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Recently, I was interviewed by eSports Guru on the topic of player-team contracts in eSports and their importance. I've added the article to the Media tab above. Check out the article about the interview and let me know your thoughts!
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Performance enhancing drug (“PED”) use in esports has long been an issue whispered about within the gaming community. These PEDs are not steroids and human growth hormone as we know from other sports, but are instead prescription drugs known as psychostimulants or neuroenhancers. These kinds of drugs (Adderall, Ritalin, Selegiline, etc.) are abused by players as a means of enhancing focus, calmness, or to otherwise act as a stimulant. However, due to the lack of drug testing by professional esports leagues and tournament bodies, there have been very few instances of confirmed PED use during matches. Unfortunately, there is now another example of such drug use.
On July 12, 2015, a Youtube video was posted where professional Counter Strike: Global Offensive player Kory “Semphis” Friesen asserted during an interview that he and his team took Adderall during a major ESL tournament. The relevant portion of the interview is as follows: Friesen: “The ESL [team communications] were kinda funny in my opinion. I don’t even care, we were all on Adderall [laughs]” Interviewer: “Really? [laughs]” Friesen: “I don’t even give a fuck, like its pretty obvious if you listen to the [team communications]. I don’t know, people can hate it or whatever.” Interviewer: “Everyone does Adderall at ESEA Lan right?” Friesen: “Yea” Interviewer: “Just throwing that out there for the fans, that’s how ya get good” In addition to the disappointing language encouraging others to violate tournament rules and abuse prescription medications, such PED use can impact the player and team’s contractual relationships. Many contracts, especially sponsorship agreements, contain morals clauses. This type of clause allows a contracted party the opportunity to cancel their remaining obligations under the contract should the other party act in a way that is harmful or damaging to its own brand. The reasoning behind such a clause is that by cancelling the contract, a party can protect themselves from being associated with the brand damage caused by the other party. In the sponsorship context, this allows a sponsor to exit a sponsorship should the sponsee player or team be engaged in a scandal or otherwise illicit activity. Although there has not been a reported contractual exodus in this matter like when Lance Armstrong was found to have been using PEDs, the use of PEDs in esports can trigger a contract’s morals clause in the following ways:
It is unknown whether or not Friesen and his team obtained the Adderall licitly and for a valid medical purpose. However, in the event that the individuals obtained the substance for an illicit purpose such as those described above, that action would likely be enough to satisfy a morals clause. Importantly, a morals clause can also be placed in a player-team contract, thus putting the players’ livelihood at stake should they utilize PEDs. Additionally, the team itself could face legal backlash over its players’ PED use from sponsors, as sponsorship agreements routinely contain morals clauses. Depending on how the morals clause is drafted in the team’s sponsorship agreements, the actions of all players (or even a substantial number of them) may be sufficient to trigger the morals clause and permit the sponsor to cancel the sponsorship agreement. As Friesen’s admission has caught the attention of many people in the esports industry at large, time will tell if there is any sponsor backlash. Eventually, the esports industry is going to have to implement effective methods for curbing its PED problem. Until then, teams should keep in mind that any PED use can impact the sponsorships that they have worked hard to obtain, and thus discourage any PED use by its players. No team or player would want to lose their contracts because a morals clause was triggered in an effort to gain a competitive advantage. Even worse, potential sponsors or teams may be hesitant to sponsor or employ a player and/or their team due to past PED use. Statements referring to taking Adderall as how you “get good” are not only irresponsible for encouraging activities that may cost players and their teams contracts, but also because they effectively encourage criminal behavior. Last night, Alex Rodriguez passed Willie Mays for fourth place on Major League Baseball’s all-time homerun list. Much like the baseball fans that deny Rodriguez’s achievements due to his performance enhancing drug use, the Yankees are denying Rodriguez his $6 million bonus for likely the same reason.
