Law of the Level

Downloadable Content Without Downloading End User License Issues

Sheppard Mullin — Fri, 26 Feb 2010 07:24:08 -0800

Let's start with the basics. When someone purchases a video game, an end-user license agreement (EULA)[2] details the rights the purchaser has to play and use the game. Additionally, users can often buy optional downloadable content such as map-packs, mini-expansions and the like. Users may also elect to purchase small add-ons to games (such as power-ups, new costumes, or equipment fully capable of being taken off sweet jumps) via microtransactions For ease of reference, we'll call both categories "DLC" (but we recognize some distinction may be drawn between the two). Purchasing DLC is typically handled in three ways: integrating the transaction into the video game itself, conducting the transaction externally via a game platform, such as video game platform, or through a third-party provider such as LiveGamer or Paypal. When the transaction relies on a third party, there may be a terms of sale (apart from the game developer's EULA) that governs a user's purchase of the DLC. Two distinct legal agreements from two separate companies relating to the same game content creates the potential for conflict. For example, the third party's terms of sale governing the purchase of DLC may be silent on the topic of content ownership or may even conflict with the EULA.

ONE EULA, INDIVISIBLE, WITH LIMITED LICENSES FOR ALL

Video game publishers can streamline the DLC transaction process by conducting the sale themselves. Second Life and Habbo Hotel are two examples of games that do not rely on any outside party to conduct microtransactions. Linden Lab, the publisher of Second Life, has a single, consistent policy for Second Life and its virtual exchanges (LindeX and Xstreet SL). Likewise, Habbo Hotel's terms of use and terms of sale both explicitly state that users have no property interest in coins, items, or goods, and that all virtual items remain the exclusive property of the publisher, Sulake. Thus, by handling the entirety of a microtransction in house, the game developer/publisher can minimize the risk of a potential conflict regarding ownership rights by creating a single, unified policy that incorporates both the EULA and the terms of sale.

PLATFORMS: ONE EULA TO RULE THEM ALL (AND IN THE FINE PRINT…BIND THEM)

Currently, many video game developers and publishers make use of external platforms for running and distributing their games (Kongregate, Facebook, Apple's iPhone, Nintendo's Wii, Sony's Playstation, and Microsoft's XBox 360). Often the platform provides an omnibus EULA for all games making use of the platform, and the game developer and/or publisher does not provide a game specific EULA. As a result, the game developer and/or publisher may not be in a position to cater the terms under which the end user will interact with a game or purchase downloadable content. Therefore, the platform's EULA may handle rights to game content or downloadable content in a manner inconsistent with the intentions of the game developer/publisher.

This concern is somewhat mollified by the fact that most major platforms model their approach to end users' rights in a manner very similar to that taken by a game developer distributing its own game. Typically, the platform EULA clearly spells out that the game developer/publisher utilizing the platform retains full ownership of all game content, DLC and content purchased through microtransactions while the end user gains only a restricted license to make use of this content. However, video game developers/publishers should always review the platform EULA to ensure there is no inconsistency between the game developer/publisher's intended approach to handling rights to DLC and the platform's method of handling the user's license to the products.[3]

In the event an inconsistency exists between the platform's EULA and the game developer/publisher's intended purpose for the game, the game developer/publisher should attempt to negotiate with the platform owner for an amendment to the omnibus EULA, or, alternatively, the right to create a parallel EULA that governs the particular game or interaction in question.[4] In the absence of a credible legal option, the game developer/publisher should consider whether modifications to the technical design of the game could eliminate the potential for harm to the game developer/publisher's interests.

A THIRD PARTY APPROACHES! EXTERNAL SERVICE PROVIDERS AND EXTERNAL USER CONTRACTS.

When relying on independent third-parties to conduct DLC transactions, the risk of conflict between the third party's terms of sale and the game developer/publisher's EULA increases. Unaffiliated third-parties may look to protect themselves from liability at the expense of video game publishers since the terms of sale are drafted with the third party's interests in mind. Third-party providers often require users to acknowledge that they, the providers, take no position on the ownership, transferability, or use of items purchased or sold through their services. These disclaimers, however, may lack language that reaffirms a publisher's ownership rights, or they may fail to instruct users to refer to their game EULAs for specifics on content ownership. Thus, third-party disclaimers may leave publishers without the best protection, as the absences of clarifying terms may foster ambiguity and confuse users as to the exact nature of the rights they have acquired to the DLC they have purchased.

To prevent conflicts with third-party providers, a video game publisher can establish a partnership with the provider. One example of this is the partnership between Sony Online Entertainment (SOE) and LiveGamer. For several of its titles, SOE allows LiveGamer to conduct microtransactions for virtual goods. SOE's EULA and LiveGamer's terms of sale complement each other to ensure that a user cannot participate in a transaction without the consent of both companies. SOE places responsibility on LiveGamer to determine the eligibility of a user to participate in exchanges; whereas LiveGamer places responsibility on SOE to determine a user's rights to acquire and use virtual items. More importantly, the terms of service for SOE and LiveGamer are both very clear that a user obtains no ownership rights in purchased game content. Thus, a collaborative partnership with a third-party provider affords a publisher the opportunity to cooperate on terms that regulate a user’s ownership rights.

MAKING PEACE WITH EXTERNAL CONTRACTS[5]

As discussed above, many of the solutions are context dependent; however, there are several proactive steps a publisher can take to reduce potential conflicts over DLC ownership. If the DLC only contains slight additions and minor changes to the game (patches, new items, or new outfits), it may be easier to have a EULA that specifically extends to cover such minor additions (for example, specifically referencing such additions in the EULA itself). If the DLC contains major additions or changes to the game (adding levels or characters, altering the ESRB rating, or allowing online interaction between users), it may be easier to create a separate, compatible EULA to handle the complexities of such significant additions. Furthermore, video game publishers can educate their users on which third party providers are authorized to provide DLC and which are unauthorized. By listing the items that may be traded and by listing sanctioned third-party providers, video game publishers can help reduce the potential for conflict. Finally, a EULA can require that even if a user purchases DLC from an unauthorized third-party, the EULA's terms will govern the DLC despite any representations made by the third-party.

