Editor’s
note: Thomas Terraz is a third year LL.B.
candidate at the International and European Law programme at The Hague
University of Applied Sciences with a specialisation in European Law. Currently
he is pursuing an internship at the T.M.C. Asser Institute with a focus on
International and European Sports Law.
1.
Introduction
The
organizational structure of sports in Europe is distinguished by its
pyramid structure which is marked by an open promotion and relegation system. A
truly closed system, without promotion and relegation, is unknown to Europe,
while it is the main structure found in North American professional sports
leagues such as the NFL, NBA and the NHL. Recently, top European football clubs
along with certain members of UEFA have been debating different possibilities
of introducing
a more closed league system to European
football. Some
football clubs have even wielded the threat of
forming an elite closed breakaway league. Piercing through these intimidations
and rumors, the question of whether a closed league system could even survive
the scrutiny of EU competition law remains. It could be argued that an
agreement between clubs to create a completely closed league stifles
competition and would most likely trigger the application of Article 101 and
102 TFEU.[1]
Interestingly, a completely closed league franchise system has already
permeated the European continent. As outlined in my
previous blog, the League of Legends European
Championship (LEC) is a European e-sports competition that has recently
rebranded and restructured this year from an open promotion and relegation
system to a completely closed franchise league to model its sister competition
from North America, the League Championship Series. This case is an enticing
opportunity to test how EU competition law could apply to such a competition
structure.
As
a preliminary note, this blog does not aim to argue whether the LEC is a ‘real’
sport competition and makes the assumption that the LEC could be considered as
a sports competition.[2]
2.
LEC’s Position in
the League of Legends Competitive Structure
The
LEC is the pinnacle of League of Legends (LoL) competition in Europe that is
organized by its developer, Riot Games. Currently, the LEC is the only path to
the League of Legends World Championship. Its previous name was the EU League
Championship Series (EU LCS), and it featured a promotion and relegation system
with the EU Challenger Series. The EU Challenger Series has been replaced with
the European Masters, which is a tournament that places the top seed from
European regional leagues against each other. It is important to highlight that
the teams in the LEC do not compete on behalf of their region (although some of
the organizations from the LEC have their second team competing in a regional
leagues).
The
franchise agreement between the LEC and the participant e-sport organizations
required organizations to buy-in
at 10.5 million euros into the LEC. The ensuing partnership lasts three
years and ensures that the organization
is guaranteed a spot in the LEC during this period, unless there are
“consistent poor performance or disciplinary issues”. The agreement effectively
prevents any other European organization/team from the regional leagues and the
European Masters from accessing the highest LoL championship in Europe (the
LEC) and completely cuts off any opportunity to reach the League of Legends
World Championships for at least three years.
The
previous system of relegation and promotion has helped foster talent and create
new successful European e-sports organizations. Currently, the winners of
Mid-Season Invitational 2019 (a mid-year world championship) is G2 Esports,
which was able to rise to the EU LCS through the EU Challenger Series in late
2015. As a result, concerns have been expressed that by adopting the closed
league model, the LEC will not be able to nurture new talent and competitive
organizations. This worry goes to the heart of Article 165 TFEU’s aim to develop
the ‘openness’ of sporting competitions and gives merit to analyzing the LEC
under EU competition law rules.[3]
3.
EU Competition Law
and its Application to Sports
Generally
speaking, EU competition law seeks to ensure ‘effective’ competition between
undertakings in Europe. Concerning the field of sports, the CJEU asserted that rules
of sport governing bodies fall under the inspection of EU competition law even
if they are purely sporting in nature.[4]
However, the CJEU left room for sport governing bodies to defend their measures
which fall within the scope of competition rules. Sporting rules can escape the
prohibitions of EU competition law if it can be shown that the concerned
measures are inherent to the objectives it seeks to achieve and that they are
“proportionate to the legitimate genuine sporting interest pursued”. In other words, the specificity of sport must
be taken into account.[5]
Additionally, the CJEU has recognized that the participation in sport
competitions can constitute economic activity because of the exposure that participation
may provide.[6]
Thus, preventing other organizations and their athletes from taking part in a
league competition and as a consequence, the world championships, can have
detrimental economic impacts on that organization and its athletes.