Rodriguez’s contract with the New York Yankees contains a rare provision known as a milestone-marketing bonus. This type of provision pays the player a substantial sum for the marketing rights related to milestone accomplishments. The only players to receive such provisions in their contracts in recent memory are Rodriguez and Albert Pujols. Following Pujols’ contract, such milestone-marketing bonuses were banned by Major League Baseball. However, to Pujols’ and Rodriguez’s delight, the ban on such clauses was not retroactive, thus allowing such clauses to remain enforceable. Pursuant to Rodriguez’s milestone-marketing clause, he was to be paid $6 million for passing Willie Mays on the all-time homerun list. However, Brian Cashman, the Yankees General Manager, has publically stated that they will not pay Rodriguez the $6 million bonus. The Yankees argument is presumably that the bonus payment is contingent upon being able to market the milestone achievement and since Rodriguez was suspended for the 2014 season due to performance enhancing drug violations, the milestones no longer have marketability. Interestingly, the contract is reportedly clear that the Yankees agree to pay the sum of $6 million, and that “Such payment will be made within fifteen (15) days of its designation of the Milestone Accomplishment under Paragraph 1, above.” The Yankees still have some time to make the payment as indicated in the contract, but if Rodriguez is not paid, he would have to take legal action against the Yankees to get his bonus. This matter would be especially important to Rodriguez, as he may be able to achieve additional designated milestones in his contract, and thus be entitled to more moey. If Rodriguez were to sue the Yankees, once the fifteen day period expires, he would allege (amongst other causes of action) that the Yankees breached his contract. In order to prove a breach of contract, the following elements must be proved: 1. The existence of a binding contract 2. One of the parties to the contract materially breached the contract 3. The material breach caused damages Rodriguez’s potential case hinges on element 2. A breach occurs when a party fails to perform its obligations under the contract. However, that definition immediately calls for clarification as to what obligations the breaching party has under the contract. Cashman’s statement, that “We (the Yankees) have the right but not the obligation to do something, and that’s it,” is particularly interesting, as such rights are usually explicitly stated in contracts. Unfortunately, it is impossible to ascertain the validity of such a statement without seeing Rodriguez’s contract. Understandably, the Yankees are upset that Rodriguez has been implicated in multiple performance enhancing drug scandals. However, whether or not he is owed the $6 million milestone bonus is determined solely by the language of this milestone-marketing addendum to his contract. If the language is as clear as reports have stated, an argument that the bonus is not owed would have to be quite creative, and still may not pass legal muster. Rodriguez can also file a grievance with the Major League Baseball Players Association. Greg Bouris, spokesman for the Players Association, has already stated “The Union is prepared to intervene on Alex’s behalf.” Despite Rodriguez’s past drug use, the Union would not want any team to establish a precedent of refusing to pay any player a contractually agreed upon amount. Of course, there is still time for the Yankees to make good on Rodriguez’s bonus. The contract allows for the bonus to be paid within 15 days of the milestone being achieved. Despite Cashman’s comments, it would not be surprising for the Yankees to pay Rodriguez the bonus within the designated window. In effect, the comments would then serve as a way of publically shaming Rodriguez for his conduct. Given Rodriguez’s litigious history, the Yankees have to expect him to take action if he is not paid.
At the beginning of any relationship between an esports player and their team, a contract should be entered into that describes the services the player is to perform, compensation, and the duration of the agreement, amongst other clauses. Depending upon how this contract is drafted, a player will either be considered an employee of the team or an independent contractor. This distinction is critical in establishing the obligations that a team has to a player and the rights that the player holds. In the esports business, the trend has been to attempt to classify players as independent contractors.
