Fantasy sports industry declared illegal in Texas

The fast-growing, multi-billion dollar fantasy sports industry, which is dominated by DraftKings and FanDuel, has come under scrutiny and was declared illegal in Texas yesterday, marking the latest US state to challenge the legality of such online contests. Online operators' claims that they can "operate as an unregulated house" do not "square with existing Texas law", said Texas Attorney General Ken Paxton. Texas, with its $1.6tn economy, is a significant market for daily fantasy companies, which charge customers to take part in mostly single-day games in which they draft a roster of players whose performance on the field earn points. The games are now illegal in Arizona, Iowa, Louisiana, Montana and Washington.

Texas Attorney General Ken Paxton declared daily fantasy sports illegal in his state Tuesday, putting more pressure on the embattled industry and leading sites DraftKings and FanDuel.

"It's my duty as Attorney General to look to the law, as passed by the people's representatives, to answer the questions put to this office," Paxton said in a statement. "Paid daily 'fantasy sports' operators claim they can legally operate as an unregulated house, but none of their arguments square with existing Texas law. Simply put, it is prohibited gambling in Texas if you bet on the performance of a participant in a sporting event and the house takes a cut.

Texas joins other states in saying that daily fantasy games are illegal. Matthew Emmons/USA TODAY Sports

"These sites are also wrong in claiming an actual-contestant exception, which applies only to contestants in an actual skill or sporting event," Paxton added. "And unlike some other states, Texas law only requires 'partial chance' for something to be gambling; it does not require that chance predominate."

State representative Myra Crownover said in a statement that questions on the legality on daily fantasy sites prompted her to ask Paxton for an official ruling.

"Recent questions on the legality of DraftKings and FanDuel prompted me to ask the Attorney General to look into these gaming sites. I requested this opinion to clarify the law. It is our responsibility to try to make sure no business is profiting from illegal activity in Texas," she said.

Paxton's opinion also makes a distinction between daily fantasy and traditional season-long fantasy games, saying, as a general rule, that season-long fantasy is legal.

Attorneys general in three of the five most populated states -- Texas, New York and Illinois -- have issued recent opinions that daily fantasy is illegal. Paxton joins attorney generals in New York, Illinois and Vermont to rule that daily fantasy sports violate state gambling laws. Nevada is requiring a gambling license to operate daily fantasy sports, and several other states are taking a look at the industry.

Earlier this month, an appellate panel granted a stay to DraftKings and FanDuel in New York that would allow them to take business from residents in the state. The New York case brought by Attorney General Eric Schneiderman not only seeks to make daily fantasy illegal in the state, but also seeks to return money to players within the state who lost money on the sites. In May, DraftKings and FanDuel will have a chance to appeal the original interpretation that went against them in the New York Supreme Court.

"We strongly disagree with the Attorney General's prediction about what the courts may or may not do if ever presented with the issue of whether daily fantasy sports are legal under Texas law," DraftKings said in a statement. "The Texas Legislature has expressly authorized games of skill, and daily fantasy sports are a game of skill. The Attorney General's prediction is predicated on a fundamental misunderstanding of DFS. We intend to continue to operate openly and transparently in Texas, so that the millions of Texans who are fantasy sports fans can continue to enjoy the contests they love."

FanDuel echoed that sentiment in its own statement.

"Today's advisory opinion by the Attorney General of Texas is founded on a misinterpretation of the law and misunderstanding of the facts about fantasy sports," attorney John S. Kiernan said. "Fantasy sports has always been a legal contest of skill in Texas. The Texas legislature has expressly recognized that payment of an entry fee to compete for prizes in a contest of skill is not illegal gambling. Texans have long enjoyed participating legally in a wide variety of contests on that basis. The Attorney General's advisory prediction that a Texas court might think fantasy sports fall outside that protection because fantasy sports contestants are not actually participating in the sports events disregards that the selection of a fantasy roster to compete against other contestants' selections is a separate valid contest of skill all its own."

Several states, including New York, have introduced legislation to regulate daily fantasy sports.

The Fantasy Sports Trade Association is holding its winter meeting this week in Dallas. Mark Cuban, owner of the Dallas Mavericks, is the keynote speaker.

.@KenPaxtonTX what a disappointment re DFS You certainly don't represent the views of Texans. — Mark Cuban (@mcuban) January 19, 2016

"If Attorney General Paxton is truly concerned about the small businesses that operate in Texas and the millions of people in Texas who enjoy fantasy sports, he would stop grandstanding and start working with the FSTA and the Texas Legislature on common sense consumer protection issues like those being proposed in Massachusetts, Florida, Indiana, Illinois, California and other forward-looking states," the FSTA said in a statement. "Paxton's deliberate misinterpretation of existing Texas law represents the type of governmental overreach that he himself professes to reject. The FSTA vehemently opposes today's opinion."

The Texas ruling also comes after a Dallas Morning News report last week that said records show that for months, Texas Lottery Commission executive director Gary Grief pursued a deal with DraftKings so that the commission could offer fantasy sports games.

The newspaper based its report on more than 400 emails, including communications with fantasy sports lobbyists, that it reviewed.

Commission chairman Winston Krause said Grief explored the matter at the urging of a lawmaker, whose identity Krause said he couldn't remember.

Grief said in a written statement that he would say only that the commission had stopped its efforts. He declined requests by the Morning News for an interview and didn't respond to an email from The Associated Press late Friday.

Information from The Associated Press was used in this report.