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

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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Last month the President signed into law the JOBS Act - the Jumpstart Our Business Startups Act.  This bill received broad bipartisan support, and a lot of commentary has been written about it since its enactment.  But you might be wondering, "what does it really mean for games companies?"

Potentially a lot.  Here are my initial thoughts as to the new law's most important provisions for games companies:

1. The ability to sell securities via crowdfunding sites.  This could be a big one, especially as crowdfunding is becoming an ever-more important financing source.  One need look no further than Double Fine's $3.3 million Kickstarter campaign to see how important crowdfunding can be.  If companies are able to sell securities via a Kickstarter-like site, rather than sell tangible goods or simply ask for donations, the result may be more funding going into making a game.  After all, companies won't need to put that money towards making and distributing the goods sold via the campaign, and more people may be willing to pony up some cash to take a cut of the game's proceeds rather than simply donate the money. 
   
   Of course, the SEC is only now beginning the process of rulemaking about this, so we'll have to wait and see how the final details shake out.
    
2. Start ups can now tell the public about their intentions to raise capital (with some limitations).  This can mean more potential investors being aware of opportunities to invest in games companies, which can lead to more money being raised and ultimately more money being put towards the game (hiring engineers, developing new tech, etc.).
    
3. Increasing the thresholds at which companies are required to register under the Securities Exchange Act of 1934.  Currently, registration is typically required for companies that have total assets in excess of $1 million, or that have more than 500 shareholders.  Under the JOBS Act, these thresholds will be raised to $10 million in total assets and 2,000 shareholders, respectively.  This means that companies can get bigger before being required to register with the SEC, which will have an impact on when a company decides to go the IPO route.  Consider, for example, the recent analysis regarding Facebook's timing on its IPO - sometimes, holding off an IPO can be a good thing for a tech company.
    
4. Easing of potential legal costs in going public for "emerging growth companies" - hey, anything that helps you reduce your lawyer's bills is a good thing, right?  With some sources suggesting that the average legal cost to go public is about $2.5 million, and yearly compliance costs running about $1.5 million, the new designation of "emerging growth companies" could be quite important to a young games company.

The bottom line is that the JOBS Act may - MAY - become an important means of finance for games projects, but we will need to see how the final regulations shake out before deeming this the new way to finance games.  After all, what kind of lawyers would we be if we didn't reserve judgment until all the facts are in?

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Starting the week off right, with some news and notes on items of interest to the games industry:

• HBO has fired back in the suit brought by a former MTV reality personage over use of the phrase "Johnny's Bananas," asking a New York state judge to dismiss the suit in its entirety.  Reasons: 1) no publicity rights in a nickname; 2) the show made no references to the individual, but rather used the phrase in a different way, unaffiliated with the plaintiff; and 3) time-barred by New York's applicable statute of limitations.  Previous coverage of this suit.
   
• Arnold v. Mutual of Omaha Insurance Co. - a California Supreme Court case that explores the differences between an employee and an independent contract.  Particularly useful for games companies as many game development services are performed by independent contractors (especially if you're a small/indy/emerging growth company).  Note the checklist of factors the court provides.
   
• Psystar has filed a petition for cert with the US Supreme Court in its long-running dispute with Apple over Psystar's distribution of "mac clones."  At the same time, Apple lost its bid to keep certain documents related to the litigation sealed, meaning that some information submitted in briefs and contained within decisions will now become part of the public record.  All those interested in copyright protection and software (so, pretty much everyone who reads this blog) should follow this case closely.
   
• Ninjavideo co-founder sentenced to 22 months in prison after pleading guilty to conspiracy and criminal copyright infringement.  Perhaps Ninjavideo's motto should be changed from "this sh*t is ninja" to "copyright law is no joke."
  
  This development will be particularly interesting to keep in mind as the ongoing debates over SOPA/Protect IP Acts continue.  More on SOPA/Protect IP coming, so stay tuned.