Esports teams, like many other businesses, would prefer to employ independent contractors instead of employees for several reasons, including:
How Courts Determine Independent Contractor Status However, what esports teams may be unaware of is that calling players independent contractors is not enough to actually be considered such. In fact, many of these contracts, if challenged in Court, would be found to create an employee/employer relationship. Due to the overwhelming benefits to a business using independent contractors, Courts have scrutinized independent contractor agreements by utilizing tests to determine whether such a relationship is sufficiently established, or if the agreement instead creates an employee/employer relationship. New York Courts utilize two tests, the first being the Economic Realities Test, which is as follows:
The second test is the Common Law Test, which is as follows:
In both of these tests, the totality of the answers of the above questions will be examined to determine how to classify the parties' working relationship. It is worth noting that these factors are not exhaustive, and the Court may undertake additional inquiry. An example of an additional factor in the esports context would be whether the player is required to wear a uniform. Analyzing Player Contracts: Economic Realities Test Teams typically exert a great amount of control over their players in a variety of ways. This could include booking player travel, requiring players to use equipment provided by team sponsors, requiring players to promote team sponsors, requiring players to be active on social media/Youtube/streaming services, requiring players to live in a team house, and more. This factor is extremely important, as independent contractors are supposed to maintain a great deal of control over their work and environment. Secondly, players are very invested in the team. Their actions and cooperation with other players are how the players (and team) can profit by winning matches and tournaments. This factor may also weigh against esports players being found to be independent contractors by a Court. However, the third factor supports the notion that players can be independent contractors, as the work requires highly skilled individuals who may work at their own initiative (in some circumstances). The fourth factor is completely determined by the contract itself. Generally speaking, the longer or more permanent a contract seems, the more likely it is that they are not an independent contractor. The fifth and final factor strongly holds in favor of finding an employee/employer relationship, as the players are a crucial component of the team's business. From the totality of the factors within the Economic Realities Test, it appears likely that a professional team would be found to create an employer/employee relationship with its players. Analyzing Player Contracts: The Common Law Test The Common Law Test is unclear in this scenario. An argument could be made that the first factor, whether the worker works at his/her convenience, could go either way in Court. Certainly there are things the player must do at certain times (matches, tournaments, etc.) but they may not be on a strict timetable for content creation. This factor would be determinate upon each individual team's practices. The second factor, whether the worker is free to engage in other employment, slightly holds in favor of an employee/employer relationship. Players can be free to partake in tournaments without their team should the team not participate, but players cannot play for multiple teams in the same events. By default, in those situations a player cannot work for multiple teams. Fringe benefits is an interesting factor in this analysis, as it can arguably be in favor of or against a finding of an employee relationship, depending upon the specific team's actions. Independent contractors technically should receive no fringe benefits (meals, company car, benefits, etc.). However, if a team allows a player to keep items that were provided by third parties, namely sponsors, or allows the player to live in team subsidized housing, then the player can be said to have received fringe benefits. In those examples, this factor would lean towards the finding of an employee/employer relationship. However, any benefits are team specific. The fourth factor, whether the player was on the team's payroll is also team dependent, as some teams pay salaries and some do not. Generally, a salaried worker is much more likely to be found to be an employee and not an independent contractor. The last factor in this test, whether the worker was on a fixed schedule, is very similar to the first factor. As stated in analyzing the applicability of the first factor to the esports team/player relationship, this factor can go either way. Importantly, the Court can examine additional factors to each test. A factor that has been employed by New York Courts was whether the worker is required to wear a uniform. In the esports context, a uniform can be said to be a team's jersey. This factor could realistically go either way in determining whether an employee/employer relationship exists. Although players are largely required to wear team jerseys at events, many, if not most, are not required to do so when creating content. Conclusion (TL;DR) Effectively, players who are classified by a team as being independent contractors may not be held to be independent contractors by the Court, if their contract is challenged. Should the Court find that an employee/employer relationship exists, then a team loses all benefits of hiring the player at independent contractor status and is then subject to the totality of laws involving employee/employer relations. Therefore, the team would incur increased costs and liability. Although each State's law will differ as to how these contracts are analyzed, it appears that there are strong arguments to be made under New York law that esports players are actually employees of their teams and entitled to benefits as such.
