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Dispute Resolution in Esports: Arbitration vs. Litigation

June 16, 2019

 

Author Note: I am attempting to not let "the perfect stand in the way of the good." So, at the risk of not providing the "perfect content," I shall endeavor to produce more articles for my readers to enjoy (or not, as the case may be).  As always, I am open to messages both through the website and on Twitter if you have a specific topic that you're interested in learning more about.

 

With this pithy statement now on the page and out of my system, let's turn to the topic at hand--what is the best method for resolving disputes between parties in the esports industry?  The recent lawsuit filed by Tfue against Faze Clan has raised public awareness both of esports in general (Forbes wrote an article on the lawsuit), and on how messy litigation and dispute resolution can be in general.

The Basics

 

One of the most important, if least discussed, Constitutional rights in the United States is the right to file a lawsuit against other individuals, companies, or governmental agencies.  In fact, the founders put such stock in the importance of the ability to file lawsuits that it was included alongside the right to freedom of speech in the First Amendment:

 

Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or of the right of the people peaceably to assemble, and to petition the Government for a redress of grievances. 
 

Legal scholars have long held that the right to “petition the Government for a redress of grievances” is intended to allow individuals access to America’s court system to file lawsuits against those who have aggrieved them. In many ways, this fundamental right to petition the government for redress of harms suffered is the cornerstone in the entire Constitutional litigation process—without the right to file a lawsuit, other Constitutional wrongs, including freedom of speech violations, would be unable to be litigated and remedied.  All bark, no bite?  Lawsuits are the bite. 

 

The same holds true in the general civil context where someone has been wronged by the actions of another.  While lawsuits involving Constitutional interpretation or broad-sweeping challenges to Congressional legislation occupy most of the airwaves when it comes to the state of litigation in the nation as a whole, these are not the lawsuits that will have biggest impact on most individuals.  Instead, “ordinary” lawsuits regarding mundane subjects such as breach of contract, employment disputes, and liability for car accidents are what the ordinary citizen needs the court to remedy, should they ever have the misfortune to run into an issue where they need the courts to intervene.

 

The right to a jury trial in the United States, as established by the Seventh Amendment, is also a core tenant of the expansive rights individuals enjoy in the United States.  If a legally cognizable claim is brought in a lawsuit, plaintiff’s in the United States have the right to let a jury decide if they should be compensated, and defendants have a similar right to present their defense to a jury of their peers, and leave it in the hands of the jury.  However, the overall frequency of civil jury trials in the United States has been dropping.  The rise of mandatory arbitration is partially to blame for the decrease of civil jury trial.  

 

Esports is industry just beginning to reach a level of maturity necessary for legal policy, jurisprudence, and best practices to develop.  This article’s purpose is to discuss the state of litigation in the esports industry, and potential future developments as the industry begins to seek out a legal framework that is both fair to the participants, while maintaining a level of efficiency that the general civil court system is not equipped to handle in every circumstance.  It is this author’s position that both arbitration and general civil litigation have their place in the esports industry, and that to ignore either would be a detriment to the orderly development of the industry as a whole. 

The State of Esports Litigation 

 

The only way to describe the current esports litigation environment is undeveloped.  The only published appellate opinions I could locate that even mention “esports, electronic sports, e-sports, etc.” are discussing other issues—esport specific concerns are not the subject of the opinion.  Samsung America Inc. v. Park, 2006 WL 3627072 (misappropriation of trade secrets action); and In re Cinematronics, Inc., 916 F.2d 1444 (bankruptcy proceedings).

 

There are multiple reasons for the lack of esports jurisprudence:

 

Lack of Financial Incentive

 

If a tree falls in the forest and no one is around to hear it, does it make a sound?  Or, in lawyer-speak, if there’s a breach of contract and the amount in controversy is pennies, will any lawyers take the case?  While there have been a number of very competent attorneys providing transactional legal advice pro bono or low bono, litigation presents a significant financial barrier to entry, rather than just a time investment on behalf of the attorney, and does not engender the same level of pro or low bono litigation support that help the truly impoverished in other types of lawsuits (especially eviction proceedings and domestic violence situations where “legal aid” organizations routinely step in to pick up the slack). 

 

Esports-specific issues do not carry the same sort of obvious life-shattering circumstances as eviction and domestic violence but are rather about pecuniary gain. Civil litigation lawyers turn down cases where the financial stakes are too low on a daily basis.  The conversation generally goes like this:

 

“I’m sorry.  I agree that you were wronged and that the other party owes you money, but you’d have to pay me more to try to obtain your money than you could possibly recover from the other party, so it’s not going to be worth either of our time or money for me to litigate this case for you.  Further, even if a court agrees that the other party owes you money, they are very likely judgment proof and all you’ll have at the end of the day is a piece of paper saying they owe you money, and my invoice.”

