Texas Daily Fantasy Sports Gambling Opinion From AG
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Legal Sports Report

Texas Attorney General Concludes Daily Fantasy Sports Is Gambling: Answers And Analysis

Texas
The future of daily fantasy sports in Texas is uncertain following an opinion Tuesday from state Attorney General Ken Paxton that DFS constitutes gambling for the purposes of state law.

Below is a list of commonly asked questions regarding the development, last updated January 18, 2016.

Key links

What does the opinion assert?

Below are a few of the critical points of the opinion, excerpted for brevity’s sake. The full opinion is here.

Playing a typical DFS product for real money is likely gambling under Texas law

Under section 47.02 of the Penal Code, a person commits an offense if he or she makes a bet on the partial or final result of a game or contest or on the performance of a participant in a game or contest. Because the outcome of games in daily fantasy sports leagues depends partially on chance, an individual’s payment of a fee to participate in such activities is a bet. Accordingly, a court would likely determine that participation in daily fantasy sports leagues is illegal gambling ‘under section 47.02 of the Penal Code.

DFS players are wagering on player performances – not the DFS contest itself

While Texas courts have yet to address the actual-contestant exclusion from the definition of “bet,” this office addressed that matter in 1994 […] We noted that the Practice Commentary to the statute indicated the actual-contestant exclusion “is intended to exclude only awards and compensation earned by direct participation in the contest-the pole-vaulter’s cup, the pro football player’s salary-not the receipt of a wager made on its outcome.” We concluded that, although the “exclusion may embrace athletes actually competing in the sporting events you refer to, it does not embrace those who pay entry fees for a chance to win a prize from forecasting the outcome of the events.”

Commercial season-long fantasy not protected

The same framework applies to traditional fantasy sports leagues, but the outcome may differ depending on whether the house takes a rake. Payment of a fee to participate in the league constitutes an agreement to win or lose something of value, and the outcome depends at least partially on chance, thus involving a bet.

DFS involves a measurable amount of chance

It is beyond reasonable dispute that daily fantasy leagues involve an element of chance regarding how a selected player will perform on game day. The participant’s skill in selecting a particular player for his team has no impact on the performance of the player or the outcome of the game.

Additional points of interest

  • Unlike NY, NV, and IL, the Texas AG did not specifically request that DFS operators exit the state.
  • The opinion focuses on the legality of playing daily fantasy sports, and references the law surrounding the operation of such games only once – in a footnote (“Likewise, entities that promote daily fantasy sports league gambling could possibly violate section 47.03 of the Penal Code by operating a gambling place or becoming a custodian of a bet.”)

Read a copy of the opinion here.

Are daily fantasy sports sites leaving Texas?

The opinion has not caused any departures as of this article.

DraftKings indicated in a statement following the opinion that they would continue to serve Texas.

StarsDraft and Star Fantasy Leagues had already left the Texas market prior to the AG’s opinion.

What happens next?

While the nature of the Texas AG’s opinion is slightly different than opinions offered in IL, NY, and NV, the next phase of the situation is likely to converge on a similar point regardless: a court battle paired with some type of legislative initiative.

The reaction (or lack thereof) by the Texas AG to the decision by operators to stay in the state post-opinion will be the next key pivot point for the future of DFS in Texas.

How likely is legislative movement on DFS in Texas?

While there have been preliminary attempts to introduce DFS legislation in Texas, movement in 2016 is highly unlikely – the legislature does not reconvene until January 2017.

What is the law regarding gambling in Texas?

You can review the Texas penal code regarding gambling here. Gambling is defined in 47.02:

Sec. 47.02. GAMBLING. (a) A person commits an offense if he:

(1) makes a bet on the partial or final result of a game or contest or on the performance of a participant in a game or contest;

(2) makes a bet on the result of any political nomination, appointment, or election or on the degree of success of any nominee, appointee, or candidate; or

(3) plays and bets for money or other thing of value at any game played with cards, dice, balls, or any other gambling device.

Certain exceptions follow the definition. Gambling as defined is a Class C misdemeanor. Additionally, 47.03 (Gambling Promotion) and 47.04 (Keeping a Gambling Place) represent Class A misdemeanor offenses.

Review the full code here.

Are there criminal implications stemming from the opinion?

As noted above, Texas does have criminal penalties that appear to be connected to both the operation and the patronage of an activity that the law defines as gambling.

With that said, the tone, tenor, and actual content of the opinion and press release did little to suggest that criminal prosecutions related to DFS are an immediate focus or priority of the Texas AG. That position could obviously differ in private and could evolve rapidly in any case.

And, of course, a state-level gambling violation could potentially set the stage for a federal charge.

How important is Texas to DFS operators?

Texas is obviously one of the largest markets by population, and is significant in terms of actual contribution to revenue as well.

According to research from Eilers & Krejcik Gaming, Texas accounted for roughly 300,000 unique paying players industry-wide in 2015, or roughly 8% of the total market in terms of active paying players.

The market is estimated to be a top 5 market in terms of revenue for both FanDuel and DraftKings.

How does this opinion impact DFS other states?

The opinion does not hold any direct force in other states.

But two related points are worth considering:

  1. The Texas opinion does refer repeatedly to the opinions from AGs in other states – suggesting that while said opinions carry no force in other states, they are framing the parameters of the discussion in a way that is unlikely to be favorable for DFS operators.
  2. The Texas opinion does speak to what I regard as the core issue in NY: whether players are wagering on the underlying performance of the athletes or on the DFS contest itself. Paxton landed squarely on the former, rejecting the notion that DFS players are “actual contestants.” It will likely take only a few more AGs – if even – expressing that opinion before a disastrous tipping point is reached for DFS, as legal logic for serving several markets rests on the premise that DFS players are “actual contestants.

What other states are addressing DFS?

Was there any indication this was going to happen?

There was no direct indication that the decision would come down one way or another, but some form of opinion on the matter from the Texas AG has been expected for several weeks.

A state representative first formally requested an opinion on the legality of DFS from Paxton’s office in November 2015. Additional background:

What pro sports partnerships do DFS sites have in Texas?

Several:

  • Dallas Mavericks – FanDuel.
  • Houston Rockets – DraftKings.
  • Dallas Cowboys – DraftKings.
  • Houston Texans – FanDuel.
  • Texas Rangers – DraftKings.
  • Houston Astros – DraftKings.

Additionally, Dallas Cowboys owner Jerry Jones is said to be an investor in DraftKings, and Mavericks owner Mark Cuban is a backer of a DFS analytics product.

Complete list of DFS pro sports partnerships here.

Statements from key players

DraftKings

DraftKings responded with this statement via Randy Mastro, counsel to DraftKings and Partner at Gibson, Dunn & Crutcher LLP:

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. 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

Via John S. Kiernan, counsel to FanDuel and Partner at Debevoise & Plimpton LLP:

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.  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.

FSTA

Via Peter Schoenke, Chairman, Fantasy Sports Trade Association.

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. 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.

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Chris Grove
- Chris is the publisher of LegalSportsReport.com and OnlinePokerReport.com. Grove also serves as a consultant to various stakeholders in the regulated market for online gambling in the United States.