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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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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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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As it's Friday, it must be time for a Quick Hits/Courtroom Roundup recap post.  So without further ado:

• Anheuser Busch must share the "Budweiser" mark with Czech brewery Budějovický Budvar, at least in the EU.  You have to be impressed that I got all that punctuation in there (no idea if it's correct, but it's in there).
   
• The "sharing is caring" attitude in the EU continues.  Use of trademarks as keywords is "likely" okay so long as the use does not "jeopardize" the mark's reputation.
   
• GoPets Ltd. can't assert an interest in gopets.com because the company didn't exist when the domain was first registered. Thus, only the initial registration of a Web domain counts as a “registration” under anti-cybersquatting law.  Read the full decision here (PDF).
   
• State-based right of publicity laws preempted by federal COPPA law when use of a child's image and likeness is without parental consent?  According to one California judge, it might.  Not sure I completely understand the reasoning.  You can read the complaint here (order granting motion to dismiss not yet available).
   
• Bethesda denied a restraining order in the long-running lawsuit over a Fallout MMO.
   
• FCC finalizes its Net Neutrality rules (if they can really be called "net neutrality," that is).  Effective date: November 20, 2011.

Enjoy the weekend.

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No, this is not a fan fiction post that should appear on the "adult" oriented Craigslist pages.  It's a story about corporate decision-making power, and control over corporate direction.  I swear, it's not as boring as it sounds.

Apparently, some investors are upset with Nintendo for not putting its marquee franchises - Mario Bros., Legend of Zelda, etc. - on the iOS platform.  These investors believe that Nintendo's strategy of only developing games for its hardware platforms is a losing one, and that Nintendo should "scrap that strategy to avoid further alienating investors who have driven the stock to six-year lows."  Harsh words, but Nintendo chief Satoru Iwata is not backing down.  He's (for the time being) sticking with Nintendo's long-held vision of game development.

So what happens when a company's investors are unhappy with the direction of the company?  Do investors have the power to change the company's direction?  Technically, yes.  Practically speaking, there may be some challenges to doing so.  Let's briefly explore two of those ways: proxy fights and shareholder derivative lawsuits

Ed. Note: this is not meant to be a full exploration of these two strategies, as these are highly complex bodies of law; rather, as a video game blawg, we'll stick to what our readers will find of most interest - the impact on the games industry.

First, the investors could launch a proxy fight, which is a fancy way of saying "we're going to replace enough directors to take control of the board, which will then fire the current senior management and install new managers from receptive to our point of view."  This is a strategy sometimes employed by investor Carl Icahn, which some notable success.  Of course, proxy fights can be (very) expensive, time-consuming, and not at all guaranteed to work.

Second, the investors could file a shareholder derivative suit against the company.  Again, this is a fancy legal way of saying "we're suing the company because it screwed up and as a result we, the investors, lost money."  The lawsuit attempts to recover some of that money, which is paid to the investors (with a good chunk of that often going to the attorneys representing the plaintiff investors).  This can be a "cut off your nose to spite your face" solution because at the end of the day, the money all comes from the same place (the company).  However, it can get your point across to senior management.

So, what does this mean for Nintendo?  Leaving aside the question of proxy fights (which are fickle things, and the indicators of such a fight looming aren't quite there right now), I don't think that a shareholder derivative suit is in the works.  Based on what we currently know, a lawsuit based on this would have to contend that Nintendo's choice of abstaining from the iOS platform was somehow unsound under corporate law.  But this type of decision - to tap into a particular platform or not - is a business judgment.  In the context of corporate law, these types of business judgments do not generally give rise to derivative lawsuits unless the judgment involves fraud, illegality, a conflict of interest, or a clear dereliction of managerial responsibilities. 

