Old Wine in a New Bottle: eSports Leagues and Rule-Setting Conduct

Wilson Sonsini Goodrich & Rosati

On July 2, 2021, dotesports reported that the Department of Justice (DOJ) Antitrust Division was investigating Overwatch League (OWL) over its soft salary cap policy aimed at discouraging excessive team spending. OWL is an eSports league featuring teams that play Activision Blizzard's hit game Overwatch. The investigation into OWL is being led by the DOJ's Civil Conduct Task Force subdivision, which has already interviewed several OWL employees related to the matter. Although OWL has never officially disclosed the details of its soft salary cap publicly, a leaked OWL memo discusses a "competitive balance tax," which was corroborated by now-deleted tweets from September 2018 by former London Spitfire General Manager Susan Kim.1

The DOJ's investigation underscores the antitrust concerns with sports and gaming leagues. On the heels of the Supreme Court's ruling in NCAA v. Alston,2 where the Court unanimously denounced certain rule-setting behavior by the National Collegiate Athletic Association (NCAA), eSports leagues should take care in organizing the structure and rules of their venture to avoid the issues commonly seen in other sporting league settings. While the DOJ's investigation reportedly focuses on the soft salary cap, it might also spill over to other OWL rules and regulations.3

Traditional Sports Leagues and the Antitrust Laws

Antitrust scrutiny of OWL mirrors the historical scrutiny of sports leagues. Sports leagues and their owners have generally argued that their rules and regulations—such as college drafts, salary caps, and free agency restrictions—help maintain competitive parity and are not unreasonable under the antitrust laws. For example, they argue that without salary caps, a team with deeper pockets could outspend the others, leading to lackluster competition and diminished fan interest.4 Courts have typically treated these justifications with skepticism.5

The Court's recent decision in Alston illustrates this. There, the Court doubled down on its skepticism of rule-setting behavior in sports by affirming the lower court decision that the NCAA's rules limiting education-related benefits violated Section 1 of the Sherman Act.6 The NCAA and Division I college athletics conferences argued that courts should defer to the NCAA's amateurism rules because they make college sports distinct and promote schools' noncommercial objective of higher education.7 The conferences further argued that such deference is necessary for industries where joint action is necessary to "create a desirable product."8 But the Court rejected these arguments, finding that the lower court correctly assessed the question raised—whether the NCAA's rules restricting education-related compensation were unlawful under federal antitrust law.9 While the decision limited its holding to the specific question of education-related payments, the Court's tone suggests that rule-setting behavior in the sports league context, absent legislation or collective bargaining, is increasingly suspect under the antitrust laws.10

Sports leagues have found more success with two narrower defenses: (1) the single entity doctrine or (2) the labor exemption.

Single Entity Doctrine

To prove a violation of Section 1 of the Sherman Act, the plaintiff must show an agreement among several actors. Following Copperweld,11 leagues facing Section 1 challenges have asserted that they are single entities under the antitrust law, arguing that their teams have a "complete unity of interest" because they share broadcast and licensing revenue, advertise collectively, and are governed by a single administrative body.

Traditional leagues have used the defense to block challenges to various rule-setting behavior associated with college drafts, free agency rules, and, most relevant to OWL, salary caps.12 However, the Supreme Court's 2010 American Needle decision clarified limitations on the defense. There, the Court held that National Football League Properties (NFLP)—an entity the NFL created to collectively license and develop its teams' intellectual property—was not a single entity under the antitrust law because the joint agreement between the NFL clubs "deprive[d] the marketplace of independent centers of decisionmaking" and therefore, "diversity of entrepreneurial interests and thus of actual or potential competition."13

The Court stated that the central issue was not whether the entities are legally distinct or have organized themselves into a "joint venture," but rather whether the agreement binds independent economic actors toward a single economic goal.14 Accordingly, agreements made between entities of a single firm constitute concerted action when the individual entities have interests separate from those of the venture as a whole.15 The Court held that although common interest in the NFL brand partially united the economic incentives of the teams, they had disparate economic interests from one another when it came to the market for fans, merchandise sales, and licensing opportunities.16

Despite this holding, however, there is no bright-line rule for whether a sports league (or any joint venture) is a single entity under the antitrust law. Under the right set of facts, a venture can still be deemed a single entity.

Consequently, the First Circuit's opinion in Fraser v. Major League Soccer, L.L.C., where the court accepted the single entity defense, is informative for eSports leagues hoping to mitigate antitrust risk. There, the lower court held that the 22 Major League Soccer (MLS) teams were a single entity incapable of conspiring with itself under Section 1.17 Unlike other major professional sports leagues in America, MLS was a single LLC with each team represented as members of the LLC's board of governors.18 The First Circuit determined that MLS was "a hybrid arrangement, somewhere between a single company (with or without wholly owned subsidiaries) and a cooperative arrangement between existing competitors."19 In the court's view, the "law … could develop along either or both of two different lines":20 one where the court would "expand upon Copperweld to develop functional tests or criteria for shielding (or refusing to shield) such hybrids from section 1 scrutiny for intra-enterprise arrangements," or another where courts would "reshape section 1's rule of reason toward a body of more flexible rules for interdependent multi-party enterprises."21 The court further commented on the difficulty of assessing the single entity question, stating that "it is difficult to find an easy stopping point or even decide on the proper functional criteria for hybrid cases."22 Importantly for the eSports context, the court suggested that new and risky business ventures deserve at least a pause when determining the legality of a league's restrictions.23