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When it comes to exploration of copyright law in the games industry, one aspect tends to dominate the discussion - works-made-for-hire.  Innumerable agreements permeate the industry that use this model, whereby one person creates a copyrightable work for another, but the commissioning person is treated as the "author."  This is not the only ownership-related model that should be kept in mind, however.  Another ownership model can be just as important, and in some cases, much more tricky.

That ownership model is known as "joint works," in which two or more parties share the copyrights in and to a work.  Why is a joint work ownership model considered more "tricky" than a  work-made-for-hire model?  Two reasons:

1. You must have a clear expression of intent to create a joint work; and
2. Joint works entitle the mutual owners to do certain things without the permission (and sometimes to the detriment of) the other owners.

The importance of the first issue - having a clear expression of intent to create a joint work - cannot be overstated.  Take, for example, the recent case of Malcolmson v. Topps, Inc., Docket No. 2:08-cv-02306-GMS (9th Cir. 2011) (unpublished opinion).  In this case, the court rejected Malcolmson's claim that he was a "joint author" of Topps' Battletech game because Malcolmson could not prove that he was an "author" of the work at issue.

Before you start yelling at the computer screen, let's make one thing clear - there is a difference between a general conception of "being and author" and what the law considers to be "authorship" of a copyrightable work.  There are two ways that one can establish "authorship," particularly in the joint work context.  First, you can have a written agreement making this fact plain.  In the absence of a written agreement, however, establishing authorship can be more difficult as you will have to prove several things.  The Ninth Circuit's decision in Aalmuhammed v. Lee, 202 F.3d 1227 (9th Cir. 2000), sets for a list of non-exhaustive factors to prove authorship in the absence of a written agreement (note: this is my paraphrasing for ease of consumption):

1. Exercise of control over the work - the person who is the "effective cause of the work;"
2. Objective manifestations of shared intent to be coauthors (as compared to subjective intent);
3. The appeal of the work turns on contributions of the putative "joint authors," and the success of the work cannot be apportioned to any one party over another.

In the Malcolmson case, the plaintiff (Malcolmson) did not have a written agreement with the makers of Battletech, nor could he raise a genuine issue of material fact under the Aalmuhammed factors.  Therefore, he could not make out a claim of being a "joint author" even though he made contributions to the Battletech universe by writing a back story for one of the characters.

Even if Malcolmson could have raised an issue of material fact at a pre-summary judgment stage, he may still have had difficulties in proving the allegations, especially in terms of his establishing control over the work. Of course, this inquiry could have been avoided had Malcolmson had a written agreement with the Battletech makers stating their joint work intentions.  Thus, this case underscores the importance of having a written agreement when you intend to create a joint work.   

And to that end (shameless plug alert), you should have an attorney review the agreement to make sure that the agreement does in fact contain an "objective manifestation of shared intent to create a joint work."  All too often, a simple phrase like "we'll create this thing together" can fail the "objective manifestation" test because of the lack of clarity. 

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I admit, I play mobile games.  Frequently.  Waiting for the metro, standing in line at the grocery store, showing up to the bar 10 minutes early - just about any situation where I'm doing nothing for more than 2 minutes is an opportunity to play.  And so I do because I want to solve that next puzzle, whether it be crushing some thieving pigs with large blocks, building my own civilization from scratch, or something else.   

At the beginning, the lure of the puzzle was enough to keep me engaged.  There was something to be solved, and I solved it. Then came badges.  Not only was I able to solve a puzzle, but I was able to brag to my friends about it.  Now comes kiip (pronounced "keep"), and game rewards are going to a whole new level.

(Ed. note: there have been a host of similar ideas in the past, such as Club Bing.  Though the idea may not be entirely new, its implementation is, and that's what we're focusing on here).

Imagine being able to obtain things IRL by completing virtual tasks.  This isn't a new form of Mechanical Turk.  This is giving gamers real life rewards for in-game accomplishments.  Here's an embed of kiip's intro video (fingers crossed that it works): 

The potential to link gamers to products without removing them from the gameplay experience is what makes this idea really interesting; it has the potential to redefine embedded advertising.  For example, as a gamer I'll be more inclined to interact with the service since I won't need to leave the game to do so.  Moreover, the metrics of success for a particular campaign won't focus on immediate click-through, but instead will need some longer timeframe to accurately gauge its impact.  Preliminary results suggest that this has the potential to radically alter in-game advertising.

