Developing Concerns : Video Game Development Lawyers & Attorneys: Reed Smith Law Firm: Intellectual Property, Marketing, Promotions & Privacy Law

Gamasutra has a great article on why it makes good business sense to utilize players as developers of new content.  It can be a new revenue stream for the publisher, it can build brand loyalty, it can increase the game's long tail, and it can mean fresh content without having to build it yourself.  So pretty much all positives and very few, if any, negatives.

At least, there are very few negatives so long as you build the legal structure appropriately.  There is a ton to consider when developing a means by which players can build, distribute, and monetize their own content - a typical development agreement between a publisher and a developer can span dozens of pages of dense, legalese print. Is this something you think you can implement in the context of a player/developer relationship?  Doubtful.

So what are the issues that should be considered?  This post will by no means cover them all, but here are a few key highlights:

Intellectual Property

The grand poobah of the issues bucket list.

1. You as the "publisher" (note the use of quotes here, since that distinction is becoming less relevant in this context) need to have in order to distribute and exploit the player-created content.  But there can be a tendancy to take more than what you need in order to "lock down" these rights.  I challenge my clients to constantly ask themselves whether they need all of the rights they are seeking, or whether something less would work just as well, and be easier to monitor.  After all, licenses can be perpetual; grants of ownership may be subject to reversionary rights later in life.
   
   The question of license-vs.-own becomes even more important if you want to take the content and exploit it internationally.  For example, do you know your requirements as publisher for comply with various countries' moral rights laws?  Does the country you seek to exploit the work in even allow you to do what you want to do?
    
2. Consider the kinds of content you are allowing players to create, and whether ancillary IP laws like VARA may apply.  (How this could happen is a fascinating question, but that's another post).
    
3. When players create content, publishers have no way of knowing whether the content is original or not.  There's no clearance process to speak of, so taking advantage of the safe harbor provisions of the DMCA is incredibly important.  For example, have you appointed a copyright agent, or are you at risk for a Righthaven-like troll coming after you?  Do you have an appropriate notice-and-takedown regime in place?
    
4. Aside from copyright issue, have you considered the impact of trademark laws in the player-created content?  After all, the DMCA doesn't apply to trademark issues so how will you handle a situation where someone uses the McDonald's Arches as an architectural work, or the Nike Swoosh on virtual clothing.
    
5. What about publicity rights?  If I put my face on a digital item then distribute it through your player-created content network, can I turn around and sue you for infringement of my right of publicity?  Maybe, maybe not depending on whether there is an implied right to use my name/image/likeness, but why not deal with it up front?

Revenue Share

1. Are you taking an off-the-top fee like Apple does, or is your rev share more complex?  If it's more complex, what kind of definitions for "gross" and "net" are you using?  Keep in mind that there are industry standards with this, so if you depart from that standard, you should have a good reason for doing so (and a compelling sales pitch as to why that departure is good for the player).
    
2. Are you providing access to any sort of dashboard or control panel so players can monitor the exploitation of their content?  What promises, if any, are you making with regard to access to and usefulness of this program?
    
3. What rights, if any, will players have to dispute the revenue share?
    
4. On what kind of payment cycle will you pay players?  Will you keep any of the player's share as a holdback, and if so, how much and when will this be liquidated.
    
5. If you're going international, where does currency exchange fees come into play?

Nature of the Content

1. How will you respond if someone uploads buggy content, or even worse, content that contains malware?  Do you know the extent of your liability?
    
2. Will you engage in a rigerous approval process (a la Apple App Store), or take a more laissez faire approach (a la Google Play).

The above checklist of questions is not meant to be all-encompassing, but as you can see there are more than a few issues that need to be thought through prior to launching a player-created content system.  Moreover, you should seek out an expert to assist with your decision-making and documentation thereof.  Not only will this help you understand the contours of the issues you face, but this will also help you create player agreements that are easy to use and easy(ier?) to understand.

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If you haven't already heard, over this last weekend a character in World of Warcraft went on a killing spree.  A virtual killing spree, but a killing spree nonetheless.  Video of the massacre can be found on the linked page (thanks to Wired for the coverage).

The Wired article points out that the scene was very similar to an episode of South Park called "Make Love, Not Warcraft."  If you haven't seen it, you can watch it here: http://www.southparkstudios.com/full-episodes/s10e08-make-love-not-warcraft.

Go ahead, we'll wait..........

Great episode, right?  Of course, as we lawyers are wont to do, we read stories like this do not focus on the "life imitating art" aspect.  Instead we pose questions to ourselves like "who's liable for what?"  It's sad, but true (sigh).  So here are some initial thoughts on legal liability:

The Hacker

There are a lot of people who were harmed here, but we can make things simple by classifying them into two categories: Blizzard and other players.  As to Blizzard, they could pursue a number of causes of action against the Hacker.  For example, trespass to chattels (an archaic legal name for "you improperly took my stuff, or otherwise deprived me of it") could exist.  So too could a copyright cause of action depending on how the exploit occurred (consider the glider case - MDY v. Blizzard - and whether this would rise to the level of a precondition to the license agreement [pdf]).  Other causes of action may similarly apply, depending on facts like the nature of the exploit, the location of the Hacker, the systems used to take advantage of the exploit, etc.  After all,

As to other players, however, this is a more complex question than you might think.  After all, WoW is a game where players can and often do kill each other.  So we would have to separate the killings from those inside a no-PvP zone, and those outside.  For those inside, causes of action against the Hacker may be available because no one would expect to be killed in a no-PvP zone.  However, you have to ask whether it would be worth anyone bringing a claim for loss of virtual property triggered by a WoW death for several reasons.  First, players may not even own the lost property depending on what was lost and the applicable EULAs/Terms and Conditions.  Second, what is the value of that property?  If it is something Blizzard could restore at the touch of a button, perhaps there is little to no value to the lost items.  Third, what if the player whose character was attached had no right to certain lost items in the first place (e.g., purchased through illegal online auctions, stolen etc.).  For these reasons, it would be difficult to value what may have been lost, thereby reducing the incentive for someone to sue the Hacker.

