Law of the Level

An Unreasonable Royalty Rate is No Gaming Matter

Sheppard Mullin — Wed, 22 May 2013 13:43:47 -0800

The Honorable Judge James L. Robart recently took on the challenging task of determining a reasonable and non-discriminatory (“RAND”) royalty rate for Motorola’s standards-essential patents (“SEP”). Microsoft Corp. v. Motorola, Inc., 2013 U.S. Dist. LEXIS 60233, No. C10-11823 (W.D. Wash. Apr. 25, 2013). This decision comes after a two-year patent war between Microsoft and Motorola. In November 2010, Microsoft filed a breach of contract suit, alleging Motorola breached its obligation to license its SEP at a RAND rate.

Motorola owns patents essential to complying with standards 802.11 of the Institute of Electrical Electronics Engineers (“IEEE”) involving WiFi and H.264 of the International Telecommunication Union (“ITU”) involving video coding. Microsoft requires licenses to comply with these standards for its Xbox 360 gaming console. Motorola offered to license each of the patents at a RAND royalty rate of 2.25% of the price of the end product. This would mean that Microsoft would owe Motorola approximately $4 billion per year for licensing its patents. However, the court disagreed and found that this rate did not fall within the range of RAND royalties. The court undertook a methodical analysis to knock the amount down to about $1.8 million. In determining the RAND royalty rate for Motorola’s 802.11 SEP, the court first determined that the appropriate RAND royalty range is between .555 and 16.389 cents per unit. The court found that the RAND royalty rate is .555 cents per unit for Xbox products. In determining the RAND royalty rate for Motorola’s H.264 SEP, the court determined that the appropriate RAND royalty range is between .8 cents and 19.5 cents per unit. The court found that the RAND royalty rate is 3.471 cents per unit for Xbox products.

In its 207-page opinion, the court came to its conclusion, in part, by looking to the policy reasons behind RAND and the importance of providing a reasonable royalty rate to licensees.

Upholding Competition and Innovation in the Industry

The purpose of RAND is to ensure that SEP owners do not unfairly hinder innovation or competition by unreasonably increasing the royalty rates of licensing their patents. SEP owners are in a powerful position to manipulate the market. For example, one of the purposes of RAND is to prevent “hold-up” – where an SEP owner demands more value than the patented technology or demands the total value of the standard, thereby effectively preventing the licensee from licensing the patent. Additionally, the court noted that hold-ups may also harm other firms that hold SEPs and cannot obtain royalties because the product is not being developed.

Where there are reasonable royalties, healthy competition is less hindered. Gaming companies, in particular, are competing for the best, most appealing console to consumers. One possible roadblock to this goal is licensing a patent necessary to comply with industry standards. When a gaming company cannot afford to obtain a necessary license that would contribute in making the system competitive with other systems, the product is less likely to be created. This decreases the marketplace of innovations.

Moreover, where there are reasonable royalties on essential patents, companies are less constrained in their innovation. A gaming console that seeks to set itself apart from the competition will likely require the use of multiple patented technologies and compliance with multiple standards. The court noted that “a RAND royalty should be set at a level consistent with the S.S.Os’ (standard setting organizations) goal of promoting widespread adoption of their standards.”

The court’s decision in this case, at the very least, gives guidance for companies in negotiating RAND rates, and also guides courts when parties are unable to come to a resolution.

California AG to Begin Enforcing Privacy Law Against App Developers - $2500-per-Download Fines

Sheppard Mullin — Fri, 07 Dec 2012 09:29:40 -0800

By Rachel Tarko Hudson

Mobile app developers must now conspicuously post and follow privacy policies just like websites and other commercial online services according to California Attorney General Kamala Harris. On October 30, the Attorney General’s office began sending warning letters to app developers notifying them that they had 30 days to comply. Time is now up. And the consequences are potentially substantial with the law carrying fines of up to $2,500 per download.

California’s Online Privacy Protection Act (OPPA) provides that “[a]n operator of a commercial Web site or online service that collects personally identifiable information through the Internet about individual consumers residing in California who use or visit its commercial Web site or online service shall conspicuously post its privacy policy on its Web site,” or in the case of an operator of an online service, make that policy reasonably accessible to those consumers. The OPPA also includes specific requirements for the content of privacy policies. While the OPPA has been in effect since 2004, the Attorney General’s office only recently began focusing its attention on enforcing the law against app developers.

The Attorney General’s office sent about 100 warning letters to the developers of some of the most popular apps in this first round, stating that it was the first step in enforcement against those developers. Given the high proportion of apps without posted privacy policies, it is likely that additional letters will be sent. While no more formal enforcement actions have been reported, the Attorney General has indicated that she and her office are prepared to sue developers if necessary. In addition, the Attorney General has reached an agreement with the major app platforms to require that apps distributed through their platforms have clear privacy policies.

While the Attorney General is presently giving app developers 30 days to comply with the OPPA in the warning letters, with the increased regulatory and consumer focus on privacy issues, app developers should examine their information privacy practices and draft and post a privacy policy that complies with the OPPA and other privacy laws. Many developers cut and paste privacy policies from other apps. This is a mistake. Those privacy policies may not comply with the law. Also, each developer should tailor its privacy policy to fit their specific app and information privacy practices.

Game On!

Sheppard Mullin — Wed, 26 Sep 2012 09:43:24 -0800

As companies are presented with the ever-challenging goal of achieving and maintaining brand recognition, many fashion companies are now attempting to engage consumers in both the real and virtual worlds. Gaming represents one non-traditional avenue that has undergone recent growth, as brands find value in connecting with existing and potential consumers through interactive online means.

Members of the fashion industry have historically utilized video games as a way to reach consumers. Some successful fashion and video game partnerships have included H&M and Maxis in connection with The Sims 2, Charlotte Ronson's fall 2009 feature in Nintendo’s Style Savvy, and Xbox’s collaboration with certain brands, such as Roxy, Quiksilver, and Skullcandy, to enable the function of stylized avatars.

Recently, forward-thinking fashion companies are looking beyond video games to explore the world of online gaming as a powerful marketing tool. Fashion Week Live, a Facebook game developed in association with IMG Fashion, is one example. Fashion Week Live provides its players with the opportunity to create and showcase fashionable looks and build a career in the fashion industry through various levels of the game. Similarly, this past summer Aldo launched Shoe Paradise, an online game and contest that involved an end-user guiding Aldo’s avatar through an obstacle course while collecting and trying on shoes, all in an effort to promote the brand’s spring/summer collection.

In addition to its marketing appeal, online gaming has also proven to be a valuable means of facilitating ecommerce. Whereas fashion-based games were once predominately designed for and marketed to young girls, now interactive platforms are increasingly aimed at an older age demographic with the specific goal of driving product sales. For example, Stylmee, a fashion game for the iPad that debuted this past spring, targets women ages 25 to 44. Stylmee offers a multifaceted platform with the interactive element of a video game on one hand, allowing end-users to create style boutiques and test their fashion knowledge, and the functionality of an ecommerce site on the other, allowing end-users to purchase real world versions of the items seen in the game.

Although an unlikely pairing, fashion and interactive games seem primed for success as the innovative use of online gaming for marketing and sales purposes continue to evolve. To discover the range of potential legal issues that surround the area of interactive games, check out the rest of this blog. For more information regarding the legal issues relating to the fashion industry, check out Sheppard Mullin’s Fashion & Apparel Law blog.

Federal Circuit Narrows Claim Construction Options in Game Controller Suit

Sheppard Mullin — Tue, 28 Feb 2012 11:24:32 -0800

By Ryan Lindsey and Nick Setty

In Thorner v. Sony Computer Entertainment America, LLC (Case No. 2011-1114, Feb. 1, 2012) (Moore*, Rader & Aiken (D. Or. sitting by designation)), the Federal Circuit reiterated the prohibition against importing limitations from the specification and reversed a district court construction depending from consistent uses of the disputed phrase in the specification.

Thorner sued Sony for infringement of U.S. Patent No. 6,422,941, which claims a feedback system for video games. Id. at 2-3 The claimed system involved an actuator that provides tactile feedback to a player when certain events occur in a game. Id. If the player crashes a car, the actuator can vibrate to give tactile feedback to enhance the user experience and to supplement visual and audio effects simulating the crash. Id.

