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Texas AG says daily fantasy sports are illegal gambling

DraftKings says it won’t budge; state’s next move unclear

“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 Attorney General Ken Paxton said.Getty Images/Getty

DraftKings Inc. on Tuesday said it won't pull out of Texas, despite a ruling from the state's attorney general that daily fantasy sports games violate state gambling laws, opening a new front in the industry's battle with regulators around the country.

Texas Attorney General Ken Paxton said the fees collected by fantasy sports companies mean that "a court would likely determine that participation in daily fantasy sports leagues is illegal gambling" in Texas.

"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," Paxton said in a news release.

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But Paxton demurred when asked whether he would seek to shut down fantasy sports companies.

His office's role "was to provide legal interpretation on existing Texas laws on illegal gambling and fantasy sports, and we cannot speculate on potential legal actions. We will allow the opinion to speak for itself," spokeswoman Katherine Wise said.

In a statement, DraftKings lawyer Randy Mastro said Paxton's ruling was "predicated on a fundamental misunderstanding" of daily fantasy sports.

"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," he said.

DraftKings' top rival, FanDuel Inc., of New York, also rejected Paxton's legal analysis but did not indicate if it would continue operating in the state. "Fantasy sports has always been a legal contest of skill in Texas," FanDuel lawyer John S. Kiernan said.

Regulators in Illinois, New York, Nevada, Vermont, and Maryland have also recently cast doubt on the legality of fantasy sports games.

In Nevada, DraftKings and others stopped offering their contests after the state's gambling regulator said the companies needed a license to continue doing business. In Illinois, the companies are still operating while challenging a legal opinion from that state's attorney general.

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The most pitched battle is in New York, where Attorney General Eric Schneiderman has gone to court, seeking to shut the companies down.

Massachusetts, in contrast, is developing regulations that would allow the games, with some restrictions.

In fantasy sports, contestants assemble fictional rosters of real-life athletes and amass points based on those players' on-field statistics. Prizes can top $1 million, and Texas is one of the industry's top 10 markets, said Chris Grove, an analyst for Eilers & Krejcik Gaming LLC.

The flurry of legal problems has slowed the growth of daily fantasy sports. Still, analysts expected players to spend about $3 billion on the contests in 2015, more than triple the amount spent the year before.

In many states, determining whether fantasy sports are legal hinges on questions of skill and chance. The companies argue their games are mostly governed by a player's skill in assembling rosters, not by the random twists of the actual sports contests.

But Texas law bans any bets that turn even partially on an element of chance, Paxton wrote. A legal exemption for prizes awarded to "the actual contestants in a bona fide contest for the determination of skill" does not apply to daily fantasy sports, he said.

Paxton also said that "traditional fantasy sports leagues" are generally legal under Texas law if the pot is split among the contestants without a third party collecting any money.

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Paxton faces his own troubles: He was indicted last year on securities fraud charges for allegedly soliciting investments without disclosing he was compensated. He pleaded not guilty and seeks dismissal of the charges.


Curt Woodward can be reached at curt.woodward@globe.com. Follow him on Twitter @curtwoodward.