Fantasy Becomes Reality: The Future for Daily Fantasy Sports in Texas

by | Jan 19, 2021 | Regulatory Risk Analysis and Compliance

Daily fantasy sports (DFS) has been one of the fastest-growing gambling verticals in the country since 2018, when the U.S. Supreme Court lifted the federal ban on sports betting, allowing states to decide for themselves whether to legalize sports betting.

DFS is similar to season-long fantasy sports, except boiled down to a single day or week and played against hundreds or thousands of other people. While season-long is often a social game along coworkers or friends with relatively small pots of money up for grabs, DFS players can win thousands—sometimes millions—of dollars.

History of daily fantasy sports in Texas

DFS started gaining popularity in Texas around 2014, when companies such as DraftKings and FanDuel raised hundreds of millions in investor funding and landed major marketing deals with ESPN and FOX Sports. The industry became controversial in 2015, when a DraftKings employee won $350,000 on FanDuel by using insider trading knowledge. This scandal grabbed the attention of many people, including Texas Attorney General Ken Paxton.

Are daily fantasy sports legal in Texas today?

According to Texas Attorney General Ken Paxton, no. In January 2016, Paxton issued an opinion that DFS is illegal gambling under Tex. Pen. Code § 47.02:

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.

Shortly after the opinion was released, DraftKings sued the attorney general in Dallas County district court seeking a declaratory judgment on whether DFS is legal in Texas. In 2018, DraftKings non-suited its claims and re-filed its lawsuit in Travis County (D-1-GN-18-001856), where it is still pending.

FanDuel, on the other hand, reached an agreement with the attorney general in which it would stop offering paid contests in Texas, and, in return, the attorney general would not pursue any legal action against FanDuel. In 2018, FanDuel notified Paxton that it would resume paid-entry DFS contests. Paxton’s office responded that “The State does not agree that you may engage in fantasy sports gambling” and that it would not object to FanDuel joining the DraftKings lawsuit as a plaintiff—which it did in August 2018.

Despite Paxton’s 2016 opinion that DFS constitutes illegal gambling, DraftKings, FanDuel, and other DFS sites currently accept players from Texas for real-money contests.

Will the Texas Legislature legalize daily fantasy sports in 2021?

It’s more likely than ever before. Texas legislators have unsuccessfully attempted to pass legislation concerning DFS for years. But with the state facing significant revenue shortfalls, 2021 may be the year that the Legislature finally passes a bill legalizing and regulating sports betting, including DFS.

Rep. Joe Moody (D-El Paso) has filed HB 393, which would make it legal to win prizes in DFS contests and season-long fantasy sports. Specifically, the bill amends the definition of a “bet” for purposes of gambling criminal offenses to exclude bets made in a “fantasy or simulated game or contest.” Moody and others sponsored an identical bill in 2019, which passed the House on a 116-26 vote but died in the Senate. In 2017, Rep. Richard Raymond (D-Laredo) filed a similar bill that was never given a vote on the House floor, and Sen. Lois Kolkhorst (R-Brenham) filed a version that was never heard in committee.

With no regulatory scheme or taxation plan proposed, HB 393 doesn’t really affect DFS on the industry side—and does not protect the companies running DFS games. Rather, Moody told the American-Statesman that he felt the bill is necessary to protect individuals from being prosecuted for entering a DFS contest. He acknowledged that he was not aware of any Texan being prosecuted for fantasy sports gambling.

How could Texas legalize daily fantasy sports?

HB 393 doesn’t do enough, but there is certainly interest in and momentum behind the legalization of sports betting in Texas. When drafting laws to regulate DFS and the fantasy sports marketplace, legislators will be faced with a myriad of issues, such as: (1) how to define fantasy sports; (2) how to determine whether fantasy sports contests constitute games of skill; (3) whether the state should charge fantasy sports operators a fixed licensing fee; (4) what public disclosures to require from fantasy sports companies; (5) whether to allow professional sports leagues to own shares of fantasy sports operators; (6) how to address gambling addiction; (7) how to determine the minimum age for fantasy sports contest eligibility; and (8) how to ensure that fantasy sports operators do not default on their prize payouts.

And perhaps most critically, legalizing DFS in Texas will likely require a constitutional amendment, or at least a state referendum vote. Article 3, Section 47 of the Texas Constitution requires the Legislature to pass laws prohibiting “lotteries and gift enterprises,” with exceptions for charitable bingo, charitable raffles, and the state-operated lottery.

June 3, 3021 update:
HB 393, which would have made it legal to win prizes in daily fantasy sports contests and season-long fantasy sports, was reported favorably out of committee but did not receive a floor vote.  

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