December 15, 2016

The eSports Explosion: Legal Challenges and Opportunities

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eSports, or competitive video gaming, is exploding and already becoming a serious contender to “traditional” sports for millennials. This article will explain what eSports is and the legal challenges and opportunities that it faces.

What Is eSports?

eSports is the playing, and, just as importantly, the watching, of competitive video games. Its fundamentals are similar to “traditional” sports: skilled players compete against each other in live events, supported by passionate spectator fans and sponsors. eSports is growing fast: a recent estimate put 2015 revenue at around $325 million and the fan population at 256 million, due to grow to approximately $463 million revenue in 20161 and over 300 million fans in the next two to three years alone.2 By 2019, the global eSports market is predicted to grow to over $1.9 billion.3 The prizes are also growing fast: one of the largest eSports tournaments reached a prize pot of $18 million in 2015, with this year’s prize pool on target to top $20 million.4

In many ways, the rise of eSports echoes the growth of the wider video games industry out of which it was born, itself now said to be worth around $85–$90 billion and continuing to grow strongly.5 As with video games, the eSports audience is more likely to draw from the millennials audience compared to traditional sports and entertainment industries.6

Although there is considerable media buzz about it now, eSports is not actually a new phenomenon. There have been at least two previous waves of eSports: the first in the 1990s and the second in the early to mid-2000s. The first wave was built partly around Nintendo tournaments and one of the first great eSports games, StarCraft. The second wave was fueled by a range of factors, including the rise of modern PC and consoles games and the spread of high-speed broadband and game playing venues and events. But this current, third wave of eSports is by far the largest, most successful, and most sustainable.

Modern eSports

The modern eSports ecosystem is young, complex, and fast-growing, but essentially its constituent elements are: spectator fans; skilled players (i.e., the athletes of eSports); amateur and professional teams that focus on preferred video games; event/league organizers; games publishers (which actually create and distribute the video games that are used in eSports); broadcasters; and finally ancillary players such as advertisers, sponsors, and merchandisers.

It is important to bear in mind that “eSports” is an umbrella term for many different games, just like the term “sport.” The popularity of eSports games fluctuates over time, and there is no guarantee the top games of today will remain in place in two, five, or 10 years. That said, the most popular and/or successful eSports games at present include: League of Legends, Dota 2, Counter-Strike: Global Offensive, StarCraft II, and Hearthstone. New challenger titles are appearing often, such as Rocket League or Overwatch, from both established developer/publishers as well as newer entrants.

eSports is a global industry with significant fan populations in North America, Asia (especially South Korea and China), and the European Union (particularly Germany and the United Kingdom).

eSports Governance

One of the biggest, if not the biggest, questions for eSports at present is how best to build a durable governance structure that fits the unique features and circumstances of eSports. At present, this is nascent at best. There is no overarching pan-eSports governance structure and few real national organizations (though that is beginning to change7), which in turn complicates matters at a regional or international organizational level (one of the first bodies to appear was the International e-Sports Federation8).

There is a current trend toward league/broadcaster regulation, with Twitch, FACEIT, ELEAGUE, and ESL all becoming involved in the rollout of rules and regulations in relation to particular games and tournaments. ESL has become particularly active in the past year, with the cofounding of the World Esports Association (WESA)9 and the Esports Integrity Coalition (ESIC). WESA has commercial aims and also involves a co-ownership structure with founding eSports clubs for the first time. ESIC is a not-for-profit members’ association that states it will look at integrity issues such as match fixing, betting fraud, and doping.10 Both organizations have high ambitions, although it is fair to say that they are nascent and there is not universal agreement regarding them in the eSports industry.

On a national level, the United Kingdom, France, and Germany have all looked into eSports regulation in different ways. France recently passed a large body of reforms known as the Digital Republic bill, which includes eSports. The bill recognizes eSports as its own distinct entity (rather than as a “lottery scheme” under French gambling law); gives players “social status” so they are eligible for certain tax and social benefits systems; and requires minors to obtain parental consent to participate in tournaments.11 In Germany, meanwhile, it has been reported that the Berlin House of Representatives has recently decided that eSports should not be reclassified as a sport.12 The United Kingdom is looking into the eSports business and regulation.13

Meanwhile, individual eSports games tend to be regulated by the games publisher, albeit usually in a rather light touch manner, with the principal exception being the Riot Games’ League of Legends, which has the most advanced and prescriptive regulatory model of any eSport. The development of both national and international bodies and commercial businesses creating their own rule sets means it will be interesting to see how they fit in alongside the game publishers in the future.