For
this reason, the organizational structure of sport competitions may have
colossal economic ramifications and easily fall within the scope of the
Treaties. Articles 101 and 102 TFEU are the two cornerstones of EU competition
law that prima facie would be applicable to this case. Essentially,
Article 101 TFEU prohibits agreements between undertakings that restrict
competition, and Article 102 TFEU forbids an undertaking or group of
undertakings (collective dominance) from abusing its dominant position on the
relevant market. So when a group of undertakings hold a dominant position in
the relevant market and make an agreement which abuses their dominant position,
the CJEU has recognized that both Article 101 and 102 TFEU may be applied.
Nevertheless, the following analysis will concentrate on Article 102 TFEU.
4.
Does LEC (and its
participant organizations) have a Dominant Position?
4.1.Are
the LEC (and its participant organizations) undertakings?
As
a preliminary point, the European Commission and the CJEU has repeatedly qualified
sport governing bodies as undertakings under EU competition law.[7]
The key criteria to determine whether an entity is an undertaking under EU law
is whether the entity is engaged in ‘economic activity’. In MOTOE, the
CJEU ruled that ELPA, a body that was organizing motorcycling events, was
engaged in economic activity because it entered into “sponsorship, advertising
and insurance contracts designed to exploit those events commercially”.[8]
In the present case, there is little doubt that the League European
Championship Limited, which is a private company limited by shares incorporated
in the Republic of Ireland controlled by Riot Games, could be considered an
undertaking since it concludes sponsorships and advertises its events.
The
organizations that have signed the franchise agreement with Riot Games are
mainly private limited companies.[9]
These organizations enter into sponsorship agreements, and as stated earlier,
the CJEU found that the participation in a sport competition could constitute
economic activity. It follows that these e-sport organizations would easily be considered
as undertakings.
4.2.What
is the relevant market?
The
next issue is determining the relevant market, including the relevant product
and geographic market, the LEC and its participant organizations occupy. To
identify the relevant product market, EU competition law examines the
substitutability of the product or service. For example, in defining the
relevant product or service market, the CJEU in MOTOE quite readily
found that ELPA was “engaged ... in the organisation of motorcycling events and
… their exploitation by means of sponsorship, advertising and insurance
contracts”.[10]
From
the outset, it should be underlined that games considered as e-sports greatly
differ from one another.[11]
E-sports usually fall within different genres of games, such as Real-Time
Strategy (RTS), First-Person Shooter (FPS), Fighting, and Sports games. LoL
falls within the Multiplayer Online Battle Arena (MOBA) genre. Thus, one may
argue the relevant market in this case is e-sports competitions in the MOBA
market. One way to test this market definition would be examining the ability
of e-sports players to move from one e-sport to another.
Unfortunately,
there has not been a complete study on the maneuverability of e-sport
professionals between games of the same genre or of a different genre. As a
result, it is difficult to have a complete view on the issue. Nevertheless,
while there have been cases where certain players from e-sports of a different
genre were able to move to LoL successfully (Ggoong [e-sports players are known
by their own made up player names]) and others who have moved from LoL to
another e-sport (Gesture, Bischu), there have been others who have attempted
such moves without success (Destiny). On the other hand, when examining
‘traditional’ sports there are also many examples of athletes who have moved
from one sport to another. For example, Primož Roglič was a high-level ski
jumper, and even won the Junior Ski World Championship in this discipline, who
then moved into professional road cycling and most recently came third in the
Giro d’Italia. Ski jumping and road cycling arguably have very little in
common, and it would be highly doubtful that the Commission or the CJEU would
include both in the same market. Such an extreme example demonstrates that
focusing on the maneuverability of e-sports athletes between e-sports may not always
be the best way to define an e-sport market, and perhaps a more suitable
approach would be to examine the specific features of the e-sport.
