Starting a new business can be a daunting and expensive process for any new entrepreneur. For a brick-and-mortar business, this process typically includes all of the usual stopping points between a mere business concept and finally opening the doors to customers. This may include finding a space in which to operate, creating a brand presence through a creative name and specialized product/service, and creating the necessary framework to handle employee and tax obligations. This process can take an entrepreneur from a few weeks, months, and sometimes several years and can require the advice of a multitude of professionals: commercial bankers, real estate agents, business attorneys, and accountants, just to name a few.
For an entrepreneur seeking to provide video game related services to potential customers via the internet, however, he or she may begin creating content by streaming on Twitch or YouTube, spreading awareness for their work on social media, or professionally all in a single day with nothing more than a computer. Part of the excitement of platforms like Twitch or YouTube is that someone pursuing video-gaming streaming, a form of artistry, or other content creation as a way to make a living can potentially transform from a complete unknown, to an internet sensation, virtually overnight.
Beyond this, a new content creator on Twitch and YouTube is typically much younger than someone who decides to open a new brick-and-mortar business, and the former may be relying on their own parents as their primary source of guidance in getting their venture off the ground. While there is ample evidence throughout Twitch and YouTube to support the fact that youth is surely not a detriment to the potential success of the business, a sixteen, eighteen, or twenty year-old is simply not going to have the same network of professional contacts to assist them with their business venture as a sixty-five year old who has retired and wants to start their own small business.
This disconnect between the traditional business creation process for these internet-based service businesses, combined with the ease of entry to the industry (through Twitch, YouTube, and social media), and the relatively lower average age of these entrepreneurs, creates the perfect environment for an inexperienced decision-maker to enter in to contractual arrangements with little to no thought of their future impact. The situation between Tfue and FaZe Clan is a perfect example of how this situation can result in future problems for a successful content creator.
TFUE v. FaZe Clan
Although the issue may have arisen far before it reached our ears, the recent legal issue between Turner Tenney (professionally known as “Tfue”) and Faze Clan Inc. (known as “FaZe Clan”), a professional sports organization has shaken the video gaming community over the past week. Tfue is a gamer who primarily plays the popular battle-royale video game Fortnite, both professionally and as a streamer on Twitch. FaZe Clan is a sports entertainment organization, which primarily enters in to contracts with professional gamers to play certain video games on behalf of FaZe Clan, including Fortnite, Player Unknown’s Battlegrounds (“PubG”), and my personal favorite, Counter-Strike: Global Offensive (“CSGO”), among others.
Based upon the information available to the public from the Hollywood Reporter article on the subject, the issue between Tfue and FaZe Clan surrounds Tfue’s “Gamer Agreement”, which Tfue and FaZe Clan allegedly signed on April 27, 2018. While we only currently have the Complaint filed in the California Superior Court for the Central District of L.A. County, the basic allegations Tfue’s Complaint regarding his contract can be briefly summarized as follows:
Counts I & II Tfue is alleging that the Gamer Agreement is void and invalid as a matter of law, or should be considered so by the court, to be, under both California contract law and California’s “Talent Agency Act” because of the language within the contract and surrounding circumstances, including the following:
a. The Gamer Agreement allows FaZe Clan to extract a finder’s fee of “up to eighty percent (80%) of the revenue paid by third-parties for Tfue’s services.
b. The Gamer Agreement restricts Tfue from lawfully pursuing his trade and profession by prohibiting Tfue from providing his services to any other gaming company than FaZe Clan, from appearing in, sponsoring, promoting, endorsing, or otherwise providing services on behalf of companies competitive with the products or services of FaZe Clan.
c. The Gamer Agreement permits FaZe Clan to reject any third-party requests (including from sponsors) for Tfue’s services, the result of which could be a declination of an offer to Tfue from a third-party, which would have otherwise been profitable to Tfue.
