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How to Advertise Real-Money Gaming on Meta in 2023: A Legal Opinion is Still Required.

Meta (formerly known as Facebook) remains an attractive forum for real-money gaming companies looking to advertise their skill-based gaming apps, esports, and fantasy sports offerings. However, Meta has a strict policy that requires an application and approval before any “online gaming” ads can run. The application form is convoluted and complex, and unless you have a gambling license from a state regulator, you will need to obtain a legal opinion from an experienced gaming attorney.

Artaev at Law PLLC has provided consulting, review, and legal opinions to gaming companies since 2020. We also have experience with the Meta/Facebook onboarding and application process. Before Meta’s overhaul of the process in August 2022, the application was much simpler than it is today. The advertiser disclosed their geographic target, acknowledged the requirement for geofencing and age compliance, and submitted a legal opinion that qualified their offering as a game of skill or other type of competition that does not require a gambling license. Now, the application process requires not only a selection of the proper jurisdictions from a drop down menu, it also requires the advertiser to choose which “category” is most appropriate for their game.

For example, when choosing the United States, Meta prompts the applicant to choose the states where the game will be offered. Clicking on a state gives a choice of the types of games that Meta considers available or “allows” in that state. This sublist is inconsistent and does not provide any context as to what types of games fall into each category. For example, selecting Texas gives the advertiser a single option to choose “sweepstakes.” But Texas courts have applied the “predominant factor test” to permit real-money games where skill predominates over chance in deciding the winner. The Texas legislature’s definition of “gambling” also contains an express exemption for “bona fide contest[s] for the determination of skill.” TX Penal Code 47.01. So, while Texas state law permits skill-based games that pass the predominant factor test, Meta’s drop down menu only allows “sweepstakes.”

Gaming companies must also select the protective measures that they implement to ensure compliance with their territorial restrictions and 18+ age policies. KYC checks may also be appropriate depending on the jurisdiction, but again, this is a requirement that varies by country and region. Smaller or startup companies often struggle with navigating the various requirements, but there are qualified third party administrator solutions that offer the necessary services for gaming industry participants.

Finally, unless your company has a gambling license from a state regulator, Meta requires a legal opinion from an experienced and qualified attorney regarding the legality of the game under a particular jurisdiction’s laws. For example, if a company is offering a mobile app game of skill in the United States, the legal opinion will need to address not only the application of federal anti-gambling laws (such as the Unlawful Internet Gambling Enforcement Act and the Wire Act), but also the individual states. Each state has its own definition of “gambling,” various exceptions, and judicially-crafted test (such as the predominance or the material element test) that must be applied to the game in question. Also, the laws can change from time to time and must be addressed, such as when Virginia adopted specific legislation regarding certain physical games of skill in 2022.

Once the application and the opinion are submitted, Meta’s initial process is to check the submission for completeness (do not forget screenshots of your landing page!) and send it off for outside counsel review. The review can take as little as 2 weeks or as long as 3 months, depending on the game and the volume of submissions. Before the August 2022 reforms, if the application was rejected, there would be a specific reason and explanation. This allowed advertisers to go back to fix and resubmit their application. Currently, Meta does not give a reason for rejecting a submission. The default message is that advertising of the particular game or app is “not supported.” This is particularly frustrating when an advertiser has waited for weeks or months, just to find out their game is “not supported.” There is no clear appeal process either, and the advertiser is left to guess at how to best resubmit their application – or whether to simply try running ads without prior authorization (which risks Meta disabling the ad account and page).

Advertising on Meta can be a powerful boost to your game’s audience, but it is also a complex process that requires a legal opinion from an experienced attorney. There are many aspects to navigating the various laws in play, as well as KYC, age-gating, and geolocation requirements that are more and more prevalent across the industry. Contact Artaev at Law PLLC today to set up your initial consultation.

The qualified and specialized attorneys at Artaev at Law PLLC know gaming law – email or call us to set up your initial consultation.

Disclaimer: This guide is for general informational and promotional purposes only. Nothing herein constitutes legal, tax, or investment advice. Every situation is different and has its own unique set of challenges. Do not take any action or sign any contract until you have obtained specific guidance from a qualified professional.

© 2023 Artaev at Law PLLC. All rights reserved.

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Are Play-to-Earn Video Games Legal in the United States?

Are play-to-earn games legal? The answer depends on the specifics of the game. For many gaming developers, play-to-earn is a lucrative business model in 2023 and beyond. These games let players compete against other players (PvP) or against the the game itself (PvE) to earn rewards that have real-world value. For example, players may pay real money to buy in-game currency to purchase virtual gear or real estate, but players also have the option to redeem the in-game currency for real-world money. Players can trade resources or earn the in-game currency through gathering, completing tasks or quests, or other gameplay. However, any company looking at play-to-earn should retain an experienced gaming attorney to consult on their game. It may be an attractive business model, but any real-money gaming implicates multiple legal areas, including taxes, securities law, and both state and federal-level anti-gambling prohibitions.

Earning real-world cash for virtual goods or gameplay is not a new concept. In fact, the first generation of massively-multiplayer online roleplaying games (MMOs or MMORPGs) like Ultima Online, Runescape, and Everquest had robust real-money economies for in-game items. Resource “farming” – where one would gather virtual resources and then transfer them to another player for a real-world money payment – became even more popular with World of Warcraft and the next generation of the MMOs like EVE Online. However, the developers did not officially sanction these in-game economies. Anti-RMT (real-money trading) provisions are prevalent in most end-user license agreements. Real money components in video games may be too close to gambling, which is obviously problematic. Developers are generally reluctant to assume additional liability and risk associated with any real-money economic component.

Play-to-Earn is Hot, But Rife With Legal Pitfalls.

However, it is the end of 2022, and making money playing video games is a real and viable career choice. Esports and video game tournaments are mainstream events, with their own ESPN page, multi-million dollar teams, and celebrity-status professionals. Many colleges offer esports scholarships. Casual video game tournaments (Call of Duty, FIFA, Gran Tursimo) are also a thing. For the more casual gamer, there are also real-money skill-based games (timed solitaire, bingo, etc.) available on the web or from the App Store. Daily Fantasy Sports giants like DraftKings and FanDuel also offer skilled players an opportunity to win real money by drafting the best fantasy sports teams.

There are also a number of NFT-based collectible card games, horse racing simulators (like Zed.Run), and countless other permutations of games where players are able to own in-game assets that they can sell and trade like their real-world counterparts. This sector of the gaming economy continues to grow, as the relatively low cost of cryptocurrency makes entry a lot more accessible. Many players also see the current “bear” market as a prime opportunity to enter some of these projects at low cost and potentially see significant growth in their in-game assets as the economy rebounds.

Modern play-to-earn games are simply another variation of the real-money gaming business model. Developers in this space fully embrace the concept of a virtual economy and the ability to earn real-world compensation for game play. The most prominent example is Axie Infinity (a Pokemon-type trading, collecting, and battling game), which has integrated blockchain technology (crypto and NFTs). Investors around the world, including Mark Cuban, quickly embraced the play-to-earn gaming model. Even in the times of the “crypto winter,” Axie is still worth many millions of dollars.

Advertising and Onboarding May Require a Legal Opinion.

Any real-money gaming business (including play-to-earn) needs experienced gaming counsel to guide them through various compliance issues. Advertising a real-money game on social media and getting through Apple’s approval process on the App Store requires a legal opinion that the game is truly skill-based and not illegal gambling. Is your game structured so that they are providing a service to you in exchange for compensation? Depending on the nature of your game, you may have unintended labor law obligations and even tax filing (W-2 or 1099) obligations to the IRS and state tax authorities.

Make Sure Your Game is Not Selling Securities.

Another potential pitfall is with the Securities and Exchange Commission (“SEC”). When designing your game and reward system, you must make sure that you are not inadvertently marketing a security and violating federal law. Securities are not just traditional stocks and bonds. An “investment contract” is also a regulated security and broadly includes any scheme where individuals pay money with the expectation that their money will be invested and they will earn a return. In the cryptocurrency world, initial coin offerings (“ICOs”) face heavy SEC scrutiny, especially after several high-profile cryptocurrencies turned out to be pyramid schemes.

The “investment contract” analysis is highly specialized and requires a thorough legal opinion. Each game is different, the laws are quickly changing in this area, and regulatory agencies are especially sensitive to crypto-related businesses in light of the numerous 2022 failings, bankruptcies, and rug pulls – with FTX being only the most recent example.

Beware Tax and Other Regulations If Your Game Uses Cryptocurrency or Other Blockchain Tech.