For the killings in a PvP zone, there might not be any cause of action available for players to sue the Hacker in the first place.  After all, they were in a PvP zone, and thanks to a legal doctrine known as assumption of the risk, that might be the end of the case.  Assumption of the risk states, in its most basic form, that if I engage in an activity I know to be dangerous, I cannot sue for damages if I'm hurt by the activity.  Consider jumping off a high dive into a pool with no water - I know there's a chance (a really good one) that I'll be hurt badly.  So if I jump and get hurt, I can't sue - I "assumed the risk" inherent in the activity.  Same goes for being in a PvP zone.   Of course, that's not to say someone won't come up with some creative legal theory, but making it stick will be difficult in this circumstances.

Blizzard

Could players sue Blizzard because it did not catch and fix the exploit prior to the Hacker's massacre?  Perhaps, but this will depend entirely on the facts.  If Blizzard knew of the exploit but did nothing about it, that could form the basis of a negligence case.  But if Blizzard was caught entirely by surprise by the existence of the exploit, a negligence case could be difficult to prove.  Moreover, Blizzard appears to have acted quickly in hotpatching WoW so that the exploit could no longer be used, meaning that a claim of ongoing negligence would be difficult to win. 

Besides, Blizzard's EULA states that the software is provided "as is."  This gives Blizzard another defense should a player whose character was killed by the Hacker try to pursue a legal claim against Blizzard.

Take-Away Points

What from the game dev/publisher side can be learned by this experience?  A few thoughts:

1. People will always find some way to take advantage of your game - expect it and have a plan to deal with it.
    
2. Put that plan on paper before you need it.  I don't know whether Blizzard did this, but given the speed with which everything happened, it would not surprise me if they did.  Having a plan in place prior to needing it is a "good fact" that can help reduce claims of negligence down the road.
   
   Also, don't create a plan then lock it in a box.  Review it regularly, and revise as necessary to keep up with new threats and technologies.  A plan dealing with a computer crisis circa 1992 isn't a good plan for 2012.
    
3. Take action to stem the damage being done as soon as you reasonably can, regardless of whether that damage is legally cognizable or not.  Be careful not to act too soon, however.  Never act just for the sake of doing something quickly - do your research and act responsibly, just do it as quickly as you can.
    
4. Review your EULAs and Terms and Conditions documents.  If you don't know what precondition language I referred to in the above sections, read the links, then drop me a line.  It is something you definitely want to look into.

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I, like many gamers, thoroughly enjoyed the “Kevin Butler, VP” ads Sony ran over the last year or so. Here’s a compilation of some of the best (my favorite is the second):

So I, like many people (including our friends at [a]List) were a bit puzzled by "Kevin" showing up in a Bridgestone commercial. And particularly puzzled by the fact that he appears to be excited about the Wii:

For those of you didn’t watch the clips, "Kevin Butler" isn’t a VP of anything. He isn’t even real. He’s a character that is played by an actor named Jerry Lambert.  So if "Kevin Butler" is a fictional character, who controls whether Kevin appears in ads for Sony, Bridgestone, or anyone else?

The short answer either the owner of the character, if the character is properly protected at law, or no one. 

Figuring out who owns a fictional character can be difficult because the general rule of "the creator is the owner" doesn't always apply to fictional characters, especially those created for advertising purposes.  Advertising agencies often create on a "work for hire" basis, meaning that the entity that created the character may or may not own the character.  

Once you figure out who owns the character, you have to figure out whether the character is protectable.  Fictional characters are protected under copyright law only if they are properly the subject of copyright law.  Most characters are ideas, and you should recall that copyright law protects expression, not ideas.   At what point is a character "expression" as opposed to an idea?  Or, put another way, is a story about an aging boxer from Philadelphia an idea, or is Rocky a characte protected by copyright law.

Determining when a character is "properly the subject of copyright law" is a job only a lawyer could love.  There are varying tests, facts that need to be shown, etc.  If you have questions about the specifics, feel free to drop me an e-mail.

Even if a character isn't protected by copyright law, it could be protected by trademark law.  Consider this: Mickey Mouse is a trademark for Disney's goods and services.

Bottom line: determining if a fictional character is protected by law is a headache.  Why does this matter?  Because ownership of fictional characters means the right to control how they are used.  After all, one could imagine that Sony would not be too thrilled about its character appearing excited about a competitor's product (though perhaps they don't care and have moved on to new advertising campaign ideas). 

So, let's say you are creating characters that you want to protect.  What can you do to ensure that your character isn't used for the benefit of a competitor:

1. Consider how much you've put into your character.  Is your character a mere archetype , or is there something more - a backstory, an identifiable but uncommon persona, catchphrases, etc.?  None of these by themselves will necessarily grant your character copyright protection, but they help (regardless of whether the legal test is the "sufficient delineation" test, the "story being told" test, or some hybrid of the two).
   
   Remember, not all characters are deserving of legal protections, and so it may not be worth it to put your time and energy into building up every character in this manner.
    
2. Audit your ad agency agreements.  Who owns the ideas that your ad agency brings to you?  Who owns the physical execution of those ideas?  Only way to know for certain is to do an audit, and make corrections where there are gaps or inappropriate transfers of rights.
    
3. Consider whether your character can function as a trademark.  Trademarks are different from copyrights in that trademarks protect identifiers of the source or origin of goods and services.  Perhaps your character should be treated like Cap'n Crunch instead of Rocky.
   
   Trademarks don't expire so long as you use them appropriately, but be careful when trying to claim expressive content as a trademark.  You can run into problems doing this (based on a Supreme Court case called Dastar which, among other things, held that one cannot use trademark law to do an end-run around the time limits of copyright law - that's an over-simplified statement of the law, and I strongly encourage you to speak with a tech-saavy lawyer about Dastar's implications if you have any questions about this).
   
   The better approach is to consider the purpose of your character up front, and decide what form of protection is appropriate (if any).

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At the outset, let me say that I recognize this question is a bit silly.  Actually, it's more than a bit.  But that's okay because sometimes silly questions can help identify areas where the law has spun into an Alice-in-Wonderland like place.  At least, that's what I tell myself as I'm writing this post.

The question raised by this post - can competitive video game playing be a collegiate sport - comes from an amalgamation of two separate news items.  First, the announcement that Riot Games is getting serious about eSports.  Second, the most recent court decision finding that competitive cheerleading is an "activity," not a "sport."  (You can read the full decision here). 

With these news stories in mind, where does video gaming fall?  Can it have professional, head-to-head competitions but still not be a "sport?"

