Prize Money Distribution and Legal Risks in eSports Competitions

Legal Interpretation of Gambling Offenses

Article 185 of the Japanese Penal Code stipulates that “any person who engages in gambling shall be punished with a fine of not more than 500,000 yen or a petty fine,” thus making gambling activities subject to punishment.
In this context, “gambling” refers to a situation where multiple parties compete for the gain or loss of property or financial benefits based on the outcome of chance.
“Outcome of chance” means determining the winner and loser based on facts that cannot be accurately predicted or controlled by the parties involved.
When such a game of chance results in the winner acquiring property (typically money) and the loser losing it, it constitutes gambling and is subject to punishment.

Furthermore, even if skill is involved in determining the outcome (such as in betting on golf), if there is any element of chance, it is considered gambling.
However, even if gambling occurs, if it is limited to “items used for temporary amusement,” the proviso of Article 185 of the Japanese Penal Code states that the offense of gambling does not apply.

Possibility of Establishing Gambling Offenses in eSports Competitions

eSports is a competition that uses various digital games to compete based on performance, determining winners and losers by the superiority of results.
While it is certain that a player’s skill influences the outcome of the game, there are also aspects where the outcome is affected by chance.

Therefore, when a competition involves wagering assets based on the game’s outcome, it generally constitutes a gambling offense under Japanese law.
For example, if competitors in a fighting game each contribute money and the winner takes the pot, or if multiple players contribute money to compete in a car racing game and the winner takes the pot, these actions are considered to fall under the category of gambling offenses according to Japanese law.

Considerations from Legal Consultation Cases

In preparation for hosting an eSports competition, the organizers have raised the following inquiry:
When organizing a competition, they wish to collect participation fees from participants to cover operational expenses such as venue costs, equipment usage fees, personnel expenses, and prize money for top performers. Are there any legal considerations they should be aware of?

In response to this inquiry, if the participation fees are reasonable and cover the actual costs of organizing the competition, it is generally considered that there are no legal issues.
However, it is important to note that if the prize money for top performers is funded by the participation fees collected from participants, there is a possibility that both participants and organizers could be subject to penalties under Japanese criminal law for gambling offenses (such as Article 185 of the Penal Code).

Legal Evaluation of Entry Fees and Prizes in Competitive Tournaments

We will examine in detail the relationship between entry fees and prizes in esports tournaments. When participants in a tournament pay an entry fee, and the prize for top performers, such as the winner, is funded solely by these entry fees, the following legal evaluation is possible.
In such a scenario, the top performers, like the winner, are seen as acquiring the prize money as victors among participants who wagered money on the outcome of the competition. Meanwhile, other participants lose their entry fees as the defeated, leading to the interpretation that the participants are engaging in gambling with each other.

Furthermore, for instance, if participants pay a fixed entry fee to the organizer to join the tournament, and the organizer awards a prize exceeding the entry fee (such as double the entry fee) to those who achieve a certain level of performance, each participant is essentially competing against the organizer to see if they can meet the performance criteria in the tournament game. This competition over the gain or loss of property based on the outcome is evaluated as gambling between the organizer and each participant.

In contrast, if the amount of the entry fee paid by participants is limited to covering part of the tournament’s operational costs, such as venue and equipment rental fees and personnel expenses, and cannot be considered the source of the prize money awarded to top performers, then it is not regarded as a competition over monetary gain or loss between participants or between participants and the organizer. Therefore, organizing such a tournament or participating by paying an entry fee is not considered gambling under Japanese law.