Business and Legal Issues for
Video Game Developers
A Training Tool
By David Greenspan and Gaetano Dimita
Contributions from S. Gregory Boyd and Andrea Rizzi
DISCLAIMER
The book is designed to help readers with a general understanding
of some of the legal and business issues in the video game industry
and does not constitute legal or any other professional advice. This
book is intended for educational and informational purposes only
and is not a substitute for legal advice from an attorney.
Reasonable efforts were used to base information on reliable
sources for the book, but the authors and publisher cannot assume
responsibility for their validity and consequences of their use.
NOTES ACCESSED
All websites were accessed between September 1, 2021, through
December 27, 2021.
DOI 10.34667/tind.45851
1 Mastering The Game
TABLE OF CONTENTS
EXECUTIVE SUMMARY 12
ABOUT THE AUTHORS 15
CHAPTER 1 THE GLOBAL STRUCTURE OF THE VIDEO GAME
INDUSTRY 17
1.1 – The Current Video Game Industry Landscape: The Numbers Behind
The Industry 17
1.2 – Demographics 22
1.3 – Geographic Breakdown 23
1.3.1 – The Major Revenue-Generating Countries 23
1.3.2 – Regional Markets 25
1.4 – Current State Of The Video Game Industry: The Players 26
1.4.1 – Game Distribution: The Platforms 27
1.4.2 – Console Manufacturers And Various Platforms 28
1.4.3 – Mobile Gaming 30
1.5 – Distribution: Digital, Retail And Cloud 31
1.5.1 – Digital Distribution 31
1.5.2 – Retail 33
1.5.3 – Cloud Gaming 33
1.6 – Major Players 35
1.6.1 – First Party 35
Microsoft 35
Nintendo 36
Sony 36
Valve 36
1.6.2 – Publishers 37
1.6.3 – Major Mobile Publishers 38
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1.7 – Beyond The Game: Growing Areas In The Industry 40
1.7.1 – Monetization Models: The Impact Of Free-To-Play And The
Growth Of Live Services 40
1.7.2 – Video Games And Community 42
1.7.3 – Intellectual Property Issues In Streaming 44
1.7.4 – Esports 46
1.7.5 – Artificial Intelligence 50
1.7.6 – Immersive Technologies 50
1.8 – Legal Challenges 53
1.8.1 – Intellectual Property (IP) 54
1.8.2 – Monetization 55
1.8.3 – Privacy 55
1.8.4 – Labor Issues 56
1.8.5 – Antitrust Concerns 56
CHAPTER 2 INTELLECTUAL PROPERTY IN THE VIDEO GAME
INDUSTRY 58
2.1 – The Importance Of Intellectual Property 58
2.2 – Copyright 60
2.2.1 – What Can Be Protected By Copyright? 61
2.2.2 – What Rights Are Conferred By Copyright? 64
2.2.3 – Some Examples Of Copyright 65
2.2.4 – US Copyright Filing Information 66
2.2.5 – Term Of Protection 67
2.2.6 – Protecting Copyright 68
2.2.7 – Penalties For Infringement 69
2.2.8 – Derivative Works 70
2.2.9 – The Public Domain 72
2.2.10 – US Scènes à Faire Doctrine 75
2.2.11 – US Fair Use 75
2.2.12 – EU Copyright Exceptions And Limitations 76
2.2.13 – Moral Rights 78
2.2.14 – Copyright Ownership, Licenses And Chain of Title 78
3 Mastering The Game
2.2.15 – Common Questions About Copyright 79
2.3 – Trademark 80
2.3.1 – What Can Be Trademarked? 81
2.3.2 – Is It Necessary To Register A Trademark? 82
2.3.3 – Picking A Good Trademark 82
2.3.4 – Examples Of Trademarks 84
2.3.5 – Term Of Protection 86
2.3.6 – Registration Process And Cost In The United States 86
2.3.7 – Registration Process And Cost In The EU 87
2.3.8 – Madrid System For The International Registration Of Marks 87
2.3.9 – Protecting Trademarks In The United States 88
2.3.10 – Penalties For Infringement 89
2.3.11 – Unfair Competition 90
2.3.12 – Common Questions About Trademarks 91
Do I Have To Use A Trademark In Commerce? 91
Can I Let Fans Use My Trademark Without A Formal License? 92
Can I Trademark My Game Title? 92
2.4 – Patents 93
2.4.1 – What Can Be Patented? 94
2.4.2 – What Rights Are Conferred By Patents? 95
2.4.3 – Term Of Protection 95
2.4.4 – Process And Cost In The United States 95
2.4.5 – Process And Cost Outside The United States 97
2.4.6 – Protecting Patents 98
2.4.7 – Patent Litigation And Penalties For Infringing Patents 98
2.4.8 – US Patent Pending And Provisional Patent Applications 98
2.4.9 – Patent Invalidity 99
2.4.10 – Anticipation And Obviousness 99
2.4.11 – Timing A Patent Filing 100
2.4.12 – Reasons To File A Patent Application 100
2.4.13 – The European Patent System 101
2.4.14 – Video Game Patents In Europe 102
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2.4.15 – Common Questions About Patents 104
What Can Our Company Put “Patent Pending” On? 104
Patent Agents And Patent Attorneys In The United States: What Is The
Difference? 105
2.5 – Rights Of Publicity 105
2.5.1 – Rights Of Publicity In The United States 106
2.5.2 – Rights Of Publicity In Other Countries 111
2.5.3 – Image Rights In Europe 111
United Kingdom 112
Germany 112
France 113
Italy 113
2.5.4 – Negotiating The Right Of Publicity 114
2.6 – Trade Secret 115
2.6.1 – What Can Be A Trade Secret? 116
2.6.2 – What Rights Are Conferred By Trade Secrets? 117
2.6.3 – Examples Of Trade Secrets 118
2.6.4 – Term Of Protection 118
2.6.5 – Process And Cost 118
2.6.6 – Protecting Trade Secrets 119
2.6.7 – Penalties For Infringement 119
2.6.8 – Common Questions About Trade Secrets 120
Can Trade Secret Status Help Me Protect My IP From Reverse
Engineering? 120
At What Stage Should A Game Company Use Trade Secrets? 120
2.7 – IP Strategy 101 121
Have A Relationship With Experienced IP Counsel 121
Protect IP In Advance 121
Protecting IP: Pitching A Game To Publishers And Investors 122
The Process Is Complex, But Results Are Achievable 122
Strategies For Small Companies And Individual Developers 122
Strategies For Large Developers And Publishers 123
5 Mastering The Game
2.8 – Three Important Points 123
CHAPTER 3 PUBLISHING A VIDEO GAME 125
3.1 – The Role Of The Publisher 125
3.1.1 – The Developer’s Concerns When Considering A Publisher 127
3.1.2 – The Publisher’s Concerns When Considering A Developer 128
3.1.3 – Going Independent 129
3.2 – The Publishing Agreement 130
3.2.1 – Introduction: The Long-Form Agreement 130
3.2.2 – Ownership Issues 131
3.2.3 – Rights Granted 133
3.2.4 – Additional Rights Issues: Right Of First Negotiation And Last
Refusal On Future Games 134
3.2.5 – Territory 136
3.2.6 – Term 137
3.2.7 – Developer’s Services; Delivery 139
Console Development Process 143
3.2.8 – Financials 143
3.2.9 – Revenue Share Involving Distribution Only 147
3.2.10 – Additional Royalty Issues And Payments 149
3.2.11 – Accounting And Statements 150
3.2.12 – Audit Rights 152
Parameters For Audits 152
Contesting A Statement 153
Cost Of Audits 154
3.2.13 – Publisher Commitments 154
3.2.14 – Representations And Warranties 156
3.2.15 – Indemnification 159
3.2.16 – Insurance 162
3.2.17 – Credits 164
3.2.18 – Termination For Cause 166
3.2.19 – Termination For Convenience 168
3.2.20 – Governing Law And Jurisdiction 169
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3.2.21 – Dispute Resolution 170
3.2.22 – Additional Provisions 171
3.3 – A Changing Role 171
3.4 – Scenarios 172
CHAPTER 4 LICENSING CONTENT 179
4.1 – Introduction 179
4.2 – The Licensing Agreement: The Long-Form Agreement 185
4.3 – The Major Issues In Licensing Agreements 186
4.3.1 – Rights 186
4.3.2 – The Licensed Property 186
Sports Licensing 189
4.3.3 – Rights Granted 190
4.3.4 – Crossover Integration 192
4.3.5 – Platforms 193
4.3.6 – Territory And Term 195
4.3.7 – Licensing Fee 197
4.3.8 – Statements And Audits 200
4.3.9 – Ownership Issues 202
4.3.10 – Representations And Warranties 203
4.3.11 – Indemnification 206
4.3.12 – Approvals 208
4.3.13 – Termination Rights 210
4.3.14 – Expiration Of The Agreement 214
4.3.15 – Miscellaneous Provisions 214
4.4 – Music 215
4.4.1 – Hiring A Composer 216
4.4.2 – Licensing Music: Master And Synchronization Rights 218
4.4.3 – Music Libraries 221
4.4.4 – Public Domain Music 222
4.4.5 – New Opportunities: Virtual Concerts And Live Performances 222
4.4.6 – Anticipating Costs And Time 223
7 Mastering The Game
4.5 – Licensing Out IP 224
Film Options 226
4.5.1 – Licensing Agents 227
4.6 – Product Placement: A Different Form Of Licensing 231
CHAPTER 5 ACTOR-TALENT AGREEMENTS 235
5.1 – Introduction 235
5.2 – Who Negotiates The Deal? 235
5.3 – The Most Common Terms In The Agreement 238
5.3.1 – Services And Rights 238
5.3.2 – Ownership 240
5.3.3 – Compensation And Credit 240
5.3.4 – Conduct 242
5.3.5 – Approvals 242
5.3.6 – Termination 243
5.4 – SAG-AFTRA: A Closer Look 244
5.5 – The Growing Role Of Actors And The Importance Of The Actors
Unions 246
CHAPTER 6 VENDOR AGREEMENTS – INDEPENDENT
CONTRACTORS 248
CHAPTER 7 CONSOLES 254
7.1 – Introduction 254
7.2 – Agreements: Development And Hardware Tools 255
7.2.1 – Development and Hardware Tools 257
7.3 – Development, Manufacturing, And Distribution Issues 257
7.3.1 – The Submission And Approval Process 257
7.3.2 – Distribution 259
7.4 – Business Issues 260
7.4.1 – Minimum Order Requirement For Packaged Goods 260
7.4.2 – Licensing Platform Royalties 260
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7.4.3 – Marketing 261
7.4.4 – Exclusivity 262
7.5 – Legal Issues 262
7.5.1 – Representations And Warranties, Indemnification, Limitation On
Liability 262
7.5.2 – Confidentiality 264
7.5.3 – Assignment 264
7.5.4 – Term And Termination 265
7.5.5- Choice Of Law, Venue 266
7.6 – Moving Forward 266
CHAPTER 8 PC DIGITAL DISTRIBUTION 267
8.1 – Introduction 267
8.2 – The Long Form PC Digital Agreement: Introduction 272
8.2.1 – Rights Granted 272
8.2.2 – Delivery Of Materials 274
8.2.3 – Continuing Obligations 274
8.2.4 – Term 275
8.2.5 – Marketing Issues 276
8.2.6 – Revenue Share And Pricing 277
8.2.7 – Statements And Audits 278
8.2.8 – Termination 279
8.2.9 – Limitation Of Liability 281
8.2.10 – Assignment 281
8.2.11 – Other Terms 282
CHAPTER 9 THE MOBILE GAMING MARKET 284
9.1 – Introduction 284
9.2 – The Major Players 288
9.2.1 – Mobile Developers And Publishers 288
9.2.2 – Mobile Distribution Platforms 289
Apple – The App Store And Apple Arcade 290
Google – Google Play Store And Google Play Pass 291
9 Mastering The Game
New Players 292
9.3 – Dealing With Mobile Distributors And Publishers 293
9.3.1 – What You Need To Know 293
9.3.2 – End-User Monetization Models 294
9.3.3 – The Publisher-Developer Relationship 297
Example Of The Mobile Development Process 299
9.4 – Entering Into An Agreement With The Distributor 301
9.5 – Major Terms Of The Distribution Agreement 304
9.5.1 – Rights Granted 304
9.5.2 – Delivery Of Materials And Acceptance 304
9.5.3 – Continuing Obligations 305
9.5.4 – Term And Termination 305
9.5.5 – Marketing 306
9.5.6 – Revenue Share And Pricing 306
9.5.7 – Legal Commitments 307
9.5.8 – Indemnification And Limitation Of Liability 308
9.6 – Regulatory Considerations 308
9.7 – Intellectual Property 313
CHAPTER 10 REGULATION OF THE GAME INDUSTRY 315
10.1 – Introduction 315
10.2 – Data Privacy 315
10.3 – Consumer Protection 320
10.4 – Advertising And Marketing 323
10.4.1 – What Forms Of Advertising Are Regulated? 326
10.4.2 – Common Issues 327
10.4.3 – Recognition Of Marketing Communications 327
10.4.4 – Influencers 328
10.4.5 – Misleading Advertising 330
10.4.6 – Microtransaction Disclosure 332
10.4.7 – Email Advertising 332
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10.4.8 – Sweepstakes And Contests 333
10.4.9 – Social Responsibility 334
10.4.10 – Children 334
10.4.11 – Third-Party IP Rights 336
10.4.12 – Where To Find Additional Resources 336
10.5 – Monetization And Loot Boxes 337
10.6 – Other Regulations 339
10.7 – Ratings 340
10.7.1 – Age Ratings And Content Descriptors 340
10.7.2 – Factors In Rating A Game 347
10.7.3 – Submissions And Review 348
Ratings For Physical Games 348
Ratings For Online Games 350
Ratings For Mobile Games 350
CHAPTER 11 CONFIDENTIALITY AGREEMENTS AND DEAL
MEMOS 353
11.1 – The Purpose Of Confidentiality Agreements 353
11.2 – The Major Issues In A Confidentiality Agreement 355
11.3 – The Major Terms In The Confidentiality Agreement 356
11.3.1 – Preamble 356
11.3.2 – Confidential Content, Exclusions And Permitted Uses Of
Confidential Information 356
11.3.3 – Level of Care And Length Of Term 358
11.3.4 – Breach And Injunctive Relief 359
11.3.5 – No Commitment To A License Agreement 359
11.3.6 – Additional Terms 360
11.4 – Deal Memos: Purpose, Benefits, And Potential Problems 360
11 Mastering The Game
CHAPTER 12 COMMON CLAUSES IN AGREEMENTS 363
12.1 – Jurisdictional Issues 363
12.2 – Waiver, No Joint Ventures And Severability 365
12.3 – Assignment 365
12.4 – Survival 366
12.5 – Notices 366
12.6 – Entire Agreement And Revisions 367
12.7 – Reserved Rights 367
12.8 – Force Majeure 367
FURTHER READING 370
Law And Business 370
About The Industry 370
Web Sites 372
ACKNOWLEDGEMENTS 373
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12
EXECUTIVE SUMMARY
The videogame industry has grown dramatically in the last decade. It continues to
evolve with new technologies, trends, business models, greater accessibility to game
devices and distribution, and consequentially new legal and regulatory challenges.
These significant changes are reflected in the scope and volume of this second edition.
This publication is primarily a guide for developers, legal professionals, students, and
anyone interested in the video game industry to help them understand the many
business and legal issues developers may encounter in the development and eventual
distribution of a video game across numerous platforms. The topics range from
intellectual property (“IP”) and regulatory matters associated with game development to
forming relationships with publishers, platform manufacturers, distributors, and content
owners. In each of these relationships, the developer will need to be familiar with the
specific business and legal issues and contractual terms so that they can negotiate
effectively and identify risks in order to avoid potentially costly mistakes.
While the publication is for educational purposes and cannot replace the expertise of
lawyers and other key personnel in the video game industry in negotiating deals, it
hopefully can offer some guidance and explanations as to the major issues in
developing and distributing a game, why various parties make certain decisions during
negotiations, and the language that may be included in an agreement. Not all topics
and jurisdictions are covered; much of the legal commentary primarily reflects practice
in the United States, the European Union, and the United Kingdom, although many of
the business and legal principles discussed are applicable in other parts of the world. In
addition, these are large markets for video games, and with the ease in distributing a
game worldwide it is important for developers to have a basic understanding of some of
the issues they may come across when dealing with various publishers, distributors,
platform manufacturers, licensors and regulations in these territories. Finally, when
reading the publication, it is important to realize that laws change and every situation is
different and negotiations will vary depending on the unique circumstances between the
parties as well as bargaining power and perhaps past dealings. Some commentary is
reflected a few times in different chapters to underscore the importance of certain
business and legal terms.
The introductory chapter provides an overview of the video game industry, focusing first
on the industry’s size and comparing various numbers such as revenue and audience
to those of other sectors in the entertainment industry, providing a perspective of its
current dominant position. Next, a look at the demographics of game players and the
growing importance of new markets led by China followed by a brief discussion on the
major players, including the platform manufacturers, distributors, and publishers, And
lastly, a snapshot look at the recent economic and gaming trends driven by new
business models, esports, community involvement, influencers and immersive
technologies, and legal trends involving privacy, antitrust, labor and intellectual property
issues.
13 Mastering The Game
Chapter 2 discusses the basic IP issues and strategies associated with game
development. With advances in technology, IP issues have taken on a greater
significance in both the tools used to develop games and the content included in a
game. Without a basic understanding of intellectual property, a developer could find
themselves with a game that cannot be distributed because proper rights were not
obtained correctly.
This chapter examines the historical protection and current coverage for copyrights,
patents, trademarks, trade secret, and the right of publicity. Some significant cases in
the United States, the European Union, and the United Kingdom are discussed in detail
with some references to other jurisdictions and cutting edge legal topics are explored.
The authors also discuss balancing a game company's legal needs to protect IP with
the promotion of innovation and community development.
Chapter 3 examines the increasingly important role of independent developers and the
evolving relationship between developers and publishers, with a primary focus on the
business and contractual issues between the parties, whether the publisher is financing,
marketing, and distributing a game or is just serving as a distributor. The importance of
certain terms and why parties may negotiate them are analyzed, including rights,
ownership, development and delivery issues, payment considerations, and legal
responsibilities and obligations. Included in the chapter are a set of questions the
developer should consider when evaluating whether to enter into an agreement with a
publisher as well as what business issues a publisher may consider when looking at a
developer.
Chapter 4 deals with the major business and legal issues in licensing agreements
whereby the developer obtains rights to incorporate IP into their game ranging from
sports and iconic trademarks to music. In some situations, a game may be based on a
property such as a film, while in other situations, content may be incorporated into the
game to add realism. In both situations, certain rights are required, and this chapter
examines what steps the developer should take and factors to consider before licensing
a property, followed by a discussion on the terms in a typical licensing agreement. In
addition, as video games continue to grow in popularity, more and more IP originating
from video games is crossing-over into other forms of entertainment such as films,
publishing, music, and sports. This chapter discusses some of the contractual and
business issues a developer/publisher needs to consider when licensing out their IP to
other parties, including whether to hire an agent specializing in this field. The chapter
also includes an introductory discussion on music and what options exist for
incorporating music in a game, from the hiring of a composer to licensing or using public
domain music, and what are the main contractual issues when dealing with some music
agreements.
Chapter 5 deals with actor-talent agreements and the key terms typically negotiated
between the parties when hiring talent to appear in a game and marketing materials,
whether using their voice, likeness, or motion capturing them or a combination of any of
the above. The chapter also discusses the growing role of the actor’s union in the United
States and some of the procedures for hiring talent, and the minimum contractual
obligations required when hiring union talent.
Chapter 6 deals with the major terms in a vendor-independent contract agreement, and
some of the legal issues in hiring vendors which has taken on greater prominence as
Mastering The Game
14
developers/publishers hire more independent contractors, and changing labor laws in
parts of the United States.
Chapter 7 addresses important business and legal issues dealing with the major
console manufacturers and what steps are needed to develop and publish retail
packaged goods and digital goods on the various platforms.
Chapter 8 focuses on the growing importance of PC distribution as a way for developers
to reach consumers, as well as the challenges of distinguishing one game from another
in what is becoming a very crowded field. The chapter also examines some of the most
significant contractual terms between a developer and distributor, including rights
granted, revenue share, obligations, marketing issues, and termination rights.
Chapter 9 talks about the incredible growth of the mobile gaming industry, perhaps the
most accessible platform for developers to distribute their games on. Against this
backdrop, this chapter takes a brief look at the major platforms, and discusses the most
important legal and business issues that developers will need to be aware of, including
those in various agreements that a developer may enter into whether acting
independently with a distributor (i.e., app store) or through a publisher acting on its
behalf. While most distributors’ agreements are typically non-negotiable, it is still
important to understand the obligations and potential risks of these deals, which this
chapter will discuss.
Chapter 10 briefly examines some of the key areas of regulation that developers and
publishers need to be aware of when making a game, such as data privacy, consumer
protection, gambling, advertising, and marketing, including particular concerns dealing
with children and influencers. In addition, the chapter provides a brief overview of game
ratings and the importance of understanding how games are rated in some of the major
territories, and the impact of ratings on development.
Chapter 11 covers confidentiality agreements and deal memos, two significant
agreements that often serve as the foundation for any business relationship. The
confidentiality agreement will usually be the first agreement reviewed by a developer
when forming a relationship with another party, whether it is with a publisher interested
in financing a game or working with a platform manufacturer. This chapter will examine
the essential terms found in a confidentiality agreement. In addition, the chapter also
discusses the significance, necessity, and problems of a deal memo, as well as points
typically raised in the document.
Chapter 12 discusses the meaning behind common clauses that appear in almost all
agreements involving any aspect of the video game industry, ranging from publishing
agreements to licensing agreements.
15 Mastering The Game
ABOUT THE AUTHORS
David Greenspan has been involved in the video game business for over 25 years
working, independently and in Business and Legal Affairs for some of the most
significant video game publishers at the time in the industry. He has worked for 989
Studios/Sony, THQ, Bandai Namco Entertainment America, and Midway Games.
He has worked on more than 100 video games and has been involved in all aspects of
video game development, publishing, licensing, distribution, marketing, and has
negotiated hundreds of agreements covering these areas. Many of these deals have
involved major game developers, publishers, distributors, motion picture studios,
professional sports leagues, television networks, and advertisers. Although he is
terrible at playing games, he negotiated a favorable royalty rate one time by defeating
a licensor’s lawyer in a sports video game.
David was the lead author of the 1st edition of Mastering The Game: Business and
Legal Issues for Video Game Developers. Mr. Greenspan has taught classes for more
than 20 years covering video games, entertainment law, and licensing with a primary
focus on transactional issues. He has taught at several law schools, including Santa
Clara University School of Law, where he is currently teaching his 14th year, and also
recently at the University of Miami Law School. He was one of the first to teach legal
and business issues covering the video game industry at the university level when he
taught classes in this area at UCLA Extension from 1996-2000.
He has lectured at many conferences and universities about the video game industry
throughout the world, including many countries in Europe, Asia, and Central and South
America.
Dr. Gaetano Dimita is a Senior Lecturer in International Intellectual Property Law at
Centre for Commercial Law Studies, Queen Mary University of London where he
teaches ‘Interactive Entertainment Law’, ‘Interactive Entertainment Transactions’,
‘Esports Law’, and ‘Art & Intellectual Property Law’.
He is the editor-in-chief of the Interactive Entertainment Law Review (IELR –
https://www.elgaronline.com/view/journals/ielr/ielr-overview.xml), which he helped
launch as the first academic peer-reviewed journal in the field. The Journal, published
twice a year by Edward Elgar, features articles focusing on the legal changes,
challenges and controversies in the gaming space.
Gaetano created and organizes the ‘More Than Just a Game’ conference series (MTJG
- https://www.mtjg.co.uk/). a unique series of academic-led conferences on games and
interactive entertainment law attracting an international network of researchers and
legal professionals. MTJG now counts events in London (the flagship two-day
conference), Paris, Madrid, Frankfurt, Maastricht, Milan and Warsaw.
Mastering The Game
16
Gaetano serves as Executive Committee member of the British Literary and Artistic
Copyright Association (BLACA), as Board Member of the National Video Game
Museum (NVM); and as member of the UK IPO Copyright Advisory Council. He is also
a member of Italian Bar Association (Rome), the Video Game Bar Association, the Fair
Play Alliance, and the Higher Education Video Game Association.
Gaetano is a qualified lawyer (Italian Bar Association) and Of Counsel of an Italian Law
firm specialized in video game law, Andrea Rizzi & Partners, advising on Intellectual
Property Law, Licensing and Regulation.
S. Gregory Boyd is a partner and co-Chair of the Interactive Entertainment Group at
Frankfurt Kurnit. He is recognized in the 2022 edition of Best Lawyers in America for
advertising law and The Legal 500 has praised him for his work with media and
technology companies.
Mr. Boyd focuses on high technology companies in the video game industry,
advertising, and public relations. He has extensive experience negotiating and drafting
all of the operational agreements for these businesses, including software (SaaS),
licensing, employment, and development agreements — for video games and other
digital media across all platforms.
Mr. Boyd is co-author of Video Game Law: Everything You Need to Know About Legal
and Business Issues in the Game Industry (Taylor & Francis/CRC Press, Fall 2018). He
is also the co-author of the textbook Business and Legal Primer for Game Development
(Charles River Media), and wrote the chapter, "Intellectual Property in the Video Game
Industry" in the first edition of Mastering the Game.
He is a founding member and past Board member of the Video Game Bar Association
and a member of the Advisory Board for the NYU Game Center Incubator. He is a
frequent speaker at international media conferences and educational institutions, and
he has been featured in a number of publications, including Fortune, Forbes and
Gamasutra. Greg also taught a seminar on advanced topics in intellectual property for
six years at New York Law School. He is admitted to practice law in New York and is a
registered patent attorney with the USPTO
Andrea Rizzi is a dual qualified (Italy-UK) International commercial IP IT/media lawyer
with 20 years of experience gained in Italy and the UK, both as a private practice lawyer
as well as in house video game/interactive entertainment lawyer Andrea’s practice
focuses on the digital entertainment and technology industries. Throughout his career
Andrea has dealt with the most diverse legal issues related to the development,
acquisition, and commercialization of some of the most successful videogames of all
time, and has been involved with the setting up, acquisition, and sale of leading
development studios. Andrea counsels some key videogame industry players in all
major areas of business law and regulations.
17 Mastering The Game
CHAPTER 1
THE GLOBAL STRUCTURE OF THE VIDEO GAME
INDUSTRY
1.1 – The Current Video Game Industry Landscape: The
Numbers Behind The Industry
According to Newzoo, a leading video game research company, the video game
industry generated revenue of approximately $178 billion worldwide in 2020.
1
This
figure is greater than the current GDPs of 156 countries, according to 2020 United
Nations statistics.
2
This record-breaking year for the industry was accelerated by
COVID-19, with many people having spent their time playing video games at home
because of the pandemic lockdowns. Newzoo forecasts revenue numbers to slightly
increase to a little more than $180 billion in 2021 and increasing to $200 billion in 2023.
3
According to analysts, there are several reasons why it is expected that both revenue
and the number of players will continue to grow in the coming years:
• Digital accessibility will become more widespread in both emerging and established
markets.
• Greater market penetration of the next-generation console platforms, combined with
the continuing success of Nintendo’s Switch.
• More powerful mobile devices will be launched, which can run more content-
intensive games.
4
1
These numbers are projected to increase despite some AAA titles pushed back to 2022 releases, and fewer
consoles being manufactured because of a scarcity of some components. Newzoo’s 2021 estimated numbers
include consumer spending on physical and digital full-game copies, in-game spending, and subscription
services (i.e., Xbox Game Pass), but excludes secondhand trade or secondary markets, advertising revenues
earned in and around games, console and peripheral hardware, B2B services and online gambling and
betting. Newzoo, “2021 Global Games Market Report: The VR & Metaverse Edition”, newzoo.com. While
there’s no doubt that recent global revenue figures for the gaming industry are incredibly impressive,
determining an accurate figure is a challenge. Estimates of 2020 revenue in fact vary between $139.9 billion
and $208 billion according to the source. This is due to the different methods of calculation and to reporting
sources not necessarily having the same level of reliability. Additionally, many private companies do not
provide financial figures. Estimates are also complicated and vary widely because the platforms in the
industry, including in the different sectors such as mobile and digital, are not necessarily clearly defined.
2
“List of countries by GDP (nominal)”, wikipedia.org. Figures for 213 countries, compiled by the United Nations
Statistics Division and based on 2020 estimates.
3
Newzoo, “2021 Global Games Market Report: The VR & Metaverse Edition”, newzoo.com.
4
Some games, including AAA titles, were not playable on previous devices because of the amount of memory
required. Currently, more major publishers are beginning to develop specifically for mobile platforms as well
as continuing to port AAA titles to mobile. This should expand their revenue streams, exposing more gamers
to these types of games.
Mastering The Game
18
• Esports,
5
cross-platform play and cloud gaming will further expand.
• Live services and video-game streaming services will grow.
• More innovative gameplay will be possible, incorporating new technology and
easier adaptability.
• Games will become more engaging, with more detailed stories and graphics, and
yet at the same time there will be games that are quite simple so anyone can play
them.
• Consumer interest will further increase due to the tremendous growth of streaming
of game content and user-generated video game related videos.
• Virtual reality (VR) will attract a more mainstream audience.
• More games will be localized making them accessible to a greater number of
players.
• Greater worldwide distribution and exposure of games from non-traditional markets.
• The Metaverse.
The current market revenue represents an increase of over 400% since 2007, when the
iPhone was introduced and revenues totaled $35 billion.
6
Compared to 1995, when the
PlayStation was introduced in the United States and the worldwide market was about
$4.3 billion, revenue has increased more than 4,000%.
7
Extraordinary growth has thus been achieved in a relatively short period, for an industry
that was on the verge of collapse in the 1980s.
8
Video games have become the primary
form of entertainment for many people (this is especially true for a younger generation
of players where games have become the center of youth culture). The social and
artistic relevance of video games has become just as influential as other forms of
entertainment – if not more. Video game revenue exceeds that earned in the film,
9
book
5
Professional or semi-professional competitions using video games. See Section 1.7.4.
6
Newzoo, “2018 Newzoo Global Game Market Report”.
7
Shapiro, Eben, “Sony, Nintendo’s Partner, Will Be A Rival, Too”, The New York Times, June 1, 1996.
8
It was close to collapse at that time for several reasons: (i) retailers sending back massive stock to companies
(infamously due to the massive failure of the E.T. game for the Atari 2600), (ii) a market saturated with too
many console systems, (iii) a high number of poorly made games, and (iv) unsold games sitting in stores and
warehouses. The Strong Museum, A History of Video Games in 64 Objects, Dey St., 2018, p. 158. See also
“Video Game History”, history.com, June 10, 2019.
9
Film industry figures can vary according to the definition of what is included as revenue. The most reliable
numbers are probably those of the Motion Picture Association (“MPA”), based in the United States, which
serves as an industry trade group. In 2020, the MPA formerly known as the Motion Picture Association of
America ("MPAA") reported that the combined global theatrical and home/mobile market was $80.8 billion
(excluding the pay television subscription market). This represents an 18% decrease from the record-breaking
year of 2019, when worldwide revenue reached $101 billion, in turn an 8% increase over 2018 and the first
time figures surpassed $100 billion. Not unexpectedly, global box office revenue dropped substantially (about
72%) as theaters were closed due to the COVID-19 pandemic. In 2020, global box office revenue accounted
for $12 billion in comparison to $42.2 billion in 2019. In contrast, digital revenue increased to $69.8 billion in
2020 from $48.7 in 2019. The MPA figures on revenue included that of movie theaters; content viewed digitally
or on a disc, both home-based and on mobile devices including electronic sell-through; video on demand and
subscription streaming; and estimates of subscriptions to television and online video services. Revenue from
film-related merchandise and pay-television subscription revenue was not included as part of the study.
Motion Picture Association, “2020 Theme Report”, motionpictures.org.; and Motion Picture Association, “2019
Theme Report”, motionpictures.org.
19 Mastering The Game
publishing,
10
and music industries. Moreover, video game revenue far surpasses
revenue generated by the major sports leagues from around the world. Video games
are also growing in importance for other entertainment sectors, as they provide a major
source of Intellectual Property (“IP”) for motion pictures, licensing and television
broadcasting (including esports). They even act as concert venues for musicians.
Not only have video games become the number one source of entertainment, but they
also continue to play a growing role in other aspects of society, including social
interaction, education, health, science and the military.
Revenue Earned In 2019 (Blue) And 2020 (Green) For The Video Game, Book
Publishing, Film And Music Industries
Comparing 2019 and 2020 revenue among the various forms of entertainment provides
perspective on the size of the video game industry and why many now consider it the
number one form of entertainment. Prior to the COVID-19 pandemic, revenues were
increasing across the entertainment and sports industries, primarily driven by
accessibility to content, higher ticket prices, streaming, expanded broadcasting rights
and merchandising. But 2020 saw an abrupt reversal of fortune for the traditional
entertainment and sports industries. The film, sports (professional and collegiate) and
music industries saw their revenue drop considerably due to cancellations of live
10
The Book Publishers Global Market Report 2021 noted that the global book publishers’ market was $87.92
billion in 2020, a decrease from the $92.8 revenue generated in 2019. The report indicated that the industry
is expected to reach $92.68 billion in 2021. “Global Book Publishers Market Report (2021 to 2030) – COVID-
19 Impact and Recovery-Research”, businesswire.com, April 13, 2021. See also “Book Publishers Industry
to Decline from $92.8 Billion in 2019 to $85.9 Billion in 2020 – Trends & Implications of COVID-19”,
prnewswire.com, May 27, 2020.
0
45
90
135
180
225
VIDEO GAMES BOOK PUBLISHING FILM MUSIC
Mastering The Game
20
events
11
and of film and television productions.
12
As a result, the revenue gap between
the video game industry on the one hand and the film, sports and music industries on
the other grew wider.
The film industry had its most successful year in 2019, reaching $101 billion in
worldwide revenue: in 2020 this figure dropped to $80.8 billion primarily caused by the
closure of theaters which saw a 72% decrease in revenue. The music industry
generated approximately US$57.5 billion in worldwide revenue in 2020 down by about
25% from the previous year.
13
Revenues of the National Football League, the most
successful sports league in the United States, reached $16 billion in 2019 and dropped
to a little more than $12 billion in 2020.
14
The English Premier League, the most
11
How important are live sports events for the overall revenue stream for the leagues? For the major sports
leagues based in the US, stadium revenue according to Forbes in 2020 accounted for close to 40% of the
league’s revenue with the numbers being substantially higher for the professional hockey league (the NHL
was at 70%). Birnbaum, Justin, “Major Sports Leagues Lost Jaw-Dropping Amount of Money in 2020”,
forbes.com, March 6, 2021. See also Kochkodin, Brandon, “U.S. Pro Sports Prove Big Enough to Handle $13
Billion Sales Hit”, bloomberg.com, November 5, 2020. Of course these numbers can fluctuate especially with
broadcasting fees increasing as traditional and online broadcasters compete for content.
12
The video game industry suffered less economic impact in comparison, primarily due to its remote
development; growth of digital distribution (which was also true for the other sectors); and the small financial
role played by live events, these latter being critical to the sports, music and film industries. But at the same
time, the industry was still impacted from component shortages for new consoles (manufacturers have
lowered their production numbers for their 2021 fiscal year) to graphic cards to delays with the release of
games (this will probably have a greater affect on 2021-22 revenues)This is especially true with AAA titles
because of problems including coordination of development and manufacturing, certification from the platform
holders and production and shipping issues for retail products. The effects of the pandemic on the film industry
appear to have been more severe: when filming did eventually move forward following production suspension,
production companies had to comply with several on-set restrictions that increased costs and filming time.
Video game development was affected to some degree, but its developers, artists, coders, and even
musicians and voice-over artists can work separately, whereas film production relies on people being
physically together on set to make the product. Because of pandemic restrictions, theaters closed or severely
limited the number of theatergoers, thereby reducing a significant stream of revenue. Consequently, the film
industry may need a bit of time before it catches up to its 2019 figures. There are also concerns that many
theaters could close permanently. See Aswad, Jem, “Music Revenue to Drop 25% in 2020, but Long-Term
Outlook is Good: Goldman-Sachs”, variety.com, May 20, 2020.
13
Wang, Amy X., “Goldman Sachs Expects Global Music Revenue to Drop 25% This Year”, rollingstone.com,
May 15, 2020. While music streaming led by Spotify and Apple Music has driven recorded revenues higher
(similar to video games whereby an abundance of content is easily accessible on a mobile device), the
industry suffered from a lack of live events which to date has made up a major source of overall revenue. The
2020 estimated numbers mentioned were provided by Goldman Sachs Music in Air Report 2021, and cover
revenue generated from recorded music, publishing, and live events. Goldman Sachs, “The Music in Air
Report 2021”, goldmansachs.com. See also Ingham, Tim, ”Goldman Sachs: Universal is Worth Over $50BN,
and Global Music Streaming Revenues will Rise $3BN this Year”, musicbusinessworldwide.com, April 29,
2021.
14
In many countries revenue from video games will exceed revenue earned by sports leagues. In the United
States fo example, according to NPD, an analytics company, video game software sales in the United States
reportedly grew to a record $49.9 billion (overall spending was $56.9 billion) in 2020 from $35 billion in 2019.
Entertainment Software Association, “U.S. Video Game Content Generated $35.4 Billion in Revenue for
2019”, theesa.com, January 23, 2020. In comparison, looking at the major sports leagues in the United States,
The NFL earned $16 billion in 2019 dropping to about $12 billion in 2020. NBC Sports, “NFL Revenue Drops
From $16 Billion in 2019 to $12 billion in 2020”, nbcsports.com, March 11, 2021. Major League Baseball
earned $10.7 billion in 2019 and about $4 billion in 2020. Young, Jabari, “Major League Baseball revenue for
2019 season hits a record $10.7 billion”, cnbc.com, December 22, 2019; and Ozanian, Mike, “MLB Teams
Lost $1 Billion In 2020 on $2.5 Billion Profit Swing”, forbes.com, December 22, 2020. The National Hockey
League consisting of teams throughout North America earned $5.09 billion based on the 2018-19 season and
sliding to about $4.4 billion in 2020. Gough, Christina, “National Hockey League – total league revenue from
2005/06 to 2019/20”, statista.com, February 2, 2021; and Birnbaum, Justin, “Major Sports Leagues Lost Jaw-
Dropping Amount of Money in 2020”, forbes.com, March 6, 2021. “The NBA earned -$8.76 billion based on
the 2018-2019 season but dipped to around $8.3 billion for the 2019-2020 season”, statista.com; and
Wojnarowski, Adrian & Lowe, Zach, “NBA revenue for 2019-20 season dropped 10% to $8.3 billion, sources
say”, espn.com, October 28, 2020. Although revenue will vary by source, for a list of sports leagues revenue
as compiled by Wikipedia, see “List of professional sports leagues by revenue” available at
https://en.wikipedia.org/wiki/List_of_professional_sports_leagues_by_revenue.
21 Mastering The Game
significant football (soccer) league in England, generated approximately $7.1 billion in
revenue in 2018-2019 and approximately $5.9 billion in 2019-2020.
15
Not only is revenue in the video game space exceeding that of sports leagues, but it
also drawing television audiences from esports events that are either exceeding those
of some of the major sports leagues or close behind. According to the technology
consulting firm Activate, more than 250 million people watch esports. Activate forecasts
that, with the exception of the NFL, more people will watch esports than those who
watch American professional baseball, basketball, hockey, and soccer.
16
Several major video game titles have budgets comparable to Hollywood movies. And
while the two industries have many similarities, the differences of the video game
industry have enabled it to grow – especially during the pandemic – in more ways than
the film industry and other entertainment media. One difference is that video games can
be continually updated for many years with new content, thereby avoiding the costly
and unpredictable outcome of sequels. A second is that video games can be relatively
easily distributed on certain platforms throughout the world, while films still rely on
theatrical releases as a major source for revenue and publicity. A third is that there are
fewer challenges in making video games compared to films. Indeed, although AAA
video game titles may take years to develop and involve issues similar to those
associated with film production, many games –especially lower-budget mobile games –
do not involve nearly as many obstacles, making them easier to produce and
distribute.
17
Finally, another difference that contributes to the success of video games
is the ongoing engagement of consumers, i.e., their active involvement in playing
against each other in games such as Fortnite or in watching and commenting on games
either as part of an esports tournament or on video game live-streaming platforms such
as Twitch and YouTube or even creating content. This engagement leads to
tremendous daily publicity and connection between developers, streamers and fans.
One similarity between the video game and film industry is their reliance on major
franchises. A relatively small number of top franchises make up a significant portion of
revenue in the various sectors (e.g., console and mobile). For many AAA publishers,
their major franchises account for a considerable portion of their income and a
disproportionate share of their profits.
18
15
Garner-Purkis, Zak, “Don’t Be Fooled by the Premier League’s $1 Billion Predicted Revenue Drop”,
forbes.com, June 11, 2020; and Lange, David, “Premier League Football Clubs Revenue in England (UK)
from 2014/15 to 2020/21 by Revenue Stream”, statista.com, September 28, 2020.
16
“Activate Technology & Media Outlook 2020”, slideshare.net, October 22, 2019. A major reason for
professional sports interest in esports is the hope to attract the relatively young demographic groups who
make up their fan base. Many potential young sports fans may now spend their time playing video games
instead of watching and playing sports which clearly concerns sports leagues trying to build their base. One
of the issues with esports attaining a mainstream television audience is that the viewer may not understand
how the game is played, especially with all the nuances that make games unique.
17
Most films involve very time-consuming procedures: acquiring a property or creating an original work,
financing, hiring talent, and dealing with multiple unions covering the various stages of production.
18
The top 10 gaming franchises in the US in 2020 were all established prior to 2020, illustrating how difficult
it can be to crack the top-ten market. See Activision Blizzard, ‘‘2020 Annual Report’, investor.activision.com.
Examples of the significance of major franchises owned by AAA publishers include the FIFA franchise, which
represented approximately 12% of Electronic Art’s net revenue in their fiscal year 2020. Electronic Arts, “2019
EA Annual Report”, ir.ea.com. Call of Duty, Candy Crush, and World of Warcraft collectively accounted for
76% of Activision Blizzard’s consolidated net revenues in 2020. Activision Blizzard, ‘‘2020 Annual Report’,
investor.activision.com. Similarly, for Take-Two, Grand Theft Auto products provided 29.26% of the
company’s net revenue for the fiscal year ending in March 2021. Take -Two Interactive, “Take-Two Interactive
2021 Annual Report”, ir.take2games.com.
Mastering The Game
22
1.2 – Demographics
In addition to the impressive economic numbers, the number of people playing video
games and the changing demographics over the years also illustrate the growing
popularity of games throughout the world, regardless of age and gender. According to
a 2021 Newzoo report, approximately 3 billion people throughout the world play video
games with the Asia-Pacific market making up 55% of the world’s players followed by
the Middle East and Africa (Newzoo lists this as one region), Europe, Latin America and
North America. Despite, North America representing 7% of the worldwide market, the
United States was second in revenue earned with Canada ranked eighth.
19
Not too long ago, the market was dominated by young males,
20
but today games are
played by both men and women of all ages. Women gamers are narrowing the gap with
men in numbers of players, as they now make up close to 46%,
21
although men still
spend more time playing games.
22
According to a game’s genre, platform and country,
it can happen that more women than men play certain games. In Japan, for example,
two out of three gamers are female.
23
Today, the average age of a gamer is approximately 34
24
but varies slightly by country.
The age group is very broad, as the range can include, for example, a 5-year-old playing
a simple game which one author cannot figure out on an i-Pad, a teenager playing with
friends, a 45-year-old who grew up playing games in the 1990s and 2000s and who
continues to play, and even a 70-year-old who plays a card game on a mobile device
for 10 minutes at a time. Still, the most important age category is 18-35. They spend the
most time playing and spend the most money on games; which can also include
spending above and beyond their own consumption and on behalf of their children or
family members under 18.
This change in demographics over the years, which led to gaming being played by all
ages, has been driven by the easy access to games (i.e., mobile devices and web portal
games such as Roblox). Another factor is the incredible variety of games at various
price points, from easy-to-play mobile hyper-casual games that are highly advertised,
to elaborate multi-million-dollar console games.
There are a wide variety of video game genres as well. Stories and settings can be just
as varied as movies: sci-fi, action, western, comedy, historical or romantic. Even within
a genre, there can be variety from one title to the next. Some examples are “first-person
shooters”, where shooting is done from a “point-of-view” perspective; “role-playing”,
known as “RPG”, in which the player takes on the role of a character; “casual” or “social,”
in which the objective of the game is to interact with friends; sports games, in which the
end-user controls the athletes and teams; and battle royale games, which are basically
19
Newzoo, “2021 Global Games Market Report: The VR & Metaverse Edition”, newzoo.com; and Wijman,
Tom, “The World’s 2.7 Billion Gamers Will Spend $159.3 Billion on Games in 2020; The Market Will Surpass
$200 Billion by 2023”, newzoo.com, May 8,2020.
20
In 1995, there were reportedly 30 million gamers, and half were 18 or younger. Elrich, David J., “ROAD
TEST; 32-Bit Video Games: Newest Kid on the Block”, nytimes.com, September 14, 1995.
21
The number was based on 33 markets and was a representative sample of the online population aged 10-
65/10-50. Newzoo, “Consumer Insights-Games & Esports”, newzoo.com.
22
“Marketing To Gamers: What To Know About The Ever-Expanding Market”,
insights.digitalmediasolutions.com, June 22, 2020.
23
Ibid.
24
“2021 Gaming Industry Statistics, Trends, Data”, gamingscan.com, June 2021.
23 Mastering The Game
a last-man-standing multiplayer experience. The design of a game is as varied as the
ideas the developer can come up with.
Quite simply, a great percentage of the world’s population can play any type of game at
any time, anywhere in the world, and thanks to this the number of gamers continues to
grow. Furthermore, developers have recognized that games can focus on any age
category, gender and skill level and still be profitable.
1.3 – Geographic Breakdown
1.3.1 – The Major Revenue-Generating Countries
Historically, the gaming market has been dominated by the United States, Japan and
Europe, in terms of both consumer spending and game development. All the major
console devices have been developed either in Japan or the United States, and the
major publishers have also been from those countries, with a few based in Europe. But
that picture has changed dramatically within the last few years, with mobile devices and
digital distribution having now made video games easily accessible, especially in
countries where gaming had a smaller presence. According to Newzoo estimates,
92 million new gamers entered the market, mostly as mobile gamers, in 2020.
25
Nowhere have changes in the industry been more evident than in China. One of the
significant reasons for the incredible growth in the industry has been the emergence of
new markets led by that country. With its growing economy, billion-plus population, and
access to smartphones, China has become one of the biggest players in the industry,
not only from a consumer and revenue standpoint, but also for its growing role in
publishing, distribution, esports, software development and manufacturing of hardware
such as consoles and smartphones. China is now the largest market in the world with
gamers and generates the most revenue.
26
It is also home to some of the biggest
publishers in the world, such as Tencent and NetEase, which continue to expand their
presence on a global scale.
27
At the same time while the Chinese market offers the possibility of incredible economic
benefits for publishers and developers, China is a cautionary tale, as regulations
imposed by the government can be unpredictable and present challenging and
significant obstacles for publishers. Some of these obstacles include:
1. For a game to be distributed in China, it must be approved by the government and
receive a publishing license (ISBN).
28
25
Newzoo, “2020 Global Games Market Report”, newzoo.com.
26
Newzoo, “2021 Global Games Market Report: The VR & Metaverse Edition”, newzoo.com.
27
In the last few years, Chinese companies have expanded their game distribution into new countries and,
led by Tencent, have also been investing in established companies. Tencent is the largest game company in
the world; they purchased Riot Games and have acquired varying interests in Supercell (Finland), Epic Games
(US), Glu Mobile (US), Funcom (Norway), Bohemia Interactive (Czech Republic), Bluehole (South Korea),
Marvelous (Japan), Grinding Gear (New Zealand), Activision Blizzard (US), Ubisoft (France), and Paradox
Interactive (Sweden). Frater, Patrick, “Tencent Accelerates Games Company Acquisitions”, variety.com, June
3, 2020.
28
Over the last few years, the Chinese government has approved fewer games and it is even harder to get
approval for international games which must be localized into Chinese. At the end of December 2020, Apple
Mastering The Game
24
2. In order to distribute a game in China, a publisher or a developer must work with
a Chinese based company.
3. At the time of writing, platforms such as Google Play and Twitch are prohibited.
4. New releases are at times prohibited.
29
5. Games from certain countries have been denied access to the Chinese market.
30
6. Severe limitations on the amount of time minors can play games known as “anti-
fatigue rules”.
31
7. Content regulations covering a number of areas that can be unpredictable.
32
removed 39,000 games from their app store for failing to comply with China’s licensing requirements. Li, Pei,
“Apple Removes 39,000 game apps from China store to meet deadline”, reuters.com, December 31, 2020.
Epic Games in November 2021 announced that after two years of beta testing Fortnite in China, they would
stop pursuing distributing the game in China after it failed to obtain regulatory approval. and were prohibited
from introducing microtransactions. Kain, Erik “Fortnite is Calling it Quits in China”, forbes.com, November 2,
2021. It appeared that the economics probably didn’t work with a prohibition on microtransactions and the
limitations imposed on minors that significantly reduced the amount of hours they could play games.
29
In 2018, the government suspended license approval for new games for both Chinese and foreign games
for nine months. This decision reportedly cost the industry billions of dollars, including losses of $1.5 billion
by Tencent. Liao, Shannon, “Apple blames revenue loss on China censoring video games”, theverge.com,
January 29, 2019.
30
Although no official notice was released, China effectively imposed a blanket ban on new games from South
Korea from March 2017 to February 2020, but since then seven games have received ISBN numbers as of
July 2021. Jung-a, Song, “China Approves First Sale of Korean Video Game in Four Years”, ft.com,
December 3, 2020; and Takahashi, Dean, “China is approving more foreign games, but not so many American
ones”, venturebeat.com, February 18, 2020.
31
The Chinese government has introduced a series of regulations over the years restricting the amount of
time children under the age of 18 can play video games. The government has enacted these measures
claiming to protect the physical and mental health of minors by preventing game addition and myopia. Ni,
Vincent, “China Cuts Amount of Time Minors Can Spend Playing Online Video Games”, theguardian.com,
August 30, 2021. For some of the previous restrictions involving minors and gameplay see the following
source for a list of the current National Press and Publication Administration anti-fatigue rules in China:
Pilarowski, Greg et al., “Legal Primer: Regulation of China’s Digital Game Industry”, pillarlegalpc.com,
January 6, 2021. In August 2021, China’s National Press and Public Administration (NPPA) issued what at
the time of writing is its most restrictive measure, which includes lowering the number of hours a minor can
play online games from 13.5 to 3 hours per week, and only from 8 to 9 p.m. on Fridays, Saturdays, Sundays
and other legal holidays. Pilarowski, Greg, Yu, Charles, and Ziwei, Zhu, “China Limits Minor Online Game
Time to Three Hours Per Week”, pillarlegalpc.com, September 14, 2021. Shortly thereafter, the government
announced that live streaming services including those involving games would be prohibited from allowing
anyone under 16 from registering to stream online. Sinclair, Brendan, "China Bans Livestreaming by Children
Under 16”, gameindustrybiz.com, September 27, 2021. South Korea also imposed laws limiting players under
16 from playing games from midnight to 6:00 a.m. According to the government, the law known as the
Shutdown Law, and enacted in 2011, was aimed at preventing game addiction. At the time of writing, the law
was in the process of being revoked. Im Eun-byel, "Korea to ax games curfew”, koreaherald.com, August 25,
2021; and Bahk Eu-ji, “Korea to Lift Game Curfew for Chlldren”, koreatimes.co.kr., August 25, 2021.
Both Tencent and NetEase introduced various limitation practices, including time limits on certain games,
gamer ID checks and facial recognition to confirm a player’s age to deal with myopia and game addiction.
Handrahan, Matthew, “NetEase to impose restrictions on young gamers in China”, gamesIndustry.biz,
January 25, 2019; and Valentine, Rebekah, “Tencent adds ‘digital lock’ to certain games in China”,
gamesindustry.biz, March 1, 2019. Also, in 2021, more Chinese companies agreed to consider using facial
recognition to help enforce governmental time limitations on minors. Batchelor, James, "Over 200 Chinese
Games Firms Reportedly Vow to Self-regulate in Face of New Restrictions”, gameindustry.biz., September
24, 2021. Computer cafes, which are used by a significant portion of the gaming community in China, now
require IDs to verify that customers are age 18 or older.
32
While most countries have some form of restrictions or warnings on content (imposed by the government
or by industry self-regulatory bodies), China imposes some of the most restrictive limitations involving
violence, political content, distortion of history and sexual relationships. Some of the regulations are vague,
difficult to predict what may be allowed, and are constantly changing. In addition China appears to be heading
towards additional content restrictions involving history, religion, and character gender, to name a few.
Rousseau, Jeffrey, “Chinese Government Tightens Video Game Restrictions”, gameindustry.biz, September
30, 2021. For a list of content regulations in China see Pilarowski, Greg et al., “Legal Primer: Regulation of
25 Mastering The Game
8. Prohibitions on game consoles have previously existed.
33
9. Enforcing intellectual property rights can be challenging.
10. Some of the broadest rules involving data privacy.
34
The United States, as the home to some of the biggest publishers, has always been the
biggest market and has consistently generated the highest revenues over the years until
smartphone presence became widespread in China.
Behind the United States and China is Japan, which is home to Sony, Nintendo and
several major publishers such as Bandai Namco, Sega, Square Enix, Capcom and
Konami. The remaining top revenue-generating countries are South Korea, which has
been a leader in esports and technology as well as home to major publishers such as
NCSoft and Netmarble, followed by the United Kingdom, Germany and France.
35
1.3.2 – Regional Markets
The Asia-Pacific market, led by China, Japan and South Korea, is the largest regional
market in terms of revenue. According to Newzoo, this market is projected to generate
$88.2 billion in 2021, accounting for slightly over 50 % of the global market.
36
This
market also includes India with its population of over 1.3 billion and the world’s second-
largest smartphone market.
37
even though only about 32% of the population in 2021
owns a smartphone which is by far the lowest of the top 20 countries by users.
38
However, according to the mobile research company data.ai formerly known as App
Annie, India is the world’s biggest mobile game market by downloads,
39
making it
potentially the next big market. North America is the second-biggest market, followed
by Europe.
40
Latin America is a distant fourth but continues to grow as its bandwidth
China’s Digital Game Industry”, pillarlegalpc.com, January 6, 2021. See also Pilarowski, Greg et al., “China’s
New Game Approval Requirements”, pillarlegalpc.com, May 17, 2019. Some commentators have noted that
a country may prohibit a game in their territory if the government considers the game to include unfavorable
content, no matter where the game is distributed. Therefore, a game can meet a country’s regulations and
still be prohibited because of violent or political, etc., content in the versions of the game distributed outside
that country. See Fahey, Rob, “Gaming will be a frontline in China’s censorship drive | Opinion”,
gamesindustry.biz, October 9, 2020.