In
this sense, it should be borne in mind that e-sports in the same genre, while
sharing many basic characteristics and many of the fine motor skills, still
diverge in terms of gameplay and strategy. If this were not the case, a
professional LoL player could become a professional DOTA 2 (another MOBA
e-sport) player without any extra effort. In reality, to make a transition, the
professional LoL player would have to learn the intricacies and nuances of DOTA
2 compared to LoL, e.g. the champions and their builds, the pace of play, meta
(the best strategies to win the game) etc. All of these differences support the
argument that perhaps defining the product or service market in this case to
MOBA e-sport competitions may be too broad, and it could be more appropriate to
narrow the definition to LoL e-sport competitions.
Lastly,
the geographic market is much more straightforward to define since the LEC
Regulations define the EU Competitive Region in its 2019 Season Official Rules.[12]
Therefore, the relevant geographic market would most likely be the EU
Competitive Region.
4.3.Does
LEC (and its participating organizations) have a dominant position in this
market?
The
Commission provides the most relevant criteria to ascertain whether an
undertaking or undertakings hold a dominant position on the relevant market in
its Guidance
on enforcement of Article 82 of the EC Treaty
(now Article 102 TFEU). Pertinent benchmarks include the “position of the
dominant undertaking and its competitors”, “expansion and entry” of actual or
future competitors, and the “bargaining strength of the undertaking’s
customers” (countervailing buyer power). Usually, market shares are used to
give a preliminary indication whether an undertaking occupies a dominant
position in the market. The minimum threshold market share for which an
undertaking or undertakings may be found to hold a dominant position is around
40-50%.[13]
If
the relevant market was defined as the e-sport competitions in the MOBA market
in the EU Competitive Region, one would have to examine competitive LoL in
comparison to other e-sport competitions in the MOBA genre in Europe. For the
purposes of this blog, there is rather limited information on the market share
of LoL competitions in comparison to other MOBA e-sports in Europe. However, to
at least give an idea of the size and dominance of LoL in the general MOBA
market, LoL was projected
to have an estimated 66% market share in 2016.
When one compares this share to the second place, DOTA 2 with 14 %, it is
evident that LoL generally holds a powerful position in the MOBA market and
this most likely extends to its e-sports competitions.
In
contrast, if the relevant market is narrowed to LoL e-sport competitions in the
EU Competitive Region only, there would be an even higher chance of the LEC and
its participant organizations being found to hold a dominant position. It could
be argued that the European Masters (although Riot Games is a co-organizer) and
the LoL regional leagues could be seen as ‘competitors’. Once more, direct
information on market shares is scant. However, if one observes the viewership
numbers of the LEC versus the European Masters, the LEC completely dwarfs the
European Masters. The LEC in its 2019 Spring Split had a peak viewership of
over 475,000
viewers and an average concurrent
viewership of over 200,000 viewers. By comparison, the European Masters Spring
2019 competition had a peak viewership of just over 60,000
viewers and an average concurrent
viewership of 32,000 viewers. From these numbers, it is evident that the LEC is
overwhelmingly more popular and as a corollary, it may indicate that the LEC’s
market share is likely to also reflect this.
5.
Does LEC abuse its
Dominant Position?
5.1.Is
the dominant position being abused and can it be justified (sporting
exceptions)?
