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Wanna Bet? Gambling in Esports

Esports and Electronic Gaming   |   Media, Entertainment, Music & Sports   |   Technology & Telecommunications   |   March 9, 2021
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Join Steve as he welcomes back Nick to discuss the intricacies of betting on esports from a legal perspective. In this episode, they explain the laws that regulate esports gambling, highlight some of the regulatory challenges facing esports gambling, and identify some risks inherent in the process.

Transcript:

Steve: Hello and welcome to a new season and a new episode of the LAN Party Lawyers podcast. To our regular listeners, welcome back; and to our new ones, on this podcast we tackle issues at the intersection of video games, law, and business. My name is Steve and for this episode, I'm joined by my friend and a former host of this podcast, Nick Brown. Nick, as you know, is no longer a colleague of mine at the firm but we're still very much connected and he is going to be, as we kind of restart up LAN Party Lawyers this season, a regular contributor to the podcast. And so we …

Nick: That's right.

Steve: … we're kind of shaking up…

Nick: Despite my best efforts, I can't shake Steve. I can't quit you. And I'm no longer a host but I'm excited to stay involved as a contributor and so I'm looking forward to being part of it going forward from time to time.

Steve: And we are looking forward to that too. We are actually going to shake up the podcast a little bit. We are going to focus, drill down more on the legal issues and keep it informative, engaging and, again, at its heart we always wanted this to be educational. We will still have interviews and you can also be on the lookout for new voices as well. Other contributors and colleagues will join me on this podcast to host other episodes. What hasn't changed, however …

Nick: Yeah, you know, when that happens, listeners, you know, grade them on the curve. They may not be as experienced. So you got to give them the benefit of the doubt.

Steve: Yeah. Sure. But what hasn't changed is that nothing we say is a legal advice, especially stuff coming out of Nick's mouth. If anything you kind of accept the opposite is true. Without further ado, on this episode, we are going to be explaining the legal frame work for esports gambling. And so Nick, I'm going to start off by asking you a question. This is really, and depending on how you answer it, this could be a short podcast.

Nick: I'll do my best.

Steve: Is it illegal to gamble on esports?

Nick: That's an excellent question and timely. Generally, the answer is no. It is not legal to gamble on esports. And to understand why, we are going to have to talk about gambling generally. But as you will see, there are some enormous exceptions to that rule, some that are big enough to drive a truck through. But you have to be careful about when and where and how you do it.

So, just basically, gambling, what is it? What are talking about today and what we are not talking about? Gambling is viewed differently state-to-state, country-to-country, jurisdiction-to-jurisdiction. But basically there are three common elements that you will find: one is consideration. It's the things that you risk, the things that you pay. Chance is the second one, which is some element of luck or randomization as opposed to skill. And then third is the prize, the winning. It's something of value that you can get back, whether it's your investment, whether it's more, whether it's something else. Those are kind of the three pieces that generally make up the puzzle in active gambling.

Steve: And it's important to highlight to what gambling is not, right? Just as you said, what gambling is not. Sweepstakes or prize-less (or without a prize) chance-based games or skill-based games. Those are all contests or activities that are generally lawful. But many of those are regulated in other ways. But that's not what we are here to talk about today. Our focus is going to be zeroed in on gambling, that activity in and of itself. So if at some point...

Nick: Put away your sweepstakes [inaudible].

Steve: Exactly. Don't come at me with your this is a skill-based game because we are not talking about those. We are talking about…

Nick: Because we don't play skill-based games.

Steve: Yeah! Well, most, yeah, exactly. You're all chance. A lot of [inaudible] going on these days as usual.

Nick: Right.

Steve: So, other key, important things to keep in mind for gambling is that gambling activities occur in kind of two different places at once. It definitely occurs where the bettor resides and also where the bettor's service is offered. The bettor (O-R). OK? So in that vein, taking bets from people in the U.S. even though you operate in a foreign country, will still subject you to U.S. laws pretty much. So that's just something else to keep in mind.

Nick: Right. It's a both situation, not an either/or.

Steve: Right, right. So Nick, why don't you give us little brief history lesson on gambling regulations in the U.S.

Nick: Sure. Just, you know, from a 30,000 foot view, all the way back in 1961, there was only one state that allowed legal and regulated gambling. As you might imagine, that was Nevada where Las Vegas is. There were no state lotteries or tribal casinos.