Aside from the geek-cool potential, why write about it here?  Because there are potential legal issues that game devs should consider before dropping the kiip code into their games.  Here are just a few that come to mind:

• CAN-SPAM compliance.  CAN-SPAM is a law that regulates when and how unsolicited commercial e-mails can be sent.  kiip appears to use a modified "Refer-a-Friend" system to send reward e-mails, but the advertiser may ultimately be seen as "procuring" the e-mails, as that term is defined in the Federal Trade Commission's Statement of Basis and Purpose (PDF).  Depending upon how kiip structures the reward-email system, the advertiser may find itself liable for $16,000 per e-mail sent.  Indeed, even the dev may find itself liable for assisting in the sending of commercial e-mails.
• State taxation.  A number of states have passed laws to require ecommerce sites to collect sales tax digital goods - New York, Illinois, and perhaps soon Massachusetts, to name a few.  Determining when an ecommerce site must collect (and pay to the state) sale tax can be a tricky thing, especially where affiliate marketers are involved.  At what point does an advertiser owe sales tax to a state based upon kiip's actions as an affiliate marketer?  What about game devs?  Does inclusion of kiip now make you subject to state sale tax laws (perhaps those of a number of states)?
• Contractual obligations.  There are a host of these.  What rights does a game dev have if an advertiser fails to pay up on a promised reward?  What if someone is hurt as a result of using the reward - is the dev liable?  Or advertisers - what about exclusivity, or action-reward linkage?  Do you want your reward to be given out for low-level achievements, while a competitor's is given out for high level achievements?

The bottom line is that kiip is one of those ideas that makes me think "why didn't I do that."  But that's not to say that game devs or advertisers should jump on this immediately.  There are issues that should be considered and worked through to ensure both the success of the campaign and the integrity of the in-game user experience.

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In November we wrote that the Michigan Film Office had approved its first video game applicant for tax credit financing.  Now that application - Pixofactor Entertainment - and other entertainment-related companies thinking about locating their next project in Michigan may have to think twice.  According to the AP, Gov. Rick Snyder's first budget proposal calls for the elimination of the film tax incentive program, and orders a $25 million cap on film credits starting later this year (although current commitments would be honored).  And Michigan is not alone in the desire to stop tax credit and tax incentive financing - in Missouri, Gov. Jay Nixon has recommended dropping funding for that state's film office.

Why are states trying to shed their tax credit regimes?  Because, according to opponents of these plans, they don't work.  In September of 2010, the Michigan Senate Fiscal Agency published an issue paper (PDF) finding that the tax credit system failed to generate significant returns in private sector activity.  The issue paper found that in FY 2008-09, the tax credit caused Michigan to spend $37.5 million, while it generated only $21.1 million in private sector activity.

Yet a study conducted by the Texas Comptroller of Public Accounts found that Texas' tax credit system worked (PDF).  From April 23, 2009 to August 31, 2010, the state awarded $48.4 million in grants, and in return expected more than $414 million in Texas spending by the applicants.  Moreover, Texas found that the cost to the state for the tax credit was just $117 per each $1,000 of proposed Texas spending by approved applicants.

So what gives?  Why the disparity between the findings of Michigan and Texas?  And if there are weaknesses in tax incentive plans, do they apply universally to video games, film, television, and commercials?

Taking them one by one, Texas offers two incentive programs that are applicable to video game development: a rebate on eligible in-state spending, and a tax exemption for the purchase or lease of qualifying items used in the development of a finished video game product (this includes games, hardware, etc.).  There is a minimum $100,000 spend in Texas by the dev, and there are other conditions on the residence of the dev team, and the number of production days spent in Texas.  So the basic gist is that, for money spent developing games in Texas, Texas will reimburse you up to 7.5% of that amount.

