ESPORTS AND THE DUAL DISTRIBUTION PROBLEM

By: Michael Arin, Volume 104 Editor

Riot Games, the publisher of the games League of Legends and Valorant, recently released their North America Community Competition Guidelines,[1] which detail conditions for the use of their intellectual property during third-party organized competition.[2] The guidelines include restraints on trade that go to the heart of the independent tournament operators’ (ITOs)[3] ability to compete with Riot Games, which also runs the preeminent league for League of Legends. These “competition restrictions” go beyond the state granted monopoly that comes from Riot’s intellectual property and impose restraints on independently organized competition.[4]

Analysis of these potentially anticompetitive provisions situates itself within the caselaw on dual distribution systems (where a manufacturer sells directly to consumers while also engaging independent distributors), the on-going discussion regarding the Paramount consent decrees,[5] the potential for termination thereof,[6] and the entertainment industry’s renewed concerns over vertically-integrated content production-distribution lines.

I.  COMMUNITY COMPETITION GUIDELINES AND THE ROLE OF ITOS

Community Competition Guidelines are critical to ITOs.[7] ITOs form the grassroots base for the competitive community in many esports.[8] But, due to the publisher’s ownership of copyright over the game,[9] they cannot operate legally without some sort of license from the publisher; and, given the sheer number of potential ITOs,[10] individual licensing by the publisher does not make sense.[11] As a result, several publishers have made general licenses specifically targeting organized competitive play (as opposed to licenses to play the game at home).[12] These licenses contain restrictions on the ITO related, generally, to price, prize pool, and certain methods of operation.[13] Here, there are four different conditions limiting the profitability of those independent tournaments: 1) limited prize pools,[14] 2) limited competition fees,[15] 3) restricted sponsors/partners,[16] and 4) limitations on collegiate leagues.[17] While there is no duty to deal under antitrust law,[18] nor is there normally a duty to license one’s intellectual property,[19] once conditionally licensed, the publisher has effectively created a triangular relationship with ITOs where the licensor exploits its license in direct competition with licensees.

II.  THE TRIANGULAR RELATIONSHIP ISSUE & THE DUAL DISTRIBUTION ANALOGY

Riot Games operates on two levels as a vertically integrated firm: game publisher and tournament operator. Here, Riot Games, qua publisher of League of Legends, issued Community Competition Guidelines that outline conditions on the use of their intellectual property. The Community Competition Guidelines can be seen as Riot Games, qua publisher, protecting Riot Games, qua tournament operator against rival ITOs.[20]

For purposes of the antitrust laws, the question used to be whether to view these restrictions as horizontal or vertical restraints. Did the publisher restrict ITOs or did a competitor restrict its rivals?[21] Under antitrust laws, most restraints are analyzed under the rule of reason,[22] but some horizontal restraints that virtually always stifle competition are per se illegal,[23] particularly when it comes to price.[24] Due to the semi-vertical structure,[25] the necessity of general licensing for ITOs to operate at all,[26] and the unique features of the esports market,[27] these restraints will be viewed under the forgiving rule of reason.[28]

While the market might be new for the courts,[29] courts have, under both section 1[30] and section 2[31] of the Sherman Act, repeatedly weighed the anticompetitive effects against the procompetitive justifications of conduct by those engaged in dual distribution systems. These relationships often occur where a manufacturer sets retail price and nonprice restrictions on their distributors while also selling directly to consumers.[32] While there is some wiggle room for classifying dual distribution systems as horizontal undertakings, the prevailing wisdom is that it is a vertical relationship, subject to the rule of reason.[33]

No plaintiff has successfully argued that the dual distribution arrangement is itself harmful to competition.[34] Instead, they must challenge this conduct under various other theories: retail price maintenance,[35] refusal to deal,[36] attempted monopoly,[37] and geographic market allocation.[38] At most, the motivation to restrict competition from the independent distributors may be a factor in the analysis of the practice’s procompetitive purpose,[39] origin, and interests.[40] In most cases, any anticompetitive effects coupled with concerns over the manufacturer’s motivations are outweighed by the manufacturer’s argument that such restraints reduce intrabrand competition and promote interbrand competition.[41] The courts have analyzed this same triangular relationship in entertainment industries similar to esports.

