Developing Concerns

Mobile Games and Privacy - The FTC and California AG Are Taking This Seriously, So Should You

Drew Boortz — Fri, 14 Dec 2012 18:00:31 -0800

A lot has happened in the (cough) months since our last post, but privacy actions have to be right at the top of the list of recent occurrences that worry our clients. Take, for example, the FTC's new report on mobile application privacy and children, wherein the FTC found that:

59 percent of the apps reviewed transmitted device ID, geolocation, or phone number to the developer, an advertising network, analytics company or other third party.
Only 11 percent of the apps disclosed that the app transmitted such data
58 percent of the apps reviewed contained advertising within the app
Only 9 percent disclosed that the app contained advertising
22 percent of the apps reviewed contained links to social media
Only 9 percent disclosed that fact

Troubling for responsible pubs/devs and regulators alike. But that's not all. The Center for Digital Democracy has filed a complaint with the FTC against Mobbles Corporation for violations of the Children's Online Privacy Protection Act.

The FTC's not the only one getting in on the act. California Attorney General Kamala D. Harris has filed the first legal action under California’s online privacy law against Delta Airlines for failing to comply with the state’s Online Privacy Protection Act.

So what do you need to know/do to avoid privacy-related issues? Here's a brief, non-exhaustive list of thoughts:

Have a privacy policy. It's not just a good idea, it's the law. See, e.g., Cal. Bus. and Prof. Code 22575 and 15 U.S.C. 6502.
Make your policy easy to find from within your game/app. California's privacy law requires that the policy be disclosed "conspicuously." The exact definition of "conspicuous" is a grey area, but as of today, general practice is either to include the whole policy within the game/app or to host the policy on a generally-accessible website and provide a link to that website within the game/app. Whatever you do, though, do not bury the policy/link so deep that no one can find it.
COMPLY WITH YOUR POLICY. This is where a lot of companies get into trouble. Sometimes its because the policy hasn't been updated to reflect what the business is doing. Other times companies use boilerplate policies or "borrow" from other policies that are available on the web. Both are bad ideas. Your policy should reflect what your business, your systems and technologies, and your revenue and monetization practices. If your policy is not customized to what you are doing, you're not protecting yourself adequately.
Regularly review your policy, and update it as necessary. Too many times a policy that was accurate years ago does not sync up with your activities today. We recommend that you review your privacy practices and your policy at least once a quarter to ensure compliance with your own promises.
Be clear about changes. When making changes to your policy, call them out so consumers can understand what you're doing. Burying changes increases the risk that the changes will not be given effect if you end up in court.
Get evidence of assent. Speaking of court, whenever possible obtain evidence of assent from users to your privacy policy. So-called "browsewrap" agreements are disfavored in court, and may be given little or no effect (especially if the terms are somewhat one-sided). Obtaining evidence of consent can be done through account creation mechanisms, which you are probably already doing if you are collecting personally identifiable information. So make sure that in your privacy policy is included in what the user agrees to - you do not want to be left "legally naked."

Turning Game Players into Game Developers

Drew Boortz — Thu, 18 Oct 2012 08:48:06 -0800

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.

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?
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).
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?
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.
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

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).
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?
What rights, if any, will players have to dispute the revenue share?
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.
If you're going international, where does currency exchange fees come into play?

Nature of the Content

How will you respond if someone uploads buggy content, or even worse, content that contains malware? Do you know the extent of your liability?
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.

Legal Liability for Warcraft Massacre

Drew Boortz — Mon, 08 Oct 2012 13:48:26 -0800

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

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

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

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

The Hacker

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

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

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

Blizzard

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

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

Take-Away Points

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

People will always find some way to take advantage of your game - expect it and have a plan to deal with it.
Put that plan on paper before you need it. I don't know whether Blizzard did this, but given the speed with which everything happened, it would not surprise me if they did. Having a plan in place prior to needing it is a "good fact" that can help reduce claims of negligence down the road.