To answer this question, we first need to agree on a definition of "sports."  In common parlance, "sports" are defined differently, depending upon who you ask.  Dictionary.com, for example, defines sports in several ways:

1. An athletic activity requiring skill or physical prowess and often of a competitive nature, as racing, baseball, tennis, golf, bowling, wrestling, boxing, hunting, fishing, etc.;
2. A particular form of this, especially in the out of doors; or 
3. A diversion; recreation; pleasant pastime. 

Mirriam Webster's online dictionary defines "sports" slighly, oddly differently:

1. A source of diversion; recreation;
2. Sexual play;
3. (a) Physical activity engaged in for pleasure; or (b) a particular activity (as an athletic game) so engaged in.

Note to the editors of M-W.com: not even Urban Dictionary includes "sexual play" in its definition of "sports."  You may want to think about revising your definition.

Based on the above, it seems fairly clear that there is a generally-understood definition of "sports," and it has to d with recreational activities that involve some athletic or physical skill or prowess.  In my book, that would include quick reactions and reflexes, mental toughness, and strategic decision-making. 

Under such a definition, could competitive video game playing be a sport?  It certainly is a "recreational activity" and quick reflexes and strategic decision-making are necessary components of a good gamer.  But I think we would all have trouble with the "athletic" part of the definition.  While on-screen characters are being athletic - jumping, running, scoring goals, killing orcs, etc., the gamers themselves are likely sitting down, and I don't know of a sport that allows the player to sit down the entire time.  Perhaps if we put gamers on treadmills and tied their power supply to the machines, that would solve the problem (probably more than one problem, actually, but that's beside the point).

So, competitive video game playing as a "sport" - under common parlance - seems unlikely.  It is tough to be a competitive game player? Certainly.  Can game players be professional?  Yes.  Are they playing a sport?  Probably not.

But as we said above, the law doesn't always see things the same way as the general public.  In the eyes of the law - particularly Title IX, the federal law that bars discrimination on the basis of sex in collegiate sports - there is no definitive definition of a "sport."  Instead, the government agency responsible for administering Title IX (the Department of Education's Office of Civil Rights) will consider several factors related to an activity’s structure, administration, team preparation and competition.

The link provides an extensive, though non-exhaustive, list of factors that are considered when determining whether an activity is a sport, but suffice it to say, cheerleading didn't qualify.  Why?  A couple of reasons:

1. The NCAA doesn't recognize cheerleading as a sport (or even an emerging sport);
    
2. Colleges don't recruit cheerleaders like they do other sports players;
    
3. There are no uniform rules that govern cheerleading competitions;
    
4. There are no ranking/seeding of teams; and
    
5. There is no uniform "post season" for cheerleading (defined as a progressive playoff system ending in a championship game).

Ed. Note: Reasonable arguments could be made that the above criteria do not adequately define what is not a "sport."  For example, if criteria #5 were dispositive, then college football wouldn't be a "sport" because of its lack of a progressive playoff system ending in a championship game.  Thankfully such a playoff system is being instituted for college football in 2014, but I don't know of anyone who would argue football was not a sport in 2012 because it didn't have a progressive playoff system. 

What strikes me about those criteria is that they speak more to administrative issues than the nature of the activity itself.  Common rules, recruiting, and ranking of teams are administrative questions. If that's the case - that a "sport" is defined more by administrative efforts than the nature of the activity - then it is entirely possible that competitive video game playing can be a "sport" for Title IX purposes.  Schools can build conferences and put together teams.  Both sexes can be on these teams (either single sex teams or co-ed).  Schools can then recruit gamers like other athletes, give the teams operating budgets with which to train, travel, and compete, and ultimately host competitions.  In fact, the competitive and rule-making aspects of competitive video game playing might be easier to establish than cheerleading because in a head-to-head video game, there are rules that determine winners and losers.  Did you score more points?  Did you vanquish your opponent?  Rules set, winner determined. 

So, competitive video game playing as a "sport" for Title IX purpose may be possible. If schools want a video game team to be a "sport," they could pull together the administrative requirements and see what the Department of Education may say.  I'd bet that the DOE would still have an issue with the "athletic" (or non-athletic) nature of video gaming, but if that happens, then perhaps this will help spur the DOE and/or the NCAA to recognize that administrative factors are not necessarily an appropriate way to define what is not a "sport."  Either that, or I'm going to reapply to college and try to get a video game scholarship.

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Though not all advertisers are aware of it, advertising agencies sometimes receive incentives or rebates from media companies for steering clients in the direction of that particular media outlet?  That is, the people you pay to help you promote your products and services may be paid by the people who are recommended to you as sound media partners.  Potentially problematic conflict of interest?  You betcha.

The practice is less common in the US than in other jurisdictions, but it does happen, as revealed in a recent survey conducted by the Association of National Advertisers and Reed Smith (the firm of yours truly).  The survey found the practice most likely in radio and tv advertising, though still a factor in new media advertising (Internet, social media, etc.).

Why is this an issue?  Because companies that advertise their products or services (in other words, everyone) should expect impartial advice from the people they pay to help promote their products and services.   Or at the very least know when there is a potential conflict and so can assess the agency's recommendations more accurately.  Moreover, for companies with large-scale ad budgets and/or lots of bargaining power, this could mean a reduction in your overall expenditures if you are able to get a pass-through on rebates or incentives.

So what should games companies do about this issue?  Understand how the "dollar flow" goes with regard to their ad spends, and make sure that knowledge is reflected in your assessments of ad agency agreements and recommendations.  Here are some "best practice" tips from to help with this:

• Require your ad agencies to be completely transparent regarding any rebates / incentives offered and received, and make sure that the entire benefit of the rebate goes to you, the advertiser (or if you're willing to give some portion of it to the agency, but either way, state how much you get).
   
• Clearly specify how rebates will be handled.  Do they come back to you within 30 days?  Can they be put into the account as a credit against outstanding fees?  If you don't say, there's the potential for the agency to sit on the rebates for a while, making this an interest free loan to the agency (assuming you get it back at all).
   
• In the case of "global" advertising arrangements, make sure that this language is reflected in both the agency and holding company levels so that leave no stone unturned.
   
• Consider conducting periodic audits to ensure that unauthorized incentives / rebate activity is not occurring.

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Right of publicity issues have been making waves left and right in the games industry for a couple of years now.  There was the Justin Bieber/Joustin Beaver flap.  No Doubt's publicity suit against Activision goes to the jury.  Take Two was sued by a man claiming to be the real life inspiration for the main character in GTA: San Andreas.  And of course the NCAA sports-related publicity lawsuits (of which there are many).