Regardless of the method used to conduct microtransactions, and regardless of whether there are issues of content ownership, merchantability, or IP infringement, video game publishers should ensure they have a fully developed EULA that not only specifically addresses DLC, but also considers the many legal issues that DLC creates.

Authored By:

Shawn Foust (GamerTag: OMG SRSLY)
(650) 815-2627
sfoust@sheppardmullin.com

and

Derek Lowrey
(Extern Extraordinaire)
_____________________________________________________

[1] Ok, it's a terrible title, but it's better than the typical legalese: "On Downloadable Content: Moving Toward A Broader Consensus Of First Party And Third Party Contracts In A Digital Millennium."
[2] I'll go to the grave defending the relevance (and usefulness) of these documents. Every time you scroll down and click without reading a piece of me dies.

[3] The game developer should also make sure that the technical design of the game is compatible with the platform's method of handling DLC.

[4] Realize that most developers and publishers will not have the requisite leverage to negotiate a change to the platform's EULA. Also, permitting parallel EULAs may be untenable for many platform owners, particularly where there would be technological ramifications to permitting changes to the omnibus EULA. Long story short? Make sure you design your game with the intended platform (and it's EULA) in mind.

[5] Or, to paraphrase a particularly famous line: "All of the DLC are belong to you."

Global Games. Global EULA?

Sheppard Mullin — Mon, 25 Jan 2010 10:42:14 -0800

I will leave the discourse on the necessary role an end user license agreement (“EULA”) plays in the game environment for another day.[1] Instead this entry takes a quick dip into the challenges to enforcing a EULA for a game with global player base and offers a few quick suggestions for catering your EULA to address some of these pitfalls.

Online play is a critical component to many blockbuster games (MMOs being a particularly obvious example). While the servers may be residing in the United States, players are often logging on across the globe. This creates an interesting issue: how does a company enforce a EULA when the player or third-party (such as a company creating improper mods) resides abroad?

The simple solution is technical in nature: restrict access. Unfortunately, banning individual users may be problematic for a number of reasons: the user may have had his account hacked by a third party (who was the actual infringer, not the banned user), a banned customer results in subscription loss with no guarantee the user won’t return to harass again, the company doesn’t recover any damages for instances where the infraction was particularly egregious (such as crashing the servers, introducing a highly disruptive hack/mod, etc.), and, finally, in the case of third-party ne’er-do-wells, the ban may not impact the culpable party at all.

As a result, a legal solution may be called for under certain circumstances. Often companies will use forum selection and choice of law clauses as a means for making the enforcement of EULAs against foreign parties more predictable. Unfortunately, the lack of an international framework complicates the enforcement of choice of law and forum selection provisions where foreign parties are involved.[2] Forum selection clauses in EULAs can be disfavored in some jurisdictions. Choice of law clauses enjoy a greater likelihood of enforcement, but foreign courts may not enforce such clauses where they believe it might undermine local public policy (particularly in areas of consumer protection). Finally, if the company manages to obtain a judgment in the United States, the lack of international treaties mandating the recognition of judgments can stymie attempts to enforce the judgment abroad.

So what is a company to do? In an ideal world, there would be a separate EULA for each country that has been catered to the law of that country and players from each country were required to play on servers subject to those restrictions. But of course, that ideal world is one only a lawyer could love -- it's impractical since it is difficult to determine where players are located (particularly problematic users will be behind proxies and IP anonymizer clients) and in many cases players from one country will be playing on servers intended for another player base (and different rules and regulations for different players on the same server can undermine game play).

As an alternative, a company can adopt a middle-of-the-road approach. First the EULA can include both a choice of law and forum selection provision. If the company elects to include both, the provisions should be separated. Keeping the clauses in the same provision runs the risk of having them both struck down simultaneously under a single unconscionability analysis. In order to increase the likelihood of enforcement of a forum selection clause, the company should consider whether it would like to designate multiple venues across different regions to minimize inconvenience to the foreign party. Finally, the company should consider including an international arbitration clause since the international treaties relating to arbitration awards are significantly more developed and broadly ratified.[3]

Authored By:

Shawn Foust (GamerTag: OMG SRSLY)
(310) 228-3724
sfoust@sheppardmullin.com

and

Craig Cardon
(310) 228-3749
ccardon@sheppardmullin.com

[1] Though if one were inclined to read my editorializing, it would go something like this: Players don’t want to play in a world dominated by glitchers, hackers, cheaters, and modders. Companies aren’t interested in a world that no one wants to play in (it’s hard to extract value from chirping crickets). The EULA and TOS, which are often rolled into the same document, create the foundation for a system of enforcement that makes a livable game-world a reasonable possibility. Otherwise, ANARCHY!

[2] For example, the 2005 Hague Convention that was meant to create a framework for enforcing forum selection clauses has failed to gain broad acceptance (Any day now I expect some serious movement. 1…2…3…Ratify! No? Maybe next year.).

[3] For example: The United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards has been ratified by well 140 countries (including the United States). Under the convention, a party may seek enforcement of the award in any contracting state.

Creating the (Virtual) American Dream: User-Generated Content and Trademarks in Virtual Worlds

Sheppard Mullin — Wed, 07 Oct 2009 05:17:24 -0800

When strolling the streets of an online virtual world that allows user-created content, it is not uncommon to see brands that you recognize. A Ferrari may roll past you in the street. The avatar walking toward you may be cushioning its steps with Nike-Swoosh-emblazoned tennis shoes. The virtual jewelry store that you pass may feature a gleaming Cartier necklace in its window. Familiar brands cushion the virtual experience with the trappings of familiar surroundings for the software user. The problem is, chances are these brand owners never created these virtual goods, and the money from their sale likely went into someone else's pockets.