Speaking of crypto, if you are utilizing cryptocurrencies, tokens, NFTs, or other blockchain technologies as part of your game, there are more legal issues in play. Tax reporting and tracking are essential because the IRS considers cryptocurrencies to be property subject to capital gains tax. Does the game involve any crypto staking? If so, is your company now considered a bank subject to the FDIC’s jurisdiction? Are you involved in the business of money transmission and required to be licensed in each state where you do business?

Despite the slow regulatory change in this area and continued lack of centralized regulation, this area remains in the public eye and something of continued interest to regulators.

The bottom line is whatever your game and whether you are a veteran or just starting out, an experienced gaming attorney is a necessary asset to your business team.

Contact Artaev at Law PLLC to set up your initial consultation. We are Michigan’s gaming law firm and we specialize in the unique concerns that you may encounter as a game developer.

Disclaimer: This guide is for general informational and promotional purposes only. Nothing herein constitutes legal, tax, or investment advice. Every situation is different and has its own unique set of challenges. Do not take any action or sign any contract until you have obtained specific guidance from a qualified professional.

© 2021 Artaev at Law PLLC. All rights reserved.

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business law esports gambling law gaming law intellectual property internet law

Are Real-Money Video Game Tournaments Legal?

Video games are quintessential contests of skill and online multiplayer modes are a must in most modern video games. And yes, playing skill video games for real money prizes is legal in the majority of U.S. states. Some of the most popular video games (Call of Duty, Fortnite, Magic: Arena, and others) frequently feature official in-game tournaments with real-money prizes for the top finishers. Fueled by the global popularity of esports, there is also a growing number of third-party esports tournament sites and apps. These third-party offerings are essentially on-demand, which means that there are always head-to-head challenges waiting and frequent “cash cups” with winners able to win a hundred dollars or even more.

Real-money game tournaments and contests serve as a more casual alternative to professional esports. Not everyone has the time (or the reflexes) to go pro or even compete at the collegiate level. But, you may be skilled enough to dominate your local group of friends at Call of Duty or FIFA and there are plenty of offerings to let you win real money prizes against online opponents. Some of the most innovative companies even integrate streaming (for example through Twitch) to add an exciting “audience” element to real money play. Anyone can feel like an esports pro. There is also a growing opportunity for market crossover, with streamers getting involved in real-money play and adding a whole new dimension to their entertainment potential, audience, and branding opportunities.

What kinds of legal issues will a contest or tournament organizer/developer encounter? As with any business, there are several distinct legal areas in play.

Esports competitions or tournaments are not expressly regulated or prohibited under U.S. federal or state law.

First, from a government regulation perspective, no states expressly prohibit esports or video game tournaments. However, there are several jurisdictions that prohibit any sort of real-money gaming. This is the case even if the game involves a pure contest of skill (even offline, like a hole-in-one contest). Accordingly, tournament organizers and app developers stay away from those restrictive jurisdictions.

In the remaining states, game contests, tournaments, and esports are not licensed under any sort of “gambling” or “fantasy sports” regulatory scheme. The largely unregulated market means that there are a number of service providers out there that disagree on where their product can be offered. Some are more conservative than others, but there is not a definitive list of where gaming competitions are legal or illegal. At least one state – Nevada – passed legislation to create an esports advisory board (within its Gaming Commission), to recommend best practices for maintaining integrity of esports competitions and related betting. According to Nevada lawmakers, they recognize the value in the esports competition industry and want to ensure Nevada remains an attractive investment environment for this burgeoning industry. At this time, the potential advisory committee is the closest any state has come to any sort of esports-specific legislation.

A lot depends on the specific competition and tournament model, as well as the types of games being played. For instance, are shuffled cards involved (Magic: The Gathering)? Or some other element of randomness (like team or opponent selection)? Are bots or AI players involved? How do all these elements interact and do they introduce a significant chance element that may affect the outcome? Does the randomness element render the game illegal “gambling”?

Third-party video game websites and apps implicate the intellectual property rights of the underlying game’s developers and may be subject to DMCA takedown notices or federal trademark lawsuits.

Second, esports competitions and tournaments do implicate intellectual property rights, specifically the rights of the game developers. A game’s developer (like Blizzard, Riot, or Epic) owns the copyrights in its games and underlying code. Third-party apps and websites operate without any sort of license from the developers, which may be a violation of copyright or trademark law. Disclaimers alone may not be enough – using game imagery, logos, or even gameplay footage may constitute copyright or trademark infringement. A player or streamer may be protected by the “fair use” copyright law exception, but a company that organizes and monetizes game tournaments is unlikely to prevail on this argument. At the same time, a properly run game tournament organizer may not have sufficient interaction with the game itself to violate IP rights. After all, the players are the ones playing. Each situation is highly fact-specific and there is certainly no bright line rule.

As real-money video game tournaments become more widespread, expect to see pushback from the game studios. At least one studio – Epic – has announced an aggressive stance towards third-party platforms that facilitate playing Epic’s games for real-money prizes (particularly Fortnite). However, as of the date of this article, no lawsuits have been filed.

Combining real-money tournaments with streaming is an attractive business model, but may involve complex licensing and contract issues.

Third, streaming tournaments and competitions, as well as partnering with known streamers, involves a number of contract law and licensing issues. Each streaming service has its own set of terms. Players (and organizers) streaming real-money game content must ensure that they are compliant with the terms or risk being banned from the platform. Further, who owns the streaming content? Normally, the creator has the intellectual property rights to their own content, but it is not so clear-cut when streaming a tournament or other organized contest. Tournament organizers should ensure that rights and expectations are clear from the outset, especially if a well-known esports streamer or player is involved. If the streamer is granting the organizer a license to showcase their gameplay, the license should at a minimum be in writing. Any royalties, cross-promotions, and sponsorships likewise need to be negotiated ahead of time. Even the best intentioned relationships go awry when money becomes involved.

For developers looking to launch a new esports or game tournament app or website, an experienced gaming attorney is a must-have. Artaev at Law has worked with a number of gaming companies from across the world and has the expertise you need. Reach out today to set up a meeting with Dan.

Contact Dan Artaev by email or call or text to set up your initial consultation.

Disclaimer: This guide is for general informational and promotional purposes only. Nothing herein constitutes legal, investment, or tax advice. Every situation is different and faces its own unique set of challenges. Do not take any action or sign any contract until you have obtained specific guidance from a qualified professional.

© 2021 Artaev at Law PLLC. All rights reserved.

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The Three Types of Skill-Based Real-Money Games: Room for Innovation, Not Stagnation.

The skill-based real-money gaming market remains a popular and innovative business environment. The draw for players is that they can play games and win real money, but also improve their chances of winning through skill. Unlike gambling or casino-style games, skill-based gaming is not mathematically skewed in favor of “the house.” There are many types of games to choose from – card-based solitaire-like games, bingo, bubble puzzlers, trivia, and even sophisticated physics-based racing games. Best of all, unlike casino gambling and sports betting, skill-based real-money games are legal and available in the majority of U.S. states and internationally as well.

For developers, the upside is obvious. Monetization of gaming has always been profitable and a lucrative business – hence the tightly-regulated casino and sportsbetting markets. Designing a mobile game instantly gives the developer access to customers across the world through a well-established distribution network (i.e. the Apple App Store). When done right, real-money skill games are not required to be licensed or otherwise regulated in a majority of the states. This makes the real-money skill game market very accessible to most developers, including smaller studios with limited budgets and without the lobbying firepower that would otherwise be required to enter the money gaming market.

These factors combine into a highly-competitive market. This makes it difficult to design a profitable game without innovation. For example, the Skillz.com platform (publicly traded as SKLZ on the NYSE) boasts over 30 million players and over 30,000 developers. However, according to Skillz’s August 2021 prospectus filed with the SEC, only three games accounted for 74% of all revenue in 2021. These so-called “big three” are Tether’s “Solitaire Cube” and “21 Blitz,” and Big Run’s “Blackout Bingo.” Predictably, there are number of copycat games that are very similar to these “big three” in design and gameplay. To be successful, developers must innovate. As part of their development and marketing efforts, all companies in this space need to understand the three main types of skill games, each with its own set of regulatory nuances:

Pure-Skill Games

The first category of games is the “pure skill” variety that are similar to the popular Solitaire Cube, 21 Blitz, and Blackout Bingo that account for such a large share of the market. These games pit players in head-to-head contests, multiplayer battles, or tournaments the outcome of which depends solely on the skill of the player. For example, in Solitaire Cube, players are given the same deck and are scored on how well and fast they play Klondike Solitaire using these cards. Players pay an entry fee, with the winner receiving a cash prize.

