THE RISE OF SIM RACING
‘Sim Racing Esports’ or Virtual Motorsports is a hugely exciting opportunity – not only within the gaming industry, but also for motorsport in general. Statistically, out of the $1.5 billion global business revenue that was achieved in Esports in the year 2019, Sim Racing comprised of $4.5 M in sales, arguably making it one of the most important and fastest-growing segments of the sport and entertainment industry.
Looking at the pace with which the young generation is adopting digitalization coupled with the miniscule cost barrierto entry in motorsports, prospects for Esports Sim Racing in the Indian market looks quite promising. Now, in the wake of the ever growing Esports culture and the recent outbreak of the global pandemic, the parallels between the real and the virtual world have never been closer.
Sim Racing has opened up exciting career opportunities and multiple revenue streams, for literally everyone out there. From becoming a professional sim racer/Esports player; launching an Esports-racing organization/team or hosting an online/virtual racing series or competition; providing coaching to sim racers; streaming race content across social media platforms; offering sim accessories or rigs, the opportunities seem endless.
However, building a successful Esports business will ultimately depend on the viability of the idea, careful planning, business-building, hard work, passion and may be some stroke of luck. In fact, the journey of an Esports entrepreneur can certainly be made smooth by avoiding a few legal pitfalls, which could be as elementary as choosing the right business structure or as critical as protecting the intellectual property.
THE LEGAL PLAYBOOK –
This legal guide seeks to provide the Esports entrepreneurs a rundown of some of the practical legal tips that can help them mitigate business risk, achieve their commercial goals and protect their legal interest.
- INCORPORATION –Getting Started
One of the primary business considerations for any Esports entrepreneur entering the Virtual Esports space, should be the incorporation of an appropriate legal business entity, such as a Private Limited Company or a Partnership Firm or a Limited Liability Partnerships (LLP) or as One Person Company.
How to choose the right business structure –
While identifying the most appropriate business structure, the entrepreneur must carefully analyze a host of key aspects–
- Objective of business;
- Incorporation costs;
- Procedure & timelines;
- Taxation structure;
- Audit compliances;
- Ownership & management rights;
- Debt exposure;
- Liability of owners; funding & investment scope
- INVESTMENT/FUNDING–Crucial part of the journey
With the Esports business slated to reach a staggering $1.7 billion in revenue by 2021, there can be no denying that Esports has presented the ‘investment opportunity of the decade’. Sim Racing is undoubtedly a niche within Esports, which is built around a devoted community of racers, software developers, content creators, and hardware manufacturers.
Given the huge crossover potential between real-world racing and virtual racing, Esports-racing/sim racing offers a unique position to create value and attraction for both motorsports and gaming enthusiasts alike. Brands, broadcasters, sporting league owners are aggressively positioning themselves to provide the fan base with compelling virtual versions of real-world motorsport.
Raising funds/investments can be a tricky affair, decide wisely –
In India, there are various routes available for raising funds. One of the most popular and widely recognized option for an entrepreneur is the Start-Up loans provided by the Govt. of India. Vide the Startup India initiative, the Government facilitates recognition of eligible entities as ‘Startup’ and thereupon, provides various benefits, inter alia self-certification; tax exemption; IPR related benefits and rebates; easy exit routes and many more.
Other popular options include, investments from accelerators/angel investors or venture capital funds, where the investments generally take the form of either shares (“equity”) or loans (“debt”). That apart, various ‘hybrid funds’ in the form of convertibles (can be performance-linked) are also used for funding and leveraging risk. A number of modern and unconventional alternative funding mechanisms such as micro-financing, peer to peer lending, and crowdfunding have also emerged, in the wake of growing trend of social media and internet channels.
In terms of documentation, the ‘Shareholders’ Agreement’ (SHA) is a critical operating agreement which inter alia regulates the raising of capital; governance of the company; distribution of profits amongst shareholders; and the appointment and removal of directors, and hence warrants meticulous detailing. Prior to executing
an SHA, entrepreneurs must request for a term sheet, with a view to apprise themselves of any onerous terms that might have been part of the deal.