III. VERTICALLY-INTEGRATED CONTENT PRODUCTION: OLD PROBLEM, NEW FACES

The courts are actually quite familiar with the problem of vertical integration in copyright-protected markets leading to dual distribution concerns, even if the presence of intellectual property rights bears little weight in the analysis.[42] Paramount, at least in part, was a dual distribution case: major film studios that also owned movie theatres enforced price and nonprice restrictions to benefit their own theatres.[43] Following the Supreme Court’s affirmation of the lower court decision, consent decrees required divestiture of the vertically-integrated theatres and prohibited their acquisition in the future.[44]

The Department of Justice recently requested termination of those consent decrees.[45] However, when the Antitrust Division reopened consideration of the Paramount decrees, the public and firms in the entertainment industry submitted numerous public comments regarding modern-day Paramount problems (e.g. Netflix, Amazon), arguing that anticompetitive conduct is sure to resume should the court terminate the decrees.[46]

The case of esports buttresses these concerns. Downstream actors—relative to Riot, qua publisher—have consistently complained of the power wielded by the publisher-controlled league.[47] The vertically-integrated firm, much like the studio system in Paramount, can bully ITOs.[48] Rather than pullback from the entertainment industry, the markets now need vigorous antitrust enforcement more than ever. [49] The basic anticompetitive concern that motivated the Paramount consent decrees is very much alive in the esports market.

[1] Riot Games, Valorant Community Competition Guidelines [hereinafter Riot Games, Valorant Guidelines], https://assets.contentstack.io/v3/assets/bltb6530b271fddd0b1/blt9cec024a7ccdee8c/
5e9642fd5c372a5f9c0fe6a5/EN_VALORANT_Community_Competition_Guidelines.docx [https://perma.cc/NLD4-34M8] (last updated Apr. 15, 2020); Riot Games, NA Tournaments [hereinafter Riot Games, League of Legends Guidelines], https://developer.riotgames.com/policies/na-tournaments [https://perma.cc/E3UB-48D2] (last updated Mar. 9, 2020). The League of Legends Guidelines were announced to be undergoing revisions on April 17, 2020. Riot Games, NA LoL Community Guidelines Update(Apr. 17, 2020), https://watch.lolesports.com/article/na-lol-community-guidelines-update/blt70fe64b6846bb7d0 [https://perma.cc/RD4Z-B8YH]. These revisions point towards recognition by Riot Games that the prior restraints were perhaps a step too far.

[2] In addition, the Competition Guidelines incorporate the Terms of Use, “any of [Riot Games’s] other policies,” and their “Legal Jibber Jabber.” Riot Games, League of Legends Guidelines, supra note 1, Preamble, art. 4(1).

[3] The term ITO means a tournament or league that is not controlled or overseen by the publisher of the esports title. An ITO may specialize in a particular game or include several different games.

[4] This distinction can guide a court in delineating the lawful exercise of copyright rights from the potentially unlawful anticompetitive restraints on trade in esports. Cf.  2 Holmes, Intellectual Property and Antitrust Law § 36:1 (2020). I plan on elaborating on this distinction in a future project.

[5] U.S. v. Paramount, 334 U.S. 131, 131 (1948).

[6] Motion to Terminate, U.S. v. Paramount, 1948–49 Trade Cas. (CCH) ¶ 62,377 (S.D.N.Y. Nov. 19, 2019) (1:19-mc-00544), https://www.justice.gov/opa/press-release/file/1219841/download [https://perma.cc/JBM9-XM97].

[7] Federal Trade Comm’n, Antitrust Guidelines for the Licensing of Intellectual Property 5 (2017); see also id. at 6 ex.1.

[8] See, e.g., @ValorantUpdates, Twitter (Apr. 15, 2020), https://twitter.com/ValorantUpdates/status/1250443398688821255 (expressing reliance on third party organization to form the basis for Riot Games’s new esports title, Valorant). The competitive scene, at least for League of Legends, can be broken down into four tiers. Tier 1 represents the professional league run by Riot Games and its regional counterparts. Tier 2 represents the semi-professional leagues such as the academy League run by Riot and its regional counterparts. Tier 3 represents the amateur scenes such as the International College Cup backed by Riot and other collegiate circuits. Tier 4 represents the novice tournaments organized online through sites such as Battlefly or in-person by local game stores. The Community Guidelines would primarily impact the bottom two tiers.

[9] Michael Arin, Note, Competing Competitions: Anticompetitive Conduct by Publisher-Controlled Esports Leagues, 104 Minn. L. Rev. 1585, 1596–1600 (2020).

[10] See How Videogames Became a Sport, and Why They’re Here to Stay (Hint: Money!), Digital Magazine (June 21, 2016), https://www.borndigital.com/2016/06/21/how-videogames-became-a-sport-and-why-theyre-here-to-stay-hint-money [https://perma.cc/P757-QZUV] (counting over 4,000 players and 1,718 tournaments since inception of League of Legends). Lack of market research on lower-tiers of organized competition obscure the size of these markets.

