The Emerging Role of Antitrust Law in Esports (Part 2)
Note: This is the second of two parts of this article, originally printed in Sports Litigation Alert, Volume 16 Issue 21, November 8, 2019. Copyright © 2019 Hackney Publications. For the whole story, please find Part One published in the National Law Review on September 16, 2019.
As noted in Part I, most video game publishers initially did not set out to monetize public exhibition or tournament play of their game titles. But, with the availability of faster broadband connectivity, opportunities in on-line gaming are projected to grow at a rate of 25 percent per year. With the eSports industry set to rival other sectors of the entertainment business in volume of commerce, its largest and most successful participants are likely to confront some of the same legal issues faced by big media companies, including antitrust.
The present consensus is that the eSports industry is still too fragmented and unconcentrated to draw antitrust scrutiny, either by governmental regulators or private antitrust plaintiffs. Since publishers own the intellectual property rights to their repertoire of games, they enjoy significant dominion over players, teams, league structures, and the terms of tournaments and exhibitions. And, although intellectual property rights do not necessarily trump antitrust concerns, publishers may lawfully exclude participants or exhibitors in ways that maximize the value of their properties. Bradford C. Auerbach, formerly an executive at Disney and Liberty Media and now a media attorney in private practice in San Diego, says that as long as publishers operate outside the boundaries of broadcasting and cable-TV and beyond the reach of the music Performing Rights Organizations, publishers of even the most popular video games are unlikely to face any kind of compulsory licensing for public exhibition of game events. Thus, copyright law allows publishers to restrict exhibition of game play to specific streaming services, because unauthorized Internet streaming would constitute an infringing public performance of a copyrighted work. Moreover, theories of single-firm antitrust violations require the alleged violator to possess market power in a relevant market. Intellectual property rights may confer the right to exclude, but they do not necessarily confer the kind of market power that implicates the antitrust laws. The availability of economic substitutes for patented or copyrighted works ordinarily constrains the market power of intellectual property owners. Consequently, publishers are unlikely to be considered dominant in a relevant market that includes many competing games that serve as economic substitutes.
Nonetheless, a publisher may find itself in control of a video game title that serves a large enough cohort of consumers for whom other games are not substitutes and which affects a substantial quantum of interstate commerce. Once that threshold is crossed, a video game publisher could discover that it is a monopolist or a dominant player in a narrowly defined antitrust market. Nick Mitchell, general counsel at Wizards of the Coast, notes that players develop skills within particular game genres, such as first-person shooter or real-time strategy games. If the game genre determines the substitutability of employment opportunities, the prospect of a monopsonist emerging in the video game player market is not that farfetched. At that point, the same legal constraints faced by major league sports leagues in dealing with professional players would apply to the publisher of a dominant title in a particular genre.
Provided market dominance is lawfully acquired, charging monopoly prices is not unlawful under U.S. antitrust law. Auerbach notes that in the past exhibitors of “pay-per-view” media events, such as one-off boxing matches, would charge whatever the market could bear. But even a lawful monopolist can run afoul of the U.S. antitrust laws by wielding their dominance in ways that maintain their monopoly position in the market or harm competition in complimentary markets. For example, a publisher dominant in a relevant market who manipulates the outcome of game exhibitions to generate a larger audience could face antitrust liability under a theory of monopoly maintenance. Similarly, wrongful conduct that impairs the capacity of a rival to enter or innovate, such as misleading consumers about the rival’s game could lead to antitrust liability. Dominant firm conduct that “raises rivals’ costs” by, for example, discouraging talent from accepting employment with a rival, could also constitute monopolization. Of course, acquisitions by the publisher of a dominant title of actual or potential rivals could also face antitrust scrutiny.
The publisher of a game title that achieves dominance in a particular genre could also face the temptation of adopting policies that harm competition in a complimentary market. A potential tying violation arises when a dominant firm in one market conditions the purchase of their sought-after product on the purchase of a different product in a second market that consumers do not necessarily demand. For example, a video game publisher that ties access to its dominant title the purchase of an unwanted piece of game hardware or complementary software for which other, more desirable substitutes exist, could face liability for a tying offense.
Unlawful Concerted Action
The second principal category of antitrust violation involves unlawful concerted action, the essence of which is an agreement among competitors which, under the terms of Section 1 of the Sherman Act, “unreasonably restrains trade or commerce.” The vast majority of concerted action cases are adjudged under the rule of reason, which requires a fulsome economic analysis of the effect of the challenged restraint on market competition. Thus, unless the conduct falls into a category that the antitrust law considers per se unreasonable (such as price fixing, market allocation, or bid rigging), courts will inquire into whether the restraint may be beneficial or justified under the circumstances. In the sports context, the inquiry will often turn on how closely the restraint is related to the game rules or the organization of tournaments. The sports antitrust jurisprudence in this area is likely to serve as the model when similar issues arise in eSports.
A New Take on Merchandising
As mentioned previously, established antitrust jurisprudence generally condemns publisher or league restraints on player compensation or mobility. But, in an important recent antitrust case, the Supreme Court also found that the NFL’s practice of pooling its individual teams’ intellectual property in order to negotiate collectively for fabrication of promotional merchandise on behalf of the teams amounts to unlawful concerted action. The court observed that the fabrication of promotional merchandise has nothing to do with the production of football games. Teams are “independent centers of decision making” with the capacity to negotiate on their own for the fabrication of promotional merchandise. The NFL’s licensing entity, in effect, removed these independent decision makers from the market. Absent any apparent benefit or justification for the NFL to negotiate collectively on behalf of individual teams, the restraint was unreasonable. Video game publishers and leagues, therefore, can run afoul of Section 1 by mandating joint decision making by independent teams on matters that are inessential to the production of the game itself.
Just as consumers today are offered a wide choice of substitute titles across most game genres, sponsorship opportunities are similarly plentiful. It is unlikely that any one publisher could dominate the market for video game sponsorships anytime soon. But, collusion among publishers of popular games could constitute a per se violation, if the conduct directly restrains prices or output to drive up sponsorship rates. Even if the conduct falls short of per se price fixing, limitations on sponsorship opportunities agreed to by competing publishers is the type of conduct likely to be condemned under Section 1.
Generally speaking, the antitrust laws exist to ensure that market participants enjoy the benefits of competition free of anticompetitive conduct that raises prices or depresses output. Such conduct can consist of dominant individual firms that engage in anticompetitive practices or combinations of competitors that seek to maximize their collective profits instead of competing individually. In the currently emerging and fragmented eSports industry, the prospects for such conduct seem unlikely and an antitrust practitioner can resemble a skunk at a garden party. But as the industry matures some firms will achieve dominance in relevant markets and others may face opportunities and temptations to collude. The emergence of antitrust law issues in the eSports industry, therefore, is not a question of whether, but of when.
Reprinted from Sports Litigation Alert, Volume 16 Issue 17, November 9, 2019. Copyright © 2019 Hackney Publications.