Rights of publicity are one of those things that causes games companies agita (translation for our non-Brooklyn readers: a combination of anxiety, agitation, and heartburn).  The reasons for this are varied: publicity rights are state-created, and so there is a lack of uniformity in their application; video games are speech and entertainment, meaning that it is often unlcear whether a particular use of someone's image is "commercial" or not; etc.  While obtaining permissions for a particular use is always safe, the reality is that a lot of times permissions are not a realistic solution. For example, consider a games company that attends a major industry event (a la E3), and wants to take pictures of event attendees who stop by the games company's booth.  Can the company place the images it took on its website?  What about its annual report?  Or what about a company that wants to use an image as part of a game to comment upon/make fun of social or political issues (e.g., the Hackman games from a few years ago)?  Would permissions be readily given in either of these contexts?

As a result of the challenges involved in obtaining specific permissions, many games companies have wondered whether there is an implied right to use a person's name or likeness.  In most situations, there is no such implied right.  However, thanks to a (fairly) recent decision in California, there are some circumstances where you can imply a right to use another's image or likeness.

The case was brought by Shirley Jones (of the Partridge Family fame) over photographs taken of her while she attended a red carpet event.  The photographs were taken by professional photographers and wire services in attendance at the event, then licensed to a company called Corbis.  Corbis then licenses the photographs to others.

Jones sued Corbis for violations of her right of publicity (which, in California, is codified as Cal. Civ. Code 3344).  The judge ruled in favor of Corbis on the grounds that Jones had granted implied rights to use her image and likeness.  The implied right arose because:

• Jones chose to walk down the red carpet where she knew photographs were being taken (she even posed for some); and
   
• There was recognition of the long-standing practice in the entertainment and photography industries to take photographs on red carpets which would then be sold and reused by companies like Corbis.

As a result, the court found Jones had impliedly given to the news services and photographs a right to use her name/likeness, including a right to sublicense those rights to Corbis.

Does this mean there is an implied right to use someone's name or likeness in all situations?  Not exactly.  First, this is a California-specific case, so it may not be adopted elsewhere.  Second, it relies on very specific facts regarding what Jones knew about the industry and the taking of the photographs.  Without those pieces, there would not likely have been any implied right. 

That does not mean that the case is not worth consideration by games companies, however.  This case does clarify a few things for companies who hope to take advantage of an implied right to use another's image or likeness.  Here are some thingsyou can do to put itself in a place similar to that of Corbis:

1. Understand the background practices, norms, and customs of events you stage and attend.  Are there photograph areas?  Are photographs typically taken?  What happens to these photographs after they're taken?
    
2. Know what you say about privacy and publicity rights.  Often companies will have general privacy policies that they haven't updated in months (or longer), and old privacy policies typically contain language like "we will not use anything about you without your express permission."  Having a statement like this will only undercut your ability to claim an implied right to use.
    
3. When in doubt, provide notice to people that you intend to take photographs/video and use their image.  This is not a "silver bullet" but it can help rebut an argument that a photograph's subject didn't know that photographs were being taken or that you intended to use those photographs in certain ways.
    
4. One strategy that is particularly effective is to hire a professional photograph to attend an event and have that photograph take "souvenir-style" photographs (the "hey, would you like a picture" type photographs).  The photographs then gives subjects a stub of some sort with the means to identify the photograph if the subject(s) would like a copy for themselves.  One the back of the stub, you can provide some information about your future use of the photographs, and give subjects the opportunity to have their photograph removed from the stock if they choose. 

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We've said it before.  We'll say it again.  Privacy, so hot right now.  Rarely does a week go by without privacy-related questions being on the forefront of our clients' minds.  For example:

• How is my business affected by the fact that some countries consider consumers to have natural right to privacy? 
   
• What rights must a company give a consumer with regard to their personal information?  How should a company go about protecting the rights of app and game users? 
   
• What should a company say about those protections? 
   
• What do I need to know about how my vendors are treating the privacy of my users, and what kinds of oversight do I need to have?

Privacy sits at a crossroads of both business and law, and it is something about which game and app companies are (and should be) concerned.  So it is with great interest that we're following the developments of NTIA's Privacy Multistakeholder Meetings, the first of which took place yesterday in Washington, DC.  The idea behind the meetings is to put together those parties who have a high level of interest in, and control over, how privacy issues are dealt with in the mobile app space.  The first meeting focused on transparency - telling consumers how you deal with their informational privacy.

Some stakeholders appear to be pleased with the outcome of the meeting, while others are not as positive.  Notably, several consumer-oriented stakeholders expressed feelings that transparency, while a good thing, is meaningless if without rule-oriented constraints.  At the other end of the spectrum, some voiced the opinion that the initiative is doomed to fail because it is being led by government, not by industry (though it appears that the government is doing what it can to avoid being the "parent in the room" for the moment).

So what should you, a games company, read from the tea leaves from this meeting, and from privacy-related action of various states?  Here's what we are are telling our clients:

1. Get involved.  These meetings are open to all stakeholders, and decisions are made by those who show up.  Privacy is not something that is going away, so the better part of valor is to dig in and meaningfully participate in the process.  That's the only way to ensure that your voice is heard and counted.
    
2. Review your current privacy practices.  Simply "having a policy, somewhere" is no longer sufficient, as government and consumer groups become more invested in privacy issues.  And as part of this process, consider whether your privacy policies can be, or should be, rewritten to reflect both technological change, transparency, and readability.  The example of the 21,000 word privacy policy for a mobile app is a striking example of how privacy policies could might be well-intentioned, yet still create potential liability.  How many screens does it take to read 21,000 words?  Depending on font, word choice, and spacing, it could be anywhere from 50 to 75 pages (that's 8.5" x 11" pages).  On a mobile screen... I'd estimate it to come out just this side of infinity.
    
3. Know what your responsibilities and obligations are, and see what you can learn from recent trends.  For example, what, if anything, can you learn from the recent California AG mobile app privacy settlement?
    
4. Don't be shy about asking for help.  Privacy issues can be complex, multilayered beasts, and even the most technologically-advanced companies can find themselves on the business end of a privacy inquiry.  It is never a bad time to initiate a privacy audit, which will help you understand: (a) what you're saying; (b) what you're doing; (c) how those things differ; and (d) how you can improve.  Ask any company that has recently had a privacy breach about whether it wishes it had done a privacy audit - even a light one - prior to the breach.

