On June 17, 2020, the Southern District of New York issued an opinion and order in a complex matter between a social media gaming celebrity and a contract he signed with an esports and entertainment company. (Faze Clan, Inc., v. Tenney, 19-cv-7200 (JSR) (S.D.N.Y. July 17, 2020) (2020 WL 3318209).)
The matter began in early 2018 when the gamer, who is a professional player of a popular online video game, signed an agreement with the company. The agreement required the gamer to:
- Play on the defendant’s team in video game tournaments;
- Participate in training activities;
- Participate in promotional marketing in social media activities; and
- Not compete with the company.
The agreement required the company to:
- Pay the gamer a monthly fee of $2,000 “on a timely basis”;
- Pay the gamer a share of income from cash prizes won in esports tournaments;
- Pay him a share of revenue for certain merchandise and apparel and other activities; and
- Provide him with training and other support for his career.
The initial term of the agreement was 6 months (until October 2018) with an automatic extension of 36 months, provided each party met certain conditions precedent. New York law governs the agreement, as it contained a New York venue clause, even though the gamer was based in Florida and the company had some employees in California.
The relationship between the parties soured about a year later, culminating in the gamer’s public announcement on social media that he wanted to end the agreement and create his own esports organization. As a result, three lawsuits were filed—two by the gamer in California and one by the company in New York. Yet the gamer kept playing on the company’s team, and the company kept paying him.
The Court Ruling
As a result of the agreement’s forum selection clause, the company was able to stay the California lawsuits to allow the parties to litigate in New York. The company brought four claims for breach of contract and five claims related to tort and quasi-contract claims in New York federal court. The gamer’s claims related to California law issues described more below. Both parties moved for summary judgment in the New York court. The court largely denied all parties’ motions, except regarding the issue of jurisdiction on the gamer.
- The court granted the company’s motion and found that the New York court had jurisdiction over the gamer because it found the forum selection clause enforceable under New York law. Courts applying New York law determine the enforceability of a forum selection clause separately from the validity of any “foreign” (other state) law defenses, so the gamer’s California claims were not a barrier to the court finding jurisdiction.
- Had the contract extended beyond the six-month initial term? The court decided that there was a factual dispute that precluded granting summary judgment. One of the conditions for the contract’s extension was the company’s payment of the $2,000 monthly fee “on a timely basis.” The company didn’t make the monthly payments for May through September of 2018. The gamer’s attorney sent the company a letter pointing out that the company had not met the conditions for extending the contract. The company then promptly made the five payments and thereafter made monthly payments. The gamer:
- Continued playing on the company’s team; and
- Continued using the company’s branding and logos in video and social media posts.
- Continued promoting the gamer’s social media profile;
- Continued promoting his tournament wins; and
- Continued paying him and providing services.
As a result of these mixed facts, the court found that:
Under New York law, the parties’ conduct after the expiration of a written contract, including one party’s continued rendition of services, the other’s acceptance of those services and payment in accordance with the terms of the written contract can establish a contract implied in fact with substantially the same terms and conditions as embodied in the expired written contract.(Citations omitted.)
- Did the gamer’s social media comments about the contract and starting a competing esports company establish a claim for tortious interference with contract? In New York, such a claim has four elements:
- The existence of a contract between the plaintiff and a third party;
- Defendant’s knowledge of that contract;
- Defendant’s intentional inducement of the third party to breach that contract; and
- Damage to the plaintiff.
Evidence of the gamer’s knowledge of the company’s contracts with third parties was found not only in his deposition, but also from the team jerseys that displayed a third party’ logo. The company also presented affidavits that brand partners had terminated or refused to renew deals with the company due to the gamer’s comments. These factual questions meant this claim would be resolved at trial.
- The gamer alleged that the contract with the company was void ab initio because three clauses violated California’s non-compete statute:
- The gamer’s grant of an exclusive license to the company for his name and likeness;
- The gamer’s agreement not to work for another gaming organization; and
- The gamer’s agreement that the company had a right to approve any third party request for his services.
The court found that these three restrictions fell within Section 16600 of the California Business and Professions Code, but that the issues would have to be resolved at trial.
- The gamer also alleged that the contract was void ab initio due to violation of the California Talent Agency Act (California Labor Code Section 1700.4 et seq.). This law is a licensing requirement, which prohibits anyone “procuring offering promising or attempt to procure employment or engagement for an artist” without a license. Moreover, the law vests exclusive initial jurisdiction in the California Labor Commission, therefore the federal district court could not decide the question.
- If you’re going to claim that a contract has not renewed, act consistently with that claim—don’t keep acting as if the contract is still in full force and effect.
- If you’re not happy with an agreement, posting comments on public social media and saying you’re creating a competitor is not a good idea.
- Although it may be common to place restrictions on parties’ dealings with competitors, the downside is that a court may void the entire contract. See if you can find another way to accomplish your goals, such as confidentiality restrictions or restructuring the financial incentives.
- Pay particular attention to forum selection clauses in a contract, especially where it has language stating that you consent to jurisdiction of a particular court. This can be the determining factor in finding whether jurisdiction exists, and can also cause a court to stay a lawsuit filed in another jurisdiction, even if you are trying to void the entire contract.
- If there’s any connection to California, consult with California counsel. As we saw here, even if the contract itself specifies another state’s law and venue, California law may void the entire agreement.