One claim construction dispute centered on the phrase “attached to said pad,” which the district court construed to mean that an actuator was attached to an exterior surface of the pad, based on the ‘941 specification. Thorner v. Sony Computer Entm’t Am. LLC, No. 09-cv-1894, 2010 WL 3811283, at *6 (D.N.J. Sept. 23, 2010). The district court relied on the specification’s use of the term “attached” only in embodiments with an actuator attached to a pad’s outside surface, and contrasted an embodiment which described as “embedded” an actuator inside the pad. Id. After claim construction, the parties stipulated to noninfringement and appealed. Slip Op. at 4.

The panel reversed, finding that the district court erred in its reliance on the specification and its uses of “attached” with embodiments with external actuators and “embedded” for an internal actuator. Slip Op. at 8.

[T]he specification never uses the word ‘attached’ when referring to an actuator located on the interior of a controller. We hold that this does not rise to the level of either lexicography or disavowal. Both exceptions require a clear and explicit statement by the patentee. It is not enough that the patentee used the term when referencing an attachment to an outer surface in each embodiment. [Slip Op. at 9 (citations omitted).]

The panel acknowledged that such use of distinct descriptors could amount to a redefinition, slip Op. at 9-10, but rejected the notion that the specification at hand was sufficiently clear in its redefinition or disavowal. Id. In so concluding, Thorner reiterated the axiom that claim terms are to be afforded the ordinary and customary meanings a skilled artisan would employ, see e.g., Phillips v. AWH Corp., 415 F.3d 1303, 1313 (Fed. Cir. 2005) (en banc), and recognized that the two potential exceptions—own lexicographer or express disavowal—factually did not apply. Slip Op. at 5.

To be a lexicographer “a patentee must ‘clearly set forth a definition of the disputed claim term’ other than its plain and ordinary meaning.” Slip Op. at 5 (citing CCS Fitness, Inc. v. Brunswick Corp., 288 F.3d 1359, 1366 (Fed. Cir. 2002)). Disclosing a single embodiment or referring to all embodiments consistently, do not satisfy the standard. Slip Op. at 5. Rather, the patentee must ‘“clearly express an intent’ to redefine the term.” Id. (citations omitted).

Express disavowal likewise requires a patentee to “demonstrate intent to deviate from the ordinary and accustomed meaning of a claim term by including in the specification expressions of manifest exclusion or restriction, representing a clear disavowal of claim scope.” Id. at 6 (citing Teleflex, Inc. v. Ficosa N. Am. Corp., 299 F.3d 1313, 1325 (Fed. Cir. 2002)). Exclusionary language may appear in either the specification or the prosecution history. Id. Disparaging a particular embodiment, characterizing an embodiment exclusively as the “present invention,” and confining the invention to “the embodiments … contemplated and disclosed herein,” may satisfy the disavowal standard under the appropriate circumstances. Id. (citing Scimed Life Sys., Inc. v. Advanced Cardiovascular Sys., Inc., 242 F.3d 1337, 1339, 1342-43 (Fed. Cir. 2001)).

Making Sense of Virtual Dollars

Sheppard Mullin — Tue, 22 Nov 2011 10:41:44 -0800

Financial institutions and currency transactions are highly regulated in the United States. That much is common knowledge. However, game developers may not realize that by creating a system of virtual currency within a game that can be purchased with or redeemed for real currency, they could be opening themselves up to legal issues arising from this morass of federal and state laws, regulations, and rules.

Regulation of virtual currency in online games is a largely untested field. Online game companies and their legal advisors are making their best guesses as to how these systems will be treated by courts and regulatory bodies. However, most agree that the laws and regulations discussed below may apply to virtual currency, depending on how the currency system is implemented. (Please note that this article is only intended to provide an overview of regulations that may be applicable to virtual currency systems—in order to determine whether any of these laws apply to your specific situation, please consult an experienced attorney.)

Return with me, for a moment, to the magical cupcake fields of our imaginary social game, Sprinkle Harvest (see http://www.lawofthelevel.com/2010/08/articles-1/intellectual-property/trademarks-for-social-games-a-recipe-for-success/), which is about to launch its lucrative new premium currency, "Cupcake Cash." (CC$25 for only US$5! Free frosting-maned unicorn with purchase!) The makers of the game are faced with decisions such as, should players be able to redeem Cupcake Cash for real money? Or transfer it to their friends? Use it in other developers' games? If a player wants to buy 50,000 Cupcake Cash in a single day, is that ok? What if, several years later, there is still 1,000 unused Cupcake Cash left in that account? Can they give away Cupcake Cash in a promotion? Or use it for an in-game lottery? The answers to these questions have as substantial impact on the legal obligations and liabilities that the developer may confront. These questions, and those posed below, illustrate only a few of the many situations in which the laws regulating currency transactions and financial institutions may be triggered.

Gift Card Laws

Can Cupcake Cash have an expiration date? Both Federal and State governments have enacted regulations regarding the use and purchase of gift cards and similar instruments, such as limitations on the expiration of purchased value or the ability of the card issuer to impose fees on the user. These laws may be applicable to virtual currency, and would clearly apply in cases where the developer offers actual gift cards that are redeemable for virtual currency. In addition, these laws may also impact third parties who sell gift cards redeemable for virtual currency.

Prepaid Access Laws

How much Cupcake Cash can a user purchase in one day? The Financial Crimes Enforcement Network (or "FinCEN" for short), is organized by the U.S. Treasury Department in order to combat money laundering and terrorist financing, among other financial crimes. The regulations enacted in connection with FinCEN impose certain tracking and reporting obligations on the part of businesses involved in financial transactions. These regulations may also require registration as a Money Services Business when providing a prepaid access program. In certain circumstances, limiting the amount of currency that can be purchased or redeemed in any given day may provide certain exemptions from these requirements.

Money Transmitter Statutes

Can Cupcake Cash be fully transferrable and redeemable for real money? Depending on the scope of how a virtual currency can be used, state laws may require registration or licensing of the issuing company as a money transmitter in every state where the company is offering transactions. These laws are particularly applicable when the currency can be redeemed through third parties or transferred between users, though other situations may also trigger these laws. Proper registration as a money transmitter is a major undertaking with significant compliance obligations. However, failure to comply with these laws can result in both civil and criminal penalties.

Unclaimed Property / Escheat Laws

What happens to unused Cupcake Cash? If a user purchases virtual currency, but leaves it unused for a certain period of time, that non-use could potentially trigger unclaimed property or "escheat" laws. Such laws vary by state, but may require tracking the use of purchased currency and relinquishing any unused virtual currency to the state. Failure to comply can sometimes result in penalties for the company that exceed the amount that was due to be turned over.

Gambling/Sweepstakes Laws

Can Cupcake Cash be given away? Or used in a virtual poker game? To the extent that virtual currency may be offered as a prize or giveaway, or used by players to place bets or gamble, gambling or sweepstakes laws may be triggered. Both the federal and state governments regulate gambling, sweepstakes, and contests, and these laws should be considered before implementing any offering of virtual currency.

Sales Tax

Is there a sales tax on purchases made with Cupcake Cash? The exact regulations governing when sales tax must be imposed on purchasers are determined by state and municipal law. However, depending on local laws, there may be requirements mandating the collection of sales tax on purchases made with virtual currency.

Privacy/Data Security Laws

Can user data obtained when purchasing Cupcake Cash be used in other marketing offers? By sharing user information with any third parties, including information about virtual currency, federal and state privacy laws may be triggered. Certain states have laws governing specific requirements that must be met by a company's privacy policy, as well as laws governing how certain types of data must be stored. Privacy regulations are particularly important when information regarding minors may be collected. Additionally, any company that is processing credit card numbers, and any company that can be classified as a "financial institution" (which isn't only restricted to banks) must comply with strict data security laws.

Recurring Transactions

Can users purchase monthly Cupcake Cash subscriptions? In situations where a user is charged a preauthorized amount on a recurring basis, such as an auto-renewal subscription fee, certain federal and state laws may apply. Various penalties may be imposed for non-compliance with those laws, including, under some states' laws, the transformation of the charged subscription into a gift.

Obviously, there are a vast number of statutes and regulations that may be applicable to virtual currency transactions, depending on how those transactions are structured. If you are considering implementing a virtual currency system within your game or software application, you should definitely speak with your attorney about how to structure that system to ensure compliance with these laws. At this point in time, regulatory agencies have not yet focused much on game providers. However, with the large amount of real currency being spent on the virtual currency market (virtual goods transactions being estimated by some at over a billion dollars this year alone), it is likely that these systems will be receiving increased governmental scrutiny.

