Why the Call of Duty League cannot cap or tax what teams pay players

Most sports leagues have some way of holding team payrolls in check. Some set a hard cap, some charge a fee when a team spends past a line, some do both. In esports, Riot Games introduced a rule of that kind in the LEC, its League of Legends league for Europe, the Middle East and Africa. Fans and players of the Call of Duty League, the franchised league Activision launched in 2020, sometimes ask why their league has nothing similar. The short answer is a federal court judgment.

In April 2023 the Antitrust Division of the United States Department of Justice sued Activision Blizzard over a rule its Overwatch and Call of Duty leagues had used: a Competitive Balance Tax that fined any team whose spending on players went above a threshold Activision set. The case was settled on the day it was filed, with a proposed consent decree, a court order agreed by both sides, which the court later entered as a final judgment. That judgment forbids Activision from imposing any rule that caps what players in its leagues can be paid, directly or indirectly.

This guide explains the case from the court and Justice Department texts themselves: what the tax was and how it worked, why the government treated it as a restraint on wages, how the decree was reviewed and entered, what it forbids, what it leaves open, what Activision must do to comply, how long it lasts, and how it differs from the spending rules of a league run by another publisher. It describes what the documents say, attributed to them. It is not legal advice, and how the judgment applies to a given rule or contract depends on the case.

United States v. Activision Blizzard, complaint and Competitive Impact Statement (April 2023) and final judgment, Section XI.

A tax on spending above a line

The Justice Department announced the case in press release 23-364, issued on Monday, April 3, 2023, by its Office of Public Affairs and the Antitrust Division. The civil suit was filed the same day in the US District Court for the District of Columbia, under case number 1:23-cv-00895.

The complaint describes Activision Blizzard as a Delaware corporation headquartered in Santa Monica, California, which develops and publishes video games, including the Overwatch and Call of Duty franchises, and runs the esports leagues for both. According to the complaint, the Overwatch League launched in 2018 with 20 city-based teams across North America, Europe and Asia, and the Call of Duty League launched in 2020 with twelve city-based teams on the same model.

The teams in both leagues are independently owned, the government's Competitive Impact Statement says. That detail matters for the legal theory: the complaint frames the competition at stake as competition among the separately owned teams of each league for the players they hire.

According to the complaint, Activision and the teams agreed to a rule the documents call the Competitive Balance Tax. Each year, Activision set a threshold for what a team could spend on player compensation. A team that went above it paid a fine, and the money collected was handed out to the other teams.

How the tax worked, in the government's own example

The complaint does not give the real thresholds Activision set for any season. To show the mechanism, it uses a hypothetical figure, which the Competitive Impact Statement repeats: a threshold of US$1 million.

Under the rule as the complaint describes it, a team paid one dollar of fine for every dollar it spent on players above the threshold. A team that spent US$1.2 million against a US$1 million threshold would therefore owe a fine of US$200,000. Activision then distributed the fines collected pro rata, meaning in proportion, to all the teams of the league that had stayed under the line.

A rate of one dollar for one dollar means every extra dollar a team spent past the line cost it two: the dollar paid to the player and the dollar paid as a fine. The fine also went to rival teams, so a team that overspent was in effect funding its competitors.

The Competitive Impact Statement gives the purpose of the tax in the government's words: it minimized the risk that one team would substantially outbid another for a player. Neither the complaint nor the statement names any team that paid it, and neither gives an amount ever collected.

Why the government saw a limit on wages

The legal basis of the suit is Section 1 of the Sherman Act, the federal antitrust provision against agreements in restraint of trade. The complaint alleges that the agreements behind the tax violated that section, and the Justice Department's case page files the matter as a civil non-merger case under the violation label of horizontal price fixing.

The complaint alleges that the tax had both the purpose and the effect of limiting competition among the teams of each league for esports players, and of suppressing those players' wages. It says teams recognized that their spending on players would have been higher without the tax. The Competitive Impact Statement adds that teams understood the tax gave their rivals the same incentive to limit what they paid players. According to the complaint, the tax limited the pay of the highest-paid players and depressed wages across each roster.