[11] Broad. Music Inc. v. Columbia Broad. Sys., Inc., 441 U.S. 1, 19 (1979). Blanket licenses increase efficiency by reducing the costs of individual licenses, but, the lack of competitive pressure from the elimination of negotiation warrants additional concern. Cf. Nat’l Soc. of Prof. Engineers v. U.S., 435 U.S. 679, 695 (1978) (finding an ethics canon prohibiting competitive bidding unreasonable because it prevents customers from comparing prices).

[12] Riot should not solely come under fire for its recent decision: Activision Blizzard has similar restrictive conditions in its community licenses. See e.g., Activision Blizzard, Overwatch Community License, https://communitytournaments.blizzardesports.com/en-us/tournament/community/preview/90b3fad1-bb2b-47ac-8a9a-2d1d026a7a21 [https://perma.cc/U8JM-36CL].

[13] See, e.g., sources cited supra notes 1, 12.

[14] Riot Games, League of Legends Guidelines, art. 3(2) (”The total value of your prize pool, including cash value of non-cash prizes, across all events you organize in a calendar year may not exceed $10,000 USD (or its equivalent in CAD).”). Setting an annual cap on the prize pool limits the ability of the ITO to attract competitors and reduces overall output. Viewed in a more favorable light, Riot is merely setting a ceiling before the ITO must come to the negotiating table (and presumably pay a royalty). Cf. Riot Games, Valorant Guidelines, supra note 1, passim. (treating the annual caps as a means of categorizing tiers of play). Note that the annual cap is not limited to prizes for League of Legends only. Riot Games, League of Legends Guidelines, supra note 1, art. 3(2).

[15] Riot Games, League of Legends Guidelines, supra note 1, art. 3(3) (“You may charge a small entry fee of no more than $20 USD (or its equivalent in CAD) for each player . . . .”). Setting a maximum price to charge players disincentivizes ITOs from providing superior tournaments because they will be unable to recoup costs of doing so. Cf. Arizona v. Maricopa County Med. Soc’y, 457 U.S. 332 (1982).

[16] Riot Games, League of Legends Guidelines, supra note 1, art. 5 (prohibited sponsorship list). The restricted sponsors list inhibits the ability of ITOs to attract investment into their tournament and therefore reduces output.

[17] Id. art. 9(I) (liming scope of college and high school competitions through duration and number of participant limits).

[18] Verizon Commc’ns v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 411 (2004).

[19] Hovenkamp et al., IP & Antitrust: An Analysis of Antitrust Principles Applied to Intellectual Property Law § 13.02 & n.12 (3rd ed., 2019 supp., 2016) (consolidating cases).

[20] “For a copyright may no more be used than a patent to deter competition between rivals in the exploitation of their licenses.” U.S. v. Paramount, 334 U.S. 131, 131 (1948).

[21] Hovenkamp et al., supra note 19, § 20.03 (citing Antitrust Guidelines for Licensing of Intellectual Property, supra note 7,  § 3.03).

[22] Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 57 (1977).

[23] U.S. v. Topco Assocs., 405 U.S. 596, 607–08 (1972).

[24] Broad. Music Inc. v. Columbia Broad. Sys., Inc., 441 U.S. 1, 19 (1979).

[25] See Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 885 (2007); Sylvania, 433 U.S. at 57.

[26] Broad. Music Inc., 441 U.S. at 19.

[27] See U.S. v. Microsoft Corp. (Microsoft III), 253 F.3d 34, 84 (D.C. Cir. 2001).

[28] See also Nat’l Collegiate Athletic Ass’n v. Bd. of Regents of the Univ. of Okla., 468 U.S. 85, 101 (1984); Hovenkamp et al., supranote 19, § 24.03.

[29] See Microsoft III, 253 F.3d at 84.

[30] 15 U.S.C. § 1 (2018). This article recognizes, but does not engage with, the argument that the publisher’s license is unilateral conduct that lies outside the scope of 15 U.S.C. § 1 or that such a general license is defensible under U.S. v. Colgate, 250 U.S. 300 (1919). But see Grossman, The Application of Antitrust Principles to Dual Distribution in Franchising, Trade Reg. Rep. Transfer Binder, 1969-83 (CCH) ¶ 50,171 (dual distributor may not safely engage in the limited type of retail price suggestion allowed to a manufacturer by Colgate).