Within many virtual worlds, users are able to create their own content. A virtual world allows users to live out fantasies that they might never be able to fulfill in real life. So if you were creating a car for yourself, or to sell to others within that world, why not make it a Ferrari or a Lamborghini? When you create a pair of sunglasses, why not decorate them with the Gucci logo to mimic a pair you've admired at the shopping mall in real life? Successful brands attract buyers, and this maxim is no different when the buyer is in the market for virtual goods rather than real ones.

Most users of virtual-world software probably aren't thinking about trademark law when they create virtual knock-offs of successful products. However, the practice potentially raises real-world legal issues. Trademark law, unlike other types of intellectual property law, exists to protect consumers. The purpose of trademark law is to prevent purchasers from confusion as to the source of the goods that they are purchasing. If a consumer purchases a Pepsi-brand cola product, they know what quality and characteristics to expect of that product (regardless of whether the consumer finds those qualities to be good or bad). By preventing other manufacturers from selling similar products with similar names, trademark law ensures that consumers get what they expect when they purchase a particular brand.

The question arises then, as to whether using real-world brands on virtual goods within virtual worlds would rise to the level of trademark infringement. In a nutshell, the test for trademark infringement is whether the allegedly infringing use is likely to cause confusion among consumers as to the source or sponsorship of the goods or services. Would a virtual Pepsi or virtual Nikes, produced by a third party, create confusion as to the source of that product? Would purchasers expect that those virtual goods came from the source of the real-world products, or would a reasonable consumer know that an unrelated entity created them?

Certain brand holders have said yes, there is a likelihood of confusion when unrelated third parties sell branded goods in virtual worlds. Earlier this year, Taser International, Inc., makers of the Taser-brand electronic control device (ECD), filed a lawsuit against Linden Lab (makers of the popular Second Life virtual world), certain executives at that company, and a number of other entities who allegedly sold products within Second Life that bore the TASER trademark, and/or resembled actual Taser products. Taser claimed $75,000 in damages resulting from the alleged infringing sales. Shortly after the complaint was filed and served, Taser settled the lawsuit and dismissed the complaint without prejudice.

Other companies have chosen alternative ways of dealing with replication of their trademarks and trade dress in virtual worlds. Furniture maker and designer Herman Miller has created a number of iconic furniture designs, including the well-known "Aeron" chair. A number of third parties within the virtual world Second Life were creating and selling products that resembled Herman Miller's products and bore their product names. In response, Herman Miller created its own official presence in the virtual world and began selling high-quality official Herman Miller virtual furniture to users. The company also launched a publicity campaign titled "Get Real," where it offered to replace knock-offs that users had purchased with the official products, so long as those users deleted the files of the knock-off furniture.

Herman Miller's response to the existence of virtual knock-off products highlights one reason that confusion among consumers in virtual worlds may be increasingly likely as time goes by—more and more companies are creating their own official presences in virtual worlds and, correspondingly, their own official products. In the past, when virtual worlds were populated only by individual users, it might have been unreasonable for a purchaser to assume that the "Gucci" sunglasses that they were buying within the world were officially branded. But with an ever-growing number of companies expanding their operations into the virtual frontier, it becomes more likely that a branded product might come from the real-world producer.

Examples of companies with official presences within Second Life include Ben & Jerry's, Calvin Klein, Coca-Cola, H&R Block, IBM, Lacoste, Nissan, Starwood Hotels, and many others. If the CK jeans that a user buys within the world actually come from Calvin Klein, is it reasonable for that consumer to believe that other branded clothing also comes from its official real-world source? At present, there is no legal precedent on this subject. But as the popularity of virtual worlds continues to grow, it seems likely that it will only be a matter of time before the courts make a decision on the issue. In the meantime, it will be up to each brand holder individually to decide how to respond to the emergence of this growing marketplace and its potential opportunities and pitfalls.

Authored By:

Thayer Preece
(650) 815-2618
tpreece@sheppardmullin.com

Who Owns The Tools Of The Trade?

Sheppard Mullin — Wed, 23 Sep 2009 05:12:32 -0800

Let’s start with the basics. Under a typical game development contract, a publisher furnishes the funds required to develop a game to a game developer. Understandably, access to these funds is subject to certain restrictions, expectations and other contractual obligations. Invariably, there is a provision dedicated to the handling of the rights to intellectual property created pursuant to the terms of the agreement.

Now this is where it gets tricky. How are these rights handled? If the funds are coming from a publisher, the developer can expect to see the phrase "Work Made for Hire" or some other language allocating the intellectual property rights for works created pursuant to the contract to appear somewhere in the agreement. This provision typically specifies that the intellectual property created by the developer will belong to the publisher if it falls within certain parameters (often anything "related to" the project or falling under a list of defined terms).

Certain traditions are observed in video game contracts. The game (which normally includes the finished product, the source code, and all of the rights to exploit the underlying intellectual property) will be spoils of war for the publisher. The developer may rejoice and pour numerous libations in celebration of the fact that it has probably retained rights to the tools of the trade such as the game engine and internally created development tools.

This is where the potential for disaster begins.

Even contracts that contain excruciatingly long descriptions of the handling of the intellectual property can run into problems if the developer-publisher relationship breaks down. As a game moves from the drawing board to an executed product, the odds are that the line between "Tools" and "Game" may difficult to distinguish. As specified by the language of the contract, the publisher will typically have rights to the source code and the developer will have rights to the tools and game engine. The problem is that may not be easy to determine where one begins and the other ends.

This is particularly true if the developer and publisher part ways during development. A publisher may argue that the source code necessarily includes certain aspects of the engine and other developer tools since a workable build cannot be compiled without that framework. Conversely, a developer may argue that the viability of the code is irrelevant where a contract details the parties’ rights to a code without reference to the value or usefulness of the intellectual property.

The best solution will of course depend upon context, but one can imagine possible solutions falling into one of three categories: technical, legal, and business. An exhaustive treatment of these solutions would take too long and put me out of a job, so I’ll give an example of each:

Technical: Throughout the development process, tag modules of code as the publisher’s or the developer’s when they are programmed. Obvious drawback: Time, patience, loss of sanity. Obvious benefit: There is a mutually agreed upon separation that is hard to dispute if everything goes up in flames.