Take a hard look at any virtual currency system before you implement it, or, if you have already launched one then conduct a thorough review promptly. If you don’t, the villains at your door may not be virtual ones.

Authored By:

Thayer Preece
650.815.2618
tpreece@sheppardmullin.com

First Amendment Fire Power: United States Supreme Court Applies Strict Scrutiny, Rejects Ban on Violent Video Games

Sheppard Mullin — Mon, 27 Jun 2011 14:29:08 -0800

Justice Antonin Scalia and his teammates mowed down California’s ban on violent video games with fully loaded First Amendment precedents and barbed retorts to opposing arguments. In doing so, the Supreme Court reinforced a fundamental point: that First Amendment protections do not depend on the medium of communication. Thus, video games are protected speech, and restrictions based on their content will be subject to strict scrutiny.

The California law at issue prohibited the sale or rental of violent video games to minors, and imposed a civil penalty of $1,000 for every violation. At the heart of the law was a definition of the restricted games as those games “in which the range of options available to a player includes killing, maiming, dismembering, or sexually assaulting an image of a human being, if those acts are depicted” in a manner that “[a] reasonable person, considering the game as a whole, would find appeals to a deviant or morbid interest of minors,” that is “patently offensive to prevailing standards in the community as to what is suitable for minors,” and that “causes the game, as a whole, to lack serious literary, artistic, political, or scientific value for minors.” The definition cobbled together tests adopted in two prior Supreme Court decisions, one adopting a restriction on obscene materials specific to minors (Ginsberg v. New York, 390 U.S. 629 (1968)), and the other a notoriously vague decision governing obscenity generally and permitting the standard for restrictions on obscene material to be based on “community standards” (Miller v. California, 413 U.S. 15, 24 (1973)). However, it sought to apply them to depictions of violence rather than depictions of nudity or sexually explicit conduct.

The Supreme Court struck down the law in a split decision that created some unusual alignments. Justice Scalia was joined by Justice Kennedy, now considered a centrist, and the Court’s three female justices, Justices Ginsburg, Sotomayor, and Kagan, all considered part of the liberal wing. Justices Alito and Roberts concurred in the judgment, but would have avoided the central issue of whether the law’s restrictions unduly restricted protected speech by finding it to be impermissibly vague. Justice Thomas dissented, applying an “original intent” analysis that would have held, in essence, that minors have no right to receive any information at all other than what their parents want them to have. Finally, and perhaps most strangely, Justice Breyer dissented, arguing that the statute met strict scrutiny analysis, primarily because interactive video games involve physical activity as well as communication.

The majority acknowledged that the government may adopt limits on materials available to minors that are more restrictive than the limits that may constitutionally be applied to adults. However, it held that in doing so the government is limited to areas that traditionally have been the subject of restrictions on speech, such as obscenity. Relying on its recent decision in United States v. Stevens, 559 U.S. ___, 130 S.Ct. 1577 (2010), which stuck down a statute prohibiting violent “crush” videos, the Court held that “new categories of unprotected speech may not be added to the list by a legislature that concludes certain speech is too harmful to be tolerated.” Brown v. Entertainment Merchants Assn., 564 U.S. ___ (2011), Case No. 08-1448, slip opinion at 3.

The majority fired back at the argument, asserted in different ways both by Justice Alito and Justice Breyer, that interactive video games are―or at least might be―different than other forms of entertainment. “[W]hatever the challenges of applying the Constitution to ever-advancing technology, ‘the basic principles of freedom of speech and the press, like the First Amendment’s command, do not vary, when a new and different medium for communication appears.” Brown, slip opinion at 2-3.

The decision also shot down Justice Thomas’s proposition (notably joined by no other justice) that, in essence, parents have “total parental control over children’s lives,” and that children are “expected to be dutiful and obedient.” Instead, the majority held that “‘minors are entitled to a significant measure of First Amendment protection, and only in relatively narrow and well-defined circumstances may government bar public dissemination of protected materials to them.’” Brown, slip opinion at 6-7, quoting Erznoznik v. Jacksonville, 422 U.S. 205, 212–213 (1975).

Thus, the majority held that the California law was subject to “strict scrutiny”―the most demanding test imposed by constitutional law for the validity of restrictions on speech. Brown, slip opinion at 11. When faced with that test, the law was even less likely to survive than a pedestrian in Liberty City.

First, the majority found that the California government “acknowledges that it cannot show a direct causal link between violent video games and harm to minors.” Brown, slip opinion at 12. In particular, it noted that the expert upon whom the government primarily relied had conceded that to the extent that exposure to violent video games had any meaningful effects, “the same effects have been found when children watch cartoons starring Bugs Bunny or the Road Runner . . . or when they play video games like Sonic the Hedgehog . . . .” Brown, slip opinion at 13.

Second, it found that the law was substantially under-inclusive, singling out video-game providers and not addressing others, such as “booksellers, cartoonists, and movie producers.” Brown, slip opinion at 14. This called into question whether the law would effectively further the purported interest of protecting minors from the effects of exposure to violent entertainment.

Finally, the majority concluded that the California law provided only marginal benefits beyond those provided by existing, voluntary regulations, while at the same time restricting purchases by minors who have their parents consent to acquire restricted games. Brown, slip opinion at 15-16.

The concurring and dissenting justices fired off in three different decisions. Justice Alito adopted a limited approach that may have been intended to provide common ground for the warring factions of the Court. They would have tossed out the law on the grounds that it was impermissibly vague, putting off for another day the question of whether there is something unique about video games that might justify restrictions that would otherwise be unconstitutional under the First Amendment. If Alito’s intent was to provide a pragmatic solution that would satisfy most or all of his colleagues, he failed. Only Justice Roberts joined his concurring opinion.

Justice Thomas dissented, arguing that the First Amendment has to be construed in light of the cultural values in place at the time it was adopted. Relying principally on “[t]wo parenting books published in the 1830’s,” but also citing from works by Locke and Rousseau and the letters of Thomas Jefferson, Thomas claimed that it was the cultural norm at the time of the adoption of the First Amendment that “[p]arents had total authority over what their children read,” as well as the right to control other aspects of their children’s lives, and hence that “the Framers could not possibly have understood ‘the freedom of speech’ to include an unqualified right to speak to minors.” Brown, slip opinion, Thomas, J., dissenting. Thus, Thomas would have rejected any First Amendment protection for minors to have access to information of any kind. Responding, the majority pointed out that even if it is true that parents have traditionally had the power to control what their children hear and say, “it does not follow that the state has the power to prevent children from hearing or saying anything without their parents’ prior consent.” Brown, slip opinion at 7, n. 3.

As a practical matter, the proposition that parents have the power to control what their children hear or say would come as a surprise to most parents. Regardless, the majority decision points out that even if they do that does not mean that the government has the power to compel them to exercise that authority, or the power to prevent their children from hearing or saying anything they have not approved.

Justice Breyer’s dissent asserts that video games are different because they constitute “an interactive, virtual form of target practice,” and while the evidence is not conclusive, there is research supporting the proposition that the effects of video games on violent or aggressive tendencies in minors “may be” more significant and severe than other forms of communication or entertainment. Brown, slip opinion, Breyer, J., dissenting. Under these circumstances, he argues, the courts should defer to the judgment of legislature. Thus, Breyer concludes, the California law should have been found to survive strict scrutiny.

It remains to be seen how the consequences of the Court’s decision will play out. Contrary to the concern expressed by Justice Alito, however, it’s highly unlikely that the recognition of First Amendment protection for violent video games will spell an end to industry self-regulation, particularly because the California statute was struck down in part based on the recognition of the efficacy of the self-regulatory scheme. Therefore, expect industry self-regulation to march on while state and federal statutes fall by the wayside. In any event, California has used this law's last life, and at least for now, the game is over.

Authored By:

James M. Chadwick
650.815.2605
jchadwick@sheppardmullin.com

Patent Holder Takes a Shot at Nintendo over DSi Cameras

Sheppard Mullin — Wed, 25 May 2011 13:43:55 -0800

Nintendo of America, Inc. ("Nintendo") faces a new patent infringement lawsuit in the Western District of Washington, regarding the camera lenses included in its Nintendo DSi handheld gaming systems. The lawsuit, filed on May 24, 2011, accuses Nintendo of infringing United States Patent No. 6,888,686, owned by Plaintiffs Milestone Co., Ltd. and Satoshi Do.