Steve: Yet!

Nick: Yet! Right. They were all just waiting. But then in 1978, the state of New Jersey allowed gambling as a method to help revitalize the famous Atlantic City area.

Steve: Bring it back to the boardwalk empire days.

Nick: Yeah, exactly. Great show. And then based on the success of that, in the 1980s, we began to see Indian casinos popping up all over the place. And of course, fast forward to today, pretty much every state allows some form of gambling. But it is the exceptions that are allowed. It's generally a prohibition but then followed by a series of exceptions. And then in that regard, the federal government, it created a set of laws that allow it to prosecute illegal gambling activities. And when you think federal a lot of times you think across state lines. So for example, the Wire Act outlaws using wire communications to engage in illegal gambling across state lines as a general matter.

Steve: So because of that whole framework, you kind of have three different entities that are regulating gambling. You have states, Indians, Indian law, and then you have the federal government. So it's really a complicated morass, really. But let's get into sports. So, Nick, why don't you tell us about the brief history on gambling on sports?

Nick: Sure. So that was gambling generally. Sports, specifically, in 1992, Congress passed the Professional and Amateur Sports Protection Act, which is abbreviated PAPSA.

Steve: PAPSA. It's fun to say.

Nick: Yeah it is. I feel like they could have come up some better acronyms. But nonetheless, what that did is it basically prohibited sports wagering. But then recently in 2018, couple of years ago, the United States Supreme Court overturned PAPSA in a case called Murphy on the basis that PAPSA had infringed on the individual state's legislative processes. It said the states should be able to handle those things themselves.

Steve: So bringing us up to speed, since that case and through the end of 2020, there were about 14 states to allow online sports wagering with another six or so that are closely examining the issue.

Nick: Yeah.

Steve: And others are probably moving in that direction as well. So you have New Jersey, which was…

Nick: I'm sure they are all pretty consistent with one another, right Steve?

Steve: Oh you would think, but no. They are all over the place when it comes to the types of regulatory schemes that they are considering. So you have some states that allow in-person betting, prohibiting online. You have to go to the casino in order to bet.

Nick: Got to show up in person.

Steve: Right. And then others are the exact opposite, where it's only online betting with in-person betting prohibited.

Nick: You may not show up in person.

Steve: Right. Do not come to the door. And then there are others that allow both. So that's why there are all over the map. Excuse the pun.

Nick: So to speak.

Steve: Right. So what you are left with is, it's really hard to have a nationwide or a multi-state organization when these schemes are incompatible with one another. And that's why the legal compliance in this area is the opposite. It's far from simple. It's pretty complicated.

Nick: Yeah. So if you had an operation in multiple states, you may have to have them run just fundamentally differently because they cannot be compliant with both states' laws at the same time.

Steve: Right. You have like a New Jersey operation and a Pennsylvania operation, Florida operation, what have you. And so then we also have gambling online, right? And that in and of itself is also regulated. Nevada was the first state to allow for it. Just gambling online separate and apart from sports betting.

Nick: Always leading the pack there.

Steve: Yeah. That and New Jersey in this area for sure. But through the 2001 Interactive Gaming Act, that law eventually limited to where you had to be physically located in the state in order to gamble. But that allowed for gambling online within the state. So if you were a resident and you lived in Nevada you could gamble there.

Nick: Alright. So, we did gambling in general, we did gambling on sports.

Steve: Mm-hmm.

Nick: So now it's the big ticket item: gambling on esports. And basically, one thing to take home is that right now only a few states allow it or at least are clear that they allow it. But even so, it's already a very significant enterprise. It's estimated to be a $1.5 billion dollar industry with a B. And according to the analysts, it's experiencing a 30% average year-on-year revenue increase, which is enormous. But it's kind of consistent with what we've seen from the esports industry in general over the past few years.

Steve: Right. So, enormous opportunity and already big dollars in this space. And so in 2017 we have Nevada that revised its wagering law to allow wagering on "or other event." And it's that language that has allowed for gambling on esports to be permitted on a case-by-case basis.

Nick: Those three words are doing a lot of work there, huh?

Steve: Yeah, well it's …

Nick: "Or other event."