Legal: Create a term in the developer-publisher agreement that will specifically handle that possibility of a termination that results in unfinished source code that requires the developer’s engine to proceed. For example, grant the publisher a non-exclusive engine license to the publisher for the creation of the game or for five years, whichever occurs first. Obvious drawback: Contracts were often born to be litigated, and one can imagine arguments regarding whether the source code is "unusable" without an engine. Obvious benefit: Much cheaper than the technical solution above (unless you have very expensive attorneys), particularly if you pre-negotiate the license.

Business: Realize that the industry is a pretty congenial place, assume everything will be fine and hit the pub. Obvious drawback: Does not plan for the possibility that everything will not be fine. Obvious benefit: Camaraderie and Irish drinking songs. Or, in the alternative, you could have designated staff review the handling of the tools and the source code for each development milestone to determine whether adjustments in operating procedure need to be made.

In determining the best solution there are many questions that should be answered, but here are a few biggies:

What intellectual property will be created or otherwise involved in the development process?
Who will own that intellectual property?
Will there be any assignments/licenses regarding that intellectual property?
What are these assignments/licenses going to look like?
How will you keep the intellectual property separate?
What happens if the project falls apart a month in? Two milestones in? The day after completion?
More epic cheat: Street Fighter II Same Character Code or Contra 30 Lives Code?

The goal is clarity. Everyone wants to make a game, and hashing out a contingency plan for a rainy day is never an undertaking anyone relishes; however, securing certainly during contract negotiations is significantly cheaper than paying for it once a dispute arises. Besides, litigation never makes anyone new friends.

Authored By:

Shawn Foust (GamerTag: OMG SRSLY)
(310) 228-3724
sfoust@sheppardmullin.com

China's Gold Crop Weathers New Regulations...For Now

Sheppard Mullin — Tue, 11 Aug 2009 11:47:32 -0800

Until very recently, virtual currency trading has been widely accepted in China. Billions of RMB in virtual currency have been traded online, and this amount has been increasing by 20% every year. The practice is so common that around the world, "Chinese Gold Farmers" have become a well-known staple of such popular multiplayer online games as World of Warcraft, and in many parts of the world, this is the image most commonly attributed to virtual currency trading. However, with the blossoming popularity of virtual currency trading in China, concerns have arisen that serious problems could stem from mixing virtual world economies with the real world's economy—problems such as inflation, money laundering, and gambling.

In an effort to combat these potential problems, on June 4, 2009, China's Ministry of Culture and Ministry of Commerce jointly released a regulation titled "Notice on Improving the Management of Online Game Virtual Currency" ("the Notice"). The Notice was also approved by China's People's Bank. The Chinese government had four goals in enacting the Notice: (1) to improve the management of virtual-currency-related enterprises by raising the standard for establishing and operating such enterprises; (2) to minimize potential risks arising out of the virtual currency market by regulating issuance of and transactions involving virtual currency; (3) to prevent participants in the virtual economy from committing real-world crimes such as gambling and money laundering using virtual currency; and (4) to regulate the virtual currency market by strengthening law enforcement.

I. DEFINITION OF VIRTUAL CURRENCY

The Notice defines virtual currency as follows: "Online game virtual currency referred to in this Notice is a virtual exchanging tool that is displayed as specific digital units, issued by online game-operating enterprises, purchased directly or indirectly by game players on a pro rata basis by means of legal tender and out of game programs, and electromagnetically recorded on the servers provided by said enterprises. Online game virtual currency may be used by exchanging the currency for online game services provided by publishing enterprises within the directed scope and time limit. Types of virtual currency include online game rechargeable prepaid cards, prepaid money or points, etc. But game tools acquired in the game shall be excluded."

The definition in the Notice specifically limits "virtual currency" to currency acquired by legal tender and out-of-game programs. Therefore, the definition excludes from "virtual currency" any currency acquired within game programs, such as the gold in World of Warcraft ("WoW"). Typically, in-game gold, coins, weapons, and apparel are considered in the industry to be "virtual tools" rather than currency. The Notice does provide a definition for "virtual tools" but states that a separate regulation regarding virtual tools will be issued by the Ministry of Culture at a later time. However, the Notice also states that "online game virtual currency issued by online game operating enterprises should not have the same name as a virtual tool in the online game." This restriction may prove significant for enterprises like Tencent, which operates a popular instant messenger and game program called QQ. Tencent sells its Q coins for legal tender but also allows Q coins to be earned within the game.

One question that many are waiting the answer to is whether the Notice bans gold farming—a popular practice in games such as WoW. Gold farming is a general term within online games for a player attempting to acquire ("farm") items of value that are then sold in-game to create stocks of in-game currency ("gold"), frequently by exploiting repetitive elements in the game's mechanics such as killing an important creature repeatedly to maximize gains. Sometimes the farmer will use a program to perform these actions automatically (a "bot" or a "macro"). In a broader sense, the term "gold farmer" could refer to a player of any type of game who repeats mundane actions over and over in order to collect in-game currency and items. However, gold farmers may not need to put aside their virtual hoes quite yet. As stated above, the Notice does not regulate the trading of virtual tools, and in-game gold likely falls into this category. Therefore, the Notice most likely does not ban gold farming. Farmers will have to wait until the Ministry of Culture's separate regulation regarding virtual tools to find out how gold farming will be regulated.

Overall, the main purpose of the Notice is to regulate the relationship between virtual and real economies. As the Notice states, "the scope of use for online game virtual currency shall be restricted to the purchase of virtual services offered by the game enterprise that issued said virtual currency. Virtual currency may not be used to purchase any real products sold by the game enterprise that issued said virtual currency, or any products or services offered by any third party game enterprise." The Notice bans the trading of real products by virtual currency. Lately, users of the QQ program have been able to purchase small items through online stores using their Q coins. However, under this new regulation, the use of the Q coins to purchase real-world goods is now prohibited. Further, the Notice appears to ban the use of Q coins to purchase any third-party (non-Tencent) services and goods, whether virtual or real.