Also, don't create a plan then lock it in a box. Review it regularly, and revise as necessary to keep up with new threats and technologies. A plan dealing with a computer crisis circa 1992 isn't a good plan for 2012.
Take action to stem the damage being done as soon as you reasonably can, regardless of whether that damage is legally cognizable or not. Be careful not to act too soon, however. Never act just for the sake of doing something quickly - do your research and act responsibly, just do it as quickly as you can.
Review your EULAs and Terms and Conditions documents. If you don't know what precondition language I referred to in the above sections, read the links, then drop me a line. It is something you definitely want to look into.

Protecting Fictional Characters (or, Kevin Butler, VP of Turncoating)

Drew Boortz — Mon, 10 Sep 2012 16:29:22 -0800

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

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

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

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

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

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

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

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

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

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

Consider how much you've put into your character. Is your character a mere archetype , or is there something more - a backstory, an identifiable but uncommon persona, catchphrases, etc.? None of these by themselves will necessarily grant your character copyright protection, but they help (regardless of whether the legal test is the "sufficient delineation" test, the "story being told" test, or some hybrid of the two).

Remember, not all characters are deserving of legal protections, and so it may not be worth it to put your time and energy into building up every character in this manner.
Audit your ad agency agreements. Who owns the ideas that your ad agency brings to you? Who owns the physical execution of those ideas? Only way to know for certain is to do an audit, and make corrections where there are gaps or inappropriate transfers of rights.
Consider whether your character can function as a trademark. Trademarks are different from copyrights in that trademarks protect identifiers of the source or origin of goods and services. Perhaps your character should be treated like Cap'n Crunch instead of Rocky.

Trademarks don't expire so long as you use them appropriately, but be careful when trying to claim expressive content as a trademark. You can run into problems doing this (based on a Supreme Court case called Dastar which, among other things, held that one cannot use trademark law to do an end-run around the time limits of copyright law - that's an over-simplified statement of the law, and I strongly encourage you to speak with a tech-saavy lawyer about Dastar's implications if you have any questions about this).

The better approach is to consider the purpose of your character up front, and decide what form of protection is appropriate (if any).

Can Competitive Video Game Playing Be a Collegiate Sport?

Drew Boortz — Wed, 08 Aug 2012 06:00:35 -0800

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Advertising Incentives and Rebates: Are You Getting Full Value from Your Ad Spends?

Drew Boortz — Mon, 23 Jul 2012 13:37:49 -0800

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.

An Implied Right to Use Another's Image or Likeness - Yes, It Does Exist

Drew Boortz — Wed, 18 Jul 2012 07:54:49 -0800

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

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

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

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

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

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

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

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

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

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

Industry and Consumer Groups Meet to Discuss Voluntary Mobile App Privacy Code

Drew Boortz — Fri, 13 Jul 2012 04:43:16 -0800

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

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

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

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

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

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

European Court of Justice: Secondhand Sales Are Legal

Drew Boortz — Tue, 10 Jul 2012 17:20:00 -0800

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

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

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

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

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

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

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

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

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

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

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

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

The Deal Is Off: Tips to Avoid Fallout from License Terminations

Drew Boortz — Tue, 19 Jun 2012 12:33:13 -0800

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

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

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

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

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

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

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

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

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

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

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

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

Dealing With Cheaters: What You Can Do To Follow Rockstar's Example

Drew Boortz — Thu, 14 Jun 2012 07:07:58 -0800

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

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

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

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

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

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

Morotola v. Microsoft, and Banning the Xbox 360 in the US?

Drew Boortz — Wed, 13 Jun 2012 05:42:07 -0800

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.

