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

Supporters of censorship in video games often talk about the “slippery slope” of what MIGHT happen without regulation and oversight. 

In the case of Schwarzenegger v. EMA/Entertainment Software Association,the State of California makes the case that protecting its citizens against violent video games is a core public policy concern.

But I have not seen much analysis regarding the opposite slippery slope. 

Let’s put aside the 1^st Amendment issues for the moment (that’s really a posting all to its own). Have we given enough thought about the business impact of this law if it is ruled to be constitutional by the U.S. Supreme Court?

• First and foremost, let’s start with the clear fact that there will be less “M”-rated video games. It’s unlikely that all of these “M” titles will be replaced with lesser-rated titles (although some presumably would).    Content will be driven towards “clear” categories of “acceptable” content. 
• According to the Entertainment Software Association (“ESA”), in 2009, over 120,000 people in the United States are employed in a job which depends on game software. Odds are that if you’re reading this post, you or someone you know make a living due to this vibrant industry.  It is not a significant leap to presume that less titles will have a direct correlation to less jobs creating those titles. Admittedly, exactly how many people might lose their jobs is impossible to say, but it surely will have a large negative impact. 
• In addition, many creative minds in the games business may take that creativity to other, less regulated mediums, further reducing the number of games created.
• I would expect that original titles will be the first to be affected. Publishers will not want to take a chance that an unproven commodity might ultimately be deemed too violent and criminal.
• Independent developers will suffer the most. Publishers will likely put the responsibility on the development community to create “legally” acceptable content. This risk may prove to be too much to bear on that segment of the industry, forcing more development projects away from the independent studios.

The likely result of this vague and overly subjective legislation would be that most games would be non-innovative and contain un-original content. Much of it will be developed by publishers that face significant legal exposure if they were to create “offensive” content. Accordingly, their incentive will be to avoid pushing the envelope.

As retail sales necessarily suffer from the lack of available “hard-core” games, consumers will likely find the more violent games via the internet…at least in the short-term. Logically, the next step will be similar regulation of the internet (the draft legislation only applies to “retail” sales or rental of violent games). 

Obviously, the exact financial impact is virtually impossible to estimate thoroughly, but it’s conceivable that it will be in the BILLIONS of dollars, considering the fact that the video game software and hardware industry generates revenues in excess of $20 billion per year. 

I don’t believe that Governor Schwarzenegger fully considered this economic impact when he assessed his purported policy concern.

If he did, he would have recognized that over 50,000 California citizens are employed in the game/software business. 

I would expect that the State of California to view this industry as a model for growth in a challenging environment. Instead, some look to stifle it.

There are a host of reasons to support the ESA’s position against censorship. Upholding freedom of speech is a worthy reason all on its own.

In addition, the direct economic interest needs to be considered relative to the tenuous and flawed public policy concern espoused by the censorship proponents. 

The slope is too slippery to anyone’s livelihood that depends on the video game industry. 

Please show your support for the Entertainment Software Association’s fight against censorship. 

The Supreme Court will hear oral arguments on November 2, 2010. 

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A few years ago, one of my clients elected to outsource a PlayStation3 “port” of its current hit game rather than allow its existing publisher to commission it directly. 

The client thought it could manage the project directly. 

Unfortunately, the sub-contractor that was chosen was unable to deliver, putting my client in breach with its publisher. Ultimately, we were able to resolve the situation amicably, but at significant loss to all involved. It wasn’t that the idea of outsourcing the project was inherently flawed. The outsourcing partner was simply not the best team for the job. 

Managing the partner as well as the resulting legal bills and internal distraction from the sub-contractor’s non-performance ultimately killed the port and its potential revenue stream. 

This was a true missed opportunity for all involved, including the eager consumer base that was anticipating the project. 

Despite this particular horror story, outsourcing is often the right solution from a financial and operational point of view. 

However, choosing the right outsourcing partner is a vital consideration at the outset.  

Outsourcing portions of game development is commonly accepted practice.    Virtually all of our games clients engage in outsourcing on some level. But the panacea of pushing the “outsource button” needs to be carefully balanced against the potential pitfalls.

The cost efficiencies of outsourcing are clearly the driving factor for these partnerships. 

However, many times the true COST of outsourcing is not properly factored in.   

Be sure the following considerations are made:

• Internal costs for the proper level of oversight and direction of your outsourcing partner. And
• Potential correction costs or production overruns when your partner doesn’t get it right.   
• Incremental overhead, administrative, insurance and legal costs that may further offset the base savings.

Working with a bad partner often places your own company at risk. Ultimately, your project will suffer. 

Non-performing outsourcing partners may put you in breach of other contracts or obligations, forcing remedial measures out of your own pocket or worse, potential legal exposure.

In most cases, these costs and the risk of legal exposure are still significantly outweighed by the benefits of outsourcing.

To avoid the pitfalls and worst case scenarios that can occur, you need to plan ahead for thorough protections and internal safeguards as well as a sound agreements governing the transaction(s) which will put you in the best position for a successful partnership. 

Get recommendations and shop around for your potential partners. It’s a small and honest industry. People will gladly share their perspectives.   

There is no contractual safeguard that will be more valuable than choosing the right partner. 

In addition, structure your deal according to your corresponding obligations.   Be sure that milestone schedules match up to your own requirements and expectations for the project.   This is equally important whether you have a publisher you are answering to or even if you’re just trying to keep the title on time and on budget. 

Assume that you will have to micro-manage out of the gate. Until you get a sense of your level of cooperation and reliability of your outsourcing partner, expect to spend a lot of time setting your expectations. 

The surest recipe for disaster is to simply assume that once the outsourcing partner is on the job, you can wash your hands of that portion of the development.   It’s possible that you chose a terrific, efficient and responsible team, but you just can’t be sure yet. Let them earn that trust at the start. 

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If you are interested in video games and the law, then you have probably heard of the recent decision from the Ninth Circuit Court of Appeals in Vernor v. Autodesk.  This was a case about software, and whether software is "bought" or "licensed" for the purposes of the Copyright Act.  Many people have written excellent recaps of the case, so we won't repeat it here.  But if you're interested, see here, here, here, and read the full decision here.

The upshot of the case is that a software user is a licensee, not an owner of a copy, where the copyright owner:

1. Specified that the user is granted a license;
2. Significantly restricted the user's ability to transfer the software; and
3. Imposed notable use restrictions.

To see whether Autodesk met those requirements, the court looked to Autodesk's Software License Agreement ("SLA").  For those who won't read Autodesk's SLA or the full court decision, Autodesk met those requirements.

What does this mean for video games?  For gamers, it may mean that you cannot sell or purchase used games if the game company has properly created a license instead of a sale.  How does a game company create one or the other?  Through the video game equivalent of an SLA - an End User License Agreement (or "EULA").  So for game companies, the Vernor decision requires not only an assessment of whether a license or a sale is intended, but also an examination of the EULA to make sure that the document creates the sale or license (as may be appropriate).

Unfortunately, it is not at all uncommon for EULAs to be "adapted" from one game to the next.  However, a EULA written in 2008 may not be sufficiently clear to comply with the requirements of Vernor.  So this raises the following question for game companies: do your EULAs create the transaction you think they do?

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