Count III FaZe Clan’s use of the Gamer Agreement as described above constitutes unfair and unlawful business practices in violation of California law, and to the detriment and damage of Tfue.
Count IV, V, & VI FaZe Clan recieved funds from third-party sponsorships for Tfue's services that were not distributed to Tfue as required. These separate counts each provide different legal theories which allegedly support why Tfue is entitled to money damages based on this alleged conduct by FaZe Clan.
Count VII FaZe Clan acted against Tfue’s interest by preventing Tfue from moving forward with a sponsorship deal with HyperX (a company that is, in my opinion, most notable for its gaming headsets, but also a manufacturer of keyboards, mice, and other PC accessories) despite the fact that the rejection of this deal was detrimental to Tfue. Tfue also alleges that FaZe Clan rejected this deal because of a clear conflict of interest as a result of FaZe Clan’s relationship with another sponsor (although the identity of this sponsor is not in the Complaint, it seems to me that they are likely referring to SteelSeries, a direct competitor of HyperX in the PC accessory industry).
The Gamer Agreement
It is evident from the above that Tfue signed an Agreement with FaZe Clan that he now wishes he hadn’t signed. Based upon the limited provisions that are included in Tfue’s Complaint, it is clear that the Gamer Agreement is both comprehensive and restrictive. If the financial implications are true, it also creates a massive windfall to FaZe Clan for Tfue’s success and puts him in a position where he has little decision-making power in terms of which sponsors he deals with and whom he provides services to. Below are my thoughts on Tfue’s position, and the lessons that can be gleaned from his situation:
Based on the above, and the timing of the signing of the Gamer Agreement, it is likely that Tfue signed the Gamer Agreement when he was relatively unknown, and while he likely always possessed the gaming skill he does today, his circumstances were not such to monetize his skills in the manner he is today. Think Eminem before Dr. Dre, or Drake before Lil’ Wayne.
A review of Tfue’s alleged historical Twitch subscriber data shows a drastic increase in subscribers to his Twitch account from 2,886 in April of 2018 (when he signed with FaZe Clan), to a whopping 65,633 in January of 2019. While this does not necessarily mean cause and effect, it is hard to ignore the timing and infer a correlation. Further, I doubt that as a twenty-year-old, excited to be signing an agreement with a major gaming organization, Tfue considered the impact the Gamer Agreement may have if he went from making several thousand dollars to making millions.
As a result, a restrictive contractual agreement with FaZe Clan which may have helped him, at least in part, to make such a meteoric rise is now (according to Tfue’s Complaint) restricting his freedom to perform services, curtailing his ability to make his own decisions regarding his own career, and potentially directing large amounts of money away from Tfue to FaZe Clan. I am assuming that the Gamer Agreement is of a lengthy duration as well, as it appears that Tfue’s attempt to negotiate a new agreement with FaZe Clan fell through, leading to the lawsuit. As such, Tfue’s only options were to 1) suffer the consequence of his decision to sign the Gamer Agreement until it ran its course, or 2) pursue legal action against FaZe Clan to attempt to get out of the Gamer Agreement.
The lesson here is simple. Always have an attorney review a contract before you sign it. It doesn’t matter if you have 65,633 Twitch subscribers, or 1,000 YouTube followers, the only time you can be certain to avoid the consequences of a restrictive contract is before you sign it. The terms of this agreement could bind you to something that could ruin your business, your career, and your livelihood. It could also lock you in to a financial arrangement you can’t get out of, and could divert the fruits of your labor to another person or organization. Although legal action is always an option, the results are never guaranteed, and will likely require a hefty amount in attorney’s fees to get your chance to get out of the agreement.
For Tfue, based upon Tfue’s Complaint and the limited portions of the Gamer Agreement therein modification of the agreement as follows could have prevented his situation: a contract with 1) a shorter duration; 2) less restrictive language; and/or 3) more control/direction by Tfue based on financial performance may have solved his issues before they began.
