Esports Levels Up - Franchising & Antitrust

Guest Post by Micah Woo

The year was 2017. It was a simpler time - no 16 seed had beat a 1 seed in March - but that is when the world of esports revolutionized. League of Legends had announced its 2018 season of the North America League Championship Series would move to a franchise model. The Overwatch League (“OWL”), a franchise league for Blizzard’s popular title Overwatch, was beginning to take shape. And then, like UMBC’s upset, the NBA announced an esports franchise league out of nowhere: the NBA 2K League (“2K League”). For the inaugural season of the League, seventeen of the thirty NBA franchises will participate.

Up until the announcement of the 2K League, every franchise league looked like a shell of what we know. For example, the the OWL has city based teams, like the San Francisco Shock, player minimums, and player benefits. The announcement of the OWL promised more than this shell, specifically announcing a player combine and draft. These events, however, never came to fruition. Then came the 2K League, with not only player minimums and and city based teams, but also a combine and a draft. The 2K League announced an application process, followed up by a player combine, and then a draft. Thousands applied, 250 people participated in the combine, 102 and will be draft eligible. The combine ran through the month of February and the draft lottery order was selected on March 13 (with Mavs Gaming, the Dallas Mavericks, winning the first overall pick). The draft will take place April 4 at The Hulu Theater at Madison Square Garden’s Lobby (1 p.m. ET).

Although it is incredible to see the growth of esports and creation of franchise leagues, one has to wonder whether these leagues will ever face litigation surrounding a complex body of law that all traditional sports leagues have faced: Antitrust. This post seeks to give a 30,000 foot view of antitrust, what defenses/exemptions are available, and present arguments for the leagues. A majority of the discussion will focus on the 2K League because, to me, it presents the greatest antitrust battle.

Before we move on a few quick things: 

  1. Yes, I am a licensed attorney in the state of Wisconsin.
  2. No, this is not legal advice.
  3. Yes, the facts of your case may change the outcome.
  4. No, this post is not solicitation.
  5. No, this post does not create an attorney-client privilege.

Cool? Kewl.

What is Antitrust

"Antitrust" is a fun word you can throw around and sound like an attorney, but what does it really mean? Well, it depends on what section of the Sherman Act, the federal codification of antitrust law, you want to apply. Section one prevents a concerted action to unreasonably restrain interstate commerce. Section two prevents monopolization.

Although a reasonable argument can be made for monopolization, it is completely within the publisher’s right to control the use of its intellectual property. Thus, this discussion will focus on section one of the Sherman Act.

First, here is a crash course lesson.

Section one can be broken up into three “simple” elements: (1) concerted action that presents an (2) unreasonable restraint (3) on interstate commerce. Let’s work easiest to hardest and break each element into layperson terms. Interstate commerce - anything involving traveling state to state. Concerted action - a group of people coming together to form an agreement. Unreasonable restraint - is it too basic to say “a restraint that is unreasonable?” Yeah? Okay, so the real crux here is what do we mean by “unreasonable?” There is a long, convoluted balancing act that goes on, but it boils down to the concept of competitive fairness. Is the restraint anti-competitive? Are there any pro-competitive reasons for this restraint (e.g. Competitive balance)? Is there a less restrictive alternative to the rule that would achieve the same effect?

When the dust settles and arguments are made, a decision is made as to whether Section One of the Sherman Act was violated. Or, put more directly, has there been concerted action that resulted in an unreasonable restraint on interstate commerce. It is important to note that the discussion is a substance over form. That is to say, it does not matter what you say, it matters how it functionally works. If, no matter how good intentioned a rule is, it has an anti-competitive effect, lacks a convincing pro-competitive reason, and there is a less restrictive alternative, sorry Charlie, you are likely SOL. As discussed below, there are exemptions to the Sherman Act, but this is section one in a nutshell.

Antitrust Exemptions

“But don’t sport leagues have to come together and create rules and such? Clearly they aren’t violating antitrust laws” - Reader (Probably).

“ depends” - every lawyer, at any time, ever.

True, sports inherently go against the antitrust laws. Teams have to form agreements on when to play, where to play, rules of the game, etc. However, no court would find these rules to be a violation of antitrust. Why? They are not an unreasonable restraint. (Remember that little discussion above?) The concerted action is required for the game to function and players, fans, and team owners accept that fact.