This rule - aptly named the Business Judgment Rule - is articluted in any number of cases, but one in particular strikes me as being very similar: Shlensky v. Wrigley (PDF).  In 1968, the Chicago Cubs were sued by shareholders of the Wrigley Corporation because the Cubs refused to play baseball games at night.  The shareholders argued that if the Cubs installed lights and played night games, more people would come, which would mean more revenue from ticket sales, concessions, etc.  By failing to take these measures to maximize potential corporate profit, the shareholders felt that the corporation had been mismanaged.

Ultimately, the Cubs won the lawsuit because management's decision not to schedule night games involved no fraud, illegality, or conflict of interest, and they articulated reasons why the decision was not complete mismanagement. 

Here, the facts (as we currently understand them) are very similar.  Nintendo has long held to the belief that it develops games for its hardware, not for everyone else's.  This strategy is in place to benefit the company's hardware sales because having exclusive titles can work out well for platforms (I know a few people who bought an Xbox 360 because they wanted to Halo).  Thus, unless some "bad fact" comes up (fraud, illegality, etc.), I don't expect the decision to abstain from the iOS platform as being deemed mismanagement sufficient to overcome the business judgment rule.

What does this mean for companies other than Nintendo?  Here's my two cents: when making strategic decisions that impact business opportunities (exclusivity, abstention from a particular platform, long-term partnering, etc.), make sure you have some legitimate business reasons as to why that decision is, in your opinion, a good one.  Do not, under any circumstances, go with reasons like "because this was my cousin's company," or "because they paid me a finder's fee."  Having solid, legitimate reasons as to why the company you manage will benefit from your decision. 

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What do an app game about illegal immigration and a downloadable FPS have in common?  They are both games that were made to get people talking.  They also look to the legal grey area of parody/satire to avoid potential legal issues.  Which brings us to the topic of today's post - where does parody and/or satire (yes, they are separate, though related, concepts) come into play in the games context, and why is this useful.  But first, a bit of background.

For those of you who have not heard of the Smuggle Truck app controversy, here's the basic gist.  A game, distributed on the Kongregate network, asks players to smuggle immigrants across a "fictional border."   So perhaps one may think that a possible message of the game is that illegal immigration is okay. But as the Smuggle Truck story page explains, the game "...was inspired by the frustration our friends have experienced in trying to immigrate to the United States.  With such a troublesome issue being largely avoided in popular media, especially video games, we felt the best way to criticize it was with an interactive satire."  So the game, according to its makers, is not all that it purports to be.

Similarly, a few weeks ago the makers of Bulletstorm (which itself is no stranger to controversy) released a downloadable FPS called "Duty Calls."  Clearly, Duty Calls was intended as a swipe at Activision's Call of Duty franchise - it even says so on the bottom of the webpage - "Duty Calls is a parody. It is not associated with Activision or the Call of Duty games."

One game as "satire," the other as "parody."  What do these game devs gain by self-identifying as parody or satire?  If there are legal ramifications for calling one's game a parody or satire, is that self-identification all that's required?  Thoughts after the jump.

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This post was written by Marc Kaufman and Gerard Dovonan, members of Reed Smith's patent team.

Combine the rising prominence of video games as both an entertainment and expressive media with and the emerging popularity of cloud computing, and it makes sense that cloud-based gaming has become a very popular concept.  Cloud-based gaming allows users to directly stream and play video games over an Internet connection.  As opposed to networked and Internet gaming that has been around since at least the ‘90s, cloud-based gaming involves the game actually running on a remote server and a user playing the game through a client connected to the server.  This allows clients to play games that would ordinarily require powerful game consoles or high-end computers on lower resource computers and consoles – and in the future potentially tablets and smartphones.  Additionally, a user can instantly access new games without downloading them and may play from any location with a fast enough Internet connection.

With the huge potential for growth in the industry, it is no wonder that the industry took notice when OnLive, Inc. received US Patent No. 7,849,491, titled "Apparatus and Method for Wireless Video Gaming," in December.  However, the granting of the patent is only the tip of the iceberg.  The questions everyone in the industry should be asking themselves are 1) am I – or do I plan to be – potentially infringing this patent and 2) is this patent even valid?