II. RELEVANT ENTERPRISES

The Notice identifies two virtual-currency-related services: (1) the service of issuing virtual currency; and (2) the service of facilitating virtual currency transactions. The Notice states, "the same enterprise may not operate both services identified above" and separates enterprises into two groups based on these categories: Enterprises Issuing Virtual Currency and Enterprises Facilitating Virtual Currency Transactions.

Enterprises Issuing Virtual Currency are those online game-operating enterprises that create and distribute their own virtual currency and provide services based on the use of that virtual currency. Tencent would be a typical example of Enterprises Issuing Virtual Currency. Enterprises Facilitating Virtual Currency Transactions are entities that provide a platform to users for trading their virtual currency. Chinese auction websites such as www.taobao.com, www.alibaba.com fall into this category. The Notice requires both of these types of enterprises to operate in accordance with the Notice, register with their provincial ministry of culture, and be approved by China's Ministry of Culture. Registration must take place within three months of the date of Notice, which means before September 4, 2009.

During the registration process, Enterprises Issuing Virtual Currency must provide information on methods of purchasing virtual currency (including cash and online payment methods), the exchange rate for virtual currency, measures taken to protect users' rights, and security measures to safeguard users' information. Enterprises Facilitating Virtual Currency Transactions must provide information on methods of purchasing virtual currency (including cash and online payment methods), measures to protect users' rights, measures to ensure that its users register accounts with real names and real bank accounts, and security measures to safeguard users' information, etc.

The Notice aims at providing safeguards to end users in virtual currency transactions. In the past, victims of virtual currency transaction disputes often had no recourse because sellers used fake names and fake bank accounts during the transaction. Without identification information, it was impossible for the Public Security Bureau (a.k.a. police) to track the theft. The Notice now places the burden of ensuring accurate end-user account information on the currency issuing and trading enterprises.

While the Notice may not prohibit the selling of in-game currency within online games, it does seek to prohibit some of the unwanted behavior that can grow out of the gold farming industry. For example, the Notice requests that online game operating enterprises employ measures to attack account theft, private servers, and robot plug-ins.

III. MINORS' PROTECTION

In an attempt to better protect minors who are playing online games, the Notice stipulates that Enterprises Facilitating Virtual Currency Transactions should not provide transaction services to people under 18 years of age. This requirement has two possible implications. The Notice clearly bans selling virtual currency to minors. In addition, it seems likely that a further implication of this prohibition is that Enterprises Facilitating Virtual Currency Transactions are forbidden from allowing minors to register as virtual currency sellers.

IV. ONLINE GAME GAMBLING

Finally, the Notice regulates gambling that uses virtual currency, stating, "Online game enterprises must not allow users to use cash or virtual currency to enter into lottery, betting, or games of chance to obtain virtual tools or virtual currency." This provision has caused concern in the gaming industry because games of chance are often used to distribute virtual currency or virtual tools. For example, online games provided by NetEase, ZTGame, and SNDA have run a type of service called "Open Box," which allows users to pay for an unopened box containing an unknown virtual tool. In order to get high-quality items in the games, some users have spent large sums of money on Open Box. After the announcement of the Notice, the above-mentioned companies have begun to modify or suspend these types of services.

Overall, the Notice's rules are addressed to enterprises rather than end users. However, in the world of online games, the line between these two categories can sometimes be blurred. It remains to be seen how the Notice will be applied to activities such as gold farming or an individual’s auctions of in-game currency or items. The Notice does not provide specific penalties for violations but gives power to provincial ministries "to investigate and punish … in accordance with certain laws and regulations." To some extent, the full impact of the Notice may not be seen until it begins to be enforced against particular activities. There is no question, however, that the Notice will be a key development in the regulation of virtual currency in China.

Authored By:

Ping Chu
86.21.2321.6000
pchu@sheppardmullin.com

Madeline Ma
86.21.2321.6051
mma@sheppardmullin.com

Thayer Preece
(650) 815-2618
tpreece@sheppardmullin.com

In-Game Monitoring May Create Exposure to Copyright Liability Claims

Sheppard Mullin — Tue, 28 Jul 2009 05:25:21 -0800

In a traditional online game, users are required to abide by the Terms of Use ("TOU"). Companies, cognizant of the fact that not everyone will comply with the TOU, implement various enforcement measures such as automated filters, user-driven complaint systems, or a more involved in-game monitoring system utilizing Game Masters. As the popularity of user-generated content ("UGC") and user-customization has increased, ensuring TOU compliance has become increasingly costly and labor-intensive. Additionally, by granting users the ability to import copyrighted materials such as facial depictions, art, literary works, or music, the inclusion of UGC in online games potentially raises Digital Millennium Copyright Act ("DMCA") compliance issues.

The DMCA typically provides online game providers with a limited immunity against monetary damages for contributory copyright infringement. Instead of paying the copyright owner statutory damages for the value of the owner's actual loss, a company that remains DMCA-compliant is only required to provide injunctive or equitable relief (for example, removing infringing material or disabling a repeat infringer's access to its system). However, if a company is found to have observed but failed to act upon copyright infringements or "clear red flags of copyright infringement," it may lose DMCA protection.

What is Red Flag Knowledge?

Red flag knowledge is a term used by courts to describe "an awareness of facts or circumstances from which infringing activity is apparent." This is a two-part test with both subjective and objective elements. Courts will look at the subjective awareness of the service provider—what specific facts came to its attention—and then determine whether, based on those facts, copyright infringement would have been apparent to an objectively reasonable person. This evidentiary threshold is a high one. To prove a company had red flag knowledge, the copyright owner must present evidence showing that the company proceeded in the face of blatant evidence or turned a blind eye to obvious red flags of copyright infringement.