These “pure skill” games do not involve any other factors than the players’ own skill in determining the outcome. There are limitless possibilities in this genre – anything from knife-throwing games, to cup flipping or “beer pong” style contests, to trivia games fall into this category. Some particularly innovative developers have even developed sophisticated physics-based games (similar to Angry Birds) that take serious dexterity, planning, and logic to master.

Pure-skill games are legal under U.S. federal law, as well as in the majority of U.S. states. Because skill games involve the opportunity to win real money, the Apple App store and various social media advertising platforms require special approval and an application that must be accompanied by a legal opinion from qualified gaming counsel. Payment processors also require special approval, a physical presence in the United States, and have their own set of standards and rules that must be met before your gaming account is approved.

Fantasy Sports or Market Games

The second category of skill games are those that are similar to the daily fantasy sports (“DFS”) contests offered by DraftKings and FanDuel. Generally, participants pay an entry fee and then are given a virtual currency budget to spend on a lineup of sports players to be on their fantasy team. The fantasy team then scores points based on real-world performance and the participants that accumulate the most points can win a cash prize.

Traditional sports and leagues like the NBA, NFL, MLB, and NHL are not the only options. There is at least one fantasy esports platform that lets players put together a lineup of their favorite gaming stars. There are also fantasy stock market games that let players pick a portfolio of real-world shares and win prizes based on how well their portfolio does against other players.

The key distinction between these fantasy games and pure-skill games is that the outcome of a fantasy game is not determined solely by a player’s skill. While it certainly takes knowledge and research to put together the best team, points are awarded based on real-world performance that is outside of the participants’ control. In fantasy sports, a particular player might have a bad game, get injured, or fall victim to bad officiating or adverse weather conditions. In fantasy stocks, a particular stock might enjoy a sudden price spike due to a merger announcement or a new product. Or, a stock might quickly lose value due to an SEC investigation or other unpredictable real world factors. In 2020, the IRS issued two separate memoranda analyzing and addressing this distinction, concluding that DFS involves “wagering” within the meaning of the Internal Revenue Code. At a minimum, the IRS’s position matters from a tax perspective: does your skill-based game involve “wagers” subject to excise tax?

DFS and similar fantasy games are more regulated than “pure-skill” games. DraftKings and FanDuel currently offer their DFS products in 43 states and are a good regulatory bellwether. In some states, DFS is offered as an unregulated skill-game product that falls outside of the state’s definition of “gambling.” In other states, legislatures have passed laws that expressly exclude DFS from “gambling,” but do not otherwise regulate or license DFS. In contrast, states like Michigan have enacted comprehensive licensing regulations for DFS. There are also states that outright ban any sort of real-money wagering. And, there are states that have issued DFS-adverse legal opinions and are embroiled in litigation to decide whether DFS constitutes illegal “gambling.” In other words, the regulatory landscape for DFS-type games is complicated and requires guidance from an experienced gaming attorney.

Arcade-Style Skill Games

The third category does not involve mobile phones, computers, or the internet at all. Rather, these games look like arcade cabinets or even like slot machines, and are found in certain bars, restaurants, and other public establishments. Originally, these games were purposefully designed to look and feel like slot machines, but introduced additional player choice or input features so that they would involve skill and purportedly fall outside of the definition of “gambling” in most states. Authorities in some states have cracked down on these types of machines (sometime called “nudge machines” or “skill slots”), concluding that the claimed skill element was a sham or otherwise insufficient to render the machine a true game of skill.

Despite the ongoing pandemic and the ubiquity of gaming options on mobile devices and the internet, these cabinet-type skill games are still thriving. One particularly popular game called “Dragon’s Ascent” has attracted the attention of regulators in the D.C. area and has sparked debate over whether the game (which pays out cash prizes) is an illegal gambling device. Players score points by shooting magic balls at dragons to capture them, using the joystick and buttons to direct and time their shots. The two-player version looks like a traditional arcade cabinet. The eight-player version adds an impressive-looking table that doubles as a screen. Both versions include drink holders, and the game’s promotional material specifically targets bars as a way for them to “offer something new.”

Although the barriers and start-up costs to enter into this specific market are significantly higher than the mobile game field, the presence of arcade-style skill games demonstrates the level of innovation and variety in the industry. Bars and restaurants that survive the pandemic may very well be interested in real-money skill games as one way to bring customers back to their in-person establishments. It is also possible that bars and restaurants will partner with more skill game developers to introduce mobile or more individualized real-money games to their establishments. After all, having a pint and betting $5 on a game of pool or darts is one of the most traditional and familiar ways to bet on a game of skill. Technology may advance, but people’s desire to compete, wager, and win real money remains the same.

Have more questions? Do you need a legal opinion or help getting your game through the regulatory process? Contact Dan Artaev today by emailing dan@artaevatlaw.com or by phone or text at (269) 930-0254.

Disclaimer: This guide is not intended to be and does not constitute legal advice. It is for informative and promotional purposes only. Do not take any action or refrain from taking any action based on this guide, and always consult with a qualified professional about the circumstances of your particular case. Each set of facts is unique and different circumstances apply to each individual business.

© 2021 Artaev at Law PLLC. All rights reserved.

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business law esports gambling law gaming law internet law

IRS Rulings on Daily Fantasy Sports Wagering: What Does This Mean for Skill-Based Gaming?

Real-money skill-based games are very popular across the world and the United States is no exception. Generally, real-money skill games allow players to compete against others in various games where the outcome is determined by the relative skill of the players (as opposed to chance). In simple terms, it is the same betting your friend $5 on a game of darts or pool at the local pub. Except these games are played online – most frequently on smartphones. Games range from timed solitaire contests (using the same deck), to knife throwing or cup flipping games, to trivia contests. Because chance does not determine the outcome, most states’ anti-gambling laws do not prohibit skill-based games. U.S. based and international companies have been working to invest in this space, using the increasing availability of the internet and smartphone apps to provide entertainment to players seeking to compete against others and win some money in the process.

I have written extensively about legality of skill gaming, as well as the obstacles that developers need to overcome to get their games up and running and advertised.

Besides private company gatekeepers, local law enforcement, and regulatory authorities, there is a new obstacle for skill-based gaming companies. This time it comes from the IRS and could have broad market implications beyond simply paying taxes.

In 2020, the IRS issued two related memoranda regarding Daily Fantasy Sports (“DFS”) wagers. Recall that DFS is an accelerated version of traditional fantasy sports, giving players a chance to set lineups and compete on a daily basis, rather than having just one team for the entire season. DFS is available in 43 states through the two major operators: DraftKings and FanDuel. Similar to pure-skill games, DFS distinguishes itself from gambling by emphasizing that relative skill of the players determines the outcome (as opposed to chance). In some of the 43 states, DFS operates pursuant to government license. In other states, DFS is unregulated and either expressly or implicitly exempt from the statutory definition of “gambling.”

In the first 2020 memo, the IRS considered whether DFS operators (i.e. DraftKings and FanDuel) were required to pay excise tax on wagers pursuant to IRC §§ 4401 et seq. Under federal tax law, each “wager” is subject to excise tax – sportsbooks are very familiar with this provision that requires the bookmaker to pay tax on every bet accepted from a patron. In answering in the affirmative, the IRS defined “wager” without any reference to an element of chance:

“[T]he statutory language in IRC §§ 4401 and 4421 does not differentiate whether an activity involves skill, chance, or some combination of the two. Most importantly, whether DFS is a game of skill for state gambling statute purposes is not relevant for determining whether DFS is wagering for federal excise tax purposes.”

IRS AM 2020-009

At the same time, the IRS did not overturn Revenue Ruling 57-521, which was a 1957 opinion on whether a puzzle contest was a taxable gaming transaction. Rather, the IRS distinguished that in the puzzle contest “the contest participant’s own skill was the only factor involved in winning the puzzle game and there was no chance element at all.” In DFS, the participants use their skill to select a lineup, but then earn points based on the real-world performance of the selected athletes (over which the participants have no control). The IRS emphasized that no matter how educated and skilled a DFS participant may be, there is always a chance that the chosen player or players will perform poorly that particular day, get injured, or suffer adverse effects on their performance from the weather or officiating. Thus, the IRS concluded that the “skill” involved in DFS was similar to the skill involved in traditional sports betting or horse race “handicapping.” Finally, the IRS also explained that that the rate of excise tax (0.25% or 2%) depends on whether DFS is “authorized” under the law of the state where the wager is accepted. The IRS did not explain whether “authorized” means DFS is operating pursuant to express state license or is simply outside of the particular state’s anti-gambling legislation.