Underlying this is the growing industry consensus that eSports need to be organized and governed better for the future in order for it to grow on a sustainable and long-term basis. Issues are arising to which the eSports industry does not yet have a good answer. There are concerns over a proper and sustainable environment for player/team relations. eSports still (very often) sees avoidable contractual and other legal issues between players and teams. From a more general integrity perspective, issues do occur from time to time of cheating, match fixing,14 and even doping.15 These issues happen relatively rarely, and certainly there is no empirical data regarding the extent to which they are a serious issue in eSports.

There is a lively debate within eSports regarding to what extent these matters need to be tackled better through regulation and, if so, when and by whom. There are proponents of pan-eSports regulation or guidance, as well as supporters of free-market development without outside interference. There are some who look to traditional sports governance, but there are as many who believe eSports needs its own model. There is no easy answer here, but eSports has entered into a period of regulatory experimentation. As discussed above, there have been moves toward pan-regional regulation, national regulation, eSport-specific regulation, and tournament-specific regulation, almost simultaneously. It is entirely unclear how these different approaches will mesh together, if at all. Time will tell.

Should There Be eSports Laws?

Although traditional sports are largely governed by internal self-regulation (policed by a combination of self-regulatory enforcement with ultimate recourse to local courts if necessary), there is a substantial body of law governing traditional sports, whether from statute, case law, or regulatory action. It is yet to be established how much of this will or should apply to eSports. For example, there are unresolved questions over if and how eSports may qualify for government grants, subsidies, tax reliefs, or even unique taxes, applied to traditional sports in many countries. Could eSports organizations qualify as charities? Could an eSport be admitted as an Olympic sport in the future? Should eSports player immigration require its own rules, or follow sports immigration rules?

There is an analogy here to the early days of the video games industry where—for want of a better legislative or judicial alternative—video games were for some time unsatisfactorily treated under existing laws as a type of film or as computer software or both16 (indeed, this is how most intellectual property (IP) statutes worldwide still view video games). For example, in the United Kingdom, video games are treated as “computer software,” whereas the United States and South Africa currently treat them as literary works and films, respectively. However, in practice the view is fast-growing that video games are separate works in themselves meriting their own legal treatment.17 Thus, with respect to eSports and traditional sports law, there will be common elements, but ultimately video games are sufficiently different to be assessed separately. Indeed, on a range of issues such as child protection, age ratings, and consumer affairs, it is video games regulation that provides the greatest assistance to eSports.

Commercial Issues

Another key challenge and opportunity for the growth of eSports is the evolution of its commercial practices. Historically this was a major stumbling block for eSports and it suffered as a result. Now there is substantially more money flowing into eSports than ever before, but nonetheless there is still a deficit in comparison with the heights reached by traditional sports.

Some of the key drivers of revenue for eSports are advertising, sponsorship, merchandise, live event revenues, and potentially publisher partnerships. In all of these areas, there is relatively little industry consistency on deal structures or terms. In principle, broadcast revenues could be a significant revenue driver (as in traditional sports), but historically there has been no meaningful “traditional broadcast” (i.e., to TV) of eSports until this year, all broadcast to date being effectively via digital platforms such as Twitch where it generally has been viewable for free by default. However, there is developing interest now by traditional broadcasters in eSports. The most notable eSports offering via traditional broadcast has been Turner’s ELEAGUE in the United States, with season one airing between May and July of this year.18 Recently, Turner commenced a new competition featuring up-and-coming eSports titled Overwatch.19 eSports broadcast is beginning to undergo a period of change and competition,20 but it is too early to tell yet what impact this may have from a commercial perspective.

There is a link here between eSports governance and the growth of eSports commercial opportunities. A frequently stated concern from existing and prospective eSports commercial partners, including big global brands, is that there needs to be a sufficient degree of commercial sophistication, IP protection, and reputation management before the partners are willing to make substantial investments into eSports. It will take time and improvements in the applicable eSports business and legal practices before a solution is found.