It is prudent on the part of Esports entrepreneurs to acquaint themselves with the nuances of structuring the investments and obtain requisite legal advice while planning for such matters. As Warren Buffet rightly quotes “Risk comes from not knowing what you’re doing.”
- CONTRACTS – The devil is in the details
Laws do exist to govern myriad aspects of a commercial partnership, however they operate as general rules and not as specific rules for governing a particular matter. Contracts, on the other hand, create and amend specific rules in a manner that allows the existing law to fit a particular commercial agreement.
As current laws do not adequately provide for the Esports industry, it is incumbent upon parties operating in this domain to regulate themselves for the most part, by creating a governing law, through contracts, at least.
Contract is King –
Contracts afford a source of security to both the parties regarding their relationship between them. For the Sim Racers, they act as a cover for their rights and entitlements, whereas, for an Organization for the most part, they provide a form of stability to their business, in terms of their ability to commercially exploit the sim racers’ services and expertise.
They are essential for governing aspects of – as critical as, investments and sponsorships (‘Sponsorship Agreements’), and also for governing relationships –as foundational as, between the founders of the business (‘Founders Agreement’) and/or between the Organization/Team and the players (‘Sim Racer Contracts’).
It is always a safe bet to keep the contracts short and simple. Emphasis must be laid to ensure that agreements meet the minimum legal thresholds to constitute a legally binding contract – contain an offer, an acceptance of that offer, consideration, intention to create legal relations and certainty of terms. For instance, if the sim racer is below the age of 18 years, the parents/guardian should sign off the contract.
What should you negotiate in a Sim Racer Contract–
In a typical Sim Racer Contract, careful consideration must be given to the following aspects –
- Clarifying if the relationship between the Team and the Sim Racer is that of an employment or is the Sim Racer providing services on a contractual basis;
- Whether the engagement of the Sim Racer with the Team is on an exclusive basis;
- What is the scope of restrictions in context of sponsorship/branding;
- Fees/remuneration or bonus of racers – terms of payment, form and time of payment;
- What would constitute ‘events of default’;
- Sanctions and penal clause provisions;
- Liability to indemnify;
- Dispute resolution mechanism – mediation, arbitration;
- Governing law & jurisdiction of the contract
Agreements/Contracts must always be legally vetted –
Sim Racers contracts can be tricky at times. Historically, disputes have been rife between contracting teams and Esports players, where on one hand, the players have alleged the teams of imposing grossly unfavorable and restrictive contract terms, and on the other, teams have brought suits against players for making undeclared earnings during the contractual tenure.
Similarly,sponsorship deals are viewed as significant revenue generator for businesses and can often contain tricky terms and conditions. A standard sponsorship contracts would generally address a multitude of issues – identification of ‘deliverables’, exclusivity, territory, limiting liability and payment. However, in the context of Sim Racing, careful consideration must be given to ensure that Sim Racer Contracts and Sponsorship contracts of the Teams do not overlap or result in a conflict of interest situation.
Say, if a Sim Racer has signed a sponsorship agreement in his individual capacity, necessary obligations and limitations need to be carved out in the Sim Racer contract, to prevent any conflict of interest that might arise due to the existing sponsorship agreement between the Team and its sponsors.
It is prudent for either parties to seek legal advice while entering into such contracts.
- COMPETITION TERMS & CONDITIONS – The rules of the game
Why and what should be documented –
Documenting the terms and conditions, the code of conduct, and the competition rules of the virtual racingseries/league, is of particular importance to Sim racing series owners and league organizers. They serve the dual purpose of safeguarding the organizers rights and interest, and governing the action(s) of the participants/sim racers, making them liable for any kind of breach of the rules or the terms & conditions of the competition.
Sim racing organizers must ensure documenting the following –
- Terms & Conditions of the Competition–This section must enumerate –
- Details inter alia of the organizer, the competition, the prize, winning criteria
- Essential contractualclauses pertaining to ‘limitation of liability’, ‘indemnity’, ‘force majeure events’, ‘ownership and assignment of intellectual property’, ‘confidentiality’, ‘exclusions from contract’, ‘governing law’, ‘jurisdiction’, ‘dispute resolution mechanism’ etc.