Plaintiffs Do and Milestone Co. accuse Nintendo of both directly infringing the '686 patent by "making, using, selling, offering to sell, leasing, importing and/or exporting handheld gaming systems that infringe one or more claims of the '686 patent," and inducing Nintendo's customers to infringe the patent through Nintendo's "sales, advertising, and instructions." The plaintiffs claim that the camera lens system included in the Nintendo DSi "constitutes a material part of the inventions claimed in the '686 patent."

The technology covered by the '686 patent claims "a lens for image pickup" with multiple lenses of particular shapes, materials, refractive powers, and optical lengths. The plaintiffs claim that the camera included in the DSi handheld system incorporates this technology.

As relief for the alleged acts of infringement, the plaintiffs are requesting to be paid a reasonable royalty for sales of the DSi devices, as well as pre- and post-judgment interest on damages resulting from the infringement.

Nintendo's DS series is the highest selling handheld gaming platform of all time, having sold over 135 million units since the release of the original DS platform, according to Nintendo's recent financial reports. Approximately 25 million of those units sold were DSi or DSi XL systems.

Nintendo comes to this case fresh off of a recent win in another patent dispute concerning its video game controller technology, where the U.S. Supreme Court declined late last year to reinstate a $21 million judgment against Nintendo that had been overturned by the U.S. Court of Appeals for the Federal Circuit. In that case, no infringement was found by any products that Nintendo is currently manufacturing. In the meantime however, Nintendo has been a repeated target of patent holders, settling one lawsuit concerning network encryption patents earlier this month, and currently facing a dispute before the International Trade Commission regarding patents related to a fantasy video game, which was filed in March.

The case is Do et al. v. Nintendo of America Inc., Case No. 2:11-cv-00865, filed in the United States District Court for the Western District of Washington.

Authored By:

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

Brands and Video Games: Three Steps for Finding a Perfect MatchStep 2: Balancing Interests in User Interaction

Sheppard Mullin — Wed, 02 Mar 2011 05:37:17 -0800

In the first part of this article series, we looked at choosing a video game for product placement based on game attributes. Now we begin addressing the details of the branding deal—specifically, deciding how users can interact with the brands within a game. For brand owners, the concern is how in-game treatment of the brand will affect the brand's image. For game developers, the focus is more on how inclusion of the brand will affect overall game play. Balancing these sometimes-competing interests is the key to reaching an agreement that will benefit everyone involved.

To illustrate the examples in this article, we turn once again to the same hypothetical brands used in Part 1: 1) Cupquake brand cake-flavored soft drinks ("The soda that rocks your world!"); 2) Captain Victory brand sporting goods ("For the heroes on your team"); and 3) Kraken Financial Services ("Release the investor in you!").

User interactions with branded products inside of video games can be broken down into four basic levels. At the most basic level, there is no user interaction at all—users can merely view the item as part of the game's environment (for example, billboards alongside a race track). One step up from that is non-destructive user interaction with indestructible branded products (such as kicking a branded soccer ball as part of a sports game). Moving higher, the next level is destructive user interaction with indestructible branded products (racecars that receive no damage after hitting a wall). The final and most interactive level involves branded products that users can damage or alter through their in-game actions (a soda bottle that the player can throw and break against a wall).

Although use of real brands inside games can benefit both brand owners and game developers, a tension exists between their respective goals—brand control and realistic game experience. As branded goods move up through the levels of user interaction and increasing realism, brand owners risk losing control over the integrity of their brand and their marketing message. However, too much control can adversely affect the realism and quality of the game itself, which may lead to a negative reception of the game (and consequently the brand featured within the game). The key is to strike a balance between brand control and enjoyable game play. If that balance can be reached, both the brand owner and the developer can benefit from the partnership.

Level 1: Background Branding

The most basic form of branding within video games is "background branding." Common examples include billboards alongside race tracks, advertisements within baseball stadiums or hockey rinks, or unreachable brand name stores outside of the game character's linear path. This is traditionally the branding method most heavily used in video games. The prevalence of background branding is largely due to the fact that it creates an easy method of balancing the needs of brand owners and game developers—when done properly, it allows brand owners to completely control how their brand is presented in the game, while simultaneously creating a natural look to the game itself that doesn't detract from the game's quality.

Background branding is often a great way to present brands within games. However, this technique may not fully capitalize on the marketing potential of video games. For example, a banner advertisement in a baseball stadium for Cupquake's new frosting-flavored sports drink is fine, but Cupquake might gain even more benefit if users could equip the sports drink in order to give their starting pitcher an energy boost. Or, instead of simply advertising an mp3 player on a billboard alongside a freeway in a driving game, developers could create an interface in the car itself that allows users to select songs from the mp3 player to listen to while playing the game (an option that also creates more co-branding opportunities with additional music brand partners). Increasing the level of user-interaction often requires more effort, but it can also lead to stronger relationships between users and brands, as well as a more realistic and immersive gaming experience.

Level 2: Non-Destructive Interaction + Indestructible Items

One way that brand owners can protect their message and product integrity is by allowing users to interact with the brand in a limited way, which cannot cause any damage to the branded product. Non-destructive interaction essentially means prohibiting violent or injurious conduct towards branded products. For instance, when placing a Captain Victory branded baseball bat inside a game, using the bat to hit homeruns would be the obvious non-destructive interaction for that object. In contrast, using the baseball bat used to mug pedestrians as part of a mafia action game would constitute a destructive interaction, and one that is most likely contrary to Captain Victory's desired image for its brand.

Destructive interaction refers to more than just a branded product taking physical damage. The term also encompasses any occurrence where the brand is denigrated in any way. For example, if game characters are fighting and dying during a hold-up of a Kraken Financial branded bank, that interaction would probably not create a desirable promotional effect, even if the bank itself is not physically harmed. Interactions that cast an unfavorable view of brands would not increase the marketability of branded products and are therefore obviously disfavored by brand owners.

In order to find that balance between the needs of the brand owners and game developers, brand owners who wish to limit the amount of destructive interaction of their branded products within the game environment should seek specific types of video games where such non-destructive use will be most natural. Referring back to the previous article on game attributes, certain video game genres incorporate violence and destruction more so than others. Common genres without destructive interaction include most sports games, children's games, puzzle games, and simulation games. For instance, as part of a café simulation game, users could be given a Cupquake soda dispenser to place in their café that increases the speed at which their food cooks. Branding within these genres may require more creativity, but if done properly, brands can maintain control of their marketing message while allowing users to have meaningful interaction with their brand.

Level 3: Destructive Interaction + Indestructible Items

Brand owners can protect their product's integrity by requiring that the branded items be indestructible—always functioning at peak performance without any signs of damage. For example, in a racing game, branded cars could hit barriers and walls at unbelievable speeds without receiving any form of structural damage. In another example, a first-person shooter, the user fires a rocket launcher at a Cupquake vending machine, after which the machine is unscathed.

While indestructible items can protect a brand's image, the lack of damage may detract from a video game's realism and may create an unnatural experience for users. In games where users anticipate destructive interaction, users often also expect to see the natural results of that interaction. In addition, game developers often pride themselves on making games with realistic physics behind the movements and effects of objects in a game. Brand owners that wish to see their products remain intact should be cautious before placing their products into games where users expect destructive results. Defying user expectations can create animosity towards the video game as well as the brand itself, and an unsuccessful game is unlikely to create a successful product placement.

Beyond the issue of physical damage to branded products, brand owners should also consider whether the brand should be susceptible to destructive interaction in the first place. Even if a Cupquake vending machine doesn't receive damage from a rocket blast, firing rockets at Cupquake products is maybe not the relationship Cupquake (or most brands) wants to create with users. From a marketing perspective, brand owners generally want to promote the positive aspects of their products rather than the "coolness" factor of destroying their products in a video game. If the branding creates a relationship with users largely based on destroying, attempting to destroy, or misusing branded products, the brand owner may want to re-think whether that partnership is beneficial to the brand.

Level 4: Realistic Brands, Realistic Destruction

Reaching the highest level of user interaction means allowing branded products to receive realistic damage or alteration due to user interaction. From a Captain Victory baseball bat splintering upon hitting a pitch incorrectly, to destroying a Kraken Financial bank with an air strike, the possibility of lifelike damage and alteration to branded products creates an added sense of realism in videogames. For video games that are marketed based on their realism and the ability of users to interact fully with the game environment, this level of interaction may be necessary for game developers to allow branding opportunities within certain games.