33
China legally permitted distribution of PlayStation and Xbox in the country only in 2015. D’Orazio, Dante,
“China officially ends ban on video game consoles”, theverge.com, July 25, 2015. It was the ban on consoles
and software piracy issues that led to the growth of online gaming in China.
34
China implemented in November, 2021, a new privacy law known as the Personal Information Protection
Law (PIPL) to some degree modeled after Europe’s GDPR but more challenging for gaming companies
because many of the restrictions are very vague and difficult to determine at this time what might fall within
the law. The law limits both Chinese and foreign companies from collecting consumer information without
their consent; from storing more personal data than necessary; and restricts Chinese nationals’ personal data
out of the country. Dou, Eva, “In China, escalating cost of business sends some companies to the exits”,
washingtonpost.com. November 25, 2021. See also Creemers, Rogier and Webster, Graham, “Translation:
Personal Information Protection Law of the People's Republic of China-Effective November 1, 2021",
digichina.stanford.edu, August 20, 2021, revised September 7, 2021.
35
Ranking of top ten countries by estimated video game revenue for 2020. “Top 10 Countries/Markets by
Game Revenue”, newzoo.com. See also: “Top 100 Countries by Game Revenues”, knoema.com, August 13,
2019.
36
Newzoo, “2021 Global Games Market Report: The VR & Metaverse Edition”, newzoo.com.
37
Singh, Bhupinder, “Top 20 Countries with Most Smartphone Users in the World”, indiatimes.com, July 20,
2021. Historically, India has not been a major market, possibly due to a hesitant role out of consoles and the
cost of hardware which may have been out of reach for most of the population.
38
Newzoo, “2021 Global Games Market Report: The VR & Metaverse Edition”, newzoo.com.
39
App Annie “2021 Mobile Gaming Tear Down”, appannie.com.
40
See 2019 European Video Games Industry Insight Report written by the European Games Developer
Federation (EGDF) and the Interactive Software Federation of Europe (ISFE) available at
Mastering The Game
26
capacity improves and gaming population increases. Mexico, Brazil, Argentina, Chile
and Colombia are the leaders in revenue there and are home to growing development
communities. Africa and the Middle East are the smallest market but also shows
potential for growth.
41
Regional Revenue Distribution
42
© Newzoo
1.4 – Current State Of The Video Game Industry: The
Players
The continuing growth of the video game industry has been fueled by new forms of
distribution, business models, technology and easy access to devices that can play
games and can connect people across the globe, thereby creating a unique social
platform. This growth includes an assortment of different players such as consumers,
independent developers, publishers, regulators, streamers and ancillary industries. As
a result, the industry is constantly evolving and is quite complicated: it requires some
http://www.egdf.eu/wp-content/uploads/2021/08/EGDF_report2021.pdf. For additional information on the
state of the industry in individual European countries see http://www.egdf.eu/category/data-studies/egdf-
members/. Many of the reports discuss either a specific issue within a country (e.g., esports, VR), or provide
an overall picture of the industry within the country, and may cover such issues as the state of the development
community, games originating from that country, legislation, and investment and educational opportunities.
The reports are either in the native language or English and most are updated annually.
41
Newzoo, “2021 Global Games Market Report: The VR & Metaverse Edition”, newzoo.com. See also
“Newzoo Global Games Market Report 2019” on the same website for a more detailed analysis of regional
revenue from 2019.
42
Chart based on 2021 projections. Ibid.
27 Mastering The Game
explanation to be fully understood. This section will provide a general overview of the
industry by outlining the current platforms, distribution channels, major companies,
areas of growth and some of the major new challenges.
1.4.1 – Game Distribution: The Platforms
Not too long ago, the video game market was dominated by the major console
manufacturers. Sony, Nintendo and Microsoft were the gatekeepers of the industry at a
time when personal computer (PC) gaming had lost much of its significance and mobile
and digital platforms had yet to make their mark.
2021 Estimates by Newzoo
© Newzoo
Fast forward, and the industry is now dominated by mobile devices such as
smartphones and tablets (with an 80-20% split). These make up over 50% of the global
market and are projected to reach approximately 52% in 2021.
43
Mobile has become the number one platform thanks to easy access to devices and
games, various price points including free-to-play and improved quality. Furthermore,
increasingly powerful mobile devices are covering all types of genres. The console
platform still plays a significant role in some countries, but not as much in markets
dominated by mobile. Nevertheless, consoles sales and distribution of games
associated with that platform, whether retail or digital, generated the second-highest
43
Ibid.
Mastering The Game
28
revenue. In fact, revenue from console sales is expected to grow as a result of the
relatively recent releases of new consoles by Sony and Microsoft, and the continuing
strong sales of Switch. Despite chip shortages and delays in the distribution chain due
to the COVID-19 pandemic, sales numbers, although less than what had been
forecasted, have been relatively strong for the consoles.
44
At the same time, the PC platform has bounced back in recent years to likewise play a
prominent role, thanks to digital distributors such as Steam, publisher-developer digital
platforms and the emergence of Epic’s Game Store. For many people, PC has also
become the preferred platform to stream, participate in stream sessions, make and post
video content about games, and play dedicated in-browser games.
Video games can be divided into three distinct platforms: console, PC and mobile.
Console games run on dedicated hardware that connect to a television (e.g., Microsoft
Xbox One Series). PC games run on general-purpose personal computers (with
Windows being the most common operating system), and mobile games run on various
types of mobile devices including smartphones and tablets.
45
THREE PLATFORMS OF VIDEOGAMES
CONSOLE
PC (PERSONAL
COMPUTER)
MOBILE/CASUAL
• Run on dedicated
hardware
• Expensive to develop
• Wide variety of genres
• System controlled
by IP owners
• Box product and
digital
• Run on Windows,
Mac or Linux
• Wide variety in
price and genre
• No single
gatekeeper for
platform
• Most sales
through digital
• Run on tablets and
phones
• Least expensive to
develop, but
development costs
increasing and difficult
to retain players
• All genres, but social
and casual games play
a big role
• Largest number of
gamers
1.4.2 – Console Manufacturers And Various Platforms
The so-called traditional video game market made up of consoles and PC gaming still
plays a crucial role in the industry but, as a result of mobile’s increasing popularity, no
longer plays the dominant role it once did. Console-related revenue, which includes
retail and digital sales, is projected to generate a bit more than $50 billion in 2021, a
decrease of about 9% from 2020.
46
44
As of October 2021, Sony had sold over 13.4 million PlayStation 5 units. Purslow, Matt, “Sony Has Now
Sold 13.4 Million PlayStation 5 Consoles” gamesindustry.biz, October 28, 2021.
45
For Cloud Gaming see Section 1.5.3.
46
Newzoo, “2021 Global Games Market Report: The VR & Metaverse Edition”, newzoo.com.
29 Mastering The Game
Console hardware entered its ninth generation with the release of PlayStation 5 and
Xbox Series X and Series S in November 2020. While both are reported to have broken
records for units sold at their initial launches,
47
previous consoles (e.g., PlayStation 4)
will still play an important role for the next few years as developers continue to produce
games for those platforms, taking advantage of their huge installed base and the
shortage of available new consoles because of manufacturing problems (i.e., chip
shortages) brought about by the COVID-19 pandemic.
PlayStation 4 was released in the United States in November 2013. It had sold over
116 million units worldwide as of July 2021 and became the second-best-selling
PlayStation behind PlayStation 2 while selling the most games for any console.
48
Nintendo Switch, which can be used as either a console or portable device, released in
March 2017, has sold a bit more than 89 million units as of June 2021
49
and enjoyed the
highest number of first-year sales of all other consoles.
50
Microsoft comes in a distant
third with Xbox One, released in November of 2013 in the United States. It had sold
about 50 million units as of January 2021.
51
In addition, each platform provides various
subscription services at different price points for purchasing downloadable games,
additional content, game demos, multiplayer gaming and cloud storage.
The popularity of each console varies greatly by geographic market, although the United
States is the leader in sales of each console, as well as in sales for software. This can
be clearly seen by the fact that almost 70% of Xbox One sales occur in the United
States, while at the same time its sales are almost non-existent in Japan, which is the
number two country in sales for PlayStation 4 and Nintendo Switch.
52
The dominance of premium console game sales in North America and Europe is further
illustrated by a SuperData report that projected sales of such games in those regions
would represent 87% of the worldwide market in 2020 ($8 billion and $4.7 billion
respectively).
53
In contrast, Asia was projected to account for only $60 million, which
reflects the region’s reliance on mobile devices and digital sales,
54
the lack of Xbox’s
presence in Japan, and China’s previous ban on consoles.
47
Deakin, Daniel R., “PlayStation 5 sales vs Xbox Series X and S: Estimated figures give PS5 the win but
Microsoft’s consoles and the Nintendo Switch are in great demand”, notebookcheck.net, November 27, 2020.
48
Vailshery, Lionel Sujay, “Cumulative Unit Sales of Sony PlayStation 4 Consoles Worldwide from August
2014 to November 2021”, statista.com, September 29, 2021. More than 1.5 billion PlayStation 4 games have
been sold as of April 2021. Croft, Liam, "PS4 Has Sold More Games Than Any Other Console in History”,
pushsquare.com, April 28, 2021.
49
Craddock, Ryan, “Switch Console Sales Hit 89 Million, Has Now Outsold PS3 and Xbox 360”,
nintendolife.com, August 5, 2021. While considered a console in the traditional sense, Switch can also serve
as a portable device and does not have to be hooked up to a television to play.
50
Batchelor, James, “Nintendo Switch Breaks Records for First-Year US Sales”, gamesindustry.biz, March
21, 2018. Until September 2021, Nintendo Switch was the best-selling console in the United States for 33
consecutive months. Craddock, Ryan, “For the First Time in 33 months, Switch Wasn’t the US’ Best-Selling
Console in September”, nintendolife.com, October 18, 2021.
51
William D’Angelo, Switch vs PS4 vs Xbox One Global lifetime Sales-January 2021-Sales”, vgchartz.com,
March 1, 2021.
52
Haigh, Marilyn “Why Japanese Gamers Don’t Buy Xbox”, cnbc.com, October 8, 2019.
53
Super Data, “2019 Year in Review: Digital Games and Interactive Media”, available at
https://direc.ircg.ir/wp-content/uploads/2020/01/SuperData2019YearinReview.pdf. In 2020, 44% of the €23.3
billion spent on gaming in Europe was from console related revenue with smartphones accounting for 40%.
Partis, Danielle, “European Games Market Generated €23.3 Billion in 2020” gameindustry.biz, August 25,
2021. According to a 2021 report from the Consumer Technology Association, over 50% of American
households own a game console. Partis, Danielle, “Over 50% of Households in the US Own a Game Console”
gameindustry.biz, July 20, 2021.
54
Ibid. Outside North America and Europe, mobile gaming generally made up the largest share of revenue.
Mastering The Game
30
1.4.3 – Mobile Gaming
The biggest change in gaming in the last several years has been the meteoric rise of
mobile gaming. According to Newzoo, worldwide spending on mobile games reached
$73.8 billion in 2020
55
primarily driven by in-app purchases
56
and is projected to reach
$93.2 billion by the end of 2021.
57
With the advent of smartphones and Internet
accessibility, gaming on mobile devices went from simplified games resembling the
console games of the late 1980s to mobile games that have more similarities than
differences with modern console and PC games. In an incredibly short period of time,
mobile has become the leading platform in both number of gamers and revenue. Mobile
now draws more revenue than consoles and PC combined. This has primarily been led
by the growth of the Chinese market.
58
The mobile market is split into two large camps. On one side is Apple’s iOS, which runs
on its iPhone and iPads and is a closed platform overseen by Apple. On the other is
Google’s Android OS, which runs on a large number of phones and tablets made by a
variety of manufacturers, though led by Samsung. In 2021 gaming reached an
estimated $41 billion in the Apple App Store, $28 billion in the Google Play Store and
more than $21 billion in 3rd party app stores.
59
And while Apple and Google dominate the mobile market, the next few years may see
some new players, especially from China. With Google banned in China, several
alternative third-party Android app stores have filled the void. These app stores are led
by major entertainment, hardware and telecom companies (e.g., Tencent, Huawei,
Xiaomi, Vivo and China Mobile) and have reportedly generated an estimated $8 billion
in revenue in China.
60
Mobile has become the most attractive platform for consumers because it provides easy
access to games on mobile devices throughout the world and a large number of games
covering all the various genres and price points. At the same time, it has become an
attractive option for developers because of the relatively low costs of game development
and the ease of distributing games throughout the world. This low cost has also enabled
more development outside of the traditionally strong markets such as the United States
and Japan. Mobile development studios and publishers can be found across the globe,
from the traditional development hubs in Japan, the United States and Europe, to China,
South Korea, Eastern Europe and Latin America.
A major obstacle for developers is that the ease of releasing an application makes for
two real dangers: their application may be lost in the crowd, and their game may be
55
Newzoo, “Global Games Market Report 2020”, newzoo.com.
56
In-app purchases can involve a wide range of items (i.e., weapons, vehicles), cosmetic enhancements
referred to as “skins” (i.e., in-game costumes), personalities/athletes, and even dance moves known as
“emotes”.
57
Newzoo, ”2021 Global Games Market Report: The VR & Metaverse Edition”, newzoo.com.
58
One of the main reasons mobile has been the platform of choice in China is that consoles were banned
until 2015. Even following their introduction, it has been a very difficult market because of numerous
regulations established by the government involving distribution and manufacturing issues.
59
These estimates were provided by Newzoo which defines revenue to includes in-app purchases,
subscriptions or paid installs for apps that are categorized as games by app stores. The revenue numbers
exclude hardware sales, taxes, advertising revenues earned in and around games, business-to-business
services and online gambling and betting. Newzoo, ”2021 Global Games Market Report: The VR & Metaverse
Edition”, newzoo.com. But see, Iqbal, Mansoor, “App Revenue Data (2021)”, businessofapps.com, August 4,
2021, updated November 2, 2021, where numbers seem to be skewed a little higher although revenue may
have been defined differently.
60
Iqbal, Mansoor, “App Revenue Data (2021)”, businessofapps.com, August 4, 2021, updated November 2,
2021.
31 Mastering The Game
cloned. An additional obstacle is that the top 10 grossing applications have dominated
the revenue stream for many years, as evidenced by the fact that those games still
accounted for close to $10 billion and 15.8% of the market in 2019, and the top 30
games for almost 32%.
61
While the number of smartphones may stabilize, there is continuing optimism that the
mobile market will continue to grow. Some of the drivers behind the mobile market’s
potential growth are increased access to games including AAA titles (which will lead to
more players), advancements in technology that will improve graphics and gameplaying
methods (e.g., through augmented and virtual reality), cross-platform play and cloud
computing (which will provide access to more advanced games), and the growth of
esports.
1.5 – Distribution: Digital, Retail And Cloud
1.5.1 – Digital Distribution
The video game industry has grown substantially over the years, along with the
introduction of new devices and new channels of distribution. For many years following
the introduction of the first commercial console gaming system (Magnavox Odyssey) in
1972, retail sales were the only way to get games into consumers’ hands. To play the
games, consumers had to either purchase a console that included games or purchase
specific software to play on each console device or personal computer.
Gaming entered a new era when digital distribution was introduced, making consoles
and PCs as well as the purchase of retail software no longer a prerequisite to play
games. Consumers can now download games on multiple devices, including mobile,
PC, and console. And while they may face limitations from bandwidth capacity, devices
and memory requirements to run those games, this is becoming less and less of a
problem. The ease of access to games, led primarily by mobile and the appeal of a
“free-to-play” business model, opened up gaming to billions of potential gamers. Free-
to-play spending (an Orwellian oxymoron...) accounted for 78 % ($98.4 billion) of all
digital game revenue in 2020, an increase of 9% from 2019.
62
Digital sales, which include revenue generated by mobile sales and PC and console
digital sales, generated approximately $127 billion in 2020 up from $109 billion in
2019.
63
This growth has been driven mainly by improvements in technology, greater
access to devices and the Internet and growth in bandwidth capabilities, which have all
provided many consumers a relatively easy way to access a huge assortment of games
with the touch of a keyboard. Digital distribution has led to an unprecedented number
of games being released by independent developers and publishers. Consumers can
now access not only new games, but also catalog titles, as retail shelf space and
inventory control are no longer barriers to sales.
61
Chapple, Craig, “The Mobile Games Market is Getting Bigger-and Not Just For the Top Ten”,
gamesindustry.biz, February 3, 2020.
62
Valentine, Rebekah, “Digital Games Spending Reached $127 billion in 2020”, gamesindustry.biz,
January 6, 2021.
63
Ibid; James Batchelor, “Record $120.1 Billion Earned by Games and Interactive Media in 2019”,
gamesindustry.biz, January 2, 2020.
Mastering The Game
32
In contrast to digital distribution growth, physical video game retailers are closing
branches – perhaps a sign of the times – and a parallel can be drawn with video rental
shops such as Blockbuster that could not keep up with the rising demand and popularity
of online streaming services. Gamestop, for example, the largest video game retailer in
the world, has closed over a thousand stores in the last few years
64
and ended
operations in the Nordic countries.
65
The evolution and gradual shift of the distribution
chain are also highlighted by hardware variations, such as the all-digital and disc-free
versions of the Xbox One S. This trend can also be seen in the most recent releases of
PlayStation 5 and Xbox One X Series as well as in the new ecosystems being built
entirely around digital distribution and streaming such as Google Stadia and the Quest
Store and Viveport for the Oculus Quest and HTC Vive VR Headsets respectively.
By far the dominant leader in PC digital distribution is Valve’s Stream, launched in 2003.
With over 1 billion registered accounts, over 120 million monthly active users including
62.6 million daily users, and as of February 2021, had more than 50,000 games
available for distribution,
66
Steam has the largest user base of any digital distributor. To
put this into perspective, if Steam was a country, it would be the 16th largest country by
population.
67
Other independent digital distributors exist, such as GOG’s Galaxy and Humble Bundle,
but one of the biggest challenges to Steam has been the relatively recent launch of the
Epic Games Store. Epic Games, the publisher behind Fortnite, is a relative newcomer
as a distributor in the digital space. It has achieved remarkable success in generating
revenue and building up a fan base since its launch in December 2018, but profitability
may still be years away, illustrating the costs and resources needed to challenge
Steam’s success.
68
In 2020, players spent more than $700 million in the Epic Games
Store, and while Fortnite accounted for most of that revenue, $265 million was spent on
third-party games.
69
The Epic Games Store had more than 180 million active accounts
and more than 50 million active users as of September 2021, despite lacking a number
of the features Valve had developed on Steam at that time.
70
Backed by an aggressive
business model to attract developers and publishers, Epic Games has signed a number
of exclusive deals with major publishers and also takes a fee of 12%, compared to the
industry standard of 30% (this is also typically the same fee taken by console
manufacturers).
64
Gray, Lauren, “This Legendary Chain is Closing Over 1,000 Stores by March”, bestlifeonline.com,
December 12, 2020.
65
Valentine, Rebekah, “GameStop Winding Down Operations in Denmark, Finland, Norway, and Sweden”,
gamesindustry.biz, December 10, 2019.
66
Brendan Sinclair, “Steam Saw 21% More Games Sold in 2020”, gameindustry.biz, January 13, 2021;
Bailey, Dustin, “Steam Just Reached 50,000 Total Games Listed”, pcgamesn.com, February 12, 2021;
Bolding, Jonathan, “Steam Just Broke Its Record Player Count by Nearly 300k”, pcgamer.com, February 2,
2020; and Chalk, Andy “Steam Users Played for Nearly 21 Billion (Yes, Billion) Hours in 2019”, pcgamer.com,
February 5, 2020.
67
“List of countries by population (United Nations)”, wikipedia.org.
68
Albergotti, Reed, Shannon, L., Klimentov, M., “Apple Takes Its Fight with Epic Games over the App Store
to Court”, washingtonpost.com, May 3, 2021.
69
Yin-Poole, Wesley, “The Epic Games Store is Getting a Lot More Popular”, eurogamer.net., January 28,
2021.
70
Epic Games v. Apple Inc., 493 F. Supp. 3d 817 (N.D. Cal. 2020) involving Epic's motion seeking a
preliminary injunction against Apple asking the court to require Apple to reinstate Fortnite to the Apple App
store, and to stop Apple from terminating its affiliates’ access to developer tools for other applications.
33 Mastering The Game
Many AAA publishers also have digital stores that distribute primarily their own games.
Some of these include EA’s Origin,
71
Ubisoft’s+ (formerly Uplay+), Bethesda Softwork’s
Launcher, and Activision Blizzard’s Battle.net.
On the console side, digital distribution is handled by the console manufacturers.
PlayStation, Switch, and Xbox have their own digital ecosystems, and many games are
distributed exclusively through their online services.
1.5.2 – Retail
The success of the digital market has taken a huge bite out of the retail market, as more
and more gamers purchase their games online. But retail still plays a role in many
countries despite this trend, and revenue driven from retail sales is relevant.
72
As
previously mentioned, there are several reasons why retail sales will remain viable for
at least the next few years. These include limitations on bandwidth, payment options,
amount of memory needed for downloadable games (although becoming less of an
issue with cloud gaming) and the fact that some gamers still like having a physical disc
(e.g., for special editions). However, retail will soon represent a significantly smaller
percentage of the market.
For publishers, retail sales pose challenges. In addition to the costs regularly associated
with retail sales (manufacturing, price protection, returns, shipping, co-op advertising,
warehousing), the trend toward fewer retail stores makes for particular issues, such as
intense competition for space and for promotional support, as well as greater
dependence on a few major retailers, leading to possible uncertainty in the market and
tougher contractual terms.
1.5.3 – Cloud Gaming
Companies are now looking to the next stage of distribution, and cloud gaming has the
potential to expand the market even further by exposing more types of games to current
and future gamers, without the need for any type of specific hardware or a physical copy
of the game. Cloud gaming allows gamers to access games regardless of their device
choices and without the latest hardware or upgrades, provided they have the required
Internet connection whether wireless or cellular.
73
With cloud gaming, games will no
longer need to be stored on hardware that, up to now, has provided the computing to
run the games; instead, the games will be streamed from servers, known as “the cloud”.
Cloud gaming eliminates the barriers imposed by hardware allowing consumers to play
games they may not have been able to access previously, including AAA titles on
simpler devices such as smartphones and tablets. In addition, cloud gaming may
introduce more consumers to a greater selection of games, through subscription-based
71
Even though EA has its own digital platform, after an eight-year absence it decided in 2020 to return to the
Steam platform and offer new games. See Orland, Kyle, “So Long, Origin? EA Comes Back to Steam with
New Games”, arstechnica.com, October 29, 2019. EA seemed to recognize the incredible reach of Steam
and acknowledge that the platform provides access to gamers who may have been reluctant to commit to
EA’s platform.
72
Historically, the top retail games have represented a highly disproportionate percentage of retail sales. By
way of example, according to the NPD Group in 2019, the top 10 titles represented almost 33% of retail sales
in the US market. See Activision Blizzard, “2020 Annual Report”, investor.activision.com.
73
Playing games on the cloud involves several different business models, including monthly fees and free
games driven by advertising.
Mastering The Game
34
streaming services similar to Netflix for films and Spotify for music.
74
The success of this
type of service will depend on the service providers’ access to quality games,
75
ease of
use, cost and the amount of bandwidth required. Despite the obstacles in these areas,
cloud gaming services for various platforms are backed by some of the biggest
companies in the tech and gaming world, including Microsoft (Xbox Cloud Gaming),
Google (Stadia), Sony (PlayStation Now), Tencent (Start), Amazon (Luna) and
Facebook (Facebook Gaming).
76
In addition, cloud gaming requires significant
infrastructure to succeed because it needs servers around the world. It was for this
reason that previous cloud service distributors failed.
77
The upside for publishers and developers is that cloud gaming provides an additional
distribution channel that can reach a broader audience, exposing consumers to games
they may not have tried in the past. This is especially true for the Asian market, which
relies heavily on mobile devices, and the growing markets in Latin America, the Middle
East and Africa, where hardware such as consoles and high-end PCs may be
unaffordable or unavailable to many consumers. According to the market research firm
Niko Partners, the number of cloud gamers in Asia will grow from 3 million in 2019 to
60 million in 2023 and as high as 500 million by 2028.
78
Cloud gaming may also enable
publishers to entice casual gamers playing on mobile devices to new genres and more
sophisticated games that could lead to more revenue. It may also expand development
opportunities through greater processing power and multiplayer server hosting.
One of the main business issues for service providers and publishers will be the
business models used with consumers and how publishers will earn money, especially
when dealing with monthly subscription services. Up to now, some service providers
have been offering various monthly subscription models that provide access to a library
of games, along with additional benefits such as a limited number of free games. Others
are offering a free service that may be ad-supported or limit user time, but they also
offer purchase of individual games. Game subscription services are a relatively
untapped market for the industry. At the time of writing, they represent less than a
74
Sony (PlayStation Now), Microsoft (Xbox Cloud Gaming) and Google (Stadia) launched subscription-based
streaming services offering a library of games. Apple (Apple Arcade), Google (Play Pass) and Microsoft
(Project Cloud for Android devices) also introduced similar services for mobile devices.
75
Success for any cloud gaming service will depend on the quality of the content available to consumers.
Both Microsoft and Sony can build upon their exclusive content through their internal studios and third-party
development deals to attract consumers, but they will still need content from the major publishers that
distribute many of the most popular games. While publishers will most likely offer catalog games, the question
of whether they will do the same for new AAA releases depends on how the publishers will be compensated
if they were to participate in a Netflix-type service. Indeed, they do not want to undermine the premium prices
they charge for original games. An advance and guarantee might justify a deal with a distributor, but perhaps
only for games that are not necessarily AAA titles. Another compensation possibility would be for the publisher
to offer a major title only a certain number of months after its release. Finally, a publisher could have a
separate option to offer their titles on a platform for a separate fee. This would be similar to HBO, which
charges a separate monthly fee as part of a television package.
76
Still others include Nvidia’s GeForce Now, NetEase and Vortex.
77
Some commentators believe that cloud gaming in most countries may be years away from reaching its
potential because of the infrastructure needed to build bandwidth. See “Cloud Gaming: From Niche Play to
Killer App”, nikopartners.com, October 28, 2019. OnLive was the most well-known company attempting to
bring cloud gaming to the market in the 1990s, but it primarily failed because of bandwidth issues. One of the
main reasons why bandwidth is so important is “latency,” which is the time between the user’s inputs and
when they take effect. If the latency is delayed, it ruins the player’s experience as the game reaction is delayed
from the time the player enters their input. This is especially problematic for sports, fighting, and first-party
shooter games. See “Cloud Gaming”, wikipedia.org.
78
Niko Partners, “Cloud Gaming: From Niche Play to Killer App”, nikopartners.com, October 28, 2019.
35 Mastering The Game
quarter of the revenue generated from sales of console and PC games, but the market
continues to grow.
79
The other main component for any business model in this market is how content
providers such as publishers are compensated. This will vary by distributor, but
publishers will only be interested if the revenue exceeds other opportunities and there
is potential growth. To entice well-known publishers, service providers may offer
guarantees and/or advances as well as royalties that are either set in advance or based
on the number of times the game is accessed.
Initially, publishers will most likely agree to offer older titles, especially those that are
service-based with new content, but for new releases publishers – and especially the
major ones – will most likely be unwilling to make them part of a subscription service
unless a game is funded by the service provider and/or accompanied by other benefits.
For smaller publishers, this may be an attractive model to earn revenue and build their
portfolio and relationships.
1.6 – Major Players
1.6.1 – First Party
“First party” is a term used to denote the makers of video game consoles. First-party
companies not only manufacturer hardware but also develop and publish software.
Some developers are subsidiaries of a first party and known as “first-party developers”;
they develop solely for the first party’s platform.
Microsoft
While the Windows operating system was always relevant for PC gaming, games were
not a major part of Microsoft business until it dove into the video game world with the
release of the Xbox in 2001. Microsoft followed up the Xbox with the Xbox 360, the Xbox
One and their latest release, the Xbox Series X. Microsoft has been a leader in digital
distribution and is aggressively focusing on a multi-platform, subscription model.
Microsoft’s Xbox Game Studios is made up of a number of franchises and over 20
development studios spread throughout the world. One of their studios is 343 Industries,
which is responsible for the Halo franchise, and others acquired within the last few years
include ZeniMax (the parent company of Bethesda Softworks), Ninja Theory,
Playground Games and Obsidian Entertainment to name a few.
80
79
Microsoft reported that the number of subscribers to its Xbox Game Pass digital subscription service jumped
dramatically, from 10 million in April 2020 to 23 million one year later. Reeves, Brianna, “Xbox Game Pass
Hits 23 Million Subscribers”, screenrant.com, April 21, 2021. Sony’s PlayStation Now cloud subscription
service had about 3.2 million subscribers as of May 2021. Harradence, Michael, “Sony Confirms PS Now Has
Reached 3.2 Million Subscribers, Up 2.2 Million Since Launch”, psu.com, May 27, 2021. Additional revenue
can be generated from gamers via both the purchase of games outside those offered and downloadable
content.
80
Meitzler, Ryan, “Xbox Game Studios-Here Are Microsoft’s 23 First-Party Studios to Date”, . At the time of
publication, Microsoft was in the process of acquiring Activision Blizzard as part of a $68.7 billion deal.
Mastering The Game
36
Nintendo
Nintendo has been a mainstay in the video game industry for almost 40 years. Based
in Kyoto, Japan, Nintendo first launched the Nintendo Entertainment System (also
known as the Family Computer or Famicom) in 1983 and since then has released
several console and handheld gaming platforms. Nintendo is well known for several
iconic game franchises, including Mario, Donkey Kong and Zelda.
Nintendo has a very strong first-party development portfolio, which develops many of
the Nintendo franchise games. Most first-party development is done by the Nintendo
Entertainment Analysis and Development division, but Nintendo also has other first-
party development studios, such as Monolith Soft. It also works with some non-first-
party development studios.
Sony
The Japanese tech giant entered the video game arena in 1994 with the release of
PlayStation. Ironically, it was a collapsed business deal between Sony and Nintendo to
create an optical disc add-on to the Super Nintendo Entertainment System (SNES) that
led Sony to develop their own console, despite internal skepticism at the time.
81
PlayStation would become the first video game console to sell over 100 million units
82
and has sold over 500 million systems of the various iterations of the original PlayStation
console.
83
Sony’s success is partly due to its ability to have a number of exclusive titles, as well as
to its strong first-party development and to agreements with a number of developers for
exclusive partnerships.
Valve
Although not necessarily considered a “first party”, since PC gaming does not have first
parties in the same way as console gaming does, Valve can be considered in the same
category as the above three companies. It is a major source for PC games and now will
once again enter into the hardware arena with a handheld PC gaming device.
84
Like Microsoft and Nintendo of America, Valve is based in the State of Washington, in
the United States. It started out as a development studio, mostly known for its Half-Life
series of games. Steam started in 2002 as a platform for distributing patches and
updates to PC games sold retail. It has since grown to be the largest PC game
81
Mellado, Fabien et al., PlayStation Anthology, Greeks Line, 2015-17, pp.19-39. See “How Intellectual
Property Laws Shaped the PlayStation”, available at either
https://www.wipo.int/sme/en/shaping_your_business/
82
“PlayStation 2 Breaks Record as the Fastest Computer Entertainment Platform to Reach Cumulative
Shipment of 100 Million Units”, Sony Computer Entertainment press release, November 30, 2005.
83
Williams, Callum, “Study Reveals How Many Game Consoles Have Been Sold Globally”, gamerant.com,
May 26, 2020. In July 2000, Sony released a smaller model known as PS One, which was then followed by a
model that included an attached screen. PS One went on to outsell all other systems until the end of the year,
including PlayStation 2. See https://www.giantbomb.com/playstation/3045-22/.
84
At times, Valve has acted similar to the traditional first parties by dabbling in hardware (e.g., Steam Machine,
Steam VR). In February 2022, Valve released a handheld PC gaming devicewith has Steam platform access
built in and allows users to access streaming services, web browsers and game stores (e.g., Epic Games
Store).See Bankhurst, Adam, “Steam Deck: Everything We Know About Valve's Handheld Gaming PC,
ign.com, February 18, 2022.
37 Mastering The Game
distribution platform but also serves as a means for digital rights management, servers
for online play and community features.
1.6.2 – Publishers
Not all games are made by first parties; in fact, only a very small percentage of games
are. The vast majority of games are made by third-party publishers and developers. And
as more development tools become more readily available and at lower costs, an
increasing number of developers are creating games for the various platforms.
Currently, there are many very large third-party publishers that develop and distribute
games for PC, console and mobile platforms. Often, these large publishers have several
in-house development studios and will also contract with independent development
studios to develop games on their behalf, as well as publish and distribute games of
others. Other companies have entered the market and acted as publishers for
independent developers for games that may not be of interest to the major publishers.
According to Newzoo, in 2018, for the first time, the top 25 public game companies
grossed over $100 billion while accounting for nearly 80% of the global market.
85
The major difference between a third-party developer and a first party is that often
games are cross-platform. However, that distinction is beginning to change, especially
with PC games. For many years, the list of major publishers had remained relatively
stable, with only the occasional new publisher entering the top 10 thanks to a hugely
successful game. But that picture has changed recently, along with the influx of
companies from China and South Korea that now play major roles.
MAJOR PUBLISHERS
Publisher
Headquarters
Major titles
Tencent
Shenzhen, China
Honor of Kings
Sony
Tokyo, Japan
The Last of Us, Spiderman,
God of War
Nintendo
Kyoto, Japan
Animal Crossing: New
Horizons, Legend of Zelda,
Super Mario, Donkey Kong
Microsoft
Redmond, USA
Halo, Forza, Flight Simulator
NetEase
Hangzhou, China
Identity V, Knives Out
Activision
Blizzard (acquired
by Microsoft pending
approval)
Santa Monica,
USA
Call of Duty, Overwatch,
World of Warcraft, Diablo
85
Taylor, Haydn, “Top 25 Public Game Companies Grossed Over $100bn Combined Revenue Last Year”,
gamesindustry.biz, April 17, 2019.
Mastering The Game
38
Electronic Arts
(EA)
Redwood City,
USA
FIFA series, Battlefield, Mass
Effect, The Sims, Madden NFL
Ubisoft
Montreuil
, France
Assassin’s Creed, Far Cry,
Tom Clancy, Prince of Persia
Epic Games
Cary,
USA
Fortnite
Sega
Tokyo, Japan
Sonic, Virtual Fighter,
Phantasy Star
Take-Two
New
York
City,
USA
Grand Theft Auto, Red Dead
Redemption BioShock,
Civilization
Square Enix
Tokyo, Japan
Final Fantasy, Dragon Quest,
Tomb Raider
Bandai Namco
Tokyo, Japan
PAC-MAN, Tekken, Soulcalibur,
Dark Souls I-III
Time Warner
Burbank, USA
Mortal Kombat, Batman, Lego
Konami
Tokyo, Japan
Silent Hill, Metal Gear
Capcom
Osaka, Japan
Street Fighter, Resident Evil, Mega
Man
1.6.3 – Major Mobile Publishers
Although all major publishers also develop or publish mobile games, some companies
have formed solely to develop, distribute and port games for mobile or social web
platforms. While Japan and the United States account for most of the major publishers
for console, these mobile publishers are much more diverse and cover all parts of the
globe. A number of Asian companies based in South Korea, Japan and China have
become some of the top mobile gaming companies, along with new companies
emerging in the United States, Scandinavia and the rest of Europe.
A SAMPLE OF MAJOR MOBILE PUBLISHERS
Publisher
Headquarters
Major titles
Tencent
Shenzhen, China
Honor of Kings
39 Mastering The Game
NetEase
Hangzhou, China
Fantasy Westward Journey
Activision
Blizzard (King
Digital)
Santa Monica, USA
Candy Crush
EA Mobile
Redwood City, USA
FIFA, Madden NFL
Bandai Namco
Tokyo, Japan
Pac-Man, Dragon Ball
franchise
Nexon
Tokyo, Japan
MapleStory, Dungeon
Fighter
Rovio
Espoo, Finland
Angry Birds
Roblox
San Mateo, USA
Meep City, Jailbreak
Supercell-1
Helsinki, Finland
Clash of Clans, Hay Day
Niantic
San Francisco, USA
Pokémon Go
Netmarble
Seoul, Republic of
Korea
Lineage 2 Revolution,
Marvel Contest of
Champions
Zynga (Take-
Two)
San Francisco, USA
Farmville, Mafia Wars
Gree
Tokyo, Japan
Driland
Gameloft
Paris, France
N.O.V.A., Let’s Golf, Minion
Rush, Asphalt
Gamevil
Seoul, Republic of
Korea
Cartoon Wars, Baseball
Superstars, Zenonia
Machine Zone
Palo Alto, USA
Game of War: Fire Age,
Mobile Strike, Final
Fantasy XV: A New Empire
Jam City
Culver City, USA
Harry Potter: Hogwarts
Mystery, Cookie Jam
Scopely
Los Angeles, USA
Marvel Strike Force, Star
Trek Fleet Command
Mastering The Game
40
1.7 – Beyond The Game: Growing Areas In The Industry
1.7.1 – Monetization Models: The Impact Of Free-To-Play And The Growth
Of Live Services
For most of the short history of video games, the method by which games generated
revenue remained relatively consistent, in the form of games sold at a premium price at
retail stores. That began to change with the hugely successful release of 989 Studio’s
EverQuest followed by Activision Blizzard’s MMORPG
86
World of Warcraft, which was
based on a monthly subscription to play the game. But it was not until the introduction
of digital distribution – first achieved through PCs driven mostly by Steam and then
through mobile devices and later consoles – that new monetization models would
forever alter the industry. These models have not only impacted how consumers play
and pay for games, but they have also affected how games are developed and
distributed.
87
With so many games entering the digital market, developers have hoped that allowing
gamers to try their game with no upfront costs might attract gamers who eventually
would pay for game-related downloadable content and microtransactions.
88
While the
free-to-play model has taken on different iterations, it has revolutionized the industry by
making most games available to the public at no cost and yet by 2020 accounted for
$98.4 billion in revenue for 78% of the total digital games revenue.
89
The top ten free-
to-play games in 2020 each earned over $1 billion (four games earned over $2 billion).
Honor of Kings led that year at $2.45 billion,
90
while Fortnite had the top revenue in 2019
with $1.8 billion.
91
86
“MMORPG” is the abbreviation for “massively multiplayer online role-playing game.”
87
Many of the major publishers are releasing fewer AAA titles and instead focusing more on providing live
services for their successful games. At the same time, publishers most likely are putting more money into the
new games they release with the hope that they can be monetized for many years. This approach can be
risky if a game fails and the publisher is releasing fewer games, but a success can be incredibly lucrative.
88
Microtransactions typically involve in-game purchases, for a small amount of money, of various virtual items.
These may include costumes; weapons; skins; and power-ups, which allow gamers to move through a game
more quickly.
89
In 2020, Asia accounted for 59% of the worldwide free-to-play digital revenue. See SuperData, “2020 Year
In Review: Digital Games and Interactive Media”, digitalmusicnews.com, 2021.
90
Ibid.
91
SuperData, “2019 Year in Review”. Available at https://direc.ircg.ir/wp-content/uploads/2020/01/
SuperData2019YearinReview.pdf
41 Mastering The Game
Worldwide revenue for free-to-play games by platform in 2019 (blue) and 2020
(green) in $ billion
92
Although it can be challenging to convince consumers and especially casual gamers to
purchase content, by 2020 some 50% of gamers had made a microtransaction
purchase.
93
However, most of that money is spent by only a small percentage of
gamers. Despite this, extraordinary numbers that have led to new forms of monetization
using the free to play model.
As companies explore new ways to monetize their games,
94
more and more publishers
have adopted a live-service revenue model similar to those introduced in the software
industry.
95
In this service, publishers provide various forms of additional content and
features for games (whether initially purchased, licensed at a premium price or free-to-
play) on an ongoing basis. Various fees apply, depending on such content.
For publishers, successful games built on this form of monetization can have greater
profit margins, by reducing development expenses and eliminating retail costs.
Previously, developers created sequels to maintain interest in a franchise. And while
this is still essential for sports games and major franchises, they can now provide
content on an ongoing basis for a fraction of the cost. In this way, they continue to
engage gamers while earning a continuous revenue stream
96
through in-game
purchases, subscription offerings and other features, thereby extending the life of a
game. For some publishers, this live-service business model now represents a
significant share of their business. Electronic Arts reported that 45% of its net revenue
92
Ibid.
93
“Video Game Industry Statistics, Trends and Data in 2021”, wepc.com.
94
The traditional forms of monetizing games have included retail and digital sales, advertising, subscriptions
that can be for a single game or a library of games, and season passes.
95
This type of monetization is often referred to as a “live service” because the game is continually evolving
with new updates. The key to a live service is the ability of the developer to retain users.
96
Development costs and marketing for all types of games on all the various platforms continue to increase,
especially for AAA titles, many of which rival the costs of Hollywood blockbusters. At the same time, premium
prices of many games have remained relatively stable over the last 15 years, although prices increased for
some games with the release of the new consoles by Sony and Microsoft.
0.
20.
40.
60.
80.
Mobile PC Console
Mastering The Game
42
was generated from live services in 2019
97
and that by 2020 it had increased to 51%.
98
Another advantage to this recurring year-round business model is that it is less reliant
on the importance of seasonal games, especially those released in November and
December.
99
1.7.2 – Video Games And Community
Social interaction has always been a part of the video game culture. It has taken on
different forms since the early days: arcades, where players would compete against
each other to attain the highest score; participation in multiplayer online games; and
today’s competitive gaming for prize money that can reach millions of dollars.
100
Now
more than ever, community involvement is a significant part of the video game universe,
as fans, players and announcers (often referred to as shoutcasters) interact with one
another on a continuing basis. This can be on chat sessions and chat platforms such
as Discord, through esports and via streaming sites that focus on game commentary
and game broadcasts by gamers. All these trends have helped expand interest in
games and differentiated them from other forms of entertainment that are for now unable
to duplicate this fan-player-commentator interaction.
The growth in community involvement has been driven by the expansion of live and
video-on-demand streaming. With live streaming, gameplay is broadcast live on the
Internet via streaming platforms such as Twitch and Facebook Gaming. The content
may be a gamer’s gameplay with commentary, reviews and instructional videos, or an
esports competition. In contrast, video on demand typically consists of the streaming of
previously recorded gameplay, which may or may not be edited. What makes streaming
unique compared to other forms of entertainment is that both formats involve interaction
between the “streamers” who play and comment on the games, and the fans who watch
the games as well as the fans engaging with each other.
101
97
Electronic Arts, “2019 EA Annual Report”, ir.ea.com. For EA’s fiscal 2020, the company announced that
$2.7 billion (just over half of EA’s total revenue) was generated from in-game content and live services. See
Kenmare, Jack, “The Mind-Blowing Figures Behind EA Sports’ Net Revenue From Ultimate Team”,
sportbible.com, May 21, 2020. One outcome of the growing popularity of live services is that major publishers
might invest less in new AAA properties, especially with the combination of increased development costs and
the uncertainty that accompanies the release of a new title.
98
Electronic Arts, “2020 EA Annual Report”, ir.ea.com.
99
Activision Blizzard, “2020 Annual Report”, investor.activison.com. According to the research company NPD
Group, sales in November and December are two or three times as high as the rest of the year because of
holiday demand. Richter, Felix, “Video Game Sales Are Extremely Seasonal”, statista.com, November 25,
2020. The growth of live services and continual content availability could lead to less reliance on sales in
November and December.
100
Many consider the first major esports tournament to have occurred as early as 1980 when Atari sponsored
a Space Invaders Tournament that attracted over 10,000 participants. See “esports History”,
esportsforgamers.weebly.com. See also Taylor, T.L., Raising The Stakes: E-Sports and the
Professionalization of Computer Gaming, The MIT Press, 2012, pp.1-33.
101
Twitch has entered into deals with a number of professional sports leagues to broadcast games that will
include commentary from Twitch users and provide athletes to stream content to fans. Hsu, Tiffany, “Twitch
Users Watch Billions of Hours of Video, but the Site Wants to Go Beyond Fortnite”, nytimes.com,
September 26, 2019; updated June 29, 2020; and Warren, Tom, “Twitch Launches a New Sports Category
as Amazon Pushes for Sports Dominance”, theverge.com, July 22, 2020. See also Taylor, T.L., Watch Me
Play: Twitch and the Rise of Game Live Streaming, Princeton University Press, 2018.
43 Mastering The Game
Gameplay streaming falls into three categories: esports, “live-play”
102
and
speedrunning.
103
Although each experience is different and there are advantages to
watching live vs. on demand and vice versa, the popularity of gameplay streaming has
been explained by several factors other than the entertainment value, such as the
possibilities to (i) find out about a new release or a catalog title through a game review,
(ii) learn new gaming skills from professional players and streamers, (iii) engage directly
with streamers through chats, (iv) listen to commentary from streamers, and (v) chat
with other viewers.
With more than 1 billion viewers,
104
a growing fan base and the worldwide popularity of
esports, streaming opportunities for publishers and developers has become an
important tool to help market their new releases and, to some degree, their catalog
games. This is also especially true for many independent developers, who may lack the
resources to engage in the more traditional ways of marketing such as print and
television. However, while more than 22,000 games are streamed on Twitch, You Tube
and Facebook Gaming,
105
a high percentage of viewers watch just the top games, and
a similar pattern has emerged with esports.
The typical viewer is male and in the 18-34 age category. However, video game
streaming attracts a young audience as well. According to the research group
SuperData, in 2019 approximately 78% of gaming preteens age 10 to 12 watch online
gaming videos, and for children ages 7 to 9 the percentage is around 67%.
106
Streaming has also attracted some of the biggest tech companies, which compete
aggressively for streamers, content and esports broadcasts. Many such deals are
exclusive.
107
Several companies make up the main streaming platforms: Twitch
(acquired by Amazon for almost $1 billion in 2014),
108
YouTube Gaming (acquired by
Google in 2006 for $1.65 billion),
109
and Facebook Gaming. But the space is dominated
by Twitch, which according to one report, in the 3rd quarter of 2021, controlled a little
more than 70% of the market based on hours watched, the equivalent of over 5.7 billion
102
Live Play involves the playing of games that are streamed live and viewed by others. Typically, these
games will be accompanied by commentary, which may include strategy on how to play the game.
103
Speedrunning involves the completing of a game or a portion of a game as fast as possible. See Woodcock,
Jamie, “The impacts of live streaming and twitch.tv on the video game industry”, jamiewoodcock.net, January
3, 2000.
104
Statista reported 1.2 billion viewers in 2020, an increase of 18% over the previous year. Clement, J.,
“Number of Gaming Video Content (GVC) Viewers Worldwide from 2016-2020”, statista.com, March 17, 2021.
See also Stuart, Keith, “Fights, Camera, Action: The Beginner’s Guide to Streaming Video Games”,
theguardian.com, August 17, 2020.
105
Newzoo, “2021 Global Esports and Live Streaming Market Report”, newzoo.com.
106
Valentine, Rebekah, “78% of Gaming Preteens Also Watch Online Gaming Videos”, gamesindustry.biz,
October 30, 2019.
107
See Stephen, Bijanm “Twitch Just Locked Down Top Streamers DrLupo, TimTheTatman, and Lirik”,
theverge.com, December 10, 2019; Khan, Imad, “Why Twitch is Still the King of Live Game Streaming”,
nytimes.com, December 15, 2019; and Taylor, Haydn, “Twitch Signs Three Exclusivity Deals with Major
Streamers”, gamesindustry.biz, December 11, 2019. In August 2020, the China-based company Bilibili
entered into a $113-million three-year exclusive deal with Riot Games for the broadcast rights to the League
of Legends World Championship, Mid-Season Invitational and League of Legends All Star in China. Esguerra,
Tyler, “Riot Signs 3-Year Deal Granting Bilibili Exclusive Broadcasting Rights in China for International Events,
dotesports.com, August 3, 2020. In 2018, Twitch reportedly paid $90 million to Activision/Blizzard for a two-
year exclusive broadcasting deal to stream Seasons 1 and 2 games of the Overwatch League. Wolf, Jacob,
“Overwatch League to be Streamed on twitch.tv in Two-Year, $90 Million Deal”, espn.com, January 9, 2018.
108
Gittleson, Kim, “Amazon Buys Video-Game Streaming Site Twitch”, bbc.com, August 25, 2014.
109
Sorkin, Andrew Ross and Peters, J., “Google to Acquire YouTube for $1.65 Billion”, nytimes.com,
October 9, 2006.
Mastering The Game
44
hours. Facebook Gaming attracted 15.7% of the market and You Tube Gaming made
up 13.8%.
110
In contrast to the dominance of a few companies and games that make up the lion’s
share of streaming platforms, the top five streamers on Twitch reportedly account for
only about 4% of viewing time.
111
However, each of those top five has more than
5 million followers.
112
Their seemingly small percentage of viewing time may be
attributable to the fact that there are 11 million streamers,
113
many of which probably
get only a handful of viewers in an extremely crowded market.
The top streamers can make millions of dollars, and their huge followings allow them to
have tremendous influence on consumer purchases. Consequently, they are highly
sought out by both streaming platforms, publishers/developers and brands. Indeed, a
popular streamer can attract a large audience to the service of a streaming platform,
and they can help promote the games of developers, who will thereby benefit from
additional sales.
114
Although the way in which streamers may make money varies slightly by platform, most
do so by sharing in a percentage of subscriptions purchased by fans for their channels,
advertising and donations. Streamers may focus on one game or type of genre or focus
on a wide range of games.
1.7.3 – Intellectual Property Issues In Streaming
Streaming is all about content. And, with the growing popularity in streaming, content
holders have become attentive to who controls the content and how it is used. Indeed,
an increasing number of fans, many of whom are unaware of IP rights, are starting to
stream, driven by the relative ease in which this can be done with PCs and consoles.
This situation has resulted in new legal challenges for streamers, developers and
publishers (who in this section will be collectively referred to as developer) and third-
party content holders.
Streaming involves multiple content owners, each controlling various IP rights that
primarily involve copyrights and trademarks. The question is “Who owns or controls the
rights when games are streamed for broadcast?”.
110
Cale Michael, “Facebook Gaming Surpasses YouTube Gaming in Total Hours Watched, Twitch Controls
70 Percent of the Streaming Market”, dotesports.com, October 27, 2021. Viewer numbers have spiked
upwards since the COVID-19 pandemic, as people quarantine at home. According to StreamElements and
Arsenal.gg, overall viewership, which also includes non-related gaming content, jumped to 1.6 billion hours
watched in October 2020. This figure is the highest total to date for Twitch and nearly double the number of
hours of 2019. At the same time, the hours watched in October on Facebook Gaming slightly exceeded 300
million hours, an increase of 118% over the previous year. Chase, “State of the Stream October 2020: Twitch
has biggest month to date, Just Chatting is the most watched category of the year, and HasanAbi dominates
the charts”, blog.streamelements.com, November 18, 2020.
111
“Growth in the Video Gaming Ecosystem: the new role of games as media”, occstrategy.com. A unique
feature of streaming is that the most popular streamers send their viewers to another “live” streamer in the
form of a “raid” when they sign off from their broadcast. This keeps the viewer connected to content that has
been approved by the original streamer they follow and helps the subsequent streamer grow their fan base.
112
“Top 100 Most Followed Twitch Accounts (sorted by Followers Count)”, socialblade.com.
113
Both Sony and Microsoft have added features to their consoles that allow players to stream directly from
their console to Twitch. In addition, many PCs have incorporated software and various features to assist
consumers in streaming their gameplay.
114
According to one study, online videos were the second-most important factor in deciding purchases, after
“what friends are playing”.
45 Mastering The Game
It is the developer who owns the game, and they will either own or have licensed
elements within the game that might be part of a stream. Generally, as the owner of the
copyright, the developer will have the right to control the exploitation and distribution of
their game. That right is enforced pursuant to terms and conditions that must be agreed
upon by a streamer prior to broadcasting.
115
There are several business and legal
reasons why a developer will want to limit parts of their game from being distributed.
First, depending on the underlying rights controlled by a third party used in a game, a
developer may be limited in what rights they can allow streamers to use as part of their
broadcast. For example, even though a music publisher may have licensed their music
for a game, that license may prohibit for their music to be streamed. As a result, if the
developer has not secured the rights to third-party content for streaming purposes, then
they cannot license the rights. This is one of the reasons a developer does not want to
give blanket licenses to streamers and wants to make sure that any content that is used
has been properly licensed or is owned by the developer. A developer may also elect
not to provide certain scenes so as not to reveal parts of the game to potential
consumers.
116
Ownership or control of the IP by the developer is also a means for them to prevent a
streamer from using their content if the streamer engages in conduct inconsistent with
the developer’s terms of use. This could include misuse of the developer’s trademarks,
unapproved forms of monetization by the streamer, inappropriate conduct, or failure to
obtain approval from the developer. Examples could be the case of the streamer adding
content (e.g., pornography) or commentary (e.g., racist, sexist) that is inappropriate and
the developer therefore choosing to terminate their license with the streamer. In the
United States, however, streamers have the right to use a certain amount of gameplay
to provide game commentary under “fair use” as discussed in Chapter 2. But there are
limits to how much gameplay can be shown, as too much gameplay may put the
commentary outside the framework of fair-use protection.
117
Third-party content owners also have IP rights that need to be respected by streamers
to avoid infringement claims as well as removal from a streaming site.
118
Unauthorized
use of content may involve the use of unlicensed material added by the streamer or use
of unauthorized gameplay. An example is the case of a streamer adding unlicensed
music as part of their stream. This problem recently came to the fore when music
publishers sent Digital Millennium Copyright Act (DMCA) takedown notices to Twitch,
with the claim that streamers were using unlicensed music.
119
Repercussions can be
115
Examples of major publishers’ Terms of Use implemented involving use of content can be found on at the
following sites: https://www.epicgames.com/site/en-US/fan-art-policy, https://square-enix-
games.com/documents/materialusagepolicy, https://www.blizzard.com/en-us/legal/dd76b654-f2c4-4aaa-
ba49-ca3122de2376/blizzard-video-policy,
https://www.nintendo.co.jp/networkservice_guideline/en/index.html.
116
It can be difficult to find a balance, as streamers can provide tremendous marketing opportunities for a
developer. Developers must ask themselves at what point will they lose control of their content and whether
showing too much material will reduce or increase sales.
117
The International Olympic Committee (IOC) served a takedown notice to a streamer, claiming that his
commenting on an Olympic event during broadcasts was unauthorized and in violation of copyright laws. The
notice led to the temporary disablement of the streamer’s Twitch channel. At the time of writing, he is
challenging the IOC under “fair use”. See Grayson, Nathan, “Twitch’s Most Popular Streamer is Taking on
the Olympics, For Better or Worse”, washingtonpost.com, August 6, 2021.