Michigan, on the other hand, offers a refundable, transferable tax credit, up to 42% of qualified expenditures.  There is a minimum spend of $50,000, and not as many exclusions or conditions as the Texas program. Thus, even a quick comparison between the two programs shows that Michigan's incentives can be much more generous than Texas'.  So perhaps the level of benefit being offered is one reason for the difference between the two.

A second notable difference is that Texas supplied funding to a good deal more games projects than Michigan.  While the November 2010 grant to Pixofactor for Ben Hogan's 5 Lessons was the first games project approved for Michigan funds (which theoretically had been available since April 2008), Texas doled out approximately $9 million to games projects between April 2009 and August 2010, and boasts an estimated 1,694 jobs (FTEs) created in the video games sector during that time.  This increased funding for games projects may be another reason why Texas has experienced more success with its program than Michigan.

Finally, Texas has separate conditions for production of TV/Film projects and games projects.  In contrast, Michigan did not separate the two kinds of projects (though there are separate requirements for "interactive web site projects," which are different from games projects).  Yet lumping video games in with TV and film can be inappropriate when it comes to deciding what to fund.  While a TV or film shoot may spend a few months in the state offering financing, they typically break up afterwards and everyone goes on their way.  This is known as the "bivouac" model of production, and leads to less permanence of any one group. 

However, game projects are different, and that difference should lend itself to having a larger impact on a tax incentive program.  First, coding and artwork can be done from just about anywhere (you don't need majestic vistas or sandy white beaches to code, though having those things can't hurt, in my opinion).  This means that, once a company sets down roots, there is less need to pick up and move to a new location based on the needs of a particular project.  Second, games (at least AAA titles) typically take longer than a few months of work to complete.  So when you put these two differences together, you end up with games companies being more likely to stay longer, and less likely to move in the future, than film or TV productions.  (In the interest of full disclosure, some have argued that the games industry should adopt the "bivouac" model of film and TV production).  But for now, game projects should not be treated like film or TV projects, at least in terms of financing metrics.

One final though on this issue - it is possible that a straight cost-benefit analysis is not the only appropriate way to measure the success of a tax incentive program.  There are other considerations, including the revitalization of underprivileged areas, promoting education and STEM skills in the area's schools, etc., that may not lend themselves to a "hard cash" analysis, but are nevertheless worthy goals. 

In sum, the bottom line is that tax credits and incentives are tricky, complex beasts, and can cut for the better or for the worse.  I for one would like to see more study of this, but based on the limited information available from a comparison of two state systems (Texas and Michigan), it seems to me that games projects are well-suited for tax credit financing, and that treating games as their own form of media, both for the purposes of project approval and payouts, is a strategy worth considering.

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Gamers everywhere rejoice - American intelligence agencies want their analysts to play video games.  Now all that time you spent playing Goldeneye wasn't just idle enjoyment - you were simply training for a career in intelligence work.   

Why would gamers be of interest to the intelligence community?  Well, according to the Intelligence Advanced Research Projects Agency (or "IARPA"), US analysts have cognitive biases, which can impact decision-making. For example, cognitive biases can filter perceptions, shape assumptions and constrain alternative analyses.  Bad stuff in the world of intelligence.

To combat the cognitive bias problem, IARPA wants intelligence analysts to play video games.  Seriously (wait for the pun...).  IARPA is going to launch the Sirius Program (there it is), which will fund the development of serious games (double pun!) to train analysts and measure their proficiency in recognizing and mitigating cognitive biases.

In preparation of the launch of the Sirius program, IARPA is hosting a Proposers' Day Conference on February 24, 2011, where the agency will provide information on Sirius, address questions from potential proposers, and provide a forum for potential proposers to present their capabilities and find potential team partners.  That's right, IARPA may be looking for you to help them with the Sirius Program.  Professions of particular interest to the Sirius Program are social scientists, computer scientists, statisticians, and gaming and virtual-world experts.

If you can't be James Bond, you could at least design the virtual worlds that will train the next James Bond.

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This post was written by Marina Palomba, a partner in Reed Smith's London office.