In an article published by Gamasutra, David Perry, game industry veteran and CEO of cloud-based gaming company Gaikai, said he isn’t worried about the patent.  From the article, Perry seems to write off the patent.  First, Perry is quoted as saying that he doesn’t expect the general concept of remote gaming to be patentable.  Then the article goes on to explain that the patent claims are focused on a set-top-box style of streaming game delivery that would not overlap with Gaikai’s business model. 

We are not sure Perry should be writing this patent off so easily.

For one thing, the application for this patent was filed in 2002, an early date in the space of cloud-based gaming.  Further, even though Perry’s opinion that the concept of cloud-based gaming is unpatentable may well be true, the claims of this patent are more focused, beyond just the general concept.  The wording of the claims appears to allow for the claims to cover a wide variety of gaming devices.  For example, while claim 1 recites "operating a video game box;" this phrase could be broadly construed to include many computing devices.  It would be prudent for the cloud-based gaming industry to give this patent due consideration.

That said, a broad construction of claims cuts two ways.  Broader claims risk being found invalid. Ultimately, in this case, the long prosecution history may play a vital role in how broadly the claims may be construed and whether they are valid.  Without offering an opinion either way, it seems clear that this patent could stir up some controversy.

Finally, this patent does not stand alone.  It is part of a very large "family" of patent applications directed to similar subject matter.  Of the 74 patent applications in the family, 39 remain pending and in various stages of prosecution. These applications cover a broad range of technologies, such as "System for streaming databases serving real-time applications used through streaming interactive video," "System for acceleration of web page delivery," and "System and Method for Compressing Video Based on Latency Measurements and Other Feedback."  OnLive clearly develops many peripheral technologies that may also be fundamental to the growing cloud-based computing industry.  More importantly, OnLive could be building a valuable patent portfolio protecting these vital technologies.

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Interesting news last week out of Japan: a service which transfers TV programs to overseas viewers via the Internet is a violation of copyright law. 

Japan Broadcasting Corp. and five Tokyo-based local TV broadcasting firms sued computer company Nagano Shoten, which offered an Internet-enabled image-forwarding device embedded with a TV tuner.  This allowed customers to forward their television to wherever they may be.  To put this into a US context, think Slingbox.

Don't get me wrong.  I am not suggesting that Slingbox, or any other "place shifting" technology, is now facing potential copyright issues because the situation in the US may not be quite the same as in Japan.  One possible reason why place-shifting technologies may be treated differently in the US can be found in the 1984 "Betamax" opinion, which held that "time shifting" television signals constituted "fair use" under US Copyright law.  It may well be that "place shifting" is treated the same as "time shifting.  However, this is far from certain - you may recall the issues Cablevision had with its "remote DVR."  While that ultimately worked out for remote DVR technologies, there was still a lot of legal proceedings that needed to be completed before any kind of resolution was reached.  And that was still just time-shifting.  Place-shifting is likely to implicate a variety of different fair use factors.

Leaving aside the question of the legality of time-shifting versus place-shifting under US law, this raises an interesting question for purveyors of cloud gaming services like OnLive and Gaikai.  After all, place shifting is a big selling point of these services.  OnLive, for example, uses the tag line "Instant Gaming.  Anywhere.  Anytime."  If image-forwarding of copyright-protected works like television programs can be problematic, then so too can image-forwarding of video game play. Moreover, since so many video games are created and/or published by Japanese companies, this recent opinion by the Japan Supreme Court could have a major impact on cloud gaming services. 

Of course, unlike television image-forwarding technologies (which may not have had any type of license agreement with the television broadcasters and/or copyright holders), cloud gaming services will have some contractual relationship with the games' copyright holders (they better).  So the idea of place-shifting may have already been dealt with, and no changes may be required.  But at a minimum, this opinion from the Japanese Supreme Court should be an impetus to re-examine your license agreements to ensure that this hasn't created a problem for you. 

