they have taken every precaution to conduct their contest or sweepstakes in accordance with applicable regulations and third-party agreements.