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Important legal news out of the EU (and no, "important legal news" is not a contradiction in terms).  The European Court of Justice has issued a decision in a case involving resale of digital goods.  Our colleagues in the EU have written an excellent piece that breaks down the decision, and they have this to say about the case:

In a landmark judgment delivered by its Grand Chamber on 3 July 2012 (Case C-128/11), the European Court of Justice (ECJ) has effectively declared the second-hand sale of physical copies and downloaded copies of software to be legal. The ECJ explains that the principle of exhaustion of the distribution right applies not only where the copyright holder markets copies of his software on a material medium (CD-ROM or DVD) but also where he distributes them by means of downloads from his website. This decision which markedly extends the scope of the principle of exhaustion beyond what has been the understanding to date has a potentially significant impact on the way software is sold and consumed.

The full article can be found here.  It is absolutely worth a careful reading, especially for games companies that do business (or will want to do business) in the EU.  So, in other words, its important for just about all games companies.

Now, some of you loyal blog readers may recall that one of the very first posts to this blog was about sales of "used" digital goods, and how game companies can structure their End User License Agreements (or "EULAs") to approve of or restrict secondhand sales (depending on what the desired end result is).  If you would like a more full treatment of US law regarding secondhand sales of digital goods, you could read End Runs (an article written by yours truly in the Los Angeles Lawyer magazine), but here are the broad strokes:

• What do you tell consumers about the transaction?  Do you call it a license?  Do you have a license agreement?  If you don't, the transaction is likely to be deemed a sale.
   
• If you have a license, do you:
  
  
  • Restrict the use of the digital goods in significant and material ways?
     
  • Restrict resales/secondary transfers by the user?
     
  • Have a tracking/monitoring system in place to guard against violations of the license?
     
• Even if you have a license, do you do (or not do) something that implies that you intend the transaction to be something other than a license?

As you can see, the inquiry about "exhaustion" does not appear in the US analysis of whether secondhand sales of digital goods are legal or not.  At least, it doesn't literally appear in the analysis, but the principle of "exhaustion" in the EU is closely aligned with the "first sale" doctrine in the US, which forms the underpinnings of the secondhand sale analysis. 

The "first sale" doctrine is an exception to copyright law's grant of exclusive rights whereby an owner of a valid copy of a work can resell that work to any third party without the original author's permission.  Imagine a hard copy book - if you own that book, you could legally sell it to your neighbor or a used bookstore, and not run afoul of copyright law.  A digital eBook version, however, is a different story, and that's where the above analysis comes into play.  The "license versus sale" analysis is used to determine if the eBook transaction is a "sale" (to which the first sale doctrine applies) or a "license" (to which the first sale doctrine is not applicable).  In short, the US and EU inquiries are not wholly unrelated.

Yet notwithstanding the similar theoretical underpinnings, it is the differences in approach between the US and EU that can have a significant impact on games companies doing business in both regions.  So, what should a games company think about in terms of the varying US and EU interpretations of "sale?"  Here are just a few thoughts off the top of my head:

• What exactly is the reason behind the need to control secondhand sales of a particular work?  Is the work of an ilk where it is important to craft appropriate licensing regimes, or can your interests be protected in other ways (e.g., spending more on innovation and new content rather than licensing enforcement).
   
• Taking the ECJ position that "perpetual" license grants are akin to sales could cause a games company to time-limiting a license in order to avoid exhaustion.  However, if you time-limit your license grant, you must have some system to track and enforce the limits (and evidence showing you actually do these things).  Failing to track and enforce the time limits may cause your license to be deemed a sale transaction in the US.
   
• Games companies that use a subscription model, as well as cloud gaming companies, may think that the ECJ decision does not apply to them as the license is granted in exchange for regular payments.  However, there are all sorts of digital goods that can be "sold" within the context of a subscription game.  Digital items, avatars, power-ups, plug-ins, etc. can all be sold (and therefore potentially resold) even if a subscription is required in order to access the item.  Thus, this decision is of import to games companies of all stripes.

As to how we are helping our clients move forward after this decision, I think our EU colleagues put it best when they said:

Creative lawyering should make it possible to find solutions which will enable the software industry to comply with the ECJ case law while maintaining its interests.

We will be giving careful thought to the best ways for our games clients to avoid unintended consequences stemming from international distribution of their works while still maintaining their interests.  We encourage all games companies to do the same. 

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One of the joys of being a lawyer is that you get paid to think about risk.  Well, not so much "think about" as "eat, sleep, and live" risk.  It's inherent in the job we do.  "Can I do X," says the client.  "Well," says the lawyer, "if you do, there is a risk that..."

And when this speech starts rolling, you can almost feel the business team's eyes rolling into the backs of their skulls.  It's not that the business doesn't care about risk.  Most business people, in my opinion, do care about risk.  They just don't value it the same as lawyers.  The "why" of this is not something I can speak to with any expertise, but I think one contributing factor is a mismatched perception of when a deal has been sufficiently finalized to control for risk.

Take, for example, a fairly typical license deal cycle.  An idea is generated, business people talk to business people, and a tentative arrangement (the "cocktail napkin" arrangement) is hammered out.  Then (hopefully) the legal team is brought into the loop, and sometimes is told something like "we need a term sheet today," or "a full agreement will kill this deal," or "if we don't get something -- anything -- in writing today, someone else will swoop in and take the deal."  So the legal team hammers out a short term sheet with some, but not all, pertinent language in it, and puts a little gem like this at the bottom:

The parties will use good faith efforts to execute a long-form agreement within X days of the effective date of this term sheet.  Until such time as the long-form agreement is executed, this term sheet will remain in effect.

On the one hand, you've got a signed agreement, so the business is happy.  They're excited to start work.  They might even start work on the assumption that any remaining details will be worked out at a later date.  After all, you've "papered the deal," right?

On the other hand, the lawyers know that the agreement you've signed is woefully insufficient at controlling a variety of foreseeable risks.  Not everything can be crammed into four or five pages, and risk mitigation for certain circumstances is often left out in favor of the more salient deal points like timing, money, etc.  And yet there is no obligation to do anything about it on their party - "good faith efforts" is not the same as "you will."