118
In Twitch’s agreement with streamers, if a streamer receives three takedown notifications for violating the
intellectual property rights of owners, their accounts can be terminated, although they have the right to dispute
the claims. See also https://www.twitch.tv/p/legal/community-guidelines/music/.
119
See Aswad, Jem, “Twitch, Amazon Slammed by RIAA and Major Industry Groups for Using Unlicensed
Mastering The Game
46
significant if music publishers pursue such claims aggressively. This is true not only for
the streamers, which could be subject to infringement and potential damage claims from
the content owners as well as removal from Twitch, but also for Twitch, if it can be shown
that under the DMCA’s safe-harbor protection they failed to take the required
appropriate action and knowingly hosted specific and identifiable music that was being
infringed.
120
Furthermore, streamers own the copyrights to their own commentary, although this
would exclude any pre-existing ownership rights to the underlying material broadcast,
such as the game and its contents. Consequently, developers should, in some
situations, request as part of their terms and conditions that the streamer license back
to the developer a worldwide, royalty-free license for its use.
1.7.4 – Esports
“Esports” refers to professional or semi-professional competitive gaming in an
organized format. It has grown from humble origins
121
to become a big business
currently undergoing evolution and change. Though its relevance to video game
development might not be immediately apparent, it is something any developer should
keep in mind, as any game that can be played competitively can eventually become an
esport (even if the market is currently dominated by very few titles).
Although esports revenue is relatively small compared to the overall industry revenue,
it is attracting much attention. Indeed, in addition to large volumes of avid fanbase,
streaming, broadcasting
122
and investments, esports are also standing out for their
Music; Twitch Disputes Claim”, variety.com, October 26, 2020; and Stephen, Bijan, “In Twitch’s Fight with the
Music Industry, Streamers are Paying the Price”, theverge.com, November 12, 2020. In September 2021, the
National Music Publisher's Association entered into an agreement with Twitch, and while the agreement does
not provide licensed music for streamers, it does adopt, according to Twitch a more 'flexible' process than
that imposed by the DMCA in dealing with potential disputes. Gryson, Nathan, "Twitch Makes Deal with
NMPA, but Streamers Still Can't Play Licensed Music", washingtonpost.com, September 21 2021. At the time
of this writing, Twitch has yet to enter into music licensing deals to allow streamers to use music in their
broadcasts unless streamers enter into a separate license agreement with music publishers. In contrast,
Facebook has entered into music license agreements that allow for selected streamers to use agreed-upon
music.
120
To avoid potential copyright infringement claims, music is sometimes muted. In Cyberpunk 2077, the
developers incorporated an innovative streamer mode that removes music that might pose a copyright issue,
although there was an initial problem at launch with some scenes. Kent, Emma, “Whoops, Cyberpunk 2077's
Streaming Mode Still Contains a Copyrighted Song”, eurogamer.net, December 10, 2020. Streamers need to
be conscious not only of copyright issues with the owners of the music but also with rules imposed by the
streaming services such as Twitch. For example, Twitch Terms of Use note that “repeat infringers” of copyright
can have their accounts terminated immediately. This usually occurs in the United States, when the streaming
service receives a DMCA notice that infringing material appears on their service that was downloaded by a
user.
121
The first documented competition dates back to 1972. See Brand, Stewart, “SPACEWAR Fanatic Life and
Symbolic Death Among the Computer Bums”, Rolling Stone, 1972.
122
A report by Syracuse University located in the State of New York discusses the potential value of esports
and predicts that esports audiences will have surpassed all viewership for American professional sports
leagues by 2021 except for American professional football (i.e., the NFL). The estimated numbers of viewers
in millions for American professional sports leagues and esports are as follows: (i) National Football League
(NFL): 141; (ii) e-Sports: 84; (iii) Major League Baseball (MLB): 79; (iv) National Basketball Association (NBA):
63; (v) National Hockey League (NHL): 32; and (vi) Major League Soccer (MLS): 16. The four largest
audiences for sports worldwide are for football (soccer) at 4 billion, cricket at 2.5 billion, field hockey at 2.5
billion and tennis at 1 billion. Of note is that in some years the League of Legends esports tournament attracts
more viewers than the finals of each American professional sport except the NFL’s Super Bowl game. “With
Viewership and Revenue Booming, Esports Set to Compete with Traditional Sports”,
onlinegrad.syracuse.edu, 2021; and Roundhill Team, “Esports Viewership vs. Sports in 2020”,
roundhillinvestments.com, September 25, 2020.
47 Mastering The Game
increasingly higher prize pools,
123
expansion into mobile devices, college
scholarships
124
, participation from sports leagues and celebrities, and even interest from
the International Olympic Committee.
125
On the other hand, the past few years have seen the lines between esports, live-
streaming, and even influencer marketing become blurred. This situation combined with
the pandemic, travel restrictions, and ecosystem and economic instability have
negatively impacted key esports revenue streams, making it increasingly difficult to
determine the size and relevance of the phenomenon. According to Newzoo, global
esports revenue was $947.1 million in 2020 and originally was estimated to increase by
14.5% to over $1.08 billion in 2021.
126
Most of the revenue ($833.6 million) in 2021
came from media rights and sponsorship.
127
Other forms of revenue come from fees
received by publishers for use of their IP, digital, streaming, merchandising and ticket
sales.
128
The global games live-streaming audience was estimated to be 728.8 million in 2021,
and esports enthusiasts will make up 234 million of this number.
129
This continuous
growth shows how esports has become a powerful advertising tool to promote a game
and to keep its community very engaged.
China represents the biggest market for esports in both revenue ($360.1 million) and
viewership, with an estimated 92.8 million enthusiasts in 2021.
130
The United States and
Brazil are second and third respectively in viewership. North America and Western
Europe follow China in total revenue with $243.0 million and $205.8 million
respectively.
131
The esports ecosystem is complex and includes many different stakeholders. Even for
major publishers, esports can be a challenge to run on their own. Huge investment in
resources and revenue are needed to build the infrastructure and manage a league.
Moreover, there are many different issues involved, such as managing IP, hiring and
managing players, finding venues, organizing sponsorship, managing event organizers
and negotiating deals.
123
Prize pool amounts of esports tournaments have reached astonishing numbers, e.g., $34 million for the
“International 9” (DOTA 2). See Nordmark, Sam, “The top 10 highest prize pools in esports”, dotesports.com,
2021. The top five esports games paid out over US$400 million and top players can earn over one million
dollars per year. Hoppe, David, Esports in Court, Crimes in VR, and the 51% Attack, Vision 2020 Press, 2020,
pp. 14-15.
124
Over 175 American universities/colleges have esports teams. For a list of schools in the US, see:
https://www.ncsasports.org/college-esports-scholarships/varsity-esports. The NCAA, the governing body of
college sports in the US, has not taken a position on whether to oversee esports. Some of the issues that the
NCAA would have to deal with would include: (i) content of games and what games would be allowed; (ii) IP;
and (iii) players ability to earn revenue.
125
See “The Olympics need esports more than esports need the Olympics,” ft.com, August 3 2021; and Bieler,
Des, “IOC announces inaugural slate of Olympic-licensed esports events”, washingtonpost.com, April 22,
2021.
126
Newzoo, “Global Esports & Live Streaming Market Report 2021”, newzoo.com. However, the effects of
COVID-19 prevented live events thereby reducing projected revenues.
127
Ibid.
128
Ibid.
129
Ibid. The League of Legends World Championship was 2020’s biggest tournament in terms of live
viewership hours on Twitch and YouTube, with 91.9 million hours. League of Legends Champions Korea
Summer was the most-watched league by live viewership hours on Twitch and YouTube, generating 53.9
million hours. Ibid.
130
Asia accounts for approximately 54% of the market in terms of revenue. Takahashi, Dean, "Niko Partners:
Asia is 54% of the $1B global esports market", venturebeat.com, July 22, 2021.
131
“Newzoo, “Global Esports & Live Streaming Market Report 2021”, newzoo.com.
Mastering The Game
48
Most importantly the developer or publisher controls the underlying IP providing access
to the video game for esports competitions. As a result, in comparison to traditional
sports, they can exercise a very high level of control over their game.
132
The developer
or publisher will therefore want to decide how much if any control they want to exercise
on esports, because this will determine the legal complexity involved.
133
Furthermore, the structure of esports can differ according on the level of control the
developer or publisher wants to exercise, as seen in the examples below.
134
• Developers can choose to rely entirely on third parties to create and manage
esports and in return receive a fee for such rights (e.g., Counter-Strike: Global
Offensive).
• Developers can decide to split between the publisher and third parties to
manage esports events (e.g., DOTA2).
• Developers can decide to let the publisher create and manage esports entirely
(e.g., Starcraft, Overwatch, League of Legends).
The spectrum goes from zero to total control and the developer can – if they wish –
even influence the nature of the players’ contract down the line. Developers and
publishers will also have to decide whether or not to foster (or even attempt to stifle)
grassroot events and the growing interest in semi-professional esports events and
leagues.
132
In traditional sports, no one owns the rights to the game.
133
See Chapter 10 “Esports” in Nabel, Dan and Chang, Bill, Video Game Law in a Nutshell, West Academic,
2018.
134
Ibid.
49 Mastering The Game
© Newzoo
Whichever model is chosen, and in proportion to the control exercised, the
developer/publisher will encounter several potential legal issues, including governance,
labor law, competition law, IP law, contract law and others.
135
Moreover, the regulation
of esports is still quite a controversial topic and not internationally harmonized. Some
examples: esports is not regulated in the United Kingdom but is regulated specifically
by law in France;
136
in Russia and Thailand it is considered a “sport”
137
but in Sweden it
135
Chao, Laura L., “‘You Must Construct Additional Pylons’: Building a Better Framework for Esports
Governance”, 86(2) Fordham Law Review, 737, 756, 2017.
136
Auxent, Adrien, “Esports are now officially legal in France”, archive.esportsobserver.com, September 30,
2016.
137
Lingle, Samuel, “Esports is now a sport in Russia”, dotesports.com, June 9, 2016, Russia is recognized as
the first country to acknowledge esports which did so in 2001 (but revoked in 2006 and reinstated in 2016)
while Thailand did so as recently as 2021. Hoppe, David, Esports in Court, Crimes in VR, and the 51% Attack,
Vision 2020 Press, 2020, pp. 67-68. If esports is recognized as an official sport in a country it may entitle
players to certain benefits as illustrated in Thailand whereby players have access to public funding. Marie
Dealessandri, “Esports Professionally Recognized in Thailand” gameindustry.biz, September 28, 2021.
Mastering The Game
50
is not,
138
and Italy has yet to decide how to govern it.
139
In addition, multiple international
regulatory bodies have been formed with different scopes, aims and objectives to tackle
esports issues. It may be difficult to create a single international governing body for
regulating esports, given its complex, fragmented and un-cohesive ecosystem.
140
1.7.5 – Artificial Intelligence
The relationship between artificial intelligence (“AI”) and video games works both ways:
Al tools are used in game development to generate content, and video games are used
as a testbed environment for AI to learn. For example, ironically, Rockstar’s Grand Theft
Auto V (a staple of road chaos and mayhem), was used to teach autonomous vehicles
how to drive in the secure context of a virtual world.
141
As video game objects need to
be pre-labeled to be managed by the game engine, this classification makes it possible
to overcome real world problems of computer vision and object recognition. In a digital
learning environment, an object labeled as “car” can be easily spotted and identified as
something different from a road or a pedestrian.
142
More generally, video game
environments have fewer variables than the open world, thus making analysis of the
data fed into an AI system more easily observable.
AI is opening new avenues for game development. It also has the potential to speed up
development and reduce cost and time in getting games to the market by eliminating
the need for working on repetitive or tedious tasks that could be instead delegated to
AI.
143
AI can also help enhance creativity, players’ experience and gameplay itself. It can even
create video games independently. Al possibilities seem endless: it can enable graphic
rendering of level design, generate music scenarios, develop credible non-player
characters, and make customized storytelling. Any possible digital asset can be created
or enhanced algorithmically.
1.7.6 – Immersive Technologies
Virtual Reality
In November 1994, Nintendo revealed their ambitious standalone game system, the
Virtual Boy, claiming it to be the “…first virtual reality system developed and produced
138
“The International”, a Dota 2 tournament run by Valve, had to be moved from Sweden because the Swedish
government refused to recognize esports as an official sport, leaving players unable to get a sports visa. See
https://www.dota2.com/newsentry/2992060508108464823
139
Rizzi, Andrea, Serao, N., and Nowak, L., “Esports in Italy: an Industry Ready to Take off (or Still in Search
of its Regulatory Soul)?”, 2 Interactive Entertainment Law Review (IELR) 42, 2019.
140
Martinelli, Jacqueline, “The Challenges of Implementing a Governing Body for Regulating Esports” 26(2)
University of Miami International and Comparative Law Review, 499, 506, 2019. The first recognized
international eSports association was The International E-Sports Federation (IeSF) formed in 2008, which
promotes recognition of eSports as sport. See https://iesf.org/about/what-we-do.
141
Roberson, Matthew Johnson, et al., “Driving in the Matrix: Can Virtual Worlds Replace Human-Generated
Annotations for Real World Tasks?”, arxiv.org, October 6, 2016, revised February 25, 2017.
142
Tilley, Aaron, "Grand Theft Auto V: The Rise And Fall Of The DIY Self-Driving Car Lab”, forbes.com,
October 4, 2017.
143
Hello Games spearheaded the Al assets revolution, using an algorithm that promised almost infinite
procedurally-generated new worlds for their space exploration title, No Man’s Sky. Services such as Aiva,
Amper and MuseNet offered assistance in composing situational music. Al Dungeon is a game capable of
generating an infinite number of unique stories, tailored to the player by the use of algorithms based on
technology by OpenAl, the same company that wrote the software which defeated the human champion team
at DOTA2. See https://play.aidungeon.io/main/home.
51 Mastering The Game
for the mass market.”
144
This first virtual reality set was released in 1995 but
unfortunately discontinued within a year.
145
It promised to deliver exciting virtual
experiences to players, but the hard reality was that the technology was just not there
yet.
146
For example, technical limitations at the time limited the display to generate black
and red colors, and the advertised VR was, in reality, a 3D effect under a marketing
disguise. Likewise, Nintendo’s virtual utopia was a collection of video games with
“…crude wireframe graphics and multiple layers of 2D sprites.”
147
After the Virtual Boy’s
failure, the promised land of VR for the masses appeared to be but a dream, and no
AAA publisher or developer dared to venture down that route again until the early 2010s.
In 2012, the Oculus Rift for PC made its debut on Kickstarter, a popular crowdfunding
platform. The Rift was marketed as a “…new virtual reality (VR) headset designed
specifically for video games that will change the way you think about gaming forever…a
truly immersive experience that allows you to step inside your favorite game and explore
new worlds like never before.”
148
While the headset’s marketing was eerily similar to the
Virtual Boy, the technology supporting Rift was actually up to task. By the end of their
Kickstarter campaign, Oculus had raised 975% of their original funding goal, and the
company was acquired by Facebook in 2014 for a reported $2 billion.
149
Fast forward to today, and many companies, AAA developers and publishers are
actively investing in VR gaming, both in hardware and software. As a result, almost all
gaming platforms now have optional VR headsets that could be used to play video
games, navigate through short experiences (i.e., mountain climbing or historical events
such as the BBC’s VR experience on the 1916 Easter Rising),
150
or socialize with other
players in virtual worlds.
151
Current VR headsets create the illusion of presence in virtual
environments (each headset and video game to a varying degree) and allow players to
experience immersive gameplay. While the cost of VR headsets was prohibitive for
many users at first, greater availability of VR platforms and technological advancements
have brought those costs down.
152
The most active players currently in the field are Facebook with its Oculus Rift and
Oculus Quest line-up, HTC with its Vive headsets and PlayStation with PlayStation VR
which combined controlled about 77% of the market.
153
These companies also maintain
platforms through which players can socialize and purchase video games and
experiences, by cultivating separate ecosystems mirroring the console market.
Samsung and Google have also invested in mobile VR, allowing users to turn their
144
Nintendo, “Nintendo Introduces Video Game Players to Three-Dimensional Worlds with New Virtual Reality
Video Game System”, Business Wire, November 4, 1994.
145
Flanagan, Graham, “The Incredible Story of the ‘Virtual Boy’ – Nintendo’s VR Headset from 1995 that
Failed Spectacularly”, businessinsider.com, March 26, 2018.
146
Edwards, Benj, “Unravelling the Enigma Of Nintendo’s Virtual Boy, 20 Years Later”, fastcompany.com,
August 2015.
147
Ibid.
148
Oculus, “Oculus Rift: Step Into the Game”, kickstarter.com, January 2016.
149
Stuart Dredge, “Facebook closes its $2bn Oculus Rift acquisition. What next?”, theguardian.com, July 22,
2014.
150
See https://www.bbc.co.uk/taster/pilots/easter-rising-voice-of-a-rebel.
151
Examples are Valve’s Half-Life: Alyx. See https://store.steampowered.com/app/546560/HalfLife_Alyx/; VR
Chat Inc.’s VR CHAT at https://hello.vrchat.com/, and Force Field’s Anne Frank House VR at
https://www.oculus.com/experiences/rift/1801263533272595/?locale=en_US.
152
For example, a player originally had to have a powerful enough PC to be able to run video games in VR,
on top of the costs of buying an expensive VR headset.
153
These numbers were reported in 2019. Horwitz, Jeremy, “Sony Wins 30% of VR Hardware Revenues as
Demand Fades for Cheap Headsets”, venturebeat.com, August 5, 2019.
Mastering The Game
52
mobile phones into VR headsets with Gear VR and Google Cardboard, respectively.
154
Even Nintendo, despite its failure with the Virtual Boy, has made a small return to VR
with its Nintendo Labo VR Kit, which turns the Switch console into a VR headset.
155
With more developers and publishers supporting VR, it appears that a new industry is
slowly forming and heading a step closer toward maturity. As of January 2020, Sony
reported to have sold 5 million units of PlayStation VR.
156
Superdata’s figures show that
VR video game revenue increased by 25% in 2020, jumping from $471 million up to
$589 million.
157
Finally, every video game released to date can be potentially converted
into a VR game, giving the industry ample opportunity to grow.
158
While the Virtual Boy was way ahead of its time, its goal of transporting players into
“virtual utopias” may now be closer than ever before. With fast-paced developments in
neighboring technological fields such as cloud gaming and AI computing, the VR
industry is slowly expanding.
Augmented Reality
One definition for Augmented Reality (AR) describes it as “…a system that fulfills three
basic features: a combination of real and virtual worlds, real-time interaction, and
accurate 3D registration of virtual and real objects.”
159
As futuristic as “AR video games”
may sound, they have arguably been around since the proliferation of wearable
technology and the smartphone revolution.
160
In the early 2000s, Nokia had become a dominant mobile phone maker, enjoying a
significant market share in the industry.
161
Part of the reason Nokia was so successful
was its push to reconceptualize mobile phones as multimedia devices equipped with
the latest available technology and cameras.
162
Many other companies followed Nokia’s
lead, and cameras became a core component for mobile phones. With an established
user base, mobile phone applications utilizing phone cameras started appearing, and
in 2003 Siemens developed a game called Mozzies that was evidently “…the first mobile
application utilizing the camera as a sensor.”
163
The player’s goal in Mozzies was to
154
Samsung, Gear VR (2015), see https://www.samsung.com/global/galaxy/gear-vr/ ; Google Cardboard, see
https://arvr.google.com/cardboard.
155
Nintendo, Nintendo Labo Toy-Con 04: VR Kit (2019), see https://www.nintendo.com/products/detail/labo-
vr-kit/.
156
Parlock, Joe, "PlayStation VR Sells Five Million Units Since 2016”, forbes.com, January 7, 2020.
157
Graham, Peter, “VR Game Revenue In 2020 Increases 25% to $589m Superdata Reports”, vrfocus.com,
January 8, 2021.
158
The latest example is Resident Evil 4 (“RE4”). Originally released way back in 2005, RE4 is finding its way
to the Oculus Quest 2 as an exclusive VR video game. Robertson, Adi, “A Resident Evil 4 VR remake is
launching on Oculus Quest 2”, theverge.com, April 15, 2021.
159
Wu, Hsin-Kai, Lee, S.W., Chang, H., Liang, J., “Current Status, opportunities and challenges of Augmented
Reality in Education”, 62 Computers & Education, p. 42, 2013.
160
While certain types of AR technologies are commonly used for AR video games, they also have military
and business applications. For example, it was reported that Microsoft won a US Army contract for AR
headsets. See Novet, Jordan. “Microsoft wins US Army contract for augmented reality headsets, worth up to
$21.9 billion over 10 years”, cnbc.com, April 1, 2021. Google Glass is a wearable AR device used by
companies such as DHL. See https://www.google.com/glass/start/. IKEA has also developed an AR shopping
mobile application that allows users to browse through their catalog. White, Jeremy, “IKEA’s Revamped AR
App Lets You Design Entire Rooms”, wired.com, April 20, 2021.
161
Lee, Dave, “Nokia: The Rise and Fall of a Mobile Giant”, bbc.com, September 3, 2013.
162
Hanlon, Mike, “Nokia Launches NSeries Branded Multimedia Device Range”, newatlas.com, April 28,
2005.
163
Bordallo Lopez, Miguel et al., “Interactive Multi-Frame Reconstruction for Mobile Devices”, Multimedia
Tools and Applications, p. 3, 2012.
53 Mastering The Game
“…shoot down…synthetic flying mosquitos projected onto a real-time background
image by moving the phone around and clicking at the right moment.”
164
AR video games have become more prevalent only with the advent of smartphones and
mobile game application stores. While mobile AR video games have been
commonplace since the early 2010s, it was arguably not until the release of Pokémon
GO in 2016 that AR put its mark on the industry’s map. Pokémon GO’s premise is
simple; players set out in the real world with their smartphones, turn on their cameras,
and try to find and catch Pokémon that virtually pop up on their screens.
165
Pokémon GO became a cultural phenomenon. The AR mobile game reportedly
generated $206.5 million in revenue and became the most downloaded mobile game
within its first month of release.
166
It is also one of the most successful mobile video
games of all time and had a tremendous impact on the design philosophy of other AR
mobile video games and video game franchises.
167
For example, CD Projekt, a Polish
Video Game developer, have released The Witcher: Monster Slayer, an AR location-
based mobile game, similar to Pokémon GO, set in The Witcher fictional video game
universe.
AR technologies in video games are slowly becoming a dominant force in the mobile
video game market. However, while AR technologies have so far been limited to mobile
gaming, future technologies such as Microsoft’s HoloLens line of headsets are
expanding possibilities.
168
If costs allow for a consumer-grade AR headset to be
released in the near future, both AR and VR video games will become more
commonplace in the industry.
1.8 – Legal Challenges
The changes in the video game industry are leading to some new legal risks and
challenges. These changes include new hardware, new distribution methods, new
monetization methods such as the adoption of non-fungible tokens (“NFT”),
169
new ways
to use content (e.g., streaming) and greater development capabilities to capture more
realism. And whenever an industry changes, it takes time for laws and regulations to
catch up. Sometimes this means that it is unclear how governments and courts will react
to certain business practices. Other times it means that regulations and laws written to
be applicable to technology from thirty years ago are applied haphazardly to
groundbreaking tech. Since laws and regulations are changing constantly and vary by
country, companies trying out new things need to be careful and seek advice on how to
164
Ibid.
165
Pokémon GO uses AR technology to superimpose “…computer-generated information over your physical
surroundings…to put virtual creatures at real-world locations.” See Chamary, J.V., “Why ‘Pokémon GO’ Is
The World’s Most Important Game”, forbes.com, February 10, 2018. See also Rushe, Dominic, “My Secret
Shame: I Am (still) Addicted to Pokémon Go”, theguardian.com, June 26, 2019.
166
Swatman, Rachel, “Pokémon Go Catches Five New World Records”, guinnessworldrecords.com,
August 10, 2016.
167
Chamary, J.V., “Why ‘Pokémon GO’ Is The World's Most Important Game”, forbes.com, February 10, 2018.
168
See Microsoft’s HoloLens 2, available at https://www.microsoft.com/en-us/hololens
169
Newzoo defines NFTs as a unit of data stored on a blockchain that certifies the uniqueness and ownership
of digital assets. See Newzoo, “2021 Global Games Market Report: The VR & Metaverse Edition”,
newzoo.com. NFTs contain unique identification codes and metadata that distinguishes them from each other.
They therefore cannot be traded or exchanged at equivalency, unlike fungible tokens (i.e., cryptocurrencies).
Sharma, Rakesh, “Non-Fungible Tokens (NFT) Definition”, investopedia.com, March 8, 2021.
Mastering The Game
54
reduce their exposure. In addition to these uncertainties, the revenues earned in the
video game industry have made it a prime target for potential litigation.
Mobile distribution is a perfect illustration of the complexities of legal issues across the
globe. Increased access to mobile distribution means exposure to the various laws in
the jurisdiction where the consumer resides. Even within the United States, laws on
privacy, consumer protection, publicity rights and taxes vary by state. Further, different
countries have different decency standards, and some content may be legal in most
countries but illegal in others. As a result, a developer needs to be aware of the different
laws and regulations in the distribution territories or at the very least the major revenue-
generating territories, and of those that impose the strictest regulations. We may well
wonder what might be some of the potential legal challenges in the industry in the near
future?
1.8.1 – Intellectual Property (IP)
One of the most significant legal challenges facing the industry today is IP, both in
litigation involving companies protecting their IP and in measures to avoid infringing the
rights of others. IP litigation has been part of the industry’s landscape since the time of
copyright issues with Pac-Man and patent controversies involving the earliest consoles,
namely Magnavox Odyssey. With technological advances in hardware and software
and the ability to capture more realism in games, IP continues to be in the forefront of
legal disputes. At the same time, courts in some countries, especially the United States,
have recognized games as creative expression equal to other forms of entertainment
such as motion pictures and books, and they have expanded the rights of developers
in IP and rights of publicity.
Recent examples of the realism captured in games that have led to litigation have
included whether a developer infringed the copyright of a tattoo artist by replicating
tattoos on players’ avatars in sports games and the use of accurately portrayed vehicles
and other trademarks in historical settings without the owner’s written consent. Previous
litigated matters in IP such as cloning, rights of publicity and the extent to which
trademarks can be used without permission in stories will continue to evolve, especially
as new jurisdictions deal with these issues. In addition, potential contentious issues may
arise dealing with ownership of content created by AI and players, the use of various
trademarks including whether trademarks can be protected in a fictional world, the
replication of artwork such as graffiti in public spaces, the use of copyrighted material
(e.g., game content and music) by streamers on live-streaming services such as Twitch,
and whether underlying IP rights were properly licensed for new forms of distribution.
Furthermore, patent litigation will continue to be a concern, whether it involves “patent
trolls” or legitimate claims, especially with the high costs associated with defending a
claim. Companies need to be careful that the technology they use does not infringe the
patent rights of another party. This is true whenever they develop a game, create new
hardware or license software (regardless of whether or not they are indemnified by the
licensor). Although software patents can be an issue in many countries, patent litigation
is especially an issue in the United States. But that is not to say the issue is limited to
US companies, as any company distributing games in the United States could
potentially face liability under American patent law.
55 Mastering The Game
IP constantly undergoes reform, and reforms impact video games even when they are
not the direct target. One example is the Contract Adjustment Mechanism in Article 20
of the Digital Single Market Copyright Directive,
170
which introduced a “best-seller”
clause at the EU level.
171
Under Article 20, authors and performers can claim additional,
appropriate and fair remuneration, beyond what was originally agreed between the
parties if the originally agreed remuneration transpires to be disproportionate to the
subsequent revenues. Additionally, Article 19 (the “transparency obligation”) gives them
the right to access information on how their works are being exploited and how much
revenue is being generated. This can be enforced against the original contracting party
or against third parties. There is also an Article 23, which stipulates that “any contractual
provision that prevents compliance with Articles 19, 20 and 21 shall be unenforceable
in relation to authors and performers.”
172
It is not yet fully clear to what extent
implementation of Article 20 by the EU Member States will impact the video game
industry and its standards in negotiations with European authors and performers.
1.8.2 – Monetization
Each monetization scheme brings with it a different legal challenge. And as developers
continue to try to figure out new ways to monetize games (with most of them being
provided for free on certain platforms), this issue will continue to be closely followed.
For example, in-game currency can involve banking law, consumer-protection law and
tax law. Additionally, the way a game sells certain items can bring gambling laws into
play: an example is “loot boxes”, which some countries have determined to be forms of
gambling.
173
In some situations, new regulations lead to new business models.
1.8.3 – Privacy
The world is becoming more connected, and gamers are no exception. The ability to
play online with friends used to be the only way for gamers to connect. Now games are
connected to social media sites, and it has become very popular to share achievements,
scores, highlights and other aspects of games with friends this way. In addition, many
games gather information on gamers as a way to target consumers with advertising and
in-game purchases. How companies manage all the private information, especially
when dealing with children and in the transfer of information among countries, will be
an ongoing concern for consumer groups and governments. We can expect more
oversight in this area, which may include greater enforcement of recent regulations and
the adoption of more restrictive regulations on the collection and sharing of information.
Furthermore, companies will most likely need to invest more resources and time in
170
The “Directive (EU) 2019/790 of the European Parliament and of the Council of 17 April 2019 on copyright
and related rights in the Digital Single Market and amending Directives 96/9/EC and 2001/29/EC”, available
at https://eur-lex.europa.eu/legal-content/en/TXT/HTML/?uri=CELEX:32019L0790.
171
Before the introduction of the DSM Directive and in particular Article 20, EU Member States relied on a
variety of legal remedies to facilitate a fair remuneration system for the benefit of authors and to prevent
buyout contracts. These included requirements to provide remuneration that is appropriate (Germany) or
proportional (Spain), best-seller clauses (France) and methods to specify remuneration for each form of
exploitation (Belgium and Poland). However, as many of these rules were not mandatory, they were subject
to numerous exceptions or were simply not followed in practice. For a full analysis see Stechova B., “How to
Best ‘Sell’ the ‘Best-seller’ Clause?”, PhD thesis, QMUL, 2017.
172
Treppoz, Edouard and Arbant, G., “The EU Copyright Directive: The New Best-Seller Right”, lexology.com,
May 2, 2019.
173
Japan outlawed “gacha” style games, which required gamers to buy packs of random items to put together
collections to gain access to even rarer items.
Mastering The Game
56
protecting information about players and their own intellectual property against the
growing threat from hackers and ransomware.
1.8.4 – Labor Issues
Employment-related issues have recently taken on greater prominence. These include
hiring practices targeting women and minorities, the formation of unions
174
in response
to working conditions,
175
sexual harassment, and the classification of workers as to
whether they are employees or independent contractors.
176
On this latter issue, some
US states led by California have altered the legal landscape by putting a greater burden
on employers to prove that workers are in fact independent contractors and not
employees. This could impact the gaming industry by placing greater obligations on
publishers and developers, which have traditionally employed independent contractors
in a number of roles in the development and distribution of games.
1.8.5 – Antitrust Concerns
One of the biggest legal and regulatory issues in the near future will involve antitrust
issues and potentially greater government oversight in this area, especially with some
of the biggest tech companies such as Apple, Google and Facebook. While some of
these issues may not necessarily deal with the video game industry directly, they most
likely will still have an impact on the way business is conducted, for example in dealing
with licensing fees, privacy, access to platforms, and market share.
177
At the same time, significant legal challenges in various countries, dealing with the
business practices of some companies that provide video game distribution platforms
(e.g., Google, Apple, Steam), are making their way through the courts. Many of those
challenges involve complex issues in various jurisdictions that apply different laws on
market share and on licensing fees paid by developers for their games to appear on
such platforms.
In 2020, Epic filed several lawsuits in various jurisdictions claiming that Apple and
Google are monopolies and that their 30% fees
178
for all revenue earned on their
platforms and their requirement that in-app payments be made through their own
174
See Fogel, Stefanie, “Game Workers Unite UK Is That Country’s First Games Industry Union”, variety.com,
December 14, 2018. See also: D’Anastasio, Cecilia, “A Big Union Wants to Make Videogame Workers’ Lives
More Sane, wired.com, January 7, 2020.
175
One recurring issue involves the long hours experienced by some developers in trying to meet milestone
deadlines, commonly referred to as “crunch time”. This has traditionally been associated with developers
trying to finish games to meet their announced release date, but, as more games move to live-service
business models, there is also now more pressure to provide additional content in very short release windows,
resulting in additional crunch time for many developers. See Taylor, Haydn, “What Yesterday’s EU Court
Ruling Means for the Games Industry”, gamesindustry.biz, May 15, 2019. For additional information on some
of the working issues raised by independent contractors in the industry, see Rocks, David, “Boom Times in a
Troubled Neighborhood”, Bloomberg Businessweek, August 31, 2020, accessible at
https://www.magzter.com/article/Business/Bloomberg-Businessweek/Boom-Times-in-a-Troubled-
Neighborhood.
176
See Chapter 6.
177
Apple’s in-app payment system deemed anti-competitive involving a dating app in the Netherlands. Foo
Yun Chee, Sterling, Toby and Nellis, Stephen, “Exclusive: Dutch Watchdog Finds AppleApp Store Payment
Rules Anti-Competitive-Sources”, reuters.com, October 7, 2021.
178
Both Apple and Google reduced their fees to 15% under certain situations, focusing primarily on smaller
revenue-generating companies.
57 Mastering The Game
system were anti-competitive.
179
In September of 2021, the first decision involving this issue was handed down by a
federal judge in California, who ruled that, while Apple should not be deemed a
monopoly (the judge noted that “success is not illegal”), the company had engaged in
anti-competitive practices under California’s Unfair Competition Law involving its “anti-
steering” provisions,
180
and that those practices limited consumer choices on payment
methods. As a result, the court ruled that Apple must allow for developers to advise
consumers on alternative external payment methods via links (e.g., in-app buttons) or
other forms of communication.
181
Notably, the decision did not require Apple to allow for
alternative app stores and payment process systems on its phone.
At the time of writing, it is uncertain what effect the decision will have on licensing fees
(including fees charged by other platforms). Likewise, it is not known how these
alternatives will be implemented and whether they will be embraced by consumers, nor
whether this will eventually lead to lower purchasing costs for them. One thing is certain:
this decision will result in further legal proceedings (both parties have filed appeals)
involving issues with the interpretation and enforcement of the decision.
182
179
See https://cdn2.unrealengine.com/apple-complaint-734589783.pdf and Epic Games, Inc. v. Apple Inc.,
493 F. Supp. 3d 817 (N.D. Cal. 2020) at https://cand.uscourts.gov/wp-content/uploads/cases-of-interest/epic-
games-v-apple/Epic-v.-Apple-20-cv-05640-YGR-Dkt-812-Order.pdf for a copy of the Apple complaint and the
subsequent US District Court's decision. Epic had announced that Fortnite gamers would pay a reduced
amount if they purchased in-app game currency directly from Epic, bypassing the Apple and Google app
stores. Spangler, Todd, “Epic Games Says Apple Has Threatened to Cut Off ‘Fortnite’ Maker’s Developer
Access”, variety.com, August 17, 2020. Apple and Google responded to Epic’s attempt to establish a separate
payment system for Fortnite gamers by banning the game for having violated the company’s guidelines. It
was this action that led to the lawsuit. New users could not download the game, and current users were
eventually unable to play the game on iPhones because the game could not be updated. The US District
Court did not require that Apple reinstate Fortnite on their platform. When the Android version of Fortnite
Battle Royale was launched, it was not available on Google’s Play Store and instead was offered on Epic’s
website. It was reported that Epic believed their site would be attractive enough to draw gamers without the
need to use Google’s platform and would also result in huge savings for the company, which also knew this
approach was not without risks. This reportedly cost Google approximately $50 million in lost revenue from
platform fees. Perez, Sarah, “Google Will Lose $50 Million or More in 2018 From Fortnite Bypassing the Play
Store”, techcrunch.com, August 10, 2018.
180
Under the iOS license agreement, the anti-steering provisions prohibited app publishers from steering
users away from its in-app payments.
181
The court ordered Apple to allow publishers to link to the payment options by December 9, 2021, but a
federal appeals court decided to delay the ruling (the court put on hold the lower court's permanent injunction)
until the appeals process was exhausted which could be at least a year away. Apple argued among other
things that the original ruling would pose privacy and security risks. Epic Games, Inc. v. Apple, Inc., 2021 U.S.
App. LEXIS 36191. At the time of this writing, it was unclear what forms of communication would be permitted.
182
John and Hollister, Sean, “Apple is Appealing the Epic Games Ruling It Originally Called a ‘Resounding
Victory’”, theverge.com, October 6, 2021; and Lyons, Kim “Epic has Appealed Friday’s Ruling in the Epic v.
Apple Case”, theverge.com, September 12, 2021.
Mastering The Game
58
CHAPTER 2
INTELLECTUAL PROPERTY IN THE VIDEO GAME
INDUSTRY
2.1 – The Importance Of Intellectual Property
Intellectual property (IP)
183
is the most important branch of law for video game
developers and publishers to understand and is a vital subject in video game
development contracts, employment agreements, distribution, advertising and
every license in the game industry. As houses are made from wood and stone,
video games are made almost exclusively from IP.
IP law enables developers to commercialize their creative works and protect them
from infringers and competitors who want to exploit their IP and use it without
permission or compensation.
What does someone buy when they buy a game? In the old days before digital
distribution, there were retail computer and video game stores where customers
could choose from a selection of available video games. They would purchase a
box with a manual and a CD made from less than five dollars’ worth of material.
How, then, could people be persuaded to pay $60 or $70 for a product that we
call a “game”? They are persuaded, even eager, to do so because they are really
buying a larger entertainment experience beyond the physical goods. This
experience is legally enjoyed by consumers through a limited license to the IP.
The game engine, concept and in-game art, music, story, game world,
middleware and graphics are all IP.
As we venture into the next generation of game consoles and continue to see an
increase in the number of gaming devices and distribution platforms, including
mobile, social and tablet, more money than ever will be invested in game
development. Since its founding, the video game industry has both embraced
and been driven forward by technological changes and opportunities. There is
nothing to indicate that this trend will not continue to fuel the next generation of
development. Game development for many large titles already meets or exceeds
film budgets in terms of years in production and total budget. Consequently,
protecting that ever-growing capital investment from competitors and pirates is
becoming increasingly important. Of equal importance is harnessing the IP of a
game for maximum value in order to recoup costs and generate profits. This can
mean anything from developing a video game franchise based on the original IP
to exploiting the in-game IP in film, television and merchandise or in other ways.
183
Adapted from the first edition written by S. Gregory Boyd and Jas Purewal. The authors are grateful
for the contribution and updates to this second edition to S. Gregory Boyd, Sean Kane, Rick Zou,
Saphya Council, Matthew Dobill, Dr Michaela MacDonald, Nicoletta Serrao, and Emanuele Fava.
59 Mastering The Game
As simple as these statements are, the questions and strategies generated by
them are more complex.
IP is an emotionally charged issue in the software community at large and the
game development community in particular. Many people are in favor of open-
source initiatives and against software patents, patents in general or even IP in
general. These points of view are clearly influential and are the subject of heated
debate at the highest public policy and legislative levels throughout the world. For
example, when Warner Bros patented its Nemesis system gameplay mechanic
in Middle-earth: Shadow of Mordor, the video game community was in uproar
over a perceived chilling of innovation across the industry because other
developers must rethink using a recurring enemy mechanic. Still, as an
educational and reference tool, this chapter serves as a guide to what the legal
issues currently are, not how they might eventually evolve or how they should be.
The current IP law system is not only complex; it is also constantly evolving in
order to adapt to the ever-changing technological landscape. The limited and
often fragmented harmonization at the international and regional level in key
areas, such as image rights, copyright or the right to free speech (freedom of
expression in the European terminology), further adds to the overall
complexity.
184
Competitors are sophisticated and will try to use the IP system
against your company. For this reason alone, it is important to understand the
current IP legal framework.
In order to start summarizing these concepts and afford a preview of the
remainder of this chapter, the following table contains examples from a game
project and the type of IP law that could be used to protect each component.
IP PROTECTION OF VIDEO GAME COMPONENTS
Copyright
Trade Secret
Trademark
Patent
Music
Code
Story
Characters
Art
Box design
Website design
Advertisements
User interface
Motion capture
Voice acting
Customer mailing
lists
Pricing information
Publisher contacts
Middleware
contacts
Developer
contacts
In-house
development tools
Deal terms
Company name
Company logo
Game title
Game subtitle
Identifiable
“catchphrases”
and non-
traditional marks
associated with
the game or
company
Inventive game
play or game
design elements
Technical
innovations such
as elements in
software,
networking or
database design
Hardware
technical
innovations
184
Some countries may have IP rights that do not exist elsewhere, such as the database right in the
European Union (EU), or their system might be difficult to compare, such as design patents in the
United States and registered and unregistered design rights in the EU.
Mastering The Game
60
2.2 – Copyright
Copyright
185
is arguably the most important IP protection for most game
companies. It easily qualifies as the best tool for protecting game property
because of its power, versatility and ease of use. Copyright protects original
works of authorship. It protects expressions of original works, such as literary,
audiovisual works or computer programs, by granting the rights holder exclusive
rights, including the right to copy or distribute the work. This protection arises
automatically, upon creation or fixation (depending on the jurisdiction: in some
countries, such as the United States and the United Kingdom, a work also needs
to be fixed in a tangible medium of expression to be protected by copyright)
without any formalities (however, see the issue of registration in the United
States), and usually for the benefit of the author. The exclusive rights often last
for the duration of the author’s lifetime plus 70 years after their death.
The copyright system stemmed from the British Statute of Anne of 1709 and
spread throughout the rest of British territories and the United States. In
continental Europe, the “author’s right” system developed from the French
decrees of 1791 and 1793. In the nineteenth century, the concept according to
which the right of authors to control their creative works was directly related to
their personality evolved in France and Germany. Author’s law and copyright are
different concepts, and even within the copyright family the United Kingdom and
United States can diverge substantially.
Sticking to the United States for now, copyright law has its roots in the
Constitution. Specifically Article I, Section 8, Clause 8 provides that Congress
shall have the power “to promote the progress of science and the useful arts, by
securing for limited times to authors and inventors the exclusive right to their
respective writings and discoveries.” The “writings” language focuses on how
Congress derives its power to make laws for copyright. Another critical element
of the phrasing above shows that copyright protects these writings for a limited
time.
Copyright laws across the world are harmonized to a certain degree thanks to the
Berne Convention for the Protection of Literary and Artistic Works, (adopted in
1886 and updated for the last time in 1971).
186
Further uniformity has been
achieved in the European Union (EU),
187
where over the past few decades the
national legislation of member states has been partially harmonized. This has
been done at the EU level (roughly analogous to the federal level in the United
185
In this book, the term “copyright” is used in a broad sense to include author’s right and related
rights, unless otherwise specified.
186
World Intellectual Property Organization (WIPO), “Berne Convention for the Protection of Literary
and Artistic Works”. https://www.wipo.int/treaties/en/ip/berne/.
187
The EU currently has 27 member states, namely: Austria, Belgium, Bulgaria, Croatia, Cyprus,
Czechia, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia,
Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain
and Sweden.
61 Mastering The Game
States) through a range of legislative acts
188
including the Information Society
Directive,
189
the much-discussed Directive on copyright in the Digital Single
Market
190
and the Copyright Term Directive.
191
As a result, while it is possible to
talk in general terms about EU copyright law, there are often differences among
countries. Therefore, this chapter can only give a general overview of EU
copyright law and its comparison with US law.
THE EU LEGAL SYSTEM
The EU is an economic and political association of sovereign European
countries. Each country (‘Member State’) has its own legal system creating
domestic laws for that country. In addition, the EU itself passes legislation. This
legislation in some cases becomes part of each Member State’s legal system
automatically, but the EU legislation more frequently sets out the principles
which Member States are meant to implement in their own ways. As a result,
while in many legal fields there is a degree of similarity between EU Member
States, there are often considerable differences that are at times clarified and
at times exacerbated by Member States and EU court systems. This
inconsistency can sometimes make it hard to state with certainty what the “EU
position” is on a particular topic.
2.2.1 – What Can Be Protected By Copyright?
In the United States, eight categories of works are eligible for copyright protection
under Section 102(a) of the Copyright Act, namely: literary works; musical works,
including any accompanying words; dramatic works, including any accompanying
188
A “directive” is a legislative act that sets out an objective that all EU member states must achieve,
although they are free to draft and implement their own laws on how to do so; “regulations” are legal
acts that apply automatically and uniformly to all EU member states as soon as they come into force.
See European Commission, “Types of EU Law”. https://ec.europa.eu/info/law/law-making-
process/types-eu-law_en.
189
Directive 2001/29/EC on the harmonization of certain aspects of copyright and related rights in the
information society is the reference law on copyright in Europe. This Directive mandates each EU
member state to implement in its legal framework a number of fundamental provisions to ensure the
maintenance and development of creativity in the interests of authors, performers, producers,
consumers, culture, industry and the public at large.
190
In 2019, the European Parliament approved Directive (EU) 2019/790 on copyright and related
rights in the Digital Single Market (DSM). Among other things, this Directive introduces new
exceptions to exclusive rights (including for text and data mining); regulates the use of copyright works
in digital and cross-border teaching activities; permits the use of out-of-commerce works by cultural
heritage institutions; and establishes a protection of press publications concerning online uses. Its
most controversial aspect of this new directive is Article 17, which regulates the use of protected
content by online content-sharing service providers. Until now, most countries have implemented a
legal mechanism whereby internet service providers (such as hosting services, access providers,
social media networks, etc.) were not responsible for the content uploaded or facilitated by its users,
as long as they did not have “actual knowledge” of the illegal content and, if they did obtain such
knowledge, they were obliged to act diligently to remove such information expeditiously. Once the
Member States implement the DSM Directive, this principle will change radically, and content-sharing
service providers will no longer be able to apply such limitation of liability. This will have a considerable
impact on the video game industry, particularly since gameplays are among the most watched videos
on platforms such as YouTube. Gameplays are protected by copyright and in absence of limitation
and exceptions, online content-sharing service providers that permit users to upload them will require
authorization from video game publishers; in the absence of a license, they will have to employ best
practices to ensure the unavailability of gameplays uploaded by their users, in the terms that
prospective national laws will determine.
191
Directive 2006/116/EC on the term of protection of copyright and certain related rights.
Mastering The Game
62
music; pantomimes and choreographic works; pictorial, graphic and sculptural
works; motion pictures and other audiovisual works; sound recordings; and
architectural works.
192
Interactive entertainment is protected in the United States as either an “other
audiovisual work” or, perhaps surprisingly to some, as a “literary work.” This
distinction is important only in relation to the registration of copyright, the
relevance of which will be discussed below. Practicing attorneys often discuss
which designation is more appropriate, but filings using either are common.
Games are not unusual in this way, since other creative endeavors also fall into
more than one category. Registration under the category of “literary work” may
seem strange for a computer program, but Section 101 defines literary works as
including works expressed in “words, numbers or other verbal or numerical
symbols or indicia, regardless of the nature of the material objects such as books,
periodicals, manuscripts, phonorecords, film, tapes, disks, or cards, in which they
are embodied.” Clearly, the source code is a collection of words, numbers and
symbols stored on some media. The United States is not alone in this approach
as both the Agreement on Trade-Related Aspects of Intellectual Property Rights
(TRIPS Agreement)
193
and the World Intellectual Property Organization (WIPO)
Copyright Treaty (WCT)
194
state that computer programs, whether in source or
object code, shall be protected as literary works within the meaning of Article 2 of
the Berne Convention.
As far as games are concerned, copyright covers stories, characters, imagined
environments and geographical locations,
195
music, art, graphics and even the
software source code itself. Moreover, it also protects the game as a whole under
the category of audiovisual or literary work. However, the full scope of copyright
protection is not absolute and is often misunderstood to provide a wide-ranging
monopoly over a video game concept or method of play. In reality, copyright
protects only the expression of ideas, not the ideas themselves.
Under US law, this means two things. First, no game ideas are protected by
copyright until they are fixed into some expressive medium (such as code or print
or a saved art file). Second, similar ideas expressed in different ways are
permitted uses that do not necessarily infringe on another’s copyright (even if, as
we will see more in detail below, at times in a game it may be hard to tell exactly
what the “idea” and the “expression” of an idea is). Determining infringement in
copyright requires comparing the protected fixed expression in the copyrighted
game to the fixed expression of the accused infringer. With the rise of short
development cycles in social and mobile games, this comparison becomes more
complex than ever before, but game industry copyright cases have been
192
United States Code, Title 17, Sect.102(a). Publicly visible architectural works, when used as a
general part of the scenery in games, do not normally require a license to be represented in a video
game because of statutory exceptions. However, prominently featuring buildings (such as making
them the focus of a game level), destroying buildings, using the interior of or distinctive sculptural
elements on the exterior of buildings may all cause an issue. For example, Sony faced difficulties
when it used the interior of Manchester Cathedral for in-game combat. For further details see:
Wikipedia, “Controversy over the use of Manchester Cathedral in Resistance: Fall of Man”,
wikipedia.org. See also Leicester v. Warner Bros., 232 F.3d 1212 (9th Cir. 2000) involving the motion
picture Batman, where no separate protection for sculptural works attached to buildings applied.
193
TRIPS Agreement, Art.10(1).
194
WCT, Art. 4.
195
Such as Middle-earth, Pandora from Borderlands, Mos Eisley from the Star Wars universe, Azeroth
from Warcraft, and the post-apocalyptic world and cities in Fallout.
63 Mastering The Game
illustrative of this quandary since the early 1980s over copyright cases involving
arcade machines and Atari before Facebook and Apple came to prominence.
196
The UK system is arguably the most similar to the US one (for example, fixation
is one of the criteria for subsistence of copyright). The position in the EU is even
more complicated. At the time of writing, EU law is still formally applicable in the
United Kingdom – but since the United Kingdom has now left the EU, national
law will likely start to deviate from the rest of the EU Member States.
197
Generally speaking, “author’s right” countries such as France, Germany and Italy
have traditionally put greater emphasis on a copyrighted work being the creation
of the mind and the author, whose personality is reflected in their work. The
emphasis is not only on protecting the economic interests of the author, but also
their personal and reputational interests. This objective is primarily achieved
through moral rights, which determine the originality requirements for a work to
be protected by copyright, such as the “author’s own intellectual creation” in the
EU, “labor, skill and/or judgement” in the United Kingdom and “modicum of
creativity” in the United States. Without getting into much more detail, in practical
terms the threshold for copyright protection may be higher for some type of works
in “author’s right” jurisdictions than it is in the United States or the United
Kingdom.
Traditionally, each EU Member State could determine, within the boundaries of
the Berne Convention and the EU Directives, the requirements that a work must
fulfill to earn copyright protection. However, over the years the Court of Justice of
the European Union (CJEU) has harmonized the law. In a recent case, the Court
established that two conditions must be satisfied for a work to be protected under
copyright law in the EU. First, the subject matter of protection must be original in
the sense of being the author’s own intellectual creation. Second, only those
elements of the work that constitute the expression (but not the idea itself) of such
creation will be protected.
198
The result is that any developer who wants to seek EU copyright protection for
their video game must fulfill both requirements. These elements may appear
somewhat vague and ambiguous (they can be for lawyers as well), but their
flexibility helps to adapt to different circumstances and cases. That said, as far
as the game industry is concerned, it is safe to assume that all modern video
games are protected by copyright in the EU, at least in some of their elements,
even in the strictest of jurisdictions.
Even though video games are more complex than films, unlike films, they do not
have a specific legal treatment in the EU. Furthermore, most national copyright
laws do not mention video games in the list protected subject matter. Obviously,
this does not mean that video games are not protected by copyright; indeed, the
opposite is true. However, considering that they consist of multiple works and
196
Pac-Man was the source of an early copyright infringement case against K.C. Munchkin. See Atari,
Inc. v. North American Philips Consumer Electronics Corp., 672 F.2d 607 (7th Cir.1982).
197
Kempton, Nick, “Interaction of EU and UK copyright in a post-Brexit world: will video games get
more protection than they bargain for?”, Interactive Entertainment Law Review 3(2) (2020), p.131.
198
Case C‑683/17 Cofemel – Sociedade de Vestuário SA v. G-Star Raw CV (European Court of
Justice (ECJ), September 12, 2019). In order to satisfy the “originality” condition, the Court also
reminded that the work must reflect the personality of its author, as an expression of his free and
creative choices (Case C-145/10, Eva-Maria Painer v Standard VerlagsGmbH and Others (ECJ 7
March 2013). Furthermore, the work for which copyright is sought must be identifiable with sufficient
precision and objectivity (Case C-310/17, Levola Hengelo BV v Smilde Foods BV *ECJ 13 November,
2018).
Mastering The Game
64
other subject matter including literary works, musical compositions, graphics,
maps, phonograms, performances and software, questions occasionally arise
regarding the legal nature of these peculiar works of authorship. In fact,
depending on the legal classification of video games under EU law – are they
computer programs, audiovisual works or some other kind of works? – different
outcomes may be reached. Computer programs, for instance, have their own
special set of rules under EU law, which sometimes significantly diverge from that
of other copyright works.
199
This means that, in some cases, it may be crucial to
understand whether a video game should be treated as a computer program or
as something else.
This was discussed by the CJEU in a case involving the unauthorized sale of
equipment which, once installed on Nintendo consoles, circumvented the
protection system present on the hardware and enabled the console to run
pirated games.
200
The Court concluded that video games constitute complex
matter comprising not only a computer program but also graphic and sound
elements, which, although encrypted in computer language, have a unique
creative value. In other words, in that instance the Court did not apply to video
games the specific EU computer program regime but the general rules for the
other categories of works, which, in that case, were more favorable to the
copyright holder.
201
2.2.2 – What Rights Are Conferred By Copyright?
Another counter-intuitive element of copyright is that it is not the right to do
anything; instead, copyright is a negative right. It does not grant the holder the
right to reproduce a work, but rather it grants the holder the right to prevent others
from reproducing that work. The list of rights specifically set out in Section 101 of
the United States Code, which have their counterparts also in EU copyright
legislation, are the rights to make copies, make derivative works, distribute, public
performance and public display.
Copyright is also easy to invoke. In the United States, copyright comes into being
as soon as an original work is fixed in a tangible medium; in the EU, as soon as
the work is expressed, which in practical terms generally takes place through
some kind of fixation. As soon as plans are drawn or code is written, copyright
arises. In contrast, patents and trademarks invoke important and complex
registration processes and fees, and trade secrets require that certain steps be
followed within the company in order to qualify for protection.
199
Directive 2009/24/EC on the legal protection of computer programs.
200
Case C‑355/12, Nintendo Co. Ltd and Others v. PC Box Srl and 9Net Srl (ECJ January 23, 2014).
201
Under EU law, technological protection measures (TPMs) that permit authors to limit certain acts
with regard to a work are regulated differently for computer software than for other copyrighted works.