Kompu Gacha, "Mystery Box" Games, and the Legality of Blind Virtual Item Sales

Drew Boortz — Wed, 06 Jun 2012 07:11:25 -0800

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

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

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

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

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

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

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

The fundamental problem with gacha-style sales under US law is that they could be deemed to be illegal lotteries. As we've discussed before on this blog, sales of blind virtual items run the risk of being an illegal lottery. That risk is greatly inflated by the existence of a "grand prize" for completing the set.

Here's a quick overview of US anti-lottery laws, just in case you happen to have missed our previous postings on the subject:

Every state in the US has laws that restrict illegal lotteries, and just about every state defines a "lottery" as having three essential elements: prize, chance, and consideration. Prize is defined as anything of value that is won by some participants, and not by others. Chance is exactly what you think ? chance is used to determine winners and losers. And finally, consideration is the required giving of anything of value in order to participate in the chance-based promotion.

A “lottery” requires all three elements; anything that does not exhibit all three elements is not a “lottery."

When it comes to gacha games, there is most definitely consideration (the payment of money - even virtual currency - for the virtual item). There is chance (the chance in terms of which card you get). And there is prize - the "grand prize," the rare items, etc. To me, this smacks of a lottery.

Some might suggest that because the items being purchased are "virtual," gacha-style games cannot be a lottery. This is not correct. Lottery laws (generally speaking) are not limited to the transfer of money from one person to another; they cover the transfer of anything of value. So a car, a year's supply of ice cream, free lawn mowing, and more can be of sufficient value to support the finding of a lottery. Virtual items are no different.

This leaves us with two ways that a gacha-style game could be altered so as not to implicate US anti-lottery law.

First, the lottery concerns could be overcome by providing game pieces for free as a alternate method of entry. This could be done in the form of having an address where someone could submit a written request and get a free card/game piece. By doing this, you remove the requirement to make a purchase in order to entry, and the illegal lottery becomes a mostly legal sweepstakes (I say mostly because sweepstakes and promotions law can turn on very minor details, and there are regulatory concerns to worry about - as a result, the lawyer in me won't allow me to make a blanket pronouncement that all such sweepstakes are legal).

However, providing free game pieces upon request is exactly what gacha sells, which more or less defeats the whole purpose of the sale.

Another strategy could be to remove the "prize" element. This would involve doing two things: a) not offering a "grand prize;" and b) making all game pieces of approximately equal worth. The first thing is fairly obvious - a "grand prize" is pretty much the very definition of a prize. But why must all game pieces be of approximately equal worth?

The answer is because “prize” is defined as anything of value that is won by some participants. As mentioned above, the virtual items are “things of value." If there is great variation in that value, you will have some "winners" and some "losers." Those who get the high-value items will be "winners;" the "losers" will be those who get the low value items. The "thing of value" being won is the relative difference in value between the rare items and the common items.

To make all of the items of roughly equal value, the items should be roughly equal in terms of availability and, to the extent the items are useful in a particular game, be roughly equal in terms of in-game strength/importance. If some items are more rare than others, or if some items are significantly more powerful than others, this creates a natural break in the value of the items (and as discussed above, this is to be avoided).

Of course, there are ways to structure virtual item sales so that you do not implicate the equal value issue but still allow you have rare items. For example, a company could choose to package items together in lots, just as baseball cards were sold in packs. In each baseball card pack, there was a set number of common, uncommon, and rare cards. This wasn't a problem viz. relative value because every purchase of a card pack contained the same number of cards of each availability. The same can be done for virtual items.

All that being said, the above are just my thoughts on how this would play out. To my knowledge there has not been a case decided that definitely finds sales of blind virtual items to constitute a lottery. There have been cases that exhibit similar elements, however. For example, the Massachusetts State Lottery took action to curtail the use of video games that dispense telephone cards of unknown value. In addition, in the early 1990's, trading card companies were sued for a practice that became known as "chase cards" - cards of extremely high value that were randomly inserted into packs of other, less valuable cards. See e.g., Chaset v. Upper Deck, 300 F.3d 1083 (9th Cir. 2002); Price v. Pinnacle Brands, 138 F.3d 602 (5th Cir. 1998). These cases brought mixed results, and were highly fact-dependent, but the consistent theme was this: encouraging consumers to make purchase after purchase in the hopes of getting the rare, "high value" item is risky.