What is one thing that all eSports players, teams, and organizations have in common? Their need for sponsorships. But once a sponsor is interested in a sponsorship opportunity, which may be difficult to achieve, a sponsorship agreement must be carefully drafted that identifies the terms of the sponsorship. This can be tricky if you have never drafted and negotiated such an agreement before. Below are 10 important elements to every eSports sponsorship agreement. This list is not meant to be all inclusive, but is an introduction to the bulk of the provisions which should be included in a sponsorship agreement.
1. Identify the parties For clarity, identify the parties right away in the contract. That includes both the Sponsor and Sponsee (the organization/team being sponsored) and their respective addresses. 2. Length of Agreement How long is the sponsorship agreement to last for? If the sponsorship is for an event, you want to make sure that the term of the agreement lasts through the expected duration of the event, and perhaps also leaving some additional days for timely rescheduling. 3. Identify what is being sponsored Is this an event sponsorship? A team sponsorship? Whatever the case may be, you want to specify what is being sponsored. If you’re a team, then briefly discuss the team, what you play, and maybe even some recent accomplishments to remind the Sponsor why they want to align with your brand. If you are putting on an event, then discuss the details of the event (i.e. if it’s a tournament, how it’s structured), and how it is broadcasted (if at all). 4. Sponsor Responsibilities This is where sponsorship agreements begin to get tricky. In this portion, you want to clearly define what the Sponsor’s responsibilities are. If the Sponsor is providing money, as many do, then specify how much, and the dates by which payment must be made. If the Sponsor is providing products, defining the Sponsor’s responsibilities can be difficult. The Team would want this clause to be as broad as possible, allowing it greater access to products (in terms of amount or frequency). However, the Sponsor would want this clause to be narrow and tightly defined in order to limit its obligations to the team. Like with the cash sponsorships, time frames should be established when the products are to be provided. If the sponsorship is for a period of time where it would be expected that multiple rounds of products would be provided to the team, then it should also be defined how additional product requests will be made and handled. This contentious point must be negotiated thoroughly. 5. Team/Organization Responsibilities Conversely, the Sponsee’s responsibilities must be defined. Effectively, this section describes what the team or organization will be offering the Sponsor in exchange for the sponsorship. It can also be used to retain some exclusive rights (i.e. control over certain aspects of a tournament). The team or organization would want this provision to be drafted as narrowly as possible, to limit their exposure and obligations to the Sponsor, while Sponsors could seek to broaden this provision. 6. Exclusivity This provision is especially important, as it defines the exclusivity, or lack thereof, of a Sponsor. Teams and organizations obviously want to have more than one sponsor, so exclusivity provisions must be carefully drafted. Sponsees should seek to categorize the sponsorship narrowly, that way it can offer exclusive sponsorships in many categories. However, sponsors may seek to broaden any category they feel is too narrow. For example, a team would want to categorize a prospective soda sponsorship as an exclusive soft drink sponsorship, specifically excluding energy drinks (as there are some soda alternatives to energy drinks). This would allow the team to offer exclusive sponsorships for soft drinks and energy drinks, respectively, thus potentially increasing its sponsorship dollars. 7. Sponsor’s promotional entitlement This section describes what promotions the Sponsor is entitled to in exchange for their sponsorship. This section can be drafted broadly or narrowly, depending upon the specifics the Sponsor requires. Some examples of narrow provisions are specifying the size of the Sponsor’s name and logo that will be used on a stream, how often the stream’s casters mention the Sponsor, and the specifics of website promotion (banner size, placement, etc.). An example of a broad provision would be limited social media promotion at the discretion of the Sponsee. 8. Intellectual Property Promotion of the Sponsor necessarily entails that intellectual property will be used, including the Sponsor’s name, and possibly logos. It is necessary to include a provision stating that the Sponsee can use such intellectual property to further the goals of the sponsorship agreement. Also worth including is a provision allowing for the limited use of the Sponsor’s intellectual property in the future, as it pertains to recordings or repackagings of the event or team during the sponsorship term. This gives Sponsees the flexibility to use old content without having to blur any names or logos. 9. Cancellation provisions These provisions are extremely important, as they define when the Sponsor and Sponsee may cancel the agreement. Such provisions are very context dependent, and as a result, vary from contract to contract. One such example would be the cancellation of a sponsorship if a certain number of teams withdraw from the event being organized by a Sponsee. 10. Miscellaneous provisions Several miscellaneous provisions should be added to the end of the contract, including, but not limited to, choice of law, arbitration, indeminity, waivers of liability, warranties, notice, and severability. Drafting sponsorship agreements is no easy task, but the above should serve as a basic intro guide to drafting the meat of the agreement. It is important to remember that the strength of any contractual relationship is equal to the strength of the contract itself. If you need any assistance drafting or negotiating sponsorship agreements, contact me at Roger@RRQlaw.com or (917) 477-7942. Too frequently do eSports players find themselves in situations where they feel trapped in a contract with their team. Fortunately, there are ways to negotiate terms to a player contract that would allow the player, or team, to exit the contract with no further obligation during the initial contract negotiation. These specific provisions are called escape clauses.
