Daniel Schnapp and Samuel Cohen, from law firm Sheppard Mullin‘s Esports & Games Industry Team, write for Esports Insider to discuss how intellectual property rights work in esports.
Global esports revenue surpassed $1 billion and the worldwide esports live streaming audience grew 12.7% year on year to 747 million people in 2021, according to Newzoo. The esports market has seen consistent engagement despite in-person events not fully returning across the US as investments, strategic partnerships, and sponsorships proliferate at exponential rates.
Underpinning esports and gaming stakeholders’ commercial viability are the various intellectual property (IP) rights they own and control. How has ownership and control of IP rights translated into billions of dollars in game sales and subscriptions, media rights deals, and Microsoft’s biggest acquisition ever?
Law firm Sheppard Mullin, on behalf of Esports Insider, breaks down how certain key esports stakeholders exploit IP rights and achieve commercial success in the US.
The Role of IP Rights in Gaming and Esports
The IP rights underlying traditional sports (e.g., football, basketball) are in the public domain. As a result, professional teams and leagues in the U.S. maintain commercial viability through the value of their respective franchises and trademarks. In contrast, game publishers and developers own or control the IP rights underlying esports game titles, allowing them to exert significant, expansive control over how such titles are used and commercially exploited in the esports arena.
Among the categories of IP rights relevant to esports and gaming, copyright and trademark rights offer particularly advantageous protections necessary to achieve such control. Copyright ownership confers a bundle of exclusive rights to publish, distribute, reproduce and otherwise exploit original works of authorship (e.g., video games, software, films, music, novels), while trademark rights extend exclusive rights to use a particular word, symbol, design, or phrase to identify the source of goods or services in commerce.
Video games themselves are subject to copyright protection, as well as individual elements of a game such as the underlying source code, game characters, maps, music, and other literary, audio, or audio-visual elements. By owning or controlling exclusive rights for a particular game title, a game publisher could create, structure and maintain their own league for the game according to their own rules and franchising preferences.
Since they own or control the IP rights necessary to update and modify games, game publishers can have a sizable impact on esports leagues, teams, and athletes by changing crucial dynamics and rules of their games at their discretion, for example by adding or removing characters or altering the physics of a map.
RELATED: The legal considerations of esports NFTs — Sheppard Mullin
Trademark rights may extend to gaming titles, team logos, or an athlete’s gamertag or professional name. Trademark rights are central building blocks of many commercial activities, particularly for sponsorships and brand partnerships where leagues, teams and popular brands negotiate the parameters and license terms governing how each may or may not use the other’s trademarks.
Copyright and trademark rightsholders enhance the value of games and esports assets through proactive negotiation of license terms and fees for the rights to access and play a game, join a league, operate a tournament, produce and distribute merchandise, or to otherwise use gameplay, game characters, underlying game software or source code, or other elements protected by IP rights.
Licenses to IP rights are effectuated in a number of ways. For example, when you ‘purchase’ a game on Steam, in most cases, you are really purchasing a non-exclusive license to play the game for personal non-commercial use, subject to the limitations in the end-user license agreement accompanying your purchase, while the applicable publisher or developer retains full ownership of the copyright and trademark rights related to the game. However, in esports tournaments, tournament operators need the rights to reproduce gameplay and game titles in public settings for commercial purposes. These rights won’t be granted by an end-user license agreement – the tournament operator must instead negotiate with the applicable IP rightsholders to obtain the necessary authorizations and licenses to conduct their tournament.
Exclusivity and Sponsorships
The exclusivity inherent in most IP rights is central to building the overall value for applicable rightsholders. Together, exclusive IP rights enable game publishers to control key aspects of the esports and gaming ecosystems, such as how teams and leagues are organised and how gameplay and tournaments are broadcasted around the world. Game publishers leverage their IP rights to control the media rights conversation with digital service providers and broadcasters. By way of example, YouTube is reportedly paying game publisher Activision Blizzard $53 million (~£40.4m) per year (from 2020-2023) for the exclusive right to stream their game titles.