Whether blind virtual item sales are legal or not is only half the issue. In addition to legal issues, blind virtual item sales can lead to public criticism if buyers are unhappy with the item they ultimately receive. The chance of a bad public relations issue arising can be lessened by: 1) disclosing what the array of virtual items includes; 2) selling packages of multiple items as one “unit” rather than selling items individually; and 3) packaging the items such that a buyer has a good idea of the nature of the items (e.g., packaging the items by game) rather than making random packages of items.

Disclosing the array of available virtual items will help avoid situations where someone buys and item they do not want. If the entire spectrum of items was made known prior to purchase, then the buyer has the opportunity to decide whether the sale is something in which they wish to participate.
Selling the virtual items in a bundle, rather than individually, means that there is more of a chance that the buyer will like at least one of the items in the bundle. If items are sold individually, then is a much greater chance that the buyer will receive something he/she does not like at all, and therefore view the entire transaction more negatively than would be the case if the buyer had received a bundle of items.
By grouping items by their general nature (e.g., by game), you reduce the probability that a buyer will receive items that are wholly undesirable. For example, if the virtual items being sold are “in-game” items, then grouping items by game would ensure that someone does not make a purchase and receive an item for a game he/she does not own. Alternatively, you could group items by age group, game genre, etc., but the most appropriate means of grouping will be largely determined by the nature of the items being sold.

The bottom line is this: true kompu gacha sales could be highly problematic under US law, unless they are structured appropriately. The best way to determine if your virtual item sales activity is structured appropriately is to contact an attorney and have them review the entire process, start to finish.

Courtroom Roundup - Pre-E3 Edition

Drew Boortz — Mon, 04 Jun 2012 05:23:48 -0800

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

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

Imperfect Perfection? 2K Sports, Unsportsman-like Conduct, and the Chase for $1 Million

Drew Boortz — Mon, 07 May 2012 05:32:26 -0800

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

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

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

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

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

As a starting point, let's walk through some general legal issues with regard to promotions like the challenge. Promotions, regardless of their means of determining winners, have two levels of legal regulation. First, promotions have a set of official rules which operate like a contract between the promotion sponsor and the entrant. These rules govern who is able to enter, how one can enter, the conditions of winning, etc. On top of these quasi-contractual terms, there are bodies of regulatory law that will dictate how the promotion can operate. The applicable law varies depending on whether the promotion is chance-based or skill-based, but one rule is consistent across all promotions - the promotion must be conducted in a fair, non-deceptive manner. Promotions that are conducted in a manner that is unfair or deceptive can be violations of unfair competition laws, at both the federal (Section 5 of the FTC Act) and state (just about every state has a "mini-FTC Act" law - for example Cal. Bus. & Prof. Code 17200, NY Gen. Bus. Law 349, etc.) levels.

But lest you think that's the end of the inquiry, know this: the two sets of obligations - the contractual and the regulatory - can be joined together so that a breach of the official rules by a promotion sponsor may be a violation of unfair competition law. In other words, breaking your own rules can lead to a lawsuit because a breach of the official rules can constitute an unfair practice in and of itself.

Turning to the 2K situation, it may seem that at first blush 2K's response is in keeping with the official rules. That is, nothing in the official rules specifically prohibits the exploit, so therefore the players who used the exploit should not be disqualified.

I have to disagree with 2K's assessment here. I think that the exploit issue is dealt with in the official rules. The rules contain a prohibition against acting in a "unsportsmanlike" manner. Now, I admit that the term "unsportsmanlike" is vague, but I can't imagine what is "sportsmanlike" about taking all of the other team's starting players out of the lineup. Not only are you facing a weaker team, but you're facing a team that would never be put onto the field (barring some sort of extremely unlikely set of events, in which case it is doubtful that the game would be played anyway).