The government also stressed who had agreed to the rule. The complaint states that the players in Activision's leagues are not union members and never negotiated or bargained over these rules. It contrasts that with other professional sports, where limits on salaries are often set through collective bargaining agreements, the contracts that a players' union negotiates with a league.

That contrast is not a detail. In United States law, a restriction agreed through collective bargaining can be protected from antitrust challenge by what courts call the non-statutory labor exemption. The final judgment defines it, citing the 1996 decision in Brown v. Pro Football, as the common-law antitrust exemption for concerted action or agreements reached through collective bargaining between unions and non-labor parties. A rule set by a league and its teams alone, with no union at the table, has no such shelter.

From investigation to final judgment

The tax had already stopped before the suit was filed. According to the complaint, in October 2021, after the Justice Department had opened its investigation, Activision told all the teams of both leagues in memoranda that it would no longer implement or enforce it.

The suit therefore did not ask for damages. The complaint asked the court to declare that the agreements behind the tax violated Section 1 of the Sherman Act, and to forbid Activision permanently from agreeing to or enforcing any rule that caps player compensation in a league it owns or controls. The proposed consent decree filed the same day gave the government that relief by agreement.

A settlement of this kind is not simply signed and filed. Under the Antitrust Procedures and Penalties Act, known as the Tunney Act, the court must first decide that the decree is in the public interest, after a period in which anyone can comment on it. The press release set out the steps, and the Justice Department's case page lists the documents filed along the way.

The Competitive Impact Statement explains how narrow that review is. The court weighs the competitive impact of the judgment, including whether it ends the violation, how it is enforced and how long it lasts, and it gives deference to the government's choice of remedy and to its predictions about how well that remedy will work. The statement also says the judgment achieves all or substantially all of the relief the government would have sought at trial.

What the judgment forbids

The core of the final judgment is one paragraph, Section IV.A. It says Activision must not impose any rule that would, directly or indirectly, put an upper limit on the compensation of any player in any of its professional esports leagues. The paragraph names two forms such a rule could take: a rule that requires or encourages a team to cap what it pays players, and a rule that imposes a tax, fine or other penalty on any team for spending more than a set amount.

The words directly or indirectly make the ban wider than the old tax. A league could not, for example, replace the fine with another penalty tied to a payroll figure, because a penalty on spending above a set amount is named in the text. Whether any other league rule has an indirect capping effect is a question the judgment leaves to its own terms and to the court that keeps jurisdiction over it.

The definitions decide what is covered. Compensation, in the judgment, means wages, bonuses and other work-related payments, and benefits such as housing, insurance and leave. A Professional Esports League is a league in which video game players are paid to compete for teams in a league format, when the league is owned or controlled by Activision, or when it features a game Activision owns or controls and Activision sets the rules on player compensation. The Call of Duty League is named in the definitions, with its versions, sequels and offshoots, and so is the Overwatch League. The judgment binds Activision's successors as well as its subsidiaries, which it names as including The Call of Duty League, LLC and The Overwatch League, LLC.

What the judgment does not forbid

Section V of the judgment sets out two kinds of conduct it does not prohibit. The first is any rule or conduct covered by an applicable labor exemption, such as the non-statutory labor exemption defined in the judgment. In practice, that is the route the complaint points to when it contrasts esports with other sports: a limit on pay negotiated through collective bargaining with a players' union is outside the ban, as far as the exemption applies to it.

The second is pay that Activision sets for its own employees. The judgment says the ban does not stop Activision from setting the compensation of people it employs, including players employed by teams in a league that Activision wholly owns. A league in which Activision itself owns every team is therefore treated differently from one in which independent owners compete for the same players.

The definitions also draw the edges of the judgment. Amateur tournaments are excluded, and so are leagues that operate entirely outside the United States. The judgment says nothing about how much a team must pay, and it sets no minimum salary: it removes a ceiling, and it puts no floor in its place.

What Activision must do to comply

The judgment does not stop at a ban. Section VI lists what Activision must do, with deadlines counted from the day the judgment was entered, and Section VII gives the government the means to check.

