March Madness

Yahoo sued over Buffett's billion-dollar basketball bet

February 3, 2014: 4:53 PM ET

A small sweepstakes company in Dallas says the Internet company owes it $4.4 million for backing out of a contest that would have paid $1 billion to anyone who correctly picked the entire NCAA men's basketball tournament. Sound familiar?

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FORTUNE -- Warren Buffett may have gotten an assist in coming up with his billion-dollar basketball bet.

In mid-January, Quicken Loans, along with Warren Buffett, announced it would pay $1 billion to anyone who could correctly pick all of the winners in the NCAA men's basketball tournament -- 67 games in all. Yahoo, though, appears to have had the same idea, perhaps first.

According to a lawsuit filed on Friday, late last year, Yahoo (YHOO) signed a deal with Dallas-based sweepstakes company SCA Promotions to run an NCAA contest. The prize for that contest was also $1 billion for a perfect bracket. Quicken and Buffett beat Yahoo to the punch, announcing their contest first. Days later, according to the suit, Yahoo decided to cancel its own contest. But the sweepstakes company running Yahoo's contest says it is nonetheless still owed $4.4 million by the Internet giant. SCA sued Yahoo. Berkshire and Buffett are not named in the suit.

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Fortune.com and others have reported that Buffett hatched the idea of hosting a NCAA tournament contest with a prize on a tour of Detroit with Quicken's CEO Dan Gilbert. Buffett has said the idea for the contest was his, but Gilbert quickly signed on. Quicken is sponsoring the contest, but it bought an insurance contract from Buffett's Berkshire Hathaway (BRKA), meaning the insurance giant is actually on the hook if someone were to win the $1 billion payout, which is unlikely.

Fortune.com has also previously reported that Buffett first went to Yahoo with the idea, but was rebuffed. The lawsuit calls into question whether Buffett really had the idea first. It also sheds some light on what Quicken might have paid Berkshire to insure the $1 billion bet, which has not been disclosed.

Berkshire did not return an e-mail requesting comment. Yahoo declined to comment. SCA referred to its lawyer for comment. "Yahoo's position is that the idea did not come from Warren Buffett," says Jeffrey Tillotson, who declined to comment further.

According to a source with knowledge of the suit, Yahoo first went with the idea of the contest and a billion-dollar prize to SCA last year. SCA then turned to Berkshire to try to purchase an insurance contract to protect it from having to pay out $1 billion. According to the source, SCA and Berkshire couldn't agree on a price. Berkshire wanted more than SCA was willing to pay. (A side note: SCA Promotions president and founder Bob Hamman is an avid bridge player, as is Buffett, and the two have known each other for years, though it's not clear how well.) Instead, SCA found another insurance company to cover the prize and signed a deal with Yahoo in late December, charging the Internet company $11 million to run the contest.

SCA says Yahoo had the right to cancel the contest, but that, according to the contract, it still owes SCA half the fee. Yahoo has already paid SCA $1.1 million, which Yahoo has asked for back. SCA is seeking the remaining $4.4 million.

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A number of people have speculated on what Buffett might have charged Quicken to insure the $1 billion bet. The odds of randomly picking all the games of the NCAA tournament are 1 in 9.2 quintillion. That suggests that the price of the insurance should be around $0.01, because insuring against something with very small odds of happening should be relatively cheap. Others have put the likely price at around $1 million.

But the aborted Yahoo contest suggests that Berkshire was looking for a lot more than that, perhaps in the eight-figure area. It is possible Buffett did the deal with Quicken instead of Yahoo because Quicken was willing to pay a higher price for the insurance. Someone with knowledge of college basketball would have a much better shot of predicting all the games, though it is still a pretty long shot. Perhaps one in 1 billion. Buffett told Fortune he would put the odds at 20 million- to 50 million-to-one, which could be why he was seeking a higher price than others thought.

Still, it would be hard for Yahoo to claim Buffett stole its idea. Last year, Fox News offered $1 million for a perfect tournament bracket. Yahoo has offered prizes for the NCAA tournament in the past as well, as has ESPN. And Buffett has insured billion-dollar bets before. Back in 2000, Berkshire insured a contest for Grab.com that would have paid $1 billion to anyone who correctly predicted seven numbers between one and 77 that were later picked at random. No one won, which could be what inspired Buffett to try it again.

Update: An earlier version of this story said the winning numbers in the Grab.com contest that Berkshire insured were picked by a monkey. In fact, the numbers in that contest were picked by Grab.com, an Internet lottery company. Berkshire did insure a contest where the winning 6-digit number was determined by a dice-rolling monkey. That was for Pepsi and in 2003. That contest also had a potential top prize of $1 billion, which no one collected.

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