Thus, you've got a split in perception of risk control, and so long as the business thinks the deal's risks have been dealt with, their incentive to push through the long-form will be reduced.  Then attention gets directed elsewhere, and before you know it, you're at the end of the deal cycle and the long-form never got signed.

Fortunately, situation such as this sometimes blow up and stand as a cautionary tale for others to learn from.  Take this one for example: last week, a Swedish company called ProCloud Media Invest AB sued Paramount Pictures for backing out of a licensing arrangement for ProCloud to develop games based upon Paramount's entertainment properties. ProCloud's lawsuit claims that it paid Paramount Pictures $1 million and "fully performed" the dutuies of a "co-producer," but the studio shuttered its digital entertainment division before ProCloud could started producing the subject to the license.  Now, ProCloud is suing Paramount for $10 million.

Digging into the complaint a little bit, one learns that the parties executed a "deal memo" and an amendment to the deal memo, but never executed the full, long-form agreement.  The complaint further alleges that four weeks after executing the amendment, Paramount shut down the digital entertainment studio.

Out the outset of some (brief) analysis, let me be clear.  I HAVE NOT READ THE DEAL MEMO OR THE AMENDMENT.  I don't know what these documents say, nor am I expressing any opinion about what either party should or should not have done in this situation. Rather, having been in situations similar to this, I can tell you that termination provisions in deal memos do not tend to be overly extensive.  It would be a rare deal memo that contemplates a termination provision for a complete shuttering of the business line.  Meanwhile, a full license could (should) include well-crafted license termination conditions. 

So, as a lawyer for a video games company, or perhaps a business development team member who plays a bit of a legal role, how can you ensure that you get the protections of the long-form while facing the inertia of a business that just wants to move forward?  Here are some tips to consider:

1. If possible, set an expiration date on the deal memo.  If you set an expiration on the deal memo or, say, 60 days after signature, this puts a lot of incentive on all parties to come to the table and negotiate the long-form.  It is a much better way to ensure that a long-form gets done as opposed to the "gem" stock language from above.  Of course, this is not something that you can get into every deal, but can be a powerful tool when appropriate.
    
2. Tie specific provisions to long-form execution.  One of my favorites is tying the payment schedule to the long-form execution, as opposed to payment on execution of the deal memo.  Money gets everyone's attention, so even if you can't put a short expiration date into the deal memo, tying the long-form execution to the payment schedule is a way to build a similar incentive.
    
3. Make sure the long-form is in your queue.  All too often, the responsibility for ensuring execution of the long-form falls through the cracks because the business thinks legal is handling this, and legal thinks the business is driving it.  Take ownership of this up front, keep the business people in the loop on its progress.  This will show the business that you - legal - are taking this seriously, which can communicate more about risk control than any conversation you could have with them.  
    
4. Take the time to put license terminations into a deal memo.  Know that even if you follow the above tips, you may find yourself operating under a deal memo for an extended period of time.  Company cultures, industry norms, development schedule - all of these can give rise to a situation where is it not tenable to negotiate out a long-form.  In such situations, even basic "the license may be terminated at licensor's discretion in the event that..." provisions can be lifesavers.

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As I read about Rockstar's new strategy for dealing with players who use cheats and hacks in Max Payne 3's multiplayer mode to gain an unfair advantage, I think it's pretty genius.  The traditional options - account suspensions, bans, etc. - don't seem to be working.  They don't have much of a deterrent effect, as evidenced by the fact that hacks and exploits are continually developed for both older and new games.  Moreover, these options are typically "nuclear" in nature, and can backfire unless they are implemented very carefully.  You can't give back a player the days s/he's missed as a result of a suspension, and you may not be able to restore an account that's been banned or terminated.

So a new system needs to be created, and I like what I see of Rockstar's strategy.  I like it because the idea of putting "cheaters" into a pseudo virtual jail and letting them duke it out Hunger Games-style may ultimately create a deterrent against use of cheats and "unfair exploits."  After all, what's the point of using a hack to gain an unfair advantage if the only people you can compete against are using that same unfair advantage?  I also like it because it allows those people to continue to interact with your game, and hopefully continue to drive your bottom line.  In contrast, a permanently banned player cannot generate new revenue for you.

Note: I put "cheaters" and "unfair exploits" in quotes because not all exploit users should be considered cheaters.  Sometimes, people figure out a way to take advantage of the game environment that was not envisioned by the developers, yet is still entirely consistent with the game's reality.  Those people are not "cheaters" in my mind, even if that exploit does give them an unfair advantage over those who haven't figured it out.  At the same time, however, we can all agree that there are a lot of hacks, cheats, and exploits that should be - and usually are - considered "cheating."  So what we have here is a definitional problem, which we'll explore a a moment.

For all of the positives Rockstar's strategy has, backfiring problems are still a possibility.  The first person who is unfairly (or incorrectly) placed into the "Cheater's Pool" will be evidence of that.  (I can see the message board flame wars now).  Indeed, any anti-cheating system that has any form of punishment for players runs the risk of backfiring on the company that implements it.

But potential backfiring problems are not reasons to neglect an anti-cheating strategy altogether.  Instead, consider these tips to help you avoid backfiring issues with your anti-cheating strategy:

1. Define What "Cheating" Is With Clarity and Precision.  As stated above, not all uses of exploits should be considered cheating.  I recommend that my clients consider the question from an in-game perspective.  In an immersive game experience, what would the character-players think about the exploit?  Would it be a manifest "deus ex machina" situation that causes confusion and feelings of unfairness among other players, or would it cause other players to say "man, I wish I had thought of that, that's genius."  The former is clearly a problem; the latter, maybe not as much.
    
2. Make Sure Your Definition of "Cheating" Is Reflected in Your Terms of Service.  All too often, game companies do not take the time to document their intentions in ways that bind players.  Sure, your ToS may prohibit "cheating," but what really does that mean.  As discussed, "cheating" can be a vague, undefined concept.  While having a lack of clarity may be a benefit in certain situations, more often than not having greater clarity in your terms or "house rules" will put you in a decision to make reasonable decisions that you (and your players) can live with.
    
3. Do Your Own Investigations Before Taking Action.  This is especially important if, like Rockstar, you ask players to report examples of cheating.  It is not above some players to abuse the reporting system by submitting false reports of cheating by players they don't like, can't beat, etc.  Make sure you have your evidence before you take any action to punish a player.
    
