Esports Biz 101: Business & Legal Considerations for Professional Esports Organizations & Teams
By Justin M. Jacobson
Many new esports teams and organizations have joined the competitive circuit in the past 12 months. This is due to the continued global development of esports business as well as its expansion into newly created games and into existing games that were not previously part of this professional world.
Some of these organizations may only field a team in one game; while, other larger organizations, may field teams in multiple games. For example, an organization such as Optic Gaming or Cloud9 field teams in a variety of games; while, North only has a CS:GO team. Whether the organization is large or small, the legal and business considerations for their proper functioning are fairly similar. Proper adherence to these formalities is extremely important for the potential short-term success as well as long-term viability and profitability of any organization. While there are many relevant business and legal matters related to the management and ownership of a professional esports organization, the following is an overview of some of the most essential and relevant aspects.
- Business Entities
One of the primary business considerations for a team or organization is the formation of a business entity for the team. A business entity, such as a corporation or limited liability company (LLC), may be created by a team owner. The selection of which business entity to form is an initial crucial decision. Whether the team forms a C-Corporation, S-Corporation or LLC, typically depends on which state the entity will be formed in and the anticipated business structuring that the team envisions. For instance, a corporation in New York does not have the same costly publication requirement that an New York LLC has. This initial cost may be a consideration for a team when choosing which entity is most appropriate for their organization. Additionally, each state provides different tax treatment for the business entities as well as different statutory limitations on ownership of a particular entity. It is prudent to consult with a qualified professional, such as an attorney or accountant, when deciding which type of business entity and which state is proper for a particular team.
Another benefit that an entity provides to its owner is protecting their personal assets (i.e. cars, houses, stocks, bonds, securities, bank accounts, etc.) from any claims arising from any contracts or other arrangements. Essentially, if a sponsor, league organizer, or some other third-party creditor desires or has an existing claim against a team who had properly entered into the original agreement on behalf of the organization, the only recourse for that creditor would be against the team entity, not the individual owner or their personal assets.
While shielding an individual proprietor from personal liability is one of the most significant advantages of creating a limited liability entity, there are also several other important advantageous benefits that the entity provides that are necessary to successfully operating an esports organization. One is that having a separate corporate identity permits the team to open a corporate bank account in the business’ name. The business will receive an Employer Identification Number (EIN) also known as a Tax-Identification Number (Tax-Id). The existence of a business bank account also facilitates easier tracking of the organizational expenses and permits the deduction or “writing off” of relevant, properly documented business expenses. A valid business entity also permits the team to obtain proper business licenses and insurance so that they can operate efficiently and field potential investment offers.
Another benefit is that a limited liability entity typically is governed by a written contract (an operating agreement for an LLC or a shareholder agreement for a Corporation) that outlines how the entity will operate. This includes an outline of the split of any profits and losses among its owners. Also, these documents specify how any management decisions are addressed and how additional owners (and members) can be added or removed. This document provides the team with flexibility to potentially bring in outside investors.
These companies also provide easy management over any team owned intellectual property (i.e., team name, logo, photographs, audio-visual works, etc.) as well as any tangible property (e.g., computer equipment, property leases, streaming equipment). This is readily apparent due to the numerous organizations that currently have registered trademarks. These include “FNATIC” (U.S. Registration No. 4,677,398), “Evil Geniuses” (U.S. Registration No. 4,568,877 for the word mark and Registration No. 4,568,878 for the stylized logo), “Splyce” (U.S. Registration No. 5,250,213), “OpTic Gaming” (U.S. Registration No. 4,870,601), and, “Counter Logic Gaming” (U.S. Registration No. 4,417,823). It also provides the organization with a set, established entity to sign and bind the talent in an effort to create, stronger and enforceable agreements.
- Intellectual Property Protections – Trademarks & Copyrights
Another paramount consideration for a professional gaming organization is the protection of the team’s intellectual property, specifically its trademarks and copyrights. A trademark applies to a particular word, logo, slogan, phrase, smell, sound or a combination of these, used in relation to specific goods or services. This includes utilizing the team name as a “service” mark if a mark is used in connection with providing a particular service (e.g., participation in professional video game competitions ) or as a trademark for providing a particular good (e.g., clothing or other team merchandise or apparel). There are two separate trademarks in each organization name, the team name as well as the team’s logo. This is true, even if the logo already includes the organization’s name in it. Brand name protection is paramount.
Prior to selecting an organization name and establishing corresponding social media platforms it is prudent to first conduct a trademark search. A screening search is used to determine the availability of the name and to assess the existence of any other confusingly similar marks that may block the team’s application. Once a search is conducted and a name is cleared, a federal or state trademark application should then be filed with the appropriate state department or with the United States Patent and Trademark Office (“U.S.P.T.O.”). Additionally, if the team plans to expand into other geographic markets, international trademark considerations come into play, including utilizing the Madrid Protocol to enable U.S. entities to apply for protection in other countries based on an existing American application or registration.
A valid registration of an organization or team name provides the owner with the ability to actively police and prevent other individuals from “stealing” or otherwise impersonating an established organization. The registration also allows the filing of an infringement claim with various social media platforms, including Facebook, Twitter, Instagram and YouTube, to retrieve or block an infringing account. A trademark owner may also utilize a valid registration as a basis for filing an anti- cybersquatting claim with ICANN to retrieve an infringing website domain name.