Two months after the excise tax memorandum, the IRS relied on essentially the same analysis to conclude that DFS wagers are “wagering transactions” that can be used to offset wagering income during a taxable year under IRC § 165(d). Effectively, DFS wagers are treated the same as gambling losses under the IRC. In its legal analysis, the IRS reiterated:

Any argument a DFS transaction is not wagering because it is based on skill must fail because elements of chance beyond the participant’s control ultimately determine the outcome of the transaction

IRS Memorandum 202042015

Why does the IRS’s DFS analysis matter for skill-based real-money gaming? Two main reasons: (1) The IRS’s interest in DFS transaction could signal increased tax scrutiny for real-money skill-gaming operators; and (2) the IRS’s legal analysis of whether a skill game is actually gambling/wagering could be adopted by states that currently do not regulate skill-based gaming.

1. Do real-money skill-based game companies have to pay federal excise tax?

There is no doubt that pure-skill games are still exempt from the definition of “wager” and “wagering transaction” for tax purposes. However, it is unclear whether there can be “any” chance at all. The first IRS memo cited a 1957 puzzle game ruling to distinguish pure-skill games, noted “there was no chance element at all,” and concluded that “[t]he existence of chance indicates that DFS contests are distinguishable” from the pure-skill puzzle game at issue in the 1957 memo.

In the second memo, IRS revised its position slightly to conclude that “the test is not whether there is an element of chance or skill, but which is the dominating element that determines the result of the game.” Regardless, the IRS took the position that the outcome of a DFS contest is predominantly determined by chance (as opposed to skill). DFS industry leaders have predictably issued statements opposing the ruling, calling it “deeply flawed” and inconsistent with state court decisions that have held that DFS is a game of skill.

If you are a real-money skill game developer, it is critical to determine whether your game has any element of chance at all. In other words, is your game more fantasy sports or pure contest? If there is any element of chance at all, you must determine whether skill “is the dominating element” of the game. Most, if not all, real-money skill games will pass this second test. At the same time, if your game is more like fantasy sports (for example a stock market or cryptocurrency picking game), your game will likely be considered to involve taxable wagering. This obviously subjects you to the excise tax under IRC §§ 4401 et seq. An added wrinkle is whether you owe tax at the 0.25% “authorized” rate or the 2% “unauthorized” rate. Most skill-based operators operate without a license or governmental approval – but at the same time, they only operate in states where their activities are not prohibited by state anti-gambling laws.

2. Will states adopt the IRS definition of “wager” to regulate real-money skill-based gaming?

Additionally, the IRS analysis may be adopted by states seeking to regulate or prohibit real-money skill games. For instance, if you are paying excise taxes to the IRS, a state regulator can easily use that fact to argue that your game is actually “wagering” and therefore constitutes “illegal gambling.” This is especially troubling because the first “excise tax” memo seems to require “chance only. It is also possible that real-money skill games will be considered “wagering” for the purposes of excise tax imposed by IRC §§ 4401 et seq but not “wagering” for the purposes of IRC § 165(d).

Stay tuned for more on this developing area. It is likely that DraftKings and FanDuel are headed for a showdown with the IRS over the excise tax issue. Any resulting Tax Court decision (or even settlement) will have significant repercussions for the skill-based gaming industry.

Have more questions? Contact Dan Artaev today by emailing dan@artaevatlaw.com or by phone or text at (269) 930-0254.

Disclaimer: This guide is not intended to be and does not constitute legal or tax advice. It is for informative and promotional purposes only. Do not take any action or refrain from taking any action based on this guide, and always consult with a qualified professional about the circumstances of your particular case. Each set of facts is unique and different circumstances apply to each individual business.

© 2021 Artaev at Law PLLC. All rights reserve

Categories
business law esports gambling law gaming law internet law

A Guide to Getting Your Skill-Based Real-Money Game Approved in the United States.

Skill-based real-money gaming has been a popular form of entertainment across the world for hundreds of years. From Roman legionnaires wagering on an early version of backgammon to $5 eight-ball games at your local pool hall, skill games have always attracted players looking for a chance to win real money. With smart phones in every pocket, skill-based gaming has entered a new era where anyone with an internet connection can play various money skill games through their phone or computer and stake anywhere from $0.25 to hundreds of dollars on the outcome.

Gaming is a rapidly growing industry and the skill-based real-money market is no exception. Indeed, there is already at least one publicly-traded California-based company (Skillz.com; SKLZ) investing substantial resources in the real-money skill-based U.S. market. However, any sort of real-money gaming business implicates federal and state-level regulation. While a government license is not necessary in most states, your game must still pass private sector review. Apple’s App Store is indispensable in the current market; advertising through social media like Facebook is another must. Banking and payment processing is likewise an integral part of your ability to run a business.

I have advised a number of companies, both international and U.S. based, on the legality of their skill-based real-money games. Through Artaev at Law, I have prepared detailed memorandums and analysis for a number of companies, as well as provided consultation to investors seeking more information about the real-money skill-games market. As a game developer, here is what you need to know:

1. Get Your Game to the Players.

If you were to get into the full-scale casino gambling market, you would have to comply with stringent state-level regulatory requirements, pay substantial application and licensing fees, and otherwise deal with an intricate governmental regulatory framework. Further, in the few states where casinos are even legal, there is only a limited number of licenses that a state will issue. In other words, it is impossible. But real-money skill gaming operates outside the gambling regulatory framework, which means you don’t have to go through a government licensing or regulatory approval process to offer your product (in most states).

Instead, real-money skill game providers find themselves faced with so-called private company gatekeepers. The popularity of real-money skill gaming is in large part due to the ubiquity of the smartphone. Apple’s App Store is the only practical way to get real-money skill games onto iPhones (no, people will not “unlock” their iPhones to sideload your real-money skill game, especially when the App Store already has a robust selection of these games that are easy to download and use). Google’s Play store does not currently allow real-money skill games, so there developers must either provide sideloading options or use a Progressive Web Application (PWA).

The bottom line is that developers must pass Apple’s “gatekeeping” to even get their app on the market. That means complying with the App Store Review Guidelines. Section 5.3.4 is particularly important:

5.3.4 Apps that offer real money gaming (e.g. sports betting, poker, casino games, horse racing) or lotteries must have necessary licensing and permissions in the locations where the app is used, must be geo-restricted to those locations, and must be free on the App Store.

Apple considers real-money skill games to fall into this category, even though skill games do not depend on chance like the “sports betting, poker, casino games, horse racing” examples. This guideline can be distilled into three requirements: (1) The app must be legal where you are offering it; (2) The app must be geo-restricted to only those locations where it is legal; and (3) the app must be free.

The first requirement is the most important and the most confusing for app developers. How do you demonstrate that your app has “necessary licensing and permissions” if the states where you are offering your real-money skill games do not regulate such games? This is a situation where a legal opinion or memorandum from an experienced gaming attorney is helpful. In general, such a legal opinion will describe your game, explain how the game fits within existing federal regulations, and then present a state-by-state analysis (supported by applicable statutory and case law citations) to show that the skill game does not violate those states’ anti-gambling prohibitions or any other law.

The second requirement of geo-restriction is self-explanatory. Your app can only offer real-money gaming if the user verifies their location in a state where such gaming is legal. You can still offer practice or play-money games without geo-restriction (or if the user does not want to or cannot verify their location).

The third requirement is that the app must be free. Section 5.3.3 of the review guidelines further clarifies that “in-app purchase” cannot be used to purchase credit or currency for use in the real-money gaming app. That means that you will need to set up some sort of external mechanism for deposits, link the user’s existing account and balance to the app, and ensure compliance with the external payment processors’ requirements.

Once submitted, the review process can take between several weeks to more than a month. A lot depends on whether your app is similar to other apps already approved or whether it is something completely new. Other factors, like the reviewer or the law firm reviewing the legal analysis may also impact the timeline.

2. Advertise Your Game.

Advertising is critical to your app’s success and online advertising platforms have special rules for real-money games. Social media companies like Facebook and Twitter require prior approval and permission before running your gaming ad. The process is similar for both platforms and generally involves filling out a questionnaire, selecting the geographic areas you are targeting, providing a link to your app’s website, and submitting a legal opinion that your app comports with the law where it will be advertised. Google and YouTube (owned by Google) do not currently allow real-money skill game advertising.

This process may be a bit more lengthy than getting approval from the App Store. Depending on the nature of your product, your location, and the platform, the process may take several months. The social media platform may also come back with additional specific legal questions for your counsel to answer. The level of follow up and scrutiny is hard to predict because the social media companies farm out the review to outside law firms, which have their own standards and review processes.