The officer in charge must be an active member of a state bar in the United States with at least five years of legal experience, including antitrust experience, or must retain outside counsel who has it. The whistleblower policy must let anyone report a concern to that officer without reprisal. Every new member of Activision's esports staff receives the judgment and the policies within 30 days, and each member of that staff certifies in writing, within 30 days of receiving the judgment, that they understand it and agree to follow it. When a team changes hands, its new management is sent the same documents within 30 days.

When Activision learns of a violation or a possible one, the judgment requires it to act promptly to stop or correct it, to keep the related documents and to file a statement with the government within 30 days describing what happened and what was done. Under Section VII, the Antitrust Division can ask for Activision's records, written reports and interviews with its officers and employees to verify compliance.

How long it lasts and how it is enforced

Section XI sets the term: the judgment lasts five years from its entry, unless the court extends it. The government may end it earlier, by notice to the court and to Activision, if it decides that the judgment is no longer necessary or in the public interest. Counted from the entry date the Justice Department's case page gives, July 11, 2023, the five years run into July 2028.

The court keeps jurisdiction over the judgment for that time, so that it can interpret, modify or enforce the order and punish violations of it. Section X lets the government seek contempt of court for a violation and prove it by a preponderance of the evidence, meaning more likely than not. If a violation is found, the government can ask for the judgment to be extended, and Activision must repay the costs of a successful enforcement action, including attorneys' and experts' fees.

The obligations also reach past the end date in one respect. For four years after the judgment expires, the government may still bring an action over a violation that happened while it was in force, and the remedies it can seek then include an order extending compliance by at least four years.

The judgment is the government's case only. The Competitive Impact Statement notes that it does not affect private suits for damages: under Section 4 of the Clayton Act, a person injured by an antitrust violation may sue on their own and recover three times the damages proved. Whether anyone has a claim of that kind is a separate question, which the statement does not address.

What it means for the league's teams and players

For teams in the Call of Duty League, the judgment means that the league's owner cannot set a payroll ceiling or charge a team for spending past one, for as long as the judgment runs. What a team pays its players is a matter between the team and each player, and the competition among teams for the best of them is left open.

For players, the effect is the one the government set out to restore: teams can bid against one another for their services without a fine attached to the higher offer. The judgment does not raise anyone's pay by itself, and it does not guarantee a salary level. It bars the return of a rule that, in the government's account, held pay down across every roster.

Two things remain possible under the text. A cap negotiated through collective bargaining with a union would fall under the labor exemption, to the extent the exemption covers it. And a league Activision owned outright, team by team, would let it set what its own employees earn. Neither describes the structure the complaint sets out for the Call of Duty League, a league of independently owned teams whose players have no union.

The notice requirements also mean the rule is meant to be known by those it protects. The judgment requires Activision to send it to known players and to each team's management, with an explanation of what it requires, and to send it again to team management every year.

Why other leagues can still use spending rules

Other esports leagues do use spending rules, and the judgment explains why they are not a model the Call of Duty League can follow. The judgment binds Activision and the leagues it defines. It does not govern leagues run by other publishers, and every league's rules belong to that league and the law of the place where it operates.

The LEC shows the other approach. Riot announced its Sporting Financial Regulations for the LEC on September 28, 2023. Under them, a team whose spending on its five highest-paid players goes above a threshold pays the league a fee of 50 percent of the excess, rising to 100 percent of the excess above 150 percent of the threshold. Half of the fees go to LEC teams that meet both the floor and the threshold, and the other half supports the tier-two League of Legends scene in the region. A team must also spend at least a floor of 50 percent of the threshold. The rules took effect from the 2024 season.

Riot's announcement gives no fixed threshold, which it says is computed from player salaries, league revenue and team finances. It is a fee on spending above a line, the same family of rule as the Competitive Balance Tax, set in another region, by another publisher, for another game, and under no judgment of the kind that binds Activision.

A cap on what a team may pay is also a cap on what a player may earn. In the Call of Duty League, the court judgment takes that tool away.

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