Intellectual Property

eSports raises a considerable number of important IP issues. Some of them are unique to eSports. For example, to what extent does a publisher’s ownership of a game give it legal control over the game’s exploitation as an eSport? Who owns the rights in an eSports tournament broadcast, bearing in mind the unique (and potentially conflicting) contributions made to it by the publisher, tournament organizer, broadcaster, producers, commentators, teams, and players? Some issues already exist elsewhere, but have yet to be clearly answered for eSports. For example, how (if at all) are eSports mechanics to be protected under copyright law? Are they patentable? What is the best trademark classification model for eSports, given its combination of video games, traditional sports, live events, and technology?

Historically, game publishers were considered the ultimate guardians of eSports created around their game because those publishers could use their IP rights and practical control over the relevant game to assert control. Whether their IP rights actually would work in that way if tested is an immensely complicated question that has not yet been reviewed or tested in any detail.

However, in practice this has been supplanted by a more straightforward contractual power over a publisher’s game. Nowadays, for the larger scale tournaments, contracts between the game publisher and the tournament organizer are becoming more commonplace, which at least partly sidesteps the IP rights issue. These contracts deal with legal points such as the licensing and use of the game intellectual property in eSports events, including how the events are run and marketed. Nonetheless, the question of what IP rights are held by the publisher and which are fragmented among other stakeholders including organizers, broadcasters, clubs, and players will make its presence felt as the industry matures.

Trademark protection is not common in eSports. For the few eSports businesses that have trademarks, there is a lack of consistency or industry practice regarding how, where, and in what classes these trademarks should be obtained. Indeed, given the newness of eSports and the already complex and overlapping nature of trademark classification across different systems, it is not clear what the natural or ideal specification should be. This will evolve fairly rapidly in the next few years, due to the competition between different businesses and the legal demands that will be made by investors and commercial partners, such as sponsors.

In traditional sports, image rights and other player-focused intellectual property is big business; for example, sportspeople Michael Jordan21 and Roger Federer22 have trademark arsenals. While some degree of image rights exploitation takes place in eSports, it is nothing like the level of traditional sports and is often controlled by clubs. It will be some time before eSports sees meaningful individual player sponsorship or endorsement where a player has taken control of and exploited his or her own IP and image rights. Image/publicity rights in eSports will highlight some unique issues. For example, no player has obtained a trademark registration for his or her gamer tag, which is the core of his or her identity as a professional player.

Patents are an area that has not yet been explored to any great degree in eSports, in particular for eSports mechanics in games or other technology. The complicated position of software patents around the world could make it complex, because they are permitted in some countries and not in others, quite apart from the cost and time required to obtain them from an eSports perspective. Any future patent applications for eSports software will likely then share the same challenges as those encountered by video games. It may be that some areas develop faster than others. For example, one area of eSports that may look to patent protection quicker than others may be companies focused on gambling, betting, and integrity solutions.23

As with IP issues in traditional sports, these are not dry matters of law. Considerable commercial opportunities and challenges for eSports businesses will depend on their IP law position. However, as with many legal matters, the average eSports business tends to be relatively unsophisticated in IP matters. This will change in the future as the landscape becomes more competitive. Although eSports has followed video games in being relatively free of litigation compared to other big creative industries, this may not stay the case in the future.

Labor Law

Another key consideration is how players, who are a key part of the foundations of eSports, should properly be represented and protected. Historically, this has been left to teams to manage (and, with a few notable exceptions,24 this remains the case), but eSports has seen several occasions where this has worked to players’ detriment. Discussions in the industry suggest that an inflection point is approaching: long-term growth can only be achieved if players are sufficiently motivated, supported, and remunerated; otherwise, it may cause systemic issues for eSports. (This applies not only to professional players but also to junior and amateur players.)

