The Esports Gambling Market and Regulations – What you Need to Know

Esports is the latest trend in Central Pennsylvania which is growing in popularity. It has, however, sparked a flurry of legislative activity with interest groups seeking to promote leagues and even provide college scholarships for high school students who participate and compete in esports tournaments.

Esports is competitive video gaming where individuals or teams can compete in various games. The games are produced by publishers who create and distribute the games for consumers. Publishers can then organize leagues to play the games with teams competing against each other for a prize pool. Teams generally consist of the players, their alternates, and sometimes a manager. Publishers can also sell licenses for the games to third-party leagues, tournament organizers, or individual consumers to play the games competitively.

It has become more popular for players to stream their competition or gameplay online for consumers to watch for entertainment. This can be done through streaming networks, social media platforms, or event spaces dedicated to esports. Some players and teams accept sponsorships where they can get paid to play the games in exchange for advertisements from the sponsor. With the increased online presence of esports, there has also been an increased presence of gambling on esports. This is problematic due to the lack of regulations surrounding esports in general and the rapid growth it has experienced in the past few years.

Since the industry is growing faster than the corresponding legislation, the rules and standards for different tournaments can vary from game to game and region to region, leading to confusion and disorganization in how the competitions are administered. The United States Supreme Court added to some of this confusion on May 14, 2018 by overruling the Professional Amateur Sports Protection Act (PASPA) of 1992, which prevented states from legalizing sports betting.[1] Sports betting used to be illegal across the country, but states are now free to create their own regulations, including regulations for gambling on esports.

Pennsylvania is one such state. On October 29, 2017, Governor Tom Wolf signed Act 42 which authorized significant gambling expansion in Pennsylvania and authorizing sports betting. The Act regulates daily fantasy sports, authorizes video gaming terminals at qualified truck stops, and authorizes tablet gambling in designated areas of qualified airports, among other expansions. The cost of licenses under the Act is steep, however. To purchase an online poker and other peer-to-peer online games license, an applicant will need to come up with $4 million. This would presumably extend to businesses seeking to establish esports facilities within the Commonwealth.

Act 42 also gives the Pennsylvania Gaming Control Board (Board) the authority to regulate gambling on esports within the Commonwealth. The Act provides for administration, licensure, and taxation of “Fantasy contests,” which are defined as “an online fantasy or simulated game or contest with an entry fee and a prize or award which: (i) the value of all prizes or awards offered to winning participants in advance of the contest and the value is not determined by the number of participants or amount of any fees paid by those participants, (ii) all winning outcomes reflect the relative knowledge or skill of participants and are determined by accumulated statistical results of performance of individuals, including athletes in the case of sports events, (iii) no winning outcome is based on the score, point spread, or performance of a single actual team or combination of teams or solely on a single performance of an individual athlete or player in a single actual event.” The Act does not apply to certain free contests or competitions (so-called “social fantasy contests”) where nothing is awarded to the winner other than a game-based virtual currency that is not redeemable for anything of value outside of the game. The Act further directs the Board to present annual reports to the General Assembly on awareness and growth of unregulated commercial gaming products such as esports.

Businesses looking to contribute to the esports gambling trend in Pennsylvania should watch out for emerging guidance from the Board regarding how to set up tournaments, obtain licenses, and pay taxes on any profits received. Municipalities may also want to look into hosting tournaments or creating venues where players can compete. On a large scale, this investment can fuel a profitable tourism industry from fans coming to watch players compete. Philadelphia, for example, has plans to begin construction on a $50 million esports arena set to open in 2021. On a smaller scale, this could involve sponsoring a team or providing a place for them to practice. Either way, if done correctly, joining the esports trend could be a profitable and growing enterprise.

This article was written with contribution from Sarah Rothermel, 3rd year law student at Widener Law Commonwealth.

[1] The case is Murphy v. National Collegiate Athletic Association, 138 S. Ct. 1461 (2018).

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