May 30, 2019 Sports Illustrated
 

Inside the Lawsuit That Could Shake Up the Entire Esports Industry

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Inside the Lawsuit That Could Shake Up the Entire Esports Industry - article by SI.com

Inside the Lawsuit That Could Shake Up the Entire Esports Industry



By MICHAEL MCCANN
May 30, 2019



photo: 'FaZe Clan players table during competition'| (Credits:LUKE WALKER/GETTY IMAGES)





Are professional esports players, many of whom are relatively young and unseasoned in business dealings, being played by the more sophisticated organizations that employ them?

This question lies at the heart of a complaint recently filed by Turner Tenney, a player professionally known as Tfue, in Los Angeles Superior Court. Tenney argues that his gamer contract violates California law. If Tenney prevails, the validity of other players’ contracts with gaming companies would be called into question.

Tenney, 21, has sued FaZe Clan, Inc., an esports entertainment company with whom Tenney signed an agreement in April 2018. The agreement concerns Tenney’s membership on FaZe Clan’s team for Fortnite. Tenney, by many accounts, is the LeBron James or Naomi Osaka of Fortnite—he is among the game’s top players and wins tournament after tournament.

In the esports world, Tenney is also a genuine celebrity. He is one of the most prominent influencers of products and services. Tenney views his contract with FaZe Clan as grossly failing to capture his high standing within esports.

Tenney’s case has been assigned to Judge Patricia Nieto. It will be litigated in the Stanley Mosk Courthouse in downtown Los Angeles. The first hearing is scheduled for September 20, 2019.

Breaking down Tenney’s contract from a legal perspective

The Blast recently published a copy of Tenney’s contract. The contract invites debate on a variety of levels, including with respect to the appropriate category for Tenney’s working relationship with FaZe Clan.

The language of the contract indicates that Tenney is an “independent contractor” of the esports company. However, as explained below, California law might nonetheless recognize him as an employee. Tenney, meanwhile, seems to regard his relationship with FaZe Clan as governed by agency law. He views his relationship with FaZe Clan as one between a client artist and a talent agency. Regardless, Tenney agreed to join FaZe Clan and team-up with a Fortnite team that contractually includes three other top players: Thang “SpaceLyon” Phan, Dennis “Cloak” Lepore and Brendan “Jaomock” O’Brien.

Tenney’s contract specifically requires that he play in tournaments and training sessions on behalf of FaZe Clan, a Delaware corporation that conducts business in Los Angeles. It also calls for him to offer up to three days a month in “publicity and promotional services,” a phrase that includes promotion through streaming videos and other content creation. In addition, Tenney is obligated to wear FaZe Clan clothing as well merchandise associated with FaZe Clan’s sponsors. Further, Tenney must participate in FaZe Clan’s social media campaigns.

Tenney also assents to represent only FaZe Clan within the industry. To that end, the gamer agreement includes an exclusivity/non-compete clause that ensures that Tenney won’t endorse other gaming companies or join other Fortnite teams.

In exchange, FaZe Clan must compensate Tenney in several ways. First, the company agreed to pay him a monthly fee of $2,000 for the first six months of the contract. At the conclusion of the initial six-month period, FaZe Clan had the option to extend the deal for three years (which it did) and, at FaZe Clan’s sole discretion, increase or decrease the monthly fee by as much as 25%. Stated differently, Tenney’s monthly base pay for FaZe Clan ranges from $1,500 to $2,500.

Similar to restricted free agency in the NFL, Tenney’s contract also empowers FaZe Clan to prevent Tenney from signing with a rival for a period of time after his contract term ends and to match a competing offer during an additional period of time. These terms go into effect following the expiration of Tenney’s three-year term (this expiration is set to occur in 2021, unless Tenney’s contract is voided or bought out before then). During the first 30 days, FaZe Clan will enjoy an exclusive window to re-sign Tenney. If no such deal is struck, and if Tenney signs with a competitor between days 31 and 60, FaZe Clan could match the offer. Only after those two months could Tenney sign with another company without restriction.

Tenney is also entitled to 80% of cash prizes from playing in Fortnite tournaments, with the remaining 20% going to FaZe Clan. As to income generated by in-game merchandise, appearances, touring and sign-up bonuses, Tenney and FaZe Clan evenly split those proceeds.

The contract also contemplates finder’s fees for brand deals that feature Tenney and that are associated with creation platforms (such as Twitch or YouTube) or social media website accounts managed by Tenney or FaZe Clan. If Tenney brings such a deal to FaZe Clan, he and FaZe Clan split the income, but if FaZe Clan finds the deal, FaZe Clan keeps 80% of the proceeds.