What does this mean for gamers?  Probably very little, although depending upon the agreements between the cloud gaming companies and the Japanese pubs, the available game libraries may change while potential issues are resolved. 

For game devs?  This ruling is definitely important for Japanese companies, but only slightly less so for US companies.  I doubt that concerns over place shifting will go away, so this is something that will need to be kept in mind when negotiating any future license agreement.

For pubs?  This would be an excellent time to review your agreements with Japanese studios.  Those of you ahead of the curve will likely take this opportunity to examine place-shifting in the broader context. 

For cloud gaming services?  As mentioned above, you should, at a minimum, ensure that place shifting is an item on your due diligence checklists, and that your license agreements (existing and future) contemplate this issue.  Whether or not the US follows the Japanese opinion and finds place-shifting to be problematic under copyright law, this is not an issue you will want to litigate in court (as any fair use case - except those obvious losers - is an involved process, and "involved" typically means "expensive" when it comes to lawsuits).

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This post was written by John Feldman, a partner in the Washington, DC office.

Zynga has joined the trend of using points as the mechanism to purchase items in-game.  Here are a few details, according to GameZebo (who in turn cites Techcrunch, Inside Social Games, and Fusible, who broke the story by tracking that Zynga bought the domain RewardVille.com weeks ago):

• At launch, the participating games will be FarmVille, FrontierVille, Mafia Wars, and Zynga Poker.
• Users will earn zPoints each time they play one of these games, which they will accumulate to level up to a higher zLevel.
• At each zLevel, users will earn zCoins which can be redeemed for exclusive in-game items.

At this point in time, you'd be hard-pressed to find a gamer that wasn't at least a little familiar with virtual curency systems.  But what if Zynga wanted to take its zCoins beyond virtual crops and guns, and wanted to offered participants the option to use in-game currency for a chance to win an incredible prize - a trip around the world, $1 million, what have you.  Would such a system be legal?

The answer will depend on the jurisdiction.  In the U.S., it is very likely that Zynga would need to offer participants a means of obtaining sweepstakes entries that does not require spending points.  Why?  Because in this context, points have value - they are generally redeemable for items in-game, which makes them seem like quasi-cash.  This is, of course, the purpose of the points. 

Under US law, though, you cannot tie the expenditure of cash (even things that are quasi-cash) to obtaining entries in a sweepstakes.  Doing so transforms an otherwise legal sweepstakes into an illegal lottery (again, generally speaking - there are some exceptions to this rule, but we won't cover them here).  To avoid the illegal lottery problem in the US, sweepstakes sponsors typically offer an alternative, free method of entry (e.g. a self-address stamped envelope, an e-mail, etc.).  By offering the alternative method of entry, you are no longer required to spend something of value in order to enter the sweepstakes, and thus the sweepstakes is highly like to be legal (speaking again in broad generalities).

However, US law is not a proxy for international law, and point systems play out differently in various jurisdictions. I won't try to cover the world here, but let's consider one large market for video games: Australia. Australia's law is a bit more complex than the US in that you can require entrants to make a purchase in order to participate in a game of chance, but you cannot require a fee.  Stick with us, because this is going to get a little bit tricky.

A "purchase" means that you spend some form of valuable currency to receive an item of value.  This may be a real-world item or an in-game item - a t-shirt, a key chain, in-game crops, a bulletproof limo, etc.  So long as you couple the sweepstakes entry with a "purchase," the game is legal in Australia.  A "fee," on the other hand, is the payment of something of value for nothing but the sweepstakes entry.  This is prohibited in Australia, even in the face of a "free method of entry" (which would render the game legal in the US).