[31] 15 U.S.C. § 2 (2018); see cases cited infra note 33. The analysis is similar to tying, which requires a tricky analysis of the publisher’s state-granted monopoly power over the game’s intellectual property being used to acquire power in the market for organized competition of the game. Max Miroff, Note, Tiebreaker: An Antitrust Analysis of Esports, 52 Colum. J. Law & Soc. Prob. 177, 206–13 (2019).

[32] E.g. Jacobs v. Tempur-Pedic Intern., Inc. 626 F.3d 1327 (11th Cir. 2010).

[33] See PSKS, Inc. v. Leegin Creative Leather Products, Inc, 615 F.3d 412, 21 n.8 (5th Cir. 2010) (collecting cases); see also U.S. v. Arnold, Schwinn & Co., 388 U.S. 365 (1967) (treating, sub silentio, dual distribution systems as vertical); White Motor Co. v. U.S., 372 U.S. 253 (1963) (same). But see Krehl v. Baskin-Robbins Ice Cream Co., 664 F.2d 1348, 1357 (9th Cir. 1982) (leaving open question of per se condemnation); Federal Trade Comm’n, supra note 7, at 14 (test for categorization).

[34] But see Brief for the American Antitrust Institute as Amicus Curiae in Support of Appellants, PSKS, Inc., 2009 WL 6479731 at *5) (arguing for quick look approach).

[35] E.g., PSKS, Inc., 615 F.3d at 420–21.

[36] E.g., Elecs. Commc’ns Corp. v. Toshiba America Consumer Prods., Inc., 129 F.3d 240, 244 (2d Cir. 1997) (viewing as a per se legal vertical relationship).

[37] Id.

[38] E.g., Smalley & Co. v. Emerson & Cuming, Inc., 13 F.3d 366, 367–68 (10th Cir. 1993); Ryko Mfg. Co. v. Eden Services, 823 F.2d 1215 (8th Cir. 1987); Krehl, 664 F.2d at 1357; see also Miroff, supra note 31 (arguing for a tying theory).

[39] Graphic Prods. Distributors, Inc. v. ITEK Corp., 717 F.2d 1560, 1576 (11th Cir. 1983).

[40] Val d. Ricks & R. Chet Loftis, Seeing the Diagonal Clearly: Telling Vertical From Horizontal in Antitrust Law, 28 U. Toledo L. Rev.151, 168 (1996) (pointing to the interests test in U.S. v Sealy, Inc., 388 U.S. 350, 353–54 (1967)).

[41] E.g. Krehl, 664 F.2d at 1356.

[42] Hoevenkamp et al., supra note 19, § 24.03[2]. A court analyzing this issue would need to take into consideration recent economic research around software markets, including theories on zero-marginal cost goods, network effects, and multi-sided markets.

[43] U.S. v. Paramount Pictures, 66 F.Supp. 323, 355 (S.D.N.Y. 1946), aff’d in part and rev’d in part, 334 U.S. 131 (1948), on remand, 85 F. Supp. 881 (1949); see also Three Movies of Tarzana v. Pacific Theatres, Inc., 828 F.2d 1395, 1400 (9th Cir. 1987); see generallySouthway Theatres, Inc. v. Georgia Theatre Co., 672 F.2d 485 (5th Cir. Unit B 1982) (reviewing reasonableness of circuit dealing).

[44] Consent Judgment as to the Paramount Defendants, art. III ¶¶ 4–9, Paramount, 1948–49 Trade Cases (CCH) ¶ 62,377, 85 F. Supp. 881 (S.D.N.Y. Mar. 3, 1949).

[45] Motion to Terminate, supra note 6.

[46] E.g., Open Markets Institute, Comment of the Open Markets Institute on the Paramount Decrees 1, https://www.justice.gov/atr/page/file/1102821/download [https://perma.cc/2F28-Y4VH]; Writers Guild of America, West, Inc., Comments of Writers Guild of America, West, Inc. In re Antitrust Consent Decree Review: The Paramount Consent Decrees 6 (Oct. 4, 2018), https://www.justice.gov/atr/page/file/1102781/download [https://perma.cc/WRW8-FFWT].

[47] Miroff, supra note 31, at 205–206 (collecting complaints).

[48] Id. I plan on addressing the differences between movies, music, and video games in a different project.

[49] Competition in Digital Entertainment, Review of Consent Decrees in United States v. Paramount Pictures, Inc., https://www.justice.gov/atr/page/file/1102391/download [https://perma.cc/HPR8-6W36].