Understanding Tenney’s case and its parallels to Curt Flood’s case against Major League Baseball in 1970

Tenney’s complaint, which is authored by attorneys Bryan Freedman and Jesse Kaplan of Freedman + Taitelman, insists that the contract Tenney signed with FaZe Clan is “grossly oppressive, onerous, and one-sided.” Among other objections, the attorneys maintain that the 80% finder’s fee is unjust given that Tenney is the artist performing the services and given that his celebrity—and rather than that of FaZe Clan—is the primary draw.

The complaint also stresses that Tenney did not understand what he was signing, and that Tenney is not alone among esports players who are easy prey for opportunistic gaming companies. These companies, the complaint asserts, exploit the players. These players lack a formal union and often sign contracts without the benefit of proper business advice and without a healthy dose of skepticism toward the intentions of gaming companies. Stated more bluntly, Tenney’s complaint depicts esports players as young adults who don’t realize the rights that they are contractually giving away.

Further, while versions of esports have been around since the days of the Atari 2600, the more contemporary version of esports with online play has experienced rapid growth in recent years. Along with such growth has been a surge in accompanying revenue. One key reason for this development is the appealing content created by top players such as Tenney. Indeed, revenue generation in esports reflects the design of videos by charismatic players, whose work is arguably akin to performing art and athletic performance (while some debate the connection between esports and athletics, one defensible definition of athleticism includes the kinds of hand-eye skills and other traits essential to esports; such a definition is under review by the International Olympic Committee, which is considering whether to add esports to the Olympic Games).

Along those lines, Tenney’s complaint stresses that esports players perform, act, direct and edit their videos and then stream those videos to their millions of followers through YouTube and Twitch. With numerous views of the videos, advertising dollars and sponsorship opportunities are generated. Where the resulting revenue ought to go is less settled.

Tenney’s high profile illustrates these points. His YouTube channel has 10.9 million subscribers, while his Twitch channel has 6.1 million followers. According to an in-depth article by Patricia Hernandez of Polygon, Tenney is the most watched Fortnite streamer on Twitch. Tenney’s complaint emphasizes that “sponsors are willing to pay for Tenney to perform in and create videos that will, at least in part, promote their goods, services and brands.” Yet the deal he signed with FaZe Clan limits his capacity to profit from his talents.

In some ways, Tenney’s complaint is reminiscent of Curt Flood’s case against Major League Baseball 50 years ago. Flood, a centerfielder, argued that while he voluntarily signed a contract to play professional baseball, baseball’s system of contracts was illegally rigged to prevent players from ever becoming free agents. Thus, players became tantamount to “property” for a team, a status that for Flood began when he signed his first pro contract at age 18.

Baseball contracts at the time contained a “reserve clause,” which enabled a team to renew a player’s contract on a year-to-year basis, typically with modest annual pay increases, for as long as the team saw fit. This arrangement was problematic for several reasons, including that baseball owners in the 1960s enjoyed surging revenues due to the growth of television broadcasts. During this same period, players’ salaries largely plateaued. Although the U.S. Supreme Court ruled against Flood in 1972 on account of baseball enjoying an exemption from federal antitrust law, three years later baseball arbitrator Peter Seitz effectively endorsed Flood’s arguments in a grievance involving pitchers Andy Messersmith and Dave McNally. The Seitz decision brought about free agency in baseball, and Flood’s case played a key role.

Tenney’s complaint draws on these same sentiments in depicting FaZe Clan as swindling Tenney and preventing him from joining other teams. To that point, Tenney’s attorneys hope the lawsuit will “shift the balance of power to the gamers and content creators/streamers—those who are actually creating and driving the industry.” Likewise, the attorneys assert that FaZe Clan illegally “owns” the streaming content Tenney creates and, through the exclusivity clause, prevents him from offering his talents to competing companies.

These restraints, Tenney’s attorneys charge, are particularly damaging since they deny Tenney the opportunity to seek his own promotional deals and fully profit from the use of his name, image and likeness—in other words, an argument similar to the one Ed O’Bannon raised in his case against the NCAA and one that is the subject of current legislation in California. Indeed, the complaint notes, an unrestrained Tenney might attract more lucrative deals and not be “saddled with an 80% finder’s fee.”

Tenney’s legal claims under California law

Building on these points, the complaint charges the right of first refusal/matching clause “undoubtedly violates” Section 16600 of the California Business and Professions Code. Section 16600 generally prohibits companies from restraining the ability of former employees and former independent contractors to join a rival company. This area of law is problematic for FaZe Clan with respect to the two-month negotiation window following the expiration of Tenney’s contract. However, California’s broad prohibition on non-competes doesn’t apply to current workers. FaZe Clan will likely insist that Tenney’s restraints prior to the completion of the three-year term are mere conditions of his ongoing working relationship—a relationship that Tenney voluntarily assented to by signing the gamer contract.