3. Set Up Your Payment Processor and Bank.

Once your game is live and advertised, it’s time to start making money. There are a lot payment processors out there (PayPal, Square, etc.) and each has their own set of rules and guidelines for business accounts. The federal Unlawful Internet Gambling Enforcement Act applies to payment processors, so they must be especially careful not to facilitate illegal gambling activities. Credit card companies present another potential obstacle, as credit card companies often lump skill-based gaming with gambling into the 7995 merchant code.

For example, after states started rolling out regulated sport-betting options, Visa issued guidance that made its payment services available for “all transactions that are consistent with local, federal, and international laws.” Visa introduced new 7800-series merchant codes for legal gambling, but none of those codes apply to real-money skill gaming transactions. Practically, this means that skill-gaming transactions may still fall under the blanket 7995 code and Visa may not authorize the transaction. Nor does Visa issue an MVV (merchant verification value) for 7995 merchants, meaning that skill-based real money gaming companies are limited as to their direct-pay options.

This essentially requires skill-game companies to explore options through payment providers like PayPal. Provided you are based in the United States and can link a bank account, the process should be straightforward. If you are based in another country however, there is a whole another set of hurdles to overcome.

There’s More.

Getting your game approved, advertised, banked is only the first step. You will also need robust terms and conditions that govern your relationship with your users, which is especially critical when dealing with real-money gaming and facing potential payout disputes. A privacy policy is also a must, especially if you are offering your game internationally. Then there is the issue of taxation and whether you should be paying excise tax on skill-based game wagers. Real-money skill-based gaming is a hot market, but requires experienced legal counsel to get through these various issues.

Have more questions? Do you need help getting your app through the review process? Contact Dan Artaev today by emailing dan@artaevatlaw.com or by phone or text at (269) 930-0254.

Disclaimer: This guide is not intended to be and does not constitute legal advice. It is for informative and promotional purposes only. Do not take any action or refrain from taking any action based on this guide, and always consult with a qualified professional about the circumstances of your particular case. Each set of facts is unique and different circumstances apply to each individual business.

© 2021 Artaev at Law PLLC. All rights reserved.

Categories
business law esports gambling law gaming law internet law

International Skill-Based Real-Money Gaming: Is It Legal?

Previously, I wrote about the legality of skill-based real-money gaming in the United States. But the U.S. is not the only country where skill-based games are popular – real money competition is huge all over the world. For example, in India, skill-based gaming is not only a popular source of entertainment, but is also becoming a way to make a living. According to Ronaldo Landers, the CEO of the All India Gaming Federation, smartphone gaming has been the most significant contributor to the growth of real-money skill game business in India. That market alone is expected to gross close to $1 billion in revenue by 2025. Market studies currently estimate 350 million gamers in India and have reported a 21% increase in transaction-based gaming, with consistent growth expected in the near term.

Despite the worldwide popularity of skill-based gaming, legal compliance remains a challenge. The law is obviously different in each country and whether skill-based money games are legal depends on where you are. Sometimes there is no uniform national approach – both the United States and India regulate gaming on a regionalized state level. In India, each state has the power to make its own betting and gambling laws, which has led to a patchwork of legislation and judicial decisions. For example, Andhra Pradesh and Telangana have banned all real-money games (whether gambling or skill based), Tamil Nadu permits skill games only, and Kerala has expressly banned real-money online rummy. The lack of national principles and regulations has even resulted in conflicting judicial decisions about whether poker is a skill-based or chance-based gambling game. The Gujarat and Bombay High Courts have determined that poker is a game of chance – while at the same time the Karnataka High Court has reached the opposite conclusion. To add to the confusion, the Supreme Court of India has opined that rummy is a skill game except if played for real-money stakes or if operators make a profit.

In Europe, gambling is generally governed on a national level. This means that each country has their own set of laws that define and regulate gambling. Skill-based games that fall outside the definition of gambling are permitted. For example, one popular skill-game platform active in the European Union only offers real money cash gaming in Austria, Belgium, Cyprus, Czech Republic, Denmark, Germany, Luxembourg, Monaco, Netherlands, Romania, Spain, and Sweden. However, players located in France, Portugal, Italy, etc., are restricted to play for virtual “play” money only. All countries either regulate or outright prohibit gambling, so the question comes down to whether a particular skill-based game falls within that country’s definition of “gambling.” That question can only be answered by careful application of the particular country’s laws to the specific characteristics of the game.

What about cross-border play? Can a company based in the United States, India, or Germany offer games between players in different countries? It depends on where the players are located. In the United States, federal law does not prohibit skill-based real-money gaming. The most significant legislation – the Unlawful Internet Gambling Enforcement Act of 2006 – restricts financial transactions associated with “betting or wagering” if the “betting or wagering” is illegal where it is initiated or received. The UIGEA does not apply to most skill-based games, which are not a “game subject to chance.” But even if it involved a “bet or wager,” skill-based gaming is not unlawful in the majority of the states in the United States. So long as the bet or wager is legal in the state where it originates and in the state or country where it s received, there is no federal prohibition on the activity.

From a practical perspective, most skill-based gaming companies put the onus on the players to determine whether real-money skill-based gaming is legal in their particular jurisdiction. This is especially the case with non-U.S. based players – the terms and conditions require the end users to do their own due diligence. Of course, before a company can offer its skill-based game on a different country’s Apple App Store, the company will have to comply with that country’s specific terms and requirements. For instance, there may be geo-restriction or geo-location requirements. It is also likely that Apple (or Facebook for advertising purposes) will require a legal opinion about the legality of the game in the host country as well as the other countries where competitors are located.

Cross-border competition can be especially attractive to players looking to compete against friends and family located abroad. Gaming plays an important part in many cultures and increased accessibility through the internet and mobile app gaming presents opportunities for users to enjoy real-money gaming no matter where they are actually located. Whether celebrating the lunar new year through some fun family games or simply challenging your cousin to a $5 game of 8-ball, skill-based money games are a growing, popular market and business opportunity all over the world.

Have more questions? Need an expert legal opinion? Need help getting your app through the Facebook, Apple, or Google review process? Contact Dan Artaev today by emailing dan@artaevatlaw.com or by phone or text at (269) 930-0254.

Disclaimer: This guide is not intended to be and does not constitute legal advice. It is for informative and promotional purposes only. Do not take any action or refrain from taking any action based on this guide, and always consult with a qualified professional about the circumstances of your particular case. Each set of facts is unique and different circumstances apply to each individual business.

© 2021 Artaev at Law PLLC. All rights reserved.

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business law esports gambling law gaming law internet law

Real-Money Skill Gaming in the U.S: Is Your Game More Fantasy Sports or Pure Contest?

In 2021, there are many opportunities to play games for real money online, even if your particular state does not offer full-scale online casino operations. Daily Fantasy Sports (or “DFS”) is one hugely popular entertainment option. Real-money pure-skill contests are another. Video game tournaments, leaderboards, and prize pools are also available, as well as countless other options. Entrepreneurs all over the world want to enter the red-hot United States gaming market, but need to understand the legal nuances in order to effectively distribute their product and avoid legal issues with regulators, banks, and app platforms like the Apple App Store.

With skill-based games, it is important whether your game is more like fantasy sports or whether it a pure-skill contest. This distinction is critical because it determines where your game is legal (and whether you need a license) – and also affects your tax obligations to the IRS.

The following chart illustrates the three categories of games and the applicable regulations:

Description/type of gameCategoryRegulations
Players determine the amount of the wager and may apply certain level of skill to increase odds of winning (like hit or stay in blackjack), but odds always against the player. Winner is determined primarily by chance or chance is the dominant factor in determining outcome. Game is similar to a casino game like slots, blackjack, keno, or bingo. Game is a poker-like game. Game features a random mechanism, like a shuffled deck of cards, roll of the dice, or a spinning wheel. Bet is on the result of a single athletic competition, event, or performance of a single player.GamblingHighly regulated, illegal and criminalized activity (without a license)in all 50 states. Federal law also applies, including the monetary transaction restrictions through the Unlawful Internet Gambling Enforcement Act (“UIGEA”).
Players pay an entry fee, and then use research, data analysis, or other skill to build a team or portfolio to compete against other player-chosen teams or portfolios. Points or scores assigned based on real-life performance. Player does not control the performance of the players, stocks, currencies, or other portfolio components. Real-world events determine outcome. Similar to fantasy sports or a fantasy league. Prize pool must be known and fixed ahead of time.FantasyFantasy sports are expressly excluded from the scope of the UIGEA. Fantasy sports and leagues are permitted in about 80% of the states, but license and revenue tax is required in some. IRS views fantasy wagers as gambling bets and no different than sportsbook betting for tax purposes. Potential exposure to excise tax for providers.
Players pay an entry fee into a sports tournament or skill contest for the chance to win a prize (whether cash or otherwise) based on their own participation. Players determine the outcome through pure skill, such as strength, speed, agility, mental knowledge, mental quickness, or other physical or mental factor. Chance has minimal or no role in the outcome. Head-to-head games of timed solitaire, chess, checkers, blockbuster, Tetris-like puzzle games. Trivia contests. Most video game tournaments. Golf or tennis tournaments, hole-in-one contests.Pure Skill ContestUnregulated and not considered gambling in about 80% of the states. Regulated pursuant to license or outright prohibited in the remaining states. Not regulated under federal law. The IRS does not consider entry fees or skill wagers to be gambling bets.
Copyright 2021 Artaev at Law PLLC. All Rights Reserved. May not be reproduced without the express written permission of the author.