For brand owners, realism can be risky for their marketing scheme, because it generally involves relinquishing control over the way branded products are used. In games that allow users a high level of autonomy, a brand owner may not know whether its branded car will be used for racing or used as cannon fodder for a user with a rocket launcher. The former is good—the brand owner can show users how well its cars can perform. But if users opt for the latter, the brand owner receives little benefit from having its cars destroyed.

Reaching a point where realistic user interaction with destructible goods benefits both brand owner and game developer can be difficult, but it is not impossible. Users could be encouraged to treat brands in a positive way through in-game incentives. For example, after drinking a Cupquake soda in the game, in a realistic environment, the user could potentially toss the bottle at a building, destroying the bottle and leaving glass shards on the sidewalk. However, if the game mechanics penalize the user for doing that (say with a movement reduction resulting from wounds from the glass shards, or a reduction in points for littering), and encourage the user to treat the brand well (such as gaining a bonus for placing the bottle in a recycling bin, thus highlighting Cupquake's environmental friendliness), then the brand can protect its image to some extent while not detracting from the realism of the game.

A theme throughout this article series is achieving mutual benefit and balance for both the brand owner and game developer. Overall, in-game branding can strongly benefit both parties, however hammering out the details of the branding agreement can create a number of issues where the interests of the parties are competing with each other. Determining the level of user interaction appropriate for the game and product in question is an important fundamental issue of the agreement, and reaching a balance between the parties' interests is key. Too much control over the brand may leave a game feeling artificial and unrealistic. Too high a level of user freedom when interacting with the brand may be counteractive to promoting the brand. When the right balance is struck, however, both brand owners and game developers win.

Authored By:

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

and

Derek Lowrey
(Extern Extraordinaire)

Brands and Video Games: Three Steps for Finding a Perfect MatchStep 1: Analyzing Attributes of Prospective Partners

Sheppard Mullin — Fri, 12 Nov 2010 12:54:56 -0800

Millions of people around the world play video games on a daily basis. As a result, video games present an amazing marketing opportunity. But how do you identify which game is appropriate for your brand? There is endless variety in the scope and presentation of video games—from vanquishing zombie hoards on your PC, to buying and selling real life locations on your mobile phone, to throwing a game-winning touchdown on your console. When it comes to branding and product placement, it’s important to find the right game to reach your target audience and maximize the value of your investment.

This three-part article series will discuss some of the issues that brand owners and video game publishers face when pursuing marketing and promotional opportunities within games. This first article focuses on game attributes—determining what types of games are best suited for your brand. Future articles will consider user interactions with brands—analyzing how a user's relationship with the brand may affect game play and the brand's marketing success, and the effects of user-generated content on branding within video games. Combined, these articles will show you how to handle the issues you face when harnessing the enormous marketing potential of video games to promote your brand.

There are three main attributes of video games that should be considered when deciding how to market your brand: genre, platform, and setting. Genre refers to the essential format of the video game, whether it is a first-person shooter such as Halo or Call of Duty, a real-time strategy such as Starcraft, a role-playing game such as Final Fantasy, or sports game such as Madden or NBA 2K11. Platform refers to the technology used to play the game. Common platforms include consoles like the Wii, XBOX 360, or Playstation 3, personal computers, casual gaming sites like Yahoo Games or Kongregate, social networking sites like Facebook or MySpace, and mobile devices. Finally, setting refers to the environment and storyline of the video game, such as whether the game takes place in outer space, a magical forest, or Germany in the 1940s.

In order to make the most effective use of branding in video games, the product placement must make sense both for the brand owner and for the game developer. The brand placement should lead to greater sales and publicity for the brand, as well as improve the overall quality and user experience of the video game. During the course of these articles, three hypothetical brands will be used for illustration: 1) Cupquake brand cake-flavored soft drinks ("The soda that rocks your world!"); 2) Captain Victory brand sporting goods ("For the heroes on your team"); and 3) Kraken Financial Services ("Release the investor in you!").

Genre

The genre of video game you choose for your brand will depend on what type of game mechanic most naturally and effectively integrates your products. For example, a basketball game would be a natural genre choice for Captain Victory Sporting Goods, as the publisher could easily outfit players with branded equipment. On the other hand, a first-person shooter might provide fewer appropriate branding opportunities for Captain Victory since sporting equipment does not typically play a large role in first-person shooters.[1]

Cupquake or Kraken Financial, however, might thrive in a first-person shooter. A first-person perspective, while not allowing users to see their characters during game play, still allows users to view brands that are part of the game's environment. For example, by placing Cupquake products in various branded vending machines throughout a game, players could receive health bonuses by drinking Cupquake cola. Alternatively, Kraken Financial banks and ATMs could serve as save-points or could integrate into a game's storyline as a provider of funds to the main character. This type of branding as part of the game's environment is also possible with adventure and role playing games, which commonly use a third-person perspective that allows players to view more of the game's environment and surroundings.

Real time strategy games, on the other hand, are often played by looking down on a distant landscape. As a result, there may be fewer branding opportunities in that genre, as users will be unable to see much detail within the game. Certain brands might still find opportunities in this genre though, particularly if their stores or signage have a distinctive appearance that players would recognize.

Platform

In addition to the traditional console or PC-based video game, one can also find video games on mobile devices, social networking sites, or on casual gaming websites. Each platform presents unique opportunities and challenges for brand owners.

One of the most important distinctions between platforms is the demographics of their players. Consoles users represent the traditional gaming audience: predominantly males, ranging in age from 13 to 30. The PC gaming audience is similar to that of consoles, though with an even more avid player base. Extra care should be taken when introducing branding on these platforms, to avoid creating an artificial or forced feel to the game. Traditional and avid gamers generally have a heightened sensitivity to branding, and a poorly integrated brand could significantly disrupt their enjoyment and promotion of the game.

Casual games, and social games in particular, reach a much wider audience than traditional console or PC-based games. For example, Facebook boasts more than 400 million active users, allowing games on that platform to reach an incredibly broad range of users, many of whom are not traditional gamers. Due to this immense and diverse audience, social games provide a prime opportunity for brands with universal or international appeal to reach a very large audience, and may also allow smaller brands to expand their level of recognition.

One feature of casual and social games that brand owners may want to be mindful of, however, is the fact that these sites often feature additional advertising on the page near the game itself. Brand owners should realize that their products and services may share a user's attention with additional third-party marketing, which could even be competitive with their products. The risk of competing advertisements may be increased by the fact that these adjacent advertisements are often served by the platform, not the individual game, and are therefore subject to separate contractual agreements. Depending on the platform at issue, your attorney may be able to negotiate an arrangement that would minimize the risk of this competition occurring.

Mobile gaming has two distinct audiences. For smart phones and similar devices, the audience has generally consisted of tech-savvy individuals and white-collar professionals, though this audience is quickly expanding as smart phones become increasingly common. For portable gaming devices, the audience generally consists of children, young adults, and hardcore video game fans. Branding on smart phones often mirrors that of social games, due to the similarly broad audience. On the other hand, branding for portable gaming devices is more focused on the traditional gaming audience or children, depending on the game. An additional consideration for mobile branding is the reduced screen size and the inability of users to perceive small details within most games. Therefore, publishers and brand owners may need to explore creative ways to display the brand in a large enough fashion that users can recognize the brand.

Setting

Video games take place in a practically infinite number of different settings. Games are just as likely to be based in a post-apocalyptic future, the distant past, or imaginary worlds as they are to be based in the present reality. Among these myriad possibilities for a game's setting, there is a clear division when it comes to branding—games based on modern-day reality provide more opportunities for real-world branding than games based on fantasy or different time periods.

"Reality" is a relative term—it doesn't mean that the game’s plot must be a true story. However, the game must have a realistic enough environment that it would make sense to have actual real-world products and services within the game. For instance, a game could feature a league of imaginary creatures like Big Foot and the Loch Ness Monster playing against real-world baseball teams. Publishers could still outfit the game characters with Captain Victory apparel and equipment to imitate a normal baseball game without affecting the essential content of the game.