The complaint also contends that the gamer agreement signed by Tenney violates California’s Talent Agency Act. The Act requires that business and individuals who act in the capacity of an agent do so with an agent license obtained through California’s Labor Commissioner. An “agent” who fails to obtain such a license takes the risk that the labor commissioner will render any negotiated contracts void and compel the agent to return any commissions to the client.

Further, a talent manager—who advises clients on career goals and maximizing marketability—can run afoul of the state’s agency act if the manager’s work grows into contract negotiation on behalf of the client. Tenney asserts that FaZe Clan is in violation of the act since, in his view, the company “continuously and systematically procures and attempts to procure employment and engagements for Tenney as an artist” and does so without a license. Tenney has filed a separate petition with the California Labor Commissioner with respect to the agency question.

Tenney also maintains that FaZe Clan has failed to share profits with him as contractually required. To illustrate, Tenney’s complaint asserts that he created and performed in a video for sponsor Digital Storm, a manufacturer of gaming computers. The video garnered over 19 million views, but Tenney insists without accompanying financial gain to him. Tenney charges that FaZe Clan has unlawfully retained payments that should have been paid to Tenney.

Along those lines, Tenney contends that FaZe Clan has breached its fiduciary duty to act with loyalty. “FaZe Clan,” the complaint asserts, “rejected at least one sponsorship deal on Tenney’s behalf due to a glaring conflict of interest.” This purported deal would have been with HyperX, makers of headsets and headphones. Tenney claims that FaZe Clan “passed on the sponsorship deal” because it “perceived that HyperX was a competitor of another sponsor that did business with FaZe Clan.” Tenney argues that in passing on the deal, “FaZe Clan knowingly acted against Tenney’s interest by preventing third-parties from helping Tenney source sponsorship deals.”

Further, Tenney maintains that FaZe Clan has engaged in an unfair business practice under Section 17200 of the California Business and Professions Code. A Section 17200 claim asserts that the defendant is liable for unfair competition acts and fraudulent business practices. Here, Tenney alleges that FaZe Clan has denied him the chance to sign deals with other companies and to profit off of his marketability.

Through their complaint and accompanying petition to the California Labor Commissioner, Tenney’s attorneys request that their client’s contract with FaZe Clan be rendered void and unenforceable. They also demand that FaZe Clan disgorge and repay Tenney sponsorship, fee, commission and other monies. Likewise, the attorneys seek compensatory and punitive (punishment) damages. Lastly, they ask that FaZe Clan be permanently enjoined from violating California law—a demand that, if granted, would impact FaZe Clan’s relationships with other players.

FaZe Clan’s likely defenses

FaZe Clan will answer Tenney’s complaint and, over time, raise a series of legal arguments designed to rebut his assertions.

One key argument will be the most basic: Tenney, as an adult, voluntarily and lawfully signed the contract that he is now protesting.

Tenney’s complaint notes that he was only 20 years old when he signed the deal with FaZe Clan. Keep in mind; a 20-year-old person is older than some players in the NBA, NHL and MLB, older than numerous soccer, tennis and golf professionals, and older than many professional actors and musicians. For purposes of the contract law, 20 is essentially the same as 40 or 60: Tenney was clearly an adult when he signed the contract.

In California, as in other states, a person who is 18 or older is generally bound by the contracts they sign. The fact that Tenney apparently regrets the fact that he underestimated the degree to which his career would take off after signing with FaZe Clan is not a legal claim. It is an acknowledgement of regret.

Expect FaZe Clan to also reject Tenney’s assertion that the gaming company has violated Section 16600 of the California Business and Professions Code. While it’s true that California law makes it extremely difficult for employers to enforce non-compete agreements with respect to former workers, Tenney still has a working relationship with FaZe Clan. Tenney, of course, contends that the relationship is only a product of an illegal (and, by inference, unenforceable) gamer agreement. However, at least in regard to Tenney while he is actively working for FaZe Clan, the non-compete argument is unlikely to prevail.

That said, the de facto restricted free agency portion of Tenney’s contract is far more vulnerable. As explained above, FaZe Clan has a temporary right after the three-year term ends to block Tenney from negotiating with other companies and to match a competitor’s offer. Such a provision might not withstand scrutiny since it resembles a non-compete. However, it’s also a term that is not set to go into effect until 2021—and thus might not yet be ripe for judicial review.