4. Implement a Reasonable Appeals Process.  Sometimes, even strong factual evidence may be interpreted incorrectly.  Reasonable companies will give players subject to potential punishment an opportunity to plead their case, and will actually consider what the players say.  That does not mean you must wait on a response before taking any action, but make sure your system is fair to the person who is under investigation.
    
5. Give Players a Means of Redemption.  Games are meant to engage as many people as possible in a world that they can share with one another.  Thus, it doesn't make a whole lot of sense to brand a player and restrict how that player can interact with your game forever hereafter.  You don't have to make it easy; just make sure there is some means of redemption.  Otherwise, the player will be incentivized to move on to a new game - probably one of your competitor's - and you've just lost a player (and the associated revenue stream) for good.
    
6. Be Reasonable/Don't Be Arbitrary.  This is by far and away the most important thing to keep in mind.  The "be reasonable" mantra is reflected throughout this post, but the other side of that coin is "don't be arbitrary."  If an action is "cheating" for Person A, it should be "cheating" for Person B.  Moreover, the punishment for Persons A and B should be the same, regardless of outside factors.  Nothing undercuts the credibility of an anti-cheating system like arbitrary action.  To ensure you do not act in arbitrary ways, consider developing SOPs for responses to cheating.  Centralize responses in one team, as opposed to having a slap-dash "whoever is driving the console makes the decision" response system. 

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Those of us who watch legal developments in the video games and new media industries have been following the Xbox 360-related battle between Motorola (now owned by Google) and Microsoft for quite some time.  We at DevelopingConcerns been waiting for a resolution from the International Trade Commission before writing a post, so that we can provide our dear readers with those little nuggets of wisdom we've become (not all that) famous for (as opposed to our atrocious attempts at humor, which of course have subjected us to public ridicule the Internet over).  

Well, waiting until a final resolution isn't going to happen; we're writing this up midstream.  Why?  Because the recent involvement by Capitol Hill lawmakers, and potential impact of the ITC granting an exclusionary order (more on his later), make this a perfect time to jump in.

By way of background, the International Trade Commission is an independent governmental agency which conducts investigations and provides general trade research to both the executive and legislative branches of government. The ITC is responsible for, among other things, investigations under Section 337 of the Tariff Act of 1930 (19 U.S.C. § 1337), prohibits certain unfair practices in import trade, including the infringement of certain statutory intellectual property rights and other forms of unfair competition in import trade to be unlawful practices. A lot of Section 337 investigations involve allegations of patent or registered trademark infringement, although other forms of unfair competition (e.g., misappropriation of trade secrets, trade dress infringement, passing off, false advertising, and violations of the antitrust laws) may also be asserted.

The instant case - the Motorola v. Microsoft Xbox 360 case - focuses on patent infringement issues.  More specifically, it focuses on the use of so-called "standard essential patents" (or "SEPs") in Xbox 360s.  SEPs are those patents that are an integral and necessary part of an industry standard, and typically are shared amongst all players in a particular industry in order to ensure that all devices/technologies within that industry adhere to the applicable standard.  In exchange for contributing the SEP to the standard, the company holding the patent will be paid a license on reasonable and non-discriminatory (or "RAND") terms.  [Note: internationally, the term is often referred to as "FRAND," or "fair, reasonable, and non-discriminatory" - the two acronyms are basically interchangeable). 

In this case, the most important SEPs at issue are those covering the H.264 video compression standard, and the 802.11 WiFi standard.  Theoretically, if Motorola demanded RAND fees, and Microsoft paid them, then Microsoft would have the right to incorporate these SEPs into the Xbox 360, so as to ensure that the device plays nicely with everything else that makes use of these SEPs (wireless routers, Internet video playback, etc.).  And life would go on as normal.

Of course, that didn't happen.  The reason is because Motorola and Microsoft could not come to an agreement on the nature of RAND fees.  The potential reasons for the failure to agree are too numerous to speculate, so suffice it to say that the parties couldn't come to terms, and so an ITC complaint was filed and an investigation was launched. 

That was in 2010 (see 75 FR 80843 for the official announcement of the launch of the investigation).  A lot has occurred since then.  For a blow-by-blow recap, read through the excellent coverage that Florian Muller at FOSS PATENTS has put together - complaint, announcement of initial decision, and the release of initial decision.  Here's what you need to know:

• The Administrative Judge (the first hearing officer at the ITC) has found that through incorporation of the at-issue SEPs into the Xbox 360, and by not coming to terms on RAND licensing fees, Microsoft has infringed upon the patent rights of Motorola
   
• Motorola, however, has appeared to act in ways that are somewhat disingenuous, and contrary to the entire ideal of SEPs.  Specifically, Motorola did not seek "reasonable" licensing fees from Microsoft.
   
• Notwithstanding Motorola's actions, Microsoft did not prevail the equitable defenses, and so the Administrative Judge recommended an exclusion order (an import ban) on Xbox 360s (at least until the parties agree on licensing fees for the SEPs).

Read the full public version (which is redacted in part) of the initial decision (via Wired.com).  The judge has some very choice words for Motorola's conduct, and indeed suggest that Motorola never intended to grant RAND terms.  That's what's really interesting about this case: if a system is built upon all industry members agreeing to a particular standard, what happens when the holder of the patent related to that standard starts acting in ways that are not "reasonable" or "non-discriminatory?"

Fortunately for this blog, lawmakers from both sides of the aisle (or perhaps more accurately, from different parts of the country) are weighing in on this question, and both companies are seeing support from Congressmen for their respective positions.  Predictably, Microsoft is getting support from Washington's Congressional delegation, and Motorola is getting support from Illinois (former home of Motorola, before the Google acquisition).  The Congressmen and Congresswomen are casting the battle as one of public policy versus strong IP protection - of fair play and the American economy over rewarding those who spend time and money inventing new technologies.  Only time will tell which side - if either - is victorious.

In the meantime, does this mean that the Xbox will be banned from the US?  Certainly not in the short run.  Now that the Administrative Judge's initial decision has been rendered, the case will go to the six-member Commission, which can review, modify, overturn, or accept the initial decision.  The deadline for this is August 23rd.  After that, the Commission's decision will go the President, who has 60 days to decide whether to accept or overturn the decision.  Therefore, Xbox 360's won't be yanked from store shelves anytime soon.  In the long run, I'd say it's unlikely that Xboxs will be banned in the US because Motorola's conduct (as reported in the initial decision) suggests it never intended to grant Microsoft a license.  My personal feeling is that, at some point, public policy will come into play (perhaps at the ITC, or perhaps at the administration level), and Motorola's apparent unwillingness to negotiate RAND fees will come back to bite it.  The law may require a different answer, but my gut says that somehow, we'll find a solution to this issue that allows Xboxs to stay on the market. 