What is not so clear to most people is that under a true application of the Sherman Act the draft, player minimums, free agency, and anything else that restrains where players can go and how much they can get paid is a violation of section one. But, after fifty-two years of the Super Bowl, countless NFL Championship Games prior to the Super Bowl Era, the NBA Finals, and countless other championships, we still have all of these things. So, what gives?

Well, our major sport leagues - NFL, MLB, NBA, and NHL - and not so major leagues - MLS and NASCAR - can rely two major exemptions to the application of section one: The Fair Labor Standards Act (“FLSA”)/Non-statutory labor exemption (“NSLE”) and the Single Entity Defense. (As an aside, the MLB also has a historical, ridiciously antiquated antitrust exemption that has slowly been eroded over time by congress, but not completely destroyed. Alas, here we are, and this exemption would be completely inapplicable to the discussion at hand).

What is an exemption, and why does it matter? If an exemption is alleged, we do not care about of the elements of antitrust. The question is whether the exemption truly applies. If it applies, there are no antitrust concerns. If it does not apply, we have to question whether the imposed rule(s) violate section one of the Sherman Act. Now for a quick and dirty overview of these exemption...

FLSA created a statutory labor exemption for unions. This isn’t something just for sports unions, but any union that is properly formed (perhaps a discussion for another time). The basis of the FLSA exemption is to protect unilateral conduct that is in place to protect an economic interest. Or more simply put, it created an immunity for union conduct (i.e. collective bargaining and strikes). As you can see, the exemption protected a union’s action to reach a labor agreement with employers; however, the statute did not create an exemption for the product of an agreement itself (e.g. collective bargaining agreements). The courts were forced to intervene and create a non-statutory exemption (or implicit exemption) to protect the the agreements. When the power of the two are combined, the result is undeniably powerful. Now, not only are unions and employers individually protected from entering agreements themselves, but so is any agreement that is reached between the two parties (assuming it was an arms-length agreement).

The other exemption is the single entity defense. In an attempt to simplify the defense, the argument is that a group is effectively owned by one entity and acts as a single, unified body, which means there is no economic competition amongst the group. In the sports world, Major League Soccer is a perfect example of this structure. All teams are owned by the same ownership group and the profits are shared amongst the owners. Another example is the recently reintroduced XFL, in which all the teams will be owned by Alpha Entertainment. In contrast, the NFL or the NBA is a group of team owners that have come together to form the league. Jerry Jones and Robert Kraft, have two different economic interest as they want to see their team be successful both on and off the field and grow their brands individually as well as the NFL brand as a whole.

This defense, however, is very much a substance over form approach. Take for example the Supreme Court Case American Needle, Inc. v. NFL (cite omitted and an oversimplified case illustration that includes the relevant info included). The NFL formed a subgroup, NFLP, to “house” all of the team’s intellectual property. In 2000, the NFLP signed an exclusive license deal with Reebok, leaving American Needle and other vendors in the financial dark. American Needle had a straightforward argument: the NFLP eliminates economic competition amongst the teams, thus the formation of the group, and agreements the group makes, are anticompetitive. In response the NFL argued the NFLP was one single entity the teams shared in both profits and losses. The Supreme Court agreed with American Needle. The court rested upon two major ideas: (1) section one will apply unless there is a complete unity of economic interest among the clubs and (2) although NFL teams have common interests such as promoting the NFL brand, they are still separate, profit maximizing entities, and their interests in licensing team trademarks are not necessarily aligned. As you can see, the NFL’s argument “we are one entity” was not enough. The court looked at the financial interest of those involved.

Time to Put It All Together

A quick recap of the analysis that will follow. Does an exemption apply? If yes, the league is in the clear. If no, we look at section one. Esport leagues have popped up with a franchise model in mind: minimum salaries, city based franchise, drafts, and free agency restrictions. But do these leagues have to worry about the application of the Sherman Act? Only one way to find out.

Does an exemption apply? At first, the answer appears to be yes. The league was set up by the game publishers who have a very clear single, unified body. Blizzard owns the rights to Overwatch and, in turn, runs the OWL. Take Two Interactive owns the rights to the NBA 2K series, and 2K League is a joint venture between the NBA and Take Two Interactive. However, I find this argument to be a very thinly place cover. Esports is unique compared to traditional sports because each game has its own developer, which gives them a lot of control over the intellectual property. However, I would argue that that does not give them autonomous control of their league.

