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Five Legal Issues Your eSports Company Needs to Know About Operating in the U.S.
September 14, 2015

Five Legal Issues Your eSports Company Needs to Know About Operating in the U.S.

By: Michelle Cohen and Ifrah Law

Photo courtesy https://outplayed.fr/ 

With a $143 million market in North America, eSports is big business in the U.S. And given its swift rise in popularity – 205 million people worldwide watched or played eSports in 2014, it will only become bigger. At last week’s eSports Conference, held in San Francisco September 9-10, industry leaders met and mingled while discussing market trends, best practices and the future of eSports. But before eSports companies get swept away by the excitement surrounding the industry, it’s critical to take a step back and ensure that your company has a solid legal footing in place to avoid “game over.”

  1. What should eSports companies pay particular attention to in crafting their terms and conditions?

Players should be provided with straightforward terms and conditions that explain the rules of the game, the policies governing the use of the site, and any other important rules, such as an operator’s ability to terminate or suspend a player if the need arises. Clear and compliant terms and conditions may limit company liability, specify mandatory arbitration for most claims, and allow the operator to terminate or suspend services at its discretion. Operators may also consider setting certain minimum standards when allowing users to post content, such as forbidding content that is violent, harassing, pornographic, infringes on intellectual property rights, or defames others. Companies might also specify that player accounts may not be bought or sold, to avoid the sale of in-game currency and goods on the secondary market.

  1. What privacy laws impact eSports companies?

Security breaches in the financial services and healthcare sectors frequently make the news. But privacy laws and data breaches –whether from employee negligence or hackers – affect all companies. Start-ups could be particularly vulnerable because they have limited resources and may not be focused on data security and data privacy. There are two main aspects of data privacy to consider – how to protect data and what to do if data security is breached.

Step 1: Get serious about protecting the personal data you collect. This includes understanding the data your company is collecting and making sure operational controls are in place. Operational controls include secure systems and appropriate managerial controls. Access to personal information should be only as needed. Employees should be trained (and re-trained) on data protection, such as making sure data is encrypted and not stored on devices that can be easily lost or stolen such as flash drives.

Step 2: Develop an action plan should a breach occur. This includes understanding what agencies, organizations, and persons may need to be notified. Most states require that affected persons be promptly notified if their personal information has been exposed. Other important considerations include: understanding the extent of the breach and whether any actions such as changing passwords need to be implemented immediately; forming an internal team to include public relations, IT, human resources, and legal, and lining up appropriate outside resources such as counsel and credit monitoring services.

  1. How can I manage kids who try to register for my eSports website?

In the U.S., there are particular restrictions on collecting personal information from children under 13. The Children’s Online Privacy Protection Act (COPPA) limits the personal identifying information that companies can gather on children under 13 and requires certain disclosures and parental consent. Since many kids under the age of 13 engage in online gaming, it is critical that gaming companies are aware of the children’s privacy laws, which include:

  • Posting a privacy policy on your website that complies with COPPA
  • Notifying parents directly before collecting their children’s (under 13) personal information and getting the parents’ consent
  • Honoring parents’ rights with respect to information collected about their children
  • Implementing reasonable procedures to protect the security of children’s’ personal information
  1. Could eSports be subject to the laws governing other online activities, such as fantasy sports or online poker?

Unlike real-money online poker, the exchange of money is not an inherent feature of eSports. Athletes compete against each other for the fun and social aspects of the games rather than to win money from one another. This lack of wagering between players removes eSports from the reach of the laws which ultimately caused the shutdown of unregulated real-money online poker in the US. However new real-money industries of fantasy eSports and eSports betting have arisen to engage eSports viewers even more actively in the games they watch. Fantasy eSports are nearly identical to traditional fantasy sports in that players exercise their skill to assemble a team whose performance is not determined by the outcome of a single athlete, team, or match. Fantasy sports—and by extension, eSports—are generally considered to be legal under most federal and state gambling laws. However as the industry grows, fantasy sports are receiving increased attention from regulators and there has been an effort to restrict them in some states. Conversely, other states seek to assure their legality by passing specifically tailored laws to protect them. Organized eSports betting on single matchups, while popular overseas, has not taken off in the U.S. due to concerns about its legality. The element of chance or luck inherent in picking the outcome of a single game or the performance of a single athlete is generally considered high enough for the activity to be deemed illegal gambling in an unregulated setting. However free-play eSports wagering sites may avoid this classification by providing virtual betting which does not involve the exchange of real money in order to wager.

  1. What are legal issues that free-play eSports betting sites should be aware of?

Free-play eSports betting platforms need to be cognizant of the three elements of gambling:  consideration, chance, and prize. These three elements, when present in a single activity, add up to illegal gambling under many states’ laws.

Free eSports wagering sites may attempt to remove the element of consideration by creating their own virtual currency, which users may obtain for free and cannot cash out for real money. Customers might receive virtual currency just for creating an account, and earn additional currency completing certain in-game activities. However, omitting real money from the equation does not necessarily mean that consideration is absent under some states’ laws. Some states may consider other benefits conferred by a user to satisfy the element of consideration, such as if users have to provide substantial information or devote substantial time to earn the currency.