Of course, no gut feeling is ever 100% right, so we will keep watching this case (and so should you) as the eventual result could have significant ramifications throughout any industry that takes advantage of mutually agreed-upon standards.  If our legal system can be used to destroy the current status quo of standards-related industries, then either industry will need to come up with a new legal solution (escrowing the IP for blind distribution as determined by a neutral trustee?) or we will find ourselves back to the format wars.  The later is not the most efficient way to progress.  Ask anyone who bought into laser discs over DVDs, or HD-DVDs over Blu-rays, how great format wars are.

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Over the last few months, a lot has been written about kompu gacha.  Kompu gacha, or "complete gacha," is a virtual item sales strategy whereby users purchase a virtual item that is part of the set of multiple virtual items.  Once the entire set is collected, the user receives a significant prize.  The catch, though, is that the virtual item that the user gets for his/her purchase is selected at random from among all of the items in the set, and some of the items in the set are far more rare than others.

Here's a great graphic, courtesy of Tyler York's article on Gamasutra, that lays out how gacha works:

Think of it as a cross between buying a pack of baseball cards and the Golden Ticket promotion in Willy Wonka and the Chocolate Factory. 

For a time, kompu gacha was huge in Japan.  Some reports suggested that people (including children) were spending hundreds of thousands of yen a month playing gacha games (100,000 Yen is approximately $1,200 USD at today's exchange rates).  Then, the Japanese Consumer Affairs Agency gets involved. 

News of the agency's inquiry had dramatic effects upon Japan's social game companies.  Some companies took voluntary steps to limit gacha plays, but ultimately this wasn't enough to satisfy the agency's concern.  Ultimately, the agency issued a notice that, as of July 1, gacha games would be considered illegal.

But that's the law in Japan.  What about US law?  Would gacha games be subject to similar legal constraints here in the States?  And what about gacha-variant sales like the "mystery box" - how should US law frame this type of sales activity?

Thoughts on the legality of gacha, and some thoughts on ways that companies can implement blind virtual item sales, after the jump.

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Lots going on in the games industry recently, and with E3 on deck, the flurry isn't likely to slow down.  Here are some key developments in legal issues related to video gaming.  The highlights: an author learns that idea theft cases against games companies can be just as difficult as idea theft cases brought against movie and TV studios; the trades will be devoid of more juicy details from the Infinity Ward lawsuit; rights of publicity cases, now with a pending jury decision; and the future of unlockable content is at stake:

• Ubisoft seeks to stop the copyright infringement lawsuit brought against it by author John Beiswinger.  Earlier, Beiswinger opted to voluntary drop the suit without a settlement with Ubisoft.  Upset by this (and the need to defend itself in court), Ubisoft is now seeking a declaration that its Assassin's Creed games do not infringe Beiswinger's novel LINK, as well as costs and attorneys' fees.
   
• Activision has ended its contract row with former Infinity Ward heads Jason West and Vince Zampella, which comes on the heels of Activision and EA settling their related dispute.  This case is too important to deal with in brief, so a retrospective will be forthcoming (I can tell how excited you are at the prospect).
   
• EA will have to participate in the Bill Russell, conspiracy-related lawsuit the former basketball star has brought against the NCAA.  The crux of this case is EA's agreement to abide by the NCAA's prohibition on compensating student athletes.  This will be another one to watch closely, as it could affect just about every form of video gaming that involves collegiate sports.
   
• No Doubt's publicity lawsuit against Activision for inappropriate use of the band's image/likeness in Band Hero will go the jury.  Look for this case to become a foundation upon which future use of avatars and unlockable content will be based.
   
• Epic wins $4.45 million in Silicon Knights countersuit.  You may recall that the suit began when Silicon Knights sued Epic for $50+ million based on claims that Epic's Unreal Engine didn't live up to the promises made by Epic (thereby forcing Silicon Knights to build a new engine from scratch).  Epic countersues, claiming that Silicon Knights may have infringed upon Unreal Engine code in building the new "from scratch" engine.  Now, Epic wins... epically.  How's that for a reversal of fortune?  Lesson here: resorting to a lawsuit may not always be the best way to resolve your differences.  You could end up owing the company you're suing, which just adds insult to injury.
   
• Social game maker Blingville LLC has agreed to not use the -ville suffix in its games, thereby resolving a trademark dispute with Zynga. 

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Over the weekend, some criticism has hit the web regarding 2K Sport's $1 Million Perfect Game Challenge.  For those unfamiliar with the challenge and the current issue, here's a quick recap.

• 2K Sports has offered a contest for players of MLB 2K12 to see who can pitch a perfect game.  For the non-sports fans out there, a perfect game is when a pitcher throws 27 (or more, as needed) straight outs.  The opposing team cannot touch base - no hits, walks, or hit batsmen.
   
• The first 8 people to throw a perfect game in MLB 2K12 will be invited to New York City to compete in a tournament.  The winner of that tournament will win $1 million.
   
• Some participants figured out a way to make it a whole lot more likely that they would pitch a perfect game by substituting the regular players on the opposing team for worse players off the bench.  Imagine how much easier it would be to throw a perfect game if you didn't have to face A-Rod, Prince Fielder, or Matt Kemp, but instead faced 9 AAA-level players who collectively have a batting average below the Mendoza Line. 
   
• Articles on Kotaku suggest that at least one of the 8 finalists chosen to compete in the perfect game tournament used this exploit to secure the tournament spot.  2K Sport's reaction has thus far been to say that the contest was run properly.
   
• There is nothing in the official rules of the Challenge that specifically prohibits activity like the exploit, but that's not to say 2K has been silent on the issue.  The 2K Sports challenge page itself says:

You may not make any substitutions or lineup changes prior to the game starting. You must use the pitcher and batting lineup that is set to start the game for that particular day.

Uh oh.  What do you get when you combine actions by the finalists that violates the spirit of the challenge (if not constituting actual cheating) with conflicting statements by the contest sponsor?  A situation only a lawyer could love. 

Thoughts on potential liability arising from this situation, and how the issue could have been avoided, after the jump.

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