Last week, I discussed why professional gaming teams should become businesses in order to secure sponsorships. With the staggering growth of eSports, online viewing of eSports competitions totaling 2.2 billion hours, and a dedicated gaming arena opening in Ohio, professional gaming is quickly becoming its own segment of the sports and entertainment industry. Although professional eSports teams may lack a traditional front office, there is room for a business adviser who secures sponsorships and other business opportunities for teams.
This business adviser would serve in a similar capacity to a sports agent for the team. Traditionally, sports agents represent individual professional athletes in negotiating their on-field contracts and securing endorsement agreements. However, as professional gaming is a tournament based league without individualized salaries, salary negotiation services and individual representation would be irrelevant.
Instead, a professional gaming sports agent would focus on sponsorships and other business opportunities for the team. An effective agent could leverage a team's substantial online presence (Twitter followers, YouTube subscribers, Twitch followers, etc.) to sponsors in return for sponsorships to provide products and financial support for the team. Such a tactic is not new for agents, as they have leveraged online followings for professional athletes and then-amateur athletes (see here) into sponsorships. Utilizing an agent would be in the best interest of eSports teams, as it leaves the players to focus on their sport while the agent secures much needed sponsorships to help get the team to additional tournaments.
The question then arises as to how agents would be paid. Normally, sports agents take a percentage of their players' salaries that they negotiated (generally 3-5%) and a higher percentage of any endorsements they secure (15-20%). However, that preexisting model does not fit professional gaming because players, or even teams, are not paid a salary. Additionally, many professional gaming sponsorships supply products, and not cash, which would be impossible to take a percentage of. Instead, agents would likely seek a percentage of tournament winnings in exchange for their services, as well as a percentage of any sponsorship money secured for the team.
Due to an agent's necessary reliance on tournament winnings and substantial online followings to be paid, teams that have yet to make a name for themselves in professional gaming may find it difficult to find an agent to represent them. It is important to remember, in both professional sports and e-sports, that agents do not establish a brand, but leverage an existing brand and shape it. An agent needs a foundation to leverage, and only the team itself can create that foundation.
Given the increase in popularity of eSports, and the money that is starting to flow through the industry, there is rising potential for a budding agent role for teams.
In the past few years, e-sports (playing video games competitively for profit) has seen staggering growth in the United States. This growth has largely been fueled by the development of a professional tournament association, the inclusion of e-sports in the X Games competitions, and at its core, technology which allows players to connect and compete in ways never previously possible.
Viewership of the e-sports tournaments is also extremely high. Last year, online viewers watched a total of 2.4 billion hours of competition footage. Live events have also sold well, prompting Major League Gaming (the preeminent e-sports tournament body) to establish an arena in Columbus, Ohio. As with the rapid rise of any industry segment, e-sports tournaments have received sponsorships from well-known brands such Coca Cola and American Express. Although the tournaments and their governing bodies have received substantial sponsorship income, teams have not had the same financial success.
Many teams are able to secure small sponsorships which supply products such as controllers and apparel. However, there is a lack of sponsorship dollars supplied to the teams, which may be what is needed most as the expenses of professional gaming can be high. One of the reasons that teams have difficulty securing sponsorships is due to their business organization, or rather the lack thereof.
For e-sports to develop into a true professional league, and for teams to see the sponsorship dollars they desire, teams will have to learn from the businesses of their MLB, NFL and NBA counterparts. Firstly, professional sports teams are business entities, not just a group of people who are acting together. This is extremely important because State law differs as to whether unincorporated associations can enter into contracts, and as to the rights of these associations as a whole. Further, choosing a business entity for the team simplifies the sponsorship process for the brand as it eliminates any question regarding whether the contract is enforceable.
The choice of what business entity to select is a trickier subject, and would have to be determined on a team by team basis. At this early stage of professional gaming, there is no "one size fits all" approach. Professional sports teams have Owners and front offices that handle the business end of the team while the players play. However, that wouldn't be the case at this stage of e-sports. Simply put, the players will also have to handle their team's business. That can become problematic in several situations, especially when team members are minors. Minors' business activities are restricted by State and Federal law, but State law may allow for some creative business-formation possibilities if there are team members over 18 who can start the business. For instance, some states allow minors to be shareholders in a business. Any team considering turning their team into a business should consult an attorney before doing so.
