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.
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.
Its Super Bowl week, and the Seattle Seahawks are back to defend their title against the New England Patriots. However, the Seahawks have made the news for some of their off-field business endeavors this week. The Seattle Times has reported that the Seahawks have filed applications for multiple trademarks since their Super Bowl victory last year. One of these applications is for "12".
The Seahawks refer to their fans and their stadium as the 12th man, largely due to the noise of the crowd not allowing opposing teams from hearing each other on the field. The team has previously attempted to trademark "12" twice, to no avail. Their applications for "12" were previously denied due to a conflict with a NASCAR team trademark and a hotel's trademark. Currently, the Seahawks are attempting to trademark "12" in the font that appears on their jerseys.
But what is a trademark? A trademark is a word, phrase, symbol or design, or a combination of words, phrases, symbols or designs, that identifies and distinguishes the source of the goods of one party from another.
Effectively, the Seahawks application for "12" in their jersey's font is asserting that it identifies and distinguishes its source as the Seahawks. However, this mark is likely not distinctive enough for trademark registration. Instead, this mark would likely be found as generic. The block letter jersey font, as shown in the picture above, is strikingly similar to many other football teams' fonts, at every amateur and professional level. Because a trademark must identify and distinguish its source, and the term "12" is not distinctive enough on its own, the font's similarity to other team fonts weakens the strength of the mark.
Generic marks can be trademarked if the mark has acquired secondary meaning. That would mean that despite its prima facie generic qualities, that consumers have come to associate the mark with the source of the goods. Although there may be an argument that Seahawks fans may associate articles bearing "12" as having originated from the Seahawks, that argument seems somewhat tenuous. The strong generic nature of the mark may be difficult to overcome and achieve secondary meaning.
Although it should be encouraged for sports teams and athletes to pursue trademark opportunities to protect their brands, the Seahawks attempt to trademark "12" appears to be an overreach.
Earlier this year, I launched 1337 Sports Management, a sports agency dedicated to servicing professional gamers in the eSports industry. Building off of my my Sports Law practice here, starting my own agency has always been a desire and the logical next step in my career. As many sports agents do, I will maintain my law practice and my agency simultaneously, and I expect my law practice and agency to benefit from one another.
Many of the legal issues faced by businesses and athletes are also prevalent in the eSports industry. However, eSports has long needed the professional assistance of lawyers and agents to fully harness their revenue potential. Individual players and team businesses have long been denied the compensation and legal rights they are entitled to/deserve. With my law practice and sports agency, my goal is to help rectify some of these longstanding issues in the eSports industry.
I'm excited for the future of my law practice and sports agency. I hope you enjoy the ride with me!
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.
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.
Crowdfunding has been a popular platform for start-ups and small businesses to raise money on the internet. Given the success of crowdfunding platforms, such as Kickstarter, and the costs of playing sports, it was only a matter of time before platforms were introduced solely directed at crowdfunding athletes. Now, several platforms for crowdfunding athletes exist, including:
represent their countries in the Olympics.
Although these crowdfunding platforms can be vital for organizations, olympians, professional athletes, or some amateur athletes, crowdfunding is an attractive and potentially unknown danger for athletes with collegiate eligibility.
NCAA Bylaw 12.01.1 states that "Only an amateur student-athlete is eligible for intercollegiate athletics participation in a particular sport." However, Bylaw 2.9, the NCAA's core principle of amateurism, states "student-athletes should be protected from exploitation by professional and
commercial enterprises." Although the NCAA's definition of amateurism has shifted over the years, receiving any form of compensation (including having something paid for) has been violative of the NCAA's amateurism principles, and has resulted in fines as well the loss of athletic eligibility. For example, Georgia running back Todd Gurley is currently suspended pending investigation into whether he received payment for autographs.
With the increasing prevalence of costly training camps and showcases for young athletes, meaning those who are not yet college eligible, it is easy to see how crowdfunding can be an attractive means of funding attendance at training camps and showcases. Although young athletes may be aware that they cannot be "paid," crowdfunding raises the following questions:
Young athletes and their parents, assuming they are aware that athletes cannot receive compensation, may not inherently view crowdfunding to attend specific events as compensation. Taking a simplistic view, the young athletes and their parents may assume that the rule barring payment prohibits salary-like payments for on field performance. Therefore, those athletes and parents may believe that crowdfunding for a specific event is not violative of NCAA regulations.
This dangerous assumption could be problematic when the young athlete attempts to play in college. Should the NCAA become aware of previous crowdfunding, the player could be fined an amount equal to the funding received and/or suspended. Such a fine could be prohibitive to a college athlete if they used the crowdfunding service several times.