The Computer Programs Directive (2009/24/EC) only forbids the marketing of devices whose “sole
intended purpose” is to facilitate the circumvention of TPMs, whereas the Information Society
Directive (2001/29/EC) more broadly forbids the marketing of devices “primarily” – not solely –
“designed, produced, adapted or performed” for that purpose. This has an important practical impact
because, if we consider video games as (entertainment) software, then the more restrictive (for
copyright holders) Computer Program Directive will apply. Therefore, if a TPM circumvention device
has more than one purpose (or feature, which is common), then its circulation does not contravene
the law. On the other hand, if video games fall within the broader scope of the Information Society
Directive, video game producers will have more chance of stopping the distribution of such devices,
because TPM circumvention is likely to be their main purpose, if not their sole purpose.
65 Mastering The Game
Even though registration is not necessary to invoke copyright, it is still a good
idea to register a game in the United States because it changes damage
calculations and is necessary in order to initiate an infringement claim. In the EU
there is no registration requirement for copyright works; copyright in a work exists
as soon as the work comes into existence and there is no legal requirement to
register with a national regulator. This is also the practice in most other countries
that have signed the Berne Convention. We will come back to the topic of
registration below.
2.2.3 – Some Examples Of Copyright
One key element of copyright is that the perimeter of what can be copyrighted is
surprisingly broad, beyond the minimal standards of original expression. From
Botticelli to Breakout, all original creations can be protected by copyright. Early
game industry litigations fought over whether or not games were protectable by
copyright, but eventually, as games grew in complexity, those issues were
resolved in favor of copyright protection both in the United States and in the EU.
The game Breakout is an interesting example because it was the subject of a
series of US cases surrounding its originality and the minimal level of creativity
necessary for protection to arise. Atari tried at least twice to register the copyright
in the game, but registration was initially rejected because of the perceived lack
of originality and simplicity in the artistic display of the game. Visually, Breakout
consisted merely of a rectangular object moving in one plane that reflected a
small ball into a multicolored wall of rectangles. The ball eliminated a portion of
the wall of rectangles and rebounded toward the bottom of the screen, where the
player attempted to move the lower rectangle to redirect the ball back toward the
wall of rectangles. Atari had to fight a series of cases over the application rejection
from 1989 to 1992, but eventually won the fight.
202
This series of cases is
important, not only to game IP but to copyright in general. The cases stand for
the proposition that courts or the Register of Copyright will not judge the creativity
or artistic quality in copyright. Any original fixed work in a tangible medium is
protected.
Copyright is also the basis for infringement claims against games accused of
cloning. In recent years, many claims against cloning have been filed. One
example from 2012 was Spry Fox v. Lolapps, Inc., which involved Triple Town
and its clone, Yeti Town. The claim resulted in a settlement agreement where
ownership of Yeti Town was transferred to Spry Fox.
203
In 2015, Machine Zone,
Inc. v. Ember Entertainment, Inc. was filed, alleging that the game Empire Z was
merely a “re-skin” of Game of War and copied elements such as the overall plot,
theme, mood, setting, pace, characters, economy and sequence. The case was
settled by the parties in early 2016.
204
In 2016, DaVinci Editrice S.R.L. v. Ziko
Games, LLC et al. was filed. While this case involved card games versus video
games, it is illustrative for the video game industry as the copyright allegations
included copying of game rules, character roles, life points and winning
requirements. Ultimately, the court dismissed the infringement claims prior to
202
Atari Games Corp. v. Oman, 298 U.S. App. D.C. 303, 979 F.2d 242 (1992).
203
Pearson, Dan, “Spry Fox wins ownership of Yeti Town as part of Triple Town settlement”,
gameindustry.biz, October 15, 2012. Spry Fox, LLC v. Lolapps, Inc., No. 2:12-cv-00147 (W.D. Wash.,
2012).
204
Machine Zone Inc. v. Ember Entertainment Inc., No. 3:15-cv-01554, U.S. District Court for the
Northern District of California.
Mastering The Game
66
trial.
205
Finally, in a bizarre twist, in 2017 Psychic Readers Network, Inc. v. Take-
Two Interactive Software, Inc. et al. was filed. This case alleged that a character
in Grand Theft Auto: Vice City infringed a copyright in a character, Ms. Cleo,
previously used as The Psychic Readers Network’s spokesperson. Zynga has
also been involved in multiple cloning cases since the start of the company. As
sophistication grows and development costs for social and mobile games remain
relatively low, cloning is occurring more frequently. Practically, mobile clones may
release on an app store and make their money quickly with extreme revenue
techniques before complying with a takedown when someone takes notice. Still,
this is not a new phenomenon in the game industry. In the early 1980s, Atari was
involved in litigation over its Pac-Man IP against a Phillips game entitled K.C.
Munchkin.
206
It is however important to stress that not all game clones necessarily infringe
copyright of the original games. It is often said that as long as the clone does not
copy the art, music, characters, code and so on of the original game, but only its
game rules and mechanics, then no infringement occurs. This is only partially
true. Game rules and mechanics are commonly considered as general and
functional ideas that cannot be monopolized by anyone; this means that different
games can use the same rules and mechanics, provided that they express them
in a different way. It is not always easy, however, to understand whether a certain
aspect of a game is merely an (unprotectable) idea, or rather a (protectable)
expression of that idea. Arguably, a specific combination of the rules and
mechanics of a game may as well be a copyright-protected expression of that
game. As a rule of thumb, if practically all game rules and mechanics have been
copied from an original game, then copyright in that game is likely to be infringed.
This matter was discussed in the 2012 US case, Tetris Holding, LLC v. Xio
Interactive, Inc, in which the court found that certain mechanics-related aspects
of the famous Tetris game were indeed protected by copyright and could not be
used in another Tetris clone (i.e., the dimensions of the playing field; the display
of “garbage” lines; the appearance of “ghost” or shadow pieces; the display of the
next piece to fall).
2.2.4 – US Copyright Filing Information
Although any original work may qualify for protection as soon as it comes into
existence, the copyright can also be registered for additional rights in the United
States.
207
Copyright registration is absolutely necessary to litigate over copyright
infringement in the United States and an early registration usually yields a better
damage calculation. Consequently, it is prudent to register copyright even before
writing a “cease and desist” letter to potential infringers (see Section 2.2.6 on
protecting copyright). Balancing all the factors, the registration is so cheap, easy,
and necessary for real legal teeth that the cost and effort required for the federal
registration are easily worth it.
205
DaVinci Editrice S.R.L. v. Ziko Games, LLC et al., No. 4:2013cv03415 - Document 73 (S.D. Tex.
2016).
206
Ihalainen, Jani, “Retrospective – Copyright in Video Games”, ipiustitia.com, October 27, 2014.
207
See US Copyright Office “Frequently Asked Questions” at http://www.copyright.gov/help/faq/ , for
further information on how to do so.
67 Mastering The Game
In the EU, on the other hand, copyright holders are allowed to litigate copyright
infringement and to claim damages to the full irrespective of whether or not they
have previously registered their copyright. As a matter of fact, copyright is rarely
registered in Europe. Some countries, such as France, Italy or Spain, offer a
voluntary registration system, the benefit of which is very much limited to the
provision of a rebuttable presumption of ownership of the copyright work and legal
certainty that the work was created on or before the registration date.
In practice, registering a copyright in the United States entails submitting a copy
of the work to the US Copyright Office, filling an application form and paying a
filing fee. The form required to register a copyright is only a few pages long and
the cost is approximately $45. The Copyright Office provides detailed instructions
and information on completing the forms and contact information for questions.
208
Of all the forms of IP that benefit from registration, this is the easiest and
cheapest.
2.2.5 – Term Of Protection
The length of copyright protection is another element that makes it attractive to
game developers. At the international level, the minimum duration is 50 years
after the death of the author; however, many national legislations provide for
longer terms (70 years in the United States and the EU, 100 years in Mexico).
Copyright duration has varied over time. In respect of computer games, in the
United States the length of copyright for works created after 1978 is 95 years
after publication and 120 years after creation for corporate creations.
209
For
personal creations, it is the life of the author plus 70 years.
All EU member states have a uniform term of protection for creative works;
generally, this is the life of the author plus 70 years for personal creations and 70
years after publication for corporate creations. When there is joint authorship, the
term of protection is 70 years from the death of the last surviving author.
Importantly, duration concerns only the exploitation rights but not the author’s
moral rights (the right to be identified as the author of a work and to object to
derogatory treatment of a work), which have divergent treatment in terms of both
content and duration in each member state (moral rights are discussed in
subsection 2.2.13, below).
These rules mean that no one can copy the original Pac-Man until about 2100.
They also mean that derivative works (works based on one or more preexisting
works, such as a sequel or prequel game) require a license until that time expires
as well (derivative works are discussed in subsection 2.2.8, below). For Pac-Man,
this means that cartoons, board games, clothing or re-creating that yummy Pac-
Man cereal are not allowed without the appropriate legal permissions. Around the
year 2100, barring a legislative extension prompted by lobbyists, people can go
wild and cover the planet with Pac-Man copies and derivative works after the
208
The US Copyright Office maintains a useful website at https://www.copyright.gov/ to help people
through the process of copyright registration. It also provides informational circulars in non-technical
English at https://www.copyright.gov/circs/, explaining copyright registration for creative works and
other topics. Copyright Office Circular 61, available at https://www.copyright.gov/circs/circ61.pdf,
provides detailed information on the copyright registration of computer programs and video games.
209
This discusses what publication is, among other questions: US Copyright Office, ‘Definitions’
http://www.copyright.gov/help/faq/faq-definitions.html.
Mastering The Game
68
original game falls into the public domain, as long as they are careful not to
infringe any other IP right such as trademarks – but that is a story saved for later.
Consider how length affects what is possible for copyright. The length of
protection is intimately tied to potential revenue generation. Game developers
can use copyright to protect their original expressions, build new games and sell
related products for a century or longer. The economic rights can literally be
developed and exploited over generations. Mickey Mouse, Star Wars and
Superman, which have existed for decades and been exploited across multiple
media, including games, are excellent examples of this. For a period, the game
industry believed that ever-increasing technological sophistication and graphical
representation were key to high revenue-generating games. Successful social
and mobile games such as Candy Crush and Angry Birds now confirm that
simple, even 2D, games can achieve eight- and nine-figure revenues.
210
These
games are likely to remain popular to some degree over a much longer lifecycle
than originally anticipated through the games themselves as well as popular
derivative properties (which will be discussed later).
2.2.6 – Protecting Copyright
The most basic step in dealing with copyright infringement is to send out a “cease
and desist” letter. This letter simply explains that you own the copyrighted
material, that the material is registered (if the letter is sent in the United States),
and that the other party is using the material without your permission, in other
words they have not secured a license from you. The letter usually goes on to
explain the penalties for infringement and demands the other party to “cease and
desist” from using the material.
If the infringement is online, a similar letter can be sent to the other party’s Internet
service provider (ISP) – a Digital Millennium Copyright Act takedown notice in the
United States or an e-Commerce Directive (2000/31/EC) takedown notice in the
EU. Most ISPs do not want to bear the potential liability of hosting copyright-
infringing material. This letter to the infringer and/or the ISP is often enough to
stop the infringer, although a potential infringer may challenge the allegation.
211
In any event, this process should be managed by an attorney. This is the case
particularly in the United States, where strict requirements exist for the content of
210
Candy Crush Saga brought in an estimated $930 million in revenue between August 2017 and
July 2018 according to Sensor Tower, while the annual revenue for Angry Birds in 2017 reached
almost €300 million ($325 million). Nelson, Randy, “King Just Had Its Best 12 Months of Candy Crush
Revenue Ever”, sensortower.com. August 15, 2018. See also Clement, J., “Annual revenue
generated by Rovio Entertainment from 2010 to 2020”, sensortower.com, July 15, 2021.
211
See Myers, Gary, Concise Hornbooks: Principles of Intellectual Property, 3rd edition, West
Academic Publishing, 2017, pp. 200-201. Under the Digital Millennium Copyright Act safe harbor
provision, a “notice and takedown” notice must meet certain requirements. The notice must be in
writing either in physical or electronic form to the designated agent of a service provider and include:
1. The signature of the copyright owner or owner’s agent, in physical or electronic form.
2. Identification of the: (i) copyrighted work(s) infringed; (ii) the infringing activity; and (iii) the
location of the infringing activity (this can be done by providing the URL).
3. Contact information of the notifying party that is sufficient for the service provider to contact
them (this can include an email address, phone number or address).
4. A statement that the notifying party has a good faith belief that the material is not authorized by
the intellectual property or copyright owner, its agent, or the law.
5. A statement that the information provided is accurate and the notifying party is authorized to
make the complaint on behalf of the intellectual property or copyright owner.
69 Mastering The Game
the letter and legal penalties for sending a letter that does not involve a legitimate
claim.
In the EU, the risk of incurring negative consequences because of sending such
a letter, provided that the sender is able to show their good faith, is generally
lower. National laws of EU Member States tend not to require the same level of
formalities as those expected under US law. Nevertheless, when dealing with
copyright claims, it is generally advisable to involve an attorney in the process.
This would, among other things, avoid the other party filing a lawsuit seeking
recognition from a court that the claim in the “cease and desist” letter is legally
unfounded, which could have negative implications for legal costs, given that the
court could order the party that made an illegitimate claim to reimburse the other
party’s legal costs.
2.2.7 – Penalties For Infringement
Copyright owners have a range of exclusive rights that enable them to control
how the work is used. Engaging in any of the protected acts without the owner’s
permission and outside of legal exceptions may result in copyright infringement.
One of the remedies available to game developers is the option to prevent
infringing parties from selling works that include the developer’s copyrighted
work(s). Developers can also sue for damages and profits equal to the profits
made by the infringing parties from selling the illegal works. Furthermore, in the
United States, willful copyright infringement carries a statutory penalty of up to
$150,000 per work infringed. In the EU, broadly speaking, there is no principle of
statutory or punitive damages in civil copyright infringement lawsuits. For that
reason, awarded damages are substantially lower in the EU than in the United
States, as are litigation costs.
In a typical copyright lawsuit filed in June 2004, Midway brought a case in the
United States against Sony Ericsson for violating its copyright on the game
Defender from 1980.
212
Midway claimed that Sony Ericsson was using the game
on its mobile phones without permission. Midway requested that the court award
damages and reimbursement of its legal fees, and required Sony Ericsson to turn
over all mobile phones, software and other materials in its possession related to
the alleged copyright violation. The case was settled out of court and dismissed
a few months later, but still serves as an excellent example of the remedies that
can be requested in copyright cases.
In another US lawsuit started in 2007, Epic Games accused Canadian game
developer Silicon Knights of having incorporated Epic’s Unreal Engine 3 code
into its own engine, thus infringing Epic’s copyright over the code. In 2012, Epic
was eventually awarded over $9 million on various grounds, including copyright
infringement. But this was not the end of it. The court also ordered Silicon Knights,
among other things, to recall and destroy all unsold retail copies of the games
they had built with Unreal Engine 3 code, which included relatively popular games
such as Too Human and X-Men Destiny. In 2014, following the dismissal of their
appeal against the decision,
213
Silicon Knights filed for bankruptcy. This is another
212
Jenkins, David, “Midway Sue Sony Ericsson”, gamasutra.com, July 2, 2004.
213
Crecente, Brian, “Court upholds findings in $9.2M Epic Games, Silicon Knights lawsuit”,
polygon.com, January 10, 2014.
Mastering The Game
70
good example of what copyright infringement can potentially lead to and the
power of copyright protections.
Copyright infringement can also lead to criminal penalties resulting in prison time,
particularly when people violate copyright by illegally selling or distributing games
over the Internet. In the United States this is provided for under Title 17, Section
506(a) and Title 18, Section 2319 of the United States Code. Criminal penalties
also exist in Europe, where they largely depend on national legislation as they
are not harmonized at the EU level.
In the United States, an instance of this came to light in February 2004 when
Sean Michael Breen, leader of the RAZOR1911 warez group, received a four-
year prison sentence and was ordered to pay nearly $700,000 in damages for
copyright infringement. He was one of 40 people arrested in a sting operation by
US Customs Service “Operation Buccaneer”.
214
Another example surfaced in early 2006, when a court in Minnesota convicted
Yonatan Cohen for criminal copyright infringement for making a game console
that included unlicensed Nintendo games. He was sentenced to five years in
prison, lost hundreds of thousands of dollars in cash and property and was
deported to Israel. Worse, his punishment included the use of his own resources
to pay for advertisements in game magazines warning about the penalties for
copyright violation. The advertisements showed him front and center, with a
picture of his copyright-violating device, a description of his punishment and a
caption that read: “This ad was paid for by Yonatan Cohen as part of his restitution
to warn others about the dangers and penalties associated with violating the
copyrights laws”.
In Europe too, Nintendo has taken both civil and criminal legal actions against
the distribution of unauthorized software and hardware, with one of those cases
also reaching the CJEU.
215
In 2017, for instance, the Italian Supreme Court
confirmed two criminal sentences against the sellers of unauthorized equipment
that enabled Nintendo consoles to run pirated games. In addition to fines of
several thousand euros each, the sellers were sentenced to imprisonment for up
to one year and eight months.
216
2.2.8 – Derivative Works
The idea of a “derivative work” is critically important in the way that copyright is
used in the game industry. A derivative work is a new work derived from an
existing copyrighted work. The language of the US statute defines a derivative
work as being “based upon one or more preexisting works, such as a translation,
musical arrangement, dramatization, fictionalization, motion picture version,
sound recording, art reproduction, abridgment, condensation, or any other form
in which a work may be recast, transformed, or adapted” (United States Copyright
Act, Sect.101).
214
United States v. Breen, Case No. 02-CR-40216 (archived), (N.D. Cal., Oakland, February 10,
2004). See Wikipedia, “Operation Buccaneer”, wikipedia.org, July 10, 2021; and Thorsen, Tor, “Game
pirate gets four years jail time”, gamespot.com, February 12, 2004.
215
Case C‑355/12, Nintendo Co. Ltd and Others v. PC Box Srl and 9Net Srl (ECJ, January 23, 2014).
216
Cases Nos 57858/2017 and 38204/2017 of the Italian Supreme Court.
71 Mastering The Game
What does it mean when you read that a company has acquired “the rights” to
make a game based on a film, or vice versa? In the copyright sense, this often
means that the game company has acquired the right to make a derivative game
based on a film, or a studio or producer has purchased an option to acquire the
right to make a film or television show based on a game. The movie Sonic the
Hedgehog is a derivative work created from the Sonic the Hedgehog game
series. On the other hand, Mad Max was first a film and then a derivative work
was created, turning the copyrighted material in the film into a game and comic
book series. In the past, games based on movies were often quickly-developed
film tie-ins (E.T. the Extra-Terrestrial being the most infamous example).
Whereas now, games based on film franchises can be integral parts of a
cinematic universe, such as Star Wars Jedi: Fallen Order, which can create
original characters that are then introduced in other works such as television
series and comic books.
Now, it is easy to imagine that this process gets complex rather quickly. Consider
The Lord of the Rings, a world described in a series of books by J. R. R. Tolkien.
The entity that controls the copyright to this world has granted a copyright license
to make derivative works for board games, computer games, films and replica
weapons; all these products are derivative works that also have their own
copyright. Any material in a derivative work that is not contained in the underlying
work is copyrightable as a new work. Furthermore, this new material may even
be licensable itself.
Continuing with The Lord of the Rings example, this offers a fascinating derivative
works case study in the game industry. Starting in 2001, Electronic Arts
developed game series, including the first Battle for Middle-earth game, based
on a license from the Peter Jackson films. This meant that the games from
Electronic Arts could only produce game content, or derivative work, that came
from the Jackson films. In 2005, while creating the Battle for Middle-earth sequel
and other Rings games, Electronic Arts acquired a license to produce a game
based on the entire world of fiction as described in the Tolkien books. This license
to make derivative works based on the books opened up a new territory for
creativity. Here, Electronic Arts was licensing a subset of material from one
derivative work and later went on to acquire a license for the entire base of
material. In this instance, interactive media is not so different from traditional
media. For example, Amazon’s $465 million dollar Lord of the Rings series will
not be able to use much of Tolkien’s original plot because of license management
with the Tolkien estate.
217
Netflix’s Witcher television series, on the other hand, is not meant to be derivative
from the Witcher games (an adaptation of Andrzej Sapkowski’s books from the
1990s), despite its star Henry Cavill being drawn to the project from the games.
The Witcher saga was largely popularized due to the games by CD Projekt Red,
but the showrunners of the television series made it clear that their product was
only “a straight adaptation of the books”. This means that the series cannot take
anything from those elements that are unique to the games, one example being
completely different designs for main character Geralt’s wolf pendant in the
television series and game. This is arguably easier said than done, considering
217
Games Industry International, “EA Granted Rights to Develop the Lord of the Rings Games Based
on J.R.R. Tolkien’s Epic Literary Fiction”, gamesindustry.biz, July 25, 2005; and Canales, Katie,
“Amazon is spending a whopping $465 million on ‘The Lord of the Rings’ season 1: This will be the
largest television series ever made”, businessinsider.com, April 16, 2021.
Mastering The Game
72
the role that the games have had in shaping the overall tone and style of the
Witcher’s Continent and characters, and how iconic some of the game moments
have become.
218
Other good examples of complex chains of derivative works can be found in the
LEGO franchises: the LEGO Harry Potter games are derivative works from the
LEGO Harry Potter toys, which in turn are derivative works from the Harry Potter
movies, which are derivative works from the Harry Potter books. The LEGO
Batman Movie Game is a mobile game which is a derivative work from the film
The LEGO Batman Movie, which, in turn, is a derivative work from the LEGO
Batman toys, which are derivative works from the Batman comics. (Chapter 4
deals with the importance of obtaining rights from the correct party).
2.2.9 – The Public Domain
What happens to copyrighted works after the protection expires, and how does
that affect game copyright specifically? The short answer is that a formerly
protected work that loses its IP protection passes into the public domain. This is
a particularly exciting idea because anyone, even game developers, can use
material in the public domain to create new works. As a rule of thumb, the older
a work is, the more likely it is to be in the public domain. Nevertheless, the fact
that a character or work is in the public domain does not provide automatic
protection because later works that do not meet public domain requirements and
other factors can create arguably protectable elements. For example, Arthur
Conan Doyle’s estate frequently challenges adaptations of Sherlock Holmes, of
which only works prior to 1926 are in the public domain at the time of writing.
Most recently, the Doyle estate sued Netflix over its Enola Holmes project, which
is based on a separate novel series by Nancy Springer, for Netflix’s depiction of
Sherlock which, it contended, was too emphatic, since the character only became
“warmer” in Doyle’s stories after 1926 when he “became capable of friendship
[and] began to respect women.”
219
In fact, a 2014 case established that Sherlock
liking dogs was a protectable trait.
220
The table below shows a greatly simplified set of rules for determining when a
work passes into the public domain in the United States. Law professor Laura
Gasaway has produced a much better chart, which is one of the most cited tables
for determining the expiration of US copyright. The Gasaway chart and another
one from Cornell University are referenced in the table below.
218
O’Connor, Alice, “If Netflix’s Witcher isn’t based on the games, why that shot of Geralt in the bath?”,
rockpapershotgun.com, October 31, 2019.
219
Conan Doyle Estate Ltd. v. Nancy Springer et al., 1:20-cv-00610, U.S. District Court for the District
of New Mexico.
220
Klinger v. Conan Doyle Estate, Ltd., 761 F.3d 789 (7th Cir. 2014).
73 Mastering The Game
IS THE WORK IN THE PUBLIC DOMAIN?
Work first published before
1926
Public domain
Work first published between
1926 and March 1989
Depends on whether the work was published
with a notice of copyright registration and
whether the registration was renewed
Work first published after
March 1989
Under copyright for 70 years after the death of
author, or if a work of corporate authorship, the
shorter of 95 years from publication or
120 years from creation
In the EU, as mentioned above, copyright duration has been harmonized for all
member states and normally lasts for 70 years after the death of the author,
irrespective of the date on which the work was first published.
221
Before making any final decision, it is prudent to check with an IP counsel before
using works assumed to be in the public domain. In the United States, particular
caution should be used in respect of works created outside the United States or
between 1926 and 1989. There may also be special circumstances surrounding
a particular work that limit its use in a game. A common example of such special
circumstances is when public domain works have been used previously to create
new works. As discussed above, these new works are derivative works. They
have their own new IP protection for the new elements contained within them, but
the underlying public domain works remain in the public domain.
The story of Robin Hood is an excellent example of a special public domain
situation, because the story is so old it is practically a fairy tale. There may have
been someone who performed similar feats in medieval England, but the myriad
of stories does appear exaggerated. It is also true that there have been countless
books and movies using the Robin Hood story. There have also been several
video games based on Robin Hood, his merry men, the Sheriff of Nottingham and
Maid Marian. The main point is that the underlying story and characters form part
of the public domain, but when creating new stories using this inspiration,
developers should be careful not to infringe on modern works that still have
copyright protection. The license-hungry game developer should be encouraged
by a secondary point, that many popular stories and characters are now available
for free game development, including much of the great art and literature from
the nineteenth century and earlier.
Another important example of the public domain comes in the form of myths,
history and cultural lore. Anyone can use these as familiar settings to build games
because they are so old, and their authorship is collective and forgotten.
221
However, in certain circumstances, EU Member States could provide that, insofar as a once
expired national copyright over a given work was revived by effect of the harmonization of the
copyright duration by the EU, copyright over that work does not give rise to payments by persons who
in good faith started to exploit the work at the time when it was in the public domain (recital (25), Term
Directive).
Mastering The Game
74
Before the trademark dispute and subsequent cancellation of the Microsoft
project Mythica, the game was going to use a place named Muspellheim. Dark
Age of Camelot also uses the name Muspellheim. Since Muspellheim is a place
from Norse mythology, both companies can use this name as a setting for their
games. That story is not under copyright protection because the author or authors
of those myths have been dead for centuries. This is similar to using “Mount
Olympus” or “Hell” as a setting in a game. On the other hand, using “The Death
Star” or “Tatooine” for game development names would be an entirely different
case because these places, as story elements, are the IP of the Star Wars
universe. These names were created recently by an author and are protected by
copyright as story elements. Although they are such a pervasive part of our
cultural consciousness and even more well-known than Muspellheim, they
cannot be used in games without permission. Any use of these names in new
and similar stories would contribute to a copyright infringement claim.
Historical events are also not subject to copyright, but the stories created out of
them may be. An example is World War II, a fertile era for game development.
No one can copyright the specific events of that or any historical period. The
Battlefield, Call of Duty and Hearts of Iron series can all use tanks, weapons and
uniforms that are historically accurate. Furthermore, they are not infringing each
other’s copyright because the games are merely representing historical facts.
222
That said, historical events also involve real people who may have proprietary
rights separate from copyright. In 2014, CMG v. Maximum Family Games was
filed in the United States alleging that the inclusion of General Patton in the
Legends of War game violated his right of publicity. The case was settled in 2015
following the filing of a motion to dismiss by Maximum Family Games.
It is important to remember that copying a story inspired by historical facts may
still result in copyright infringement, but merely copying the historical facts will
not. For instance, a developer cannot make a game based on the movie Saving
Private Ryan without the appropriate license. A developer can, however, make a
game about Pearl Harbor or other WWII events as long as they are creating the
game around the historical event and not the movie of the same name.
222
Having said that no copyright infringement exists, trademark infringement has still been alleged in
certain circumstances. In 2012, Electronic Arts sued Textron (the makers of Bell Helicopters) in the
United States, seeking a declaratory judgment concerning its right to include Bell Helicopter
trademarks in its game. The case settled in 2013 following the court’s decision not to dismiss Textron’s
trademark claims. In May 2013, Electronic Arts publicly announced that it would no longer license any
weaponry for use in its games; see Nayak, Malathi, “Video game maker drops gun makers, not their
guns”, reuters.com, May 7, 2013. In 2020, Activision won a legal battle against the manufacturers of
the real-life Humvee military vehicles. According to the Court, the inclusion of Humvees in Activision’s
Call of Duty series made the games more realistic and was therefore allowed – the artistic goal of
realism being a viable defense against trademark infringement. Similarly, when Pinkerton Consulting
& Investigation company claimed that Take-Two Interactive and Rockstar Games were infringing its
trademarks by featuring agents of the “Pinkerton Detective Agency”, who also wore the related badge,
within the game Red Dead Redemption 2, Take-Two Interactive and Rockstar Games filed a
declaratory judgment in order to be declared not liable for trademark infringement based, inter alia,
on the argument that references in the game were historical. Pinkerton later withdrew its claims
against Take-Two and Rockstar, which in turn declared that they would not continue legal action
against Pinkerton. Things may also get more complicated when parody – not realism – is the reason
why a certain vehicle was included in the game, which is what had happened in a French case
involving the Grand Theft Auto “Turismo” cars (see Section 2.3.11 on unfair competition).
75 Mastering The Game
2.2.10 – US Scènes à Faire Doctrine
The US scènes à faire doctrine is similar to public domain property. This doctrine
recognizes that some expressions of ideas are so often used that they cannot be
copyrighted by themselves. An example of this is the fairy tale beginning, “Once
upon a time…”. So many fairy tales begin that way that a fairy tale-based game
could certainly begin that way, too.
223
Other scènes à faire doctrine examples
would be generic characters or group of characters in a fantasy genre, such as
wizards or dragons. These species and their general characteristics are not
copyrightable, but specific depictions of these characters, such as Gandalf or
Drizzt, would be.
Although scènes à faire is originally a French term, the same doctrine is not
formally recognized in EU copyright law, although the requirements of originality
for copyright works under EU law would most probably lead to a similar outcome.
2.2.11 – US Fair Use
The concept of “fair use” is commonly discussed and misunderstood in copyright
law. As a general notion, fair use means that one party may use a portion of a
copyrighted work for a limited purpose without asking permission from the
copyright holders, in other words without paying for a license. This concept is
stipulated in the US statute and requires four conditions to be considered, as per
the table below.
As one might imagine, fair use can constitute a grey area at times. It is commonly
brought up by parties opposing copyright infringement, but is not a perfect
defense.
FOUR FACTORS IN FAIR USE
1. The purpose and character of
use
Educational uses and uses in parody are
more often protected than strict commercial
copying.
2. The nature of the copyrighted
work
Using sections of a commercial work is more
likely to result in a finding of infringement.
Copying creative fictional works is more likely
to result in a finding of infringement than
copying factual compilations.
3. The amount and
substantiality of the portion
taken
Taking a large portion from a work is more
likely to result in a finding of infringement
than taking a small portion.
4. The effect of the use on the
potential market
Demonstrably weakening the market for the
copyrighted work is more likely to result in a
finding of infringement.
223
See the Fort Apache case discussing a Paul Newman film: Walker v. Time Life Films, Inc., 784
F.2d 44 (2nd Cir.1986).
Mastering The Game
76
There are two common pitfalls relating to fair use. First, fair use is a US concept.
Most other countries, especially in Europe, do not provide for such flexible
provisions allowing copyrighted material to be used without a license.
224
This
means that a game company hoping to incorporate some copyrighted material
into a game as a “parody” or other traditionally shielded type of fair use may run
into problems when selling its game in other countries. A small clip intended as a
humorous interlude may lead the company into litigation or forgoing sales outside
the United States. This concept may also extend to marketing and content, for
example, on social media platforms that vary copyright claims procedure by
country.
The second point to remember about fair use is that it is a defense (rather than
an exception) to a claim of copyright infringement. This means that a copyright
holder in the United States can certainly sue the company that included the clip
for using a copyrighted work or a derivative of that work without a license. After
the case is brought, the law grants the offending company the opportunity to
argue the merits of fair use. This means that a company plainly operating within
the traditional boundaries of fair use is still open to litigation and, therefore, open
to the associated costs and bad publicity associated with a copyright litigation. In
short, the decision to use copyrighted material in a game under the protection of
fair use poses a risk and should be weighed with due care.
Recently, the concept of fair use in video games was put to the test when a
company claiming to own copyright to tattoo designs of several famous National
Basketball Association (NBA) players filed suit against 2K Games and its parent
company, Take-Two Interactive, alleging that 2K Games infringed upon its
copyrights in the NBA players’ tattoo designs by reproducing them on player
likenesses in NBA 2K games.
225
The court ultimately determined that 2K Games’
reproduction of the NBA players’ tattoos constituted fair use, and that beyond fair
use: (a) 2K Games’ use of the tattoos was so insubstantial that it constituted de
minimis use of the designs, nonactionable for copyright infringement; and (b) the
plaintiffs granted an implied, sub-licensable license to the NBA players in
question when they inked the tattoos on their skin, knowing that the players were
likely to appear in public, on television and in other forms of media. More recently,
however, another US court in a very similar case involving tattoos on an athlete
ruled against 2K Games motion for summary judgment seeking to dismiss the
case on fair use, implied license and de minimis use in their WWE 2K wrestling
game series.
226
2.2.12 – EU Copyright Exceptions And Limitations
The EU counterpart to the US fair use doctrine is the existence of certain statutory
exceptions and limitations to copyright in the national legislation of EU member
states.
224
Hugenholtz, P. B. and Senftleben, Martin, “Fair Use in Europe: In Search of Flexibilities”,
papers.ssrn.com, November 15, 2011.
225
Solid Oak Sketches LLC v. 2K Games, Inc., 449 F. Supp. 3d 333 (S.D.N.Y 2020).
226
This case involved tattoos that appeared on the professional wrestler Randy Orton in 2K Games’
WWE 2K wrestling game series. Alexander v. Take-Two Interactive Software, Inc., 489 F. Supp. 3d
812 (S.D. III. 2020).
77 Mastering The Game
Previously, there had been only one, rather technical, exception to copyright
mandated by EU law for all member states, allowing for:
“[t]emporary acts of reproduction […], which are transient or
incidental [and] an integral and essential part of a technological
process and whose sole purpose is to enable: (a) a transmission
in a network between third parties by an intermediary, or (b) a
lawful use of a work or other subject matter to be made, and
which have no independent economic significance.”
227
However, this exception has little or no impact for developers; essentially, it only
allows third-party service providers to make temporary copies of works insofar as
that is necessary in order to carry out certain technical activities (such as
browsing, caching and reproduction on Internet routers).
EU law also provides for a long list of other possible copyright exceptions and
limitations that member states are free to implement in their national laws. While
these exceptions and limitations are purely optional, the list is exhaustive and no
other exception or limitation may be added to national laws.
In general terms, EU exceptions and limitations are quite narrow, as a number of
specific conditions need to be met for an exception or limitation to apply.
Moreover, EU exceptions and limitations can apply only insofar as they also
satisfy the “three-step test”. This test mandates that exceptions and limitations
can apply only to certain special cases provided that they do not conflict with the
normal exploitation of the copyrighted work and do not unreasonably prejudice
the legitimate interests of the copyright owners.
The most relevant of the possible EU exceptions and limitations relate to:
• uses for the purposes of caricature, parody or pastiche (i.e., a style that
imitates another style);
• uses of copyrighted works made to be located permanently in public
places, such as monuments or sculptures (so-called “freedom of
panorama”);
• quotations for purposes of criticism or review;
• incidental inclusions of a copyrighted work in other materials;
• uses for the purpose of illustration for teaching or scientific research;
• non-commercial reproductions made by a natural person for private use;
• non-commercial reproductions made by public libraries, schools or
museums;
• non-commercial uses for the benefit of persons with disabilities.
• These and other copyright exceptions and limitations have been adopted
differently across Europe.
228
227
Information Society Directive (2001/29/EC), article 5(1). Note that the DSM Directive (2019/790)
introduced more mandatory exceptions for text and data mining, cross-border and digital teaching
and preservation of cultural heritage; the implementation deadline for EU member states was June 7,
2021.
228
A useful website at https://copyrightexceptions.eu maps all the different “selections” of exceptions
and limitations by the EU member states.”
Mastering The Game
78
Similar to the US fair use doctrine, EU copyright exceptions and limitations affect
video games in two ways. First, the copyright over a game cannot be enforced if
a valid claim to any of these exceptions is made (for example, a parody of a video
game may be possible even without the authorization of the owner of the
copyright over the game). Second, a game can lawfully incorporate third-party
copyright work insofar as it does so under any of these exceptions (for example,
a game character may freely parody a film character). Before applying any of
these exceptions and limitations in the EU context, it is recommended that game
developers seek the help of a specialized legal expert to determine their correct
application.
2.2.13 – Moral Rights
Moral rights are a concept that originated in the legal systems of France and
Germany and spread from there, assisted in part by international treaties such as
the Berne Convention. At the international level, moral rights are rights granted
to the authors of creative works first so that they can be identified as the author
of the work in certain circumstances, such as when copies are issued to the
public, and second to enable them to object to derogatory treatment of the work
that amounts to a distortion or mutilation or is otherwise prejudicial to the honor
or reputation of the author. Moral rights are therefore essentially concerned with
protecting the reputation of an author. Beyond these two moral rights, national
legislations sometimes grant additional moral rights.
229
There are some important caveats regarding moral rights. First, they are
associated with the author and cannot be assigned, transferred (except to the
author’s heirs, upon his or her death), or sold (although, in contracts, the author
will frequently try to secure their moral rights to the extent possible). Second, in
some jurisdictions such as the United States and the United Kingdom, a moral
right has to be publicly asserted in order to be enforceable; this is why the
beginning of many non-US literary works includes wording stating that the moral
rights of the author are asserted. Third, although this does not apply to some
prominent jurisdictions such as France and Italy, in some countries the author
can waive their moral rights. Sometimes the waiver needs to be specific, in other
words to identify the work and the uses for which moral rights are waived.
Consequently, whenever there is an assignment (which is a written transfer of the
author’s rights, obligations, and benefits to another party), sale or transfer of a
copyright work, a well-drafted contract will include a waiving by the author of any
corresponding moral rights. Lastly, in the United States, moral rights do not apply
to computer programs (meaning, in practice, computer code, but not related
works such as game artwork). For all these reasons, it is rare for moral rights to
cause issues in game development.
2.2.14 – Copyright Ownership, Licenses And Chain of Title
The author of a work or in the case of a work for hire, the owner of a copyright,
can transfer the copyright using an assignment agreement. Usually, the author
229
For instance, the right of retraction and first publication in France or the right to object to false
attribution, as a separate right, in the United Kingdom. This is quite common in Europe and Latin
America.
79 Mastering The Game
or owner permanently assigns the copyright to another person or entity and the
new rights holder will then have the right to prevent others from using the work in
violation of copyright laws. An assignment agreement is different from a license,
the latter being a temporary permission to use the work without risking violating
the copyright. In Prince v. Gearbox Software, LLC et al., composer Bobby Prince
sued Gearbox, Apogee Software, and 3D Realms for unpaid royalties in
connection with sixteen original songs that Prince composed for Duke Nukem
3D.
230
In this case the work, or the songs, were licensed by Apogee under an
exclusive contract; the license was not transferred when Gearbox acquired the
Duke Nukem property. The parties all settled, but it is important to follow the chain
of title and be clear on what kind of transfer is being used and how is it limited.
2.2.15 – Common Questions About Copyright
Is mailing a sealed envelope proof of copyright?
Mailing a sealed envelope to a person with a copy of the company’s newest game
is not remotely the same as registering the copyright for the game. Sometimes
called “the poor man’s copyright,” in the United States this procedure has no legal
effect. At best, it may prove that the material was in a certain form on a certain
date, but that evidence is open to challenge since an individual can mail an
unsealed envelope to themselves and seal it later. In the EU, depending on the
country concerned, a sealed envelope with an uncorrupted stamp from the post
office may have some probative value. That said, actual copyright registration is
easy and inexpensive, so there is little reason to resort to mailing a sealed
envelope when mailing a form and payment to the Copyright Office is nearly as
easy, or, outside the United States, there is an alternative national registration
system available.
In the United States, is a copyright holder entitled to $150,000 in
damages per instance of infringement?
The statutory damages clause for copyright infringement is often misinterpreted.
A copyright holder is entitled to up to $150,000 in damages per instance of
copyright infringement in the United States. This is for willful infringement of a
registered copyrighted work. Furthermore, it is not per copy of the registered
work, it is per instance of infringement. Making 10,000 copies of a particular game
or film does not multiply the damages by 10,000. The game or film is one
copyrighted work and that counts as one instance of infringement. The damage
calculation may end up becoming more than $150,000 through other damage-
calculation mechanisms such as calculating ill-gotten profits or lost sales, but it is
not the result of multiplying the number of copied units by $150,000. The
damages may also add up because most games actually contain many copyright
works. The number of copies does not directly multiply the damages under the
willful damages statutory section. The number of works, not the number of copies,
is most significant. That said, as noted previously, statutory damages for
copyright infringement are not typically available for countries outside the United
States.
230
Prince v. Gearbox Software, LLC et al., 3:2019cv00380.
Mastering The Game
80
2.3 – Trademark
Trademarks focus on pushing information about the company out into the public.
In fact, a successful trademark is one that allows consumers to recognize the
company and its products or services instantly when they see the mark. Logos,
images and catchphrases all qualify as trademarks and form part of a company’s
goodwill. The Xbox, PlayStation or Apple logos are immediately recognizable and
communicate certain messages about the source and expected quality directly to
consumers. Brand recognition and association with a particular company is the
purpose of a trademark.
Trademarks are arguably the second most important type of IP protection for
game companies after copyright since a good trademark can set a company and
its games apart from others in the minds of consumers.
Based on the applicable legislation, the possibility of protecting a trademark may
be derived simply from the use of a specific sign as a source indicator for a certain
company’s products and services. Alternatively, it may be subject to some kind
of registration, which is the case for registration-based trademark systems such
as that adopted by the EU (non-registered trademarks may exist – and coexist –
with registered trademarks).
In the United States, the Lanham Act is the primary trademark legislation, which
also governs false advertising and trademark dilution, as well as trademark
infringement. It sets out the basic rules governing trademark registration,
infringement standards and the penalties for infringement.
Trademark law in the EU has been harmonized for over 30 years. This
harmonization has been achieved through two separate activities. First, national
trademark laws have been unified through a series of EU legislative acts. Second,
the European Union Trade Mark (EUTM) – an EU-wide trademark distinct from
individual national trademarks – has been established as a further opportunity to
integrate the internal market and remove free barriers to trade.
231
The latest
legislative reform further strengthened the main principles of the EUTM system,
while making it more efficient and consistent as a whole and adapting it to the
digital era.
232
The EUTM allows applicants to obtain a trademark valid in the entire territory of
the EU with a single application. The EUTM is a single title and, as such, is
registered, withdrawn, cancelled, renewed, assigned and so on in relation to the
whole EU rather than to individual member states.
233
This mark can be a cost-
effective way of establishing trademark rights over a broad array of countries,
which, whenever a company has the product or resources to consider
international protection of its trademark(s), should be considered and discussed
with its IP attorney (in parallel with the use of the Madrid Protocol, discussed
below).
231
The legislation establishing the rules applicable to the EUTM is Regulation (EU) 2017/1001 on the
European Union trade mark (EUTMR).
232
Directive (EU) 2015/2436 to approximate the laws of the member states relating to trademarks.
233
These procedures are carried out through the European Union Intellectual Property Office
(EUIPO).
81 Mastering The Game
2.3.1 – What Can Be Trademarked?
In principle, any sign that is capable of differentiating the products and services
of one undertaking from those of others can serve and be protected as a
trademark. However, when it comes to registering a trademark, the legislation of
different countries may apply different requirements and limitations, for example
by limiting protection for certain signs considered deceptive, immoral,
scandalous,
234
offensive
235
and generally contrary to public policy and morality.
236
The most common trademarks consist of a word, name, symbol, graphic or short
phrase used in business to identify a specific company’s products or services.
More exotic trademarks can consist of shapes,
237
colors, sounds, animations,
holograms, and, depending on the local trademark legislation,
238
even a smell, a
tactile sensation or a taste. Most of these unusual trademarks, which are referred
to as non-traditional trademarks, are rarely used due to the difficulties connected
with their registration, whenever registration is a requirement, and their
protection. However, in recent years the relevance of non-traditional trademarks,
in particular that of shape and sound trademarks, has increased also in relation
to the video game industry. In fact, publishers started exploring the possibility of
registering some of their iconic sound as trademarks – as happened for Sony with
the PlayStation robot sound (“play-sta-tion”), or for Nintendo, with Super Mario’s
coin sound.
239
In addition, under the new EU trademark system, applicants can now submit
multimedia trademarks that combine both audio and visual elements,
represented in any appropriate form using generally available technology, as long
as the representation is clear, precise, self-contained, easily accessible,
intelligible, durable and objective. For developers and publishers, multimedia
trademarks could potentially be relevant for the protection of: (i) animations
representing brands, such as Sonic the Hedgehog running across the screen
followed by the Sega logo; and (ii) gameplay mechanics and character
animations, such as Scorpion’s “Get over here!” move from Mortal Kombat, or the
X-ray kill cam in the Sniper Elite series.
240
At this stage, however, it is too early
to predict whether EU multimedia marks will turn out to be an effective instrument
to prevent gameplay elements from being copied.
234
Sect. 2 of the Lanham Act, for example, provides that registration should be refused, inter alia, in
relation to trademarks which “[consist] of or [comprise] immoral, deceptive, or scandalous matter.”
235
Importantly, however, in 2017 a US Supreme Court judgment invalidated the Lanham Act
“disparagement clause”, which prohibited registration of trademarks that may disparage or bring into
contempt or disrepute persons, institutions, beliefs, or national symbols. The Court held that such a
provision violated the First Amendment to the US Constitution’s Free Speech Clause. See Matal v.
Tam, 137 S. Ct.1744 (2017).
236
For instance, article 7(1)(f) of the EUTMR provides that registration should be refused in relation
to trade marks which are contrary to public policy or to accepted principles of morality.
237
Shape trademarks are important to consider when clearing a video game content’s intellectual
property rights. In fact, as shape trademarks have become increasingly popular in recent years,
numerous signature objects of certain brands have been registered as trademarks (such as popular
guns, vehicles or trucks).
238
Some trademark offices might, for example, require “as a condition of registration, that signs be
visually perceptible” (TRIPS Agreement, Art.15).
239
Ten Doeschate, Bart, “Mario’s coin: sound trademarks in the EU”, lexology.com, April 13, 2016.
240
This is an application before EUIPO to register a 25-second video clip depicting the “kill cam”
mechanic from the Sniper Elite series published by Rebellion, a video game company based in the
United Kingdom. The application was filed for Class 9 (software), Class 28 (games) and Class 41
(entertainment, education). Lobov, Kostyantyn, “How multimedia trade marks could kill cloned
games”, gamesindustry.biz, February 19, 2018.
Mastering The Game
82
2.3.2 – Is It Necessary To Register A Trademark?
In the United States, in order to identify a trademark for a game company, the
company only has to use a superscript TM after the mark, like this – “mark™”.
Simply placing the ™ designation after a word puts the world on notice of
“common law” trademark rights. Common law trademark rights are derived from
the use of the mark in commerce. Through business use, trademarks become
associated with a company and perhaps also with a particular product or service
within the company. Common law rights are also controlled by state law; the mark
is protected only in the area where it is in use, not throughout the United States.
The position is the same in other common law countries, such as Canada, the
United Kingdom, India and Australia and, in practice, in many other countries too.
The EU, on the other hand, has a registration-based trademark system. This
means that a trademark generally needs to be registered with an EUTM in order
to ensure that it will be protected throughout the EU or within a specific member
state. In addition, the trademark owner is required to use their registered
trademark within five years of the date of registration, otherwise the registration
could be revoked.
241
Unregistered trademarks may also be protected in the EU, but the law is not
harmonized at the European level. Unregistered trademarks can be relied upon
to oppose or invalidate the registration of an EUTM,
242
and, based on member
states’ national regulation, might enjoy some protection if the sign meets the
applicable requirements (which normally require a certain level of recognition
among consumers). This is the case, for instance, in Germany, Ireland, Italy and
Sweden. The protection granted to an unregistered trademark will usually be
limited to the area where the trademark is used in commerce and, thus,
recognized.
Not registering a trademark, or not registering in all regions which are relevant for
the marketing of a particular good or service, could be risky to the extent that
someone else might legitimately register the same trademark or a similar one. As
a result, your potential use of the same trademark would be strongly limited in
relation to territories, goods or services not currently covered by your use. Even
where those territories were already covered by your use, opposing a (fraudulent)
registration of your trademark by a third party may turn out to be a burdensome
and expensive process.
243
2.3.3 – Picking A Good Trademark
A trademark can be considered strong whenever it is distinctive in relation to the
goods or services to which it relates. As a general rule, the less a trademark
suggests the purpose, kind, quality, quantity, origin and value of the goods and
services with which it is associated, the more it is distinctive in the eye of a
241
EUIPO, “Route to registration”, euipo.europa.eu.
242
Art. 8(4) of EUTMR provides that whenever certain conditions are met, the proprietor of a non-
registered trademark or of another sign used in the course of trade can successfully oppose an EUTM
trademark registration.
243
This might give raise to trademark disputes, as the one between American indie development
studio Playsaurus and Chinese company Shenzhen Lingyou Technology Co., Ltd. in relation to the
trademark Clicker Heroes.
83 Mastering The Game
customer. Mark strength is an indicator of the strength of available protection and,
also, contributes to the overall IP value.
In the United States, trademarks are divided into five categories based on the
level of distinctiveness,
244
which reflect the relative strength of the mark. The five
categories of trademark strength are fanciful, arbitrary, suggestive, descriptive
and generic (see the table below).
JUDGING TRADEMARK STRENGTH
Mark
category
Description
Example
Fanciful
Words that have no meaning beyond that
given by the company
Xbox
Arbitrary
Words previously unassociated with a type
source
Apple (for
computers)
Suggestive
Words that suggest something about the
source
Electronic
Arts
Descriptive
Words that merely describe the source
Computerland
Generic
Generic descriptor; cannot be a trademark
Video game
Fanciful marks are the strongest marks. They have no meaning other than the
meaning a company associates with them. Examples of fanciful marks include
Xbox, Bioware, NVIDIA, Tetris and Eidos.
Arbitrary marks are also strong, but less so than fanciful marks. They are words
that are not associated with the particular product until the company associates
them. An example of an arbitrary mark is Apple for computers, Android for the
operating system, or id for a development studio.
Suggestive marks can be a natural word that suggests the product it represents
but does not directly describe it. These are the weakest marks for which
companies can normally obtain protection. Examples of suggestive marks are
Electronic Arts for a maker of video games, PlayStation for a console game
platform, Space Invaders for a game featuring invaders from space, or Centipede
for a game featuring a centipede.
Descriptive marks are extremely weak marks because they are devoid of any
distinctive character. They are essentially useless and cannot be registered
unless a company has used them so much that they have acquired something
called “secondary meaning” (US) or “distinctive character” (EU). Secondary
meaning can only be acquired through extensive marketing and public exposure.
244
These categories were established for the first time in Abercrombie & Fitch Co. v. Hunting World,
Inc., 537 F.2d 4 (2d Cir.1976).
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84
Examples of descriptive marks include Vision Center for a store that specializes
in glasses, or Computerland for a computer store.
Generic marks are things like video card, controller or video game. The term
generic is the polar opposite of trademark and a generic term can never be
converted to a trademark in the United States or virtually anywhere else.
Furthermore, in the United States, even unique trademarks may become generic
and unprotectable if there is ubiquitous use, a phenomenon known as genericide
(think Frisbee, Escalator or Laundromat). Thus, brands will often fight actions that
genericize a trademark such as when Google fought against adding “google” to
the dictionary as a verb. The EU equivalent refers to signs that cannot constitute
a trademark due to inherently lacking the ability to distinguish the goods or
services of one company from those of another. The classification scheme above
is not applied worldwide. For instance, the European Union Intellectual Property
Office (EUIPO) and member states’ local offices assess the level of
distinctiveness for each trademark as normal, low, absent or enhanced.
In general, trademarks that would be considered ‘fanciful’ or ‘arbitrary’ in the
United States are considered to have a normal level of distinctiveness in the EU.
Those that would be considered suggestive in the United States are considered
in the EU to have a low level of distinctiveness and so to be laudatory, (i.e.,
trademarks that express praise in relation to some characteristics of the goods or
services concerned). Purely ‘descriptive’ or ‘generic’ trademarks are considered
non-distinctive and therefore, as a rule, cannot be registered in the EU.
Lastly, a good trademark should not conflict with earlier trademarks. In fact,
whenever a trademark is identical or similar to another and relates to goods or
services identical or confusingly similar to those of another previous trademark,
it will be difficult to protect and, most importantly, to register whenever the
relevant system is registration-based, because the owner of the earlier mark is
entitled to oppose its registration.
245
2.3.4 – Examples Of Trademarks
It should be obvious that it would be wiser not name your next game and
development company Game by Game Development Company; those terms are
too generic to become trademarks at all.
The strongest trademarks are words that have no meaning other than that which
the company generates for to them, such as Xbox, Sonyor Nintendo. In other
words, the more imaginary the trademark is, the stronger it is. Examples of great
trademarks outside the game industry include Google, Rolex and Exxon. When
naming a new company or product, it is worth making the effort to create a highly
distinctive mark (one that would be categorized as fanciful or arbitrary according
to the US classification). The increased strength legally afforded to creative marks
is a fascinating example of how IP law respects and promotes creativity.
Microsoft has learned some lessons the hard way in the game context, on two
occasions. The first was just before the launch of the first Xbox console. The
trademark Xbox was, at that time, in use by another software company. Worse,
245
For instance, in the EU, a trademark that conflicts with an earlier trademark(s) will be refused
registration based on relative grounds for refusal.
85 Mastering The Game
the competing company was a publicly traded company easily identifiable
through a standard trademark search.
246
Clearly, this issue should have been
addressed much earlier in the launch cycle. The case was eventually settled out
of court and probably cost Microsoft a substantial amount of money.
The second trademark lesson for Microsoft came in 2003 with the planned
massively multiplayer online role-playing game (MMORPG) Mythica. One of the
most popular games in the genre, Dark Age of Camelot, is made by Mythic
Entertainment. This potential trademark conflict was so obvious it did not really
require a search and could have been uncovered simply by asking almost anyone
familiar with the genre. In response to the clear Mythica/Mythic conflict, Mythic
initiated a case against Microsoft for trademark infringement.
247
Around the time
of the case, Mythic Entertainment’s CEO Mark Jacobs is famously quoted as
telling a Microsoft lead designer at E3 that Mythic was going to call its next game
“Microsofta”. Whether causally related or not, Microsoft cancelled the whole
Mythica project after the dispute arose. Microsoft settled the suit with Mythic,
agreeing not to use the term “Mythica” and to drop its US applications to register
“Mythica” as a trademark. As part of the settlement, Microsoft also assigned
Mythic the rights to international trademark applications and registrations for
“Mythica” as well as the associated domain names.
Similarly, in 2019 heavy metal band Iron Maiden sued game company 3D Realms
over the title of a game in development under the name “Ion Maiden”. Iron Maiden
had registered their trademark also for computer games, and a number of Iron
Maiden video games had been released over the years.