However, opinions are divided as to the solution. One solution is minimum eSports governance standards. Another solution is that eSports players should unionize, a view that seems particularly favored in the United States. Another solution is that player professionalization and education, potentially with the assistance of player agents, could go a long way toward alleviating or even solving the problem. Yet another solution is that as a general rule, players should be employees of the teams for which they play. Currently, the great majority of players are termed contractors. The true solution may be a combination of several of the above, with the exact mixture varying from region to region and/or game to game. Enforcement mechanisms needed to police them will also vary.

Gambling

In principle, eSports gambling, including betting and jackpots/lotteries, could be as popular, or at least as lucrative, in eSports as in traditional sports. However, commercial gambling services at scale remains largely untested in the eSports world. A number of operators were established, such as Vulcun and Unikrn, to explore this field. There is increasing interest from more established, mainstream gambling operators.

From a legal perspective, eSports gambling services are likely to be approached by gambling regulators as being subject to the same rules as for traditional sports gambling. For example, the restrictions on fantasy sports in many U.S. states and on actual online betting under the U.S. Unlawful Internet Gambling Enforcement Act would apply to eSports gambling services. Similarly, the gambling licensing regime in jurisdictions such as the United Kingdom would apply to eSports gambling services. Ultimately, real money eSports gambling will probably be regulated much like real money traditional sports gambling,25 but again there will be unique complications arising from the nature of eSports itself. From a more general perspective, some evolution will also be required regarding the display of gambling advertisements in eSports, particularly where children may be concerned.

“Skins gambling” and betting has also become a popular target during the last few months. Skins are virtual, vanity items available in eSports games such as Counter-Strike: Global Offensive (CS:GO). Third-party sites have appeared in the last few years allowing people to gamble and bet on eSports matches with them. A recent firestorm involving two people using YouTube who failed to disclose that they were owners of a skins gambling site they were promoting26 has seen increased scrutiny over these sites. This incident quickly elevated to CS:GO developer Valve releasing a statement that it would be shutting down these sites.27 The legality of these sites from a gambling perspective is a gray area, but it also invokes certain IP questions. Currently, virtual items are typically considered the intellectual property of the developer, with users given limited licenses for their use. Legal ownership of virtual items in video games has not yet been crystallized in statute or in court to any material degree, although there have been some near misses, for example with two possible cases broaching the issue being settled out of court.28 Interestingly, the grounds on which Valve required these sites to be shut down were for breach of applicable terms of service and not due to gambling or IP issues.

Conclusion

For a whole new generation, eSports is challenging (or even supplanting) traditional sports for viewing hours, long-term engagement, and monetization. However, there are a range of legal and business issues where eSports needs a more sophisticated approach. Sometimes this will involve learning lessons from video games and from traditional sports, but in other areas eSports will need to forge its own path. Above all, eSports needs to build its own governance structures if it is truly to realize its potential on a sustainable, long-term basis.

Endnotes

1. Global Esports Market Report: Revenues to Jump to $463M in 2016 as US Leads the Way, Newzoo (Jan. 25, 2016), https://newzoo.com/insights/articles/global-esports-market-report-revenues-to-jump-to-463-million-in-2016-as-us-leads-the-way/.

2. Dan Pearson, Report: eSports Revenues to Hit $465M in 2017, GamesIndustry.biz (Feb. 17, 2015), http://www.gamesindustry.biz/articles/2015-02-17-report-esports-revenues-to-hit-usd465m-in-2017.

3. John Gaudiosi, Global ESports Revenues to Surpass $1.9 Billion by 2018, Fortune (Oct. 28, 2015), http://fortune.com/2015/10/28/global-esports-revenues-nearing-2-billion/.

4. Robert DellaFave, The International 2016 Prize Pool Now Firmly on Pace to Trounce Old Record, eSports Betting Rep. (July 15, 2016), http://www.esportsbettingreport.com/dota-2-international-prize-pool-set-to-shatter-old-record/.

5. James Brightman, Games Software Revenues to Reach $110 Billion by 2018—DigiCapital, GamesIndustry.biz (May 4, 2015), http://www.gamesindustry.biz/articles/2015-05-04-games-software-revenues-to-reach-usd110-billion-by-2018-digi-capital.

6. Mitchell Chapman, The $1bn Industry: eSports, Sideqik (Mar. 9, 2016), http://www.sideqik.com/sideqik-infographics-together-marketing/the-new-1bn-industry-esports.

