A sign hangs on the wall in the reception area at Fanduel Inc.'s offices in Edinburgh, U.K., on Tuesday, Feb. 7, 2017. Photo: Chris Ratcliffe/Bloomberg

Reversing a lower court in a $1 billion lawsuit, a New York state appeals court on Thursday tossed out breach-of-fiduciary-duty claims lodged by FanDuel founders and former officers who claimed that certain "conflicted" directors undervalued the company when it merged with the bookmaker Paddy Power Betfair.

In an opinion that was tersely stated—especially when considering the complexity and stakes of the lawsuit—the Appellate Division, First Department court in Manhattan made two major rulings.

First, the court said that Scottish law, not New York law, governed the matter. And secondly, under Scottish law, the court said company directors generally owe fiduciary duties only to their corporation, not to shareholders, and, therefore, the fiduciary-duty claims of more than 130 former founders, officers, directors and employees of FanDuel must fail.

The intermediate appellate court also knocked down the plaintiffs' argument that the corporate "internal affairs doctrine," which directed which law should control, applied only to defendant directors who were at FanDuel when the billion-dollar-plus legal action was launched.

Instead, a five-justice panel ruled, the doctrine applied to all defendant directors who were at FanDuel when events transpired that gave rise to the lawsuit.

The decision from the panel was framed on Thursday by counsel to FanDuel and its board of directors as a powerful victory. In all, there were more than 15 defendants named in the lawsuit, including two private equity firms in addition to FanDuel and its directors. The more than 130 plaintiffs in the lawsuit had claimed in court arguments, according to defense counsel, and in an amended complaint that total damages could exceed $1 billion, or multiples more of that.

"This is a sweeping victory for our client which confirms that the transaction was fundamentally fair and the proceeds [from the 2018 merger] were appropriately distributed," said Mark Kirsch, a partner at King & Spalding in Manhattan who represents FanDuel and its board of directors. Matthew Biben, a fellow King & Spalding partner who has been FanDuel's longtime counsel, also helped to lead FanDuel's representation.

It appears that the plaintiffs, who have been fiercely litigating the suit since February 2020, may seek leave to appeal the First Department court's decision to New York state's highest court, the Court of Appeals, or find another route for challenging Thursday's ruling.