248
At the time of writing,
the case is still ongoing, but in the meanwhile 3D Realms have thought it best to
change the name of their game to Ion Fury.
249
Beyond a developer’s or publisher’s own trademark registration costs, care
should also be exercised in the use of other company’s trademarks in games. As
with many other forms of IP, developers and publishers run the risk of costly
trademark infringement suits if they choose to include third-party trademarks in
their game without a license. One such example of this concept in action is
Activision’s victory in AM General v. Activision.
250
In that case, AM General
(manufacturer and owner of the IP for Humvee military vehicles) sued Activision
for its close copying of the Humvee military vehicle in several Call of Duty games
and its inclusion of Humvee trademarks in the game. Applying the Rogers test
(discussed in subsection 2.5 on rights of publicity, below), the court found that
AM General failed to show that Activision’s games and promotional efforts
explicitly misled consumers into thinking that AM General endorsed Call of Duty
or Activision, granting Activision its motion for summary judgment and upholding
Activision’s use of Humvees in Call of Duty. All that being said, the litigation to
reach that conclusion between the parties lasted the better part of three years
and underscores both the costliness and fact-specific inquiry required for suits
involving unlicensed trademark use in games.
246
Smith, Tony, “Microsoft buys Xbox name off true owner”, The Register, June 18, 2001.
247
Bishop, Todd, “Microsoft ends development of ‘Mythica’ Game”, seattlepi.com, February 13, 2004.
248
The band’s complaint mentioned Ed Hunter (1999), Flight 666 (2009), Final Frontier (2010), and
Legacy of the Beast (2015). See Witcoff, Banner, “Case Update: Iron Maiden Holdings Ltd. v. 3D
Realms Entertainment ApS”, lexology.com, January 2, 2020.
249
Matena, Daniel and Mamakos, George, “Ion Maiden Becomes Ion Fury, Launches August 15 on
PC with a Big Box Edition!”, gamasutra.com, July 11, 2019.
250
AM General LLC v. Activision Blizzard, Inc., 450 F. Supp. 3d 467 (S.D.N.Y. 2020).
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The lesson here is that trademark searches and clearance should not be
considered additional or frivolous costs for a game company. On the contrary,
these searches are an essential part of the game development process and
mistakes could cost game companies literally millions of dollars and potentially
result in the failure of entire projects.
2.3.5 – Term Of Protection
Trademarks can be immortal. If the mark is used continuously in commerce and
the relevant fees are paid, it can last forever. There are some marks in the United
States, like Coca-Cola, Levi Strauss & Co, Prudential and Heinz, for example,
which have been used for more than 100 years. The distinctive red triangle logo
of the Bass brewery, registered in 1876, is the oldest registered trademark in the
United Kingdom and remains in force today. One of the oldest registered
trademarks in the world is the Czech trademark “PILSNER BIER” (1859).
251
On the other hand, a trademark can just as easily be abandoned through non-
use. The legal presumption of invalidity is established after three years of non-
use, regardless of whether it concerns a registered mark or common law
(unregistered) trademark rights.
2.3.6 – Registration Process And Cost In The United States
In the United States, a trademark may also be registered with the federal
government for wider and stronger protection. Unlike patents, trademarks are
relatively quick and cheap to register. The registration process has some
complexities, however, and is therefore usually done with the assistance of a
trademark attorney. The process should begin with a trademark search that
examines US and perhaps international sources to ascertain whether other
companies are using the mark and, if so, whether it is being used in a related
field. After the company has the results of this search, they can decide to move
forward with the federal registration process or reconsider the mark. As routine
as this initial search process is, sometimes it fails in spectacular ways – even for
well established companies.
After the trademark search, the federal registration process with the United States
Patent and Trademark Office (USPTO) begins. This process usually takes less
than a year and costs approximately $3,000, including the initial trademark
search. After the mark has been registered at the federal level, the registration
and litigations surrounding it are controlled by federal law. The registration is valid
throughout the entire United States.
The fees for maintaining a trademark registration
252
are currently lower than
patent maintenance fees and can vary based on how many classes of goods
and/or services are covered by the trademark registration. The USPTO groups
similar goods or services into 45 different classes, as do many international
trademark offices. A class can be thought of as a grouping of similar goods or
251
Lech, Mikolaj, “The oldest registered trademarks in the world”, znakitowarowe-blog.pl.
252
Declarations must be filed periodically with the USPTO under Sects. 8 and 15 of the Lanham Act
(United States Code, Title 15, Sect.1058) in order to maintain a trademark registration. Technically,
this is not a renewal.
87 Mastering The Game
services; for example, downloadable content may be classed as a good under
Class 9, and streaming content (temporary use of non-downloadable interactive
games) may be a service under Class 41. At the time of writing, the cost for
maintaining a trademark in one class and filing the appropriate Declaration of Use
is $525.
253
As of August 2019, the USTPO requires all foreign trademark registrations
254
in
the US to be filed by an attorney licensed to practice law in the US. This
requirement includes USTPO office action responses and renewals. In contrast,
at the time of writing, US citizens, permanent residents and applicants filing
through the Madrid Protocol are not required to work with an attorney in order to
file with the USTPO.
2.3.7 – Registration Process And Cost In The EU
The registration procedure for an EUTM is straightforward and swift. As with a
USPTO registration, the pre-filing phase should ideally involve a knockout search
aimed at finding identical and/or similar trademarks, then the application should
be filed with the EUIPO. The entire process lasts for approximately 5 months, or
less in the case of a fast-track registration.
255
The fees for registering and renewing an EUTM for one class are, at the time of
writing, either €850 or €1,000 depending on whether or not the
application/renewal is made online.
256
Additional classes cost significantly less
(currently, €50 for the second and €150 for the third and all subsequent classes).
Besides the possibility of applying for an EUTM, you can always apply for a
national trademark in one or more of the EU member states. In this case, while
the requirements for national registration are, as mentioned, highly harmonized
by EU law, the duration of the registration process and the related costs will
depend on the local trademark office involved.
2.3.8 – Madrid System For The International Registration Of Marks
The Madrid System is the primary international system for facilitating the
registration of trademarks in multiple jurisdictions around the world. The Madrid
System is a centrally administered system, managed by WIPO, which allows the
applicant to obtain a bundle of trademark registrations in separate jurisdictions
with a single application. It differs from the EU trademark system in that it does
not provide a single, uniform right, but rather permits applicants to centrally file,
register and maintain trademarks in many countries around the world instead of
having to seek protection and manage trademarks separately in relation to each
individual country of interest.
In order to file an application with the Madrid System, the applicant is required to
have already registered in one local IP office, or at least to have completed the
trademark application filing. The same local IP office also receives the Madrid
253
USPTO has online forms that can be used for filing purposes. See USPTO, “Apply online”,
uspto.gov. Beginning on January 2, 2021, a number of trademark fees increased in the United States.
See USPTO, “Summary of FY 2021 Final Trademark Fee Rule”, uspto.gov.
254
The USTPO considers an applicant to be foreign if the business or individual has a permanent
legal residence or a principal place of business outside the US.
255
A fast-track registration procedure is available when fees are paid upfront and the goods and
services concerned selected from a database of terms already accepted by the EUIPO.
256
EUIPO, “Fees payable directly to the EUIPO”, euipo.europa.eu.
Mastering The Game
88
System application, which it certifies and forwards to WIPO. WIPO then conducts
a formal examination of the application, while the relevant substantive
examination is carried out by the various designated IP offices. These then
communicate the decision to WIPO, which in turn notifies the applicant.
257
Contrary to the EU system, under the Madrid System each designated country
applies its own registrability requirements, so it may still be necessary for an
international trademark applicant to intervene at the local level after filing the
application.
2.3.9 – Protecting Trademarks In The United States
All trademarks should be noted with the appropriate symbols. Use the symbol
™
to indicate whether the mark is being used in business. Once the registration is
successful, the applicant can use the ® symbol following the mark, as an
indication that the mark has been registered with the USPTO or another national
trademark office. Conversely, under the EU system there are no legal
requirements with regard to the use of symbols, nor will their use have any
substantial value in demonstrating that you are taking steps to ensure protection
of your trademark.
The effect of the registration is that the trademark becomes an item of personal
property. It confers exclusive rights on the owner not only against the use of
identical but, also, confusingly similar marks. In addition, under EU trademark
law, marks that have gained reputation are also protected against unauthorized
use that takes advantage of, or is detrimental to, the distinctive character or
reputation of the mark. As such, trademarks are a powerful element in the IP
strategy of any game developer or publisher.
Policing trademark is similar to policing other types of IP. One important
difference is that an unauthorized use of a trademark used by others can damage
not only the legitimate owner, but also the value of the trademark itself. For
instance, if the trademark is associated with lesser products or services, its value
in the eyes of the public will be diminished (“tarnished”). If this unauthorized use
becomes rampant, the mark also runs the risk of “dilution”, eventually losing all
value and becoming generic. This has happened in the United States to
trademarks that were so often misused that they became household words, such
as aspirin and thermos. Both were trademarks at one time but died a death from
misuse and over-popularity.
Being proactive in protecting your trademark is essential in order to secure your
trademark value. Even in a registration-based system, registering a trademark
may not be enough to protect your trademark fully – enforcing activity may also
be necessary. A lack of enforcement can lead to trademark dilution (in the sense
specified above) and weaken your trademark, once consumers grow used to
marks too similar to yours. In the game industry, terms such as “battle royale”,
“metroidvania”, “roguelike”, or “soul-like” originate from the genre-defining works
Battle Royale, Metroid, Castlevania, Rogue and Dark Souls, but are commonly
used as generic terms to describe categories of games that may well come from
257
WIPO, “How the Madrid System Works”, wipo.int.
89 Mastering The Game
different sources than the original works. In the long run, this may make it harder
for the owners of the original works to claim exclusive rights to such terms.
Zynga games also provide a good example of proactive enforcement. Many
Zynga games and projects names end in “-ville”: YoVille, FrontierVille,
RewardVille, FishVille, CastleVille, ChefVille, PetVille, CityVille and, last but not
least, the popular FarmVille series. This is called a “family of marks”. Zynga
reacted vigorously to other companies using the same suffix for their games,
knowing that this was not good for the “-ville” trademarks. Zynga sent cease and
desist letters to the developers of three unrelated games called BlingVille,
PyramidVille and Dungeonville, which then led to litigation.
258
The BlingVille and
PyramidVille cases were eventually settled and both developers had to change
the name of their games.
259
Likewise, registration of Quackville (in the United
States) and Toonsville, Scaryville, Chrom Ville and Wine Ville (in the EU) as
trademarks for games was refused after Zynga opposed those marks (but not
that of Zodiakville in the EU).
Monitoring possible infringing activities, also through specialized professionals
and agencies
260
and taking action whenever a possible infringement is identified,
for instance by sending cease and desist letters, will allow you to maintain and
consolidate the scope of your registered right. Moreover, being mindful of similar
registered or unregistered marks is valuable in order to refrain from infringing
third-party rights, for instance by offering your goods or services in a new territory
where the mark is not registered and/or by extending your commercial offer to
new goods or services.
You should also be mindful of the fact that the scope of your registered trademark
is limited to the classes for which you requested and were allowed registration.
The possibility of enforcing your rights for different classes, in the EU, will depend
mostly on the reputation of your trademark, as mentioned. In practice, reputation
is mainly linked to how well-known and popular your trademark is in the mind of
the public. In addition, it can also be achieved through proactive enforcement and
protection of your trademark rights to safeguard their exclusivity.
In case of disputes over the use of two potentially conflicting trademarks, the
parties to the dispute often end up signing a particular type of settlement called a
“coexistence agreement”. A trademark coexistence agreement typically defines
the different categories of products and services for which the conflicting
trademarks can respectively be used and the specific ways in which they can be
used, in order to avoid market confusion and prevent future disagreements
between the parties.
2.3.10 – Penalties For Infringement
The penalties for trademark infringement can be harsh and are similar to those
for copyright infringement. Courts generally issue injunction orders to prohibit
further use of the infringing trademark. Sometimes, monetary penalties are also
258
Zand, Joel, “Sacré bleu! Lawsuits over Zynga’s Trademark Claims to ‘Ville’ Names”,
lawblog.justia.com, January 3, 2012.
259
Wu, Stephen, “Blingville v. Zynga Settled”, 3dinternetlaw.com, September 11, 2012; and Weber,
Rachel, “Zynga settles Kobojo lawsuit”, gamesindustry.biz, October 19, 2012.
260
There are law firms and companies that specialize in searching for infringing uses of trademarks.
These companies can perform searches on a regular schedule and send your game development
company reports on potential infringers. As with most types of IP, one of the early steps in policing
the IP is sending a “cease and desist” letter. Later steps can include litigation over the trademark.
Mastering The Game
90
available if the injunction is violated. Additional remedies include the
recall/removal of the infringing items from the channels of commerce and their
destruction. Monetary damages based on loss of profits or ill-gotten gains are
also possible. Similar to copyright, personal liability through the corporate shield
is also possible in the United States. The specific damage calculation for each
case is dependent on the circumstances surrounding the infringement.
It is important to keep in mind that the registration of a mark in one country does
not mean that it is enforceable in another country; it merely means that should a
foreign business with a similar trademark attempt to bring its product into the
country where the mark is registered, you could then enforce your rights.
Although trademark law is respected in most countries, the realities of enforcing
a trademark may vary significantly from one state to another.
2.3.11 – Unfair Competition
In the event that a trademark infringement claim is not available or is weak based
on the applicable law and related requirements, some countries might provide
different instruments allowing for additional protection against trademark
counterfeiting and product imitations.
For instance, unfair competition in its multiple declinations (as partially
harmonized by international treaties),
261
generally constitutes a claim that the
plaintiff could assert, possibly in combination with a trademark infringement claim,
in order to cover more legal ground.
In the United States, unfair competition is a useful claim whenever you wish to
protect a trademark used in commerce but not registered. In this case, the plaintiff
will have to provide evidence of the likelihood of confusion between its mark and
that of the defendant and of the validity of its mark. In particular, the plaintiff must
establish prior rights over any rights the defendant may have.
262
In the EU, unfair competition is not specifically harmonized, and might not be a
viable option and/or have the same requirement in all EU states. It is however
fairly used, for instance, in Germany, France, and Italy. In the United Kingdom,
the common action of “passing off” may protect an unregistered trademark with
a reputation and goodwill in the marketplace that is being used by someone else
in the same or similar market without permission.
In Germany and Italy, an unfair competition claim may be brought, even where
the requirement for a trademark infringement claim is not met, as long as the
plaintiff is able to prove that the conduct of the defendant at issue has resulted in
a likelihood of confusion between the products/services and/or trademarks of the
plaintiff on the one hand and those of the defendant on the other – provided that
the two are competitors.
263
In order to establish likelihood of confusion, the
plaintiff must prove that their goods or services enjoyed a certain recognition
261
Art.10bis of the Paris Convention for the Protection of Industrial Property, in particular, provides
for a list of acts considered to constitute unfair competition, such as misleading indications and false
discrediting allegations.
262
Bryner, William M., “U.S. Trademark and Unfair Competition Litigation, Trademark Administration”
in Garrison, Sean and Donovan, Mary A., eds. Trademark Administration, New York: International
Trademark Association (INTA), 2018, p. 22.
263
Bolte, Meissner, “Intellectual Property & Antitrust in Germany”, lexology.com, December 11, 2018.
91 Mastering The Game
among consumers. In practical terms, the situation is not dissimilar in France,
where to bring a successful unfair competition claim the plaintiff is more generally
required to prove that the defendant is a competitor who committed a wrongful
act that harmed the plaintiff.
A recent case of unfair competition in games, under French law, involved two
“hyper casual” mobile games: Woodturning 3D and Wood Shop. The Paris
Judicial Court held that Woodturning 3D was not original enough to enjoy
copyright protection. Nonetheless, it also found that the marketing of Wood Shop
constituted unfair competition because Wood Shop was an intentional clone of
Woodturning 3D and consumers could confuse the two game apps.
264
Another interesting French case involved game publisher Take-Two and sports
car manufacturer Ferrari. Take-Two’s Grand Theft Auto: San Andreas and Grand
Theft Auto IV both featured in-game sports cars called “Turismo”, produced by a
fictional in-game Italian manufacturer named “Grotti”. The Grand Theft Auto
games also featured in-game logos of the car manufacturer, depicting a prancing
hare (in Grand Theft Auto: San Andreas) and a sitting horse (in Grand Theft Auto
IV). Ferrari claimed that the Turismo cars reproduced two real-life Ferrari models
(the Ferrari 360 Modena and the Ferrari F40) and that the in-game logos were
also confusingly similar to the real-life Ferrari prancing horse logo. This led Ferrari
to start litigation based on a number of grounds, including unfair competition. The
Court of Paris first upheld Ferrari’s unfair competition claims, holding that, for
players, virtually driving a Turismo was just like virtually driving a Ferrari. Because
of this, Turismos were not considered a parody of Ferraris but virtual substitutes
for them. This decision was then overturned by the Paris Court of Appeal, ruling
out any unfair competition on part of Take-Two.
265
According to the appellate
judges, Turismos and their manufacturer’s logos were merely generic references
to sports cars as a category and their designs were sufficiently different from
those of the Ferraris. Furthermore, sports cars commonly feature prancing or
galloping horses and other powerful animals in their logos, whereas the Turismo’s
prancing hare and sitting horse would be perceived as (generic) parodies of those
powerful symbols. Lastly, many sports car manufacturers are famously Italian.
For all of the above reasons, the Court concluded that players would not confuse
or associate Turismos with Ferraris.
2.3.12 – Common Questions About Trademarks
Do I Have To Use A Trademark In Commerce?
Actual use is always better for bolstering trademark rights, but the de facto
consequence connected with the use – or, rather, the non-use – of a trademark
will mostly depend on the country in which you operate. For instance, in the
United States, it is possible to establish such rights for a short time merely by
demonstrating intent to use. In 1988, trademark law changed when this intent-to-
use provision was added. Prior to this addition, a mark needed to be used in
commerce. Since the amendment, it has been possible merely to apply for federal
264
France: Paris Judicial Court, Decision No. RG 20/03352 of September 4, 2020.
265
France: Paris Court of Appeal, Ruling No. 013/2016 of January 26, 2016.
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registration with the stipulation that there is a bona fide intent to use the mark in
commerce within a certain period.
266
However, certain trademark systems also require that the trademark is in fact
used in commerce. For instance, as mentioned, trademarks in the EU (both
EUTMs and national trademarks) should be put to genuine use in the relevant
territory in the five years following their registration; failing such use, the
trademark may be revoked. In the United States, non-use for three years
constitutes prima facie evidence that the mark has been abandoned, regardless
of whether or not a trademark is registered.
Lastly, as discussed above, the genuine use of a trademark in commerce might
ensure further protection for the trademark, especially with regard to common
law, unregistered trademarks and unfair competition matters. In the case of a US
registered trademark, after five years of consecutive use the mark holder can
apply for incontestability, meaning that the validity of the mark can only be
challenged on limited grounds.
Can I Let Fans Use My Trademark Without A Formal License?
This is common practice in the game industry for both copyrighted material and
trademarks. Game companies often create fan community packages that include
material and conditions for its use. The allowed uses are case specific, and it is
often not economically feasible to attack every infringement that occurs. Game
companies also recognize the advertising value in game-related communities. In
short, make sure that fan sites know the uses with which your game company is
comfortable. Be as clear as possible about the rules and stress that appropriate
attribution is important.
For example, a fan website kit may include appropriate legal attribution for a
trademark. The notice may say something similar to “Title is a trademark of
GameCompany” or “Title is a registered trademark of GameCompany”. This
situation becomes more complicated if there is a substantial commercial
component to the website, or if the website is spreading misinformation that is
harmful to your game sales. In the case of a commercial component, the website
may be making money using your game company’s trademarks and perhaps its
copyrighted material. As indicated above, the appropriate action, if any, is
dependent on the individual circumstances. A negotiated license and/or a “cease
and desist” letter may be in order to stop unwarranted uses.
Can I Trademark My Game Title?
Here, the answer is “Yes.” In practice, it is harder to register a US trademark that
will be used for one property only. In the United States, films, books and other
creative products usually need some type of product extension such as
merchandising, a series or a sequel. However, despite the unspoken rule that
applies to most other goods and services, the USPTO has issued a special
266
USPTO, “Trademark application – intent-to-use (ITU) basis”, uspto.gov.
93 Mastering The Game
exception for video games which states that game titles may seek trademark
protection.
267
In the EU, there is no formal impediment to the registration and protection of a
video game title (or any other work title), provided of course the trademark meets
the distinctiveness threshold and the other legal requirements.
In this regard, it is interesting to note that a German court has found that the
distinctiveness threshold should be lower in relation to titles falling into certain
video game market segments, as consumers are used to a low level of
distinctiveness and thus are prone to perceive as trademark also titles that would
otherwise be considered descriptive. The market segment at issue was that of
video game simulators; in the specific case concerned, Farming simulator 2013
was considered to have a sufficient degree of distinctiveness.
268
Having said that, while the United States and the EU might be favorable to
trademarking a game title, a developer or publisher may still meet with significant
restrictions or difficulties in obtaining similar protection in foreign jurisdictions.
2.4 – Patents
The patent system in the United States is descended from the English Statute of
Monopolies of 1623, which sought to overturn earlier royal monopoly grants but
preserved inventor’s rights for 14 years with grants of “letters patent” for “new …
manufacture”.
269
More recently, in the United States, patents go back to the
Constitution. Under Article I, Section 8, the Constitution grants Congress the
power to “promote the Progress of Science and useful Arts, by securing for limited
Times to Authors and Inventors the exclusive Right to their respective Writings
and Discoveries.” Patent law has been evolving continuously ever since,
sometimes significantly.
270
In Europe, national laws have been harmonized both by EU and non-EU
measures, resulting in a somewhat fragmented legal system that derives its
substantive laws from a variety of overlapping legal sources. Traditionally,
patents were issued by each member state individually. Now, the EU is moving
towards a unified patent system and participating member states are currently
working under the assumption that it will become effective and operational
sometime in 2022.
271
In the meantime, an applicant can obtain a bundle of patents
from the European Patent Office (EPO) in the designated European countries
under the European Patent Convention.
Although extremely important for some hardware, software, development tools
and other middleware companies, patents are not used as frequently in the video
game context because the speed of development and the period of use often
renders the patent process too costly and lengthy to be practical. This situation
267
USPTO, “What Does Not Constitute a Single Creative Work”, Trademark Manual of Examining
Procedure (TMEP), Washington, D.C. Dept. of Commerce, Patent and Trademark Office, 1974,
Sect.1202.08(b). Interestingly, coloring books allow a user to trademark titles for a single version as
well.
268
Germany: Cologne Higher Regional Court, Ruling No. 6 U 54/14 of November 28, 2014.
269
Wikipedia, “History of United States patent law”, wikipedia.org.
270
The America Invents Act of 2011 was the first change to the patent system since 1952. Wikipedia,
“Leahy-Smith America Invents Act”, wikipedia.org.
271
EPO, “When will the Unitary Patent system start?”, epo.org.
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may change as the industry matures, but for the time being, patents are not often
utilized throughout the majority of the game industry.
Patents are perhaps the most complex form of IP protection. It is important to
understand the details about this form of IP if you plan to use it in your business.
2.4.1 – What Can Be Patented?
In the United States, the Patent Act defines potentially patentable subject matter
as any “new and useful process, machine, manufacture, or composition of
matter”.
272
Examples include machines, pharmaceuticals, medical equipment,
video cards or a better mousetrap. Patents do not usually protect games
themselves because they do not meet the statutory criteria. Yet there are a
growing number of game-related patents in the areas of hardware, digital
distribution, networking and inventive gameplay. A recent example of a US game
patent is the aforementioned Warner Bros patent, entitled “Nemesis characters,
nemesis forts, social vendettas and followers in computer games”,
273
of the
Nemesis system gameplay mechanic originally seen in the Middle-earth: Shadow
of Mordor game. The Nemesis system is a machine-learning algorithm whereby
non-playable characters remember the player’s interactions with them in the
virtual world. In 2015, the USPTO issued Patent No. 5,718,632, entitled
“Recording medium, method of loading games program code means, and games
machine”, which covers mini-games executed independently while main games
are being loaded.
The position is similar in Europe and internationally, with one vital caveat for
games: it is often much harder outside the United States to patent software-
related inventions. For example, the European Patent Convention excludes
computer programs “as such” from patentable subject matter, although this
exception does not apply to computer programs with technical character.
274
Another point to be aware of is that some countries allow applications for lesser
patents known as either “utility models,”
275
“lesser patents,” or “innovation
patents”, which do not exist in the United States. With utility models, so-called
“minor inventions” can be protected through a system similar to the patent
system. Like a patent, a utility model also provides an exclusive right, which
allows the right holder to prevent others from commercially using the protected
invention without authorization, for a limited period. In comparison with patents,
utility model systems generally require compliance with less stringent
272
United States Code, Title 35, Sect.101.
273
US Patent No.10,926,179, filed on March 25, 2016.
274
The prohibition derives from a provision of the Convention that “programs for computers” are
excluded from patentability to the extent that a patent application relates to a computer program “as
such” (Art. 52(3)). This ambiguous phrase has been variously interpreted over time, although at the
time of writing the trend seems to be toward loosening up the European hostility to software patents.
For example, software patenting has been permitted on the basis that it has a technical effect on
hardware, or even that the software concerned permits other software to work significantly better.
275
Not to be confused with US utility patents.
95 Mastering The Game
requirements, have simpler and therefore quicker
276
procedures and offer a
shorter term of protection.
277
In the United States, Alice Corp v. CLA Bank International is a Supreme Court
case that has substantially limited what can be patented.
278
While certain game
patents are still being allowed, anything that might be labeled as a software or
business method patent has been much tougher to get through the USPTO and
the courts. The case centers on the notion that an “abstract idea” implemented
by a computer is not patentable. That, of course, sets up a real head-scratching
legal problem both inside and outside the game industry.
2.4.2 – What Rights Are Conferred By Patents?
A common misconception is that a patent grants the right to make an invention,
but this is not true. Similar to other forms of IP, patents grant a negative right, that
is, a right that prevents others from doing something. In other words, a patent
confers the right to prevent other people from making, using, selling or importing
an invention in the protected territory. The patent owner is under no obligation to
ever actually construct the patented invention but can prevent others from
practicing the invention within a specific territory and for a limited period.
2.4.3 – Term Of Protection
Patents have a limited lifespan. A layperson might think that a patent expiration
date would be printed right on the front of a patent. Unfortunately, nothing could
be further from the truth. Currently, patents are valid for 20 years from the time
that they are filed if the patent holder pays the required maintenance fees and
has not withdrawn the patent or the patent has not been invalidated in court
proceedings.
279
Before June 1995, this calculation was not so simple in the United
States. These older US patents are valid for 17 years from the patent issue date
or 20 years from filing, whichever is longer.
280
Just to make the calculation more
complicated, it is not unusual for patents to be shortened or extended for some
time through a variety of mechanisms. It is possible to estimate a patent term by
looking at the basic date on the face of a patent, but a full review of the patent’s
history and related documents is necessary to find the exact expiration date.
2.4.4 – Process And Cost In The United States
Of all types of IP registration, the patent process is the longest and most
complicated. The process generally takes from two to four years. It starts with the
patent applicant preparing a patent application, including all relevant figures. The
process also entails regular correspondence with the patent office and complying
with or writing rebuttals to patent office arguments. Although it is possible to go
276
In Germany, for example, there is no substantive examination of a utility model application before
grant. A utility model can be obtained more rapidly but the risk of a subsequent invalidation is greater
than for a patent. See German Patent and Trade Mark Office (DPMA), “Utility Model Protection”,
dpma.de, DPMA, October 20, 2020.
277
WIPO, “Utility models”, wipo.int.
278
Alice Corporation Pty Ltd. v. CLS Bank International, 573 U.S. 208, 134 S. Ct. 2347 (2014).
279
This lifespan is longer than that of a design patent, which lasts 14 years.
280
Boyd, Gregory S., “NES– Expired Patents Do Not Mean Expired Protection”, gamasutra.com,
November 11, 2005.
Mastering The Game
96
through this process without a patent attorney, it is strongly recommended not to
do so.
A patent consists of two main sections. The first section is called the specification
and is the narrative description that makes up most of the written material in a
patent. This section includes the background of the invention and sets out the
state of the technology leading up to the invention. There is also a detailed
description of the invention, with figures and examples. In theory, a person
reading this section can learn everything there is to know about how to make and
use the invention. Remember that a patent is a deal with the government: in
exchange for sharing complete knowledge of the invention with the world, the
patent holder is granted a limited monopoly on that invention.
The second main section is the patent claims. These claims are numbered
sentences found at the end of a patent. There has to be at least one claim, but
there is no absolute upper limit on the number of claims; however, in the United
States, every patent claim over 20 costs an additional amount of money, so large
numbers of claims are economically discouraged. In general, an average patent
has from three to 15 claims. The patent claims is the most important section of
the patent because it defines the scope of protection by describing exactly what
the patent protects. In fact, material in the specification that is not included in the
claims is not protected and is therefore given away to the public. Be very careful
that the patent claims adequately and completely describe your invention and
that the description supports the claims.
The cost of filing a patent application varies based on several factors. These
factors include the complexity of the technology, the number of other patents in
the field and the amount of material that your company can provide the patent
attorney. If the technology is complicated, there are many patents in the field and
you call your patent attorney with an idea written down on an index card, the cost
is going to increase. The total cost of an application can range from $15,000 to
$30,000 including the cost of filing and shepherding an application thorough the
patent office. The range also depends on the number of mailings called “office
actions” from the patent office and the time spent preparing answers to them.
Beware of companies that offer to “file” a patent application for $2,000 or some
other very low figure. Such companies are hiding costs in at least two areas. The
first is that USPTO fees are usually not included. Second, the low estimate is
usually only for “filing” the patent application and does not include the cost of
answering office actions and doing the other work necessary to obtain the patent.
This is similar to stating that skydiving costs $200, but that the parachute is extra.
The good news is that patent costs tend to be spread out over the whole period
of the application. There will be costs to prepare and file the application but paying
for the office action work is not necessary until many months later when the patent
application has been acted on by the patent office. It is also possible, but unlikely,
that an application will go straight through to become an issued patent.
There are also ongoing costs for patents in addition to filing costs. In order to
keep a patent enforceable during its term, maintenance fees must be paid to the
USPTO. These maintenance fees are due at 3.5, 7.5, and 11.5 years after
issuance. The fees change often; the best source of information in this regard
97 Mastering The Game
may be your IP attorney or the USPTO itself.
281
If the fees are not paid, the
patents will expire and it takes a substantial effort to revive them, if possible at
all. The difficulty reviving the patent is dependent on the length of time since the
fees were due and the circumstances surrounding the failure to pay the fees.
282
Make certain that your company plans for this and has someone designated to
monitor that the necessary payments are made.
2.4.5 – Process And Cost Outside The United States
Outside of the US, you can expect a similarly long, complex, and expensive
process compared with other forms of IP protection. As pointed out above, the
costs of filing a patent application may vary. Internationally, the fee structure of
the national/regional patent office needs to be considered, especially when you
seek to protect your invention in several countries. Regional patent offices, such
as the EPO (which will be explained in more detail below), exist which facilitate
the process of receiving patent protection in various countries. Where you seek
to protect your invention in various countries worldwide, then the Parent
Cooperation Treaty (PCT) route which is administered by WIPO may be the
appropriate option. Similar to the Madrid System mentioned above in relation to
trademarks, only a single “international” application in one language at one office
needs to be filed instead of applying for patent protection in each country’s patent
office separately. This allows you to seek protection in each of the currently 153
contracting PCT states. Importantly, the PCT does not provide for a single
international patent but facilitates filing for patents in various countries. The
procedure is divided in an international and national stage. After filing the
international application an International Searching Authority provides an opinion
of the patentability of the invention. In case the application is not withdrawn, the
application is published by WIPO after 18 months.
Additionally, the so-called Paris Priority facilitates the filing for patents in various
countries. It stems from the Paris Convention from 1883 and resolved the issue
when inventors sought to file for patent protection in various countries. The issue
was that a patent application filed in one country could be deemed to be novelty-
destroying in relation to the patent application regarding the same invention in
another country. Simultaneous applications at different offices which would have
dealt with this issue were not feasible for inventors due to different filing and
translation requirements. The Paris Priority alleviated this issue. Any person who
applies for a patent in one of the Paris Convention Signatory States can file for
an identical application in another signatory state without the first application
being novelty-destroying for these later applications. This priority is limited to 12
months and has the effect that the first application is considered the effective date
for determining novelty for subsequent applications within this period.
You should also be aware that the process itself can have very important
differences compared with the US. For example, Europe traditionally uses a “first
to file” approach to patents (the first applicant for the patent is the person who
gets it by default, not the person who invented the patentable invention first). The
US has only recently adopted a type of “first to file” in March 2013 as its standard
281
USPTO, “Maintain your patent”, uspto.gov.
282
USPTO, “2590 Acceptance of Delayed Payment of Maintenance Fee in Expired Patent to
Reinstate Patent [R-10.2019]”, uspto.gov.
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98
under the America Invents Act, so the differences are hopefully becoming
smaller, but we will likely never achieve complete harmonization.
283
2.4.6 – Protecting Patents
If another company is violating your patent rights, the first step in policing this
type of IP is to put the other company on notice by sending them the patent and
a letter about the potential infringement.
284
Hopefully, the parties can work out
some suitable licensing settlement, but this is sometimes not the case. If the
parties cannot come to an agreement, litigation may be in order. If there is a need
for immediate action, you should also consider preliminary injunction
proceedings, where possible. In general, if you fear that a product infringes your
patent, it is often worth including an expert in patent law (a lawyer specialized in
patent litigation or a patent attorney) from the beginning. A good action and risk
analysis at an early stage often avoids unnecessary and much higher costs later
on.
2.4.7 – Patent Litigation And Penalties For Infringing Patents
Generally speaking, patent litigation itself should be the last option. Even the
winner of the litigation often incurs substantial costs in time, money and other
resources. Patent litigation is complicated and ultra-niche. It is not surprising that
it is expensive; costs often run well past $2 million in legal fees. There is also no
doubt that this process will become substantially more expensive in the future.
Importantly, patent litigation costs differ from country to country – for example, a
patent litigation in the United States is much more expensive than in Germany.
Winning a patent litigation normally results in three remedies. First, the patent
holder can win an injunction that stops the losing party from practicing the
patented invention. Second, the infringing company may be forced to pay
damages for past infringement and, potentially, a royalty on units sold going
forward. Third, the patent holder can claim the destruction of the infringing
products.
2.4.8 – US Patent Pending And Provisional Patent Applications
The use of a “patent pending” notice is only appropriate when an application or
provisional application has been filed with the USPTO or another national patent
office. The marking is not mandatory but can be important when proving notice
and calculating potential damage for patent infringement. Some people also
argue that the notice adds value to the product in the eyes of investors and
consumers and expresses a certain level of business sophistication.
In the United States, provisional patent applications are often an attractive option
for small or mid-sized game companies with a patentable invention. These
applications cost less than pursuing a standard patent application and preserve
283
Wikipedia, “Leahy-Smith America Invents Act”, en.wikipedia.org.
284
A formal warning letter of alleged infringement of an IP right may entail risk in some countries: if
the unjustified warned party suffers damage, for example, due to a sales stop, damages can be
claimed from the warning party. See Germany: Federal Court of Justice, Decision No. I ZR 187/16 of
January 11, 2018. In these jurisdictions, it is worth getting legal advice beforehand.
99 Mastering The Game
the priority date for the invention. These provisional applications resemble
complete patent applications except that they are not examined at the USPTO
without further action on behalf of the inventor. The inventor has one year from
filing a provisional application to file a standard patent application based on the
provisional one. If successful, the applicant will be able to use the date of the
provisional application as the date of invention. Finally, the expiration date of the
patent is still counted from the date on which the full application is filed so that
the company does not pay any time-related penalty for filing the provisional
application.
285
It is common for an early-stage game company to be cash poor, but they may
have a patentable invention or several such inventions that are potentially worth
a great deal. This is particularly true of middleware companies. The company
may fear its competition stealing the invention, but still wants to market the
product and raise money. This is potentially a great position from which to file a
provisional patent application. After the company files the application, it has three
issues covered. First, the invention is on file with the USPTO and the invention
priority date is set. The company can market the invention without fear of losing
it due to a statutory bar or a competitor copying. Second, the company has spent
a fraction of the full cost of a patent application. Lastly, the company can point to
the pending application for both product sales and as a valuable addition to the
company for capital acquisition.
2.4.9 – Patent Invalidity
Patent invalidity is the process of determining the viability of the claims in a patent
or seeking to invalidate or cancel one or more of the claims covered by the patent.
There are two circumstances in which patent invalidity is particularly important in
the game industry. The first instance is when a game company is trying to get a
patent issued through the patent office, such as the USPTO. The second instance
is when a game company is being sued by a patent holder for infringement. In
the first instance, the game company will want to show that its patent application
represents a valid invention. In the second instance, the game company will try
to prove that the patent holder’s patent does not represent a valid invention. This
area of patent law is enormously complex and the ideas contained in the sections
below should be considered as minimal summaries.
2.4.10 – Anticipation And Obviousness
There are many mechanisms that lead to patents being declared invalid. Two of
the most often discussed mechanisms are called anticipation, or lack of novelty,
and obviousness, or lack of inventive step. Anticipation (lack of novelty) is found
when one document in the prior art meets every element of a patent claim.
Although the definition of the term “prior art” is not uniform at the international
level, in many countries it refers to any information made available to the public
anywhere in the world by written or oral disclosure before the filing/priority date.
As indicated above, patent claims are the numbered paragraphs located – in
many countries – at the end of a patent document, that define the scope that the
patent aims to protect. Each claim has subsections, indented as individual steps,
called elements. An easy way to think about anticipation is using this idea: that
285
USPTO, “Provisional Application for Patent”, uspto.gov.
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100
which infringes if after would anticipate if before. In other words, a patent cannot
be valid if there is something found in the prior art that would have infringed the
patent. This means that there must be something in the prior art that met each
and every portion of the claim being invalidated.
The second common way that patents are declared invalid is through
obviousness, or lack of inventive step. With obviousness/lack of inventive step,
every patent claim element does not have to be met by just one invention or
publication. Instead, all the prior art can be blended together with another
knowledge that was present before the filing date (priority date) of the patent
application concerned. The standard here is what a person of ordinary skill in the
relevant scientific discipline (“person skilled in the art”) would know and do with
the information available to them. A simplified way to look at this involves three
steps. First, were all of the pieces of an invention present? Second, was there a
reason to put those pieces together? Third, could a person of ordinary skill put
those pieces together to make the patented invention? If these steps are all met,
the patent is invalid for obviousness.
2.4.11 – Timing A Patent Filing
Before the revision of US patent laws in 2013, people were allowed a year to use
or sell their inventions before they had to file a patent application and there was
no disadvantage for doing so. As of 2021, this grace period still exists, but the
United States has changed from a first-to-invent to a first-to-file jurisdiction. Game
developers that wish to file for a patent must be wary of using that grace period
because they could lose the “race to the patent office” while they are biding their
time.
As mentioned above, there are other ways for patents to be found invalid beyond
those discussed in this chapter. Since patents are territorial rights, the reasons of
invalidation and the invalidation procedures vary from one country to another.
These reasons include keeping information from the patent office, affirmatively
lying to the patent office, and a variety of technical issues. As always, the best
advice beyond understanding this simple summary is to consult your patent
attorney and/or the patent office in the country/region of interest, as well as the
more specialized sections of this text.
2.4.12 – Reasons To File A Patent Application
People usually consider enforcement, litigation and licensing as the only reasons
for filing a patent application, but there are many others. First, patents and patent
applications are a symbol of sophistication for your company. Companies often
demand some concrete proof of IP before agreeing to protect it in contract
negotiations and licensing. Patents grant your game company that concrete proof
and gravitas. Second, patents and patent applications change the valuation of
your company. Investors consider these as substantial assets, especially when
they are referenced in license agreements. On average, a company with patents
will be valued more highly than a company without patents, all else being equal.
Third, patents and patent applications can increase pricing on your products.
Software and hardware that is patented or patent pending has a higher value in
the marketplace because, by definition, it is not available elsewhere. Fourth, a
101 Mastering The Game
patent application creates an intellectual moat and prior art “bomb” for those that
file later. Even if your application is never approved, its publication by the USPTO
alone ensures that no one can come after you and patent the same invention.
Fifth, patents can be used defensively as they can provide potential patent
counterclaims if a patent case is ever brought against your game company. When
two companies with substantial patent portfolios are involved in a litigation, the
defendant often has grounds for counterclaims based on its portfolio, which raise
the stakes of litigating with a game company that has patents. Lastly, patents can
be used for direct enforcement and licensing, but this is a long, complex and
expensive proposition. In fact, it is usually a last resort and very few patents are
ever involved in a litigation. The items at the start of this paragraph are far more
common uses for patents.
2.4.13 – The European Patent System
The European patent system is somewhat more complex than the US system.
Generally speaking, in Europe it is possible to file a patent both at the national
and at the European level. National patent filing is done with a national patent
office and leads to a patent having effect only within the boundaries of the
relevant national territory.
Patent filing at the European level is done with the European Patent Office (EPO)
in Munich, Germany. The EPO also has a branch in The Hague and sub-offices
in Berlin and Vienna. The EPO is not an institution of the EU but an organ of the
European Patent Organisation, an intergovernmental organization created in
1977 through the European Patent Convention, which today has 38 Contracting
States (including all of the EU member states).
286
A European patent does not automatically have effect across all Contracting
States. After the grant, the European patent is a “bundle” of individual national
patents of the designated Contracting States.
287
When filing a European patent,
therefore, it is necessary to designate the Contracting States that the European
patent is meant to cover. Moreover, in many Contracting States the patent must
be validated in order to retain its protective effect and be enforceable against
infringers. Some Contracting States require a translation of the patent
specification, or at least of the claims, if the patent has not been granted in one
of their official languages.
288
If the applicant is not a resident or does not have their principal place of business
in one of the Contracting States, they must be represented by a European patent
attorney throughout the procedure before the EPO except for the initial filing of
the patent application.
289
It is always advisable to seek professional
representation before any patent office, whether the EPO or a national patent
office, even when not required by the law.
It normally takes from three to five years for a European patent to be granted.
According to the EPO, the average cost for obtaining a European patent is
286
See EPO, “Legal foundations”, epo.org. See also EPO, “Member states of the European Patent
Organisation”, epo.org.
287
See EPO, “European patents and the grant procedure”, document, Munich: EPO, 2016, p. 32.
Available at
http://documents.epo.org/projects/babylon/eponet.nsf/0/7BFD01F37A47BA47C1257FED004EF089/
$File/European_patents_and_the_grant_procedure_2016_en_6.7.pdf.
288
Ibid., p.17.
289
European Patent Convention, Art.133(2).
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102
approximately €6,000, not including patent attorney fees. Renewal fees must also
be paid in each designated state in which the European patent has been validated
in order to maintain the European patent in those States. Costs for a European
patent are therefore likely to increase depending on the number of designated
States. As a rule of thumb, it is usually cheaper to file a European patent than to
file individual national applications when three or more States are designated.
The fact that a European patent is in reality nothing more than a bundle of national
rights can create significant practical problems for patentees. It is not possible to
enforce a European patent before a single court. The infringement of a European
patent needs to be examined under the conditions of each national patent law. If
– according to the national laws – a European patent is infringed across Europe
and the patentee wishes to obtain damages for all States concerned, they will
have to go to a different court for every single State in which the infringement is
taking place, according to different national legislations and procedures.
In order to remedy this situation, a unitary patent system has been in
development for more than a decade. Once in force, the system will allow
companies and individuals to obtain a truly single patent that is enforceable
before a single centralized Unified Patent Court.
2.4.14 – Video Game Patents In Europe
In general, patents in Europe have a similar structure to US patents in that they
consist of a description of the invention, claims, drawings and an abstract, and
grant their owners comparable rights for 20 years from the date of filing. Utility
models are also available in some European countries. As mentioned, these are
essentially similar to regular patents, but protect minor innovations for a shorter
time while being easier and quicker to obtain.
As is the case in the United States, both eligibility and patentability are subject to
a strict set of requirements. The patent must relate to an invention that is novel,
“inventive” (that is, non-obvious) and susceptible of industrial application. In
addition, the patent must describe the invention in a manner sufficiently clear and
complete that the invention can be carried out by the person having ordinary skill
in the art; for video game patents, that would typically be an engineer or a game
programmer.
In Europe there are explicit exclusions from patentable subject matter, such as
schemes, rules, games, plants and animal varieties, inventions against public
order or morality, whereas in the United States there are no prescribed
exclusions, but abstract ideas, natural phenomena and laws of nature are
excluded by case law.
Additionally, European law has traditionally differed from US law when it comes
to software patents. Under the European Patent Convention, computer programs
cannot be patented “as such”, but only if they are implemented in a way as to
create a further “technical effect”.
290
The exact meaning of these rules has been
the subject of long-standing debates.
290
According to EPO guidelines, for instance, a computer program designed based on specific
103 Mastering The Game
The European Patent Convention also excludes from patentability schemes,
rules and methods for playing games, if claimed “as such”, no matter how original
they are. The exclusion applies not only to rules for traditional games such as
card or board games, but also to game rules underlying video games. For video
games, this excludes the patentability of elements that govern how the game
proceeds, both of its own accord (for example, evolving characters and
storylines) and in interaction with the player (for example, tapping along with the
game soundtrack to make your character dance if rhythms match).
291
In short, the only way to obtain a patent in relation to a video game is to have the
game rules implemented in such a way as to produce a “technical effect”, going
beyond those already inherent in the game rules and their implementation via a
computer program. Rules that engage players and keep them interested, or give
rise to a balanced and rewarding gameplay, are considered to have merely
psychological effects, not technical effects, and are therefore non-patentable as
such.
This is quite a complex area of patent law, and it is not always easy to understand
whether such a technical effect exists. To cite practical examples, in Case No. T
2321/12, the EPO refused a Nintendo European patent application over a
dungeon game because the only novel matter that the patent described involved
game rules, in particular a set of rules according to which the playable character
had to arrive at a specific “connection point” such as a portal or the dungeon
entrance in order to move from the ground space to the dungeon space, or vice
versa.
292
Similarly, in Case No. T 2127/09 the EPO refused a Bandai European
patent application over a Tetris-like game: the game rules described in the patent
were excluded from patentability as such, and their technical implementation was
deemed not inventive.
293
In Case No. T 0188/11, the mechanics of a Nintendo
kart racing game were also found to be unpatentable in Europe: Nintendo’s patent
application described a video game mechanic in which players could influence
the driving of the kart in different ways depending on the weight of the in-game
driver and passenger characters. According to the EPO, attributing weight to a
virtual character and having the kart respond in different ways according to their
weight was merely a game rule and, as such, excluded from patentability.
294
Conversely, in Case No. T 0012/08 the EPO found that Nintendo could patent a
specific Pokémon game mechanic as implemented by a computer program.
Nintendo’s patent application related to a computer program to make the
probability of a Pokémon appearing during the game time-dependent, which was
achieved by having a software program interacting with a clock, and which the
EPO considered to be an inventive “further technical effect”.
295
Similarly, in Case
No. T 0928/03 the EPO granted Konami a patent over the implementation of a
specific soccer game mechanic. Konami’s invention consisted in a method
technical considerations of the internal functioning of the computer on which it is to be run may
produce a further technical effect. The same is true for a computer program controlling the internal
functioning or operation of a computer, such as processor load balancing or memory allocation. See
EPO, “Guidelines for Examination” Part G, Chap. II, 3.6.1, epo.org, EPO, March 2021.
291
EPO, “Guidelines for Examination in the European Patent Office”, epo.org
292
EPO Boards of Appeal Decision of April 21, 2016 in respect of Case No. T 2321/12 – 3.2.04,
epo.org.
293
EPO Boards of Appeal Decision of May 12, 2011 in respect of Case No. T 2127/09 – 3.2.04,
epo.org.
294
EPO Boards of Appeal Decision of May 3, 2013 in respect of Case No. T 0188/11 – 3.2.04, epo.org.
295
EPO Boards of Appeal Decision of February 6, 2009 in respect of Case No. T 0012/08 – 3.2.04,
epo.org.
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allowing a gamer to understand which in-game soccer player the currently
controlled in-game soccer player would pass the ball to next; this was done by
highlighting the soccer player that would receive the ball with a guide mark as
long as the player was on screen, and by using an enlarged guide mark on the
edge of the display to indicate the direction in which the ball would be passed
when the soccer player was off-screen.
296
To summarize, it is easier to obtain a
patent whenever hardware, such as Nintendo’s Wiimote, is also involved: in Case
No. T 1504/17, for instance, the EPO granted Nintendo a patent concerned with
the use of a controller’s movement sensor to determine how in-game objects are
selected and moved to other areas of the screen. The EPO expressly noted that
the inventive feature of the patent was in fact “not a game aspect, such as a game
rule, or specific to a particular role-playing game but a technical way of controlling
an object in a game space”.
297
One final aspect worth emphasizing is that not all patents are necessarily valid,
even when granted by the EPO or any other national patent office. It is entirely
possible that a patent granted by the relevant patent office may later be found to
be invalid because it related to a non-inventive product or process, or to a
computer program or game “as such” and, therefore, cannot be enforced against
anybody. If you receive a claim for patent infringement, it is strongly
recommended to discuss the validity of the patent at hand as well as all other
circumstances of the case with a professional well-versed in patent law. If a
patent holder knows that their patent is invalid but still claims that the patent is
infringed, in certain jurisdictions they could even be liable for damages in respect
of the alleged infringer.
2.4.15 – Common Questions About Patents
What Can Our Company Put “Patent Pending” On?
“Patent pending” can only be written on a product can if an actual patent
application or provisional patent application has been filed with the national patent
office. Putting this marking on a product that does not meet this criterion could
result in a liability.
While the mark of “patent pending” does not directly grant patent rights to the
user, it serves to put potential future infringers on notice. Some companies hold
the common misconception that they should always put “patent pending” on any
invention. Yet, patent pending is not like a trademark and does not grant the
common law rights that the symbol ™ does in the United States. Also, if the patent
is not granted, it is not proper to keep this marking on the unpatented item. As a
final consideration, in the United States, placing patent pending on a product
when there is no patent application is a violation of Title 35, Section 292 of the
United States Code. There are financial penalties for marking products
incorrectly.
296
EPO Boards of Appeal Decision of June 2, 2006 in respect of Case No. T 0928/03 – 3.5.01,
epo.org.
297
EPO Boards of Appeal Decision of August 17, 2006 in respect of Case No. T 1504/17 – 3.2.04,
epo.org.
105 Mastering The Game
Patent Agents And Patent Attorneys In The United States: What Is
The Difference?
As you can see from all the information presented in this chapter, patent law is a
complex area of law. It may not be surprising to learn that most attorneys
practicing patent law have additional qualifications and specialized degrees. In
the United Kingdom, becoming a patent attorney is a very different legal
educational process from other legal professionals. In the United States, law
school is the same for all attorneys and all practicing attorneys are required to
take a state bar to practice law, but patent law is the only area of practice that
requires lawyers to take a further examination in order to become a “registered
patent attorney”. This examination covers patent law and, in particular, the rules
governing patent applications. The test is administered by the USPTO and may
be taken by attorneys and non-attorneys. One requirement for this examination
is a college-level scientific or technical education. The exam is difficult and, in
some years, only about 50% of students pass. An attorney who passes this exam
is a “patent attorney”. A non-attorney who passes the exam is a “patent agent”.
Patent agents can aid in writing patent applications and other matters before the
USPTO, but their capacity is more limited than that of registered patent
attorneys.
298
2.5 – Rights of Publicity
Publicity rights, also known as rights of publicity, personality rights or image
rights, are sometimes considered IP rights because they are intangible exclusive
rights. Furthermore, these rights are considered in any creative endeavor that
may use someone’s image. In general terms, publicity rights are a set of rights
that allow a person to control the commercial distribution of their own name,
image, likeness, voice or other identifiable representation of personality.
Developers and publishers should be aware that this can include the use of a
distinctive voice, nickname, catch-phrase or even tools of trade of a particular
individual.
299
This is the right that allows a celebrity to be paid to endorse a certain
product or company and simultaneously allows that celebrity to prevent a
business from faking their endorsement.
On the other hand, unlike the core IP rights, there is no international treaty
specifically relating to publicity rights. Because of this, the way in which these
rights are handled differs widely from country to country and, in the United States,
from state to state.
Publicity rights exist for several policy reasons. These include the idea that the
right to one’s identity is among the most fundamental human rights. It is also
closely tied to the right of privacy, protecting a person from unwanted commercial
298
For further information on the European patent attorney system, see EPO, “Conditions for
registration and enrolment”, epo.org. A patent attorney is distinct from a lawyer specializing in patent
law; in some countries, patent attorneys may not represent clients in courts dealing with patent
infringement.
299
In 1974, for example, a court found that tobacco company Winston’s use of doctored photographs
of race car driver Lothar Motschenbacher’s car infringed his rights even though his facial features
were not visible. Motschenbacher v. R. J. Reynolds Tobacco Co., 498 F.2d 821 (9th Cir.1974).
Mastering The Game
106
exposure. Furthermore, there is an argument that rights of publicity prevent fraud
and unfair business practices that could derive from a fake endorsement.
Publicity rights are important in the game context because using a person’s
likeness in a game, or to advertise a game, usually requires their permission. The
same is true for using a person’s voice or other recognizable characteristic.
2.5.1 – Rights Of Publicity In The United States
The approach to rights of publicity is not harmonized in the United States and
varies by state. Indeed, publicity rights are not regulated at the federal level but
are governed by state law.
300
The state with jurisdiction is the state in which the person concerned currently
lives. Publicity rights may originate from state law statutes
301
or from case law,
300
Importantly, there are state law statutes in many states responsible for the bulk of game
development in the United States, including California, Massachusetts, New York, Texas and
Washington.
301
California: Cal. Civil Code, Sects 3344-3344.1 (prohibits the unauthorized commercial use of
name, voice, signature, photograph or likeness. Allows the rights of a deceased personality to
continue for 70 years after the death of the personality).
Florida: Fla. Stat., Sect. 540.08 (prohibits the unauthorized publication or use for commercial or
advertising purposes of the name or likeness of any person which continues for 40 years after their
death).
Illinois: Ill. Rev. Stat., Ch. 765, Sect.1075/1 et seq. (an individual has the right to control whether and
how to use their identity for commercial purposes; this right continues for 50 years after death).
Indiana: Ind. Code, Sects 32-36 (prohibits the unauthorized “commercial use” of a personality’s name,
voice, signature, photograph, image, likeness, distinctive appearance, gestures, or mannerisms.
Several exceptions are listed, such as literary works, musical compositions and fine art. This right
continues for 100 years after their death).
Kentucky: Ky. Rev. Stat., Sect. 391.170 (prohibits the unauthorized commercial use of the name or
likeness of a “person who is a public figure” until 50 years after their death).