Although companies are not required to actively police for copyright infringements, courts have held that a business which "buries its head in the sand" to avoid discovering red flags is liable for infringing uses of its system. Thus, while companies may be able to tailor their activities to minimize unintentional exposure to red flags, active avoidance could potentially qualify as willful blindness and violate the DMCA's safe harbor requirements.

In-Game Monitoring and User Generated Content

In-game monitoring systems are a potential source of red flag knowledge. Such mechanisms are typically designed to enforce TOU's using a number of different tactics. Common forms include filtering, in-game monitoring, and complaint-response systems.

Filtering:

Filtering is a process commonly utilized by streaming media companies like MySpace.com and YouTube.com to ensure that prohibited materials are identified during their upload stage. Gaming companies may elect to implement a variety of different filters (spam, profanity, etc.) and, typically, courts do not require that a particular filtering process be 100% fail-proof or that TOU-specific filters also identify copyright infringements. However, to the extent that such a filter picks up and identifies copyrighted materials—either through digital fingerprinting, employee identification, or other means—such identification may qualify as a red flag if the company's filtering and monitoring process is not properly structured. As a result, monitoring via filtration could potentially obligate a company to take down or disable access to the infringing items. Furthermore, a filter-based TOU system may frustrate users by denying them immediate access to their UGC. Thus, gaming companies might not find such systems to be a worthwhile investment.

In-Game Monitoring:

Game Masters pose an interesting balancing issue. Unlike automated filters, the presence of in-game monitors creates a much higher possibility that a court will impute knowledge to the company because employees are physically present in the in-game environment and able to perceive any UGC included therein. The more time employees spend exploring a virtual world, the more opportunities they have to encounter instances of infringement. Even if most infringements are handled expeditiously, increased exploration of a virtual world multiplies the opportunities for Game Masters to stumble upon a red flag and fail to address it properly.

On the other hand, despite its dangers, in-game monitoring is one of the best means of ensuring TOU compliance. By actively patrolling the virtual world, Game Masters are able to immediately counteract TOU violations and their mere presence may have a deterrent effect on users who might otherwise engage in spamming, profanity, etc. Consequently, companies may wish to establish a comprehensive, written monitoring policy rather than eliminating in-game monitors altogether.

Complaint-Response Systems for TOU:

With a TOU complaint-response system, there is a reduced risk of red flag knowledge. Much of the gray area which arises from the presence of Game Masters is eliminated since the company is not patrolling its virtual world or overseeing UGC uploads and, instead, merely addresses TOU complaints specifically enumerated by users. Yet, despite its potential benefits, a response-based system can be problematic.

Complaint-response monitoring requires user participation, which can result in a deluge of TOU and copyright reports—or the complete lack thereof. Thus, labor costs are difficult to project and playability may suffer. If there is a surge of TOU reports, the company may be unable to address all of them without taking on new employees. Failure to report any TOU violations could harm playability and alienate some users (especially children).

Summary:

Ultimately, while the optimal method of TOU-monitoring will depend on the specifics of a company, designing a TOU monitoring practice with an eye to potential DMCA issues is an important means of protecting against liability for copyright infringement. With increased flexibility in content creation and UGC comes increased risk of copyright infringement. Game designers must carefully consider the balance between gameplay and self-protection.

Shawn Foust
GamerTag: OMG SRSLY
Twitter: PwnLaw
sfoust@sheppardmullin.com
with assistance from Ben Rubinfeld, summer associate in Century City

In Search of Space Prosecutors

Sheppard Mullin — Thu, 09 Jul 2009 11:38:39 -0800

ARS Technica recently reported on the theft of significant amount of virtual currency from an online bank. The theft was carried out by the former CEO of the bank and the virtual currency was eventually sold for the very real amount of $5,000.

Some background is helpful. The game involved, Eve Online, is a massively multiplayer game where the player pilots a spaceship in a massive universe. The game distinguishes itself in part by the sheer amount of shenanigans permitted by the game design and the terms of service. Players may cheat, lie, steal, murder, and generally make themselves a menace to civilized space society. The most complex and lucrative heists, such as corporate and bank heists, can require coordination between dozens of players over the course of years. Occasionally, stolen items or goods can amount to serious real money. The TOS attempts to prevent people from cashing in on their ill-gotten gains outside of the game by prohibiting the sale of in game items/currency for real currency.

As the value of stolen goods increases, the likelihood of a victimized user bringing claim for recovery of lost items increases. Indeed, claims to this effect have already been brought in China where micro-transactions have blurred perceptions regarding what constitutes "property", though it is worth noting that theft was not permitted in the games the disputes arose from. In the absence of an elite corps of SPACE PROSECUTORS (similar to space pirates, only they fire lasers by the hour), a company should consider how best to protect themselves from claims brought by the targets of these virtual heists. Changing a game that prides itself on a distinctly free experience is often inadvisable, even if it is the strongest means of protection, due to the risk of alienating the player base. Another solution is a clearly drafted EULA. Some terms to contemplate including:

A clear statement that theft and espionage within the game is permitted under the TOS.
A term explicitly disclaiming any player ownership interest to in game items and currency.
A limitation on liability that notes that the company is not responsible for lost items, has no obligation to replace items and is under no obligation to investigate the theft of items.
A privacy policy that restricts any right for one player to obtain personal information relating to any other player.

In games that emphasize role playing, such as Eve Online, a particularly eloquent solution is to build corruption and vice into the roleplaying experience and counter those behaviors by providing support for player run enforcement mechanisms (such as player courts). Allow players to develop, implement and participate in the system of justice creates an internal balance while simultaneously educating the players on the possibility of virtual crimes. Ultimately, a combination of community management , game design and legal contracts provides a company with the tools to manage player expectations regarding a game, prevent gross excesses under the rules, and minimize the exposure a company may face from claims arising from disgruntled users.