[Ed. Note: There's been a lot of attention on the issue of tax incentives (including on this blog). As many of our clients are based in the UK, we wanted to give a perspective on the recent UK developments there]

Many in the games industry had high hopes for tax incentives to be introduced in the UK if the Conservative Party won the 2010 general election. The new coalition government between the Conservatives and the Liberal Democrats has now decided against implementing a game specific tax credit, despite supporting such a credit before the election. Right or wrong, this is perceived as a real blow to the games industry in the UK.

For the uninitiated in the economics of the gaming industry, it is estimated that, worldwide, the game industry in 2008 was about $45 billion. This number is expected to grow $48.9 in 2011 and $68 billion in 2012, making it the fastest-growing component of the media sector worldwide. Being a major player in this sector is no laughing matter.

Why was the UK games industry calling for tax incentives?

Despite the UK leading the field in games development for some time in recent times Canada has shot up the rankings as the premier developer of boxed products. This has come as a severe blow to the UK which points to the fact that Canada, and parts of the USA, have very generous tax regimes for the games industry. One might argue that tax incentives alone do not make for success alone but nevertheless TIGA, the trade association representing the UK’s games industry, has supported and called for tax breaks.

TIGA’s reasons for lobbying for tax reforms are basically 4 fold:

1. Foreign government support for video games development over the last decade has created an uneven international playing field, making it difficult for UK games developers to compete;
2. A brain drain to subsidised studios overseas is causing a lack of skilled staff in the UK;
3. While globally the industry grew by 20% in 2008, the UK video games industry fell by 4%; and
4. Tax revenue to the UK government fell in 2009 by £17 million and the sector’s gross contribution to the GDP declined by £41 million.

In short, according to TIGA, the British-made video games are facing a long-term decline in the global sales charts and the UK is expected to fall to 5th place, overtaken by Canada and South Korea, whose studios are heavily government supported.

Why has the UK Government ruled out the proposed tax relief?

In November 2010 the Coalition Government, under Minister David Gauke, gave its reasons why a specific tax relief is unjustified [see text of the debate here]:

• Tax relief artificially distorts markets

David Gauke has indicated that a tax incentive for the games industry would merely rob investment in other successful areas. He also rejected the TIGA figures saying they were erroneous. He also clearly indicated that TIGA’s assumptions about unemployment in the industry were unfounded saying that the highly skilled would easily find new work.

• There is no evidence of market failure

The Minister added that "The United Kingdom’s video games industry is recognised as a world leader, having produced hugely successful games such as the "Grand Theft Auto" series, and has led to innovations in industries as diverse as defence and health care…..all ..achieved without specific Government intervention for the sector through the tax system."

• The Government prefers wholesale tax breaks rather than specific industry relief

In the June Budget the Coalition cut corporate tax rates from 28% to 24%. The government clearly also dislikes the proliferation of special tax regimes and exemptions. It has allegedly inherited over 1,040 such tax relief exemptions and while continuing to support some such tax breaks it is certainly not willing to introduce new ones.

• Under EU regulations such tax breaks will be illegal state aid

What does this mean for the UK Games industry?

The arguments for and against tax relief can continue but commentators and experts in games development, such as Nick Lovell of Gamesbrief, are supportive of efforts to stimulate new business activity and investment, particularly by helping with training and networking, and much less so of direct government involvement in commercial decisions. Nick Lovell states:

"I fear that tax breaks would have helped the UK in the short term, offering publishers a bribe to place their development in the UK. But in the long-term it does not help us innovate, develop new business models and grow. Like Canada, we will become indentured serfs, dispatching our surpluses to foreign paymasters. The long-term is what matters, not attempting to stem the tide of change.

I would rather that the film industry was not subsidised. I would rather that Canada did not offer games tax breaks. But given that Canada does, my preferred solution is to make the UK the best place in the world for small businesses (low corporation tax rates, highly skilled knowledge workers, a creative community), not to offer tax breaks due to special pleading on an industry-by-industry basis."