As a gaming company providing a new product, you obviously want to steer clear of classification as a gambling game. Unless you are a licensed casino (or working in partnership with a licensed casino) in one of the few states that have legalized online gambling, real-money gambling games are illegal. Not only do you risk fines and prosecution from state and federal law enforcement, but you will not be able to pass Apple or Google’s app vetting process, advertise on Facebook, or use a mainstream payment processor like PayPal.

Skill-based real money games are those where the outcome is not determined by chance. These games fall either into the “fantasy sports” or “pure skill contest” categories. In either category, the argument is that where chance is not a dominant factor, the game is skill-based and falls outside the definition of regulated “gambling.” Many real-money skill-based gaming platforms have adopted this “if it is not prohibited, then it is legal” approach to offer their products in about 80% of the United States. But there is a difference between the so-called “fantasy sports” and “pure skill contest” categories. The first difference is regulatory – state law treats “fantasy sports” and “pure skill contests” differently.

To fully understand the difference, it is important to know that the “it’s not gambling” argument is not new. In the early 21st century, it was widely used by online poker providers and then daily fantasy sports operators. Recall that between the early 2000s and 2011, Texas Hold’em became huge in the U.S., helped by online pioneers like PokerStars and PartyPoker that allowed anyone to play online poker from anywhere. ESPN was airing the World Series of Poker as part of its routine sports coverage. The 2006 James Bond franchise reboot Casino Royale even focused on high-stakes no-limit hold’em (as opposed to Baccarat in Ian Fleming’s original book treatment).

The primary argument for legality was that poker is a game of skill, not chance, and therefore not gambling. Advocates pointed to the fact that skilled poker players were consistently able to beat their opponents, even though the game did involve the element of chance with a random shuffle of a card deck. In response to growing concern about unregulated real-money poker, a number of courts concluded that chance played a significant role in the outcome and Texas Hold’em is indeed gambling. The federal government took further regulatory action by enacting the Unlawful Internet Gambling Enforcement Act (“UIGEA”). The UIGEA essentially killed off any off-shore poker and other grey-market online gambling operations by targeting U.S. banks and payment providers and prohibiting them from facilitating wagering transactions. Those providers that continued to offer U.S. players real money poker games were shut down through federal law enforcement action on so-called “Black Friday,” April 15, 2011, and their executives charged with a number of felonies, including money laundering and fraud.

Daily Fantasy Sports emerged as an entertainment alternative around 2007 and relied on the same “it’s not gambling” argument as poker. Players would stake real money for a chance to play in a fantasy sports contest, where they would set a daily lineup of their own fantasy team and compete against others for the highest score. The highest score or scores would be awarded cash prizes. DFS relied on the definition of “bet or wager” in the UIGEA that expressly excluded fantasy sports contests. But, just because DFS is not illegal under the federal UIGEA (and MasterCard or Discover can process the associated wagering transaction) does not mean it is automatically legal. Some states concluded outright that DFS is “gambling” and is illegal. Others enacted legislation that DFS is not gambling. And some have done nothing at all. Thus, DFS offerings vary state-by-state: as of the date of this article, DraftKings and FanDuel both offer DFS in 41 of the 50 states. But DFS law is far from settled and remains in a state of flux; for example, in New York, DFS was authorized by the state legislature, but a lawsuit challenging the constitutionality of the law is pending on appeal. Texas is another example – in 2016, the Texas attorney general issued an opinion that DFS is illegal gambling, but both FanDuel and DraftKings continue to offer DFS in Texas pending the final outcome of various lawsuits.

On the other hand, games that are head-to-head contests of pure skill are legal in most states because they fall outside the state’s definition of “gambling.” These games – whether online or in person – allow participants to pay an entry fee and compete for a prize (monetary or otherwise). Even if the game is played on a smartphone, it is no different than paying a fee to play in a money tennis or golf tournament. Or paying an entry fee to participate in an arm wrestling contest at the state fair. In fact, certain states expressly exclude so-called “bona fide contests of strength, skill, or speed” from the definition of gambling, provided that the only persons making the wagers are the participants themselves. But although the analysis seems straightforward, providers of pure-skill contests disagree about where exactly real money games are legal. Various platforms have different lists of “restricted jurisdictions,” demonstrating their different tolerance for risk, and that the law remains unsettled in this area.

The second difference between fantasy and pure skill is tax treatment. Under the Internal Revenue Code, gambling winnings are taxable income, but may be offset by gambling losses. In 2020, the IRS decided that wagers made on DFS constituted a “wagering transaction” (i.e. gambling) under Section 165(d) of the Internal Revenue Code and the Tax Court agreed. This ruling was consistent with another 2020 internal IRS memo that concluded DFS wagers were subject to an excise tax, which is normally applied to wagers made at sportsbooks. The IRS’s analysis and conclusion that DFS is essentially the same as sports gambling has significant legal implications. Not only does it potentially expose DFS providers to millions of dollars in unpaid excise tax liability, but it is also an indicator of how the nature of the game may determine the outcome of “is it gambling” analysis. A game could very well be “gambling” for tax purposes, but at the same time “not gambling” under a state’s definition of “gambling.”

The skill-based gaming market is an attractive, fast-growing industry in the United States. However, it is also plagued by an uncertain legal landscape and inconsistent treatment at the federal and state level. Tax implications are also something to consider when designing your game. Whether you are a start-up or a well-established company looking to introduce a new game product, Artaev at Law can provide you with consulting and legal analysis required to do it right.

Have more questions? Do you need help getting your app through the Apple, Google, or Facebook review process? Contact Dan Artaev today by emailing dan@artaevatlaw.com or by phone or text at (269) 930-0254.

Disclaimer: This guide is not intended to be and does not constitute legal advice. It is for informative and promotional purposes only. Do not take any action or refrain from taking any action based on this guide, and always consult with a qualified professional about the circumstances of your particular case. Each set of facts is unique and different circumstances apply to each individual business.

© 2021 Artaev at Law PLLC. All rights reserved.

Categories
business law esports gambling law gaming law intellectual property internet law

The Facts About Real-Money Skill Gaming: Dispelling 5 Common Internet Myths.

Artaev at Law advises companies looking to launch new technologies and tap into the skill-based real-money game market in the United States. In keeping up with the latest legal and regulatory trends, we do a lot of research, and we have seen a lot of misleading and downright false information on the internet. Do not be deceived and get the facts backed up by legal analysis – Artaev at Law is the trusted, experienced, and accurate source to answer your questions and dispel the most common myths about real-money skill gaming.

1. MYTH: Online gambling games are the same as “real-money games of skill.”

FACT: No. Words matter. “Gambling” is term of art used in state laws across the United States to define heavily-regulated casino-type activities, usually with reference to an element of “chance.” Federal laws like the Unlawful Internet Gambling Enforcement Act (“UIGEA”) also regulate and prohibit banking institutions from facilitating unlawful gambling. But paying an entry fee to a cash-prize tournament or wagering on yourself in a head-to-head contest is not the same thing as “gambling.” These real-money games of skill rely on the relative skill of the players to determine the outcome and do not involve any element of chance, so they cannot be considered “gambling,” which has a specific definition under the law. I have even seen other law firm websites make this mistake and misuse the term “gambling” to refer to anything that involves the wagering of real money. There are also a lot of questionable websites that attempt to equate online casinos to video games or pure-skill games in an attempt to confuse and generate clicks and get people to transfer money to off-shore operations. Do not be deceived – and contact a knowledgeable lawyer if you have questions.

2. MYTH: States only regulate “games of chance” and if the real-money game does not involve “chance,” the game is automatically legal everywhere.