If that weren't enough, 2K gave further insight into how it defined "unsportsmanlike conduct" by including the "no substitutions" point in the promotion "Checklist." The "Checklist" is part of the promotion website that is meant to describe the rules in "plain English." Thus, 2K put players on notice that work-arounds like this exploit would not be tolerated.

There's a problem with this theory, though, and that is the fact that the "no substitution" language is not found in the official rules. This means that one could argue that the "no substitutions" language is not part of the restrictions placed on participants - it was merely a guideline, not a rule that binds how the promotion sponsor must act. In short, inconsistent messaging from 2K has made what would otherwise be a clear-cut case into a murky situation where it seems no one is happy. Read the comments on the Kotaku story to get a feel from what a lot of players are feeling.

So, the takeaway for companies thinking about running promotions is that they will want to avoid the problems associated with inconsistent messaging. The best way to do this is to have your legal team make sure that anyone speaking for a company with regard to the promotion uses the exact language found in the rules. Marketers may hate it because it sounds too formal or "legalese"-ridden, but it can dramatically reduce the risk of having inconsistent messaging.

Setting aside the problem of inconsistent messaging for a moment, let's consider the practical consequences of 2K's decision. Let's assume that 2K disqualifies some of the finalists on the grounds that they acted in an unsportsmanlike manner (as a result of using the exploit). This would result in a pool of no more than eight people who are upset with the company. On the other hand, by allowing people who used the exploit to become finalists, 2K has a pool of several thousand who could be upset - those who did not become a finalist but could have if 2K had disqualified some of the chosen finalists. Would you rather have eight people considering a lawsuit, or several thousand people considering a lawsuit? I'd choose the eight.

Finally, consider how the two potential lawsuits could move forward. For a lawsuit brought by people who were disqualified as a result of using the exploit, they would have to prove that their actions were fair and sportsmanlike. I would think this would be very difficult to prove. For a lawsuit brought by people who were not finalists, however, they would have to prove that 2K did not live up to its contractual obligations. After all, the rules could be interpreted as a promise to disqualify "unsportsmanlike" players. I would much rather be a defendant in a case where someone had to defend the use of the exploit as "sportsmanlike" than in a case where I had to defend my decision not to disqualify such people.

Given the media attention the challenge is getting with regard to the exploit, I would be surprised if this issue simply went away. Yet even if legal action does not arise from the challenge, think about the bad PR that 2K is getting from what should otherwise be a victory for the company. At the end of the day, there are real consequences that arise from questionable promotions, even if those consequences do not take the form of judgments and/or lawyers fees.

Bottom Line: So what can we learn from the 2K situation? Here are a couple of takeaways:

Clearly drafted official rules can be critical to the success of a promotion. Too often I see companies copy and paste rules from previous promotions, which can only make the promotional obligations less clear. Give serious thought to your promotion rules, and make sure each set of rules is tailored to the specifics of your promotion.
Include in those rules a "superseding" clause whereby the rules will override any statement you make that appears to conflict with the rules. Though the "Checklist" doesn't exactly conflict with the official rules, one could imagine a scenario where this is the case. To avoid inconsistent messaging about the promotion, make sure the rules are dominant.
If you have messaging about the promotion other than the official rules, make sure that messaging mirrors the rules exactly. Any variation from what is in the rules can lead to situations like this, where participants are not sure how the promotion will operate.
Consider the overall fairness of a promotion when making rule-interpreting decisions. Was fairness served by 2K's decision to finalize the eight winners, even though some question has been raised regarding the use of the exploit?

Quick Hits: the May Day (Redux) Edition

Drew Boortz — Wed, 02 May 2012 05:55:56 -0800

It's the day after May Day. And since there's no good way to make a transition from that into some bullet point topics of interest for games companies, let's just get right into it, shall we?