The
finding of a dominant position is not enough to constitute a breach of EU
competition law. Article 102 TFEU also requires that the dominant undertaking
or undertakings abuse its dominant position, and it allows the dominant
undertaking(s) to demonstrate how the relevant measures may be justified and
proportionate. Within the sport context, the sport governing body must explain
how the conduct which restricts competition pursues a legitimate objective and
the anti-competitive effects must be “inherent in the pursuit of those
objectives … and are proportionate to them”.[14]
There are a variety of ways an
undertaking may abuse its dominant position, but in the present case, the LEC
and its participant organizations agreement to seal the LEC and the LoL World
Championship from any other European competitors would most likely fall under a
non-price based exclusionary abuse. More specifically, exclusionary conduct
must constitute ‘anti-competitive foreclosure’ which according to the
Commission’s Guidance Paper is “a situation where effective access of actual
or potential competitors to supplies or markets is hampered
or eliminated as a result of the conduct of the dominant undertaking
whereby the dominant undertaking is likely to be in a position to
profitably increase prices to the detriment of consumers” (emphasis added).[15]
The
foreclosure requirement in this case is quite evidently satisfied since the LEC
and its participant organizations have effectively excluded other organizations
in Europe from the highest European competition of LoL and as a result, the LoL
World Championship. Actually assessing whether there has been an increase in
price to the detriment of consumers is not necessary, and the CJEU has ruled
that “Article 102 TFEU must be interpreted as referring not only to practices
which may cause damage to consumers directly, but also to those which are
detrimental to them through their impact on competition”.[16]
Moreover, a dominant undertaking “has a special responsibility not to allow its
conduct to impair genuine undistorted competition in the internal market” and
“[Article 102 TFEU] is aimed not only at the practices which may cause
prejudice to consumers directly, but also at those which are detrimental to
them through their impact on the competition structure”.[17]
Therefore, it is not necessary to show direct harm to consumers, but that the
foreclosure effects damage competition to a sufficient degree to their
disadvantage.
As
discussed earlier, the former promotion and relegation system helped promote
new talent and organizations that were able to develop new fanbases, giving the
opportunity for the European LoL viewers to get behind up and coming
organizations. By stifling the prospects of new organizations from emerging in
the LEC or the Worlds stage, market development may be hindered in
contravention with Article 102 (b) TFEU at the European LoL e-sport’s expense.
Nonetheless,
the LEC hopes that the
closed structure “provides teams with more security
to make longer investments that will strengthen and support pros, and provide
better experiences for fan (sic)”, to “unlock revenue sharing” and “to focus on
shaping the long-term future”. Basically, the LEC and its members seek greater
financial security for themselves in order to invest more in its players and
fans. The question is then whether the restrictions of competition resulting
from the closed league described above are inherent to the pursuit of the
aforementioned objectives.[18]
While “the ensuring of financial stability of sport clubs/teams” could be a
legitimate objective,[19]
it is possible to envisage less restrictive means to achieve financial
stability without completely excluding other European organizations from
competing for the final LEC title and the LoL World Championship. For example,
perhaps the LEC play-offs could give the opportunity for teams number 5 and 6
from the regular season to first face off against the top two teams of the
European Masters Tournament.[20]
A similar play-in format could easily be introduced for the LoL World
Championships. Despite these changes, new organizations would still be
precluded from joining the LEC. Perhaps this would require the LEC to come up
with new creative structures that allow new organizations to join the LEC after
having proven their worth. An example of such a system can be found in the top
European basketball competition, EuroLeague, which issues different
license/partner tiers for its participating clubs in order to provide better
financial security for itself and its participants but still provides the
possibility for a better performing national team to participate in the
EuroLeague.[21] Based
on my analysis, it is probable that the anti-competitive effects of a
completely closed league will not be found to be entirely ‘inherent’ in the
pursuit of financial stability.
6.
Conclusion
Taken altogether, the issue with EU
competition law does not solely materialize because the LEC aims to provide
greater financial stability for itself and its partners. Instead, the problems
arise when there are no or very limited avenues for new competitors, in this
case European e-sport organizations and their cyberathletes, to progress to the
highest levels of competitive LoL in Europe. The closed league structure of the
LEC precludes any outside organizations from playing in the LEC Playoffs and
Finals, and as a result, they also may never participate in the LoL World
Championship. On the other hand, it is understandable that the LEC seeks to
create further financial stability for itself, the organizations and ultimately
the cyberathletes. However, this should not come at the detriment of new
competitors who could help elevate the level of competition in the LEC.
By
extending this analysis to the wider sports world, it would be advisable for
sports governing bodies who wish to create a more closed competitive league to
pay close attention to the anti-competitive effects such restructuring could
produce. Moreover, these effects would have to be proportionate and in the
sporting context, “inherent in the pursuit of those objectives”.[22]
All things considered, it does seem rather difficult to reconcile a completely
closed league, as the one found in the LEC, with EU competition law.