Steve: Right. So adding that language allowed for basically operators to whether or not these particular matches could be, whether esports gambling would be allowed for these particular matches. And so this has actually already happened for a number of games including League of Legends, Overwatch, CS GO, and Dota 2, which are consistently the top three or four games that are most bet on esports.

Nick: Yeah, they tend to travel together. Right?

Steve: Right. There's also New Jersey. So, Nick, why don't you tell us about New Jersey, how they do it?

Nick: That was exactly, you read my mind, Steve. So remember, we mentioned New Jersey allows sports gambling, but the law in New Jersey - bear with me here - it prohibits esports betting…

Steve: That's backwards.

Nick: …by putting esports in the same category as high school sporting events, which you can't bet on in New Jersey. However…

Steve: Why?

Nick: …this is a whole podcast about exceptions. And so the exception to that is, events that are international and where more than 50% of the players are over the age of majority (18), then they can have esports betting on that exception to the exception. And one famous example is in November of 2019 New Jersey allowed betting on the League of Legends world championship. It was one of the frequent flyers here.

Steve: And I asked you why that the state had done that, but now that you've explained, you know, it has to do with - once you explained the exception it makes sense. We're trying to make sure that this particular event that we will otherwise allow, is involving people, you know, not minors. It involves adults over the age of 18. And if it's international…

Nick: Or at least most of them.

Steve: Yeah, you know. And then with respect to the international flare of it, I mean, I don't know if I fully understand why other than it might be better organized and have some sort of framework and structure to it, that it's not something that's fixed, which we'll get to in a second. So that's New Jersey. It's actually not allowed in that state unless. It's the big "but."

Nick: Yeah, I mean, you ask why internationally. It doesn't seem coincidental to me that the one that they allowed was already running internationally and very lucrative. So that might be a cart in front of the horse situation, but nonetheless that's how it works generally.

Steve: Right. Then there are a couple other states: Colorado, West Virginia if the player is over 18 like New Jersey. A couple other states just kind of touch upon the fringes of esports but don't really address it straight on. So, for example, Maryland. They have a law that says that esport tournament organizers may offer prizes so long as the dominant element in the outcome of the match is the relative skill of the player. So it kind of goes back to that is it skill, is it chance? And so it might even not be gambling at that point. Iowa, they also have online sports betting but the AG's office there, the Attorney General's office in that state, has said that that does not include esports, adding to the fuel to the proverbial fire that is, is esports a sport debate. So I'll let that one linger for a little bit. I know that's a fun one that people like to just skip over, but it actually has some serious ramifications sometimes in esports gambling conversations. Other states like Indiana has actually banned it. Whether they'll change their mind one day, who knows? But as states are considering gambling on sports generally, some of those states actually, whether or not esports is included is a big question mark. Arkansas, Michigan, Rhode Island, Montana, New Mexico, Pennsylvania to name a few. So it's a big, this is a big "it depends" answer ultimately. And that's kind of what this whole episode is about.

Nick: Yeah.

Steve: But we expect a lot of movement, you know, that there's going to be a lot of activity over the next year. As online sports betting increases, you know, I think eventually it will include esports as well.

Nick: Yeah, it's only a matter of time. It's following all the other trends. It's a matter of when, not if. But, you know, the take away is that there's no one size fits all option and even if you mapped out how everything worked today, it might be different tomorrow. It's almost certain to be different by the end of the year. So you got to keep your eye on the moving target.

Steve: And we're only focused on winners of the matches. Right? That's not the only kind of betting. If anything, that might even…

Nick: That's right.

Steve: …not be the most popular betting that's done. There's other concepts in the marketplace to consider such as related to gameplay, really: first one to get a kill; how long the match lasts, duration; whether or not certain point spreads are met; head to head, you know, combat between two players.

Nick: Right.

Steve: And also betting on skins, which is really very much gambling when you're just kind of throwing in your skins to try to get better skins.

Nick: Yeah.

Steve: Some of that has already been actually regulated like the skins betting and been seen by our marketplace here, but a lot of this is still new. The whole episode is about just who wins or loses, but there's other pieces to it as well to keep in mind. And that's just in the U.S.

Nick: Right. Generally, most of the betting that we're seeing is on just match winners or, you know, full tournament winners. And in that regard, the betting must cease before the match or tournament begins. But like Steve said, there's a lot of creativity out there, and just like you see all sorts of creative betting on sports matches, whether spread or the number of interceptions or all sorts of individual stats. I think you're going to see more and more of those over time as well.