This post will focus on how players can utilize escape clauses to their advantage, should they successfully negotiate such terms, through the lens of a very recent example involving a League of Legends player who went by the tag name of Kori. The relevant facts Kori was a player for Supa Hot Crew ("SHC"), a European-based League of Legends team, and was owed several months of pay from the organization. Meet Your Makers ("MYM"), another European-based League of Legends team, purchased SHC's roster at the end of 2014, which included Kori's contract. Given that AK3 GmbH and their CEO Sascha Ackerman, who owned SHC, were also involved in the business management of MYM, Kori was concerned about similar non-payment issues with MYM. Upon informing MYM's business manager that he wanted to leave the team, the manager made several threats, effectively holding Kori to his contract. Kori then fled the team (and Europe) to play for Roar, a North American team in a different league. Upon Kori's departure, MYM contacted Riot Games (the game developer and effective league office) asserting that Kori breached his contract. Riot responded by disallowing Kori to play for any other team worldwide while still under contract. Subsequently, Kori returned to MYM. Riot then performed an investigation into the allegations of Kori and MYM, issuing punishments to both parties. How escape clauses could have allowed Kori to leave Escape clauses allow either party to cancel a contract if certain conditions are met. The beautiful thing about escape clauses is that they can be drafted around almost any desired set of circumstances. The tricky part, obviously, is to get both parties to agree to the clauses' inclusion in the contract, and the specific triggering circumstances. I haven’t seen Kori’s contract, but here are a few different kinds of escape clauses that would have allowed Kori to cancel his contract if they were hypothetically included. One example of an escape clause would allow a player to cancel his contract under a change in management. Under such circumstances, Kori would’ve been able to cancel, or effectively opt-out of, his contract when SHC’s roster was purchased by MYM. An example of a similar clause in action can be found in the professional sports world. Earlier this Baseball offseason, Joe Maddon, the then manager for the Tampa Bay Rays, canceled his contract when the General Manager left the team for the Los Angeles Dodgers. Maddon’s contract had an escape clause which allowed him to cancel his remaining duties under his contract should the General Manager change. Within days of exercising his escape clause, Joe Maddon was signed as the manager for the Chicago Cubs. The “change in management” language can be so general as to include a change in the management structure/personnel of the signing team, or can be as specific as to limit the player’s opt-out rights to a change in team/organization. Of course, a team may be more agreeable to an escape clause that is limited to a change in team/organization, as the signing team will no longer be paying and playing the player anyway. However, if a purchasing team is made aware of a player having such a clause, it may devalue the purchase price of the roster due to the uncertainty of that player remaining with the team. If a player or their agent wanted to get really creative with such an escape clause, they could add exclusive renegotiation windows with the purchasing team to negotiate a contract extension in lieu of the player opting out. Doing so may make that player’s contract a bit more valuable in a purchase as it can add stability. Importantly, this kind of escape clause is time sensitive. Each clause will specify a window by which the clause must be utilized, or else the right lapses. That means if the circumstances arise which would trigger the escape clause, the player would only have X days to affirmatively choose to cancel the contract. If that time period expires without the contract’s cancellation, the player cannot then try to cancel his/her contract without being in breach. Another kind of escape clause is one that will allow a player to cancel their contract upon nonpayment. Following a missed payment date, these clauses allow for a period of time (generally a few weeks) by which to make the payment. If the payment is not made in that window, the clause would allow for the Player to cancel their contract. If Kori would have had such a clause in his contract (assuming there were no other barriers to payment), following his first date