However, if a video game takes place in a fantasy world within an underground cavernous wasteland, it might be disconcerting for players to encounter real-world brands within the game. Similarly, even if based on reality, but set in 1914 to mimic World War One, a video game would have a very unnatural feel if modern day brands appeared as part of game play. There may still be opportunities for brand owners within these spaces, however. In recent marketing campaigns, certain brands have tied their products to fantasy games by using combinations of real-world advertisements and in-game promotions. Likewise, historical games could still provide a rich environment for brands that have been around since that era, so long as the placement is implemented in a time-appropriate manner.

Video games provide an excellent marketing opportunity for brand owners, but making sure the brand and game are a proper fit is key. If the game doesn't effectively promote the brand, or if branding within the game creates an unnatural experience for players, then both the publisher and the brand owner could be harmed rather than helped by the product placement. Considering a game's genre, platform, and setting when entering into a product placement agreement will help to ensure that branding not only serves to effectively promote the product, but enhances the game experience as well.

Authored By:

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

and

Derek Lowrey
(Extern Extraordinaire)

[1] Unless Captain Victory is keen on players using branded sporting equipment to bludgeon their enemies to death.

Trademarks for Social Games - a Recipe for Success

Sheppard Mullin — Fri, 27 Aug 2010 04:25:35 -0800

The rise of social games has changed the face of the gaming industry in countless ways. With lower barriers to entry than traditional game development, new titles are launching essentially non-stop, not only from larger companies, but from a multitude of start-ups as well.

As a game developer, you are creating a product that you believe is innovative and compelling. But how do you make your game stand out in this throng―and how do you protect yourself against the horde that will try to ride on your success? By using trademarks effectively to promote and protect your brands.

Ingredients for a Strong Trademark

Naming a new game can be a challenge. You want a name that stands out and draws players in, but you also want to tell potential new players something about the game you're offering. One of the main problems that many developers encounter stems from this second desire—descriptiveness.

The strength of a trademark (its ability to identify the source of goods or services), is measured on a sliding scale, with generic words ("cake") on one end, and purely fanciful marks, that is, words that have no inherent meaning, ("cakiala") on the other. Generic words can't be protected on their own as trademarks. Fanciful marks and arbitrary marks (words that have no relation to the goods on which they're used) are the strongest trademarks.

In between these two extremes are the categories where most social game titles fall—descriptive and suggestive marks. The line between these two categories is pretty blurry. Descriptive marks, as the name suggests, describe a quality or characteristic of the goods. Suggestive marks, on the other hand, do not outright describe a quality of the goods, but merely suggest it.

Hypothetical example—PastryPlay is a successful new social game developer using its first rounds of funding to create a game where players plant and grow delicious magical cupcake plants. A descriptive name for this game might be "Cupcake Farm." The name describes exactly what the content of the game is. In contrast, a suggestive name could be "Sprinkle Harvest." The name evokes the content of the game without expressly describing it.

So why should you care whether your mark is descriptive or suggestive? Because suggestive marks are considered inherently distinctive and therefore automatically entitled to trademark protection. On the other hand, descriptive marks do not, on their own, merit full trademark protection. Only once a descriptive mark has been used and advertised extensively, so that it serves to identify that one specific game, can it get full trademark protection.

When a social game is published, it is instantly viewable by millions of potential players—and countless competitors. If a game is successful, chances are it will breed imitations. In the example above, PastryPlay can't stop its competitors from coming out with their own cupcake-farming games. And because the terms "cupcake" and "farm" simply describe the content of the game, PastryPlay can't prevent other developers from using those words in their game titles. Social gaming giant PlaySweet can then sweep in with its newest title "Cupcake Ranch," and there's nothing that PastryPlay can do to stop it. If PastryPlay had chosen a suggestive name, on the other hand, they would be in a good position to challenge anyone who used a confusingly similar title for another social game.

Sifting through the Competition

Once your company has chosen several potential names for your new game, it's time to find out if you are the first person to use that trademark. In the United States, trademark rights are based on first use in commerce, so if someone has used anything confusingly similar to your potential name before you for related products, you could be in trouble.

Searching for prior trademark use is an absolutely necessary part of the branding process. Performing a trademark search before a game title (or other company name or product, for that matter) is adopted is exponentially less expensive—and annoying—than fighting a legal battle over your title at some point in the future. This is why you want to choose several potential names for a new game—it is entirely possible that you may be blocked from using one of the names by a prior use, particularly with the huge number of social games that are already on the market.

The searching stage is where you want to get your trademark attorney involved. It may seem simple to perform some quick Internet searches to find any really obvious obstacles, but a trademark attorney brings a couple of desirable qualities into play—knowledge of search techniques for a wide range of sources, including trademark databases, and the experience to know which search results are likely to cause conflicts.

In the social game space in particular, because the barriers to entry are so low, there are an incredibly large number of games out on the market. While many of these games are not huge success stories, and may have a limited number of players, trademark law doesn't care how many monthly active users you have—only who used the mark first.

Suppose that PastryPlay didn't perform any trademark searches before adopting the game title "Sprinkle Harvest." The game is released, and thanks to creative genius, effective marketing, and word of mouth, it's a huge success, with over a million monthly active users in just a few weeks. Unfortunately for PastryPlay, Bill Baker, a retired software engineer, coding in his spare time, had published a similar game called "Sprinkle Harvester" about a month before. His game isn't as sophisticated or popular. He only has about 2,000 monthly active users. But if he files a lawsuit, he could force PastryPlay to change the name it has spent so much time and money promoting, and he could also be entitled to a lot of money in damages.

Prepare in Advance

The good news is that there are ways to protect your new game title before the game is published. The United States Patent and Trademark Office allows you to file an Intent-to-Use ("ITU") trademark application. Essentially, this application allows you to reserve your rights in a trademark that you plan to use. Protection for ITU trademarks dates back to the moment the application was filed.

Let's re-visit our prior situation, but with slightly different facts. PastryPlay settles on the name "Sprinkle Harvest" about halfway through its development process and immediately files an ITU trademark application for the title. Shortly after PastryPlay files its application, Bill Baker releases his "Sprinkle Harvester" game. PastryPlay then releases "Sprinkle Harvest" about a month later. In this scenario, PastryPlay is now in control, with the basis to claim trademark infringement against anyone using the name after its trademark application date, including Bill Baker, who will likely have to change his game title. And, because PastryPlay's application was on record, and Bill had a duty to search trademark records before adopting his mark, he may now have to pay a higher amount in damages than if PastryPlay had simply used the mark first.

As you can see from this example, the filing date of an ITU application is incredibly important. By being proactive about your trademarks, you can gain the right to prevent future developers from using any titles that are confusingly similar to your own. The date from which you can first establish trademark rights could prove to be the difference between maintaining the goodwill of your brand or losing your investment.

You Have Your Cake. Now Eat it, Too.

Having trademark rights is all well and good, but you don't maximize the benefit from having those rights unless you enforce them. Enforcement is an integral part of both maintaining your legal rights in a mark and retaining the distinctiveness of your brand.

The first step of enforcement is keeping an eye out for infringing uses. If someone on your team notices a game with a similar name, send it to your trademark attorney to find out if it's going to be a problem. You can run periodic searches of social game platforms, or have your attorney do it for you. Your attorney can also order watching services that will monitor new trademark filings, both in the United States and abroad, in order to identify potential new threats as quickly as possible.

Once a potentially infringing use has been identified, you need to address it. The most typical way to do that is to have your attorney research the situation, then send a cease and desist letter if appropriate. Ideally the letter will lead to a quick resolution, but in some cases, further legal action may be necessary.

Back to the delicious dealings of PastryPlay—Fiona Frosting is an artist working on Sprinkle Harvest. While surfing the Internet one night, she discovers the infringing Sprinkle Harvester game and notifies PastryPlay's CEO. The CEO decides that because the infringing game is so small, he will just ignore it. This leads to a couple of potential problems—

First, PastryPlay does decide to go after a more popular, nautical-cupcake game called "Sprinkle Harbor." The makers of Sprinkle Harbor point to Bill Baker's Sprinkle Harvester game as evidence that PastryPlay's trademark lacks distinctiveness, and that coexistence should be possible, since Sprinkle Harvest is already coexisting with a more similar mark. This could cause complications if PastryPlay tries to bring a lawsuit, and almost certainly puts it in a weaker position when negotiating a settlement.