FACT: No. There are 50 states in the United States and each one of them has their own laws that regulate gambling. Each state has its own definition of “gambling” and what exactly is and is not allowed depends on the nature of the game offered, as well as specific regulations. Some states specifically allow participants to wager real money on “bona fide contests of skill.” Others prohibit wagering any real money on any game, even if chance is not involved. Note that wagering on the play of others, even if they are involved in a contest of skill, is prohibited as gambling. After all, that is how sportsbooks work – wagering on the competition of others. This is a constantly evolving regulatory area – the major real-money gaming websites themselves disagree where to offer real-money gaming – some offer cash games in 45 states, others in 41, others in 35, etc. Whether your particular game is legal (and where) is a case-by-case analysis that requires an up-to-date legal opinion.

3. MYTH: Real-money games of skill are those shifty-looking slot machines that you see at truck stops or those internet cafes that offer sweepstake games.

FACT: No. Those slot machine looking things are in fact slot machines (with some extra features added to attempt to claim that they involve “skill”) and internet cafes try to disguise game of chance gambling as sweepstakes. Law enforcement in many states have used existing gambling laws to shut down these establishments. Real-money games of skill are in fact played predominantly on mobile devices or computers at home. They are nothing like slot machines or sweepstakes and allow players to compete head-to-head for real cash prizes. There are card based games (like Solitaire that awards points based on speed to completion), bubble shooter games, Tetris clones, knife throwing games, and many others. The head-to-head (or tournament) contests are more akin to entering a pool tournament for a chance to win a cash prize, rather than any sort of randomized game of chance.

4. MYTH: Skill games or are just a different type of gambling video game that Las Vegas using to try to appeal to Millennials who are not interested in the traditional casino games.

FACT: No. Skill-based real-money gaming is not something that involves or depends on land-based casinos. While the regulatory bodies in states like Nevada and New Jersey did adopt regulations to encourage a new type of slot machine that involves an element of skill, there is no indication that these types of machines enjoy any sort of popularity. Like many other forms of entertainment in 2021, skill-based real-money games are based online. Advanced internet and mobile phone technology and accessibility is making these games an especially lucrative business.

5. MYTH: There are no legal implications for organizing or running a real-money video game tournament (FIFA, Tekken, Magic: The Gathering, etc.) because the outcome depends on the skill of the players.

FACT: No. There are two distinct problems with this assumption. One, is that legality depends on the nature of the game being played. Is there an element of chance? This could be determined by not only the nature of the game, but how the match-making or team selection function works. If chance is present, how much, and does it predominate over the skill element? That will determine whether the particular game passes the state-level “gambling” test. Two, there are intellectual property issues. The game studios own copyright and trademark rights in their games and do not endorse third party websites that enable real-money wagering on their games. Studios like Epic Games have publicly announced their view that these websites are misappropriating their intellectual property, and legal action is likely forthcoming.

Skill-based real-money gaming is an exciting and emerging form of entertainment worldwide. But there is a lot of misinformation online. The regulatory landscape is always changing, and Artaev at Law are the experts on the facts, trends, and the law about real-money skill-based (or pure-skill) gaming.


Contact Dan Artaev by email or call or text to set up your initial consultation.

Disclaimer: This guide is for general informational and promotional purposes only. Nothing herein constitutes legal, investment, or tax advice. Every situation is different and faces its own unique set of challenges. Do not take any action or sign any contract until you have obtained specific guidance from a qualified professional.

© 2021 Artaev at Law PLLC. All rights reserved.

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business law esports gaming law

Esports. So Hot Right now: Advice from an Esports Attorney for Players and Teams.

Metro Detroit is uniquely poised to become the next epicenter of a growing industry: Professional competitive video gaming, or simply esports. An emerging and growing form of entertainment, the Michigan esports scene is rooted in its strong high school and collegiate programs. Professional esports actually had its first major metro Detroit debut August 2019, when Little Caesars Arena hosted the League of Legends Championship Series summer finals. Detroit’s storied sports history, as well as its growing reputation as a technological pioneer made it particularly attractive to Riot Games when it decided to bring this event to the Motor City.

The tournament attracted more than 10,000 live fans to the city and the arena, with tens of thousands more watching a stream on Twitch. Metro Detroit is also home to gaming lounges, arcade bars. Since 2019, the pandemic obviously shifted demand away from in-person events, but fans still continue to follow their favorite players remotely. California remains the epicenter (no earthquake pun intended) of the American video game industry, which is still dwarfed by the Asian market. Still, there is a robust esports community in Michigan, which bodes well for Michigan continuing to attract professional events and business in the future.

Despite the industry’s potential, there are no dedicated esports law firms or esports lawyers in Michigan, and Artaev at Law is the only Michigan law firm that specializes in video game law. If you search for “Michigan gaming lawyer,” the results come up for casino gaming lawyers, which is probably not the type of gaming you are looking for.

Why do you need a lawyer in the first place? Professional esports, like professional football, tennis, baseball, etc., is a legal minefield for the unwary. Intellectual property issues are front and center. Contract law and employment law concerns abound. Additionally, esports participants and professionals tend to be younger, often without professional representation, and especially vulnerable to predatory market practices. The unique nature of the industry and legal issues facing participants also requires specialized knowledge base and background from your lawyer.

Get someone who knows both the law and video games. The classic “Legend of Zelda” line rings true: It’s dangerous to go alone! Take this (advice):

  • Before signing ANY contract with ANY team, sponsor, representative, etc., consult with an attorney. It is a worthwhile investment in your future and you must understand all of the rights, costs, and benefits that you are agreeing to. Obtaining a professional consultation before you enter an agreement is far cheaper than trying to get out of a contract after the fact or worse, having to defend against a lawsuit for breaching that contract.
  • An esports attorney can act as your agent and advise you regarding things like your rights and obligations, contract termination, payments, taxes, and other legal aspects. An esports attorney can help you protect your career, revenue stream, and potential winnings, while you can completely focus on the gaming and building your brand.
  • Do not assume that because you are part of a school team that you are automatically protected. Professional esports is all about money and like any other industry, it is a business first. Treat your involvement just like you would any other serious business transaction.
  • Merchandising and general intellectual property are big money, but often overlooked. As a pro gamer, you will likely receive a salary, but you also stand to make a lot of money through sponsorship. For example, if Mountain Dew calls you up and offers big money to drink their products during your live stream, who owns those rights? Who gets the money?
  • Like with any business, the more it grows the more trouble it attracts. Did you create a signature kill shot or a unique move that gained you 1,000 new followers on Twitch? What rights do own to that creation? What about your unique online persona? What happens to your creations after you sign a professional contract or a sponsorship deal?
  • Another question that will come up sooner rather later is how to deal with the social media aspects – especially the negative trolls. Can you send “cease-and-desist” letters? What legal options do you have when someone defames you online?

Video games are big business and are a growing sector of the entertainment world. The $1 billion (plus) global industry is continuing to expand worldwide, including to Metro Detroit. The emerging market means there are more players, more teams, more brands, and more potential pitfalls than ever before.

Have more questions? Contact Michigan’s video game lawyer Dan Artaev at dan@artaevatlaw.com or 269-930-0254 with any questions and professional representation in the esports or video game industry.

© 2021 Artaev at Law PLLC. All rights reserved.

Categories
esports gaming law intellectual property

FAQ: Can Playing Music on Twitch Get Me Sued?

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Yes it can. As the popularity of internet streaming soars, content creators are encountering unique legal issues related to the media that they use. In June 2020, Twitch received thousands of so-called “takedown notices” under the Digital Millennium Copyright Act (“DMCA”) related to multiple archived clips that contain copyrighted music. The Recording Industry Association of America (“RIAA”) owns the copyrights to many popular songs and is responsible for this DMCA blitz. This situation has prompted many questions from the streamer community, and so I have created this FAQ in response. If you have more specific questions regarding your situation, please reach out directly to set up a personalized consultation.

Q: What exactly is the issue with playing music that I paid for?

A: The issue is copyright law and the fact that that most streamers don’t have the right license. When you purchase a CD, download a song from iTunes, or subscribe to Spotify, you are only buying a personal use license for the songs. Remember how making bootleg CDs is “piracy” and illegal? That’s because your “ownership” of a song does not include the right to reproduce it. It also does not include the right to play the music for the public. When you hear music a gym, restaurant, or retail store, they have obtained special “public performance” licenses, which are more expensive.

Q: Are they really going to sue me? Even if I’m not making any money?

A: They might. Under U.S. copyright law, the copyright owner may sue to get an injunction (an order to stop doing something from the court), and in addition to actual damages, get statutory damages, as well as costs and their attorney fees. Under the law, infringement is still infringement even without profit or monetary gain. If a court finds that the infringement was willful, statutory damages can be up to $150,000.00. Also, under the Twitch terms of service, three DMCA notices against your account is grounds for a permanent ban from the platform.