of nonpayment, he would have entered into the timeframe where he could cancel the contract. Should that timeframe have passed, he would not have the right to cancel the contract until the next date of nonpayment. This kind of escape clause is frequently found in ongoing service contracts, which a player contract technically is. Negotiating this kind of escape clause can also be particularly telling of how secure a team is financially. Significant push back from a team on this provision could indicate unstable financials, because why would a team worry about a player leaving for nonpayment if timely payments are not an issue. It is important to note that some jurisdictions may consider nonpayment a material breach of contract, thus cancelling the remainder of the contract. However, even in those jurisdictions, an escape clause tied to nonpayment can be effective because it clearly spells out (for both parties) that nonpayment is a viable reason to cancel the contract and neither party would need a lawyer to tell them of their contractual rights. Conclusion These are just some examples of escape clauses as they hypothetically would have applied to Kori’s contract dispute. The tricky part with escape clauses, or any clause a player desires, is negotiating their acceptance by the team. That’s where leverage comes into play. Different players of different abilities and “star power” will have differing amounts of leverage to utilize in negotiations with a team, and will thus be able to command differing levels of contractual protection. I hope this sheds some light on a way that player contracts can be utilized to define and protect players’ rights in the absence of a union. TL;DR- Escape clauses in player contracts can offer some protection to players Recently, strong allegations have surfaced that esports is suffering from a performance enhancing drug ("PED") use problem. These PEDs are not the steroids and human growth hormones of other sports, but are instead neuroenhancers.
These kinds of drugs (Adderall, Ritalin, Selegiline, etc.) are known as "smart drugs" due to their abilities to enhance focus, calmness, and act as stimulants, which debatably enhance performance in professional gaming. Although there appears to be much confusion as to whether such neuroenhancers are banned from professional gaming (a quick Google search reveals many questions on the topic and few actual answers), if it is banned, there appears to be little enforcement as noted in the link above. Irrespective of neuroenhancers' status as potentially banned substances in professional gaming, utilizing such substances can have an impact upon a player's/team's existing sponsorship agreements. As I noted previously, sponsorship agreements generally contain morals clauses. A morals clause allows a sponsor the opportunity to cancel a sponsorship should the athlete or team act in a way that is harmful or damaging to the sponsoring brand. In other words, morals clauses allow sponsors a means of exiting a sponsorship agreement with an athlete engaged in a scandal or otherwise illegal activity. The use of neuroenhancers in pro-gaming, regardless of whether the substance is banned, can trigger a sponsorship's morals clause in several ways:
Any of the above reasons, which certainly is not an exhaustive list, could also be the cause of a scandal within the sport. Although scandals could be sufficient to independently trigger a morals clause, when combined with any of the above points, a scandal makes it much more likely. Similarly, a team sponsorship may be impacted by a team member's use of neuroenhancers. Depending on how the morals clause is written, a single team member's actions may be sufficient to trigger the morals clause and permit the sponsor to cancel the sponsorship agreement. As the esports industry determines methods for curbing its PED problem, teams should keep in mind that any PED use can impact the sponsorships that they have worked hard to obtain. No team would want to lose its sponsor because a morals clause was triggered in an effort to perhaps gain a competitive advantage. Even worse, future sponsors may be hesitant to sponsor a player and/or their team due to past PED use. Franchises are everywhere. McDonald's, one of the most visible franchises in the US, has over 34,000 stores worldwide. Take a look at this extremely interesting spreadsheet on the number of McDonald's franchises by country over a five year period. Needless to say, McDonald's is a strong brand that isn't going anywhere anytime soon.