There are a myriad of reasons teams don't receive the sponsorships they desire, including the lack of a formalized business structure. If your team wants to be treated as a legitimate business, make sure your team is actually a business first.
Earlier today, I added a Media page to the website, where I will post videos and articles I am featured in. Currently, there are two videos and an article posted. Stay tuned for more, and also keep an eye on the blog for video posts.
Below is the most recent video, which you can find on the Media page. In the video, I discuss my practice and the O'Bannon v. NCAA ruling on the Price of Business show on Business KTEK 1110 in Houston.
The Uniform Law Commission's Athlete Agent Committee met earlier this week to discuss changes to the Uniform Athlete Agents Act ("UAAA"). This act, having been passed in 43 States, is a series of laws that attempts to regulate sports agents. However, agents are governed by the players' union of each professional league, as they must be certified by the union to act as an agent for a player in that sport. (Note: the one exception being Major League Baseball, which does not certify an agent until they have a client on an MLB team and meet the certification criteria. Therefore, a person can act as an agent, although uncertified, to baseball players if their clients are not in the MLB.)
Despite being governed by the professional sports' unions, the UAAA imposes additional regulations for agents in a supposed effort to protect collegiate athletes and their institutions. Some of the UAAA provisions echo best practices for agents which do protect athletes, like noting on a representation agreement that the athlete will lose any remaining athletic eligibility in college. However, much of what is unique about the UAAA, as opposed to the agent rules of the professional players' unions, burdens agents with no visible benefit.
The UAAA prohibits the following conduct by agents:
Violating any of the above provisions carries both criminal and civil penalties. The first of the above prohibitions, perhaps the most important, is also generally prohibited by the agent rules of the various professional sports' unions.
So what are the proposed revisions that were discussed this week?
As far as agents are concerned, there is one primary revision that should be enacted: Abolish the State registration of sports agents.
There are a multitude of problems with the State registration system. Most glaring, the State registration system fails its designed goal to "keep the good guys in business...[and] keep the bad guys out" (Jerry Bassett, Director of the Alabama Legislative Reference Service, which drafts bills for the Alabama legislature.) As previously stated, agents are governed by their sports' players unions. Agents must satisfy a myriad of requirements in order to become certified by a particular sport. During this process, the supposed "bad guys" are weeded out, and not granted certification by the league. Of course, there will be agents that are granted certification and then break rules and laws, but there is no possible way to prevent all wrongdoers from entering the profession.
Interestingly, there is little data on who, or how often, States are disallowing agents from registering. The leagues are already undertaking the exhaustive agent certification process, which requires disclosure of much the same information as States require. Simply put, it is likely rare that any professional Players' Union, whose primary goal is the protection of the players, would certify an agent that a State rejects.
Further, should any State employ more stringent restrictions on agents than the professional leagues do, the newer agents would likely suffer the most. Currently, a person with a four year undergraduate degree and postgraduate degree could become an NFL agent, provided they meet the additional requirements such as passing the exam. That means a 24 year old with little business experience (and fantastic connections) could hypothetically become an agent. However, a State utilizing more stringent requirements than the leagues creates higher barriers of entry, disallowing entrants into the market.
Additionally, the UAAA's registration system is extremely short sighted. Generally, sports agents have a multi-state, if not nationwide or regional practice. By requiring an agent to register with each individual State, agents must pay a registration fee with each State that has a collegiate athlete they wish to speak with. Due to the nature of the multi-state practice, these fees quickly add up. And what do agents get from paying the fees? Nothing more than the chance to talk to athletes in the hopes that they sign with the agent.
As it currently stands, the UAAA's registration system amounts to little more than systematic extortion. Agents who wish to be successful, which is already difficult enough, are going to pay the wildly varying fees to avoid any criminal and/or civil liability. The UAAA gives States an additional, steady, stream of income that they likely will not want to let go.
