Problematic Regulations Governing U.S. Esports Tournaments
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While there are few laws in the United States that were written with the concept of “esports” competitions in mind, in practice esports tournament organizers face a myriad of regulations that could apply to their tournaments.
Generally the most problematic set of laws affecting esports competitions are ones that were intended to regulate misleading lotteries, sweepstakes, and other forms of gambling.
The ultimate effect of these rules is that they can limit the ability of your esports tournament to either charge entry fees or offer meaningful prizes for winning the competition.
In addition, it is important to be aware that these laws are predominately set by the state in which the competition is held and can vary, sometimes dramatically, across each state. This is particularly important to be aware of if you intend to hold an online competition, as your online tournament could be subject to the laws of the states of each of your participants.
Overview
The most common form of state regulation affecting esports competitions are lottery laws. By default, doing the following three things in combination is generally prohibited across the U.S.: (1) requiring entrants to pay entry fees to (2) participate in a game of chance, for (3) the opportunity to win a prize. This blanket prohibition often affects esports tournaments in unexpected ways.
While the specific laws vary by state, with sometimes radically different outcomes for similar games, you can generally avoid this prohibition if your tournament only offers two of these three elements. As a result, there are three primary ways to offer a lawful esports competition:
(1) Games of Skill. If the game is one of skill, most states permit the competition to both charge entry fees and offer prizes.
(2) No Entry Fee. If the competition does not require an entry payment, the competition is generally lawful even if prizes and chance are involved. However, the state laws governing sweepstakes may apply, which typically require that certain information be disclosed to entrants even if the competition is permitted.
(3) No “Prize”. If the competition does not offer a “prize” in the legal sense of the term, which generally requires a defined market value or active secondary market, it will generally be permitted to charge an entry fee, involve chance, or both. Think of the tickets a child might win from a local arcade game.
Games of Skill
In most states, games of skill are treated differently than games of skill. If your esports game can be effectively classified as a “Game of Skill” in the state(s) you operate in, you will likely (but not always) have more flexibility in your ability to charge entry fees and offer valuable prizes at your tournament.
However, what exactly constitutes a Game of Skill varies across the states. The three predominant tests used to determine whether a game qualifies as a Game of Skill:
(1) Predominance Test. This is the most common test used by states. If the competition involves more skill than chance, it is considered a Game of Skill under the Predominance Test. If your state uses this test, your esports competition is very likely to be able to charge entry fees and offer prizes.
(2) Material Element Test. This is a more stringent test. If chance plays a material, or significant, element in determining the outcome of the game, then it is considered a Game of Chance. This typically includes card games, such as Hearthstone or Magic: The Gathering.
(3) Any Chance Test. This is the least common test that states use. Under this definition, if any element of chance is present, it is considered a Game of Chance. Under this test, virtually every esports game would be considered a game of chance.
If your esports competition is a card game with random draws like Hearthstone or Magic: The Gathering, it would likely be considered to be a Game of Chance under the Material Element Chance and thus would likely have to forego either charging entry fees or offering a “prize”.
Random spawn positions and item drops in games like first person shooters and Smash Bros. could also be implicated in this test. In addition, the somewhat random odds of shots going in the hoop in NBA2k, or catches being made by receivers in Madden NFL games, could run the risk of being a “material element” of chance as well and trip this test.
It is important to be aware that chance can take a variety of forms, particularly when it comes to competitions in the Any Chance Test states. Chance could be a random card shuffle or a random item drop or spawn position, as stated above.
Chance can also result from something as innocuous as two players in Smash Bros. pressing a button at the same time while not knowing the decision of the other, with one player losing the fight because his button happened to have more invincibility or priority than the other player’s. Even this sort of “simultaneous decision making” could very well trip the Any Chance Test, or in certain circumstances, the Material Element Test.
One of the few games that would survive the Any Chance Test would be chess, where every player has perfect information at every turn, and play moves in sequence, with no information withheld from either player at any time.
No Prizes
While removing the prize element often defeats the purpose of an esports competition, it is an option for many organizers to grow their esports communities, particularly for video game publishers who can offer digital downloads tied to their games.
This is because certain prizes can be offered that do not meet the legal definition of a “prize”. For example, if the reward does not have a market value — such as the arcade ticket mentioned above — it is generally not considered a “prize” in the legal sense of the term.
Offering a virtual “prize” similarly could avoid this qualification if that virtual prize has no secondary market — for example, if a “skin” or player costume that is given directly to a player’s gaming account and cannot be sold, it will very likely not be considered a violation of a state’s lottery laws.
It is less clear whether giving a player a download code that could then be sold to another player on the secondary market would not be considered a “prize” in the legal sense, but if that download code is sufficiently common or low-value that there is no real secondary market for it, it will likely not be a prohibited “prize”. Now, on the other hand, if it is an extremely rare skin that could fetch a significant price on the secondary market, the skin should be awarded in a way that it could not be sold to other players to avoid creating a secondary market if the state’s laws did not otherwise permit it.
Enforcement Trends
To date, no states have used taken legal actions against esports tournaments, and the overall public policy trend is very positive. States across the country are taking a more relaxed attitude toward activities that have traditionally been considered gambling, and the country in general seems to be embracing the esports scene and the funding mechanisms required to sustain it at a competitive level. This reduces the risk that an aggressive regulator will over stretch an otherwise ambiguous anti-lottery law.
Certain states still remain, like Colorado and Arizona, that are relatively unambiguous in their restrictions as they apply to prizes and entry fees in esports. In future articles, I will take a closer look at the regulations of individual states like these that govern esports competitions.
Andre J. Castillo and his law firm, Castillo Corporate Counsel, PLLC, provide business law services to tech start-ups and small- and medium-sized businesses in Washington state, such as Matcherino, and the District of Columbia. In this capacity, he has represented companies in deals with the world’s largest video game publishers, Fortune 500 companies, and government agencies. An avid esports fan himself, Andre can carry his own against top players in the Street Fighter, Marvel vs. Capcom, and Samurai Showdown series. He graduated magna cum laude from the University of San Diego School of Law and holds an M.A. from the Johns Hopkins University-SAIS. He can be reached via email at info@cccp.llc.