Q: Why is Twitch so concerned with what I am doing?

A: Because they may be liable as the host of the copyrighted content. Under the DMCA, Twitch can avoid liability as the host if they act in response to a “takedown notice.” That is why they have been actively mandating mass clip deletions in response to the DMCA notices they have received. It is generally easier for a copyright holder to target the host like Twitch or YouTube than the streamer. The host has incentive to act in order to take advantage of the “safe harbor” under the DMCA, and if the host doesn’t act, the host has money to pay any adverse judgment obtained by the owner of the copyright.

Q: Isn’t my playing music “fair use”?

A: Probably not. The “fair use” exception to copyright infringement generally protects reproduction for criticism, comment, educational use, news reporting, scholarship, or research. When music is played to accompany a streamer’s gameplay, the music is not being used for any of these purposes. Whether or not something is “fair use” is a fact-specific inquiry, but generally playing a soundtrack to your gameplay is not going to be considered fair use.

Q: Isn’t the video game itself also protected under copyright law? Do I need a special license to stream the game itself?

A: The game content itself is protected by copyright, but streaming it probably qualifies as “fair use” and is protected from infringement actions. Most streamers commentate or critique their gameplay or the gameplay of others, so arguably the use of copyrighted content meets the factors listed in 17 USC 107. Essentially, sharing copyrighted content is the base of the entire streaming industry.

However, as Wisconsin attorney Matthew Harding pointed out to me, the issue is far from settled. On one hand, Amazon’s multi-billion dollar acquisition of Twitch, as well as eight-figure exclusive streaming contracts with top-tier talent, indicate that the industry is confident in its fair use argument against any game companies that would target the game itself. On the other hand, there are prominent industry figures that believe streaming video game content is not fair use and could be targeted via DMCA take-down notice, much like unlicensed music. Mr. Harding also observed that any company that targets streamers of its games with copyright infringement lawsuits or takedown notices will face significant backlash from the community, but the bottom line is that the publisher still owns the copyright and is entitled to enforce the exclusive rights that are attached to that copyright by law.

Q: I’m confused. I have seen rhythm and music game streamers get taken down – why are they not protected by “fair use”?

A: As stated in the response to the previous question, the “fair use” issue is not settled. In fact, each “fair use” situation is fact specific, but it is likely that these rhythm or music game players are not using the copyrighted work for commentary or criticism purposes. It is not enough to simply broadcast yourself playing the game. Running commentary or criticism is needed to make a plausible “fair use” argument.

Q: As a streamer, what can I do?

A: Twitch is actively working to give its streamers options. Recently, it has launched Soundtrack – a product that allows streamers to run a separate music channel during the broadcast. The artists and labels available are limited, but gives indie artists more potential exposure. Of course, the RIAA is fighting Twitch on this product too, claiming that Twitch needs synchronization and mechanical licenses for its Soundtrack tool. The fight continues.

Also, there is a number of websites that sell royalty-free licenses. For example, Tunepocket offers memberships that give streamers access to a range of music and sound effects specifically for public performance.

Q: I am a podcaster. Can I play music during my podcast?

A: Unless you hold the copyright to the music (i.e. it’s original) or have the right license, no. You face the same issue as streamers do when they play music in the background of their game streams. Music you buy on iTunes or stream through Spotify is not licensed for public performance like your podcast.

Dan Artaev is an experienced attorney who is an avid gamer and who has advised gaming companies regarding various legal issues, including intellectual property rights. Have more questions? Contact Dan by email at dan@artaevatlaw.com or by phone or text at (269) 930-0254.

© 2021 Artaev at Law PLLC. All rights reserved.

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business law esports gaming law intellectual property

A Lesson in Licenses and Why You Own Nothing.

In 2019, Fortnite went offline. No one could play, stream, compete, or access their account. This was part of an in-game “event” known as the Fortnite Blackout or The End. Can Epic Games do that? What rights do you even have as a player, team owner, or competitor? It all comes down to the End User License Agreement (EULA) – so leave it to a gaming lawyer to use Fortnite to teach you about the critical role of licensing in the digital age!

By way of background, Fortnite is certainly one of the most –if not the most popular video game in the world. The game, which is available as free download on modern consoles, PCs, and even iPhones, is a hit with kids, teens, adults, professional athletes, celebrities, and even Prince Harry (the Duke of Sussex) who got so addicted that he called for the game to be banned in Britain. True story. It has also evolved into an international eSport phenomenon, with this year’s World Cup Finals winner taking home a cool $3 million check. There are hundreds, if not thousands, of professional gamers and streamers across the world that make this game their career. Epic Games, the game’s owner and creator, is estimated to have earned between $2.4 and $3 billion from the game in 2018 alone. This is particularly impressive given that the game is free to download and play, with all of the revenue coming from in-game cosmetic content, such as different character outfits.

Now imagine if one day all of that was suddenly gone. Epic shuts down the servers and Fortnite no longer exists. Well, this actually happened (at least for about 24 hours)–during the Fortnite Blackout or The End event. The hundreds of hours you spent playing, earning points, and ranking? Gone. Did you spend all of your birthday money on new outfits so you could look like a James Bond villain in the game? Gone. Even worse if you are a professional gamer who made Fortnite a career. Or a team owner who invested hundreds of thousands of dollars into building the next world champion. What can you do? Who can you sue?

The simple answer is NOTHING and NO ONE. Because you have to understand licensing. And the fact that the traditional concepts of ownership–i.e. I pay money for something therefore I own it–do not transfer to the digital world. Did you read the EULA that you have to accept before logging into Fortnite? I didn’t think so. Yet it contains important rights and obligations–especially if you play professionally. The reality is, by playing Fortnite and even paying real money to “buy” in-game characters, weapons, etc., you own nothing. In simple terms, Epic Games grants you a license to play the game at its sole discretion, but Epic Games owns and controls everything and anything within the game, even the content that you paid real money for.

The Fortnite EULA is a license, which is a right to do something, or access something. Think of it like a ticket to go see a football game or a concert, but in this case it is a ticket that gives you access to a video game. In legal terms, what distinguishes a license is the fact that it is a “revocable” right, meaning the licensor (the owner of the license) can terminate the licensee’s rights of access at any time, subject to any conditions of the license. So what terms do you agree to when playing Fortnite?

Epic grants you a “personal, non-exclusive…limited right and license to install and use the Software…for you personal entertainment use.” Also, ” The Software is licensed, not sold, to you under the License. The License does not grant you any title or ownership in the Software. ” Ok, but can Epic just shut down the game? Yes–read on–” You also acknowledge that any character data, game progress, game customization or other data related to your use of the Software or Services may cease to be available to you at any time without notice from Epic….”

What about all the real money you paid for skins, custom characters, etc.? You get that back, right? Nope. Read on–” Epic, in its sole discretion, has the absolute right to manage, modify, substitute, replace, suspend, cancel or eliminate Game Currency or Content, including your ability to access or use Game Currency or Content, without notice or liability to you.” Meaning, you do not really own any “game currency” or the “content” that you bought–in fact, all you are acquiring when you are “purchasing in-game content” is another license to use the currency or the content that you purchase with the currency for as long as Epic wants.

It’s not really so confusing. When you downloaded and played Fortnite, you agreed that Epic owns everything and you own nothing. If you paid any money to Epic for skin or custom parachute, Epic gave you a license to use that particular skin or parachute. You paid for the “experience”–not a tangible item itself. That’s licensing.

Of course, this reality creates a whole host of follow-up questions. What happens to content I create using Fortnite’s creative mode? Does Epic own that too? Short answer is YES. What about streamers who make a living playing Fortnite? Professional gamers? Team owners? Fortnite World Cup sponsors? There is no easy answer there, as each situation is fact-specific and depends on the various terms of the license agreements, any sponsorship agreements, intellectual property law, etc.

The Fortnite Blackout was a lesson in “ownership” in the digital age. Traditional concepts of ownership do not apply or transfer to to the digital realm. Music, video, games, and even photos that you upload or post on social media–are not “yours” in the traditional sense. Rather, there is an increasingly complex web of rights that becomes even more complex when gaming is a business.

So, like any business owner, if you are investing time, money, and effort into a game–with the idea to play professionally, make streaming revenue, or to otherwise make it in the gaming business–engage and consult with an eSports attorney. Understanding your rights and obligations will help you craft an effective business strategy going forward, and plan for contingencies and er…singularities.

Have more questions? Contact Dan Artaev at dan@artaevatlaw.com or 269-930-0254 to set up your free initial consultation.

© 2020 Artaev at Law PLLC. All rights reserved.

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