EA's declaratory judgment against Textron in the lawsuit over the inclusion of Bell helicopters in Battlefield 3 can stay in California. Sometimes, it pays to move quickly when threatened with a potential lawsuit.
Speaking of lawsuits, if you're involved in a copyright infringement suit and you're seeking a preliminary injunction against an infringer, then you need to be aware that the "presumption of irreparable harm" may no longer be valid (it depends on your jurisdiction). Instead, you may need to show evidence of irreparable harm (PDF) if you are to prevail on the prelim.
Developing Concern's own Patrick Sweeney was recently interviewed by Ayzenberg for a feature on developing trends in game finance and monetization. Great read for those who are interested in how games are getting funding and making money in today's games market.
Amazon settles its digital purchase sales tax dispute with Texas. Amazon will now invest roughly $200 in capital investments in Texas, and will begin collecting sales taxes on digital goods sold to consumers in Texas. Read our previous coverage of the issue with collecting sales taxes on digital goods.
The US DOJ has indicted 10 individuals for making and selling mod chips that circumvent DRM technologies. The indictments stem from "Operation Tangled Web," which was launched in 2008. As GamePolitics points out, the mod chip issue is being considered by the US Copyright Office as an exemption to the DMCA (the law under which the 10 individuals are being prosecuted). I have no idea whether the DOJ's prosecution of mod chippers will have any impact on the Copyright Office's rulemaking, but whatever the Copyright Office decides it is unlikely to be of much help to those individuals already in the DOJ's sites.
A Pennsylvania man has sued Ubisoft for copyright infringement. The man claims that Ubisoft's marquee franchise "Assassin's Creed" infringes upon his novel "Link." The basis of the claim is that both storylines involve the ability to relive ancestral memories. Although a lot of fact development will need to occur before any final judgment can be rendered for this case, a quick perusal of the complaint indicates that a lot of the "substantial similarity" may stem not from original expression but rather from the ideas of reliving ancestral memories (there's a device that allows you to tap into those memories, while reliving those memories you interact with historical figures, good battles evil, etc.). If that's the case, the plaintiff may find it difficult to prove copyright infringement because, as we've said a few times here, copyright law does not protect ideas.

In the meantime, however, the plaintiff appears to be on the receiving end of a lot of vitriol from fans of Assassin's Creed. Sometimes, legal actions have non-legal consequences (a factor that should always be kept in mind when exploring your own legal options).
EMI filed a lawsuit in New York federal court alleging that Def Jam Records owes UMI for making unlicensed use of EMI's music in Def Jam’s new video game, Def Jam Rapstar.

The JOBS Act: Game Changer for Start Up Games Companies?

Drew Boortz — Mon, 09 Apr 2012 05:48:23 -0800

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:

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.
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.).
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.
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?

Trademarked Characters, Crossovers, and Bankruptcy: How to Structure the License Agreement to Protect Your Marks

Drew Boortz — Thu, 22 Mar 2012 05:54:27 -0800

Blending characters and story lines from two distinct universes has long been a staple of the entertainment industry. Comics, movies, and video games have all done it. And with the upcoming Avengers movie and the release of Street Fighter x Tekken, the desire to create crossovers does not appear to be diminishing.

From a legal standpoint, I find crossover projects to be a lot of fun (fyi: when a lawyer says "fun," that probably means "complex, detailed, and time-consuming" - not exactly the same definition as most people would have for "fun"). There are a myriad issues that can fall out from a crossover project, and any company thinking about this kind of game needs to have solid legal representation from the get-go. Here's but one example.

Let's say that Company A has a well-known character - something instantly recognizable by the masses. So too does Company B. These companies have trademarked their respective characters (a process that is not necessarily automatic, nor necessarily possible in all situations - another complexity!), and have been diligent in protecting those trademarks. The companies are approached by Publisher, a video game publisher who has a great idea for a new crossover game utilizing characters from both companies. Everyone thinks this is a great idea (new revenue streams almost always seem like great ideas), and so Company A and Company B enter into separate agreements with Publisher.