Aside from repealing the UAAA, there are two viable solutions to removing the State registration of sports agents:
The removal of all registration provisions will not be favored by the States as they are earning money off of the UAAA. However, the nationwide clearinghouse can be established in such a way that each State which has enacted the UAAA gets a share of the registration fees from across the country. A clearinghouse can also make the registration process more favorable to the agents as well. Certainly all of the registration information will be centralized, decreasing the need for an agent to fill out multiple applications for multiple States. This would allow registration in a new State to be as simple as paying the fee, as all enacting States would have agreed on a single set of registration criteria.
The State fees themselves could also be staggered, creating discounted bundles of States or a flat fee for each additional State. There is a great deal of flexibility that could be used in creating a nationwide clearinghouse for sports agents that could make the UAAA more attractive to agents. However, this still does not ease the burden of having to essentially be certified as an agent twice, once with the professional sports league, and once with the clearinghouse.
As it stands, the UAAA's State registration model is extremely flawed and burdensome to sports agents. The creation of a nationwide clearinghouse for agents, as proposed for discussion this week, with flexible price models would reduce the burdens on agents, but still unfortunately require that agents be certified by the leagues and the States.
The most important contract to a sports agent is the contract between the player and agent, otherwise known as the Standard Representation Agreement. This contract establishes the terms of the agent's representation, including fees, scope of representation, term of representation, payment scheduling, and how disputes between the agent and player are to be handled.
Before diving in to the meat of the contract, it is important to establish at the very beginning who the parties to the contract are, namely, the player and the agent. It is also be worthwhile to include that the athlete will lose their "amateur" status and eligibility at the collegiate level by entering into this contract with the agent. This is particularly important to players who still have athletic eligibility in college.
NCAA Bylaw 126.96.36.199, known as the No-Agent Rule, declares that it is punishable offense for an athlete to allow an agent to conduct or attend the athlete's negotiations with a professional team. Violations of the rule could result in the loss of NCAA eligibility. By informing the player at the beginning of the contract that signing it would threaten his/her eligibility, the player is on notice of the potential penalties should they cancel the contract and attempt to play in college again.
Next, the contract should focus on the scope of the agent's representation, which delineates the services that the agent will provide. This is the most important clause of the agreement, as it not only establishes what the agent will be paid for, but any exclusive rights the agent may have. It is not uncommon for athletes to have multiple representatives in different earning spheres, such as an agent who works on the player-contract and an agent who handles marketing. These exclusivity rights must be established to avoid any confusion as to what responsibilities the agent has, and importantly what they should be paid for. Exclusivity should also be considered with respect to location. For instance, a baseball player from Japan may wish to have three agents: one to handle his player-contracts globally; one to handle his marketing in the US; and one to handle his marketing in Asia. A broad scope of representation clause that tightly defines the agent's exclusive rights is best for the agent.
Now that the agent's services are delineated, it is important to include how the agent is to be paid. Each of the major US professional sports has an industry standard or agent regulation delineating what the agent's fee can be for successfully negotiating a player-contract. This fee is a percentage of player-contract's value. Agent fees for secured sponsorships and endorsements are much higher, generally between 15% and 25%. In this clause, it is important to include that the agent will be paid on any contract that is substantially negotiated during the term of the agreement. This ensures that an agent is entitled to their fee even if they are fired prior to completion of the deal. Also, it is in the agent's best interest to define what constitutes income from sponsorships and how the agent is to receive a portion of this income as a fee. Athletes are increasingly paid in equity and other non-liquid measures, which creates a difficulty in determining an agent's fee if it is not specifically stated in the representation agreement.
The last large clause in the agreement relates to expenses. Specifically, whether the player, agent, or a combination of the two, are to pay for expenses such as equipment, service providers, and travel. Certain sports have agent regulations which cap the amount of money the agent is allowed to spend on equipment for a player in a year, such as in baseball, so the relevant agent regulations must be consulted when drafting this clause. The specifics of who is to pay for each expense type can be negotiated individually.