 

A similar explanation applies in contingency cases, except in those cases a savvy civil litigator must simply decline and tell them that it’s not economically feasible for the lawyer to pursue the case.  In either scenario, the wronged party is left without an attorney, the case is never filed, and the accompanying case law is never developed.

 

There is no denying that the money in the esports industry has skyrocketed over the past couple of years.  Forbes put the estimated total revenue in the esports industry for 2018 at over $800 million.  That is the sort of money that allows for the pursuit of civil litigation, and subsequent development of esports jurisprudence.  This also explains the aforementioned Tfue vs. Faze Clan lawsuit--the money is finally right to actually pursue civil actions with competent legal counsel (and the parties are certainly not judgment-proof).  

 

Disbursed and International Nature of the Esports Industry

 

One of the major features of esports is that, barring bad internet or legislation, people can engage with esports titles and competitions from anywhere in the world.  This is undeniably a plus for the industry, but it is a barrier for legal actions.  While in some ways this barrier is directly related to the lack of financial incentive—it is more expensive to litigate cases where some or all parties live in different states/countries—it is also a systematic problem for a legal system in the United States that is still based on state-based bar associations and antiquated unauthorized practice of law ethical rules. (I’ll likely cite to the June 2015 “Sports and Entertainment Agents and Agent-Attorneys: Discourses and Conventions Concerning Crossing Jurisdictional and Professional Borders” Law Review article). 

 

 While the majority of transactional practice can arguably be practiced across state lines, state bar associations and state courts have made it very clear that attorneys may not represent an out-of-state client in a litigation matter, or engage in litigation in a state, where they are not licensed to practice law.  Given the already small pool of attorneys willing to engage in litigation in the esports industry, it may be nearly impossible for potential litigants to find local representation, and while there are procedures for pro hac vice admission, it is prohibitively expensive for modest amounts in controversy. 

 

There are also jurisdictional problems that limit the ability to litigate against out-of-state and international defendants.  Given the necessity of obtaining personal and subject-matter jurisdiction over the potential defendants of the action, it may not always be feasible for an American esports professional player who was stiffed on payment of a tournament win to sue a esports tournament operator out of Sweden, especially if the player’s performance was in Sweden.  While some of jurisdictional issues can be circumvented by engaging in litigation overseas, again, this is an extreme financial barrier to overcome to obtain what is likely to be a modest recovery.  That is, if it’s possible to collect on an international judgment at all.

 

These issues will likely always remain in the esports industry, but the growth of the industry will provide both additional international and domestic legal representation that can provide cost-effective representation, and larger amounts in controversy that make engaging in international litigation a potentially feasible method to recovery for the victim.  We live in exciting times for the esports industry—and it is important to build a strong jurisprudence that future general generations can continue to improve.

 

Pros of Litigation

 

Corporations and those who hold the money always benefit from periods where the status quo isn’t challenged.  While most, if not all, of the major players in esports understand that the overall health and growth of the industry require trust and mutual benefit to both the major players and the smaller professional players and semi-pros alike, when disputes inevitably arise, it is predominantly the less powerful party that is significantly harmed. 

 

Lawsuits allow for an avenue of redress for aggrieved parties, while a framework that allows for accurate, if sometimes expensive, resolutions to controversies.  Perhaps the most important tools for litigation are those of the right to conduct discovery, including questions under oath and discovery of documents.  Litigation, and the threat of litigation, will inevitable improve the overall accountability of the esports industry, and may dissuade some bad actors from ever stepping foot in the space.

 

 Litigation, when it eventually ends up in the appellate courts, will also help create and reinforce expected outcomes.  While litigation may initially cause disruption to an industry, the resulting precedent predicts what the outcome will be for similar disputes in the future.   Major companies and financing require stability and the ability to accurate forecast results to be willing to invest in the scene, and legal precedent is one avenue by which systematic disputes are resolved.

 

Litigation can also provide public awareness for issues in the esports industry, and, if handled ethically, can be an agent for good.   This has been showcased in plenty of other industries, including traditional workplace disputes with major companies (such as the Amazon warehouse wage dispute) and the resulting conversation can result in better conditions for employees, and a better understanding of public opinion for the companies.
 

And finally, and to this author most importantly, litigation is the ultimate leveler of societal imbalances.  While it is impossible to completely level the playing field between well-heeled parties and the indigent, even in litigation, at the end of the day, if there is a cognizable claim made by the plaintiff, the plaintiff can leave the final decision in the hands of a jury, to do with as they best see fit.  Plaintiffs may not always be happy with the result they are given, but a civil jury trial is quite possibly the most equitable way to arrive at a result that’s existed in human history. 