Others in the video games industry are less sanguine. TIGA CEO Richard Wilson said "Unless the Coalition Government introduces Games Tax Relief or a similar fiscal measure then the UK will forfeit millions of pounds in inward investment, jobs will be lost and we will cease to be a leading developer of video games."

The Association for United Kingdom Interactive Entertainment (a/k/a UKIE, which was formerly known as the European Leisure Software Publishers Association, or ELSPA) is also unhappy with the decision. UKIE's director general, Michael Rawlinson, said: "We are extremely disappointed by today's budget. Our industry will be rightly puzzled as to how tax breaks can be lauded before an election, only to be seen as 'poorly targeted' and scrapped just six weeks later."

The future looks secure for the gaming sector in general, if not the UK. Though games revenue slipped last year the gaming business remains strong. Predictions for 2011 include a rise in cloud gaming and that the USA will continue to dominate the market and entertainment software will remain one of the fastest growing industries in the U.S. economy. This may not be something, sadly, that the UK will be able to claim.

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Money.  That's what I want.  But is it what you have?

It's a common problem - you've got a great idea, but you don't have the means to turn that idea into the next Zynga.  What are your options? 

• You could obtain financing from an angel (venture capital firm Kleiner Perkins recently launched a $250 million fund devoted to all things social media-esque)
• You could try to obtain government funding or grants
• You could try for a tax credit deal if offered by your state of residence
• You could directly appeal to an established developer or publisher (best of luck with this if you don't already have a "name")
• You could "self finance" (otherwise known as tapping your life savings, begging/borrowing/stealing from every family member and relationship, etc.)

Doesn't seem like a whole lot of promise there, does it?  Well, that's what the folks at Kickstarter.com probably thought.  Kickstarter.com is, according to its website:

...a new way to fund creative ideas and ambitious endeavors.

We believe that...

• A good idea, communicated well, can spread fast and wide.
• A large group of people can be a tremendous source of money and encouragement.

In other words, its a marriage of crowdsourcing and financing.  It works like this - the developer sets a target financing level, and asks the public to contribute money if it wants to see the project developed.  If the target threshold is achieved within the specified number of days, the developer gets the money (well, the money minis Kickstarter.com's cut and credit card processing fees) and can start the project.  If the financing threshold is not achieved, then no money is charged to any person who made a pledge.

Often, in exchange for making a pledge of a certain amount, a project developer will give away premiums or other items (e.g., for $10 you get a virtual high five; for $50 a free download of the game; for $1,000 you get me to come over to your house and clean your rain gutters; etc.).

Some thoughts on this financing model for the video game industry, after the jump.

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Last Friday, Pixofactor Entertainment announced that it was the first game developer to be approved by the Michigan Film Office for a 40% refundable tax credit.  Pixofactor's project, Ben Hogan's 5 Lessons for the Wii, has a prospective budget of $2.7 million, meaning that Pixofactor could qualify for a refundable tax credit of up to $1.08 million.

While assuredly great news for Pixofactor, this is also great news for us at Developing Concerns because it provides us with an excellent opportunity to present a quick-and-dirty overview of tax credit finance deals.

[Ed. Note: I'm neither a tax lawyer, nor a Michigan lawyer, so please don't construe this post as suggesting either to be the case.  Tax law, in general, and Michigan law, in particular, will impact any particular tax credit deal in that are impossible to forecast in the abstract.  I have not reviewed Pixofactor's deal or the Michigan codes in detail, and as such I can make no representations about any special knowledge or fact at issue.  Any variance between this post and reality is due to my desire to describe tax credit deals in general, not the Pixofactor deal in particular.  Now that the lawyering CYA is done, on with the show...].

Every tax credit regime is different, and they all have their own special provisions and requirements.  There are, however, a few commonalities when it comes to assignable tax credit incentives.  Typically, you start with an idea (as prosaic as that nugget of truth is).  You then turn this idea into a business plan and a budget.  At this point, you realize you need the money you've forecasted in that budget, so you set about seeking investors.  One way to entice these investors is to take advantage of tax credit incentives offered by various states or territories.