Shawn Foust

GamerTag: OMG SRSLY

Twitter: PwnLaw

sfoust@sheppardmullin.com

Branded: Product Placement and Video Games

Sheppard Mullin — Fri, 19 Jun 2009 15:35:50 -0800

Video games and feature films have a lot in common. Both tell stories and have exciting visuals and music. Although one is "interactive", recent Blu-ray HD discs are now turning linear films into more immersive, interactive experiences. Rights and talent deals for both have likewise followed a path towards convergence with terms and consideration often being negotiated and drafted the same way. Nowhere is this trend more obvious than the increasing popularity of product placement in enhancing the economic value of video games by making the game play more realistic while providing increased marketing value and good will by allowing the game developer and product owner, generally at no out-of-pocket cost, to reach new audiences.

Product placement often runs the risk of detracting from its habitat by unduly emphasizing the product without an adequate plot hook. It is not uncommon for a critic to remark upon a particularly clumsy product placement in a movie. Games offer an appealing alternative: an immersive environment that may be actually enhanced by the incorporation of a branded product.

The trend toward incorporating brands into video games is a recognition of a the value these brands can bring to a virtual world. Brands normally pop up in games in one of three ways:

Branded Entertainment. The brand is the game. Examples include Bond games (GoldenEye, I knew thee well), Activision’s Spiderman games, or Electronic Arts’ FIFA and Madden games. Popular brands have a built in audience, which reduces some of the risk in developing the game. Also, the game play may be more engaging since the game's universe is familiar to the player.
Product Placement. Various definitions may be applied, but here product placement will refer to contractual arrangements between a game company (for ease of reference, the "Developer") and an external company (the "Company") for the insertion of the Company's product into the game universe. Examples of this might include a golf club into a golf game or a guitar in a music simulation.
Extra-Contractual Use. Sometimes virtual representations of real items appear without a contract. Typically this occurs in one of two ways: (1) the Developer inserts the item with the view that its incorporation constitutes fair use or does not otherwise constitute an infringing use of the item; (2) users insert the item into the game (e.g. a game mod that replaces Fallout 3's Nuka-Cola with Coca-Cola).

Of these three, let’s talk about Product Placement. Since the price of admission is often 0 dollars, this is an opportunity for the Company to be less concerned with the amount of exposure the product receives and more concerned with how it can incorporate the product into the game in a way that makes gamers pause and think: that’s cool. Gamers can be very sensitive to aesthetics and perceived corporate pandering so the wise company will find ways to work with the Developer to incorporate their product into the game in an innovative or intuitive way rather than insist upon restrictive brand guidelines.

As an initial matter, the external company should determine whether a particular game is an appropriate place for the product. For example, a golf club manufacturer may be enthusiastic about its club being placed in a golf game, but it may be less enthusiastic about it being used to bludgeon zombies in a survival horror (though I really cannot see why as such a placement expands the product into the critical zombie apocalypse preparedness market) ^[1] In addition to this general question, there are a few other central issues that should be addressed:

QUALITY: Quality refers to how the product will appear inside the game and what characteristics will be attributed to the product. Companies should ask whether the virtual item will be an exact replication, a generic item with branding affixed, or a revamped setting-appropriate manifestation. Often mockups will provide an example of what the item will likely look like (though the mockup will rarely be offered as a guaranteed representation of in-game appearance). Companies with sensitive public images should also ask what the item will be used for in the game. The company should also ask whether the product will be assigned certain ratings or characteristics and how those ratings or characteristics compare to other items of the same type. Finally, the company may wish to condition the product placement on the expected rating of the game or, alternatively, at least insist that the game be rated and properly labeled.

PLACEMENT: Where will the item appear? Rather than thinking of the placement in terms of "screen time," which is almost impossible to control in a game, the placement should be viewed in terms of the role the item will play. Perhaps the item will be an unlockable piece of decoration for an avatar, a functional tool that may be equipped, or a piece of virtual detritus that is strewn about to add to the ambiance. Each of these roles will likely effect how and when a player will interact with the company's item. The Company should work the with the developer to create a placement that enhances the image of the product without unduly disrupting the flow of the game. This will require flexibility in most cases.

CONTROL: Who will have the final say with respect to the product? Programming unique items into games can be time consuming and costly. Removing the item may be extremely difficult or impossible. The logistics of programming therefore require the Developer to maintain significant control over how an item will be implemented into a game. This means the Company's opportunity to influence how the item will appear is during the initial approval process, which occurs prior to the item's incorporation into the game. As a result, all restrictions and obligations should be clearly set forth during that approval process (that way both the Company and the Developer have the chance to determine whether the placement is in their best interests). The company should go into this understanding that gamers often provide their own game enhancements, whether or not authorized by the Developer's click-through terms-of-use, which can put the placed product beyond any meaningful control. That is, of course, the risk or price for reaching out to an untapped gamer demographic.

DURATION/TERMINATION: A company should also be aware of the permanency of a product placement. Removing items from a game may be costly or impossible. As a result, the Company should expect injunctive rights to be hard to obtain. Often the best a Company may walk away with is the right to demand that the item be left out of future releases of the game or the right to demand a patch to the game to remove the item as soon as it is commercially reasonable. A liquidated damages provision may be an appropriate solution in some cases, as it provides the Company with a clear option for recovery while protecting the Developer from the risk of a costly patch that may result in them passing on the product placement.

External companies should view product placement as a partnership with the game developer. A well placed item enhances a game's environment, which improves the game play experience. Companies that are flexible in their negotiations and encourage creativity in the placement will find new and interesting opportunities to put their products in front of a typically hard to reach gamer demographic.

^[1] TANGENT. Think about the advertising possibilities here: "GolfCo Clubs are a PREFERRED zombie bludgeon device." "Buy now and receive free Virus-X vaccination!" "GolfCo Clubs: Great Score Today, Protection From Undead Hordes Tomorrow!"