Massachusetts: Mass. Gen. Laws Ann., Ch. 214, Sect. 3A (prohibits the unauthorized use of name,
portrait, or picture of a person for advertising or trade purposes).
Nebraska: Neb. Rev. Stat., Sects 20-202 (prohibits the exploitation of a natural person’s name,
picture, portrait, or personality for advertising or commercial purposes, as an invasion of privacy).
Nevada: Nev. Rev. Stat., Sects 597.770-597.810 (prohibits the unauthorized commercial use of any
person’s name, voice, signature, photograph or likeness during life and continuing for 50 years after
death).
New York: N.Y. Civil Rights Law. Sects 50 and 51 (prohibits the unauthorized use for advertising or
trade purposes, of the name, portrait, or picture of any living person).
Ohio: Ohio Rev. Code Ann., Sect. 2741.01 et seq. (prohibits the unauthorized use of “any aspect of
an individual’s persona” for commercial purposes during life and for 60 years after death).
Oklahoma: Okla. Stat., Title 12, Sects 1448 and 1449 (prohibits the unauthorized use of another’s
name, voice, signature, photograph, or likeness, in any manner, on or in products, merchandise, or
goods for the purposes of advertising or selling. This right continues for 100 years after death).
Pennsylvania: Pa. Cons. Stat., Title 42, Sect. 8316. (prohibits the unauthorized use of name or
likeness).
Rhode Island: R.I. Gen. Laws, Sect 9-1-28, 9-1-28.1(a)(2) (prohibits unauthorized use of any person’s
name, portrait, or picture for advertising or trade purposes).
Tennessee: Tenn. Code Ann., Sects 47-25-1102, -1103, -1104, -1105, -1106 and -1107 (prohibits the
unauthorized use of an individual’s name, photograph, or likeness in any medium for the purposes of
advertising, fund raising, or solicitation of donations or purchases. The right continues for 10 years
after death).
Texas: Tex. Property Code Ann., Sect. 26.001 et seq. (prohibits the unauthorized use of a deceased
individual’s name, voice, signature, photograph, or likeness in any manner, including commercial and
advertising uses for 50 years after death. This law does not apply to the rights of living individuals).
Utah: Utah Code Ann., Sect. 45-3-1 et seq. (prohibits unauthorized commercial use of an individual’s
personal identity in a way that expresses or implies approval or endorsement of a product or subject
matter).
Virginia: Va. Code, Sect. 8.01-40 (prohibits the unauthorized use of a person’s name, portrait, or
picture for advertising or trade purposes until 20 years after their death).
Washington: Wash. Rev. Code, Sect. 63.60.010 et seq. (provides every individual or personality with
107 Mastering The Game
without a specific statute.
302
Moreover, some states allow publicity rights to pass
to a person’s estate so that they may be protected for a period even after death
(see the table below).
303
While some states have no post-mortem right of publicity
and most others limit it to a certain number of years, one state, Tennessee, the
home of Elvis, has a perpetual right of publicity.
STATES THAT RECOGNIZE THE RIGHT OF PUBLICITY FOR DECEASED
PERSONS
California
Kentucky
Ohio
Utah
Connecticut
Michigan
Oklahoma
Virginia
Florida
Nebraska
Pennsylvania
Washington
Georgia
Nevada
South Carolina
Illinois
New Jersey
Tennessee
Indiana
New York
Texas
Failure to obtain permission from the person or their estate when required could
result in a court granting an injunction to halt the sales of the game and/or
awarding damages to the person whose image was used without consent.
Moreover, such damages are likely to be punitive in addition to the court-derived
fair market value for licensing the person’s right of publicity. A developer or
publisher could also be required to remove the infringing use of the person’s
likeness, image or other attribute and, if this is not a viable option (for example
because the product is marketed and distributed in digital form and a game patch
removing the character cannot be issued), to recall all copies of the product.
Finally, a game-maker could be left in the unenviable position of being forced to
obtain a license from the aggrieved or litigious individual.
a property right in the use of their name, voice, signature, photograph, or likeness. The protections
for an Individual, that is, a natural person, continue until 10 years after their death, while the right of
a Personality, that is, any individual whose “publicity” has a commercial value, continues for 75 years
after their death).
Wisconsin: Wis. Stat., Sect. 895.50(2)(b) (prohibits the unauthorized use for advertising or trade
purposes of the name, portrait, or picture of any living person).
302
The following states have common law Publicity Rights: Alabama, Arizona, Connecticut, Georgia,
Hawaii, Michigan, Minnesota, Missouri, New Hampshire, New Jersey, South Carolina and West
Virginia.
303
In November 2020, New York State enacted legislation establishing a limited post mortem right.
The law protects people for 40 years after their death, provided that their rights of publicity had
commercial value upon or because of their death; these rights include their name, voice, signature,
photograph, or likeness and are limited to lawful residents of New York who died within 180 days from
when the law became effective. Significantly, it will not apply retroactively to celebrities and athletes
such as Marilyn Monroe and Jackie Robinson. The legislation also allows for descendants to control
and protect the likeness and image rights of the deceased. See United States: The New York State
Senate, “Senate Bill S5959-D”, 2019-2020 Legislative Session, nysenate.gov.
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108
While the right of publicity can afford broad protection against unauthorized use,
it is not without its limitations, including the First Amendment rights of a developer
or publisher.
304
The application of the First Amendment will depend on the type
of use of the personality attributes within the video game. It may allow the use of
an individual’s name, likeness and other protectable characteristics when not
solely intended to attract attention “to a work that is not related to the identified
person” or for “appropriating an individual’s commercial value as a model rather
than as part of a news or other communicative use”.
305
In Rogers v. Grimaldi,
306
the Court of Appeals in New York created a two-step test to examine first whether
the product at issue is wholly unrelated to any underlying work incorporated
therein and second whether the use of the individual’s name is merely a disguised
commercial advertisement. The test aims to determine whether the unauthorized
use of an image or trademark in a product, such as a video game, may produce
a misleading impression that the depiction demonstrated an endorsement. The
“transformative use”
307
defense is also used to balance the right of publicity
against First Amendment protections in a video game and goes a step further
than the Rogers test. It hinges on a determination of whether the purpose of the
game merely exploits the identity of a party for monetary purposes or whether the
video game contributes distinctive and expressive content. While this may seem
complex, in fact it comes down to whether the person’s image or other personal
attribute has been sufficiently “transformed” in the game. If the creator can
demonstrate their creative input, this should defeat a right of publicity claim and
warrant the First Amendment protection.
Even with the Rogers test and the transformative use analysis, right of publicity
suits have flourished in the video game industry for the past decade. Various
celebrities and influencers have alleged that their rights of publicity have been
infringed in games, as in the case of Kirby v. Sega of America Inc.,
308
No Doubt
v. Activision Publishing, Inc.
309
and Gravano v. Take-Two Interactive Software,
Inc.
310
Many in the video game industry believed that the Supreme Court’s
decision in Brown v. Entertainment Merchants Association in 2011, declaring that
video games are protected by the First Amendment, would end such claims.
311
304
The First Amendment is part of the US Constitution and guarantees freedoms including freedom
of speech, press, and religion, and the right of assembly.
305
Restatement (Third) of Unfair Competition Sect. 47, Comment c, (1995).
306
Rogers v. Grimaldi, 875 F.2d 994 (2nd Cir.1989).
307
Comedy III Prods. Inc. v. Gary Saderup, Inc., 25 Cal. 4th 387, 407 106 Cal. Rptr. 2d 126, 141, 21
P.3d 797, 809 (2001).
308
Kirby v. Sega of America, Inc., 144 Cal.App.4th 47, 50 Cal.Rptr.3d 607, 81 U.S.P.Q.2d (BNA) 1172
(2006). Kierin Kirby, a singer for the musical group, Deee-Lite, claimed that use of her likeness and
catch-phrase in a video game violated her right of publicity. The court held that Sega’s decision to set
the game in space and make the character a space-reporter, instead of a musician, was sufficiently
transformative to avoid any liability.
309
No Doubt v. Activision Publishing, Inc., 192 Cal.App.4th 1018, 122 Cal. Rptr. 3d 397 (Cal. Ct. App.
2011). The musical group No Doubt sued the publisher of Band Hero, alleging right of publicity
violations arising from the use of avatars representing the band in the game. The court held that
Activision’s use was not transformative as the avatars were performing the same activity by which No
Doubt achieved its fame.
310
Gravano v Take-Two Interactive Software, Inc., 142 AD3d 776, 37 N.Y.S.3d 20 [1st Dept 2016],
affd 31 NY3d 988 [2018]. In another case, the band The Romantics also sued Activision in 2008,
alleging that the game Guitar Hero violated their rights, but the case was ultimately dismissed.
311
Brown v. Entertainment Merchants Association, 564 US 786 (2011). The Supreme Court strongly
held that video games qualify for First Amendment protection and that the “basic principles of freedom
of speech … do not vary” with the creation of a new and different communication medium. Specifically,
the Court stated that “[l]ike the protected books, plays, and movies that preceded them, video games
109 Mastering The Game
Initially, the opposite was true, specifically in the context of sports games.
312
In
Keller v. Electronic Arts Inc. and Hart v. Electronic Arts, Inc., which dealt with the
depiction of former National Collegiate Athletic Association (NCAA) college
football players in games,
313
the courts refused to find for the video game
company on First Amendment grounds. The cases settled after the courts opined
that neither game was sufficiently transformative to avoid a right of publicity
suit.
314
In Champion v. Take-Two Interactive Software, Inc., basketball player
Phillip “Hot Sauce” Champion sued the developer of the NBA 2K18 game over
the use of his likeness and of the nickname “Hot Sizzles”. The suit was dismissed
in 2019 because the image and name of the in-game character did not sufficiently
resemble those of the real-life player.
315
communicate ideas – and even social messages – through many familiar literary devices (such as
characters, dialogue, plot and music) and through features distinctive to the medium (such as the
player’s interaction with the virtual world). That suffices to confer First Amendment protection.”
312
In Brown v. Electronic Arts, Inc., 724 F.3d 1235 (9th Cir. 2013), former football great Jim Brown
filed a suit against Electronic Arts based on unauthorized video game use of his image and player
statistics. In granting Electronic Arts’s motion to dismiss, the court opined that Electronic Arts’s use
was protected by the First Amendment.
313
The NCAA is recognized as the most significant organization regulating intercollegiate athletic
competition in the United States. Formed in 1905 primarily in response to concern about the increased
violence in college football, the NCAA has grown to include 1,098 colleges and universities and 102
conferences. The NCAA determines playing rules, sets eligibility requirements, regulates recruiting of
students, and establishes the requirements for and the number of scholarships that may be offered
covering 24 sports. NCAA, “What is the NCAA”, ncaa.org.
Throughout its history, the NCAA has prohibited college athletes from exploiting their name, image
and likeness (“NIL”) while in school, justifying it in the name of amateurism. Once a college athlete
receives compensation, they are no longer eligible to participate in college sports and are considered
professional athletes. As a result, under the various past licensing deals involving college video
games, the players’ NIL were never licensed, and student- athletes received no compensation. Sports
video games eventually imposed a unique issue as the artwork became more detailed with
advancements in technology, some players felt that their likeness and image were being used even
though they were not named. They would later argue successfully in court that other elements such
as their look, distinguishing features or style of play combined with licensed rights, including team
names, jerseys, numbers and statistics, indirectly identified them and therefore violated their rights of
publicity. In 2021, the playing field began to shift dramatically against a backdrop of state legislation
allowing athletes to profit from the exploitation of their NIL, followed by a unanimous Supreme Court
decision against the NCAA restrictions on educational related perks. National Conference of State
Legislatures, “Student-Athlete Compensation”, ncsl.org, October 20, 2021; NCAA v. Alston, 141 S.
Ct. 2141 (2021). Shortly thereafter, the NCAA, decided to allow college athletes the right to license
their NIL rights under certain circumstances. How will these changes potentially affect the sports video
game industry in the US? In the past, game developers could only sign deals with retired college
athletes to use their NIL on the packaging or marketing campaigns because of the NCAA restrictions;
rights to use a school’s team colors, name, jerseys, and other indicia were obtained separately
through a license with the school, primarily through licensing agents (i.e., CLC). None of these deals
permitted the use of a player’s NIL. Under the new NCAA rules and various state legislation, college
athletes can now negotiate deals and receive compensation to be on the cover, in marketing
materials, social media, appear at events, and in the game. However, the agreement with the athlete
requires separate permission to use the school’s indicia in marketing materials. While signing a
student might be very lucrative for a handful of students, it will be a lot more challenging for individual
players to appear in a game. Most likely, until the players can be represented as a group, whether
through the school, the conference they play in, or a new organization representing the players similar
perhaps to a labor union, it will be challenging to negotiate, sign and administer individual agreements.
Perhaps games may only have certain players, or be limited by the number of teams. Furthermore,
compensation issues may arise: would some players receive more money, or would the money be
equally distributed? No matter how such issues are resolved, expect changes in college athletics,
which video games may have helped bring about.
314
Keller v. Electronic Arts Inc., 724 F.3d 1268 (9th Cir. 2013); Hart v. Electronic Arts, Inc., 717 F.3d
141, 154 (3rd Cir. 2013). In Hart, the court held that “[i]f a product is being sold that predominantly
exploits the commercial value of an individual’s identity, that product should be held to violate the right
of publicity and not be protected by the First Amendment, even if there is some ‘expressive’ content
in it that might qualify as ‘speech’ in other circumstances. If, on the other hand, the predominant
purpose of the product is to make an expressive comment on or about a celebrity, the expressive
value could be given greater weight.”
315
Champion v. Take-Two Interactive Software, Inc., 64 Misc.3d 530, 100 N.Y.S.3d 838 (SupCt. New
York County 2019).
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110
Several right of publicity litigations have also been brought by or on behalf of
historically famous or infamous individuals, including John Dillinger,
316
General
George S. Patton
317
and Manuel Noriega, with varying degrees of success. In
Noriega v. Activision Blizzard, Inc., Panamanian dictator Manuel Noriega brought
a suit against Activision for the depiction of his likeness in Call of Duty: Black Ops
II. Activision filed a motion to strike under California’s anti-SLAPP statute,
claiming that the game’s inclusion of Noriega’s likeness was a valid exercise of
its constitutional right to freedom of speech. The court held against Noriega, and
granted Activision’s motion because it satisfied both the Rogers test and
transformative use test.
318
With all this in mind, developers and publishers should
also be aware that fame is not necessarily a requirement for bringing a right of
publicity suit.
319
More recently, a new approach to litigation has emerged where the right of
publicity claim is supported by other causes of action such as copyright and
trademark infringement, although the general thrust of the courts has been to
afford broad First Amendment protections to games, stopping short of ruling
conclusively on right of publicity grounds. In recent litigations, various plaintiffs
brought lawsuits against developer and publisher Epic Games for allegedly
copying famous dance moves to make purchasable dance emotes in Epic
Games’ Fortnite.
320
Between the two cases, plaintiffs brought claims based on
trademark, copyright and right of publicity infringement; the collective rulings in
the cases illustrate the application of Hart v. Electronic Arts, Inc. in practice. In
one case, Pellegrino v. Epic Games, the court applied Hart’s transformative use
test to conclude that Epic Games’ depiction of the plaintiff’s signature moves (a
couple of short dance steps falling short of a full choreographed dance routine)
was sufficiently transformative to provide Epic Games’ dance animation a
stronger claim to First Amendment protection than the plaintiff’s interest in their
right of publicity. While the Pellegrino court’s ruling did determine that Fortnite
was entitled to strong First Amendment protections, the suit was still pending at
the time of writing, the court having allowed the plaintiff’s false endorsement claim
316
In 2011, a court granted a motion to dismiss in Dillinger LLC v. Electronic Arts Inc. finding that the
use by Electronic Arts of Dillinger’s name in a game was protected by the First Amendment and that
Dillinger had no right of publicity protections since he had died prior to the statute becoming effective.
Dillinger, LLC v. Electronic Arts, Inc., 795 F. Supp. 2d 829 (S.D. Ind. 2011).
317
As previously indicated, the claims in CMG v. Maximum Family Games involving the inclusion of
General Patton in the game Legends of War: Patton were settled in 2015 following the filing of a
motion to dismiss.
318
Noriega v. Activision Blizzard Inc., Cal. Super. Ct., BC551747 was dismissed in 2014. The Court
found that Activision Blizzard’s First Amendment rights trumped any right of publicity protections
Noriega might be due. It also found that Noriega was so infamous that his reputation could not
conceivably have been damaged by his inclusion in the game. Lastly, considering the game as a
whole, it deemed Noriega’s limited use to be sufficiently transformative.
319
In 2005, Topheavy Studios, Inc. v. Doe, No. 03-05-00022-CV, 2005 Tex. App. LEXIS 6462 (Tex.
App. August 11, 2005) was filed, relating to the publication of a video game containing images of an
underage plaintiff exposing her breasts, taken at a trivia contest on South Padre Island. The case
resulted in a temporary restraining order being issued barring the further production of copies of the
game. In 2015, relatively unknown Italian surgeon Sergio Canavero recognized himself in a surgeon
character of Konami’s Metal Gear Solid V: The Phantom Pain trailer and filed a complaint with the
local police. Whether the likeness is coincidental or not, what makes the case interesting is that
Canavero was a real-life surgeon who studied and wrote on real-life phantom pains, which, as the
name suggests, were a central theme in Metal Gear Solid V: The Phantom Pains. How the case
developed remains unknown. See Galliani, Gabriel, “Could The Metal Gear Solid Lookalike Doctor
Really Sue Konami?”, kotaku.com, April 29, 2015.
320
Pellegrino v. Epic Games, Inc., 451 F. Supp. 3d 373 (E.D. Pa. 2020), and Brantley v. Epic Games,
Inc., 463 F. Supp. 616 (D. Md 2020). In Pellegrino, the court dismissed the claims involving rights of
publicity, privacy and trademark.
111 Mastering The Game
to survive a motion to dismiss. The second case, Brantley v. Epic Games, cited
heavily from Pellegrino in reaching a similar conclusion to dismiss the plaintiff’s
suit. In each case, the court also noted that while there is an interest in the right
of publicity, short dance moves are generally not copyrightable subject matter,
although the Copyright Act preempts right of publicity claims as choreography
and dance fall within its ambit. Moreover, it noted that it is generally difficult to
attach trademark significance to such moves.
2.5.2 – Rights Of Publicity In Other Countries
Publicity rights as described above are unique to the United States. Other
countries around the world have developed publicity rights that arise, on the
whole, from the same fundamental policy reasons, namely, the human right to
protect one’s name and image coupled with the economic right to control its
commercial exploitation, although the implementation of those policy reasons in
law varies around the world.
For example, in countries such as the Australia, Canada and the United Kingdom,
publicity rights have been created by case law,
321
drawing on the rights of privacy
and of passing off – or, in other words, by fusing together an individual’s right not
to have their person broadcast in public together with their right to avoid having
their person associated with a product without authorization. However, these
rights are not nearly as robust or as detailed as the US system, reflecting,
perhaps, the reluctance of these countries to enshrine a formal or detailed
publicity rights system. In other countries, including France,
322
Germany
323
and
the People’s Republic of China,
324
publicity rights are part of statutory law
although, again, the degree of protection varies considerably.
2.5.3 – Image Rights In Europe
Unlike copyright, trademarks and patents under the European Patent Convention
which are highly harmonized in the EU, rights of publicity or, more often, “image
rights”, are regulated not by EU law but at the national level. The lack of
harmonization in Europe is evident in the term of protection. In some countries,
such as Germany, the term extends beyond the person’s death, while in others,
such as Spain, its patrimonial aspect means it ends once the individual passes
away.
Image rights differ conceptually across Europe and from the US right of publicity,
which is of a mainly economic nature, while image rights in Europe are mainly,
although not exclusively, understood at a personal level. Thus, image rights in
Europe generally have both personal and patrimonial aspects, allowing any
person to control any use or misappropriation of their representation,
appearance, voice or name.
321
Pacific Dunlop Limited v. Paul Hogan and Ors [1989], FCA 185 (the “Crocodile Dundee” case) in
Australia or Robyn Rihanna Fenty v. Arcadia [2013] EWHC 2310 (Ch) (the “Rihanna t-shirts” case) in
the United Kingdom.
322
Art. 9 of the French Civil Code and Art. 226-1 of the French Criminal Code together enshrine the
right to “respect of private life” and impose penalties on persons infringing it.
323
In Germany, the doctrine of publicity rights is known as the “Allgemeines Persönlichkeitsrecht” and
is derived from the German Constitution, the German Civil Code and court decisions.
324
Art. 99 of the General Principles of Civil Law of the People’s Republic of China.
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112
While limited exception might be provided on a country basis, in general terms
any developer who wants to use a person’s likeness will need their authorization.
In fact, even in those countries where freedom of speech is constitutionally
protected, the test could be stricter than in the United States whenever the image
is not strictly for informational purposes, and particularly if the image is
reproduced in video games. Therefore, before including third persons’ names or
appearances in a video game, developers should seek a license from the persons
depicted unless the use of the name is merely descriptive, such as in a quiz game
with questions that includes the name of sporting figures or celebrities, or falls
under one of the applicable exceptions, of which examples are provided below.
United Kingdom
The United Kingdom does not have any law specifically regulating image
rights.
325
However, it provides for the possibility of a common law action for
passing off whenever the reproduction constitutes false endorsement.
Accordingly, in a recent case involving the reproduction on t-shirts of a picture of
pop-star Rihanna, UK courts took the view that the use of the image amounted
to passing off because a substantial portion of consumers would consider that
Rihanna had endorsed it.
326
As far as we know, there is no specific UK case law relating to in-game image
rights violations. In a case relating to the video game Mind Candy, which featured
the Lady Gaga-inspired character “Lady Goo Goo”, Lady Gaga, not being able to
rely any piece of legislation protecting image rights, sued the video game
publisher for trademark infringement – as “Lady Gaga” is also a registered
trademark.
327
Germany
Unlike the United Kingdom, Germany explicitly recognizes image rights as both
a privacy and a property right, protected from birth until 10 years after the death
of the relevant individual. As a general rule, the reproduction of an image is
subject to the consent of the individual depicted; however, German law provides
for some exceptions specifically connected with photography but that can be also
extended to video games. In relation to photographic works, images depicting a
certain individual may be distributed or published without the relevant consent,
whenever: (i) they reflect the sphere of contemporary history; (ii) the person has
been portrayed only incidentally as a part of a picture of a landscape or any other
physical location; (iii) the picture shows a gathering taking place in public; or,
more generally, (iv) the artistic freedom of the photographer prevails over the
personality right of the depicted person, because the photographer is reporting
on facts capable of contributing to debate of general interest.
328
However, this
exception applies mostly in relation to images used as part of newsworthy
information and would not necessarily apply when the use of the image
325
Fenty & Ors v. Arcadia Group Brands Ltd (t/a Topshop) & Another [2013] EWHC 2310 (Ch).
326
Ibid.
327
Ate My Heart Inc. v. Mind Candy Ltd [2011] EWHC 2741 (Ch).
328
Sect. 23 of the German Act on the Protection of Copyright in Works of Art and Photographs -
Kunsturhebergesetz (KUG).
113 Mastering The Game
appropriates commercial value, such as when a celebrity’s features are exploited
for purposes of merchandising or advertising.
329
When the image is used for commercial purposes, according to German case law
the scope of freedom of speech of the person exploiting the image should be
further limited. Following this reasoning, a German court awarded television
presenter Günther Jauch, whose image was reproduced on the cover of a
magazine, a reasonable license fee.
330
France
Image rights are protected in France under both civil law, on the grounds of the
right to privacy, and criminal law. According to French civil law, image rights are
infringed whenever clearly identifiable features of a person’s likeness or
personality are used without that person’s authorization or, if an authorization was
in fact given, whenever its limits are exceeded. Similar to the United States and
Germany, France also has a “newsworthy” exception. Additionally, France also
provides a general and quite broad parody exception which in principle should
apply also to commercial uses of a person’s image, provided that the use does
not maliciously harm that person’s reputation.
331
Parody intent was invoked as a defense by the developer of a French political
game called Jean-Marie, jeu national multimédia: FN 92. The developer tried to
justify their in-game use of the image of Mr. Fodé Sylla, president of French anti-
racism association SOS Racisme, whom the game presented as an enemy of
France. Furthermore, in consideration of the political scope of the game, such
use was found to be maliciously harmful to Mr. Sylla and therefore to violate his
image rights.
332
Collective management of image rights is also a source of litigation in France. In
the early 2000s, the French Football Federation claimed that Konami had
reproduced the names and images of French soccer players without their consent
in various versions of the game “International SuperStar Soccer”. However,
Konami argued successfully that it had valid authorization to do so from the
International Federation of Professional Footballers (FIFPRO), the relevant
authority managing the soccer players’ collective image rights.
333
Italy
Italy does not have laws specifically protecting image rights in the modern sense
of the word; image rights in Italy are mainly a judicial creation, whose legitimacy
is nonetheless rooted in the Italian Civil Code and the Copyright Law.
334
329
Lauber-Rönsberg, Anne, “The Commercial Exploitation of Personality Features in Germany from
the Personality Rights and Trademark Perspectives”, The Trademark Reporter, Vol.107 (2017), pp.
803-847.
330
Germany: Cologne Higher Regional Court, Ruling No.15 U 133/13, ZUM-RD 521 (2015) of March
6, 2014.
331
Jacques, Sabine, The Parody Exception in Copyright Law, Oxford University Press, 2019.
332
See France: Cour de Cassation, Civil Chamber 1, No. 96-15.610 of July 16, 1998; and Dimita,
Gaetano, Rizzi, Andrea, and Serao, Nicoletta, “Image rights, creativity and videogames”, Journal of
Intellectual Property Law & Practice 15(3) (2020), pp.185-192.
333
France: Konami Corporation (Japan) v. Football France Promotion SA, Tribunal de grand instance
de Paris (Paris District Court), 3rd ch. 3rd sect., May 18, 2004.
334
Martuccelli, Silvio, “The Right of Publicity under Italian Civil Law”, Loyola of Los Angeles
Entertainment Law Review Vol.18 No. 3(6) (1998), pp 543-563.
Mastering The Game
114
Italian law also provides for exceptions to the general rule that the reproduction
of a person’s image requires that person’s authorization. For instance, the
unauthorized use of someone’s image may be considered justified whenever it
refers to a public figure or a celebrity or whenever the image is exploited for a
cultural purpose. However, the viability of this exception for uses that have a
commercial purpose has been debated and is ruled out by courts more often than
not. Italian courts take a very protective view of image rights, which are
furthermore interpreted in a broad sense as evidenced by the relevant case law.
For instance, in a dispute involving popular Italian singer Lucio Dalla, a court
found that Mr. Dalla’s image rights were violated by an advertisement that only
showed two of the most distinctive features of his persona: a woolen cap and a
pair of round glasses.
335
More recently, a court found that the use of Audrey Hepburn’s likeness in an
advertisement recalling the well-known movie Breakfast at Tiffany’s violated Ms.
Hepburn’s image rights (post-mortem) and awarded damages to her heirs. In that
case, the advertisement in question was not even reproducing an actual picture
of Ms. Hepburn but only a model impersonating Holly Golightly, the character
played by Ms. Hepburn in the movie.
336
2.5.4 – Negotiating The Right Of Publicity
Considering the unharmonized legal framework surrounding publicity rights and
the subsequent uncertainties, it is standard practice in the video game industry
to license image rights globally whenever a real person is used in a game.
When negotiating for a right of publicity, the most critical license terms are: the
rights granted (i.e., the way the likeness will be used); services to be provided, if
applicable; exclusivity; territory; the term of the license; and whether or not the
likeness will be used in advertising. Moreover, the subject of the license will likely
ask for certain terms including review and approval rights over actual in-game or
advertising uses. Recent business strategies suggest that worldwide rights and
a perpetual license are preferable, but the cost of obtaining these will reflect their
broad nature. Another consideration is whether the game developer will require
the services of the person to create voice-over or record motion capture, for which
fees are often charged in addition to the mere likeness license.
Potential licensees should also be aware that in the United States most celebrities
and actors are members of the Screen Actors Guild - American Federation of
Television and Radio Artists (SAG-AFTRA).
337
Guilds have additional
requirements above and beyond contracted payments to the celebrity. Most
critically, they require recurring payment for the use of the celebrities concerned
and payments into the guild’s pension and health fund.
335
Italy: Dalla v. Autvox, Pretura di Roma (Rome District Court), April 18, 1984, Foro It.1984, I, 2030.
336
Italy: Dotti and Ferrer v. Caleffi s.p.a., Tribunale di Milano (Court of Milan), Decision No. 766 of
January 21, 2015.
337
See Section 5.4 regarding SAG-AFTRA.
115 Mastering The Game
2.6 – Trade Secret
Trade secret can be thought of as the oldest and most established form of IP.
Even two million years ago, Homo habilis could keep his competitive advantage
for a new stone tool, the use and construction of that tool, by treating it as a “trade
secret”. The mechanism then, as now, was merely to keep that information
secret. The processes have grown more complex since then, but the basic idea
is the same.
In general, to qualify as a trade secret, the information must be commercially
valuable because it is secret, be known only to a limited group of persons and be
subject to reasonable steps taken by the rightful holder of the information to keep
it secret, including the use of confidentiality agreements for business partners
and employees.
338
A trade secret is the only form of IP that is not disclosed
publicly; patents, copyrights and trademarks all rely on some form of public
disclosure. International treaties such as the Paris Convention for the Protection
of Industrial Property and the TRIPS Agreement provide foundations for the
protection of undisclosed information, although the means of their implementation
vary widely, and set out the principle that the appropriation of trade secrets
without permission is an act of unfair competition.
In the United States, trade secret law was until recently available only at the state
level in the form of the US Uniform Trade Secrets Act, resulting in a patchwork of
different standards and no federal jurisdiction for claims. States could choose to
adopt the Uniform Trade Secrets Act, a model law, to establish remedies for
misappropriation of trade secrets. Notably, New York and North Carolina are the
only major video game-producing states that have not adopted the Act;
unfortunately, many prominent game-makers are located in these states.
339
The
federal Defend Trade Secrets Act of 2016 incorporates similar laws to the Uniform
Trade Secrets Act. As with trademark law, the federal trade secret law does not
pre-empt but coexists with state law. The Defend Trade Secrets Act authorizes a
trade secret owner to file a civil action in a federal district court seeking relief for
trade secret misappropriation in relation to products or services used in interstate
or foreign commerce.
340
The legal landscape is not dissimilar in the EU. Prior to the implementation of the
2016 EU Trade Secrets Directive,
341
trade secret was not a harmonized exclusive
right in the EU but, rather, a remedy based on different legal principles such as
unfair competition, general principles of tort law, contract law or breach of
confidence. The Directive aims to address this fragmentation by introducing a
unified approach across the EU. It defines a “trade secret” and creates a minimum
level of protection. It sets out what would be considered a lawful acquisition, use
338
WIPO, “Trade Secrets”, wipo.int.
339
References to all US states’ Uniform Trade Secrets Act or adjacent laws are set out in Beck Reed
Riden, “Trade Secrets Acts Compared to the UTSA”, faircompetitionlaw.com, August 8, 2018.
California (Cal. Civ. Code, Sect. 3426), Washington (Wash. Rev. Code Ann., Sects 19.108.010 -
19.108.940), Texas (Tex. Civ. Prac. & Rem Code Ann., Sects 134A.001 - 134A.008), and
Massachusetts (MA S.2418, 189th Gen. Ct. (Ma. 2016)) are the other major video game-producing
states besides New York and North Carolina.
340
American Bar Association, “Explaining the Defend Trade Secrets Act”, americanbar.org,
September 20, 2016.
341
Directive (EU) 2016/943 on the protection of undisclosed know-how and business information
(trade secrets) against their unlawful acquisition, use and disclosure.
Mastering The Game
116
and disclosure of a trade secret, and what would be considered unlawful. It also
clarifies the remedies available to trade secret holders.
Under the terms of the definition contained in Article 2 of the EU Trade Secrets
Directive, information is considered a trade secret if:
“(a) it is secret in the sense that it is not, as a body or in the
precise configuration and assembly of its components,
generally known among or readily accessible to persons
within the circles that normally deal with the kind of
information in question; (b) it has commercial value because
it is secret; and (c) it has been subject to reasonable steps
under the circumstances, by the person lawfully in control of
the information, to keep it secret”.
A comparable definition can be found in Section 1(4) of the Uniform Trade
Secrets Act, which defines a trade secret as follows:
“ ‘Trade secret’ means information, including a formula,
pattern, compilation, program device, method, technique, or
process, that: (i) derives independent economic value, actual
or potential, from not being generally known to, and not being
readily ascertainable by proper means by, other persons who
can obtain economic value from its disclosure or use, and (ii)
is the subject of efforts that are reasonable under the
circumstances to maintain its secrecy.”
342
Both definitions are constructed in a way that captures all kinds of information,
extending beyond classic trade secrets such as construction drawings or recipes
and including information such as known product defects or company code of
conduct violations. Furthermore, it is evident that in order to qualify as a trade
secret, certain steps must be taken to ensure the confidentiality of the information.
2.6.1 – What Can Be A Trade Secret?
Any information that is objectively confidential (such as information known only
to a limited group of people) and has an economic value for a company can be
protected as a trade secret, including formulas, business strategies, data
compilations, devices, process, algorithms and/or customer lists. The most well-
known example of a trade secret is the formula for Coca-Cola. The formula is
known only to a select few individuals in the company and has been kept
confidential for more than a century by strict confidentiality measures. Although
many public descriptions exist, none have been verified. Other examples of trade
secrets may include notes on game development, business contacts, license
terms and other internal business items that are valuable to game development
but not protected by other IP rights.
As already emphasized above with regard to the Defend Trade Secrets Act and
the EU Trade Secrets Directive, the most significant aspect of trade secret
342
The definition of a trade secret under the Defend Trade Secrets Act is identical although the
security efforts standard is broader and includes any “reasonable measures”.
117 Mastering The Game
protection is the “reasonable steps/efforts” requirement. A company must show
that it has actively taken steps to identify and protect its trade secrets.
343
The main advantage of trade secret regime is that unlawfully obtaining trade
secrets is actionable without the need to show that the trade secrets have been
either used or disclosed by the lawful owner. In addition, they have no registration
cost and can be protected relatively quickly.
2.6.2 – What Rights Are Conferred By Trade Secrets?
Trade secret holders have the right to prevent others from accessing, using or
disclosing their trade secret without permission. In the EU, the Trade Secrets
Directive provides protection and civil remedies for the unlawful acquisition, use
or disclosure of trade secrets. Criminal penalties available at the national level
are not affected. The measures, procedures and remedies put in place by way of
civil redress include injunction, compensation, damages and account of profit.
Speaking in terms of the Uniform Trade Secrets Act, a company has the right to
prevent others from “misappropriating” a trade secret. Section 1(2) of the Act
describes misappropriation in this way:
“ ‘Misappropriation’ means: (i) acquisition of a trade secret of
another by a person who knows or has reason to know that the
trade secret was acquired by improper means; or (ii) disclosure
or use of a trade secret of another without express or implied
consent by a person who (A) used improper means to acquire
knowledge of the trade secret; or (B) at the time of disclosure or
use knew or had reason to know that his knowledge of the trade
secret was (I) derived from or through a person who has utilized
improper means to acquire it; (II) acquired under circumstances
giving rise to a duty to maintain its secrecy or limit its use; or (III)
derived from or through a person who owed a duty to the person
seeking relief to maintain its secrecy or limit its use; or (C) before
a material change of his position, knew or had reason to know
that it was a trade secret and that knowledge of it had been
acquired by accident or mistake.”
Unlike the Uniform Trade Secrets Act, the federal law (Defend Trade Secrets Act)
requires ownership of the trade secret as an essential element of the claim. A
company has to establish “rightful legal or equitable title to, or license in” the
information alleged to be a trade secret. If a company fails to successfully
establish that another party accessed or used their trade secret without
permission, they can usually rely on: (i) a claim for a breach of a confidentiality
agreement; or (ii) an employment contract that obliges the parties to not misuse
any confidential information that they may come across in the course of
employment or similar interaction with the company.
343
In the EU, the case law at the national level further clarifies that this refers to taking “adequate and
reasonable” actions to avoid disclosure that should be implemented both externally and internally
(Spain: Civil Judgment No. 441/2016, Provincial Court of Madrid, Section 28, Rec 11/2015 of
December 19, 2016). A national court in the EU has also confirmed that the owner of the trade secret
is not required to successfully keep the confidential information secret, meaning that a trade secret is
protected even if the steps to keep it secret, despite being “reasonable”, turn out to be insufficient
(Austria: Austrian Supreme Court Decision No 4 Ob 165/16t of October 25, 2016).
Mastering The Game
118
2.6.3 – Examples Of Trade Secrets
Every kind of information can be a trade secret. It is essential to have in place
protection measures qualifying as “reasonable efforts”/ ”reasonable steps” to
keep the information confidential and show that the information has a certain
value for the company. Further, it should be kept in mind that a trade secret does
not protect against reverse engineering. Therefore, trade secret is most suitable
to protect information that can be kept confidential and cannot be worked out from
reviewing publicly available products, processes or literature or where publication
of information is meant to remain private. As an example, mailing-list data for
subscribers of a massively multiplayer online game (MMO) could be considered
as a type of trade secret. The users concerned have subscribed to Company A’s
MMO for years and have each paid hundreds of dollars to the publisher. If an
employee steals the MMO contact list, they can have easy access to people
interested in playing an MMO and willing to pay for it in the long term. This
information could be enormously valuable to a competitor.
Development tools could also be trade secrets. Consider a development tool that
may intelligently populate a 3D level with environmental objects by pulling the
objects from a specified directory. This software could be written in-house for one
development project but easily modified to work with other projects, saving
programmers and level designers many hours of work by laying down a ‘skeleton
level’ which is a basic outline structure that can be added to and changed. This
tool is certainly also covered by copyright, but if never sold, published or patented
it could also be a trade secret. As with Coca-Cola, some elements of the tool
could remain trade secrets even if the tool itself were sold. An employee taking
the code for this design tool to a competitor would be stealing a trade secret.
Contact information of publishers/developers/middleware providers and details
about licensing and publishing agreements can also be a trade secret. In fact,
license agreements and other contract secrets are one of the most common trade
secrets in the game industry. Often both parties do not want details of deals
leaked to the public. This class of secrets covers obvious clauses such as how
much is paid and when. It also covers less obvious but equally important
information, such as which employees are “key employees’” for fulfilling a
development agreement.
2.6.4 – Term Of Protection
Trade secrets last as long as the owner of the information prevents it from
becoming common knowledge. Like trademarks, trade secrets are potentially
immortal. The only limitation is the time for which the information can be kept
secret.
2.6.5 – Process And Cost
Unlike patents and trademarks, no formalities such as registration are required to
obtain trade secret protection. However, while no registration or maintenance
fees are required, trade secret protection is not without costs. By definition, trade
secrets must be subject to reasonable protection measures, including practical,
contractual and legal measures; a company that is unable to show sufficient
119 Mastering The Game
evidence that it has taken reasonable steps to enforce its trade secret will not be
protected from misappropriate use.
2.6.6 – Protecting Trade Secrets
Practical protection measures include maintaining a database containing details
of all trade secrets, controlled access on a need-to-know basis, passwords and
encryption to restrict electronic access and so on. All such information security
measures should be aligned with an internal trade secret policy on which
employees should receive regular training. Common protections include
recording trade secrets and having employees sign documents stating that they
understand that certain information is a trade secret and that the information has
special restrictions on dissemination. Controlled access is an important part of a
trade secret. If the trade secrets are electronic files, it would be appropriate to
allow only certain people to access those files, consider encryption for those files
and place special protections on modifying or copying them.
In addition, contractual protection measures need to be implemented, in
particular with employees and business partners. All employees and third parties
should sign a non-disclosure agreement. Protection of trade secrets not only
includes not telling anyone the information unless they need to know it, but can
also include other internal security measures. Measures such as restricted
access to the information internally, passwords, encryption, locked cabinets and
non-disclosure documents all help protect the company’s trade secrets.
Lastly, a strategy needs to be put in place in case protected information is
compromised in any way or a compromise may be imminent. First, your company
should do whatever is necessary to stop the leaked information. This may include
further restricting access, changing passwords and perhaps moving databases.
It may also include sending ISP and/or webmaster notices if the trade secret
information is being hosted online. The company also usually places the offender
on notice that he or she is distributing a trade secret. This notice, similar to other
such webmaster/ISP notices, will demand that the offender “cease and desist”
from distributing the secret.
All evidence relating to the unauthorized access, opportunity and usage and the
steps taken to mitigate the impact should be kept, as this will form the basis of
your claim for trade secret misappropriation.
Similar to copyright and other types of IP enforcement, each of these steps should
be taken in concert with your attorney.
2.6.7 – Penalties For Infringement
Virtually every country has a sanctions system for misuse of trade secrets or
confidential information. In the United States, for example, remedies available
under the Defend Trade Secrets Act include an injunction to preserve evidence
and prevent trade secret disclosure, damages and reasonable attorney’s fees.
Damages can be measured in three ways. First, they may be measured as a loss
of profit by the party that originally held the secret. Second, they may be
measured as profit by a party that used or disclosed the misappropriated trade
secret. Third, if appropriate, the measurement could be a reasonable royalty
Mastering The Game
120
payment for the trade secret.
344
Unlike the Uniform Trade Secrets Act, the Defend
Trade Secrets Act allows a trade secret owner to seek an ex parte seizure order
(as an alternative to a temporary restraining order, which does not involve law
enforcement personnel) to prevent dissemination of the trade secret.
In the EU, penalties for the unlawful acquisition, use or disclosure of trade secrets
ranges from civil to criminal remedies. The Trade Secrets Directive harmonizes
civil remedies, while making it possible for member states to provide for additional
criminal sanctions, such as for the violation of manufacturing trade secrets. Under
the civil remedies available, a trade secret holder may apply to the court for: (i)
an injunction, which may be directed to prevent the infringer from using the
information or require them to recall or destroy the infringing goods; (ii)
compensation, which would be awarded to the trade secret holder based on the
amount of royalties or fees that the infringer would normally have to pay to use
the information; (iii) damages, which may cover any reasonable and foreseeable
economic loss caused by the trade secret infringement; or (iv) an account of
profits, which allocates the profits generated by the infringer’s use of the protected
information to the trade secret holder.
2.6.8 – Common Questions About Trade Secrets
Can Trade Secret Status Help Me Protect My IP From Reverse
Engineering?
In general, reverse engineering is allowed both under the US and EU legal regime
under copyright law exceptions and limitations.
345
A lawful acquisition, use and
disclosure of trade secrets through reverse engineering takes place when, for
example, hardware or software is observed, studied or tested and ultimately re-
created without accessing a blueprint, source code or other related information.
This process, while in no way easy, has been accomplished for some relatively
secure gaming systems and software. However, trade secret status can protect
game developers from reverse engineering since the difficulty of reverse
engineering is sometimes well beyond the realm of human capability and is only
possible if some protected information is leaked to the public. Trade secret status
can help protect against such leaks and potentially cut off reverse engineering
attempts before they become feasible.
At What Stage Should A Game Company Use Trade Secrets?
The best advice for a gaming company embarking on any new project is to
maintain some planned secrecy at every stage. You should think carefully about
what information may qualify as trade secret and the best way of protecting it. If
applied correctly, trade secret protection can be a cost-efficient way of
contributing to a robust IP strategy. Try to keep key in-game calculations,
customer lists, community information and key business contacts a secret
confidential, make sure that you put in place reasonable protection measures
(including non-disclosure agreements, access control, IT tools) and that you can
344
Uniform Trade Secrets Act, Sect. 3(a) and the United States Code, Title 18, Sect.1836(b)(3)(B).
However, damages under the Uniform Trade Secrets Act may vary from state to state.
345
For example, with regard to computer programs (EU Directive 2009/24/EC).
121 Mastering The Game
provide evidence of these measures. That should help to prevent your game
ideas and business know-how from being stolen or reproduced and give you the
possibility to prosecute any trade secret misappropriation if necessary. The major
reason why game companies lose information that they consider a trade secret
is the cost and trust issues associated with obtaining and maintaining such
“secrets”. Quite often, a small game company will be founded by a group of
friends, who feel that such measures would be unnecessary because of the high
level of trust between them. Although this may be the case, they are necessary
to obtain trade secret protection. Even without any voluntary betrayal of trust
inside the company, there may be other possible ways of obtaining the
confidential information, such as hacking, people accessing the premises, friends
from company members obtaining access to the information in the apartment of
the respective company member and so on. Without reasonable protection
measures in place, you will not be able to claim infringement of a trade secret.
Therefore, it is always better to ensure the protection of valuable resources with
the proper measures before there are any problems. As a rule of thumb: the more
valuable the information, the better your protection measures should be in order
to be considered reasonable.
2.7 – IP Strategy 101
The bottom line is that your IP is the lifeblood of your company. Here are some
tips for how best to protect your IP in day-to-day business.
Have A Relationship With Experienced IP Counsel
At the risk of sounding repetitive, this cannot be said enough. Ideally, you should
find an attorney with game industry experience. This relationship forms the
foundation for educating the development team about IP rights surrounding the
game project and building protections for those rights. This person can help
developers of any size protect their IP by drafting and reviewing documents and
offering advice. Having this relationship ensures that the developer has taken the
appropriate steps in advance of pitching the game. This relationship also ensures
the best possible case-by-case advice while interacting with publishers or
investors.
Protect IP In Advance
Use trademarks properly, including by using the appropriate symbol in the United
States (™ or ®) when trademarks are used in documents. Keep trade secrets,
especially when pitching a game, and understand that sharing those secrets can
jeopardize their protection. Publishers and other parties understand that
developers cannot give away the farm – it is expected that some delicate
information will be proprietary. Developers can always describe processes in
general without going into detail. For copyright protection and date confirmation,
developers should always write critical game design ideas out in detail and save
concept art and early screen shots. Before pitching ideas to publishers and
investors, discuss patent registration possibilities with your attorney. Lastly, and
most importantly, keep good records to document the earliest possible
ownership, development and use of the idea for all types of IP.
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122
Protecting IP: Pitching A Game To Publishers And Investors
Understand that publishers and investors want to limit their legal exposure and
that many “standard” non-disclosure agreements are essentially one-sided
documents to protect the other party rather than you or your business. The
development team should have its own or a mutual non-disclosure agreement
and ask if the publisher or investor would consider signing it. This negotiation can
take some time and should be undertaken before the pitch day. It is impolite and
unprofessional to wait until the last minute to produce this document. Advice of
IP counsel in this area is critical in drafting a non-disclosure agreement to protect
the developer’s interests and deciphering the other party’s non-disclosure
agreement.
346
The Process Is Complex, But Results Are Achievable
Since the process of protecting IP is often so complex and attorneys are a
necessary part of that process, why should a game developer even bother? First,
a knowledgeable game developer can ask good questions when dealing with IP
advisors, saving everyone time and money. Second, a game developer familiar
with IP may recognize the early warning signs of IP infringement in game
development, before money is wasted on creating an infringing character, story
line or feature. In addition, much of IP protection requires planning and structure
within the development company. An educated consumer of IP advice is best
situated to understand that advice and to implement structures within the
company that protect IP. Most importantly, all of the contracts and licenses
surrounding games deal with IP, from work-for-hire contracts for employees to
publishing deals, royalty structures and movie rights. Even though the developer
is working with attorneys, the developer makes the final decisions and should
know that the ultimate responsibility for protecting and selling the game rests with
him or her. Given everything discussed in this chapter, that burden requires an
understanding of this extremely important topic.
Strategies For Small Companies And Individual Developers
Small companies and individual developers should concentrate on low-cost
options to protect their IP. These companies do not usually have the staff or the
resources necessary for an elaborate IP strategy and most will not even have a
single employee tasked solely with developing and implementing such a strategy.
The low-cost options for IP protection in the United States include simple
copyright registration for commercially available products. The plan may also
include federal registration of the company’s one or two most important marks to
receive the ® designation, or the use of
TM
to achieve common law protection at
the very least. European-based businesses may want to start by registering an
EU trademark. The company’s most important mark is usually its name or
name/logo combination. Trade secret processes are also relatively inexpensive
and easy to put in place for a small company.
346
See Chapter 11 regarding non-disclosure agreements.
123 Mastering The Game
Small companies and individuals may regard international trademark protection
as too expensive. In the digital distribution era, however, it is highly recommended
for a game company’s trademark registrations to cover at least some of the
relevant key markets as soon as practical. These businesses will also be less
interested in patent protection unless it is involved in the core business model,
such as hardware development.
Strategies For Large Developers And Publishers
Larger developers and publishers should implement the same measures as small
companies but should also expand IP protection to include more resource-
intensive steps. These steps include registering the trademark of all major titles
released by the company internationally or in the main jurisdictions of interest. A
developer or publisher may also want to file for a federal registration of the
trademark to cover other categories of goods, especially if they intend to sell
game-branded merchandise or otherwise enter into merchandise licensing
agreements. Such steps may also include international registration and policing
of the company’s most important trademarks. Additionally, as indicated above, a
company may want to retain one of the third-party trademark monitoring
companies to conduct checks for any infringing marks on an ongoing basis. Large
publishers and developers should also consider filing separate US copyright
applications for music and other protectable components associated with game
titles.
347
An upgraded IP program may include building a patent portfolio, especially in the
United States. Some game companies pay bonuses to employees in the
company who submit patentable ideas and help complete the patent process.
After a company has developed and/or purchased a patent portfolio, larger
companies should consider monetizing this portfolio by seeking out licensing
partners. These patents can be used as friendly negotiating tools with partners to
add value to negotiated transactions, or can be used offensively to force
competitors into paying licensing fees or designing their product around the
patented invention.
Patents, although a purely offensive instrument in legal terms, also have a certain
perceived defensive value. This value comes from the fact that litigants often find
companies with large patent portfolios to be “menacing.” A company with a large
patent portfolio is usually indicative that it has significant legal resources and
sophistication. Of course, there is also the idea that such a company may file a
counterclaim for patent infringement in any litigation against it.
2.8 – Three Important Points
Before concluding the chapter, all the different forms of IP and some of the
important details are summarized in the table below.
347
Larger projects often have more protectable IP and large developers have the resources to spread
the protection around. More registrations often result in more potential claims if there is a theft down
the road. So, a large developer with multiple filings can litigate several registrations and several
different types of IP in one case and has more granular coverage if just one element is taken (such
as just taking the music from a game).
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DIFFERENT FORMS OF IP
IP – Important
Details
Patents
Trademark
Trade Secret
Copyright
Term
20 years
Immortal
Immortal
70–120 years
Cost
High
Medium
Medium
Low
Ease of
obtaining
Tough
Medium
Medium
Easy
Use
Rare
Often
Often
Often
Registration?
Yes
Recommend-
ed
No
Recommend-
ed where
available
Coverage
Medium
Narrow
Large
Large
Even the largest game development and publishing companies can make trivial
errors in IP protection that cost significant money or, worse, the rights to a whole
game. Such errors can sometimes be avoided with an introductory understanding
of IP and a relationship with a competent, experienced attorney. Failing to take
these steps is the metaphorical equivalent of leaving the city gates open and
letting the Visigoths rush in.
Game developers can take three steps to avoid potentially disastrous IP pitfalls.
First, they should obtain a basic understanding of IP protection and what it means
to them, especially in the areas most important to the creation of games.
As a second step, developers should have an attorney with broad experience in
IP, especially trademark and copyright. This attorney, who may or may not be the
same attorney used for other business issues, can help set up the most efficient
and protective internal structures to protect IP. As discussed throughout this
chapter, an attorney can also aid in negotiating the myriad of game contracts that
are literally filled with IP-related language.
Third, developers should ensure that their employees and contractors sign
appropriate agreements assigning all the IP they produce to the company. These
three steps are necessary to build solid legal defenses around valuable game
property. It is not an understatement to say that the life and future of your game
depends on them.
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CHAPTER 3
PUBLISHING A VIDEO GAME
3.1 – The Role Of The Publisher
The publisher has historically played a role similar to that of a movie studio,
whereby they finance, develop, distribute, license, and market a product to
consumers. Publishers finance games of third-party developers in return for
distribution rights and possibly ownership. They distribute finished games
including often on their own distribution platforms,
348
and they finance the
development of games internally.
349
While the role of the publisher is changing -
mostly attributed to digital distribution which has opened the door for self-
publishing - publishers still play a significant role in distributing games throughout
the world on all the major platforms and distribution channels.
One significant and unchanging aspect of the role of major publishers is their
importance in distributing games for retail. This process involves a lot more steps
and money than digital distribution to make a product available to consumers.
Although retail sales have fallen over the past few years, they still make up an
important stream of revenue. As a result, a developer seeking to distribute a retail
version may seek a relationship with a publisher who has more expertise,
resources, and established relationships with parties involved in distributing and
marketing products to consumers, including retailers, manufacturers, and media
outlets.
A publisher may also provide worldwide services in connection with a digital
release of a game, as they could have: (i) greater influence with distributors and
platform holders; (ii) brand recognition, which helps attracts consumers to their
network of games; (iii) financing to help support the release of a game,
downloadable content, continuing services, and porting to additional platforms;
(iv) marketing expertise; (v) extensive data and analytics; and (vi) a social media
presence. All of the above could be beneficial to a developer.
350
348
The most prominent publisher-owned digital platforms excluding those owned by the major
console manufacturers include EA’s Origin, Ubisoft’s Connect (formerly known as Uplay) Epic’s
Game Store, Blizzard Entertainment’s Battle.net, Tencent’s WeGame, and Wargaming Game
Center.
349
Many publishers have their own internal development teams which are sometimes separate
entities. In addition, publishers have acquired third-party development studios along with their
employees and IP. All rights to the games are owned by the publisher unless the game includes
licensed property. Many of the major publishers are relying more on in-house developed games,
although they are developing fewer. Most of these games are associated with continual services
which extend the life cycle of a game by offering new ongoing content such as in-game purchases
on an ongoing basis.
350
According to Game Developers Conference 2020 State of the Game Industry report, more than
25% of developers are working with publishers with 19% paying advances. The 2020 survey was
based on responses from nearly 4,000 industry people, although the report did not specify the
countries of the participants. Game Developers Conference, “2020 State of the Game Industry
Report”. You can download the report at http://reg.gdconf.com/gdc-state-of-game-industry-2020.
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For many developers, taking on the responsibility to launch a game successfully
is a tremendous burden on a company’s resources, especially its time and
money. Therefore, developers need to balance the benefits and drawbacks of
dealing with a publisher before determining how they want their game to be
distributed. This is assuming that a publisher and distributor will even be
interested in working together, a factor that is particularly relevant to AAA
publishers, who have become more focused on exploiting their own IP. However,
this has also created opportunities for smaller publishers to enter the market and
provide services for developers. In this regard, there are many similarities with
the film industry, where smaller distributors compete with the major film
distribution studios. This is mainly true in the mobile space where most AAA
publishers have been slow to enter the market, thereby creating an opportunity
for new publishers focusing solely on this platform. Another possible similarity to
the film industry is that we may eventually see some of the AAA publishers like
the major studios establish separate divisions focusing solely on smaller
independent projects.