A deeper look at the OWL and 2K League, as well as a comparison to the MLS, provide a good example of why the esport leagues are not one single entity. The OWL is league, set up by Blizzard, for Blizzard’s popular title Overwatch. The team structure is similar to traditional sports - each city based team has its own owner and unique brand. There are also some teams in competing areas, the LA Valiant and the LA Gladiators for example. With the ownership and brands separate from the league creator, it is tough to say there is a single economic interest. Afterall, the San Francisco Shock want as many fans as they can get, especially from any LA team, while continuing to promote the OWL brand. Similarly, the 2K League is a league for Take Two Interactive’s popular title NBA 2K [insert year here]. Interestingly, the league is “joint venture” between Take Two and the NBA. However, this does not automatically put the two in the clear. The 2K teams, while started under current NBA teams, have similar competing interest compared to the traditional NBA. The teams are owned by separate owners, Mavs Gaming and Bucks Gaming (how original) are owned by the Dallas Mavericks and Milwaukee Bucks respectively. So far, there is no indications the teams share in the economic success and failure together. Rather, the Bucks want all the fans they can get (#BuxIn6). Thus, while seemingly autonomous, a deeper looks suggests a greater comparison to traditional sports franchise models. 

At the very least, I would estimate a court would not have a strong enough grasp on what esports is to openly accept the single entity defense. There are too many different economic interest at play. As outlined above you have the publisher’s interest, the league’s interest, and the team’s interest. While they may form one, autonomous body to play in a structured format, there is no clear indication of a true share in all of the financial success and failures as one body. A comparison would be the MLS. Each team is owned by a group of investors. There are no single owners of each team. While each team may be city based, the fact remains that the Chicago Fire and D.C. United are owned by the same group of people. In this instance, it is clear there is one single entity that shares in success and failures. In the current esports franchise model, although each team has a common interest in promoting their league, each team is a separate, profit maximizing entity, and their interests are not necessarily aligned. Thus, it is not clear the single-entity defense would hold water.

As an aside, only the North American League of Legends franchise system has a player’s union. The union was formed under very questionable basis (again perhaps a discussion for another time). Thus, the FLSA/NSLE may apply to any CBA the two parties create. However, no other league has a player’s union, thus the FLSA/NSLE cannot apply to the remaining franchise systems.

So, because it is not completely clear whether the single entity defense would apply, a look at section one is necessary. Now here is the thing - the answer to this analysis may completely depend on the challenged rule. However, I believe a reasonable argument can be made that there is no concerted action. First, I want to distinguish this from the single entity defense. The single entity defense would essentially forever exempt the league from antitrust scrutiny. Arguing no concerted action means the owners did not come together and unilaterally implement the challenged rule. Second, this argument depends on what evidence an attorney can dig up. Currently, there is no clear indication how the league rules came to be. The OWL was formed before team owners came along, which makes it reasonable to conclude the current restrictions in place were not formed with concerted action. The 2K League was announced with teams committed and then announced the structure. The difference is nearly night and day and could lead one to believe the inclusion of concerted action.

Now, why did I state it depends on the challenged rule? Because there there is the question of whether the rule is unreasonable, which has a long, convoluted analysis that depends on what is being challenged. Thus, is difficult to say that a rule violates section one of the Sherman Act without all of the pieces. However, if history serves well, it is reasonable to conclude that any sort of rule about pay or ability to free move around would be unreasonable.

Esports has evolved since its inception in the early 2000s (or as late as the late 1980s and 1990s, depending on how you view history). Currently there is the widespread assumption that players are afraid to challenge the system because, after all, they are getting their dream of playing video games for moneyHowever, that fear will fade and more players will begin to seek representation and legal challenges will undoubtedly follow. One of the first challenges to come the way of professional leagues will be an antitrust claim. A quick look at the available exemptions makes it unclear whether one would apply; however, I would find it hard to argue one does. Although current leagues based on their current rules may be able to survive by arguing there is no concerted action, as time passes and rules change this defense too will fade. All of this can be resolved “quickly” with a players union. In short, mo’ money, mo’ problems.