Texas Attorney General Ken Paxton announced that the state reached a settlement with FanDuel that would have the daily fantasy sports operator leave the state on May 2.
The settlement comes about a month and a half after Paxton offered his formal opinion that DFS constitutes gambling under state law. The move takes one of the larger states for DFS out of play for FanDuel, which will operate in 41 states after the May deadline.
DraftKings appears ready to fight the attorney general in court on his assertion that DFS is illegal in Texas.
FanDuel and DraftKings have both left Mississippi and Hawaii recently after negative opinions in those states.
From a press release from the AG:
“I commend FanDuel for responsibly and pro-actively working with us to reach this settlement,” Attorney General Ken Paxton said. “This will spare both the company and the taxpayers of Texas the expense of an extensive lawsuit that I believe would only affirm what my office has already determined.”
Unlike some other states, Texas law only requires “partial chance” for something to be gambling; it does not require that chance predominate. Traditional fantasy sports leagues that are not operated by a third party for revenue are, as a general rule, legal under Texas law. In those leagues, participants generally split any pot amongst themselves, so there is no house that takes a cut.
FanDuel will continue to operate its free games in Texas, but will stop accepting paid contest entries on May 2. In return, the Office of the Attorney General agrees not to take any legal action against FanDuel in connection with the operation of its contests.
Before this announcement, it had been unclear what, if any, action Paxton might take regarding DFS.
The following email was sent to FanDuel users in Texas:
Dear Texas Fans:
We have some important news to share regarding our contests for users in Texas. As you may know, fantasy sports was founded in Texas more than four decades ago. In 2009, FanDuel was formed at Austin’s SXSW Interactive Festival, paving the way for millions of sports fans to play fantasy in a whole new way. We are proud of the business we’ve built, our ability to innovate fantasy sports and create a new product that fans love.
We believe FanDuel has always been legal in Texas and strongly disagree with the recent advisory opinion of the Attorney General, but understand that the laws surrounding fantasy sports require clarity. As such, we have worked with the Texas Attorney General to map out our plan to wind down our operations in Texas, suspending paid contests on May 1st. The Texas legislature will be in session in 2017 and we will work to pass legislation that protects fantasy sports and consumers so that we can bring our paid contests back to Texans as soon as possible.
In the meantime:
– Users will still be able to participate in free head to head challenges and leagues after May 1st.
– As has always been the case, users in Texas can withdraw their funds at anytime. Users can also play FanDuel when visiting other states in which FanDuel continues to operate paid-contests.
Please follow us at www.FantasySportsForAll.com and let your lawmakers know that you support fantasy sports. We have more than 20+ bills in state legislatures across the country that safeguard fantasy sports and provide consumer protections. It is our intent to work with the Texas legislature to pass a similar bill in 2017, when back in session. Your support will help ensure that all fantasy companies are able to continue to operate in Texas.
Thank you for your support,
The loss of the Texas market will be a blow to FanDuel’s bottom line. It is 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. It is believed to be one of the top five states in terms of revenue for FanDuel.
FanDuel has had deals with at least three pro franchises in Texas — the Dallas Mavericks (NBA), the San Antonio Spurs (NBA) and the Houston Texans (NFL).
How any of these deals might be impacted by FanDuel’s withdrawal is a matter of speculation for now; however, it seems unlikely that FanDuel would continue to be promoted by these teams given the current environment.
Legal Sports Report has made a request for comment from FanDuel about these team deals.
The statement was conspicuous in that only FanDuel was mentioned, not its main competitor, DraftKings.
After the announcement of the settlement, DraftKings’ plans became clear, as it began to challenge Paxton’s opinion regarding DFS legality. DraftKings counsel Randy Mastro offered this statement about its filing in Texas:
“DraftKings is working collaboratively with legislatures and Attorneys General across the country to put in place a regulatory framework for our contests with thoughtful and appropriate consumer protections. Even so, due to recent actions in Texas, the company has today taken the responsible and unavoidable step of seeking a declaratory judgement to bring clarity to its legal situation. We look forward to presenting evidence to demonstrate that Daily Fantasy Sports are skill-based games and perfectly legal under Texas law, certainly no less so than other kinds of skill-based contests. We are committed to ensuring that our fans can continue to enjoy the contests they love.”
The full filing can be seen here.
Earlier, it was evident that DraftKings was not working on its own settlement:
Texas Attorney General's office declines comment regarding any contact with DraftKings, after today's settlement w/ FanDuel.
— David Payne Purdum (@DavidPurdum) March 4, 2016
Both DraftKings and FanDuel are currently engaged in court battles over their legality in New York and Illinois. A variety of attorneys general have weighed in with opinions similar to Paxton’s, the latest coming this week in Georgia.
Of note: One of DraftKings’ investors is Legends Hospitality; Dallas Cowboys owner Jerry Jones is one of the owners of Legends.
The DraftKings relationship with the Cowboys — with which it also has a sponsorship deal — was alluded to in the filing, regarding where the case should reside:
And they further have implications for DraftKings’ existing business partnerships in Dallas County—including its partnership with the Dallas County-headquartered Dallas Cowboys—should DraftKings be forced to exit the state.
While legislative efforts are making progress in a variety of states — including reaching governors’ desks in Virginia and Indiana — Texas won’t be joining them, at least until 2017.
That’s because the legislature is not in session all year. So anyone hoping for the law to change regarding fantasy sports will have to wait awhile.
Interestingly, Texas had been on of the first states to float a DFS regulatory bill in the spring of 2015. That bill was only introduced, and gained no traction in the capitol.