Agreements between the publisher and developer vary depending on the role
played by the publisher. The most common scenarios are as follows:
1. The publisher hires a development team to develop a game based on a
new concept or established franchise
351
and owns the copyright to the
game.
2. The publisher has licensed rights to a property from a licensor and may
pay a royalty to the developer creating the game.
3. The publisher pays for the development of a game based on a concept
created by a third-party developer and pays royalties based on revenue
earned, but does not own the copyright.
4. The publisher acts only as a distributor of a finished game, typically
receiving a fee for its services overseeing the distribution and
manufacturing of the game.
352
5. The publisher agrees to publish a developer’s mobile game, exposing
the game to the publisher’s network of users in exchange for a
percentage fee based on revenue earned from the game.
6. The publisher hires a developer to port a game to a specific platform
typically involving just a development fee without any royalty payments.
In each situation, the publisher will also typically provide the money for the
manufacturing (not relevant for digital), distribution, and marketing of the game.
351
This is rare as most publishers have either internal teams or have worked for a long time with 3rd
parties on successful franchises. However, a publisher may want to develop a game for a number of
platforms and may not have the internal resources to do so and as a result hires a third-party
developer.
352
There are also situations in which the publisher may assist in some of the financing for a game to
help finish the product. In return, the publisher might receive a higher distribution fee and/or additional
rights. The timing of seeking financial help from a publisher should be considered by a developer
since publishers, depending on the amount of financing requested, may want to be involved in some
development issues and oversee the marketing. For example, if a developer has already started a
marketing campaign, that may pose an issue if a publisher wants to go in a different direction.
According to the 2020 Game Developers Conference State of the Game Industry survey, funding for
games came from the following sources ranked by the highest percentage: (1) company’s existing
funds; (2) personal funds; (3) external publisher; (4) government funds; (5) venture capital; (6) other;
(7) angel investors; (8) video game platform holders (e.g., Apple Arcade, Xbox Game Pass); (9)
crowdfunding; and (10) Alpha funding (e.g., Steam Early Access).
127 Mastering The Game
In addition, the publisher will: (i) serve as the party that enters into agreements
and manages relationships with the first-party console manufacturers
353
and/or
mobile app stores, ensuring that a game satisfies the requirements of the
hardware owners including delivery, submissions, testing, and payment; (ii)
create and implement a marketing and sales plan including overseeing the
implementation of user acquisitions; (iii) secure deals with sub-distributors, if
necessary; and (iv) form relationships and work with third parties that might be
involved in the distribution and marketing of a game.
As illustrated above, there are many different scenarios between the publisher
and developer, all of which will affect the agreement. The type of relationship and
roles played by the parties, the bargaining power, the budget of the project,
monies advanced by the publisher if applicable, and the responsibilities
undertaken by each party will all play an important role in the negotiations. No
two agreements will be alike, but most will incorporate similar terms and
conditions such as ownership and rights, revenue splits, recoupment costs,
oversight involving the development and exploitation of the game and various
legal issues. However, those terms and conditions will be applied differently
depending on the deal. For example, all agreements should have
representations and warranties, but some deals will have more than others;
some will be absolute, some will have limitations and others will have a
combination of both. Furthermore, if the developer is delivering a completed
game and owns the IP, they should have more influence in the publisher’s
decisions related to the marketing and sale of the game as well as the expenses
incurred, especially if those expenses are recoupable. The following sections will
highlight many of the major issues that appear in publisher-developer
agreements.
Prior to considering a business relationship, both the developer and publisher
will discuss a number of issues to see if the parties are able to come to an
agreement and whether they would work well together. The extent to which the
issues are addressed will depend on each party’s commitment to the other party.
If the publisher is financing production, then it will most likely conduct greater due
diligence on the capabilities of the developer.
3.1.1 – The Developer’s Concerns When Considering A Publisher
As more companies enter the publishing business to fill the gap created by the
influx of independent developers, it is important for the developer to conduct their
due diligence in determining whether a particular publisher is the right fit for the
developer. For the developer, the most significant questions to ask are:
• What games has the publisher distributed and how well did they do?
Have there been any situations in which the publisher did not release a
completed game? If yes, why?
• Does the publisher have the capabilities to distribute and market the type
of game under discussion between the parties (e.g., action, shooter,
sports) throughout the world, as well as the proper resources and
expertise to market, distribute, and exploit the game? How well versed
is the publisher in engaging with online communities?
353
Unless a developer is also a publisher then the developer must enter into an agreement with a
publisher that has a license agreement with a console manufacturer in order to have their games
distributed at retail.
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• What type of relationships does the publisher have in countries which
might require working with local publishers, such as China?
354
Does the
publisher use sub-distributors?
• Were other developers satisfied with the services performed by the
publisher for their games and how easy or difficult was the publisher to
work with regarding the development of a game?
• What type of milestone approval process is employed by the publisher?
• Does the publisher have the financial resources to make payments when
owed and to exploit the game including providing ongoing financial
support for new content?
• What type of relationship does the publisher have with console hardware
manufacturers, retailers, digital distributors, and mobile marketplaces
such as Apple and Google?
• What services will the publisher provide in the development of the game,
such as assisting in the development, testing, localization, submissions,
ratings, and, if applicable, securing third-party licenses such as
trademarks, talent, and music?
• If ancillary rights (e.g., merchandising) are granted to the publisher, does
the publisher have the capabilities to exploit these rights and would they
need to work with a third-party licensing agent?
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• Are there other games that will be released by the publisher at the same
time as that of the developer, and will this affect the release of the
developer’s game?
3.1.2 – The Publisher’s Concerns When Considering A Developer
Before considering whether to enter into an agreement with a developer, the
publisher should also do its own investigation into whether a deal would be in its
interest.
356
While certain concerns will vary depending on the platforms on which
a game is intended to be released, some of the major issues that the publisher
should address with the developer include:
357
• How successful were previous games created by the developer?
• How successful has the developer been in delivering games on time and
within budget?
• Is the developer currently working on other games that might interfere
with the game being considered by the publisher? This can involve
354
In China, laws require that a publisher be local and therefore any company that wants to distribute
in China must work with a Chinese company. See Pilarowski, Greg et al., “Legal Primer: Regulation
of China’s Digital Game Industry”, Pillar Legal China Regulation Watch, January 6, 2021.
355
See Section 4.5.1 for information on licensing agents.
356
There are also advantages for the publisher in working with third-party developers including (i)
expertise in certain categories of games as well as technology; (ii) possible reduction in costs for
development and sharing of risks; (iii) forming new relationships for potential long-term partnerships;
and (iv) new IP to distribute.
357
The publisher may also want to (i) interview other publishers that are either working with and/or
have previously worked with the developer; and (ii) conduct an on-site inspection to review the
developer’s facilities.
129 Mastering The Game
obligations to fix bugs or to provide additional content for previous
games.
• What is the developer’s financial situation? Unless the publisher is only
acting as a distributor, it may want to consider the possibility of auditing
the financial records of the developer.
• What is the experience and reputation of the people that would work on
the game for the different platforms?
• Have the people working on the game successfully worked together on
other games? And if they did work together, was it for the same platform
they will be working on with the publisher?
• Is the developer licensed to work on first-party hardware?
• What is the business model the developer plans to implement, and how
will the game make money and retain customers?
• While it may be a difficult question to answer, both parties should
consider whether they can work together in the long term to ensure
continuing game development with ongoing content, as well as potential
new projects.
358
All of the above factors will be important in determining whether the parties will
enter into a relationship and also how much the publisher believes in the
profitability of the game.
359
If a publisher does not believe the game will sell, then
there will be no interest even if the publisher can acquire distribution rights to the
game without paying the developer an advance. For the publisher, costs incurred
and time spent on distributing a game would be better dedicated to other games,
if they determine that doing so would lead to greater profitability. However, it is
rare, but possible, that a publisher will take a greater risk to form a business
relationship even if their P & L shows a loss.
3.1.3 – Going Independent
For certain developers, entering into a relationship with a publisher can provide
several benefits. Nonetheless, a number of factors have progressively emerged
during the last decade, allowing developers to publish on their own. These
include (i) the advent of digital distribution; (ii) the proliferation of gaming
platforms and the rise of mobile gaming; (iii) new opportunities to source funding;
(iv) availability of software tools to help develop games, whether provided by the
platform or third parties, such as Unity Technologies and Epic Games; and (iv)
companies that can provide specific services covering marketing and payment.
The growth and consumer acceptance of digital distribution, whether on mobile
devices, PCs or consoles, has allowed developers to go ‘digital only’, thus
358
If the publisher is going to financially commit to a developer’s game, then they will most likely want
to benefit from that investment with an opportunity to further the relationship. Firstly, a publisher may
want a stake in the developer’s company. Secondly, if a game is successful, then a publisher will
want to have the right to be involved in subsequent games based on the IP, and potentially to be
involved in additional projects, and will therefore seek a right of first negotiation. See Section 3.2.4.
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A publisher often creates a document outlining the potential profitability of a game, referred to as
the ‘Profit and Loss Analysis’ (P&L). Despite the difficulty of predicting the success of a potential
game, especially a first-time release, and despite the fact that more games are free to play, the P&L
details how much money the publisher expects to receive based on different sales scenarios, and
how much they anticipate spending on exploiting the game. This allows them to determine whether
they believe the game will be profitable and therefore worth supporting.
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avoiding the complexities involved in the distribution of physical products (and
therefore reducing the need for the publisher’s expertise and organization, which
is particularly valuable in respect of the distribution of physical products across
multiple territories).
360
The proliferation of gaming platforms and the rise of
mobile gaming now makes it possible to develop games with significantly lower
budgets than the budgets needed to develop AAA titles, which are continually
increasing.
The traditional role of the publisher is changing and, to an extent, has already
changed. Such changes, which have affected the current video game
ecosystem, have also blurred the former distinction between publishers and
developers. For instance, Epic Games or CD Project Red were largely regarded
as traditional developers until a few years ago. Now, they have evolved into a
new, hybrid category of players. Their core functions are still creativity and game
development, with the corporate culture that one would expect from a developer,
but they have also expanded the scope of their mission to cover at least some of
the functions carried out by a ‘traditional' publisher.
This is more obvious in connection with the market for digital-only games. This
is partly due to the success of some of their most recent games (Epic’s Fortnite
and CD Project Red’s The Witcher), which has made them cash-rich (and
therefore potentially capable of investing in or acquiring other studios or third-
party titles). It is also (perhaps more significantly) due to the fact that they own
or control digital distribution platforms (Epic Games Store and gog.com), which
have come to play a pivotal role in connection with the publishing and distribution
of video games in general, and all the more so in connection with the distribution
of a game in digital-only format.
3.2 – The Publishing Agreement
3.2.1 – Introduction: The Long-Form Agreement
For developers that enter into a publisher agreement (‘the Agreement’),
361
this
document will set forth the business and legal relationship between the two
parties involved in the exploitation and the possible financing of a game. The
Agreement will establish the rights, obligations, and responsibilities of each party
involving potential financing, royalties, game development including ongoing
downloadable content, testing, localization, delivery schedules, distribution,
approvals, marketing, manufacturing, maintaining relationships with the platform
holders and digital distributors, representations and warranties, and
indemnification. The Agreement will vary depending on the potential role of the
publisher and whether the publisher will be a source of financing or just a
distributor of the developer’s game.
In situations where the developer self-finances the game, they may not have the
necessary expertise and money to distribute and market the game, nor the
360
See Chapters 8 and 9 covering digital and mobile distribution and the increase in independent
developers in the space.
361
For the purposes of this chapter, the use of a publishing agreement will cover two situations: (i)
the publisher is involved in the development and distribution of a game; or (ii) the publisher acts only
as a distributor.
131 Mastering The Game
necessary business relationships to release a game on the various platforms and
in certain territories. In particular, if a game is going to be distributed as a
traditional box product, it becomes even more challenging when having to deal
with a multitude of worldwide distributors and retailers as well as replicator and
logistical service providers. Consequently, developers may seek a publisher to
distribute their game.
Although in distribution deals a developer usually does not receive funding for
development, they may nonetheless be able to obtain an advance and/or
guarantee from a publisher for the rights to distribute the game, especially if the
game is highly sought after by publishers. This approach is very similar to a
movie business model whereby film companies distribute completed
independent films and typically pay advances for rights and in return collect a
distribution fee and recoup the costs agreed upon.
In some situations, developers may enter into agreements with different
publishers to distribute their games on different platforms and in different
territories because a publisher may have access to a market, as well as a greater
understanding of a particular market or platform. In addition, the initial financial
reward may be greater in dealing with more than one publisher. For example, a
developer may enter into a deal with one publisher for European distribution and
with another publisher for North American distribution. This type of situation
usually involves a retail release of the game.
362
In some instances prior to the parties entering into a Long Form Agreement, the
parties first may enter into a binding deal memo, sometimes referred to as a term
sheet. This document addresses the major business and legal terms of the
relationship between the developer and publisher without going into as much
detail as a long-form agreement with the understanding that the long-form
agreement will later supplement the terms of the deal memo and address all
other issues between the parties. The objective of the deal memo is to lock in a
deal and for development to start quickly to avoid possibly waiting for a long-form
agreement to be drafted, negotiated and signed.
363
3.2.2 – Ownership Issues
The most important section in the Agreement, aside from the financial
considerations and the delivery schedule, is that which covers ownership and
the rights granted for the exploitation of the game.
In situations where the publisher hires a developer to create a game based on a
publisher’s original concept or licensed property, the publisher, and not the
developer, owns the IP rights to the game subject to the rights of a licensor, if
applicable.
364
This is almost always achieved through express contractual
agreements between the publisher and the developer in a publishing agreement.
However, sometimes it can also be achieved through operation of law. For
362
In this situation, the publisher pays the developer an agreed-upon recoupable advance. Advances
vary, but some reach into the millions of dollars. The Witcher 3 retail versions of the game for example
were licensed by the developer to different publishers in the major markets while they held onto the
digital rights at the same time. CD Projekt, “NAMCO BANDAI to distribute The Witcher 3 in Western
Europe”, cdprojekt.com, October 28, 2013.
363
See Section 11.4 for a discussion on deal memos.
364
By owning all rights to the game, the publisher, usually without any limitations, also has the right
to exploit any of the elements contained in the game (e.g., characters or story lines) by any and all
means including derivative works which would include but not be limited to sequels, merchandising
and films.
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132
example, in the United States, such work would fall under the ‘work-for-hire’
concept,
provided the relationship between the two parties falls within the
prerequisites of Section 101 of the Copyright Act.
365
That said, not all countries
recognize ‘work for hire’, and in countries such as France and Germany, the
‘author’ and owner of the work is the natural person or persons who created it.
366
Nonetheless, either as a result of contract or of law, the publisher will usually
have the perpetual right to exploit the game and any elements in the game
throughout the world by any and all means, with few restrictions.
367
However, in
some continental European countries, the author will retain moral rights which,
generally speaking, cannot be assigned.
368
In other agreements in which the publisher finances a majority of the game, but
the underlying concept to the game originated from the developer, the two parties
would need to negotiate the ownership rights and, if the developer maintains
ownership rights,
369
then the parties would need to go into specific detail about
the rights and obligations of each party, including but not limited to: the platforms
for which the game will be developed, the term, the territory, the financials, and
the rights to other games based on the IP (i.e., sequels), and possible
merchandising rights.
Whether the publisher obtains ownership of the game based on the developer’s
IP or a grant of rights will depend primarily on the bargaining positions of the
parties, the consideration being paid to the developer, and what rights the parties
may want to ultimately secure in an agreement. If the publisher is funding the
entire development, then the publisher will most likely insist on owning the
property, but if other publishers are also interested in the game, or the developer
has an established reputation, then the developer may be able to maintain
ownership as part of their bargaining position. For some developers, owning the
IP may not be as significant as other issues in an agreement, and therefore they
may be willing to assign their rights to a publisher in exchange for other key
365
Work can qualify as ‘work for hire’ in two situations. The first is when the work is carried out within
the employee’s scope of employment. For example, when an engineer creates code during their
employment, the code is then owned by the employer. The second situation is when a work is created
by an independent contractor and three conditions are met: (i) the work has been specially ordered
or commissioned (e.g., the independent contractor is paid to create something new); (ii) the work
must fall within one of the nine categories outlined in the Copyright Act which include: a contribution
to a collective work, contribution to a motion picture or other audiovisual work, a translation, a test,
answer material for a test, an atlas, an instructional text, a compilation or supplementary material;
and (iii) prior to the start of any work, the parties expressly agree in writing signed by both parties
that the work shall be considered a work made for hire. Myers, Gary, “Concise Hornbooks: Principles
of Intellectual Property Law”, 3
rd
edition, West Academy Publishing, 2017, pp. 61-68. Works involving
video games for purpose of the Copyright Act fall under audiovisual works or literary works. If an
employer fails to enter into an agreement prior to work commencing, then the hiring company must
include language in the agreement that the work will be assigned, or at the very least, licensed to the
employer. However, these alternatives could have their drawbacks, including the right to reclaim a
copyright involving assignments under United States copyright laws.
366
Although different from the US model, other countries such as Japan, India, and the United
Kingdom follow a work-for-hire model and vest initial copyright ownership in an employer-employee
relationship with the employer. Cohen, Julie E. et al., Copyright In A Global Information Economy,
2
nd
edition, Aspen Publishers, 2006, p.126.
367
This would include the right to exploit the characters and story, as well as derivative works such
as sequels to the game, merchandising, books and films.
368
The principle of ‘moral rights’ is also relevant in relation to games which have originated or have
links with European individuals. See Section 2.2.13 on moral rights.
369
Additional issues would also need to be addressed regarding ownership involving any new content
created by the publisher, whether for the game or for marketing materials. If the publisher provides
materials to localize the game, would the developer own those materials? If the publisher creates a
marketing campaign, could the developer own it? This would all need to be negotiated between the
parties, but the developer could have a good argument for ownership rights, especially if the
expenses to pay for the content were recoupable by the publisher.
133 Mastering The Game
points in an agreement.
370
However, a developer should take into consideration
that a successful game can help build a franchise, which can be challenging to
achieve with future games. Even if the developer transfers their ownership rights,
they should still negotiate the right to be involved in the exploitation of future
games and ancillary rights. This can be achieved actively by developing sequels
or passively by simply collecting royalties on the exploitation of the IP without
engaging in any other work.
In any event, even if the publisher owns the copyright to the game based on the
developer’s original IP, the developer will want to at least maintain ownership or
obtain the unlimited perpetual license with the right to create derivatives to the
pre-existing source code, tools, and engine they developed, since they may want
to use these materials for additional games to help reduce their future costs.
371
In some situations, the publisher will agree to allow the developer to maintain
ownership of these materials provided that the developer agrees to a holdback
period whereby they consent to not working directly or indirectly on a similar
game for another publisher which may incorporate the developer’s code for an
agreed-upon period of time (e.g., one year from the release of the game). This
prevents a situation whereby the developer may create a similar type of game,
which could eventually compete against the publisher’s game created by the
same developer.
372
In deals involving only the distribution of a game, the developer would maintain
ownership of all rights associated with the game and grant a limited right to the
publisher to distribute the game.
3.2.3 – Rights Granted
In the event that the publisher owns the copyright to the game, they will have the
exclusive right to exploit the game throughout the world in perpetuity. Otherwise,
if the publisher is only distributing the game and the developer controls the
copyright to the game, the agreement will state the publisher’s distribution rights
which may be limited by platform, territory, and term. There is no set formula on
which rights the developer will grant, and like many other terms in the agreement,
they will vary depending on a number of factors, including which party provides
the financing
373
and game concept.
370
See comments about IP ownership and negotiations involving developer’s code and tools. Boyd,
S. Gregory et al., Everything You Need to Know About Legal and Business Issues In the Game
Industry, CRC Press, 2019, pp. 70-72.
371
In the agreement, the parties should list the developer’s specific pre-existing tools and technology
as well as any third-party licensed software and tools. If there are pre-existing tools and technology
then the publisher will need to license those rights from the developer to use in the game. At the
same time, if all of the developer’s IP is acquired by the publisher including the source code then the
publisher will have to license the code back to the developer for use not only in developing the game
but also in any future projects the developer may work on using the code and tools.
372
If any type of restriction is to be imposed on the developer, the parties would need to discuss a
number of issues, including: (i) is the holdback limited to a type of genre or platform? (ii) how long is
the restriction (e.g., one year from the release of the game)? and (iii) what type of limitation is imposed
upon the developer (e.g., the developer cannot release a similar game one year from the release of
the game, or the developer cannot work on a similar game until one year after the release of the
game)? If any restriction is tied to the release of a game the developer must insist on an outside date
to cover situations where the publisher fails to release the game without any fault on the part of the
developer. All of these issues would be subject to negotiations, but the developer should try to limit
the restrictions as much as possible.
373
It might be advantageous for a developer to work with one publisher under one worldwide business
and marketing plan. Publishers will seek the broadest rights possible so they can recoup their
investment, especially if they are providing any type of advance and/or guarantee. For certain games
Mastering The Game
134
As part of the rights section, the parties will spell out the name of the game or
games that will be subject to the agreement as well as the different platforms
374
on which the publisher will be permitted to distribute the game, whether on an
exclusive or non-exclusive basis.
375
This section will also discuss the form of
distribution permitted by the publisher. Generally, the publisher has the right to
distribute games by any and all means, and this broad language includes the
right to distribute by way of traditional box games for retail, digital downloads
including mobile, and possibly even platforms and distribution means that have
yet to be developed and may become relevant depending on the length of the
term.
376
3.2.4 – Additional Rights Issues: Right Of First Negotiation And Last
Refusal On Future Games
Whether or not the game will be successful is difficult to predict and will depend
on a number of factors. However, if the initial release of a game is successful,
both parties will want to guarantee their involvement in future releases (i.e.,
sequels).
377
The most common way in which the parties may negotiate rights to
work on future titles is what is usually referred to as the right of first negotiation.
This right provides a mechanism for an agreed period of time for the parties to
work together on future projects.
Publishers that do not own the copyright to the game will try to make sure that
they benefit from their contribution and will request that if the developer creates
a new game based on the original distributed game, such as a derivative work,
such as AAA titles, the bargaining power lies mostly with the publisher, since there are few parties
that can provide the financing and other resources needed to support these types of titles. In addition,
with fewer major publishers, there are fewer alternatives for developers to work with on these games.
However, as more games are introduced to the market, a number of distribution companies have
entered into the business to work with independent developers including publishers specializing in
one area, such as mobile. While not as big as the major publishers, some have grown to become
billion-dollar companies and can provide some financial assistance in exchange for distribution rights.
374
If the developer is responsible for developing the game on multiple platforms, the publisher may
request parity in features and quality among the various platforms, subject to technical limitations
from the hardware.
375
Depending on the length of the agreement, a game may do well on one platform and as a result,
the developer or publisher may decide that the game should then be developed for or ported to other
platforms that were not originally contemplated for the initial launch of the game. Furthermore, a
publisher may also want to obtain rights for all platforms no matter what platforms the developer has
delivered the game for since the publisher may want to restrict other companies from distributing the
same game on different platforms. If a game is successful, the publisher may argue that their
investment helped sales of the game and therefore other publishers should not be allowed to benefit
from the original success of the publisher’s actions. In some situations, if the publisher distributes a
game on a non-exclusive basis, they may seek to add language which guarantees some form of
price parity subject to any laws. The developer may not want to give up rights for other platforms
since the publisher may not have the necessary expertise to distribute on certain platforms. For
example, a publisher specializing in console and PC distribution may not have sufficient capabilities
or the relationships to distribute games via the mobile market, although if permitted, they could
sublicense the rights.
376
In some situations, units of a game may be sold with other games, which are known as a bundle.
In this situation, the royalty is usually a proportional percentage based on the number of titles included
in the bundle. For example, if two different titles are sold together for one price, then a royalty of 50%
of the revenue received would be allocated to each title. Usually, a developer in a distribution
arrangement with a publisher will request that any potential bundling deal must first be approved by
the developer, especially if one game has greater value (i.e., greater previous sales) than other
games included in the bundle.
377
While publishers may elect to distribute a sequel, many games are also providing downloadable
content and other live services extending the shelf life of a game. It is also possible for the parties to
include multiple titles in a deal involving different IPs. Each property may be treated slightly differently,
such as financials, marketing commitments, termination rights, etc. In most situations, the publisher
will want to recoup their financial obligations from all games.
135 Mastering The Game
then the publisher would have the first opportunity to obtain distribution rights to
these future games provided that the publisher is not in breach of the Agreement.
In this situation, the publisher would usually request a right of first negotiation,
which provides the publisher with the first opportunity to negotiate exclusively
with the developer on rights for such derivative works during an agreed-upon
time frame. During this exclusive window, which varies for each deal but usually
ranges from 30 to 60 days, the parties would discuss the business terms
regarding the rights to exploit a derivative work. If the parties are unable to
conclude a deal, then the developer has the right to negotiate the distribution of
the game with any other party. It is also possible that the developer, though
initially unsuccessful in securing future rights to their derivative work, could
decide to still enter into an agreement with the publisher if they are unable to find
another deal, or could even decide to distribute on their own.
In addition to the right of first negotiation, some agreements may even allow the
publisher to have the right of last refusal, which also may be referred to as a right
to match. In this situation, the publisher will have the opportunity to match any
offer that the developer may accept from another publisher. If the original
publisher matches the offer, then the publisher would then have the right to
distribute the derivative works, assuming that the parties come to an agreement.
Neither the right of first negotiation nor last refusal is automatic, and the parties
will need to negotiate these points. In the event that the developer agrees to a
right of first negotiation and last refusal, then it might be to the benefit of both
parties to establish minimum requirements that would trigger either of these
rights. Usually, this includes a minimum threshold in which worldwide revenue
(the preferred choice with games earning revenue from various forms of
exploitation) or game sales must be met in order to trigger a right of first
negotiation and last refusal. To illustrate, if the developer receives royalties
exceeding $1 million, then the publisher will have the right of first negotiation and
maybe also last refusal; although the developer might negotiate that this
threshold can only apply after a certain period from the game’s release (e.g., six
months). In addition, the parties may want to consider some of the minimum
business terms that would be pre-negotiated in the agreement if the right of first
negotiation was to go into effect. One example is whether or not the developer
should receive higher royalties with the increased value in the property.
Furthermore, in order for the right of first negotiation to be triggered, there might
be other factors that the developer may want to consider, including the working
relationship between the two parties. If the working relationship is strained, a
developer might be willing to take less money from another publisher knowing
that a stronger relationship with another publisher may be more beneficial in the
long run than greater initial payments from the original publisher. It is important
for the parties to agree on what issues need to be matched in the event of a right
of last refusal. For example, it should be established whether the sole concern is
about revenues such as advances, guarantees, and royalties (as if often the
case), or whether there are other issues that must be matched, such as
marketing and sales commitments.
Developers need to be careful when including the right of last refusal since this
could severely hinder the efforts of the developer in negotiating deals with other
publishers. In most situations, a developer would not want to allow a publisher to
match a deal, since other publishers may be reluctant to discuss a deal because
Mastering The Game
136
they know that any deal they offer could be matched, and therefore they are
unwilling to make a commitment.
In the event that the publisher owns the copyright to a game and elects to create
derivative works, the developer should try to negotiate a right of first negotiation
to secure an opportunity to develop any subsequent games. This is especially
true if the game is based on an original game concept created by the developer.
Furthermore, even if the developer does not work on the game, and depending
on their bargaining power, they might try to negotiate some form of compensation
for the use of their original IP
378
and maybe even have some form of approval
rights.
With the right of first negotiation, the developer has the initial opportunity to
negotiate a development deal with the publisher, provided that the developer is
capable of making the derivative games for the selected platforms within the
budget planned by the publisher.
3.2.5 – Territory
This section of the agreement provides information on the countries in which the
publisher has the right to distribute the game(s). If the publisher owns the
copyright to the game, then they have the right to exploit it by any and all means
throughout the world. However, if the publisher only acquires the rights to
distribute a game, then these issues will need to be negotiated between the
parties. Most games today are distributed worldwide, although more challenges
may exist for a particular platform such as retail (e.g., a publisher may not have
distribution capabilities in certain countries), thereby limiting the territorial rights
to a publisher. A developer needs to confirm that if there are any underlying rights
in the game, they have obtained a worldwide license for those rights.
The publisher will want to obtain the broadest rights possible in order to exploit
the games in as many countries as possible. A developer may be willing to grant
worldwide rights, assuming financial terms are agreed upon and provided the
publisher has the capability to distribute in the relevant countries. In countries
where the publisher does not sell directly, the publisher will try to sell the game
through third-party sub-distributors and digital distribution platforms. Most
developers will accept this practice, provided that the publisher would still
ultimately be responsible for any of its obligations and responsibilities under the
terms of their agreement. However, the developer needs to be aware of
additional deductions that are taken from the developer’s or publisher’s share to
pay for the sub-distributors and digital distribution platform services, since this
might ultimately affect the developer’s royalties.
In some situations in which the developer is delivering a finished game, or if the
parties have only entered into a distribution agreement, the developer may limit
the territory and elect to have different publishers distribute the game in various
countries, depending on the capabilities and financial guarantees provided by a
publisher. In addition, although rare, a developer may want to grant different
378
A passive royalty is a royalty paid to a party even though they do no work on the project that
entitles them to the royalty. Instead, they are paid because of their involvement in an underlying work
that led to the new project. An example could be a writer who wrote the original story for a game but
who did not work on the sequel; given that the basis for the sequel originated from their original story,
that writer is entitled to a passive royalty.
137 Mastering The Game
platform rights to different publishers in the same territory. For example, a
developer may grant North American rights to one publisher for console games
and then grant other rights, such as mobile rights, to another publisher. If the
developer decides to take this course of action, then they need to coordinate the
releases among the publishers.
The developer should also negotiate language in distribution agreements to the
effect that if the publisher fails to make at least a reasonable effort to distribute
the game within a certain agreed-upon time frame in a country (subject to timely
delivery), then the rights would either revert back to the developer or become
non-exclusive. This is especially important if the developer did not receive any
payment (whether in the form of an advance or guarantee) for the rights from the
publisher and instead only relied on royalties from sales of the game.
Furthermore, a developer should consider negotiating additional terms that
discuss what would satisfy the minimums for distribution in a territory. This might
include, depending on the bargaining power of the parties, an agreed-upon
distribution plan and marketing spend. Alternatively, some agreements may
include language whereby the publisher either agrees to a ‘best efforts’ or
‘commercially reasonable efforts’ clause to sell and promote the game, including
a marketing spend which could even be tied to an industry standard. However,
although these terms impose obligations on the publisher, they also could have
different meanings to the parties, as well as to a third party interpreting the
language in the event of a dispute. Therefore, the parties should aim to be as
specific as possible to avoid any potential disagreements as to the language in
the agreement.
379
One alternative to consider might require the publisher to
market and distribute the game in a way that is similar to equivalent games that
have been published previously.
3.2.6 – Term
The term of the agreement spells out the length of time that a publisher has the
right to exploit the game, subject to early termination usually caused by the failure
of a party to cure a material breach, possibly force majeure depending on the
language of the agreement, or its entry into bankruptcy. Unless the game is
owned by the publisher, terms will vary depending on the platform, the financial
considerations of the deal, and whether the parties will continue to support the
game with new content.
For agreements in which the publisher owns the copyright, the term is perpetual.
However, if the publisher is only acquiring distribution rights, then the term will
be an agreed-upon number of years (with a sell-off right for physically distributed
games)
380
and will vary from agreement to agreement. In any case, the publisher
will seek the longest term possible so that it has enough time to hopefully recoup
379
Agreements may include general language when referring to obligations that a party will use
reasonable or best efforts (i.e., selling a game or renewing obligations) and take actions based on
industry standards (i.e., by providing credits). If you are negotiating a deal that includes these types
of clauses it is important to understand what the reasonable efforts or industry standards are. For
example, if a publisher agrees to a marketing spend based on industry standards, what are the
standards that will be applied? Is the standard applied for all games? Is it based on a particular genre
or platform, or for games with minimum development costs? Depending on the standard used, the
marketing spend can vary.
380
Provided that the publisher continues to comply with the terms and conditions of the Agreement
and does not manufacture any new inventory, the publisher may have a limited non-exclusive period
to sell off any remaining retail inventory after the term. The sell-off period typically ranges from three
to six months, but will vary depending on the length of the term, and a longer term may result in a
longer sell-off period.
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138
any costs (e.g., distribution, marketing and quality assurance costs, etc.) and to
make money on its investment.
Depending on the different platforms negotiated in a distribution deal, the term
might only be a few years because the life cycle of a game on a particular
platform may be limited. Nonetheless, with additional opportunities to exploit a
game after the initial platform launch, publishers will request longer terms. This
is especially true with developers providing continuous new content to a
successful game and providing games as live services. In addition, with digital
and mobile distribution, games originally developed for the more traditional
platforms (i.e., console and PC) may have value on a new platform. For example,
while a PC game from 10 years ago would no longer sell at retail, it is very
possible that it could still be sold digitally or on a mobile device years later and
therefore still retain some value. Pac-Man, an arcade game released more than
40 years ago, is a perfect example of a property that is still popular on relatively
new platforms such as mobile. In addition, the parties may negotiate to allow the
publisher the option to extend the term for a certain number of years. An option
to extend the term may serve as a good compromise if the developer is reluctant
to grant the number of years requested by the publisher. Provided that the
publisher is not in breach of the agreement, under the option, the publisher would
have the opportunity to extend the term by exercising the option. In this scenario,
the publisher may pay the developer an additional recoupable advance against
future royalties for the right to extend the term.
One point to consider for extending a term may be an automatic extension in the
event that the publisher generates an agreed-upon amount of royalties for the
developer. For example, if the developer receives $100,000 in royalties then the
term extends for an agreed-upon amount of time, with or without an additional
advance paid to the developer.
While a term will refer to the number of years a publisher will have the right to
exploit a game, it is also important to note that a term can also be tied to
obligations of the parties, including required services. Many agreements use one
definition for the term but apply it to a number of different contractual provisions.
The parties need to be careful when defining the term given that, while agreeing
to allow the publisher to exploit rights for a certain period, the developer may not
want to commit to providing services or obligations for the same length of time.
For example, an agreement may state that the term of the deal is 10 years in
order to exploit the rights to the game, but it may also include language by way
of example that states the representations and warranties, services to be
provided by the developer, and errors and omission (E&O) insurance coverage
for the length of the defined term. Unless the developer is continuing to provide
additional content during the length of the agreement, a developer may not want
to incur certain obligations and costs such as E&O insurance, especially when
claims are typically made closer to the release of a game. Therefore, a developer
may want to consider separate terms depending on the situation. For example,
there could be one term covering the right to exploit a game, another covering
the length of services required, and another covering other obligations such as
representations, insurance, and even the right of first negotiation if agreed upon
by the parties.
139 Mastering The Game
3.2.7 – Developer’s Services; Delivery
This section of the agreement will spell out the specific services, including the
time frames for delivery of milestones that will be required from the developer
and will vary depending on whether the game is part of a development deal or
distribution only. In both situations, there will be major obligations on the part of
the developer under the terms of the agreement, although significantly less if the
publisher is only distributing the game.
For games financed by the publisher, during the development process, the
developer will be required to submit the game design and technical design
specifications
381
to confirm the direction of the game, followed by deliverables of
the game at various stages of development for the publisher’s approval or
rejection.
382
The parties typically negotiate a detailed production/milestone
schedule listing each deliverable which may also include marketing materials;
383
381
Design specifications usually cover how the game will look and may change during the course of
development as agreed upon by the parties or as requested by a licensor if applicable (i.e., if the
game is based on a licensed property). If the milestone schedule changes as a result of the direction
of the game, then payments may need to be revised if the developer is to incur any additional costs.
The technical specifications deal with programming development systems and software used in the
development of the game as well as the technical risks and possible alternatives.
382
For games financed by a publisher, the publisher will typically want to approve game designs and
technical design specifications and will usually play an active role in overseeing development. In
most situations, the publisher will play a role similar to a studio financing the production of a film,
providing recommendations and feedback. In other situations, they may have less oversight
depending on the history of the developer; in some cases, the publisher feels more comfortable
allowing the developer to make certain decisions during the development of the game. However, in
most situations where the publisher finances development and owns the IP, the publisher generally
has full creative and quality control. In addition, the size of the budget may determine the level of the
publisher’s involvement in overseeing the project. An AAA title with a big budget will frequently result
in a lot of oversight by the publisher, but a mobile game for $100,000 might have much less publisher
involvement after the design concept and milestone schedule has been agreed upon by the parties.
This issue can be extremely important for both parties, and a successful developer will probably be
more reluctant to defer absolute control to a publisher over the creative process. It is therefore
important to negotiate what role and approval the publisher will have regarding the development of
the game. In many distribution deals, the developer is delivering a completed game and therefore
the publisher’s approval process may be easier. Nonetheless, owners of the various platforms such
as Sony will need to approve the final deliverables to ensure that the game conforms to their platform
requirements. However, if the publisher is paying a minimum guarantee or advance then the
publisher will want to have rights to review the game during various stages of development, to protect
itself against an unacceptable game.
383
Unless the publisher is providing IP assets, typically the developer will be responsible for providing
all the services and materials to develop all versions of the game and possible demos of the game
agreed upon by the parties for all agreed-upon formats (e.g., National Television Standards
Committee (NTSC)/Phase Alternate Line (PAL)). Services will primarily include programming artwork
software graphics animation/cinematics/video text-sound dialogue music, and some quality
assurance testing. Agreements will usually allow the developer to hire subcontractors to perform
some aspect of development, subject to approval from the publisher. The parties will also need to
confirm each other's responsibilities involving marketing materials. Creating campaigns and assets,
buying media space and user acquisitions can be expensive although publishers will typically cover
the costs, which are usually recoupable. Publishers will request that developers make themselves
available for press inquiries and provide assistance in helping with the creation of game-related
materials. The developer may also be responsible for delivering localized versions of the game for
various countries, which involves language translations and revisions if necessary for rating purposes
and perhaps local customs (see Section 10.7 on ratings). Traditionally games have been localized
into English, French, Italian, German, and Spanish (referred to as EFIGS), but as new markets
evolve, more games are being localized for several territories. According to a 2020 analysis based
on over 34,000 games on Steam, the top 10 languages were English, German, French, Russian,
Spanish, Chinese (simplified), Italian, Japanese, Brazilian Portuguese and Korean. Carless, Simon,
“Game Localization for Discovery: Trickier Than You Think”, gamesindustry.biz, June 29, 2021. The
same study also noted that approximately 19,521 games were available in only one language, and
about 4,200 games were localized into two languages. Localization can be very expensive and time-
consuming, especially if voice text and screens are localized and involve several characters. In
addition, companies should consider localizing web pages and storefronts (e.g., Steam), especially
as that may be the first contact a consumer has with a game. Localization costs for a game are
typically covered by the publisher, but the parties must budget the cost and time carefully, so it does
not delay the release of the game or become a financial burden preventing completion. In many
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the delivery date;
384
and the compensation to be paid by the developer for the
publisher’s acceptance of each deliverable.
385
Some development agreements
will not only tie payment to milestone deliverables but also may pay a monthly
fee to the developer. Milestone schedules will vary depending on the scope of
the game and the time allocated for development. Mobile games may only take
a few months, while a major console game release can take a few years and
cost as much as a major film with some exceeding more than $100 million plus
marketing costs.
386
The cost to develop a console or PC game can be enormous
and costs for these types of games have increased substantially, whereas games
for mobile and tablets may average around a few hundred thousand dollars, but
these costs have increased as well with some mobile games costing millions of
dollars as technology and capabilities improve.
The developer and publisher may also agree to add content, including
downloadable content and microtransactions, after the game’s initial release.
This is especially true for free-to-play games as well as games that are part of
live services whereby new content is provided on a continuing basis. The
publisher and developer would need to negotiate what type of new content will
be created, services to be provided and corresponding compensation, delivery
dates, how new content will be paid for and royalties which may be determined
differently from the royalty for the initial game. Many of these issues will be
addressed in a milestone schedule which can sometimes be a challenge to draft,
as it may constantly be updated depending on the success of the game.
All agreements should clearly spell out the delivery and acceptance procedures
for each deliverable, especially since this will typically be tied to most of the
developer’s payments. Since agreements in almost every situation will be drafted
by the publisher and therefore initially favorable to its side, publishers tend to
have a lot of latitude in rejecting a milestone. As a result, the criteria used in
accepting and rejecting milestones might be very broad and will probably initially
include language indicating that approval is subject to the publisher’s sole
discretion. Therefore, developers must negotiate language which requires a
rejection to be based on specific reasons, such as a failure to meet technical and
design specifications. Developers should also consider adding language
situations, the publisher may agree to provide the copy for localizations which are then implemented
by the developer. According to the developer for Witcher 3, the company localized the game into 15
languages and employed over 500 voice actors. Makuch, Eddie, “This is How Much the Witcher 3
Cost to Make”, gamespot.com, September 9, 2015.
384
The delivery dates for each milestone are critical to ensuring that the game is released on time.
The developer’s payment often will be tied to its delivery of the agreed-upon assets for each
milestone. If a milestone is delayed because of a failure on the part of the publisher (e.g., the failure
to deliver music or localization assets) or failure on the part of a third-party licensor to provide timely
approvals, then the developer should not be liable for missed milestones. The parties need to draft
the agreement to cover what happens if delivery is delayed as a result of the failure and may need
to revise the milestone schedule to reflect the delays. Most games are complex creative processes,
and it is not uncommon, to various degrees, for game designs and features to be revised. As a result,
milestone dates and deliverables can change, resulting in revisions to the milestone schedule to
reflect the addition and removal of deliverables. If revisions are made, the developer needs to make
sure that they have the time and resources to meet the new delivery requests.
385
One possibility when dealing with a milestone payment is to divide it into two payments. This
would involve one payment being made upon acceptance of a milestone deliverable, and another
payment as a monthly fee. In this situation, if the developer is late delivering an acceptable
deliverable then the developer would still be entitled to receive some money to allow them to continue
development. Otherwise, there could be situations where the developer may have a problem working
on the game if its funding is delayed, even though it may have caused the delay. This is perhaps one
of the most difficult issues to deal with since the publisher must weigh the consequences of delaying
or stopping funding for a game based on unacceptable deliverables.
386
Wikipedia, “List of most expensive video games to develop”, en.wikipedia.org.
141 Mastering The Game
indicating that a publisher’s decision will not be unreasonably withheld or
delayed, since this will affect payments.
Assuming that the deliverable is approved by the publisher, the developer
proceeds to the next milestone. The publisher, pursuant to the agreement, will
have a certain number of days to review the submission and provide its
comments back to the developer. In the event that the deliverable is rejected, the
publisher should provide the basis for such rejection, so the developer has an
opportunity to correct the problems and resubmit within the allocated time period.
Subsequently, the publisher will have another opportunity to review the
previously rejected deliverable.
387
Depending on the severity of the problems,
this could push back the deliverable schedule. Furthermore, if the problem is
material and either cannot be fixed or would take too long to fix to meet the
game’s street date, then the publisher would have the right to terminate the
agreement, among other options.
The options of handling rejected deliverables varies depending on the complexity
of the game and the platform(s). For mobile, it may be easier in certain
circumstances, depending on the complexity of the code, to deliver an unfinished
application/game to another developer to complete the game. However, as
mobile games become more complex, for certain mobile applications/games and
for console games the option might not be viable due to potential difficulties in
working with the source code. Nonetheless, an increasing number of developers
are using third-party software such as Epic’s Unreal Engine, thereby making it
easier to understand the code. If the publisher decides not to proceed with
development, then it will seek the return of monies paid to the developer,
388
in
addition to any other rights and remedies it may have.
The developer’s most important obligation will be to deliver the finished game on
the agreed-upon delivery date to the publisher, especially when dealing with a
retail product. This is significant since the publisher will have relied on the
delivery date to meet a street date in planning its sales and marketing strategy,
which may include in-store promotions and advertising. Consequently, any
delayed release may result in wasted marketing opportunities and expenses, and
any marketing may have little or no value if the game’s eventual release is not
close to the originally planned release.
389
In the event that the developer does
miss the delivery date, and depending on the severity of the delay, then the
agreement may include language indicating that any payments to be made to
387
One of the main issues that can occur is when the developer receives no response from the
publisher within the review period and therefore deems their game to have been rejected, or the
game has not been rejected, but leaves the developer uncertain as to its status. This is language
that should be removed by the developer, since the developer will be left without any guidance and
this will result in delays affecting both development and payments.
388
While an agreement generally includes language indicating that, in the event that the developer
breaches the agreement during development then the developer must return any monies received
from the publisher, the publisher’s rights may nonetheless be difficult to enforce. The developer often
does not have the financial capability to return the money, since funds received for development
would have already been used to develop the game. To verify that money paid for development is
actually used for that purpose, publishers may request the right to audit the developer’s financial
records. This can be a very contentious issue, since the developer may argue that how they spend
their money and what their costs are is confidential or a trade secret, and therefore they should not
be required to reveal the information to the publisher. If a deal is terminated because of a material
breach, the parties would also need to negotiate the rights to the IP. If the IP originated from the
developer, then they would want the right to own it, in the event that they have to return the
development costs.
389
Similarly to film studios, a publisher for some forms of media may need to purchase consumer
and trade marketing placements months in advance. In some situations, it might not be possible to
pull the advertising or promotions, and therefore the publisher would still be responsible for the costs.
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the developer may be reduced, whether in the form of an advance, a guarantee,
or a bonus.
As part of a publisher’s release strategy, they will release ‘street date letter
agreements’, which are normally entered by the publisher and its sub-
distributors. They are designed to ensure that the distribution of physical
products that requires the delivery of the products to the various retailers and e-
tailers takes place sometime prior to the planned launch date and to ensure that
the sub-distributor, retailers and e-tailers do not make the game available to
consumers prior to the planned release date. They may also adopt certain
security measures (e.g., to store the box products in a secure place, to limit
access to the products by the employees of the sub-distributor, retailer or e-tailer,
etc.) that are meant to ensure the simultaneous release of the game, thus
protecting the effectiveness of the so-called hype created by the publisher during
and throughout the marketing campaign, as well as ensuring a level playing field
between the various retailers and e-tailers.
In addition to delivering the game and any additional content on time and on
schedule, the developer will also be obligated to make corrections to the game,
usually referred to as ‘patches’, that might be uncovered after its release,
390
and
to provide updates and assistance that may be needed to help with customer
support. If the developer is not delivering any additional content, then the parties
may negotiate a finite time period in which the developer has to provide these
services, since the developer may move people from the development team onto
other projects. Otherwise, personnel would need to be available on an ongoing
basis for as long as content is provided and the game remains active.
If a game is being financed by a publisher, then language might also appear in
the agreement covering key personnel working on the game. This provision
helps the publisher to ensure that the game meets the publisher’s objectives,
with an assurance that certain people will work on the game, whether on a full-
time or part-time basis.
391
Any changes to key personnel will typically require
prior approval from the publisher.
392
390
Corrections needed for a game will typically be assigned a level based on the severity of the
problem. For example, a serious problem may be labelled a Level 1 bug. Each level also has a
separate time period within which the bug would need to be fixed.
391
A development studio may be working on a number of projects at one time; therefore, personnel
that the publisher had hoped to work on a game may be assigned to another project. This provision
will address this issue.
392
While a publisher often wants key personnel to work on a specified game, an employer cannot
prevent an employee from leaving. Nonetheless, the employee is of course prohibited from
misappropriating any trade secrets or other confidential information. See Chapter 2.
143 Mastering The Game
Console Development Process
3.2.8 – Financials
For both the developer and the publisher, this section will probably be the most
important negotiating point in the agreement, since it will spell out the amount of
money each party will spend and receive in the development and exploitation of
a game. In this section a number of issues will be addressed covering the ways
in which a developer may be compensated by the publisher, including advances,
guarantees, and royalties, as well as payment schedules, and how royalties will
be calculated, including the publisher’s recoupment of expenses.
The compensation paid by the publisher will vary depending on whether the
publisher is financing the game or is only distributing it. If the publisher is
financing all or most of the development, compensation will typically be broken
down into two forms of payment, each linked to the other.
393
First, the initial
consideration paid to the developer will typically be in the form of recoupable
advances
to cover development costs pursuant to a milestone schedule.
Secondly, the developer may be entitled to royalties based on revenue earned
from all forms of exploitation of the game. All of this is subject to negotiations,
including on how royalties are earned and how costs are recouped, which can
be limited by stating what can be recouped and by capping how much can be
recouped by the publisher. Furthermore, royalty rates can vary depending on the
amount of revenue earned, means of exploitation, and content distributed (e.g.,
downloadable content).
The milestone payments paid by the publisher in most cases would be
considered recoupable advances against future royalties owed to the developer
from revenue earned from the game. A recoupable advance permits the
publisher to regain any payments made to the developer. Only after the publisher
has recouped the milestone payments typically from the developer’s portion of
393
There are situations in which the publisher only pays a fee to the developer for developing the
game, and no additional payments are made to the developer. These types of deals are usually
associated with lower-cost products such as mobile games and the porting of games. However, in
some situations, if the game includes the developer’s pre-existing software then the developer may
ask for some form of royalty for the licensing rights, although payment might not be made until the
publisher has recouped its development costs out of the developer’s share.
Milestones
Development
• Publisher
Approval
• Payment
Alpha Build
• Publisher
Approval
Beta Build
• Publisher
Approval
Rating
Submission
• Rating
Board
Approval
• Beta Build
Gold Master
• Platform
Approval
• Certificatio
n
Replication
Distribution
Marketing
& Sales
Licensed
Property
Original
Concept
Game
Design
Mastering The Game
144
net revenue as defined in the agreement, as well as any other agreed-upon
expenses, will the developer be entitled to receive royalties.
394
If the publisher is financing development, the parties would usually agree that
part of the recoupable advance payment would be paid upon signing of the
agreement as part of the milestone schedule. This would allow the developer to
begin developing the game, and then for additional payments to be made based
on the successful delivery of specific materials to the publisher. For example, the
second milestone may be paid upon the delivery of a design document followed
by additional payments upon the delivery and acceptance of various stages of
development, including the delivery of the alpha and beta versions of the game.
In most situations when negotiating milestone payments, the publisher will back-
end payments as the most important deliverables will be towards the end of the
development cycle. This also decreases the risk of their investment if the
developer fails to deliver an acceptable game.
If a developer is relying on milestones to fund development, it needs to make
sure that it has carefully planned out its costs so the payments will cover the
development of the game, including salaries for employees, overhead, and costs
for licensed materials including software and game assets. In addition, the
schedule should include a ‘cushion’ to avoid any unexpected costs during
development.
395
If the publisher is financing development, the second form of payment would
generally be in the form of royalties. These payments are usually an agreed-
upon percentage of net revenue earned from the sales and licensing
396
of the
game, downloadable content, and possibly any other form of revenue generated
from the game, including advertising and derivative works.
397
Net revenues are calculated by taking all revenues actually received by the
publisher
from the exploitation of the game (usually referred to as ‘gross
revenues’)
398
and then allowing the publisher to recoup any agreed-upon
expenses they incurred in the distribution, marketing, and development of the
394
The agreed-upon deductions would be deducted from gross revenues and not from the
developer’s share, although it may affect the developer’s share since less money would be available
to allocate to royalties.
395
Prior to the parties agreeing on a milestone schedule, the publisher will often request that the
developer demonstrates to the publisher the developer’s costs so the publisher can confirm that the
costs are consistent with the type of development being undertaken by the developer.
396
Downloaded content is provided to consumers as licenses and is therefore not owned by
consumers. This greatly limits any consumer rights regarding ownership of IP, including user-
generated content, and also provides more leeway for developers when terminating services for a
game.
397
Depending on the negotiations and ownership of the IP, the developer might also share in other
forms of revenue derived from the exploitation of the property, including derivative works such as
sequels, film, collectibles, and toys. If this is the case, it is important to negotiate the royalty rates
and deductions, which will be different from those for games since the film and toy industries have
different business models in determining deductions. Also, the parties will need to consider whether
revenue earned from these derivatives as well as any passive royalty would be cross-collateralized
with the revenue generated from sales of the game. See Note 420. Another possible scenario could
occur if the developer is the owner of the IP and controls the licensing; in this case the publisher
might be entitled to a royalty from ancillary sales. The publisher might justify this by claiming that
their work on the game's distribution led to an increased awareness of the property.
398
Gross revenue would include sales of games, downloadable content, in-game purchases,
subscriptions, rentals, in-game advertising, ancillary sales, and any other revenue generated from
the exploitation of the game.
145 Mastering The Game
game by way of deductions listed in the Agreement.
399
Platform fees are
deducted by the platform holders prior to remitting any monies earned by the
publisher, though agreements will state that these are allowable deductions.
400
The parties would need to negotiate the deductions (which may partly depend
on the platform and whether the game is being released in physical and/or digital
format), but typically the agreed-upon deductions (many of which cover only retail
sales) may include cost of goods,
401
discounts,
402
damaged goods, promotional
and advertising expenses including user acquisitions and ‘co-op’,
403
refunds,
credits, returns,
404
price protection,
405
service provider costs,
406
shipping,
insurance, markdowns, porting fees, localization, currency exchange fees,
expenses incurred by the publisher in the event that the developer is unable to
399
A developer will want the publisher to spend money on marketing and distributing the game since
it is assumed that money spent wisely will help sales. In some agreements, the parties may agree
that all costs associated with the marketing of the game are not recoupable (but typically the publisher
would receive a higher fee), or anything over a certain amount (i.e., a cap) would not be recoupable.
Most agreements, however will allow the publisher to recoup these costs, which would be recouped
from gross revenues and not from the developer’s share. It is very possible that the publisher does
not recoup their costs because of a game’s underperformance. If costs are deductible then a
developer should negotiate that the costs should be limited to direct out-of-pocket expenses tied to
the game, thereby excluding costs such as overheads or internal marketing costs. Over the years,
marketing costs have increased, especially for games that receive the highest development and
marketing budgets, known as AAA titles, and for mobile titles with acquisition costs. At the same
time, however, there are also a number of new ways to reach consumers through social media, which
are relatively cheaper and can be effective, despite occurring in a crowded market.
400
The revenues actually received by the publisher will determine the royalties earned by the
developer since distributors, whether for mobile devices or digital distribution, will be entitled to
deduct an agreed-upon percentage as their fee before remitting any monies to the publisher. In
addition, if the publisher is using sub-distributors then it will usually only account for the money it
actually receives since the sub-distributor will deduct its fee and possibly expenses prior to remitting
money to the publisher.
401
Cost of goods would include the cost of manufacturing, assembling, and packaging units of a
game (this would not be applicable to digital games) as well as any royalties owed to console
manufacturers or licensors. Generally, no royalties would be paid on retail versions where (i) units
are sold for less than the cost of goods since the publisher would not be earning any money on the
sales; (ii) replacement copies; and (iii) free goods, although this may be capped unless they are being
provided to the press.
