The Department of Justice has taken Activision Blizzard to court, alleging the publisher’s esports leagues had been potentially underpaying their workers/players via an exploitative “Competitive Balance Tax”.
The tax, which was signed off years ago by both Activision and each team in their Call of Duty and Overwatch esports leagues, was designed to operate (roughly) like the salary caps found in the NFL and NBA. The government says this specific deal, however, “had the purpose and effect of limiting competition between the teams in each league for esports players and suppressed esports players’ wages”, saying in a court filing on April 3:
From the inception of each league, Activision and the teams agreed to impose rules that had the purpose and effect of substantially lessening competition for players by suppressing player compensation. Under these rules, which Activision called the “Competitive Balance Tax,” teams were fined if their total player compensation exceeded a threshold set by Activision each year. For every dollar a team spent over that threshold, Activision would fine the team one dollar and distribute the collected sum pro rata to all non-offending teams in the league. For example, if Activision set a Competitive Balance Tax threshold of $1 million, a team that spent $1.2 million on player compensation in a season would pay a $200,000 fine, which would be distributed to the other teams.
Teams recognized that their spending on player compensation would have been higher absent the Competitive Balance Tax. The Tax minimized the risk that one team would substantially outbid another for a player. The Tax not only harmed the highest-paid players, but also depressed wages for all players on a team. For example, if a team wanted to pay a large salary to one player, the team would have to pay less to the other players on the team to avoid the Tax. Teams also understood that the Tax incentivized their competitors to limit player compensation in the same way, further exacerbating the Tax’s anticompetitive effects.
Sports fans might be thinking, hey, that’s almost exactly how the NBA’s salary cap and luxury tax work. And it is! But as the Department of Justice point out, the NBA’s deal was hashed out in negotiations with a player’s union, as part of collective bargaining agreements. This tax was not.
The government say that an investigation into the Competitive Balance Tax has been going on for years, and that in 2021—having been warned it was potentially illegal—Activision “issued memoranda to all teams in the Overwatch and Call of Duty Leagues announcing that it would no longer implement or enforce a Competitive Balance Tax in either league”.
Reuters report that the case has today (April 3) led to a settlement, agreed to by both parties (but yet to be formally approved by a Federal Judge, hence the continued filing), with Activision saying “The tax was never levied, and the leagues voluntarily dropped it from our rules in 2021. We have always believed, and still believe, that the Competitive Balance Tax was lawful, and it did not have an adverse impact on player salaries”.