In a second scenario, PastryPlay has ignored the Sprinkle Harvester game until seven years later. During that time, Sprinkle Harvester was acquired by industry giant PlaySweet, which upgraded its graphics, and launched a massive marketing campaign. Now an active competitor, PastryPlay decides to sue. But PastryPlay has waited too long. PlaySweet is able to mount defenses based on implied consent, laches, and the statute of limitations for trademark claims, and it is now too late for PastryPlay to protect its brand.

As a developer, your game titles are one of your most valuable assets. The value in your titles comes from their ability to identify your game. The more competitors there are in the market with similar names, the less your title serves as a unique identifier. As a result, it's vital to address any infringement in order to maintain that value.

Sweet Satisfaction

Trademarks are one of those areas where handling things properly from the beginning can save a lot of trouble and heartache down the road. There is no substitute for getting trademark advice directly from your attorney, but hopefully this article has given you a basic recipe to keep in mind while cooking up your game brands.

Authored By:

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

How To Stop Worrying And Love Facebook Credits

Sheppard Mullin — Tue, 03 Aug 2010 09:35:32 -0800

Facebook Credits are here, and they’re sparking quite a bit of debate. Credits are the virtual currency that Facebook hopes third-party game makers will use so that there’s a single, consistent currency across all the games in the Facebook community. But if you’re going to use Credits, you not only have to pay Facebook a 30 percent cut of any transaction you make with the currency, you also have to keep to some pretty stringent terms dictated by Facebook.

This article by Shawn Foust was originally published in the Social Beat. To read the article please click here.

Sex, Violence, Videogames and the Supreme Court

Sheppard Mullin — Wed, 21 Jul 2010 10:33:39 -0800

In February 2009, the 9th Circuit Court of Appeals struck down California's Violent Video Games Act banning the sale or rental of "violent video games" to minors. While the holding is squarely in line with substantial U.S. Supreme Court precedent requiring parents — not government censors — to decide what is appropriate content for children, the U.S. Supreme Court just granted review. Mixed in with the legal issues are some of the most troublesome themes for free speech protection — minors, sex and violence. The grant of review is therefore unsettling.

The underlying lawsuit was filed by video software associations against Governor Schwarzenegger, who signed the Act into law on Oct. 7, 2005. The Act prohibited the selling or renting of "violent video games" based on the "fear" that repetitive violence contributes to anti-social conduct among minors. The Act defined "violent video games" as those where the options available to the player include killing, maiming, dismembering or sexually assaulting an image of a human being, if those acts are depicted in one of two ways:

“Either in manner that appeals to deviant or morbid interests of minors, is patently offensive to what is suitable to minors according to community standards, and where the game as a whole lacks serious literary, artistic, political or scientific value for minors; or, in a manner that enables the player to virtually inflict serious injury upon images of human beings or characters with substantial human characteristics in an especially heinous, cruel or depraved manner that involves torture or serious physical abuse to the victim.”

The first method borrowed legal doctrine from obscenity laws. Obscenity is not protected speech under the First Amendment as it is deemed to have no value to society, i.e., to be without serious literary, artistic, political or scientific value. The second method borrowed language from federal death penalty jury instructions to define "cruel," "depraved," "heinous" and "serious physical abuse" to include infliction of gratuitous violence upon the victim beyond that necessary to commit the killing, needless mutilation of the victim's body, and helplessness of the victim.

The 9th Circuit struck down the Act, finding that video games are a form of expression protected by the First Amendment and the Act sought to restrict expression based on content, i.e., violence. Applying the "strict scrutiny" standard of review, the court held California failed to prove any compelling interest supported its enactment and that less restrictive alternatives were available to protect minors.

The court noted the video game industry itself has a voluntary rating system to provide parents with knowledge about game content. The Entertainment Software Rating Board rates the content of games with age-specific ratings, ranging from early childhood to adults only. It also assigns content descriptors.

Noting the Supreme Court has held minors are entitled to a significant measure of First Amendment protection, the 9th Circuit also rejected California's argument that the Act was supported by the compelling interest of protecting children from "violent, aggressive and anti-social behavior." While there is "an abstract compelling interest in protecting the physical and psychological well-being of minors," California failed to prove the harm was real or that the Act would alleviate that harm in a direct material way.

Excerpted from Communications Lawyer Vol. 27 #2, July 2010

Authored by:

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

Social Games and PRIVACY POLICY PANDEMONIUM

Sheppard Mullin — Mon, 19 Jul 2010 11:25:12 -0800

I’ve spent the better part of the last few months acquainting myself with the intersection between privacy and social games. Things can be a bit complicated.[1] The goal of this article will be to explain the current state of affairs and suggest some options to consider when drafting a privacy policy that touches on social games.

I’ll use an example to set the stage for the discussion:

Little Jill Jellybean is a new user to Facebook. She signed up because everyone in her peer group was on there and South Park had an episode on it (so you know it’s a moral imperative to join). A friend posts on her wall about an exciting new game, so Jill installs the application, Uranium Enrichment City[2], and begins playing. Jill builds the foundation of her nuclear core, but quickly finds that the only way to enrich uranium quickly enough to become a higher level atomic scientist is through microtransactions, so she puts in some money to buy spent fuel rods. Also, since her reactor may melt down without constant monitoring, she utilizes the Enrichment City application on her smart phone to monitor radiation levels. Things progress marvelously.

It all seems so innocent…but there lurks a unspoken legal reality beneath the playful surface: Little Jill Jellybean’s interaction with the game may touch upon 4 or more privacy policies (with 4 or more separate entities collecting information relating to her and her activities).

We can see where the different privacy policies come into play when we break down the example:

Smart Phone: When Jill boots up the Enrichment City mobile application, the smart phone may begin to collect information about her and transmit that information to the developer of the smart phone’s app platform. Information such as her name, location, usage habits and so forth.
Social Network: The game resides on a social networking platform, where it can access Jill’s friend ecosystem and grow through a variety of viral means. While Jill plays, the social network will collect information relating to Jill (namely the information she puts on her profile), and perhaps how Jill is interacting with the applications on the platform (which applications Jill is downloading, how much money she is spending on those applications, etc.) Jill may get her friends involved in this process by inviting them to assist her in the development of her heavy water reactor for example.
Social Game Developer: As Jill enriches uranium with breathtaking efficiency, her interaction with the game will also be subject to information collection. The game may ask her to register an account or perhaps it will receive information from the social network or the smart phone relating to Jill’s user characteristics.
3^rd Party Services: Any number of third parties with separate privacy policies may be directly integrated into the game. Payment services or developer toolsets/engines/platforms are typical examples. Each of these may collect information (particularly payment services) and each will likely have its own privacy policy.

Now, Jill has presumably agreed to each one of these privacy policies at some point (if not actively, then passively through use). However, Jill may not be aware of which activities are being governed by which privacy policies and how that information is being transferred among the entities associated with the application.

Regulations aren’t great in setting forth explicit requirements with respect to privacy. Instead we often get broad statements that are meant to be applied according to context. But issues are popping up with greater frequency, so it makes sense to try and be as clear as possible. Possible downsides include the prospect of FTC enforcement proceedings or litigation based on unfair business practices if the privacy policy does not accurately describe what information is collected and how it is actually used. Additionally, there are risks if the privacy policy fails to comply with the requirement of California law and other laws that expressly say that if you collect personal information from a consumer online you must disclose what information you collect and how you use it. Additionally, a company may be responsible for downstream disclosures or uses of personal information if you know that the company to which you provide information is going to disclose it or use it in a particular way and you don't disclose that.

So what can the developer of a social game do with its privacy policy to straighten some of this out? Provide clear and concise information.

Identify the entities. The developer of a social game is in the best position to know which entities are involved with the social game. Typically the developer has chosen the platforms where the game will run and the third party services that will be integrated into the game. Identify these entities and provide a link to each entity’s relevant privacy policy.

Explain how the entities are involved. You may not be able to state what information the associated entities are collecting (particularly since this is likely a moving target), but you can explain to your user how the various entities are related to your game. For example:

X is our platform, you can find its privacy policy here: [link]. They provide the home for our game.

Y is our payment service provider, you can find its privacy policy here: [link]. We’re not wild about handling financial information so they handle the transactions for us.

Reference other agreements where appropriate. Often the platform or another third party will obligate the developer to undertake certain actions with respect to privacy. In certain instances it may make sense to directly reference and link to the relevant agreement so the user understands the reason for the inclusion of certain language in the privacy policy. The link provides the user with the opportunity to investigate the broader context and better educate themselves on the handling of their personal information. However, recognize that some of your agreements might be subject to confidentiality clauses or that there might be other reasons for not referencing a third party.