Lastly is a series of smaller, general clauses that apply to the entire representation agreement. Including:
Notably, I have not included any clauses that involve financial services such as loans and investments. Financial services is a broad enough topic that it warrants its own contract. Further, not all agents provide financial services as the risks faced by the agent are greater. Some leagues have separate requirements for financial advisors, such as the NFL. Due to the increased risk, special rules, and breadth of services that could comprise financial services, it is in the agent's best interest to draft a separate agreement regarding any financial services offered.
Many of the clauses I've described contain the ideal situations for agents, but players may wish to renegotiate specific terms. As in all contract negotiations, it is important to know the difference between the terms you need and the terms you would like to have. The relationship between a player and agent is built on trust, and no agent wants to start that relationship off poorly by engaging in a contentious negotiation over the terms of their representation agreement.
Being a sports agent is a tough, cutthroat, profession, where agents must be mindful of their clients' professional and personal endeavors, of other agents poaching their clients, and of recruiting new clients. All of this is supposed to be done in accordance with the rules governing agents that are established by each professional sport's players' unions.
Unfortunately, too often are there reports of some agents flouting these rules. Disputes between players and their agents are generally handled in arbitration, away from the prying eyes of the media and the public. However, one recent player has decided to sue his agent in court, alleging that the arbitration process is biased towards agents after he was ordered to repay a loan that he argues was not a loan. By that player taking his agent to court, the proceedings are now public record, and have drawn attention to the practices of a well known NFL agent and perhaps the industry at large.
One of the rules that NFL agents must abide by is that agents cannot provide money, or anything of value, to induce a player to sign with them. However, agents are allowed to provide loans under certain circumstances. Here lay the critical question in this case: Does money given to a player immediately after signing a representation agreement with an agent qualify as an inducement, or a loan?
Rosenhaus met DeSean Jackson at midnight, the time he was free from his former contract, beside a highway to sign a representation agreement. Rosenhaus then gave Jackson a large sum of money in a Luis Vuitton bag. Subsequently, a loan agreement was signed. After several years, Jackson fired Rosenhaus, and Rosenhaus is now attempting to collect the outstanding balance on the alleged loan.
Although the money was qualified as a loan, the Court may view the money as an inducement for representation. If that's the case, then Jackson may not have to repay any of the money. Only time will tell what the result of this lawsuit will be.
As a result of this litigation, the NFL Players Association (NFLPA) has strengthened its sanctions against agents who violate its rules. Now, an agent who violates the agent rules three times can have their certification revoked, effectively ending their career as an NFL agent.
So what can agents do to ensure that a loan to a player is actually deemed a loan in any potential arbitration or lawsuit? Simple. Create a paper trail. If a player requests a loan, have them do it in writing. If an agent raises the possibility of a loan, they should also put the loan proposal to the player in writing. Simply put, do not rely on a loan agreement contract to be the sole evidence that a loan exists. By creating a paper trail surrounding the contract, an agent has now created additional evidence in their favor should the player ever attempt to have the loan invalidated.
Certainly, the timing of the loan does not assist Rosenhaus' claim that the money was in fact a loan. If a player immediately signs with an agent, under what circumstances would that agent know that the player needs a loan and be prepared to give a specific sum? Hypothetically speaking, if the agent was aware that the player needed a loan for a specified amount prior to signing with him, then the agent may have broken other rules such as impermissible contact with represented players. Before issuing a loan to a player, agents should be sure that a reasonable amount of time has passed to become fully aware of the player's need.
No agent should put their careers at risk by creating the perception that they have broken the rules governing their profession.
Quiles Law is an esports and sports law firm based in New York City.
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Attorney Advertising. The information presented in this site should not be construed to be formal legal advice nor is it intended to form any attorney/client relationship. Our attorneys, collectively, are licensed to practice law in the States of New York, New Jersey, and Pennsylvania. Copyright Roger R. Quiles, Esq., 2017. All rights reserved.