There are some clever ways to structure your sweepstakes that can avoid this issue.  For example: 

1. As mentioned above, you can couple of the sweepstakes entry with something else of value.
    
2. You can use the point-commerce as a measurement tool - e.g., "accumulate 500 points and get an entry into a sweepstakes," or "every time you spend 50 points, you get a sweepstakes entry."  In this scenario, you do not "spend" your points on the sweepstakes entry.  Instead, you are being rewarded for doing something - accumulating points, spending the points on valuable items (in-game or not), etc.  As long as the points are not "spent" for the sole purpose of obtaining sweepstakes entries, there isn't any payment of a "fee."
    
3. You can create different classes of points. Some points can be used for "purchasing" in-game items; some points can only be used for entering sweepstakes. You can accumulate both classes of points from the same transactions. E.g., "When you accomplish a certain number of kills you will receive 50 Redeemable Points (redeemable for in-game items) and 10 Game Points (redeemable only for sweepstakes entries).

Of course, that is not the end of the story (if it were, the world wouldn't need lawyers - oh, the horror...)There are permit requirements in some states and territories, which can be tricky to navigate in and of themselves.  So the bottom line here is to always check with a promotions lawyer before launching an international sweepstakes.  Laws change and there are many other restrictions and regulations that could apply. But, it's certainly interesting to note that as points become the ubiquitous currency for in-game commerce, there are ways to layer on a sweepstakes that may even permit a required purchase depending on the jurisdiction.

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Yelling “fire” in a crowded theater can lead to a panic.   But people in a different theater will simply enjoy their movie, unaffected by the nearby riot. 

A quick perusal of the trades will reveal that many video games industry watchers seem to be yelling “fire” as a result of soft retail figures. For sure, 2010 was a challenging year for many game companies. Retail sales numbers were generally down as compared to 2009 (with a notable exception for November, 2010 sales).   This follows a weak 2009 (as compared to 2008), making for two consecutive soft years.   So the cries of “fire” may be understandable. But are they justified?

Yes and no. 

Even if we ignore the individual stories contained in these numbers (lucrative launches of Microsoft’s Kinect  and Activision’s Call of Duty: Black Ops, etc), one has to ask whether retail sales numbers really capture what is going on in the industry.   As THQ’s Brian Farrell correctly pointed out last month, NPD sales figures do not track DLC sales, MMO subscriptions or iPad/iPhone revenues.   They also do not track social network game transactions.  

This means that, even if there is a bona fide panic regarding retail sales, the game industry as a whole may not be suffering. They might be standing in a wholly different theater (if you want to extend the metaphor to its breaking point).

Take a look at Riot Games. As reported in the Los Angeles Business Journal, the developer of “League of Legends” is in the middle of significant expansion. How can they accomplish this? By proving that in a year of down retail revenues, new hardware peripherals and concerns about console cycles, compelling gameplay and the right business model will find an audience.   

Game developers are less dependent on traditional, high-cost console development controlled by a few publishers. With the explosion of mobile and social gaming, developers have entirely new spaces (or “theaters,” if you will) in which to create. 

Those companies who have embraced these emerging trends are finding lots of opportunities in this down market and the NPD retail figures are nothing more than a news item to them. 

Of course, it’s not as simple as it seems. There are barriers to entry in the games space, and they are often significant.   But with innovative companies like Riot around, combined with a rise in venture capital opportunities for games companies, the future seems bright, regardless of next month’s retail sales figures.

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According to reports, Apple has removed a "jailbreak"-detection API from its latest version of iOS.  The API, which was introduced as part of Apple's Mobile Device Management functionality in iOS 4, would have allowed third party developers to check to see whether the device had been "compromised" (that is, not running as Apple intends - unlocked, jailbroken, etc.). 

While no one is sure exactly why Apple removed the API from iOS, some concerns have been raised that the API opened up a number of potential vulnerabilities in exchange for not much protection (it was theorized that the API could be "fooled" into thinking that a jailbroken device was operating normally, which would render the detection functionality essentially useless). However, I do not think that Apple's decision to drop the API is based on this concern alone. 