But how do businesses become franchises? Franchises are governed by Federal and State law, and the mix of the two have created the following best practices: Determine if franchising is best for your business The two primary options for a business to expand out of its area are to franchise or open branches. A branch is wholly owned and controlled by the business itself, and all of its profits flow to the business. However, opening and operating a branch are entirely at the expense of the business. Due to the expenses involved, branches are more suited for slow, calculated growth. On the other hand, franchising can allow a business to grow quickly, as the expenses to open and operate a franchise are paid by the franchisee, or the person buying the franchise. The business will condition the operation of the franchise upon numerous terms to maintain uniformity as much as possible, and will receive royalties for use of the brand (usually in the form of a percentage of the franchise's profits). However, franchising requires a strong brand identity that potential investors (the franchisees) want to buy into, liquidity (both for costs and regulatory requirements), and standardization of practices to be effective. Register trademarks If your business has yet to do so, register your brand as a trademark. Brand identity is extremely important when franchising, whether you are building a brand or franchising an established one. Hence, it may be best to register your trademark(s) as soon as possible to begin building your brand identity. Strong brand identities can drive the price of franchises higher, so its in the business' best interest to strengthen the brand as early, and as much, as possible. Additionally, registering a trademark gives the trademark holder a multitude of rights under Federal law. Create a subsidiary for the business A business should create a subsidiary entity to serve as the franchisor, or the company that sells franchises. This practice is used for several reasons. First, it helps limit the liability of the original company such that if any liabilities arise from franchising, like lawsuits, the parent company is likely protected. Secondly, the subsidiary is created for ease of accounting. The primary disclosure document, which must be created and disclosed prior to engaging potential franchisees and will be discussed shortly, requires a financial audit for several years prior. However, by establishing a subsidiary, the financial history can only reach back as far as the creation of the subsidiary and would not include the finances of the parent company. Drafting the necessary documents Prior to engaging in any talks with potential franchisees, several documents must be drafted. Firstly, Federal and State Law require the creation of a document compiling specified information regarding the company including its financial history, its company officers, any litigation, trademarks, and more. Depending on which accepted format of this document your business uses, this is either called the Federal Disclosure Document or the Uniform Franchise Offering Circular ("UFOC"). Additionally, all contracts that the franchisee would have to sign must be drafted. Primarily, this includes the franchise agreement. This contract sets out the many rules that franchisee's must abide by, including royalties, training, required sellers, signage, marketing, duration etc. This contract is comprehensive, but can be amended. Importantly, these documents must continually be updated as material changes to the information it contains is available. This means that if any information changes which could impact a potential franchisee's decision to purchase a franchise, then the document must also be changed. Such documents are highly technical as they incorporate Federal and State law, and require a financial audit. For this reason, attorneys and accountants are generally retained to prepare these documents. Compliance with State regulations Although Federal law regulates franchises, State laws impart additional requirements that must be met in order for businesses to offer, or continue to offer, a franchise in that State. Some of these additional requirements include:
Of course, the above are only a small sampling of the variances in State laws pertaining to franchises. Due to the complexity of the regulations pertaining to franchises, compliance should be managed by the business' attorneys so they may update and alter any documents as necessary and inform business personnel of any changes they must make in communications. It is especially important that all people who are involved in the selling of franchises at the business are aware of the applicable State regulations, and its changes, as some laws may take effect upon first contact with a potential franchisee. Communication between these individuals, and compliance counsel (or personnel) is extremely important. Ready, set, go! The legal aspects of franchising are a very technical process at the outset, but once established, compliance and any additional tweaking is all that is necessary. This is only a general overview of the process of franchising, and a business should have an attorney and an accountant guide them through the process of franchising their business. 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. |
AuthorQuiles Law is an esports and content creator law firm headquartered in New York City, representing a global clientele. Archives
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