Are You Game? E-sports Opportunities and Legal Issues

In its 2018-2019 budget, the Hong Kong SAR Government has pledged HK$100 million to develop the e-sports industry. What is all the hype about e-sports?

The e-sports industry has blossomed in recent years. It has become one of the spotlight industries in Asia, in particular in places like South Korea and China. “E-sports” typically refers to competitive video or computer gaming. Currently, the popular e-sports game types include MOBA (multi-player online battle arena), first-person shooters and virtual sports games. E-sports must however be contrasted with purely video or computer gaming without a competitive element with another player or team.

E-sports are now increasingly being played at a professional level in leagues and tournaments. It will be a medal event at the 2022 Asian Games in Hangzhou, China. Some major e-sports competitions feature whopping prize pools of over US$20 million and are held at landmark stadiums across the world, such as the Staples Center and the Bird’s Nest, with tickets sold out in seconds.

Hong Kong is relatively slow to the scene. In August 2017, the Hong Kong Tourism Board organised the first ever e-sport and music festival at the Hong Kong Coliseum. Also in 2017, a company that specialises in gaming hardware was successfully listed on the Hong Kong Stock Exchange.

While this industry is booming with myriad of opportunities – for game publishers, players, sponsors, event organisers - there is an interesting matrix of legal issues and pitfalls involved. This article looks at some of these legal issues: intellectual property, gaming, employment, and dispute resolution.

As with many newly developed technologies and industries, to date there is no one single “e-sports” law around the world. The challenge therefore is, how should one apply existing (and sometimes outdated) legal concepts to this new form of “sports”?

Intellectual Property

E-sports attract many different forms of IP, including copyright, trademarks, designs, and patents.

The copyright aspects include: the codes of the computer program, the visual graphics, such as game characters and backdrops, and the music (as musical works). Whereas the name and other key elements of the game (such as team names) can be protected by trademarks.

As game end user licence terms usually exclude commercial use, competition organisers have to obtain rights from the copyright holder of the game to publicly make it available and stream online or broadcast. This may have to extend to obtaining the relevant permissions for music performances and commentary accompanying the e-sports competition. Sub-licensing may also be required if a third-party platform is engaged to provide streaming services.

Current estimates are that there are over 200 million of fans following e-sports worldwide (including casual fans and avid fans). Live-streaming of e-sports events is a potential gold mine, considering some of the very lucrative broadcasting deals already happening in the traditional sports world.

Patent protection is also something on the agenda. There are already a number of granted e-sports related patents.

Designs rights also increasingly come into play, in particular for hardware and accessories (e.g. mouse, keyboard, chair) especially designed for e-sports with an aesthetic appeal to give those devices a “cool” factor.

Gaming

Gaming laws and regulations very often come into the picture in e-sports.

For instance, in Hong Kong, gambling is generally illegal except for certain licensed or exempted activities. “Games of chance” or “games of chance and skill combined” (or even games with prizes which do not involve a substantial degree of skill) fall within the ambit of the Gambling Ordinance. Many e-sports games may, one way of another, involve an element of chance or uncertainty (e.g. drawing cards from a deck or purchasing some randomly generated in-game items).

Another legal area to look at is crowd-funding. Many e-sports competitions are funded by a mixture of sponsorship, ticket sales and in-game purchases. The question is whether contribution to the prize pool may constitute crowd-funding. While it may be possible to distinguish these prize pools as a kind of reward-based funding (as opposed to equity/share-based funding), the line is not always easy to draw, especially in jurisdictions where the regulations on crowd-funding are not so clear.

Betting with virtual, in-game currencies is also not uncommon. For example, “skin betting” is a popular phenomenon. “Skins” do not offer any game advantage, but are outfits or covers for in-game characters or items that are usually bought and sold for real money. While skins can be legitimately traded, they are also used for illicit betting on anything from e-sports matches to casino games on unregulated platforms.

Another e-sports phenomenon which gives rise to gambling concerns is the “loot box” feature which is usually purchased with real money and gives a randomly generated selection of in-game items. There are concerns whether loot boxes create a pay-to-win culture by encouraging users to gamble for the prized items (and in the process getting a lot of unnecessary or unwanted items). These controversies have prompted authorities in various jurisdictions to introduce a tighter control on loot box features. For instance, Mainland China requires game publishers to disclose to users the probability of getting particular items in a loot box.

Employment

At present, there is little guidance or consistency in most jurisdictions as to whether e-sports competitors are considered professional athletes. Some e-sports players have been able to get athlete immigration visas into certain jurisdictions, but there is no guarantee. Another issue is potential tax implications as to whether e-sports players are subject to tax as sportsmen. For instance, the Inland Revenue Ordinance in Hong Kong has a withholding tax requirement for profits derived from performances in Hong Kong by non-resident sportsmen.

Having said that, given the growth of the industry, we expect to see further legislative and regulatory clarification on those issues.

Another potential issue is the engagement of underage players in e-sports. These underage players may be tempted into jumping into professional leagues or competitions without proper contract protection. Another issue is whether it is legal to employ these underage players into professional teams in the first place. Raising legal awareness of these issues among e-sports stakeholders is certainly important, and some jurisdictions have gone further by introducing measures such as minimum wage and minimum contract length to protect e-sports players.

Disputes

Given the rapid growth of the industry, one should not be surprised to see an increasing amount of disputes in the e-sports arena. Indeed, recently there have been reports of IP disputes and lawsuits over imitation of game contents and misappropriation of trade marks.

The old debate around litigation vs. arbitration as the most appropriate avenue for dispute resolution equally applies to e-sports. Given that the industry is online-based and of digital nature with a strong international element, the litigation route implies facing the challenge of deciding the appropriate forum.

Alternatively, commercial arbitration is already commonly used for a great deal of disputes in traditional sports (e.g. for sponsorship and licensing matters) and offers the added benefit of the dispute being kept confidential. The Court of Arbitration for Sport (CAS) currently does not recognise e-sports disputes to fall within their jurisdiction. It remains to be seen whether new or specialised arbitral bodies specific to e-sports would be created with particular experience on disciplinary, corruption, doping and technical cheating issues. As things stand now, e-sports stakeholders would have to resort to the traditional arbitration bodies in their contracts.

Conclusion

As we see video gaming expanding from a hobby for children and adults to a remunerated profession in a fast growing industry where astronomical amount of money is involved, complex legal issues have naturally emerged and challenged the existing laws. 

Jurisdictions: 

Partner, Hogan Lovells (Hong Kong)