Rather, I think the decision reflects both this concern and a broadening attitude toward certain kinds of jailbreaking.  Remember, it was not too long ago that the US Copyright Office completed its Digital Millennium Copyright Act ("DMCA") Anticircumvention Rulemaking.  Through the Rulemaking, the Copyright Office concluded that jailbreaking smartphones to run third party software was not (in many, but not all, cases) a violation of copyright law.  By removing copyright law as a cause of action against certain jailbreakers, the Copyright Office also removed the potential penalties that could be obtained against such people.  This means that device manufacturers like Apple will likely be reassessing how they spend money in relation to the cat-and-mouse game that is jailbreak prevention. 

What can we read from the tea leaves offered up by this decision?  First, I don't think we can expect Apple to embrace the jailbreaking community wholesale.  Jailbreaking can still be a violation of contract law (through the license you agree to when you buy and active an iPhone), and will still likely violate the warranty Apple offers on its iOS devices.  Second, I would not be surprised to learn that Apple is refocusing its jailbreak prevention efforts on its enterprise customers.  These customers are typically much more concerned about rogue devices/software than the everyday user, and so I doubt Apple (or any other device manufacturer) will ignore jailbreaking completely.  Third, I think that in offering the API to all developers, there was an implied incentive to utilize it.  Adding code that is not part of the app's core functionality could lead to bloated, buggy code.  By removing the API (instead of just leaving it alone), Apple effectively kills the implied incentive, thereby helping ensure that apps offered through the App store are more streamlined/less buggy.  It also has the nice effect of keeping app sizes smaller, which may not mean much in individual cases, but in the aggregate, may add up to a lot of space.

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Video games are escapist fair.  They allow us to be soldiers, athletes, anthropomorphic hedgehogs, and just about anything in between.   I have been known, on occasion, to conquer the world, save princesses, win the Masters, and engage in aerial dogfights with 1040's Messerschmidts, all in the course of a single day.  The reason I spend time in these pursuits is that games allow me to add new dimensions and experiences to every day life.  

Yet adding new dimensions to every day life is not limited to just console gaming.  A couple of years ago, alternate reality games (or ARGs) were something of a rage.  I'm sure (hope?) some of you remember I Love Bees, Push, Nevada (Ben Affleck's marriage of television and ARGs), and Lost Ring (McDonald's ARG that tied in with the 2008 Olympics in China).  Then along game the augmented reality apps, which offered new possibilities for looking at the world.  With a simple touch of a button or on-screen icon, augmented reality apps can provide you with a sensory experience unlike what "real" life provides.  Want to know the location of Twitterers surrounding you, or want to use X-ray vision to find a nearby subway station?  There are apps for that. 

Now, Christopher Nolan, director of Inception, has taken augmented reality apps from minigame-saturated or information-heavy offerings to something that can be better described as a sensory-rich experience.  Here is Wired's overview of the Inception app (they do a better job discussing its feature set and potential than I could).  This is definitely an app I will be checking out.

If this were a blog devoted to gaming news, then this would probably be a great post.  But it's not.  This is a legal blog, so we ask legal questions.  Such as this: what liability does the app maker and distributor take on when offering augmented reality apps?  Here's another, why should augmented reality apps be treated any more differently than more traditional game-based apps?

Thoughts and answers after the jump.

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The landmark trial against alleged XBox modder Matthew Crippen has been dismissed by federal prosecutors.  The dismissal comes after the judge in the case publicly berated prosecutors, and raised "serious concerns about the government's case." 

For those of you unfamiliar with the case, the defendant was charged with violations of the Digital Millennium Copyright Act (commonly referred to as the DMCA) as a result of his modding XBox consoles to run "other than authorized" software.  According to the charges filed against the defendant, the modding violated 17 U.S.C. Section 1201(a)(1)(A), which makes it a crime to circumvent technological measures designed to control access to copyrighted works.