- Handbook/Rule Book for the Participants/SimRacers –This section must clearly outline inter alia –
- Rules and regulations of the particular sim racing league/competition – the structure, format, eligibility criteria and rules of the competition/series and/or eligibility of the sim racer/player;
- Terms & conditions governing participation of the sim racer/participant;
- Guidelines on ‘Code of Conduct’.
- Rights of the League Organizer –publicity rights, including right to broadcast; ensuring participation of the racer in publicity and media activity; obtaining consent of racer to allow use of name, images, likeness etc.
- Boilerplate clauses like dispute resolution, finality of decisions, and limitation of liability
- INTELLECTUAL PROPERTY PROTECTION – Never let your guard down
A typical structure of the Esports ecosystem gives rise to a host of complex and novel Intellectual Property (IP) rights and issues. However, as compared to the other traditional professional sports, Esports does differ in critical respects. In case of the former, leagues own and license their own intellectual property, whereas, in case of the latter, the copyright in any given game is owned by the developer or publisher of that game.
For example, the league/tournament owner of a professional motorsport league shall be entitled to grant exclusive rights, like in the capacity of being the media rights holder, it can grant exclusive broadcasting rights to a particular broadcaster to telecast the league event(s). However, an Esports league owner/organizer, say to host an online game/racing series might be required to acquire the license to play/use the game by paying a fees and accepting the end-user license agreement (EULA) terms or applicable terms of service.
Nonetheless, a Sim Racing organizer or team, would still be entitled to a bundle of rights, which it can exclusively control for a limited duration (e.g., copyright and patents) or even in perpetuity (e.g., trademarks and trade secrets).
Arguably, one of the most important IP protection in Esports is Copyright. For game publishers,a copyright in a game gives them a substantial degree of control over Esports teams, players, leagues and broadcasting deals, thereby allowing them to make massive commercial gains through transfer, license and sale.
Copyright can exist in original artwork, logos or original text which appear on the website or software application. A copyright is automatically obtained in a work when the same is fixed in a tangible medium of expression. It does not warrant outright registration to seek protection from infringement. However, a copyright registration would establish prima facie evidence in court of law, of validity of the said copyright and of the facts stated in the registration certificate. Registering a copyright is an inexpensive procedure, however the benefits are numerous, like bringing the ownership of work on public record and allowing the author/owner of copyright to recover damages in cases of infringement.
For Organizers/Teams, knowledge of ‘which protections apply’ and ‘who owns rights’ can act as an effective safeguard against liability from copyright infringement. It is a good idea to enter into a work-hire agreementor obtaining a written assignment (i.e. transfer) of copyright from the third party who created a copyright work in lieu of a consideration. Just because, money was paid for the work, does not automatically render ownership to such work.
Strong brand identity is quintessential to thrive in the Esports space. For aSim racing team/organization or a professional sim racer, a recognizable brand can be crucial in helping them leverage their customer/fan base to build loyal followers. In this context, Trade Marks can give much-needed protection and economic benefit to these stakeholders.
Trademarks in India can be of two types – ‘common law (unregistered) trademarks’ and ‘registered trademarks’. Generally, ownership of a trademark in India is determined on a ‘first-to-use basis’. Unregistered trademarks are rights from the use of the mark in respect of the users’ products or services to distinguish them from someone else’s
products or services. As registration is optional, common law trademarks afford very limited rights and protection. Registered trademarks on the other hand, inter alia provides prima facie evidence of ownership and validity; statutory protection in India; serves as a tool to deter unlawful use by others; allows for instituting lawsuits in an action for infringement.
How can knowledge of IP protection give an edge–
For a team or organization, elementary knowledge about trademark protection is both a boon and bane. On one hand, understanding the intrinsic value of a trademark registration can not only provide the team/organization a host of rights and protection in respect to the business, but also helps to strategize on how to position itself in the global Esports market. On the other, ignorance of the associated rights and obligations in respect of a registered trademark might result in incurring unwarranted liability on account of actions of passing off or infringement brought by the aggrieved party.
