The rise of Esports: Navigating an evolving legal and regulatory landscape (by Linklaters)
By Verity Egerton-Doyle and Sînziana Ianc.
Esports has emerged as a mainstream entertainment industry, with an ecosystem which includes professional teams, broadcasters and regulators. With a global market valued at USD1.7 billion in 2022 and projected to reach a value of USD 11.94 billion by 2030, it has become a serious commercial opportunity, prompting a surge in financial investment from both grassroots investors as well as established corporates.
Driven by technological innovation, the Esports industry is embracing AI, immersive technologies such as AR and VR, Web3 and blockchain – and the opportunities they bring to drive efficiencies in the development process, deeper player engagement and new revenue streams. However, the industry’s rapid development has outpaced the laws regulating it, leading to a range of legal challenges. Our global sports team advises on the over-arching legal and regulatory landscape of the Esports industry.
In this article we examine three key areas of legal risk – and the role of technology in also helping to mitigate these risks.
1) Employment law issues: ensuring Diversity, Equity, and Inclusion
As the popularity of Esports continues to skyrocket, with escalating salaries and betting stakes, the industry faces unique employment law challenges that mirror those of traditional sports in some respects as well as having issues specific to Esports. From determining the employment status of players, to the enforceability of restrictive covenants, and addressing concerns about workplace conduct, the employment law landscape is as dynamic as the games at the heart of this booming sector [read more].
The Esports industry has been criticised in recent years for a perceived lack of diversity. In this context, Esports organisations are increasingly recognising the role that “positive action” measures can play in preventing or remedying workplace discrimination and fostering an inclusive culture. However, even in jurisdictions where there is a legislative framework permitting employers to take positive action, there is often ambiguity over the extent to which employers can take such positive action without such action amounting to unlawful discrimination. Therefore, positive action measures need to be carefully considered, supported by data and evidence.
Technology can play a crucial role in rendering Esports more inclusive and to break down barriers to diversity. Adaptive games technology has made possible for players with disabilities to participate in Esports tournaments and compete at the highest levels. For example, the increasing use of VR technology in Esports has allowed for tournaments to be more engaging and immersive for both for players and fans. But it also has the potential to render Esports more accessible to players with limited mobility to take part in tournaments.
2) Lack of governing bodies
Unlike traditional sports, Esports lack an international governing body. Multiple organisations, such as the International Esports Federation and the Global Esports Federation, aim to centralise governance but face competition and lack widespread recognition. This fragmented regulatory environment leads to inconsistencies, as game developers largely regulate their own games, running competitions, setting and enforcing rules for players and other stakeholders. This self-governance can result in perceived conflicts of interest and inconsistent rulings. As recent scrutiny of traditional sports by antitrust regulators shows, where a governing body has the power to set and administer rules, this can give rise to risks for the body itself.
Some Esports tournaments take place exclusively online – such tournaments can be played across numerous jurisdictions simultaneously, and therefore different players will be governed by different national laws depending on where in the world they are playing from. Such regulatory patchwork leads to a lack of transparency and certainty for players, fans, teams, leagues, sponsors and broadcasters alike.
This is a space where innovation in Web3 and blockchain technology can help deliver greater transparency to the Esports ecosystem. The creation of decentralised tournaments can help minimise some of the real and perceived conflicts of interest associated with in self-governance of game developers. The implementation of smart contracts for prize distribution and the enforcement of disciplinary actions, may also improve transparency and make Esports tournament fairer and more secure. And decentralised Esports tournaments could also help improve community engagement by allowing members to participate in sponsoring events and contribute to the tournaments’ revenues.
3) Threats to the industry’s integrity
Doping, gambling, and player misconduct jeopardise the integrity of Esports, similar to traditional sports. While some organisations enforce drug testing, the absence of a unified governing body means not all tournaments follow doping regulations. Like traditional sports, Esports can benefit from introducing a global anti-doping and enforcement framework, tailored to the features of Esports competitions. In the meantime, industry participants should be mindful of the potential for reputational damage and take an active approach to managing these threats.
Loot boxes and other in-game purchases have now become a major source of revenue for game developers, with in-game purchases expected to generate more than USD74.4 billion by 2025. Exacerbated by the advent of GenAI, which has offered players the possibility to create new digital assets and later sell and trade them with other players thanks to Web3, there are growing concerns about the potentially negative impact of these types of microtransactions on children and young people [read more].
Regulators are increasingly scrutinising emerging practices within the video games sector to ensure the protection and wellbeing of all players, particularly children. Following the passing of the UK’s Online Safety Act and the implementation of the EU’s Digital Services Act, game developers, particularly those that offer online multiplayer and in-game purchase functionality, will need to ensure they have in place user protections (such as satisfactory age-verification procedures) in order to comply with these new legislations and avoid potentially significant fines.
The use of ‘software cheats’ to provide players with an unfair advantage has also come under scrutiny. Recent high-profile hacking cases highlighted the significant financial and reputational cost to tournament organisers of a cyberattack. Game creators and tournament organisers are prompted to invest in more sophisticated protection software to counter evolving hacking techniques.
Looking ahead
The Esports industry is developing faster than the laws regulating it. Factors such as the global reach of Esports, risks associated with the emergent technologies involved (such as the growing use of Artificial Intelligence and Web3) and the influx of significant financial investment, mixed with a complex, layered but also patchy regulatory environment, means that Esports is raising a multitude of novel legal issues – with new regulation developing in response.
Stakeholders must navigate this fragmented legal landscape while continuing to leverage the benefits of innovative new technologies both to grow revenues and help manage emerging legal risks. As the industry grows, further scrutiny and regulation are likely, underscoring the importance of informed, strategic responses to these emerging issues.
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