Steve: Yeah. And again, this episode is about the U.S. regulations. And the U.S. by comparison is a really restricted place. The international scene is much more welcoming of online esports betting. In fact, the Isle of Man and Malta have approved esports betting structures and commissions.

Nick: Pretty sophisticated.

Steve: Exactly. One of the largest esports betting companies in the world, Unicorn, is regulated by the Isle of Man, for example. So, to operate legally, companies like that need to go abroad under those jurisdictions and operate in certain places that betting is allowed. So that's kind of where we are currently. And a lot of the reason for that actually relates to match integrity, which is something we discussed earlier. So, Nick, why don't you just give us a brief rundown of match integrity and why it relates to esports betting?

Nick: Yeah, yeah, sure. So, you know, any time people are going to be betting on the outcome of tournaments or skill-based games, then, you know, match fixing is a big concern because you want the integrity to be there. You want your bet to mean something and you want your research and your analysis to be genuine and not just based on some back room deal. So just like gambling regulations generally conduct thorough investigations of the gambling operations in their jurisdiction, we've seen the same type of thing with the fledgling esports betting industry. For example, New Jersey famously seriously vetted the League of Legends world championship finals before allowing them, as the exception to the exception, to be betted on.

You may recall, we've talked about certain famous match fixing events in the past. It's thankfully rare, but it does happen. To me, far and away the most interesting event of that involves StarCraft II players, Life and Bbyong. Life was regarded as almost - it's hard to find agreement among internet people, especially StarCraft II gamers - but most people agreed at one point that he was one of the best players in the entire world, even when he was only 15. And he ended up going down for match fixing. He won over $70,000 apparently for throwing two games - 70,000 Korean won.

Steve: How much in dollars?

Nick: You know, I don't know?

Steve: That's a good Jeopardy question.

Nick: I don't have my won to dollar calculator on me, but I would not want to have to give that up.

Steve: Right.

Nick: And ultimately, after the investigation and the prosecution, Life was sentenced to 18 months in prison. That's a year and a half in prison for throwing a couple games. And he had to give back the money that he got.

Steve: The audience really doesn't understand how sad you were when this news was released because, you know, Nick had to take his Life posters down from his room.

Nick: [laughs]

Steve: He was so upset…

Nick: I was shook, yeah.

Steve: You were shook to the core when this happened.

Nick: Yeah.

Steve: Poor guy. But, you know, out of events like this, third party organizations have actually been formed to help police the scene because it is a big deal. And the only way esports gambling is going to move forward is if match fixing is addressed and integrity is introduced and upheld.

Nick: Right.

Steve: And so there's the esports…

Nick: It has to be legitimate and it has to look legitimate.

Steve: Right. And that's why you have the Esports Integrity Coalition, among others. And just a side note, interesting tidbit, Nick. StarCraft II was the #6 top 10 esports bet of 2020.

Nick: Nice!

Steve: Just to kind of give you a, you know, it's not dead yet kind of feel.

Nick: No dead game here. Yeah.

Steve: Exactly. So…

Nick: Yeah. All the people are betting on the 12 people still playing that game. [laughs]

Steve: [laughs] Is Life back? I don't know. I haven't checked, but he might be.

Nick: No, I think he's out of prison now.

Steve: [laughs] Other times gambling comes up in gaming: loot boxes is one. We've talked about it before. Is it gambling? That's the big, you know, debate is consideration chance and prize. Some countries have said yes, some countries have said now. Prize is oftentimes in this particular instance where this would fail…

Nick: Right.

Steve: …whether or not loot box and engaging in it results in a prize. But having a market where…

Nick: And that's determined a lot by whether you can trade it. Right?

Steve: Exactly.

Nick: If it's something you want personally, that's viewed differently than something you can then go and sell to somebody else.

Steve: Right. So, what you most often find is in the terms of service of these companies that have the game, this particular virtual currency carries no value. So they can undermine that prize element. But then there's other games, classically CS GO which had a third party marketplace that they supported that would allow for the trading and selling of certain items. Hence, why some people have called them gambling.

Nick: Right. Some people including the FTC! [laughs]

Steve: Eh, you know. Some people, some people.