Further, while Tenney contends that FaZe Clan has acted as an agent for purposes of California’s Talent Agency Act, FaZe Clan will probably refute such a deduction. The company can assert that the gamer agreement depicts Tenney as an independent contractor of FaZe Clan—not a client of FaZe Clan.

It’s possible that Tenney is neither an independent contractor nor a client. He might instead be an employee who is owed the benefits and protections of employment. Last year, the California Supreme Court held in Dynamex Operations West, Inc. v. Superior Court that a worker is only an independent contractor if he or she (A) is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact; (B) performs work that is outside the usual course of the hiring entity's business; and (C) is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity. As a seasoned player, Tenney, it would seem, is performing work within the usual course of FaZe Clan’s business.

FaZe Clan will likely also argue that California state court is not the appropriate venue for the litigation. The gamer agreement contains a choice of law provision, which instructs that the agreement “shall be governed and construed in accordance with the laws of the State of New York” and that the parties “submit exclusively to the state or federal courts in New York, NY for any claim” related to the contract.

Further, FaZe Clan will object to Tenney’s request for injunctive relief. The gamer agreement expresses that the remedy of breach by FaZe Clan “shall be limited to the right to recover money damages.” While Tenney’s attorneys would argue the contract isn’t just breached, but also unenforceable, and while the California Labor Commissioner has the right to impose injunctive relief, FaZe Clan will attempt to mitigate any potential exposure from the lawsuit.

It’s also apparent that FaZe Clan will challenge the facts as retold by Tenney. As detailed by Hernandez in her Polygon story, FaZe Clan owner Ricky Banks has actively used Twitter and YouTube to dispute Tenny’s claims. In sum and substance, Banks argues that Tenney has grossly exaggerated the degree to which FaZe Clan has profited from him. FaZe Clan, Banks reports, has only taken in $60,000 from activities related to Tenney.

Banks also stresses that Tenney is neglecting to acknowledge the instrumental role played by Banks and FaZe Clan in helping him to become an esports star. This point is similar to when sports teams note that while a star player earned his or her stardom, the team—and its coaching, brand and infrastructure—facilitated.

Impact on the industry

Tenney’s lawsuit is a potential game-changer. As explained above, the enforceability of other gamers’ contracts is at stake. Further, pretrial discovery—where both sides are ordered by the court to share information with the other side—could be unwelcomed news for both Tenney and FaZe Clan officials. They might be obligated to provide sworn testimony and offer financial documents, emails, texts and other evidence that they would prefer to keep confidential.

It is also possible that Tenney’s lawsuit, like many lawsuits, will simply end in a settlement. A settlement would involve Tenney and FaZe Clan agreeing to terminate the contract under a set of conditions that both sides accept.

There are also larger themes at stake. A key one is the notion that esports players are inadequately informed about the contracts they sign. A relatively straightforward, but probably incomplete, remedy to that concern would be for players to hire attorneys, particularly those with esports expertise. An attorney would assist in the drafting and interpretation of a contract. But an attorney might not be aware of other players’ salaries and conditions of players’ employment. That said, there are now dedicated esports attorneys, including Bryce Blum and his colleagues at the Electronic Sports Gaming Law firm as well as esports attorneys at large firms such as Michael Wall of Foley & Lardner.

A more complete, but also more difficult to obtain, solution would involve the formation of a union or trade association for esports players.

Several entities function in some ways like a union for players, including with respect to educating them on best practices for careers. Ellen Zavian and Jim Schmitz detail these entities in an article published by the Association of Corporate Counsel’s Docket magazine.

For example, there is a League of Legends Players’ Association or LOLPA, which is for pro gamers who play League of Legends. LOLPA was formed by Riot Games, the game’s publisher. There is also the Overwatch Players’ Association, which was created by a former coach and former player of the Overwatch game. These organizations are no doubt helpful, but they are game specific and not owned by the players themselves. They also lack the formal recognition of a union that could comprehensively bargain with gaming companies in accordance with federal labor law.

A number of commentators have outlined other potential benefits of a union or players’ association. For instance, in a recent Texas Review of Entertainment and Sports Law article, attorney Uriah Tagle noted the role of age among esports players, and how many gamers “peak” at 24 years old. Like professional athletes, seasoned gamers are susceptible of being replaced by younger, faster players. A union could help these gamers prepare for what should be decades of a post-playing career.

SI will keep you updated on major developments in Tenney’s litigation and esports and the law.

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Michael McCann is SI’s Legal Analyst. He is also an attorney and Associate Dean of UNH Franklin Pierce School of Law.