Potentially, the NCAA could hold the young athlete accountable for his or her parents' crowdfunding in support of their athletic endeavors. The NCAA's prohibition against players receiving extra benefits also extends to their parents. The NCAA's investigation into Reggie Bush and his family is a good example of this, although the investigation took place after he turned pro.
While attending USC, Bush's family rented a home from Michael Michaels, who at the time was establishing a sports agency that hoped to sign Bush. Throughout their time in the house (approximately a year) Michaels provided multiple impermissible extra benefits and inducements, including rent free housing, transportation, and money to pay off debts. Although it was alleged that Bush was aware of Michaels providing the benefits to his family (under the purported agreement that he would repay Michaels when he turned pro), Bush's knowledge was immaterial as parents are also prohibited from receiving extra benefits and inducements. The NCAA found multiple violations to have taken place (including violations not mentioned here), and retroactively sanctioned Bush, as he was now a pro player. Bush's experience should serve as a cautionary tale to crowdfunding parents, as an athlete can be sanctioned for their parents' actions as they relate to the athlete.
Lastly, there is a question of whether athlete crowdfunding sites should be responsible in some way for the potential repercussions of athletes utilizing their service. Although there is little, if any, legal recourse against such a site for an athlete unknowingly committing NCAA violations, there is no question that the websites should include a warning regarding college eligibility when signing up for the service, especially if the websites are hosted domestically. That warning should not be buried in their terms of service agreement, but should be explicit. If these sites are truly supporting the advancement of athletes, then they should seek to protect their aspirations by at least providing a warning.
Of course, crowdfunding for athletes is only problematic from an NCAA perspective if the user plays an NCAA sport. For those that don't play such sports, crowdfunding could be instrumental to their amateur and/or professional career. It is unfortunate that NCAA regulations would stand in the way of future NCAA athletes going to specialized camps, or showcasing their abilities, that will help them reach the next level. However, it makes sense. Allowing crowdfunding for future college athletes would create a vehicle by which highly touted young athletes could be financially swayed by colleges, professional teams, and agents. Such inducements are not only banned by the NCAA, but also the professional sports leagues.
Crowdfunding can be positive for many athletes, just not those athletes who plan on playing in the NCAA.
Last week, my blog post regarding equity for endorsements focused on the benefits and disadvantages of the athlete/celebrity endorser. This post will focus on the companies, and why they should or shouldn't offer equity for endorsements.
Startups have long sought celebrity endorsements under the misguided notion that the endorsement will equate to the company's success by harnessing the celebrity's star power. In fact, there are many articles on how to attract celebrity endorsers (See here and here) Not surprisingly, offering equity for endorsements is a common suggestion on these "How To" articles. But, companies should be mindful of how they distribute their equity, as a celebrity endorsement does not always work out well for the company (see here).
In sum, all of the benefits of getting endorsements for equity necessitate sales increases and discount the loss of equity.
Celebrity endorsements of products and companies have long been commonplace. However, where these celebrities were once paid with money, many are instead accepting equity. This is particularly true when it comes to celebrities endorsing start-ups and their products.
Last week, The New York Times ran an article which stated that equity for endorsement agreements are gaining in favor with celebrities due to the recent explosion of the start-up scene, especially in California, and the deal's ability to create substantial income should the company become successful. This is especially true for professional athletes.
Professional athletes have particularly taken to equity for endorsement agreements. This is likely due to the potential of receiving a windfall and the players' understanding that athletic careers can be lost at any time. In recent years, several athletes have made headlines by entering into equity agreements. One of the most notable equity for endorsement agreements was David Wright's acquisition of .5% of Glaceau, the creator of Vitamin Water. When Glaceau was bought in 2007 by Coca Cola for $4.1 Billion, Wright's .5% was worth an estimated $20 Million. In 2010, Tom Brady entered into an equity deal with Under Armour, a now ubiquitous athletic apparel company. Most recently, in June, 2014, Richard Sherman entered into an equity for endorsement agreement with BODYARMOR SuperDrink.
However, accepting equity for endorsements has significant benefits and disadvantages for the endorsing athlete.
Although athletes and celebrities may be agreeable to equity for endorsements due to the low risk/high reward potential, companies do not freely offer such opportunity. Many companies are protective of their equity, and within good reason. My next post will discuss the benefits and disadvantages of equity agreements to companies, who bear a much bigger risk when offering equity for endorsements.
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.
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