7. Disclosure: the author is legal counsel to the United Kingdom’s eSports association and drafting an advisory report on eSports for the British government.

8. Int’l e-Sports Fed’n, http://ie-sf.org/ (last visited Sept. 26, 2016).

9. World Esports Ass’n, http://www.wesa.gg/ (last visited Sept. 26, 2016).

10. Esport Integrity Coalition, http://www.esportsintegrity.com/ (last visited Sept. 26, 2016).

11. Chris O’Brien, French Government Announces Plans to Legalize and Regulate Esports Industry, VentureBeat (May 3, 2016), http://venturebeat.com/2016/05/03/french-government-announces-plans-to-legalize-and-regulate-esports-industry/.

12. Members House from Berlin, Scientific Services Parliament, Opinion on the Conditions and Effects of the Recognition of eSports as a Sport (Mar. 18, 2016), available at https://www.piratenfraktion-berlin.de/wp-content/uploads/2016/05/Gutachten_eSport_Sportart_WPD_AGH_Berlin_2016.pdf.

13. Disclosure: the authors together with the United Kingdom’s games industry association Ukie are advising the British government on these matters.

14. Richard Lewis, New Evidence Points to Match-Fixing at Highest Level of American Counter-Strike, Daily Dot (Jan. 16, 2015), http://www.dailydot.com/esports/match-fixing-counter-strike-ibuypower-netcode-guides.

15. Bryan Armen Graham, Anti-Doping in E-Sports: World’s Largest Gaming Organization Will Test for PEDs, Guardian (July 23, 2015), http://www.theguardian.com/technology/2015/jul/23/anti-doping-in-e-sports-worlds-largest-gaming-organization-will-test-for-peds.

16. See, e.g., Copyright, Designs and Patents Act, 1988, c. 48 (Eng.).

17. See Case C-355/12, Nintendo of Eur. GmbH v. PC Box Srl, ECLI:EU:C:2014:25 (Jan. 23, 2014).

18. ELEAGUE Season 1, Liquipedia Counter-Strike Wiki, http://wiki.teamliquid.net/counterstrike/Turner_Sports/ELEAGUE/Season_1 (last modified Aug. 31, 2016).

19. Overwatch Open, http://www.overwatchopen.com/ (last visited Sept. 26, 2016).

20. Todd Spangler, Turner, WME/IMG Form E-Sports League, with TBS to Air Live Events, Variety (Sept. 23, 2015), http://variety.com/2015/tv/news/turner-wme-img-esports-league-tbs-1201600921.

21. See Trademark Electronic Search System (TESS), U.S. Pat. & Trademark Off., http://tmsearch.uspto.gov/ (search “Michael Jordan” in the “Basic Word Mark Search (New User)”).

22. See Trademarks: Search Availability, European Union Intell. Prop. Off. (search “Roger Federer” in the “TMview” database).

23. Markus Gampp, Patents on Gaming and Gambling Technology—A Safe Bet?, Lexology (Oct. 24, 2014), http://www.lexology.com/library/detail.aspx?g=a9c3efbe-aa9e-4525-863b-7b7794634b9d.

24. Alex Walker, Riot Drops a Massive Banhammer on Three League of Legends Teams, Kotaku (May 9, 2016), http://www.kotaku.com.au/2016/05/riot-drops-a-massive-banhammer-on-three-league-of-legends-teams.

25. See The Rise and Rise of eSports: The Issues and Opportunities, 14 World Online Gambling L. Rep., no. 8, Aug. 2015.

26. Allegra Frank, Counter-Strike YouTubers Revealed as Owners of Gambling Site They Promoted, Polygon (July 4, 2016), http://www.polygon.com/2016/7/4/12093546/csgo-lotto-tmartn-syndicate-youtube-disclosure.

27. Erik Johnson, In-Game Item Trading Update, Steam (July 13, 2016), http://store.steampowered.com/news/22883/.

28. Inara Pey, Evans et al vs. Linden Lab—L$43 Million Settlement, Inara Pey: Living in a Modemworld (June 2013), https://modemworld.me/2013/06/30/evans-et-al-vs-linden-lab-l43-million-settlement.