Fast forward a year or so, and Publisher has fallen on hard times. Publisher goes into bankruptcy and now the bankruptcy trustee wants to assign the agreements with Company A and Company B to a third party. Neither Company A nor Company B is comfortable here. They don't know the new publisher at all, and they are concerned that the new publisher will sacrifice game quality to hurry up production and see immediate return on investment. As a result, the brands of both Company A and Company B could suffer.

So, what rights does Company A/Company B have to stop Publisher's assignment? Can Publisher move forward with its plan without either (or both) Company A's or Company B's consent? Exploration of these questions, and thoughts on how to structure future trademark license agreements to deal with these issues, after the jump.

The rights of Company A and/or Company B to stop Publisher's assignment will start with the agreements Company A and Company B had with Publisher. If these were straight trademark licenses, then either Company A or Company B may be able to stop the assignment of the agreement to the new publisher. If, however, the agreements were executory contracts, Publisher (or the bankruptcy trustee) could assign this to a third party even if Companies A and B object.

Wait a minute, you might be saying. Don['t publishers traditionally take only a straight trademark license from a licensor, and as such, shouldn't the publisher be prohibited from unilaterally assigning the license to a third party if publisher goes bankrupt?

Yes, but...

Times are changing. Publishers often rely heavily on in-house development arms, and developers themselves are getting into the publishing game. Publishing has become even easier thanks to the opportunities offered by iTunes App Store, the Android App Market, the XBLA Indie Channel, and more. Thus, the "traditional" model of a straight trademark license is no longer the only way things are done. More and more, these agreements are morphing into a hybrid of licenses and services agreements. The balance between these two parts will determine whether the agreement can be assigned without consent or not (in bankruptcy, that is).

Striking the correct balance between a trademark license and a services agreement can be difficult, but fortunately we can draw some guidance from last year's decision in In re XMH Corporation. In this case, XMH entered into a trademark license agreement with a company called Western Glove. Under this agreement, XMH would sell clothing that bore the trademark of Western Glove. At a certain point, however, the agreement converted into a services contract whereby Western Glove took back its trademark rights, but hired XMH to perform certain support services (sourcing, marketing and sales, merchandising, etc.). Later still, XMH goes into bankruptcy and wants to assign its rights under the Western Glove contract (including rights to receive a royalty stream) to third parties. Western Glove objected to the assignment.

Thus, the crux of the case was what kind of agreement arose between the parties. XMH argued that the trademark license portion of the agreement expired, leaving only the services contract, and therefore the services contract could be assigned under Section 363 of the Bankruptcy Code. Western Glove argued that the services contract contained an implied trademark license and as such it could not be assigned because Section 365(c)(1) of the Bankruptcy Code prohibits assignment of agreements where "applicable law" (non-bankruptcy law) prohibits assignment without consent. Since trademark licenses generally cannot be assigned without the consent of the licensor (see Miller v. Glenn Miller Productions, Inc.), Western Glove thought it had the right to stop the assignment by XMH.

Ultimately, the court ruled that the services portion of the agreement was not an implied trademark license because the parties took great pains to distinguish between the trademark license portion and the services portion. Had the parties intended the entire agreement to be a trademark license, the document would have said so. Since it did not (and indeed, did just the opposite in drawing a distinction between the trademark license and the services contract), the agreement could be assigned by XMH over the objection of Western Glove.