Importance of a trademark search –
From a due diligence perspective, while selecting an organization name and establishing corresponding social media platforms, it is prudent to conduct a trademark search. It may be noted that, just because a name of logo is not a registered trademark does not indicate that the same is not being used by someone else. Any particular name or logo used in the course of trade, which has developed a goodwill (in the sense that consumers who see that name/logo have learnt to associate it with that particular brand/business) is deemed to have acquired distinctiveness and hence can serve as a ground to prevent others from using it or a similar name/logo under the law of ‘passing off’. In some case, when a racer-gamer is streaming a video and referencing various brand names or displaying the brands in a way to indicate sponsorship or affiliation, there can be liability for brand misuse also.
How can registration of relevant IPprove beneficial –
Valid registration of team/organization names affords prima facie evidence of legitimacy and allows filing of infringement claims against those who are ‘stealing’ or otherwise impersonating an established organization, with social media platforms like YouTube, which retrieve or block such infringing account(s). Moreover, a valid registration can also be used as a basis for filing an anti-cybersquatting claim with the relevant INRegistry(registry for “.IN” domain names and operated under National Internet Exchange of India (NIXI)) or initiate legal proceedings under the rules of Internet Corporation for Assigned Names and Numbers (ICANN) (central repository for maintaining and coordinating the Internet Protocol and the Domain Name System).
From a strategic viewpoint, teams/organizations should consider registering the trademarks – (which may include the organizations’/teams’ name, logo and any slogan); purchasing domain names; and registering social media accounts. Moreover, an Esports business catering into a niche product/service should also consider whether there is any other intellectual property that may be relevant to its business (like a company
manufacturing racing simulator rigs may consider obtaining a design protection for its products).
Why registering a league title is a smart thing –
Also, organizations may also consider registering titles of game/virtual races series, which when become popular, are most likely to be exposed to be misused, where competitors might try to ride on the popularity of the same. As variety of racing leagues are hosted/held over a variety of different games – iRacing, AssettoCorsa, Gran Turismo, r-Factor, the hosting organization may consider registering the unique title of the race series/leagues to create a brand identity and better fan engagement. That apart, there is massive opportunity for teams to commercialize ‘gamertags’ of their racers.
CONCLUDING REMARKS –
Now more than ever, it is imperative for stakeholders to be conversant with the legal landscape in the rapidly growing and increasingly popular sim racing industry. As more and more eyeballs turn to Sim Racing Esports – with most of those eyeballs belonging to the millennial category that is young, affluent and technologically driven, an industry-wide expansion that demands niche legal expertise, is inevitable.
Matters such as structuring financing arrangements, commercially exploiting team/franchise ownership groups, securing licensing deals or media/content distribution rights, adequately protecting IP are bound to garner heightened legal deliberation and support. Similarly, the main protagonist of the Esports industry i.e. the Esports players must not shy away from seeking legal advice on matters pertaining to the structure of representation, endorsement, or performance agreements, or for that matter, negotiating onerous and burdensome provisions pertaining to exclusivity and/or ownership of their IP.
In the circumstances, it is absolutely incumbent on players, teams, agents, organizations, brands to consider and remain compliant with the contractual and regulatory obligations, while simultaneously scouting for novel and creative legal solutions to enhance their Esports business and capitalize on the stay-at-home economy during the pandemic and beyond.
The author is a cross border lawyer, dealing with both contentious and non-contentious issues for a multitude of sectors and industries. He has advised clients on diverse matters relating to commercial laws, corporate laws and other general laws. His forte lies in Contracts, Dispute Resolution and Strategic Advisory. He has always been passionate about everything automotive and is keen to offer his services to Indian Motorsports. He can be reached a https://www.linkedin.com/in/mohantysandipan/
This Guide is intended to serve as a reference only, and not as a substitute for direct legal advice.
Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of Bizbehindsports and Bizbehindsports does not assume any responsibility or liability for the same.