Tax credit incentives are offers by states or territories to give you credits against your tax obligation if you conduct specified economic activity within their jurisdiction.  Assignable tax credits are tax credits that you can transfer the credit to a third party who isn't conducting the specified activity.  In other words, you can sell your right to claim a tax credit of X, and use that money to fund your project.

To take advantage of tax credit incentives, there are (typically speaking) detailed submissions that must be made, approvals that must be obtained, and caveats and exclusions that must be kept in mind.  For example, some budgeted activity may qualify for reimbursement, but others may not.  Or financing may be achievable only if a certain percentage of the budget has already been secured through other sources.  But when it's all said and done, a developer who receives approval for an assignable tax incentive has something of value - a reduction in tax burdens.  The developer can then turn this "something of value" into real money by selling it (assigning it) to a third party, often at a discount.  Using Pixofactor's numbers, the $1.08 million tax credit deal might sell for $900,000 (using a rough 90% of value as the price for the credit - remember, the investor will need to get something out of the deal as well). 

What is everyone left with once the dust clears?  The developer got $900,000 in cash that can be used to fund game development (pay salaries, rent office space, conduct QA, etc.).  The investor got a net benefit of about $100,000 (a little more than $1 million in tax credits for $900,000) and can use this according to whatever limitations the state placed upon the credits (e.g., use this year only, no carryover, etc.).  And finally, the state hopes to get future economic activity that will mean generate greater tax revenue in the future than the cost of the tax credit today.

That is the basic gist of assignable tax credit deals, but as you may imagine, the details get incredibly complex, incredibly quickly.  Moreover, tax credit deals have come under some recent criticism about their efficacy in driving future economic growth.  But for developers who can work through the credit approval process, tax credit financing can be a valuable means of securing project capital.

If you have questions about tax credit financing for video game development (or film development, as this is the older brother - and much more common use of - tax credit financing than video games), please contact the video games team at Reed Smith.

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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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In video games-related Supreme Court news that has nothing to do with the Governator or obscenity (so please, try to stay interested), the Court has agreed to hear a dispute between Stanford University and Roche Molecular Systems Inc. over whether individual inventors or contractors retain intellectual property rights to federally funded inventions.

The case concerns the Bayh-Dole Act, which allows institutions such as universities, nonprofits and small business contractors to retain the rights to inventions created through federally funded research.  Check out Patently-O's analysis of some of the confusion surrounding Bayh-Dole.  The question before the Supreme Court is whether the law allows inventors employed by these institutions to unilaterally assign intellectual property rights to a third party.

For the record, I am not, nor do I think I could even pretend to be, a patent lawyer.  So I'm going to tread carefully here.  More after the jump.

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On October 11, the Bill and Melinda Gates Foundation announced the Next Generation Learning Challenges Project, a $20 million dollar project to fund "organizations and innovators to expand promising technology tools to more students, teachers, and schools."  This should be of interest to game companies, particularly start ups and smaller studios, that create programs and applications to teach STEM skills (Science, Technology, Engineering, and Mathematics). 

The Gates Foundation said that it will accept applications for initial awards of $250,000 to $750,000 to address at least one of four specific issues:

• Increasing the use of blended learning models, which combine face-to-face instruction with online learning activities.

• Deepening students’ learning and engagement through use of interactive applications, such as digital games, interactive video, immersive simulations and social media.

• Supporting the availability of high-quality open courseware, particularly for high-enrollment introductory classes such as math, science, and English, which often have low rates of student success.

• Helping institutions, instructors and students benefit from learning analytics, which can monitor student progress and customize proven supports and interventions.

The deadline to apply is November 17, and awards will be announced next March. The Gates Foundation plans to fund similiar awards every six to 12 months. 

This is not the first of such grants to be announced in the last few months.  In September, the White House announced the National STEM Video Game Challenge, which is providing prizes for similar actions. 

This type of funding can be a critical means of initial financing for new projects or companies, but applying for grants of this type is both an art and a science.  For that reason, it is worthwhile to think strategically (and realistically) about your product, your company, and your sales pitch (the written, and sometimes in-person, explanation of why you should be a grantee). 

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