Labor Exemption

The Supreme Court has held that competitive restraints created from good-faith union-management negotiations are exempt from federal antitrust law.24 The non-statutory labor exemption results from various Supreme Court decisions relating to antitrust challenges against employers with unionized employees.25 Taken together, these cases hold that provisions within a union-employer collective bargaining agreement (CBA) do not constitute a conspiracy, combination, or concerted activity in violation of Section 1 of the Sherman Act. In Brown v. Pro Football, Inc., the Supreme Court noted that "[a]s a matter of logic, it would be difficult, if not impossible, to require groups of employers and employees to bargain together, but at the same time to forbid them to make among themselves or with each other any of the competition-restricting agreements potentially necessary to make the process work or its results mutually acceptable."26 Thus, it is much less likely that a restraint agreed upon through the collective bargaining process will violate the antitrust laws.

Client Takeaways

The DOJ's recent investigation into OWL's rule-setting behavior signals that the eSports industry should expect increased scrutiny of business practices and restrictions placed on players and league members. Given these developments and the cases discussed above, eSports organizations can potentially mitigate antitrust risk by:

  • adopting a single entity corporate structure similar to MLS; and/or
  • engaging in good-faith bargaining with players.

If deemed a single entity, an eSports league eliminates the possibility of a Section 1 claim, making it much less likely that its rule-setting behavior will violate the antitrust law. And although a league's rules are generally subject to the antitrust laws, restrictions set through a bargaining process, rather than league fiat, are likely immune under the non-statutory labor exemption. Outside the two strategies discussed above, eSports leagues should be wary of rules that collapse distinct economic interests of league constituents, including competition for player services, which appears to be the crux of the DOJ's recent OWL investigation.

[1] Jacob Wolf and Liz Richardson, “U.S. Department of Justice opens antitrust inquiry into Overwatch League’s soft salary cap, ‘competitive balance tax,’” Dot Esports (Jul. 2, 2021), https://dotesports.com/news/u-s-department-of-justice-opens-antitrust-inquiry-into-overwatch-leagues-soft-salary-cap-competitive-balance-tax.

[2] 141 S. Ct. 2141 (2021).

[3] “Rules of Competition and Code of Conduct,” Overwatch League (Feb. 09, 2019), https://overwatchleague.com/en-us/news/21568602/rules-of-competitionand-code-of-conduct.

[4] Alston, 141 S. Ct. at 2153-54.

[5] Id. at 2166; See generally O'Bannon v. NCAA, 802 F.3d 1049 (9th Cir. 2015); McNeil v. NFL, 790 F. Supp. 871 (D. Minn. 1992); Mackey v. NFL, 543 F.2d 606 (8th Cir. 1976); Robertson v. Nat'l Basketball Ass'n, 389 F. Supp. 867 (S.D.N.Y. 1975); Philadelphia World Hockey Club, Inc. v. Philadelphia Hockey Club, Inc., 351 F. Supp. 462, 503-505 (E.D. Pa. 1972).

[6] 141 S. Ct. 2141.

[7] Id. at 2158.

[8] American Athletic Conference v. Alston, 20-520, Pet. at 33 (Sup. Ct. filed Oct. 15, 2020).

[9] Alston, 141 S. Ct. at 2166.

[10] Id. at 2167 (“As a result, absent legislation or a negotiated agreement between the NCAA and the student athletes, the NCAA's remaining compensation rules should be subject to ordinary rule of reason scrutiny.”).

[11] Copperweld Corp. v. Indep. Tube Corp., 467 U.S. 752, 771 (1984).

[12] Fraser v. Major League Soccer, L.L.C., 97 F. Supp. 2d 130, 136 (D. Mass. 2000).

[13] Am. Needle, Inc. v. NFL, 560 U.S. 183, 184 (2010).

[14] Id. at 195-97.

[15] Id.

[16] Id. at 198.

[17] 284 F.3d 47, 58 (1st Cir. 2002).

[18] Daniel S. MacMillan, “Is MLS Inherently Anticompetitive? The Strange Single-Entity Structure of Major League Soccer in Order to Legitimize American Professional Soccer,” 28 Marquette Sports Law Review 503, 505-506 (2018).

[19] Fraser, 284 F.3d at 58.

[20] Id.

[21] Id.

[22] Id. at 59.

[23] Id. (“To the extent the criteria reflect judgments that a particular practice in context is defensible, assessment under section 1 is more straightforward and draws on developed law. Indeed, the best arguments for upholding MLS's restrictions—that it is a new and risky venture, constrained in some (perhaps great) measure by foreign and domestic competition for players, that unquestionably creates a new enterprise without combining existing competitors—have little to do with its structure.”).

[24] Allen Bradley Co. v. Loc. Union No. 3, Int'l Bhd. of Elec. Workers, 325 U.S. 797 (1945); Connell Constr. Co. v. Plumbers & Streamfitters Loc. Union No. 100, 421 U.S. 616, 622 (1975); see also Loc. Union No. 189 v. Jewel Tea Co., 381 U.S. 676 (1965); United Mine Workers v. Pennington, 381 U.S. 657 (1965).

[25] Id.

[26] 518 U.S. 231, 237 (1996).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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