You also have games that work with in-game currency and that kind of have a gambling feel, whether that be a classic casino-style game. Big Fish Casino case comes to mind, recently decided out of Washington. In that case you have an instance where if you have an illegal gambling activity, it's not regulated or the activity is not operating pursuant to a license, then what you might have is an instance where some states allow the person who lost the money to get their money back from the house. It's like a punishment kind of law for acting that way. And so in this instance, that's what happened. The legal analysis boiled down to whether or not the virtual currency used to play the game, whether that had any value. And even though the chips didn't, there was a mechanism for transferring chips between users, which could be considered like cashing in winnings.

Nick: Uh-oh.

Steve: Right. And so because those chips could be exchanged and that they extended the privilege of paying time, the court actually said they fell within the definition of a "thing of value," i.e., consideration under Washington law. So that was an interesting and big case for the gambling and gaming industry in particular. It's a fast moving space. And because it's fast moving, lots of moving parts and so many different opinions on how to handle it, that creates risk. And so you might be wondering whether or not the reward of running an illegal gambling operation is worth the risk.

Nick: [laughs]

Steve: That's, like, the big risk. Right?

Nick: What's your professional advice on that, Steve?

Steve: I can't give it, so because we said that this is not where we offer advice and we're going to stick to that and we're just going to move on to issue-spot. Right? Issue-spot. So, I just want to point this other one out because it came out in the Big Fish case, but in addition to just getting in trouble with the regulator, you could get tagged in one of these states that have laws allowing people who have lost money gambling to sue the house back for their money. That's just not something that oftentimes people are aware of.

Nick: And that's independent of criminal liability.

Steve: Yeah, you might get tagged with both of them.

Nick: Right.

Steve: You're running an illegal gambling operation and the person who lost their money wants their money back and has a statute that allows for it. So lots of different things to consider. And we didn't even get into where the payment processor gets in trouble. There's a whole statute that regulates them. If they're participating in illegal gambling, they could get in trouble. So then they stop processing your payments and so they're just there. Anyway…

Nick: All the way up and down the chain.

Steve: There's a lot of risk. We could go on forever.

Nick: Yeah.

Steve: Not going to. But, Nick, why don't you cap it off with the future and how it's looking in this space?

Nick: Yeah, so the bottom line is, keep an eye on this. History has taught us that where compete, people end up betting on it. So it's natural that as the competitive esports industry continues to experience its dramatic growth, so will the related gambling community that is going to be based on it. So that's not going away. But as more interest and money is generated, do look for more controversies and regulations. The patchwork state-by-state regulation that we described may be outdated even by the time this podcast recording goes live and certainly by this time next year, the state-by-state landscape is going to look very different than it does right now. Can't really predict exactly what it's going to look like other than probably not going to be uniform and you're going to want to really know what the rules are in your jurisdiction.

Steve: Well done. Well said. That brings us to the end of our episode. We want a thank you to our former cohost, regular contributor, Nick Brown, for joining us today. Thank you so much…

Nick: Thank you so much for having me!

Steve: …to our listeners. Well thank you. I'd say plug something, but you know. Nick doesn't do anything else that's interesting other than be a regular contributor on this podcast.

Nick: My mix tape isn't done yet.

Steve: OK. We'll be waiting for you to tell us when it lands. Be sure to check out other episodes of our season 1 and season 2 of the podcast. You can connect with us on social media, Instagram, Twitter, or on our webpage lanpartylawyers.com. We love to hear your thoughts and comments and opinions about the topics we cover, so if you have them please reach out. And until next time…

Nick: Game on!

Steve: Game on!


©2020 Carlton Fields, P.A. Carlton Fields practices law in California through Carlton Fields, LLP. Carlton Fields publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information and educational purposes only, and should not be relied on as if it were advice about a particular fact situation. The distribution of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship with Carlton Fields. This publication may not be quoted or referred to in any other publication or proceeding without the prior written consent of the firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our Contact Us form via the link below. The views set forth herein are the personal views of the author and do not necessarily reflect those of the firm. This site may contain hypertext links to information created and maintained by other entities. Carlton Fields does not control or guarantee the accuracy or completeness of this outside information, nor is the inclusion of a link to be intended as an endorsement of those outside sites.

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