Identify the information being transferred. Often the platform or third party service provider will be collecting information independently of the game developer. That’s fine, and it’s up to the platform and service provider to have an appropriate privacy policy in place to cover that. However, if you as the game developer are collecting and transferring information, clearly state what information is being transferred and for what use. Also, consider identifying the entity that will be receiving that information.

The right wording for any particular privacy policy is very much a product of circumstance, but the general thrust is always the same: be clear and up front where possible. This isn’t just a matter of making things easy on your users; it’s a means for avoiding public relations situations and the ire of regulators. Friends don’t let friends create privacy policies that wallow in unnecessary vagueness.

Authored By:

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

[1] Kind of like a Rubik’s Cube that hates you.

[2] Quite possibly my most brilliant game idea ever -- I’m willing to consider co-development opportunities.

Machinima: Machine + Cinema

Sheppard Mullin — Tue, 16 Mar 2010 04:23:58 -0800

If you’ve ever seen clips of Halo avatars discussing how they are stuck in a canyon with the enemy camp,[1] or watched the South Park episode where the main characters play World of Warcraft,[2] then you’ve experienced a genre of film called “machinima.” The term "machinima" (machine + cinema) generally refers to animated filmmaking within a real-time virtual 3-D environment.[3] To accomplish this, a "machinimator" (machinima + animator) pieces together video game footage to create an independent production that is distinct from the video game itself. Essentially, the machinimator is a digital puppet master who utilizes the environment, design, and characters of a video game to create a separate story. Machinimators normally record their productions in real-time using a capture card (hardware) or video capture program (software). Additionally, many video games now provide an in-game video capture ability, which allows users to easily record their own game footage.

Given the creative avenues available, machinima can vary from simple run-throughs of particular quests to sophisticated films involving elaborate plots and detailed character development. Some of the very first examples of machinima lacked any narrative and were straightforward recordings of multiplayer battles in Doom and Quake. These early forms of machinima went largely unnoticed by the public. Today, however, the genre has advanced in style and creativity sufficiently that both ongoing series and feature film-type machinima have steady followings. As machinima becomes more widespread, fans and new viewers can find films online, at convention and festival contests, and even on television.

For video game publishers, the growing popularity of machinima is both beneficial and troublesome. One benefit of machinima is the potential for advertising. If a particular machinima production becomes popular enough, it is essentially a source of free promotion for the video game on which it is based. On the other hand, if publishers allow users to create machinima, they have to address additional contract and licensing issues. Moreover, publishers may encounter machinima that is offensive or reflects poorly on the video game.

By creating a settled policy on game content usage and following up with the enforcement, video game publishers can benefit from the many advantages of machinima while minimizing its potential problems. At present, however, approaches to policies and enforcement vary widely. Some publishers create specific rules for users establishing rights and limitations for the use of copyrighted game content in machinima. Other publishers adopt blanket prohibitions on derivative works and grant exceptions for specific productions. Finally, many publishers maintain an official stance against machinima but tacitly allow the existence of derivative works by not enforcing restrictions.

Welcoming Machinima with Open Arms… and Strict Guidelines

As explained in the previous article on microtransactions, when someone purchases a video game, an end-user license agreement (EULA) details the rights the purchaser has to play and use the game. If publishers wish to encourage machinima, the EULA itself can permit derivative works, or the EULA can direct users to a separate document governing derivative works. As part of a user's license to create machinima, publishers typically carve out certain exceptions. Publishers often restrict commercial use of machinima, prohibit profane or obscene content, and require that users grant to the publisher an unrestricted, royalty-free license to exploit the machinima. Additionally, because some artists create machinima that utilize game content from multiple video games, publishers often forbid users from infringing third-party IP rights when creating derivative works. This limitation is particularly important for publishers who may exploit user-created machinima, and who could be held responsible for infringement of third-party IP rights. Thus, by specifically allocating what a user can and cannot do with derivative works, through either the EULA or a separate document, a video game publisher can take advantage of the public attention that machinima may attract and at the same time help protect its rights in derivative works.

Prophylactic Bans Against Machinima – With Exceptions

Not all video game publishers permit machinima based on their game content. Among other restrictions, a publisher can use its EULA to impose a general prohibition against all derivative works based on its video game. As a result, anyone creating machinima without a license to create derivative works will violate the EULA. To add some flexibility, the EULA can contain a “waiver of restrictions clause,” which will allow a video game publisher to lift the restriction on derivative works for certain users upon request. With this approach, publishers may face additional contracting costs for reviewing license requests on an item-by-item basis. However, by creating a general ban against machinima, video game publishers can limit the creation and distribution of improper or infringing machinima, while still reserving the right to authorize machinima that they deem acceptable.

Under-Enforcement (Implied License)

Some publishers adopt EULAs that prohibit users from creating derivative works, then under-enforce this restriction. However, this approach leaves users in limbo, unsure of the legal status surrounding their creations. Furthermore, under-enforcement may lead users to believe that a publisher has implicitly authorized existing machinima. This may create problems for publishers if they later seek to enforce their restrictions on derivative works. If, after a sustained period of under-enforcement, publishers identify problematic machinima, estoppel[4] defenses or the doctrine of implied license may prevent publishers from enforcing their restrictions. Thus, to avoid losing the ability to protect their rights in derivative works, video game publishers (regardless of their position on machinima) may need to enforce their policies on game content usage from the start.

Machinima and Copyright: The Crossroads of Infringement and Fair Use

Due to its use of a video game's engine, characters, and footage, machinima is a "derivative work" and may infringe upon a publisher's copyright in its game content. In the United States, copyright holders have certain exclusive rights in their work. This means only the copyright holder (and his/her licensees) may reproduce the work, perform it publicly, and distribute copies. In addition, only the copyright holder may create and own derivative works. Absent EULA guidelines addressing machinima or individual licenses from the copyright holder for the online environment, machinimators can face liability if their creations infringe on publishers’ copyrights.

Machinimators may avoid this liability if their works constitute "fair use." The fair use doctrine allows limited use of copyrighted material without the permission of the copyright holder for certain purposes, such as commentary, criticism, news reporting, research, teaching, or scholarship. To determine whether a derivative work constitutes fair use, a court balances at least the following four factors:

the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes;
the nature of the copyrighted work;
the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and
the effect of the use upon the potential market for or value of the copyrighted work.

Machinima does not necessarily constitute fair use. The application of the fair use doctrine to any particular machinima will depend on the specific circumstances, which courts analyze on a case-by-case basis by balancing these factors. If the machinima does not negatively affect a video game’s profits, or relies more on independent creativity than another copyrighted work, there is a better chance that it constitutes fair use. On the other hand, if the machinima significantly reduces the video game’s potential profits, or relies too heavily on other copyrighted work, there is a strong possibility that it will be found to infringe. In any event, the fair use doctrine is unpredictable. Rather than relying on the the fair use defense and risking infringement liability for a specific machinima production, a cautious machinimator may want to seek a license to create derivative works from the video game publisher.

Final Thoughts

As video games continue to increase in popularity, the continued growth of machinima is likely to follow. Only time will tell if publishers decide to embrace or discourage machinima. Regardless of how publishers handle machinima, under-enforcement of content usage policies can lead to user confusion and difficulty in enforcing those policies at a later time. To help protect their rights in game content and to ensure that users understand the legal boundaries for machinima, it can be beneficial for publishers to not only address derivative works through a EULA or separate document, but to also enforce those policies. For machinimators, creating derivative works without a license may infringe upon a publisher's copyright and draw liability. Since there is no guarantee that a specific machinima production will constitute fair use, machinimators may want to protect themselves by obtaining a license for their creations.

Authored By:

Judy Suwatanapongched
(213) 617-5534
jsuwatanpongched@sheppardmullin.com

and

Derek Lowrey
(Extern Extraordinaire)
___________________________________________________________

[1] The cult favorite Red v. Blue, created by Rooster Teeth Productions.

[2] “Make Love, Not Warcraft.”

[3] As defined by The Academy of Machinima Arts and Sciences (AMAS). Yes, they have their own academy.

[4] Legal jargon that essentially means one cannot assert something contrary to an established stance, as proven by past conduct.

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