Court Backs Arbitration Ruling in eSports Dispute

Nov 18, 2022

By Jared Good

FaZe Clan Inc. (hereafter “FaZe Clan”), is one of the most recognizable eSports companies in the world with an estimated valuation of $400 million, according to Forbes. In the lead-up to FaZe Clan’s efforts to go public, they took the necessary steps to seek Series A funding through investors. During these efforts, the president of FaZe Clan, Greg Selkoe, established communications with the principal of Adult Use, Adam Salman. During these discussions, Selkoe and Salman entered into a Referral Agreement, that stated:

“[t]he Client [FaZe Clan] shall pay to the Referrer [Adult Use] a referral commission … equal to five percent (5%) of the dollar amount of securities purchased by the referred party in connection with the Funding as a direct result of introductions made by the Referrer.”

After the terms of this agreement were enshrined, Salman introduced Selkoe to Igor Gimelshtein of Zola Ventures, a former employee of a Canadian financial services company called Canaccord Genuity (hereafter “Canaccord”).

During the introduction, Selkoe was alleged to have orally agreed that if Salman and Gimelshtein obtained funding for the company through Canaccord, then both parties, Adult Use and Zola, would each receive a 5% commission of the amount of the capital that was raised. Canaccord’s Managing Director, who specialized in eSports, Michael Kogan, stated his intentions to invest in the Series A funding round, and further leading the anticipated financing round, Series B. Adult Use and Zola received their 5% commission for the investment made during the Series A round. However, during the Series B financing round, Adult Use and Zola were not actively involved in the funding. Canaccord negotiated the necessary terms and conditions with a third-party, Bridging Finance Group. FaZe Clan paid the 5% commission to Canaccord, but neither Adult Use or Zola received anything.

Given the dispute over the referral fees and the apparent lack thereof, Adult Use and Zola entered into an arbitration agreement with FaZe Clan to settle the dispute. Adult Use and Zola maintained that they were entitled to the 5% commission from the $30,000,000 CAD loan from Bridging Financing Group. FaZe Clan countered that under the terms of the original Referring Agreement between the parties, Adult Use and Zola should receive nothing as they had no active involvement in the procurement of the funding received in Series B. Ultimately, the arbitrator agreed with FaZe Clan and dismissed Adult Use and Zola’s claims, issuing a partial final award.

After their attempt to have the Arbitrator vacate the award, Adult Use and Zola filed suit in New York State court under New York law and the Federal Arbitration Act. FaZe Clan removed the case to the federal court of the Southern District of New York. The Court rejected each of Adult Use and Zola’s claims in succession.

The court found that they did not have the authority to review the award. The Second Circuit has a longstanding precedent that awards under the FAA may only be confirmed or vacated by the District Courts. There is no power for the court to evaluate the merits and facts that the tribunal determined. For the award to be considered “final” and “definite,” the arbitration award “must resolve all the issues submitted to arbitration, and…must resolve them definitively enough so that the rights and obligations of the two parties, with respect to the issues submitted, do not stand in need of further adjudication.” The court held that the claims that had been brought by Adult Use and Zola had been properly adjudicated.

Likewise, the court found that the arbitrator had not exceeded their authority to enter the award. Second Circuit precedent holds that the required inquiry is “whether the arbitrators had the power, based on the parties’ submissions or the arbitration agreement, to reach a certain issue, not whether the arbitrators correctly decided the issue.” Adult Use and Zola argued that in the adjudication the arbitrator exceeded the scope of the terms that were agreed upon in their Rule 33 motion. Specifically, the parties complained that the motion was intended to cover only the regulatory issues related to the broker dealers, not the contractual issues.

Although the court agreed that the arguments put forth contained some merit, based on Second Circuit precedent this acknowledgement was irrelevant. Relevant case law “emphasiz[ed] that an arbitrator’s authority to decide an issue is determined by either the parties’ submissions or the arbitration agreement.” The arbitration agreement entered into by the parties provided that arbitration was for “any and all disputes arising out of or related to the Referral Agreement.” Given that the referral did not apply to the inclusion of Bridging Financing, FaZe Clan was correct to raise the defense, thus the arbitrator was within his authority to dispose of the claims.

Adult Use and Zola then argued that they were deprived of a fair opportunity to present evidence. Under § 10(a)(3) of the FAA, vacatur is permitted where the arbitrator is guilty of misconduct in refusing to hear evidence pertinent to the material. The court flatly rejected these arguments made by Adult Use and Zola, stating that the petitioners had failed to timely raise their claims, given that they failed to make their arguments for weeks prior.

Lastly, the court rejected any argument made by the petitioners that the court was authorized to modify the award under § 11(b). Under that section of the Act, a court has the authority to modify or correct an arbitral award “[w]here the arbitrators have awarded upon a matter not submitted to them, unless it is a matter not affecting the merits of the decision upon the matter submitted.” The court held that Adult Use and Zola failed to provide any reasons for why the award should have been vacated.

Ultimately, the court confirmed the award to FaZe Clan, finding that Zola and Adult Use had failed to show any evidence as to why they should have prevailed. The Referral Agreement that had brought them their commission from Series A financing, ended up dooming their claim for any future financing since the literal reading of the agreement would not have permitted any commission. By going to arbitration, Adult Use and Zola failed to convince the arbitrator that they were, within the terms of the agreement, authorized to receive their share, and thus received nothing.