Esports Biz 101: Part 1 – Business and legal considerations for professional esports orgs

This is a guest piece by Justin M. Jacobson

Justin M. Jacobson, The Jacobson Firm

Many new esports teams and organisations have joined the competitive circuit in the past 12 months. This is due to the continued global development of esports business as well as its expansion into newly created games and into existing games that were not previously part of this professional world. 

Some of these organisations may only field a team in one game; while, other larger organisations, may field teams in multiple games. For example, an organisation such as Optic Gaming or Cloud9 field teams in a variety of games; while North only has a CS:GO team. Whether the organisation is large or small, the legal and business considerations for their proper functioning are fairly similar. Proper adherence to these formalities is extremely important for the potential short-term success as well as long-term viability and profitability of any organisation.

While there are many relevant business and legal matters related to the management and ownership of a professional esports organisation, the following is part one of a two part article that provides an overview of some of the most essential and relevant aspects.

Business Entities

One of the primary business considerations for a team or organisation is the formation of a business entity for the team. A business entity, such as a corporation or limited liability company (LLC), may be created by a team owner. The selection of which business entity to form is an initial crucial decision. Whether the team forms a C-Corporation, S-Corporation or LLC, typically depends on which state the entity will be formed in and the anticipated business structuring that the team envisions. For instance, a corporation in New York does not have the same costly publication requirement that an New York LLC has. This initial cost may be a consideration for a team when choosing which entity is most appropriate for their organisation. Additionally, each state provides different tax treatment for the business entities as well as different statutory limitations on ownership of a particular entity. It is prudent to consult with a qualified professional, such as an attorney or accountant, when deciding which type of business entity and which state is proper for a particular team.

“Whether the organisation is large or small, the legal and business considerations for their proper functioning are fairly similar”

Another benefit that an entity provides to its owner is protecting their personal assets (i.e. cars, houses, stocks, bonds, securities, bank accounts, etc.) from any claims arising from any contracts or other arrangements. Essentially, if a sponsor, league organiser, or some other third-party creditor desires or has an existing claim against a team who had properly entered into the original agreement on behalf of the organisation, the only recourse for that creditor would be against the team entity, not the individual owner or their personal assets.

While shielding an individual proprietor from personal liability is one of the most significant advantages of creating a limited liability entity, there are also several other important advantageous benefits that the entity provides that are necessary to successfully operating an esports organisation. One is that having a separate corporate identity permits the team to open a corporate bank account in the business’ name. The business will receive an Employer Identification Number (EIN) also known as a Tax-Identification Number (Tax-Id). The existence of a business bank account also facilitates easier tracking of the organizational expenses and permits the deduction or “writing off” of relevant, properly documented business expenses. A valid business entity also permits the team to obtain proper business licenses and insurance so that they can operate efficiently and field potential investment offers.

Another benefit is that a limited liability entity typically is governed by a written contract (an operating agreement for an LLC or a shareholder agreement for a Corporation) that outlines how the entity will operate. This includes an outline of the split of any profits and losses among its owners. Also, these documents specify how any management decisions are addressed and how additional owners (and members) can be added or removed. This document provides the team with flexibility to potentially bring in outside investors.

These companies also provide easy management over any team owned intellectual property (i.e., team name, logo, photographs, audio-visual works, etc.) as well as any tangible property (e.g., computer equipment, property leases, streaming equipment). This is readily apparent due to the numerous organisations that currently have registered trademarks. These include “FNATIC” (U.S. Registration No. 4,677,398), “Evil Geniuses” (U.S. Registration No. 4,568,877 for the word mark and Registration No. 4,568,878 for the stylized logo), “Splyce” (U.S. Registration No. 5,250,213), “OpTic Gaming” (U.S. Registration No. 4,870,601), and, “Counter Logic Gaming” (U.S. Registration No. 4,417,823). It also provides the organisation with a set, established entity to sign and bind the talent in an effort to create, stronger and enforceable agreements.

Intellectual Property Protections – Trademarks

Another paramount consideration for a professional gaming organisation is the protection of the team’s intellectual property, specifically its trademarks and copyrights. A trademark applies to a particular word, logo, slogan, phrase, smell, sound or a combination of these, used in relation to specific goods or services. This includes utilising the team name as a “service” mark if a mark is used in connection with providing a particular service (e.g., participation in professional video game competitions ) or as a trademark for providing a particular good (e.g., clothing or other team merchandise or apparel). There are two separate trademarks in each organisation name, the team name as well as the team’s logo. This is true, even if the logo already includes the organisation’s name in it. Brand name protection is paramount.

Prior to selecting an organisation name and establishing corresponding social media platforms it is prudent to first conduct a trademark search. A screening search is used to determine the availability of the name and to assess the existence of any other confusingly similar marks that may block the team’s application. Once a search is conducted and a name is cleared, a federal or state trademark application should then be filed with the appropriate state department or with the United States Patent and Trademark Office (“U.S.P.T.O.”). Additionally, if the team plans to expand into other geographic markets, international trademark considerations come into play, including utilizing the Madrid Protocol to enable U.S. entities to apply for protection in other countries based on an existing American application or registration.

A valid registration of an organisation or team name provides the owner with the ability to actively police and prevent other individuals from “stealing” or otherwise impersonating an established organisation. The registration also allows the filing of an infringement claim with various social media platforms, including Facebook, Twitter, Instagram and YouTube, to retrieve or block an infringing account. A trademark owner may also utilise a valid registration as a basis for filing an anti- cybersquatting claim with ICANN to retrieve an infringing website domain name.

“The ownership of a valid trademark registration could potentially be utilised to pursue sponsors or a tournament organiser for failure to pay an organisation”

Furthermore, an existing trademark registration permits the owner to contact the U.S. Customs Department and Border Patrol to prevent the importation of any infringing or counterfeit goods bearing the protected mark or any goods containing marks that are confusingly similar to a protected mark. An existing registration will also be beneficial for entering into licensing agreements with third-parties. This helps alleviate potential liability concerns when publicly distributing merchandise bearing the mark.

Finally, the ownership of a valid trademark registration could potentially be utilised to pursue sponsors or a tournament organiser for failure to pay an organisation, which has become frustratingly common in today’s esport world. Past examples of this have been seen all over from France to Argentina. While this approach has not be used yet, it could potentially be argued that the team permitted or otherwise “licensed” the mark for use by sponsors or an organisation in commerce for the advertising and promoting of the organization or sponsor. The failure by the entities to provide the negotiated for compensation could be tantamount to a breach; and, may even permit the owner to recover any damages they incur as a result of this breach. While this may seem far-fetched, a trademark registration may act as a weapon in a franchise’s arsenal.

In the second part of this piece, which will be published on Wednesday 24th January, we will explore some other related legal and business matters, including additional intellectual property protections as well as contracts.

This article is not intended as legal or business advice, as an attorney or other professional specializing in the field should be consulted.

© 2018 The Jacobson Firm, P.C.