What lessons can a licensor draw from In re XMH? Here are some thoughts on structuring future license/publishing agreements:

Think about the fundamental nature of the publisher/licensor relationship, and follow the development of the game (and use of the character) from start to finish. I find flow charts can be helpful here, and can allow you to visualize responsibilities without getting hung up on generic relationship labels. All too often I hear statements like "well, so and so is a publisher, so they won't do X." The industry changes far too quickly to attach too much meaning to a generic relationship description.
Be sure that the title of the agreement reflects the relationship you intend to create. Though not dispositive, courts may look to the titles of agreements are statements of intent. Too often titles of agreements are recycled (e.g., "Publishing Agreement") from one deal to the next without giving any thought as to whether a more appropriate title is warranted (e.g., "Trademark License for the Publishing of an Interactive Entertainment Software Product"). Though it may seem like a small thing, the 7th Circuit found the titles and structure of the XMH/Western Glove agreement persuasive in deciding that there was no implied trademark license in the services contract portion.
Trademark licensors should think farther down the line than just the individual agreement with the publisher. What rights, if any, is the publisher granting to a developer to take over a game's publishing if the publisher goes under? Large developers may want this pseudo-"turn around" right so that they can take advantage of their efforts even in the face of the publisher's bankruptcy. A trademark licensor will want to be sure that it structures its agreement(s) with publishers carefully so that approval rights/consent obligations will be clear.

Take this a step further, and think about the above in the context of a multi-party license, such as those generally entered into for crossover games. The ripple effect can give rise to a ton of sub-issues. What if in our hypothetical the agreements that Publisher had with Company A and Company B were different? Let's say Company A's agreement was titled a "Trademark License" while Company B's agreement was titled "Publishing Agreement." In that situation, it may be that Company A could object to Publisher's assignment in bankruptcy, but Company B could not. This would put Company A in a much more economically advantageous position than Company B, and could extract more from Publisher's assignee than could Company B.

See why we recommend involving legal counsel right from the start?

Taxing Mobile Apps and eBooks: California Issues New Guidance

Drew Boortz — Thu, 08 Mar 2012 06:46:50 -0800

Benjamin Franklin is often quoted as saying that nothing in life that is certain except death and taxes. In light of all of the battles over online sales taxes, perhaps taxes are not as certain as we think. Consider the state-by-state challenges that etailers are having with various states: Virginia may collect taxes, Texas won't. Here is a pretty good overview of how various states treat online sales taxes.

So not even taxes can be said to be certain anymore (at least in the online context). But to help alleviate some of the confusion surrounding this topic, California has provided a little bit of guidance for online companies of all stripes.

Our colleagues at the Taxing Tech blog have a great article on what the new California guidance means. For anyone involved in digital distribution of games, apps, ebooks, or the like, it's a must-read. And while we won't duplicate the insightful comments of our colleagues here, we thought we would provide you with some of our own thoughts on what the new guidance means:

Sales of physical goods by California companies are still likely to create a nexus for California sales tax purposes. This means you may want to think carefully about whether your business is profiting from sales of physical media - CDs, diskettes, jump drives with pre-loaded software, etc. If the profit margin isn't as good as you think, perhaps it's time to consider online-only distribution.
Sales of electronic products (apps, ebooks, etc.) through digital means (Apple's App Store, Android Marketplace, etc.) may not be subject to sales tax collection obligations so long as you do not provide physical back-up media along with the sale. Personally, I don't know of anyone who does this as a matter of course, but if you do provide backup copies of the software on physical media, you may want to rethink this course of action.

The bottom line is that the new guidance can be a big win for games companies that sell their products online-only. It can keep the effective cost of your products down, which can lead to greater downloads by consumers, and keep your administrative burdens low at the same time. You know what we call that? A win-win.

DevConcern's Patrick Sweeney: So You Want To Be a Games Lawyer...

Drew Boortz — Thu, 19 Jan 2012 12:32:21 -0800

For some great insight on what life is like as a video game attorney, read Patrick's interview with IndustryGamers. Solid advice in there, though I'm disappointed his day-to-day experience isn't exactly like L.A. Law.

If they ever make a revival of the show, I'd vote Patrick to be the next Arnie Becker.