 

Cons of Litigation

 

The expense of litigation is the elephant in the room.  Lawsuits are a costly method to resolve a conflict between parties.  Court appearances, depositions, and the production of documents take time and energy and resources from both parties, which could have instead been applied to other projects and work that create value.  Litigation is never a value-creating proposition.  At the end of the day, there will always be fewer total resources between the disputing parties than there was before the lawsuit was filed.

 

Lawsuits are also a lengthy process.  It routinely takes over a year to get to a jury.  If there are appeals, it can be years before the dispute is finally resolved.  Other processes, such as arbitration, can resolve disputes in a significantly quicker manner.

 

Another large factor that most people don’t consider is the uncertainty of a verdict in a jury trial.  Jurors are notoriously fickle, and every litigator has stories about crazy verdicts rendered by juries that came as a complete surprise to both parties.  This level of uncertainty can lead to devastating results to either party, while arbitration tends to result in awards that are more consistent (now, whether that consistency is a positive to all parties involved is a con that’ll be discussed below). 

 

Finally, there's the publicity angle (see again, the Tfue lawsuit).  There are costs to our industry to airing our laundry in the quasi-public forum of the courthouse.  Business people do not like to become involved in industries that look unstable, so there is a fine line to walk between regulation and squabbling. 

 

 

Arbitration as an Alternative to Traditional Litigation 

 

Without going into exhaustive detail, many of the pros and cons are reversed from what is discussed above.  Here are a few additional things to keep in mind. 

 

Pros

  • It is usually much cheaper.

  • More uniform results.  The arbitration pannels, that being the individuals who decide who "wins" the dispute, will usually be picked from the same pool of potential canidates.  This also means arbitration is generally conducted by professionals well acquainted with the specialized esports industry.

  • Decisions are rendered faster than would occur in court

Cons

  • No power of subpoena or formal discovery.  It can be difficult, if not impossible, to obtain information and documents from any reluctant third-parties. 

  • Decided by industry professionals, which can bring bias concerns into the picture.  Arbitrators must be favorable enough to organizations to continue to work with them in the future, so the arbitration process can sometimes favor the institutional side of the equation while neglecting the one-off individual parties.  (This law review article goes into more detail on this issue).  

  • No precedential value, making it very difficult to resolve reoccurring legal disputes about the application of law to fact.

  • Less due process to the litigants, which can impact results and result in parties losing their ability to have a "day in court," if they so chose. 

  • Rules sometimes heavily favor the large organizations at the expense of the individual players.

  • Can maintain the status quo, even in the face of industry-wide issues, when arbitrators are afraid to rock the boat of their gravy-train institutional parties. 

Moving Forward 

 

One advantage that esports will have as a burgeoning industry is the benefit of jurisprudence developed by other entertainment and sports industries.  Law is intrinsically an industry that builds upon the past through past legislation and case law.  Unscrupulous characters have been trying to avoid paying on contracts and agreements since the beginning of time.  Breach of contract jurisprudence is well-developed, and when the amount in controversy reaches a critical mass it is only a matter of time before simple breach of contract cases are litigated.  There have been plenty of settlements on breached contracts in the esports industry, but far too many that have just fallen by the wayside due to the above-mentioned reasons that have prevented efficient litigation.  Simple controversies about failure to preform under a contract will be a continuous point of dispute in esports, as it is in every industry worldwide. 

 

Another area of litigation that has some precedent from developed industries is anti-trust and the player/agent relationship disputes.  Professional sports have litigated these issues in depth, and while there are some wrinkles that I expect will require significant litigation to resolve (mostly surrounding intellectual property rights, as discussed below and by other articles in this publication) it is elementary that the basic legal foundation will have its roots in traditional sport and entertainment jurisprudence. However, there are significant issues that are new and unique to the esports industry, including intellectual property rights of the publisher of the games (which is not a problem in traditional sports--no one owns "Football").  

 

This is a debate that will not be settled overnight.  In fact, it is my position that both arbitration and litigation have their places in esports dispute resolution.  The reduced costs of binding arbitration can be a godsend to less affluent parties who have been demonstrably harmed, but not to the extent that it would be cost effective to file a civil lawsuit. However, binding arbitration clauses, if allowed to run rampant, can mask systematic issues until it is too late.  All due care should be employed when considering whether to engage in arbitration vs. litigation, and whether binding arbitration language belongs in any particular contractual agreement.   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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