In turn, the digital service providers that broadcast esports content rely on their own IP rights to protect and monetize their live and on-demand streaming services. Any use of a digital service provider’s platform is subject to contractual limitations and conditions determined by the digital service provider and often effectuated through licenses to end users, game publishers, leagues, and/or tournament operators. While the value of esports media rights still pale in comparison to traditional sports media rights, there is room for innovation that could lead to enormous growth.
As the popularity of esports rises, so does the interest of endemic and non-endemic sponsors seeking to build brand awareness through the growing global esports audience. Esports stakeholders enhance the commercial value of their IP rights through sponsorship arrangements involving financial compensation in exchange for a license to use a party’s trademarks or logos in advertising or to otherwise communicate an association or endorsement. Similarly, individual athletes and influencers rely on their rights of publicity to ensure they are fairly compensated for the commercial use of their image, name, likeness, or other recognizable aspects of their persona.
The value of properly managed trademark and publicity rights in esports has paved the way for more lucrative partnerships between global brands and tournament operators, esports teams, and athletes. Advertising and sponsorships continue to be the most critical sources of revenue across the esports market, collectively generating 40-60% of total esports revenue in 2021, per Newzoo.
Although outside the scope of this article, it is important to note that applicable laws governing endorsements and promotions vary widely by country and jurisdiction. In the US, advertising and marketing in general are regulated by the Federal Trade Commission (FTC). Both esports stakeholders and partnering brands should be cognizant of the FTC Endorsement Guides or the applicable law when structuring and negotiating the terms of a sponsorship or endorsement.
Regulatory Enforcement
Rightsholders regularly employ strategies to increase and maintain the commercial value of their works through protection and enforcement of IP rights. For example, most major entities distributing game content in the U.S. utilize the Digital Millennium Copyright Act (DMCA) to request take downs of unauthorized uses on digital services, or shield their own liability for pirated or infringing content posted to their own platforms by third parties.
There are a series of “safe harbors” available via the DMCA, each with unique conditions and requirements that must be fulfilled before liability can be absolved. Copyright registration through the Copyright Office and/or trademark registration through the U.S. Patent and Trademark may confer important, additional enforcement rights such as the ability to file a lawsuit and recover damages for infringement. Indeed simply failing to enforce your IP rights may result in weakened or “abandoned ” copyright or trademark rights which may be impossible to earn back.
In any scenario, determining the types of rights and remedies available (if any), such as the category and amount of damages available are subject to various exceptions (like fair use) and are highly date- and fact-specific inquiries. Nuances in the law reach far and wide and vary significantly between jurisdictions and should be analysed by a qualified attorney on a case by case basis.
RELATED: The convergence of music and gaming — Sheppard Mullin
Most IP regulations were enacted decades ago before the existence of the technologies that have transformed the way we consume, share, store and manipulate information and media, leading us to a more interconnected world. As a result, the tactics IP rightsholders use to exploit and enforce their IP rights have transformed in tandem and continue to evolve today. Game publishers that already create immersive worlds and interactive entertainment are poised to play a central role in the convergence of the virtual and real world, or the “metaverse.”
Many are aware of the potential impact the metaverse might have on esports and gaming. The brands driving sponsorship revenue in esports have taken note of the engagement opportunities inherent in immersive, virtual experiences, and metaverse esports leagues are well on their way. Similar to most emerging forms of technology, applying the law to the metaverse presents novel challenges that will require rightsholders to evaluate and adapt to new strategies and practices to monetize and enforce their IP rights.
Developing an IP monetization, protection and enforcement strategy is a crucial step any successful business must take, especially as technological advancement enables new methods of consumption and distribution in the world of esports. In many cases, such a strategy involves the use and licensing of both owned and controlled IP rights, and IP rights owned or controlled by third parties.
Accordingly, whether you are an athlete, influencer, or work for a game publisher, team, or other esports organisation, it is always prudent to evaluate your business’s property and relevant IP rights at an early stage to ensure proper implementation of a holistic approach to maximizing the value of your IP — now and in the future.
Daniel Schnapp is a Partner and Samuel Cohen an Associate at the law firm Sheppard Mullin. Both work in its Entertainment, Technology, and Advertising Practice Group and its Esports & Games Industry Team.
From our sponsor Sheppard Mullin