1) If the contract were of a shorter duration, Tfue could simply weather the storm that is the Gamer Agreement and part ways with FaZe Clan when the Agreement expired. While he would still lose out in the short term, knowledge that his long-term career is not at risk would be the more important victory.
2) If there had been thorough examination of the Gamer Agreement prior to its signature, the provisions cited within the same jump off the page as both comprehensive and restrictive. Often in reviewing contracts for my clients, my final advice to them is that it is okay to come to the conclusion that you are simply not willing to sign the contract with certain provisions left in. If the other party refuses to change the contract, it is almost always better to not sign the contract, rather than to agree to something you can’t do (either literally, figuratively, or morally).
3) It makes perfectly good business sense that FaZe Clan would expect to “recoup their investment” in Tfue at the time of signing the Gamer Agreement. Rather than arguing against these provisions at the time of singing, perhaps Tfue could have asked for a provision that required the Gamer Agreement to be renegotiated or to terminate after certain financial performance. While FaZe Clan may not have been willing to budge on some of these provisions, it is unlikely their attorneys would have been absolutely unwilling to agree to any reasonable modifications to the Gamer Agreement. If they were, see #2 above.
The biggest takeaway from FaZe Clan’s side of the current situation is that regardless of the result of the dispute or of who is “right” or “wrong”, it is a publicity nightmare for FaZe Clan. While it appears that the Gamer Agreement does have some confidentiality language in it, in terms of what Tfue can disclose to third-parties regarding the Gamer Agreement, this language did not stop the disagreement between them from reaching the public. Only time will tell what kind of damage the fallout will do to FaZe Clan’s business and reputation.
Here are some tools FaZe Clan (by and through their attorneys) could have implemented in their Gamer Agreement to avoid this publicity nightmare:
1) Confidential Pre-litigation Mediation Clause – This clause requires any dispute between the parties to the agreement to submit to facilitated mediation as a condition precedent to filing a lawsuit or submitting a claim for arbitration. Mediation is a form of facilitated negotiation, where an impartial third-party attempts to find a resolution to the issue(s) that are agreeable to all parties. In short, it requires the parties to attempt to work things out before proceeding to litigation or arbitration. Most courts will enforce these clauses as a good faith attempt to avoid formal court action and promote settlement.
On the one hand, this lets an uninterested third-party mediator (typically a practicing attorney in that area of law or an alternative dispute resolution attorney) review each party’s claims, and try to find a resolution that is agreeable for both parties. On the other, this process not only often results in settlement, but it also gives the parties a better idea of what the other party’s interests in the dispute are beyond their legal claims. If the mediation is unsuccessful, the parties could still make their claims in the appropriate court or via arbitration if the contract contains an arbitration clause.
The kicker here is that this entire proceeding is confidential (assuming the contract drafter utilizes the proper language). None of this process would be public, and would have allowed FaZe Clan a chance, by and though their attorneys, to approach Tfue (and his attorneys) to attempt to reach an amicable resolution.
2) Arbitration Clause – Similar to the Confidential Pre-litigation Mediation Clause, an arbitration clause drafted with proper language would have further served to privatize the dispute if it were to move beyond negotiation or mediation. Arbitration is an alternative to litigation that can be selected by parties to a contract, which is typically less formal than litigation. This could also have aided FaZe Clan in avoiding the publicity headache that FaZe Clan now faces, and the potential backlash from their and Tfue’s fans.
Before you sign any contract, including a contract in the video game streaming, e-sports, and other online content creation industries, it is extremely important that you hire an experienced business attorney to review the document and represent you in contract negotiations.
While it is best to find a business attorney who has experience representing clients in your particular industry, if you are grasping at straws to find a qualified and trustworthy business attorney, here a couple suggestions on tracking one down:
· Ask family and friends who own a small business for a referral;
· Connect with other business professionals (financial advisors, CPAs, etc.) that you currently use for other services for a recommendation of someone they work with.