Furthermore, an existing trademark registration permits the owner to contact the U.S. Customs Department and Border Patrol to prevent the importation of any infringing or counterfeit goods bearing the protected mark or any goods containing marks that are confusingly similar to a protected mark. An existing registration will also be beneficial for entering into licensing agreements with third-parties. This helps alleviate potential liability concerns when publicly distributing merchandise bearing the mark.
Finally, the ownership of a valid trademark registration could potentially be utilized to pursue sponsors or a tournament organizer for failure to pay an organization, which has become frustratingly common in today’s esport world. Past examples of this have been seen all over from France to Argentina. While this approach has not be used yet, it could potentially be argued that the team permitted or otherwise “licensed” the mark for use by sponsors or an organization in commerce for the advertising and promoting of the organization or sponsor. The failure by the entities to provide the negotiated for compensation could be tantamount to a breach; and, may even permit the owner to recover any damages they incur as a result of this breach. While this may seem far-fetched, a trademark registration may act as a weapon in a franchise’s arsenal.
In addition to potential trademark protection for an organization’s name, there are benefits to filing a copyright application for a particular logo as well as registering any other created content. While it is established that a copyright is automatically obtained in a work upon completion of the original work of authorship when it is fixed in a tangible medium of expression; a formal registration of the materials with the U.S. Copyright Office within three months of public release provides additional valuable benefits to the work’s owner. Registering a copyright is also a relatively inexpensive procedure. Some of these benefits include that the ownership of the work now becomes a matter of public record and is available for search within the U.S. Copyright Office. This makes it easy to search and verify the ownership and extent of an existing, copyrighted work. Registration permits an individual to quickly find and contact the creator in the event that the individual desires to use or license the copyrighted material.
Additionally, in order to bring a copyright infringement lawsuit when the owner believes that one of their works has been infringed upon, the work must be registered with the U.S. Copyright Office prior to instituting a lawsuit. A valid registration certificate constitutes prima facie evidence of valid copyright ownership in the work after five years. Also, if the owner has filed for registration prior to the infringement or within three months of publication of the work, the author may be entitled to recover actual damages incurred, statutory damages as well as attorney’s fees spent in pursuing the matter. These fees can even exceed the actual damages suffered by the copyright owner.
Registering a copyright is an easy and inexpensive procedure. Once the work is registered and the certification is issued, the benefits of the registration are retroactive to the original filing date of these elements. It is also important that if any third-party created or otherwise assisted in the creation of the logo or any other finished work, such as a graphic designer, that the individual assigns or otherwise licenses any rights that they have in the work to the organization. This is typically effectuated by some sort of “work for hire” agreement or other assignment.
Overall, these intellectual property protections are beneficial in pursuing any imposter or confusingly similar organizations as well as pursuing any third-party selling counterfeit goods or otherwise tarnishing the team’s reputation.
- Contractual Obligations
In order for a team to function properly, they require the proper infrastructure and personnel. To best protect the organization, the use of formalized written contracts for any of its employees and any other team personnel, including any gamers, coaches, assistance, analysts, graphic designers, is prudent. The agreement typically outlines the salary or other compensation to the personnel as well as lists the individual’s obligations to the organization. This could include a set number of streaming hours a player must adhere to, a set number of tournaments a coach must attend or any other listed requirements that the team wants to ensure are properly adhered to. For example, Blizzard’s new Overwatch League mandates the execution of standard written contracts with set salaries for all competing gamers.
An organization should also be aware of the requirements and existence of an agreement with any sponsor. For instance, a recent sponsorship agreement was entered between League of Legends’ team, Flyquest and Snickers. The arrangement requires Flyquest to ensure that the Snickers product is present at the “FlyQuest team house and at fan activations” as well as obligating the team to create a series of custom “branded” content pieces. While the exact number of monthly or weekly custom content pieces to be created as part of the partnership was not openly disclosed, such information would be clearly outlined in such writing. It is prudent for a team to ensure that all their “deliverables” to a brand are clearly outlined in some formal writing. With an explicit formal writing, the team can easily understand what is required of them, e.g. how many sponsored social media posts they must provide a month, and the brand is aware of what they are receiving in exchange for its sponsorship. This also helps by confirming the details of the sponsorship, including how much and if any product is included, and if so, which product.
Furthermore, entering into a formalized writing, such as an investment agreement, for any potential investor or third-party owner is practical. The drafting of such an agreement outlines the organization and the investor’s rights and duties, including listing the investment amount and how it is recouped. This is essential to the proper administration of the organization; as without it, there could be confusion as to what the investor’s rights are in the team as a result of their investment.
There are many legal and business considerations for professional esports organizations. While it is not mandatory for a team to adhere to these suggestions, the potential issues that the lack of proper rights in a team’s name or contractual obligations could be the difference between a successful venture and an unsuccessful one.
This article is not intended as legal or business advice, as an attorney or other professional specializing in the field should be consulted.
© 2018 The Jacobson Firm, P.C