Authored By:
Shawn Foust (GamerTag: OMG SRSLY)
(310) 228-3724
sfoust@sheppardmullin.com

Edwin Komen
(202) 772-5328
ekomen@sheppardmullin.com

The Digital Countdown

Sheppard Mullin — Mon, 25 May 2009 22:09:01 -0800

February 17, 2009 will be one of our most important historic dates. No president will be sworn into office. No one will land on the moon. Instead television in the U.S., as we know it, will simply be turned off. The switch from analogue to digital TV will be thrown at midnight. Many will awake on February 18 to find their beloved televisions don't work. Welcome to the Digital Age.

Click here to read more.

Originally published in February 2009.

Authored By:
Edwin Komen
(202) 772-5328
ekomen@sheppardmullin.com

Dealing with 'Rogue Reality'

Sheppard Mullin — Fri, 15 May 2009 15:22:55 -0800

When game designers introduce realistic elements in their games, sometimes unwanted side effects are produced that affect real life. Shawn Foust, head of Sheppard Mullin’s Video Game practice, discusses this Rogue Reality.

Click here to read more.

Originally published September 30, 2008.

Authored By:
Shawn Foust
(310) 228-3724
sfoust@sheppardmullin.com

A New Game Plan

Sheppard Mullin — Sat, 09 May 2009 14:29:24 -0800

On Feb. 20, 2009 the 9th Circuit Court of Appeals struck down a California law banning the sale or rental of “violent video games” to minors and requiring such games to be labeled “18” (the legal age for adults). While this decision may surprise some California lawmakers and parents, its holding is fully consistent with substantial U.S. Supreme Court precedent entitling minors to a signifi cant measure of First Amendment protection, and leaving parents with the duty to supervise “appropriate” content.

Click here to read more.

Originally published March 9, 2009.

Authored By:
Guylyn Cummins
(619) 338-6645
gcummins@sheppardmullin.com

Gibson's Patent Action Against Activision Hits Wrong Chord with Court in "Guitar Hero" Dispute: Summary Judgment Granted

Sheppard Mullin — Wed, 06 May 2009 19:35:01 -0800

Activision licensed the Gibson trademark and trade dress in November 2006 in connection with Guitar Hero's "custom guitar controller peripheral." Activision paid a one-time fixed license fee to cover the term of the license and Gibson agreed to help promote the Guitar Hero product.

In January 2008, Gibson sent a letter to Activision requesting that it secure a license under Gibson's U.S. Patent No. 5,990,405 ("the '405 Patent") for "the generation and control of a simulated musical concert experience and participation by a musician in a pre-recorded musical performance using a musical instrument as a control device" or halt sale of any version of the Guitar Hero game software. Activision denied the request on the ground of noninfringement of any valid patent claim and noted "Gibson knew about the Guitar Hero games for nearly three years, but did not raise its patent until it became clear that Activision was not interested in reviewing the License and Marketing Support Agreement." On March 11, 2008, Activision brought an action in the United States District Court for the Central District of California, entitled Activision Publishing, Inc. v. Gibson Guitar Corp., CV 08-1653-MRP, seeking a declaratory judgment that: (1) Guitar Hero does not infringe Gibson's '405 Patent; (2) the '405 Patent is invalid; (3) Gibson is barred from alleging infringement by an implied license and the doctrines of equitable estoppel and laches; and (4) Activision has not breached its agreement with Gibson.

On February 28, 2009, following claims construction and a Markman hearing, the district court granted Activision's Motion for Summary Judgment and denied Gibson's Motion for Reconsideration of the Claim Construction Order, sustaining Activision's Objections to Evidence. As an introduction to its decision, the Court held that "[a]s a general observation, no reasonable person of ordinary skill in the relevant arts would interpret the '405 patent as covering interactive video games." The Court held that Gibson's contention that "the '405 patent covers any system when a user controls something 'musical' with any device" would mean that "actual musical instrument" would cover every conceivable device. The Court observed that the use of the words "musical instrument" has a much more narrower meaning. The Court also held that the Guitar Hero controllers must be considered independent from the console system to which they are attached and the '405 Patent can only read on the Guitar Hero controllers and nothing from the console's input point onward. Further, the Guitar Hero controllers are not "musical instruments" because they do not make musical sounds within the meaning of the '405 Patent or which are "representative of the sounds" the controllers make or are capable of making. The Court further noted that the Guitar Hero controllers are not "musical instruments" in a traditional sense because they do not involve "actual operation of a musical instrument" or use virtual reality-type control devices -- both of which were systems disavowed by Gibson in its '405 Patent. The Court further criticized Gibson by noting that "Gibson's doctrine of equivalents arguments border on the frivolous" and "Gibson's argument about the MIDI protocol actually undermine its position."

This case illustrates how a patent which is narrowly drawn with respect to "a pre-recorded musical performance using a musical instrument as a control devise" does not encompass a virtual reality-type control device, which simulates a musical performance and how a Court can become hostile to an attempt to interpret a patent and claims construction in an expansive and overly broad fashion.

Authored By:
Theodore C. Max
(212) 332-3602
tmax@sheppardmullin.com

Virtual Currency: Regulation and Taxation Issues

Sheppard Mullin — Fri, 01 May 2009 15:03:02 -0800

China's State Administration of Taxation recently announced a tax levy on individual income made through virtual currency transactions, despite a February 2007 ban on the trading of virtual currency.

Click here to read more.

Originally published November 1, 2008.

Authored By:
Ping Chu
(8621) 2321-6000
pchu@sheppardmullin.com

Implications of Aristocrat v. IGT for Software Patents

Sheppard Mullin — Fri, 01 May 2009 12:29:47 -0800

The law governing U.S. software patents sometimes shifts like the ground here in California – a point illustrated by the recent decision of the Court of Appeals for the Federal Circuit (CAFC) in Aristocrat Technologies Australia PTY Ltd. v. International Game Technology, 521 F.3d 1328, 1333 (Fed. Cir. 2008).

Click here to read more.

Originally published January 1, 2009.

Authored By:
Gary Clark
(213) 617-4197
gclark@sheppardmullin.com

Darren Franklin
(213) 617-5498
dfranklin@sheppardmullin.com