Based on the fact that the government dismissed its case, and the judge questioned whether the government had enough to bring the case in the first place, one can assume that modding is completely legal, right?  Not exactly.  This was just one case, with arguably bad facts for the government.  Another case, with another set of facts, may have an entirely different outcome.

Here's what we know about modding - it is, by definition, an issue under the DMCA if there is software involved.  Software is subject to copyright protection, and based upon the additions to copyright law made by the DMCA, actions you take to circumvent technologies designed to protect that software may constitute copyright infringement.  But that is not the end of the story, because the DMCA contains several exemptions to its anti-circumvention statutes, and there is the overriding defense of fair use that may be applicable as well (though the Crippen case has made it less likely fair use will apply, at least in modding-for-profit cases).

The DMCA exemptions specifically state that certain kinds of modding, from jailbreaking and unlocking cell phones to creating video mash-ups from DVDs, do not violate the DMCA's anti-circumvention laws.  While these exemptions might be of interest to the video games industry in certain situations, there is one exemption that is tailored just for us:

Video games accessible on personal computers and protected by technological protection measures that control access to lawfully obtained works, when circumvention is accomplished solely for the purpose of good faith testing for, investigating, or correcting security flaws or vulnerabilities, if:

(i)  The information derived from the security testing is used primarily to promote the security of the owner or operator of a computer, computer system, or computer network; and
 

(ii) The information derived from the security testing is used or maintained in a manner that does not facilitate copyright infringement or a violation of applicable law

If we unpack that statement a bit, it boils down to QA.  If your modding is done so you can test the security of the system used to protect the underlying work, then the modding is likely to be acceptable.  Other modding behavior, such as that engaged in by Mr. Crippen, is more questionable.

Then there is the overriding defense of fair use.  Fair use, as embodied in 17 U.S.C. 107, may seem easy to describe in the abstract, but it is difficult to grasp in its totality.  It basically says that certain activities, which in the abstract may meet the definition of copyright infringement, are nevertheless acceptable because of the good they do.  Examples of "classic" fair use activities involve teaching, criticism/commentary, etc.  However, each application of fair use turns on the facts at hand; there are no bright line rules when it comes to fair use - some commentary can still qualify as copyright infringement (see Gawker's battle with former governor Palin over her upcoming book).  So any modders hoping to rely on fair use should be wary of this strategy.  After all, fair use did not work so well for Matthew Crippen (PDF).

What, if anything, can be learned from this first modding trial?  First, modding is something that console manufacturers take seriously.  While modding may not turn into the same legal quagmire that file sharing has, it is still something that console devs take seriously.  And with both criminal and civil penalties available under the DMCA, anyone tinkering with console hardware or software should do the same.  Second, there is now one decision finding against fair use for modding-for-profit activities.  This is not an automatic bar for all future modding cases, but it does make a future defendant's case that much more difficult.

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Gamasutra has a great article, written by Cameron Davis, on how to pitch your project to publishers (onomatopoeia included).  It provides some salient insights on how to best convey your ideas to those who: a) have money; and b) can use that money to market and distribute your game to a wide-ranging audience.

In that same vein, we thought we could contribute to this discussion, but of course, being lawyers, we can't really help but speak to those legal issues that studios and developers should think about when pitching publishers.  As with most things legally-related, there are a million different ways to approach this topic: negotiation strategies, contract pitfalls, dealing with an "Alice in Wonderland"-esque definition of "net profits," etc.  This post, however, will focus on protecting the ideas you bring to the pitch.  Because while idea misappropriate would never happen in this business, chance favors the prepared (all apologies to Louis Pasteur for the paraphrasing).

Why should you care about idea protection?  Because ideas are illusive things, and are capable of legal protection only in certain circumstances.  Without being able to obtain those protections, there's very little to stop someone taking your ideas from a pitch and using them without your consent (or without paying you royalties).   Considering game devs can spend significant amounts of time thinking about a project, protecting that investment can be extremely worthwhile.

Thoughts on protection strategies after the jump.

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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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