402
Often large retailers will require an additional discount because of the large quantity of purchases
made of a game. This is a cost that would apply to physical game sales.
403
‘Co-op’ advertising in this situation involves the practice by which the publisher pays a portion of
advertising created by retailers involving the publisher’s game(s). Costs are usually associated with
in-store, point-of-sale, circulars, and similar promotions paid by the publisher to a retailer or
discounted from monies owed by the retailer to the publisher. It is also possible for the publisher to
pay for marketing costs and to not recoup costs, although in that case they would ask for a higher
fee.
404
A publisher will often be allowed to deduct returns and refunds from gross revenues since they
are not earning any money on those games. This can be particularly important in countries with
strong trade laws regarding returns. For example, in Germany, the great majority of retailers have a
strong right to return unsold goods to their suppliers for full value. Consequently, European
distribution agreements will usually need to apportion this risk between the parties (usually to the
publisher’s benefit).
405
In general, in this situation price protection is money paid or credited to a retailer by the publisher
when the publisher elects to drop the wholesale price by a certain amount and pays the difference
between the original wholesale price paid by the retailer and the new wholesale price. Price protection
would only apply to inventory still in the retailer’s possession. For example, the publisher sells a game
initially at a wholesale price of $30. Later, the publisher decides to drop the wholesale price to $20
to help sell games and as a result the publisher would then owe the retailer a credit of $10 for each
unit still in the retailer’s inventory. Typically, in order for the retailer to qualify for price protection, it
must satisfy certain conditions such as compliance with applicable payment terms and sales
information (e.g., confirmation of inventory levels). Activision Blizzard, “Annual Report 2020”,
investor.activision.com.
406
In this situation, the publisher is paying a third party to provide services involving the distribution
of a game such as internet hosting charges, carriage fees for mobile games, and in-game advertising.
Mastering The Game
146
perform the required services as per the agreement,
407
and taxes.
408
In addition,
publishers may also include very broad language covering any other costs that
may be incurred by the publisher in the development, manufacturing and
distribution of the game. Publishers add this language to protect themselves
against any unforeseen costs that they may not have contemplated, but it is
strongly recommended that developers delete it from the Agreement or limit it.
For the developer, one of the key takeaways is that they understand what is
included in a deduction and the potential costs of such a deduction. They must
also consider if a deduction should be removed, and therefore that cost is
incurred by the publisher, is capped, or is subject to the developer’s approval.
After deducting expenses, the developer’s royalty rate is applied to the net
revenues to determine the amount of money that the developer will receive from
the publisher. However, a developer typically will only receive a royalty after the
publisher has recouped all of the defined costs from the gross revenue, and then
any monies paid to the developer for development, which are typically deducted
from the developer’s revenue share. Only after the publisher has recouped these
costs will the developer actually receive any royalties, presuming that the
revenues earned have exceeded costs. It is possible that some deals may be
structured to ensure that the publisher recoups all or some advances from gross
revenue instead of the developer’s share. There is also the possibility that the
publisher remits some revenue to the developer even before they have fully
recouped their agreed-upon costs. In this situation, the publisher may pay a
royalty to the developer at a lower royalty rate and then increase it once the
publisher recoups its costs. Because of the different scenarios that might be
negotiated involving the revenue stream, it is critical that the developer
understands the type of deductions requested by the publisher before agreeing
to them, since this will have a direct impact on revenues earned by the developer.
The following scenario provides an example: the publisher pays the developer a
recoupable fee of $1 million according to a milestone schedule for developing a
mobile game. Pursuant to the terms of the agreement, the developer is to receive
a royalty of 10% of net revenues from all revenue generated by the mobile game.
The publisher spends $100,000 on marketing expenses and acquisition costs
which are recoupable from gross revenues. The game is released and generates
$3.1 million in sales after the platform holder (i.e., Apple) takes their share from
all revenues. Before determining the amount of royalties for the developer, the
407
If the developer is contractually required to provide certain services (e.g., development, bug fixing,
localization, music) and is unable to do so, and those services are then undertaken by the publisher,
whether directly or through a third party, then the costs incurred by the publisher will either be
recouped from developer’s royalties or from gross revenues. Although it will need to be negotiated
and might be difficult to obtain, the developer will want to have some consultation or approval rights
on the party providing the services since costs will be recouped from the developer's share, and there
may be a need to disclose some of developer's confidential information.
408
Different sales or consumption taxes may apply around the world. For example, US states have
different levels and rules for sales tax and similarly, the European Union has a valued-added-tax
system with different rates across different countries. Therefore, the same game could sell with
approximately 10% sales tax in California but 20% sales tax in the UK. There are also different rules
around the world regarding corporate taxation and revenue recognition. It is therefore useful to have
a working understanding of the applicable financial and tax rules when negotiating a development
agreement. An additional tax issue involves withholding taxes which are taxes that the government
may impose on revenue earned from the exploitation of a game in that country. In this situation, a
publisher would deduct the appropriate taxes from the revenue and pay it to the taxing authority. If
this occurs, the publisher should obtain a receipt of payment from the taxing authority which then can
be used to possibly obtain a tax credit from the developer's local tax authority. If any of the withholding
tax is returned to the publisher, then the developer should insist on receiving the revenue.
147 Mastering The Game
publisher is entitled to deduct the $100,000 of marketing expenses from the
gross revenues, resulting in net revenues of $3 million. Based on a 10% royalty,
the developer would be entitled to $300,000. However, since the publisher paid
a $1 million recoupable fee to the developer, the publisher would be allowed to
recoup the $300,000 from the developer’s share before paying any royalties to
the developer and would still be entitled to recoup an additional $700,000 from
future royalties earned by the developer.
The parties will need to negotiate the royalty rate that will be used to determine
the developer’s share.
409
Determining the royalty rate will depend on a number
of factors, including but not limited to the bargaining power of the parties, the
platform, the rights granted, the services provided by a publisher, the
development costs, third-party licensing fees, advances, marketing
commitments, whether the royalty is applicable to the initially released game or
additional content (e.g., microtransactions, downloadable content), whether
costs can be recouped on a cross-collateralized basis, the developer’s track
record, previous rates between the parties if they have worked together before,
industry standards, and platform fees.
410
Furthermore, as the publisher’s
financial commitment increases, the royalty percentage may be lower for the
developer.
Royalty rates can also vary depending on the amount of revenue earned based
on a sliding scale. For example, the royalty for the developer may increase when
revenues achieve a certain number. The parties could also agree that the
royalties decrease if the parties agreed initially to a higher royalty.
3.2.9 – Revenue Share Involving Distribution Only
In distribution agreements, where there is most likely little or no financing
provided by the publisher, the developer will receive a larger share of the revenue
than in a publisher-developer development agreement, since the developer
financed the development and therefore assumed all of the initial risks. The
amount of money that the developer receives from the revenue share and the
fee that the publisher receives may primarily depend on the following factors:
1. The amount of money invested by the developer to develop the game;
2. The rights granted by the developer and distribution formats;
3. Services being performed by the publisher;
4. Whether the developer has agreed to incur additional costs in the
distribution of the game (e.g., marketing costs);
5. The amount of money agreed upon by the publisher to pay for various
services which may include manufacturing costs, first-party licensing
fees, marketing, content updates and distribution expenses;
6. Interest in distributing the game from other parties;
7. The bargaining power of the parties; and
409
The royalty rate may also fluctuate if the developer is late with the delivery of the game. For
example, depending on how late the developer is with the game, the royalty may be reduced.
410
Royalty rates may also vary depending on the item sold. A royalty rate for ancillary products may
result in a higher royalty rate for the developer than a game or downloadable content.
Mastering The Game
148
8. Whether the publisher is paying an advance and/or guarantee for the
rights and how much it amounts to.
As part of the negotiations involving each party’s revenue share, the publisher
and developer will simultaneously negotiate which expenses will be allowed to
be deducted from the revenue earned from the exploitation of the game and the
order of the deductions. Deductions and platform fees will vary depending on the
platforms in which the game is to be distributed. Typically, after platform fees are
deducted before any money is remitted to the publisher, the publisher would first
be allowed to deduct agreed-upon applicable expenses (e.g., if retail is
applicable, then manufacturing costs, price protection) from the gross revenues,
and then would be allowed to take its fee/royalties from the net revenues.
Afterwards, the parties would then be allowed to deduct any other agreed upon
expenses they incurred in the distribution and marketing of the game with any
remaining monies going to the developer.
411
As part of the compensation paid to a developer, a developer might seek an
advance against royalties and/or a minimum guarantee from the publisher in
exchange for the rights. A guarantee is a payment that the publisher makes to
the developer, typically at the end of the term, in the event that the developer has
not earned the guaranteed amount of revenue from royalties and advances, if
applicable.
In determining the guarantee, a publisher will generally base it on a percentage
of the publisher’s projected revenue from the exploitation of the game.
412
The
guarantee is important for the developer since it provides some form of
assurance that the publisher will maximize the opportunity to exploit the game.
Other factors that will be considered when determining the guarantee might
include the bargaining power of the parties, which is primarily determined based
on the level of interest from other publishers, the track record of the developer,
other financial considerations such as the publisher’s fee, the initial impressions
of the game, and other commitments from the publisher such as marketing.
For distribution agreements, the developer might also request a recoupable
advance, which may be a single payment or several payments spread out over
the term of the agreement. This can be triggered by a particular event, such as
the signing of the agreement, acceptance of a gold master by a console
manufacturer, or the release of the game.
411
To illustrate, here is one possible scenario: the developer and publisher agree that the publisher
will take a 10% fee for the services provided and will advance all costs for the manufacturing of
goods, and for first-party licensing fees, which will be deducted from the gross revenue. Marketing
expenses paid for by the publisher will be recouped from net revenues after the publisher has
received its fee. The game grosses $5 million after deducting platform fees. Manufacturing and
licensing fees equal $2 million and marketing costs are at $1 million. As a result, the publisher would
first deduct the manufacturing and licensing fees from the $5 million gross revenue, resulting in net
revenue of $3 million. Based on a 10% fee, the publisher would then be allowed to deduct $300,000
from the net revenue, leaving $2,700,000. From the $2,700,000 the publisher would then be allowed
to deduct the $1 million marketing expenses. The remaining $1.7 million would then be remitted to
the developer. In some distribution deals, the developer might cover the marketing expenses, but in
return may negotiate better economic terms such as their fee.
412
The publisher needs to be careful when providing projected numbers so they do not over-promise,
but at the same time, should not project sales too low since the developer might not have confidence
in the publisher’s capabilities if the number is lower than the developer’s expectations. Projecting
revenue has become more challenging with free-to-play games since publishers have traditionally
tied guarantees to anticipated retail sales.
149 Mastering The Game
The amount of a potential advance will vary depending on a number of factors
similar to those used in determining the guarantee, including the bargaining
power of the parties, interest in the game, royalties, the amount of money the
publisher might have to commit to the game and the guarantee, if any, paid to
the developer. If a game attracts a lot of interest from various distributors, then
the developer can try to negotiate a number of possible scenarios regarding a
guarantee. For example, a developer might negotiate a guarantee that is
recoupable, or it may be able to negotiate for only part of the guarantee to be
recoupable.
Because returns and price protection can be unpredictable and play a significant
role in the industry when dealing with retail versions of the game, the publisher
will require the right to establish a reserve that it can draw upon in the event that
future royalties fail to cover deductible costs. The reserve is a percentage of the
developer’s royalties which are withheld by the publisher for an agreed-upon
period of time.
413
For example, the publisher could be in a situation where it has paid the developer
royalties based on first-quarter sales of the game only to discover later that it
overpaid, because of higher-than-expected returns and/or price protection that
the publisher incurs in the second reporting quarter. With a reserve, the publisher
would be allowed to access the funds to help pay for the deficit, thereby reducing
its risk instead of relying on future royalties to recoup, which may not be enough.
Even with a reserve, there still could be situations in which the publisher does
not necessarily recoup its costs. Some of the additional issues involving a
reserve that the parties will need to negotiate include:
1. The size of the reserve (usually anywhere from 10 to 25% of projected
revenues for the affected reporting quarter);
414
2. Which costs the reserve will be applied against (e.g., gross revenue or
developer’s royalties);
3. How long the reserve can be maintained before the monies need to be
liquidated (usually between 6 and 12 months); and
4. Which costs can be applied against the reserve (e.g., price protection,
returns, damaged goods).
3.2.10 – Additional Royalty Issues And Payments
In some agreements, royalty rates may change based on the number of units of
a game sold, revenue derived from a game,
415
pricing for a game, or after the
publisher recoups their development costs or advance. To illustrate: if a game
does well and hits certain levels of sales, then the parties might negotiate a
higher royalty rate for games exceeding certain thresholds. For example, the
royalty rate for a game may be 10% for sales from 0 to 200,000; 12% for sales
from 200,001 to 500,000; and 15% for all sales above 500,000. If using a unit
measurement, it is important to determine whether the units sold applied to the
413
Thornburgh, Don, “The Reserve”, International Game Developers Association Contract,
WalkThrough 34, 2003. Publishers need to be careful when ordering retail product so they can reduce
their risks with returns, price protections, and cost of goods.
414
The percentage of the reserve can vary, with a higher reserve for the period covering the first six
months after launch and then dropping thereafter. Also, instead of establishing a reserve based on
a percentage, publishers may ask for more flexibility by establishing a reasonable reserve based on
the publisher’s expectations.
415
The adjustment of royalties payments is commonly referred as a ‘sliding scale’.
Mastering The Game
150
royalty rates involve all games, no matter what the wholesale price, or whether it
is only for units sold above a certain wholesale price. It is also possible that the
parties may start at a higher royalty rate and then lower the rate after hitting
specific financial targets, whether for revenue or games sales. Because so many
games are free, even games that are initially sold for a premium price, if the
parties agree to a scaled royalty rate, then royalties should be based on revenue
thresholds.
416
For example, the parties could agree that after 200,000 units of a game are sold
at a wholesale price no less than $39, then the developer will be entitled to a
royalty for all units of the game sold thereafter. While this might be easier for
accounting purposes, it does lead to some additional issues. One is determining
what price the game has to be sold at to qualify for application of the royalty.
Most likely the publisher is looking at the initial wholesale price since they will
have calculated the number of units needed to be sold to cover its costs,
including development, marketing and sales. Secondly, if the sales threshold is
not reached, but just falls short and then the game sells at a lower wholesale
price, would the developer be denied royalties?
In addition to royalty payments, the publisher may also agree to pay bonus
payments to the developer upon the occurrence of one or several events. For
example, the publisher may agree to pay a bonus to the developer if the
developer delivers the game earlier than scheduled or the game achieves certain
revenue targets, or if the game meets or exceeds an agreed-upon average game
rating based on industry reviews.
417
If a bonus payment is made then the
developer should try to negotiate to ensure that it is non-recoupable.
3.2.11 – Accounting And Statements
In any publisher agreement in which royalties are paid to a developer, it is critical
that the developer receive a statement indicating how the publisher calculated
the amount of money owed to the developer. The statement must be clear and
easy to understand so that the developer can determine whether or not the
statement is in fact accurate. Each deduction in a statement should be spelled
out so that the developer can confirm that the deductions were permissible under
the terms of the agreement. Although a publisher should often communicate
sales numbers and analytics about the playing and buying habits of consumers,
a statement will confirm the actual revenue generated from the game.
At the very least, the statement must include the revenues received by the
publisher broken down by territory, platform and the source or revenue (i.e., retail
416
In very rare situations, especially because many games today are distributed for free and with
downloadable content becoming the means in which games make money, a publisher might structure
a deal whereby instead of paying royalties after the publisher has recouped its agreed-upon costs,
the publisher only pays a royalty after a fixed number of units of the game have been sold and at a
certain price. The publisher would determine its costs and establish a number that would be large
enough so that the publisher has recouped its costs in financing and exploiting the game with a profit.
This model is becoming increasingly outdated.
417
Some agreements will often use ‘metacritic’ scores as the basis for determining reviewer scores;
these are named after a company that accumulates review scores of games. The company
accumulates the reviews from what they believe to be the most respected game reviewers and assign
weighted scores to their reviews (some reviewers receive more importance because of their track
record and the publication they work for), resulting in an average score. See Metacritic, “How We
Create the Metascore Magic”, metacritic.com. However, this can create problems, for example,
determining what should happen if the developer scores one point below the agreed-upon rating.
151 Mastering The Game
sales, subscription, advertising, and downloadable content), as well as the
deductions taken by the publisher. Itemizing how revenue was earned and
deductions is important because certain deductions may only be allowed for
certain platforms, and revenue streams and royalty rates may vary by platform.
In addition, if the publisher agreed to any type of consumer marketing
418
and or
channel/trade
419
commitment, the statement should include how those dollars
were spent to confirm that the marketing commitment has or will be satisfied.
In almost every publisher agreement, the publisher will insist on being allowed to
recoup its investment (e.g., in development and costs associated with the
exploitation of the game) by combining all revenues earned from all sources
involved in the exploitation of the game. This provision, referred to as cross-
collateralization, allows the publisher to recoup its costs faster and reduces its
risks. For example, if the publisher paid separate development costs for a
console game and a mobile game, then prior to paying any royalties to the
developer, the publisher would be able to combine both streams of revenue
before having to pay any royalties to the developer.
420
Statements are generally provided to the developer on a quarterly basis, 30 to
60 days after the close of a quarter, and each statement should be accompanied
by any monies due to the developer. Publishers have traditionally requested this
amount of time to allow them to accumulate and analyze the various reports they
receive from various parties throughout the world, including retailers, distributors,
mobile providers, licensees, sub-distributors, and even divisions within their own
company that may have separate reporting structures. After receipt, some of
which may be received at different times, the publisher will then calculate
revenue earned by the developer. However, it should be noted that mobile and
digital distributors may provide real-time information on money earned on those
platforms and, in fact, developers can receive money directly from those platform
providers. Nonetheless, things can get complicated quickly with statements if
some revenue goes to the developer and other revenue goes to the publisher. It
can therefore be difficult to determine deductions and, as a result, the publisher
will likely want to receive all revenues earned and then report to the developer.
In some agreements, depending on the length of the term, the publisher’s
obligation to deliver a statement on a quarterly basis may be reduced if revenue
does not meet certain minimum numbers. As a result, instead of issuing quarterly
statements, the publisher may issue statements semi-annually or not at all, in
the event that the game does not earn a minimum amount of revenue during a
six-month period. For example, if revenue is less than $1,000 for a particular
418
Consumer marketing usually covers advertising (online, offline, television), public relations, game
trailers, trade shows, and all consumer creative elements.
419
Channel/trade marketing would usually cover materials that appear in retail stores and in-store
placement. Retailers promote video games through their store and store brand, referred to in the
business as the ‘channel’. The consensus in the industry is that such in-store promotion (either in a
video game dedicated store such as GameStop, or a general store with a dedicated video game
section, such as a Walmart or Target) has value because the persons receiving the advertising in the
stores have self-identified as being interested in video games simply by their presence in the store,
and are therefore more likely to purchase a game.
420
The cross-collateralization provision allows the publisher to recoup any advances or development
costs against any and all royalties, regardless of the platform or form of exploitation (e.g., revenue
from merchandise). Cross-collateralization may also be allowed if the publisher is financing multiple
games, and this would allow for the publisher to recoup all advances paid to the developer from the
combined revenue of all the games distributed by the publisher. As a result, if one game does poorly
and is in a negative recoupment position, the difference can be made up from revenue from the other
games. Cross-collateralization allows the publisher to recoup its costs faster. Without cross-
collateralization, the publisher would be allowed only to recoup its costs for that specific game against
the revenue earned from that game.
Mastering The Game
152
accounting period then the publisher would not be obligated to issue another
statement until the time when revenues exceeded $1,000. A developer may not
want to agree to this provision, since it is important for a developer to know how
well or how poorly a game is generating revenue, especially if the publisher is
recouping costs from the developer’s share. In addition, with new content
continually being created for games, it would be advisable for developers to
continue to receive statements on a quarterly or semi-annual basis.
To avoid any doubt on what information the publisher will include in a statement
it is advisable for the publisher to provide a sample statement to the developer
prior to signing an agreement. If the sample statement is acceptable then the
parties should attach a copy to the Agreement typically referenced as an exhibit
or attachment. If it is not acceptable then the developer should negotiate
revisions and then attach the edited sample statement to the Agreement.
3.2.12 – Audit Rights
It is important whenever an obligation exists to issue a statement that the party
receiving a statement also has the right to audit the relevant records associated
with the statement. This will be the primary means by which a developer can
determine if the numbers calculated by the publisher in determining the
developer’s share of revenue are accurate. Many times, the mistakes found in
statements are the result of conflicting contract interpretation on what deductions
are permitted by the publisher.
While the costs of conducting an audit may preclude a developer from exercising
their rights as often as they may like, if at all, it is crucial for the developer to at
least have the option to audit the records of the publisher. Not only can an audit
reveal a mistake that could amount to additional revenue for the developer, but
if no mistake is made it provides assurances to the developer that the publisher’s
calculation of royalties is consistent with the developer’s interpretation of the
Agreement. It is also possible for an audit to reveal a mistake in favor of the
publisher.
Parameters For Audits
To avoid potentially time-consuming and costly audits, the parties will need to
set out the parameters within which an audit can be conducted. Specifically,
those parameters are: the number of audits that can be conducted each year
(usually once a year); the location of the audit (usually the place of business of
the publisher); the time at which an audit can take place (during normal business
hours); the length of the audit; the records that can be reviewed; and who can
conduct the audit.
421
The developer will want to make sure that they know exactly where audits will
take place so there are no surprises and no potential for additional expenses
associated with conducting an audit. Prior to an audit taking place, the developer
must provide notice within a certain period of time so that the publisher has
enough time to accumulate the records that will need to be reviewed.
Furthermore, the parties will have to agree on which documents will need to be
provided for the developer’s auditors and how long an audit can go on, since any
421
The auditor would need to be certified and would need to sign a confidentiality agreement.
153 Mastering The Game
audit will also involve time and resources from the publisher. This section in the
agreement will usually entitle the developer to review records that specifically
relate to determining the royalties earned for the game and would include records
involving all sales to consumers as well as permitted deductions.
422
If the
publisher cannot support their deductions with proof, then the deduction should
not be permitted. The limitation is justified to avoid a developer requesting
documents that might be associated with the publisher’s business, but do not
directly relate to the game which is the subject of the audit.
The parties will also need to agree on who can conduct an audit. A publisher will
at the very least require that the audit can only be conducted by a certified
accountant and may also require them to work on a non-contingency basis
423
and to be from a particular accounting firm. The publisher wants to have some
degree of approval on who the auditor may be, to ensure that the auditor is
competent, has experience in the industry, and possibly to ensure that they have
not audited records for a competitor. This is the publisher’s guarantee that the
audit will be conducted in an efficient and professional manner, which should
help both parties, including in terms of cost reduction. An auditor not familiar with
the industry will most likely waste time for both parties by requesting unnecessary
information.
Contesting A Statement
A publisher will insist on language limiting the time in which the developer has
the opportunity to challenge a statement. Generally, excluding fraud, the
developer will only be allowed to challenge a statement within one or two years
of its receipt. Afterwards, the statement is deemed final and is accepted by the
developer. This restriction provides a level of comfort for the publisher that it will
not be required to review records from several years earlier, which may be
difficult and time-consuming to retrieve. In the event that it is discovered that the
publisher has overpaid the developer, then either the developer will be required
to return the overpaid amount, or the publisher will be allowed to deduct the
amount from future royalty payments, at the option of the publisher.
Issues involved in contesting a statement can create further complications. If an
error is obvious, for example a calculation mistake, then there should be no
issues about the publisher owing more money to a developer, although the
parties would need to agree on when the payment would be made, on whether
interest would be paid on the money owed and how the interest rate would be
determined. However, there may also be situations where there is a
disagreement about calculations and whether certain deductions were permitted
under the agreement. As a result, resolving the issue becomes more of a
challenge. At the very least, the developer’s auditors should be required to
provide the publisher with a copy of the audit report within a certain period of
time, explaining the accounting discrepancies and allowing the publisher to
respond to the alleged errors. Often, an explanation of how the developer’s
revenue share and deductions were calculated leads to a resolution. Other times,
422
Some of the records that an auditor might request could involve costs of goods, marketing
expenses including those incurred by third-party vendors, and price-protection allowances. In
addition, if a game is sub-distributed then the auditor may want to look at the statements provided by
the sub-distributor to the publisher. However, the information may be limited subject to what the sub-
distributor provides to the publisher.
423
A publisher will usually make this request since an auditor working on a contingency basis may
spend more time on the audit and raise more issues, since they will be paid based on what they find.
Mastering The Game
154
the parties might still be in disagreement and will have to discuss a settlement,
although depending on the dispute of a disagreement, this could lead to a notice
of breach and eventually termination.
424
In the event that the parties need to
settle the disagreement, the publisher will require a release from the developer
stating that no additional claims will be made against the publisher regarding
statements that were covered under the audit, so that future potential litigation is
avoided between the parties.
Cost Of Audits
The responsibility associated with the cost of the audit will be another issue within
the audit provision. Generally, the cost of the audit (typically limited to reasonable
costs associated with the actual audit) is the responsibility of the developer
conducting the audit, but the responsibility shifts to the publisher if the audit
shows an underpayment in an amount typically between 5 and 10% involving the
relevant royalty payments reviewed by the developer.
425
A publisher may also
require the underpayment to meet a certain threshold. For example, the parties
might agree that the publisher will pay for the audit in the event that an
accounting mistake is 10% or more and equivalent to at least $5,000. In the event
that either of these two preconditions are not met, the publisher does not have
to pay for the audit.
3.2.13 – Publisher Commitments
In addition to any payments required from the publisher to the developer, the
parties will agree on additional obligations to be undertaken by the publisher
which will vary subject to negotiations and the rights granted. Typically, the
publisher can advise on development, assist with community services and also
handle the relationships and serve as the liaison with the first-party console
manufacturers, digital distributors, and other platforms including mobile.
426
As
part of this responsibility, the publisher usually tests the product (for quality
assurance), as does the developer; helps with localization, which may include
providing in-game text and assisting with the voice-over; provides customer
support; and submits the game to the hardware manufacturers for certification.
427
Costs associated with submissions are generally advanced by the publisher
(unless the developer is required, as a result of delays, to pay additional fees for
424
If the language in the agreement does not cover how to resolve disputes involving a statement,
the parties should consider adding it. The fastest and most likely the cheapest way to resolve the
disagreement would be mediation and then arbitration. See Section 3.2.21 for a more detailed
discussion on dispute resolutions.
425
The parties must also agree as to what costs would be reimbursed. Costs should be actual and
reasonable expenses that may be incurred by the auditor. In addition, consider whether costs include
not only the costs to conduct the audit, but the auditor’s travel and potential accommodation
expenses. Some agreements may also request reimbursement for any legal fees incurred as part of
the audit.
426
Both a publisher’s library of games and their relationships with distributors is critical for a
developer, since it is the network of publisher’s games that can help improve the discoverability of
the developer’s game.
427
In some distribution deals involving retail products, the developer may elect to deal with the first
parties regarding the approval process but will look to the publishers to help finance the
manufacturing costs. When dealing with responsibilities undertaken by a publisher, many of these
activities should be tied to some level of commitment. It may not be enough to say that a publisher
will perform certain services. Instead, consider that services will be performed in a manner customary
to similar games published by the publisher (e.g., a AAA title), especially if you have chosen to work
with a publisher based on their track record.
155 Mastering The Game
extra or accelerated submissions) and then are typically recouped from revenues
earned from the exploitation of the game.
The publisher will generally be responsible for the manufacturing (if a boxed
product of the game is being sold), marketing, and sales of the game; and when
a developer enters into an agreement with a publisher this should be one of the
main issues on which the developer makes its decision to choose one publisher
over another, assuming there are multiple expressions of interest from various
publishers. The publisher’s ability to deliver on the distribution and marketing of
the game will be significant in helping to sell the game.
428
The parties will also
need to decide who will be responsible for submitting games for ratings (whether
a rating board, government body, or platform owner), the collection of player
data, and community support. All involve a number of procedures and regulatory
guidelines, which will often vary by region, and which need to be carefully
understood and followed.
429
Publishers should provide developers with business plans covering their overall
strategy in the distribution of the game. This plan should cover at least the
projected release dates in the various territories (subject to the timely delivery of
the game), the distribution channels, the retail outlets (if applicable), how they
plan to distribute in certain territories which impose additional regulations (e.g.,
in China and Vietnam), as well as pricing and monetization of the game.
Depending on the relationship between the parties, the level of consultation and
possible approval of the business plan will vary. If the publisher is acting solely
as a distributor, then the developer should have approval rights, especially if
marketing costs are recouped by the publisher. A developer will also want a
contractual commitment from the publisher, provided that the game is delivered
in a timely manner in the major territories.
Depending on the negotiations between the parties, the developer should
attempt to negotiate a marketing commitment from the publisher, especially if the
parties only enter into a distribution deal. This obligation would require the
publisher to spend a certain amount of money and/or to engage in certain
consumer marketing initiatives that may include, if applicable, attracting mobile
customers, and/or retail marketing events. This commitment would provide
additional assurances that the game would be a high priority for the publisher,
although if the publisher is spending a lot of money on development, then it would
be fair to assume that the publisher will already be committed to putting
marketing dollars behind the game.
If the publisher was to agree to a marketing commitment, the parties would also
need to agree on how the money will be spent; when the money would be spent
(e.g., within the first six months of the game’s release); and, depending on the
territorial rights granted, the parties must consider how the marketing
commitment will be allocated for the different territories. Generally, the publisher
will want as much freedom as possible regarding the marketing spend and will
428
Other than a situation in which the publisher owns the IP to the game or hires a developer to
create a game based on the IP of a third
party, the developer may request that the publisher provide
the agreed-upon distribution and marketing services comparable to other similar games that were
distributed by the publisher. At the very least, the developer should insist on language that the
publisher will use at least “commercially reasonable efforts”. See Note 379. A developer can also
play an important role in promoting the game through online channels (i.e., Facebook, Twitter),
although it would need to coordinate with the publisher.
429
See Chapter 10.
Mastering The Game
156
argue that based on its experience, it needs the discretion to decide on when
and how dollars will be spent.
Since the publisher should be in a better position than the developer to
understand market conditions, the publisher should be the party responsible for
creating a marketing plan and spending plan for the game. However, the
developer should try to get approval rights which may be difficult, or alternatively
meaningful consultation rights that allow for their input and evaluation of the
game’s marketing plans,
430
especially if the publisher is acting only as a
distributor, if marketing costs are recouped by the publisher, or if the game is
based on the developer’s IP.
Finally, if the publisher says they will perform certain services and spend money
on certain activities it is important that those assurances are confirmed in writing
in the agreement and that both parties understand the obligations of the
publisher, and what costs, if any, can be recouped.
3.2.14 – Representations And Warranties
Although representations and warranties are usually ignored by everyone except
the lawyers negotiating the deal, these are significant provisions making up any
agreement between parties. These are the statements included as part of the
representations and warranties on which the other party relies prior to entering
into an agreement. Minus these assurances, the other party might not enter into
an agreement because there might not be any guarantee that one party
possesses the proper rights to enter into an agreement. Without the appropriate
guarantees from one party, the other party would then have to assume the risk
for certain matters – risks that may not be worth taking, and therefore provide
justification for not entering into an agreement. In addition to providing
assurances to the other party, representations and warranties are significant
because they will be tied to the indemnification provision (see below). An
inaccuracy in a representation or warranty could lead to a breach of the
agreement and eventually termination of the deal, so it is critical that the
representations and warranties provided are accurate. If a party cannot
contractually guarantee certain representations and warranties then the risk may
be too great for the other party, therefore ending negotiations.
If the publisher has the right to sublicense rights to an affiliate or a third party
then the developer should require an additional representation and warranty from
the publisher that these parties are bound by the terms of the agreement. The
publisher would also need to indemnify the developer against any claims in
breach of any of the representations and warranties.
Not only will the developer be required to make a number of representations and
warranties, but they must also require the publisher to make representations and
warranties. The publisher’s representations and warranties often depend on the
bargaining power of the parties since most publishers will try to limit their
commitments, risks, and exposure by limiting their representations and
warranties.
430
The marketing plan usually outlines the anticipated amount of money that will be spent, how it will
be spent, when it will be spent, and where it will be spent by the publisher.
157 Mastering The Game
The most important representation and warranty will be that the materials used
in the game, whether content for the game or software used to develop the game,
are either original, in the public domain, or licensed and do not violate the rights
of third parties involving copyrights, trademarks, patents, rights of publicity (the
right to exploit one’s likeness for commercial purposes) and privacy (the right to
be left alone).
When a publisher enters into a deal with the developer, they need to have
assurances that the materials will not violate the rights of third parties, because
a problem with the rights could result not only in legal disputes that could prove
to be costly, but also a court order preventing the distribution of a game or the
removal from a platform. In the event of a threatened legal action involving
infringing materials, the developer will be responsible, not only for any costs to
resolve the problem with the third party claiming infringement but also for any
damages (although they may be limited) incurred by the publisher through the
indemnification provision.
In many situations, the publisher may take on the commitment to provide a
license for material that the game is based upon or for music. In this particular
situation, the developer should require a representation and warranty requesting:
confirmation that any licensed materials have been properly obtained;
431
that the
license as used in the game or marketing materials does not infringe the rights
of third parties; and to be indemnified against any claims that may arise from the
acquired licenses, although an indemnity provision under the law of a continental
European country such as Germany, France or Italy, may be of very little or no
practical value.
432
Furthermore, this representation and warranty should also
cover any new materials created or provided by the publisher (excluding any
materials as delivered and approved by the developer), whether for the game,
such as localized materials prepared by the publisher, or marketing materials.
For example, if a publisher uses unlicensed music in a marketing campaign, then
the publisher should indemnify the developer for any claims associated with the
unlicensed music, since a claim regarding the music could result in a breach of
the publisher’s representations and warranties.
While the developer will deliver materials to the publisher so that the publisher
can create marketing materials and packaging, if applicable, in the event that the
publisher alters the materials, or places them in a context which might allegedly
infringe the rights of third parties, then the publisher should be held accountable.
In addition to both parties making a representation and warranty regarding the
IP associated with the game and any additional content added afterwards, each
party will usually also agree to add the following reciprocal guarantees that (i)
they has the authority and are free to enter into the agreement; (ii) the person
signing the agreement has the authority to act on behalf of the signatory; (iii) it is
431
A party licensing rights for use in a game needs to confirm that the rights obtained are consistent
with the rights granted under the publisher-developer agreement. For example, if underlying licensed
rights are limited to five years, and yet the publisher-developer agreement requires a 10-year term,
then this will be a problem. Also, when licensing software, the parties need to be aware of whether
the software tracks users in violation of privacy regulations.
432
Because civil codes provide the general principle that – to the extent that there is an obligation on
one party (contractual or other) – if that party does not fulfill that obligation, then that party is liable to
compensation. On the basis of this principle, whether an indemnification obligation (to be applicable
in respect of a contractual breach) is added to the contract, that addition will not strengthen the legal
position per se (which would be the same even without the indemnity), nor would it weaken it per se.
This is unlike English law, for instance, under which indemnities have specific legal effects (e.g., an
indemnity may trigger the aggrieved party's duty to mitigate, which would otherwise not apply in
respect of a simple breach of contract claim).
Mastering The Game
158
a validly existing corporation or other legal entity; (iv) it is not involved in any legal
dispute that would compromise any of the rights granted or prevent it from
carrying out any of its obligations; (v) it has the capability to perform its
obligations under the terms of the agreement; and (vi) it has not entered into any
other agreements that would interfere with the rights granted by it.
The developer may also have to further represent and warrant that:
1. The game, monetization models, and collection of data (this may be
reciprocal depending on which party collects data) will not violate any
rules, laws or regulations in the territory.
2. The game will operate in accordance with the game design
specifications.
3. The game does not contain any computer code, viruses, or Trojan
horses that could invalidate a rating, disrupt, harm, or impede in any
manner the game, or any ‘Easter eggs’
433
which may contain lewd,
pornographic, or other objectionable content.
4. All people associated with the game will have been paid for their services
and the publisher will have no obligations to compensate any parties
unless otherwise agreed upon by the parties.
5. All people working on the game will have performed services either
through ‘work for hire’, depending on the jurisdiction, or will have
contractually assigned or have undertaken to assign all their rights in and
to the work they provided for the game.
434
6. They possess the technical resources and abilities required to fulfill their
obligations under the terms of the agreement.
7. They are financially sound and fiscally capable of performing their
obligations.
8. They will not use any free or open software that might subject any part
of the code used for the game to any license obligations unless approved
by the publisher.
435
9. They have not been sued in the past for any claims.
Certain representations and warranties can be absolute or they can be limited,
depending on the bargaining power of the parties. A publisher will seek broad
representations and warranties from a developer, so it will be the developer’s
responsibility to try to narrow these statements as much as possible. One way in
which the developer can qualify its representations and warranties is by adding
the words ‘to the best of their knowledge’. For example, the developer may agree
to a clause that states the game software does not knowingly contain any virus.
In this situation, if there is a virus unknown to the developer, it precludes the
433
An ‘Easter egg’ is an item or gameplay hidden in a program which is accessed by performing
certain commands outside normal gameplay.
434
A publisher may require a developer to provide copies of written, signed employment agreements
(redacting any information that may be confidential) to confirm this representation and warranty.
435
The use of open source can pose problems for a developer. While open source may be free to
use, it is still subject to a license agreement that can impose significant obligations on the developer,
and therefore the license in which the code is used needs to be carefully reviewed. License
agreements will vary with regard to the obligations imposed upon the developer. For a discussion on
open source software, see Nimmer, Raymond T., Licensing of Intellectual Property and Other
Information Assets, 2
nd
edition, LexisNexis, 2007, pp. 808-825.
159 Mastering The Game
publisher from claiming breach of the agreement. This is because the developer
has only promised that they are unaware of any infringement on the rights of a
third party, even though it may transpire that such infringement has occurred.
436
However, in the event that a publisher accepts limited representations and
warranties, it may add a clause that the limitation on a representation and
warranty does not limit the developer’s obligations under its indemnification
provisions.
The developer should also request exclusions from certain representations and
warranties, including those related to the delivery of materials provided by the
publisher to the developer which would remain the responsibility of the publisher.
Moreover, if the publisher alters the materials provided by the developer, then
those specific alterations to the materials would no longer fall under the
developer’s representations and warranties.
In many agreements, a developer may be required to represent and warrant that
they comply with all laws and regulations in fulfilling their obligations pursuant to
the agreement. This is extremely broad language and could be interpreted to
include laws involving IP, business practices including monetization models and
loot boxes, tax, and privacy to name a few. It is important to understand what
this compliance representation includes, especially if the agreement covers the
world or a number of countries. In addition, a developer that is required to agree
to this language should negotiate reciprocal language so that the publisher has
the same obligations. This representation and warranty is becoming even more
significant if no separate representation exists in the agreement covering the
collection and sharing of consumer data. As more countries impose tougher
limitations on the use of data and impose significant fines for the misuse of
information, it is critical that, when collecting personal data, each party complies
with all the rules and indemnifies the other party against any breach.
An additional representation and warranty that may be made by each party
involves revenue earned from a game. Since revenue is unpredictable, and
royalties in some situations may be the only form of payment received by a
developer, a publisher may require the inclusion of language in the agreement
indicating that they do not guarantee royalties will be earned, if any.
In fact, the agreement will typically include language indicating that the developer
acknowledges the unpredictability of games sales and agrees not to make any
claims against the publisher for lack of sales or more revenue that could have
been earned for the game. However, even though the developer may have to
agree to this representation and warranty, they should in turn request a
commitment from the publisher regarding a release schedule (assuming the
game is delivered on time or relatively close to the scheduled release) and
possibly a marketing commitment.
3.2.15 – Indemnification
The indemnification clause is another provision that is usually only read by the
lawyers unless a problem occurs, but it has the potential to be very significant in
the event of a dispute involving a third party. The indemnification clause should
spell out the procedures that the parties would need to undertake if the
436
Litwak, Mark, Litwak’s Multimedia Producer’s Handbook, Silman-James Press, 1998, p.184.
Mastering The Game
160
indemnification clause is invoked, as well as the responsibilities and costs of
each party.
Indemnification requires one party (the ‘indemnifying party’ or ‘indemnitor’) to
defend the other party to the agreement (the ‘indemnified party’ or ‘indemnitee’)
from claims brought by a third party against the indemnified party. In this
situation, the indemnifying party takes responsibility for any claims brought
against the indemnified party by a third party. Indemnification will not apply when
the parties to an agreement are involved in a dispute. Instead, it will only involve
a situation in which a third party brings a legal claim and names the indemnified
party, and most likely the indemnifying party as well, in the dispute. An example
is if a developer represents and warrants that all the music in the game is original
or properly licensed from a third party, however, a third party sues the developer
for copyright infringement and also sues the publisher, since the publisher is
distributing the game. Even though the publisher may not have been directly
involved in obtaining the music rights which are the subject of a dispute, since
the publisher is distributing the game, the publisher could be in violation of the
music owner’s copyright. This is because one of the rights of a copyright holder
is the right to control the distribution of the copyrighted material. In this situation
under the indemnification provision, the developer would typically take
responsibility in defending the claim and for any damages, legal fees, court costs,
and settlement that the publisher might incur as a result of the pending litigation.
The indemnification clause will often be tied back to the representations and
warranties, since a third party lawsuit will be associated with a breach of a
representation and warranty that all materials created by the developer (other
than materials provided by the publisher) do not infringe the rights of third
parties.
437
This is why it is critical for the developer to be aware of the
representations and warranties and also that they consider whether the
representations and warranties should be limited in certain circumstances.
Litigation can be extremely expensive and, for a small developer, the costs
involved in defending a lawsuit can be substantial. An award for damages could
even put a developer out of business. In addition, it is critical for the developer to
obtain representations and warranties from the publisher as well as an obligation
to indemnify the developer against any claims if it is named in a lawsuit involving
a potential breach by the publisher of its representations and warranties.
438
This
is particularly the case when the parties specifically elect to have the agreement
governed by US or English law, since under Anglo-American laws an indemnity
is capable of producing effects that may, and normally do, enhance the legal
position of the indemnified party.
439
437
There may be situations in which a party does not represent that there will be no third-party claims
but will still indemnify against those claims. This is primarily done to eliminate a potential breach of
the agreement associated with the representations and warranties.
438
The developer should also require that the publisher indemnify the developer against the
publisher's manufacturing, marketing, promotion and distribution of the game unrelated to its
development, unless it involved materials provided by the publisher to the developer.
439
For instance, in the case of English law, an indemnity generally does not impose a duty on the
beneficiary of the indemnity (the indemnified party) to mitigate its losses, while a warranty imposes
such a duty on the beneficiary of a warranty. Also, with an indemnity, the indemnified party is under
no requirement to show the fault or negligence of the other party (i.e., the indemnifying party), and it
is sufficient for the indemnified party to show the ‘trigger’ that the indemnifying party has breached
one of the representations or warranties under the terms of the agreement between the parties. The
third main advantage of an indemnity is that it covers remote damages which, depending on the
degree of remoteness, the beneficiary of a warranty may not be able to recover.
161 Mastering The Game
On the other hand, under the laws of European countries such as France,
Germany, and Italy, in principle, the violation of an (unqualified) contractual
obligation, provided it is clearly worded in the agreement, should put the
aggrieved party in the same legal position irrespective of whether or not the
aggrieved party can rely on an indemnity.
440
The indemnification provision not only spells out a party’s obligation to indemnify
the other party but it also covers how the process works, which could have
significant ramifications for both parties. This provision usually includes the
following points:
• The fact that proper notice must be provided to the indemnifying party
by the indemnified party so that the indemnifying party is aware of the
legal action; otherwise, the indemnifying party, if not named in the
lawsuit, might not be aware of any potential litigation.
441
In fact, language
may be added to an agreement if the indemnifying party does not receive
timely notice, thereby prejudicing their defense. In that case, they no
longer have an obligation to indemnify the indemnified party for that
claim.
• Information on whether the parties want to include an alleged breach to
be covered under the indemnification provision or just a breach. A party
may want to exclude this if it feels it may be at greater risk if it is included
in the agreement, although one party may argue that they should not be
responsible for any costs associated with an alleged breach caused by
the indemnifying party.
• The indemnified party may want to have approval rights, not only for any
type of settlement, since any settlement could potentially affect the rights
of the indemnified party, but also the approval of the law firm
representing the indemnifying party. The indemnified party may request
this additional protection since the indemnified party wants to make sure
that the counsel representing the parties is competent; the indemnified
party could have a lot at risk, especially if there is a potential for losing
distribution rights and paying damages.
• The indemnified party may want to hire its own counsel, although the
indemnified party would be responsible for the costs unless it took over
the defense for both parties. Agreements may include language that
allows either party to assume control of the defense and any settlement
(subject to the approval of the other party) if a party believes the
indemnifying party is unable to adequately defend the case.
Some of these issues might be resolved by both parties obtaining proper
insurance coverage which, subject to the policy, would pay for legal fees and
damages.
440
However, even in civil law countries indemnities are widely used and may be useful drafting tools.
For instance, indemnities may be used to pre-quantify the liability of the breaching party and/or to
introduce exclusions or limitations of the parties’ liability.
441
Besides including the name of the party making the claim and the nature of the claim, the notice
may also include the amount of the alleged damages and the nature of the relief sought. A copy of
the claim would also be attached to the notice.
Mastering The Game
162
3.2.16 – Insurance
With the increase in litigation and potential associated costs, combined with
concerns that a developer may not have the resources to cover their
indemnification obligations, publishers in most instances will require the
developer to obtain errors and omissions (“E&O”) insurance which may also be
referred to as professional indemnity insurance or professional liability
insurance.
442
Excluding fraud or deliberate infringement, E&O generally covers
the costs involved in litigation (including legal fees) and any ensuing settlements
associated with claims involving IP issues such as copyright and trademark
infringement, as well as rights of publicity and privacy.
443
Typically, patent
coverage is provided under a separate policy because the cost of litigation is
much higher than for other IP coverage.
Policies that provide worldwide coverage can be obtained, but the availability of
E&O insurance will vary by country and in some situations may be difficult to
obtain (e.g., in Latin America). In addition, policies written outside the US and
Canada, but which provide coverage in those territories may cost additional
money because of the amount of litigation and the costs of litigation (i.e.,
damages and legal fees) in those territories.
Publishers will typically require that the developer:
1. Maintains E&O insurance with minimum amounts for any cause of
action;
444
2. Arranges a deductible that does not exceed an amount requested by the
publisher;
445
3. Maintains coverage for an agreed-upon period of time;
4. Names the publisher as a beneficiary and an additional insured party
under the policy;
446
442
The E&O application will seek information about the applicant and the game to help the underwriter
determine the risks involved in insuring a game. Those questions may include: (i) is the game original
and have any rights been obtained from a third party? (ii) have agreements been signed with third
parties providing the rights necessary for the developer to exploit the game? (iii) have all clearances
been obtained? (iv) is the music original or have licenses been obtained? (v) has the developer been
sued in the past for any claims? (vi) what is the developer’s yearly revenue and what is the anticipated
revenue from the exploitation of the game? (vii) what steps did the developer take to ensure there
are no possible infringements? and (viii) is all work done by the developer pursuant to a written
contract and do those agreements contain an indemnification clause?
443
Depending on the policy, E&O insurance can also cover claims involving a breach of contract.
444
See Section 4.3.11 which includes a discussion on coverage limits. Developers may be required
to carry cyber insurance covering data and privacy breaches such as the General Data Protection
Regulation (GDPR). See Chapter 10 for a discussion on privacy regulations including the GDPR.
445
While a higher deductible will result in a lower premium, if the deductible is too high it is possible
that the developer may not be able to cover the amount in the event of a claim.
446
Many agreements require the developer to name the publisher as well as its affiliates and
subsidiaries, etc., as an additional insured party, but the developer should ask for this to be deleted.
This request would theoretically mean that a claim brought against the publisher that might have
nothing to do with the developer could fall under the policy because they are an additional insured
party. However, it is very doubtful that this would have been the intent of the parties, especially since
the publisher should have their own E&O policy. Instead, the publisher would be more concerned
about being named a beneficiary under the policy. In this situation, if the developer were to win their
claim under the policy, then the insurance company would directly provide the publisher with any
money they would have been entitled to under the insurance policy as a result of any ruling or
settlement. For the publisher, this avoids them having to request the money from the developer,
which could pose problems.
163 Mastering The Game
5. Notifies the publisher at least 30 days in advance if the policy is cancelled
or has been revised; and
6. Receives a certificate of insurance evidencing proof of developer’s
insurance as required under the agreement. However, a publisher
should also request a copy of the developer's policy to confirm that the
insurance policy actually does cover what was requested by the
publisher. This is especially true when working with smaller independent
developers. A publisher should confirm that the developer is properly
insured; that the policy actually covers the game and any other content
distributed (otherwise a potential claim can be denied); which actions
would trigger coverage under the policy; and how the insurance
company would defend a complaint.
If the developer has obtained E&O insurance
447
and a claim is made against the
publisher (and assuming the claim is covered under the policy), the insurance
company would be responsible for a certain amount of the damages or
settlements incurred regarding the litigation, subject to the deductible and
amounts covered under the policy as well as the developer following the required
procedures in submitting a claim.
448
Furthermore, the insurance company will
generally play a major role in the hiring of the law firm that would handle the
case.
For example, if the developer and the publisher are sued for an alleged copyright
infringement involving materials created by the developer for the game, under
the indemnification provision the developer would be responsible for defending
the case and paying for any and all damages or settlements, including those
incurred by the publisher. Assume that the claim is for $300,000 and the
developer’s policy covers up to $500,000 for any single claim and $1 million for
all claims with a $100,000 deductible. In this case, if the developer settled for
$150,000 then the developer would be responsible for paying $100,000, which
covers the deductible, and the insurance company would pay the remaining
$50,000 out of the settlement. As part of the E&O policy, insurance companies
will usually direct the insured party regarding the law firm that will represent the
447
Developers need to think about E&O insurance, and depending on the budget, they may not have
allocated resources for a policy. It is very common not to have an E&O policy, especially for smaller
developers, because either they are not aware of it or they do not have the money to purchase a
policy. Furthermore, developers need to consider when the appropriate time is to obtain E&O
insurance. In most situations, as soon as a developer releases content publicly, they will want to be
covered. Even when the game has not yet been completed, a developer by itself or through a
publisher will release marketing materials, trailers, place content on a website, and release parts of
the game, including beta versions, for possible consumer feedback. All of these situations expose
the developer and possibly a publisher to a claim by a third party. Finding an insurance company
(typically a broker), completing an application, and having the application approved takes time. As a
result, the developer needs to factor in these steps when obtaining a policy, especially if a publisher
requires a copy of an insurance certificate and the policy within 30 days from signing an agreement.
In very rare situations, and depending on the relationship, it is possible that the publisher will cover
the developer under their policy. Publishers will most likely be reluctant to do this since it increases
their exposure to a claim. Developers and publishers might also want to consider other forms of
insurance covering their business which might include general liability insurance, employer’s liability
insurance and workers compensation (required in some jurisdictions), cyber insurance (covering
hacking, ransomware, viruses), and product liability insurance. Game companies should also make
sure their policies are updated and provide the coverage needed, especially when a company grows
in revenue and personnel, thereby increasing risks.
448
Insurance policies will require that the insured party notify the insurance company immediately
and provide the required documentation about a claim within a certain time frame. Failure to do so
could result in a claim being rejected by the insurance company. If a claim is made against a
developer and they have E&O insurance, one of the first things they should do is contact their
insurance company and notify them about the claim.
Mastering The Game
164
developer and may also offer advice on settling the claim, since this could be
cheaper for the insurance company.
449
E&O insurance costs can be expensive and costs for a policy will typically be
determined by a number of factors and may include (i) the size of the developer
seeking insurance; (ii) the services and products provided by the developer; (iii)
the risks involved; (iv) how the developer manages risks (e.g., what steps do they
take to prevent them); (v) what type and amount of coverage the developer is
seeking; (vi) the level of experience of the developer (vii) whether the developer
has been involved in legal disputes; (viii) how much coverage the developer
wants to obtain and the deductible that would be agreed upon; (ix) the size of the
deal into which they are entering with the publisher; and (x) the length of the
policy requested by the developer. As for any deal, parties seeking coverage
should negotiate the costs quoted by the insurance company.
The party responsible for covering the E&O costs will usually be determined on
the basis of a number of factors, including the type of deal between the publisher
and the developer, and whether or not the cost was contemplated when
determining a milestone schedule. Whoever is responsible for the costs of the
insurance, it is critical that the parties understand what the policy does and does
not cover, and the procedures that must be followed in order to claim
coverage.
450
3.2.17 – Credits
This section in the agreement covers the attribution credits that will be given to
the developer, the publisher and the individuals associated with the game. As
games continue to grow in prestige throughout the world, credits are taking on
greater prominence. For the developer, credits can be a significant issue in the
agreement since they provide recognition that is seen by other publishers as well
as the consumer. Therefore, the parties need to negotiate what credit or other
form of acknowledgment (e.g., a website address) the developer, as well as the
personnel associated with the game and any additional content, will receive,
where the credits will appear, as well as the size and screen time of the credit
subject to any limitations imposed by any platform manufacturers. Credit
attribution should not just be limited to the game but should also consider
marketing, press, and any other materials related to the game that are seen by
the public.
If the game is financed or owned by the publisher, the developer will want to
make sure that its company logo appears at the beginning of the game on a
separate screen prior to the game starting, for an agreed period of time and no
449
Insurance companies will recommend a selection of law firms that have previously worked with
the insurance company, specialize in the area in dispute, and are located where the dispute is to be
resolved. Depending on the policy, it might be possible for the insured party to select their own law
firm, although costs will most likely be capped. One of the goals of the insurance company is to limit
their exposure, and sometimes they might recommend settlement so as not to incur additional court
costs and an unfavorable verdict.
450
Finding appropriate insurance coverage can be a daunting challenge for developers, as few are
likely to have experience in this area, aside from finding their own personal insurance. E&O is entirely
different in nature, and therefore it is important for a developer to work with a broker they can trust
and who is knowledgeable in this area. The approach should be no different from when a developer
seeks legal counsel. A developer needs to research this area, and should ask for recommendations
from other developers or from the publisher or the lawyers they work with. Also, just like any other
agreement, the developer needs to understand what their policy covers.
165 Mastering The Game
less prominently than the publisher’s credit. This on- screen credit has become
even more significant with the rise of other forms of distribution that do not involve
traditional packaging, thereby reducing opportunities for recognition. The
developer will also want its logo to appear on any packaging as well as marketing
materials including social media posts, no less prominently than the publisher’s
logo. If no publisher credit appears then the developer should try to obtain credit
at least as large as any other credit on any of the materials.
In addition to receiving logo credit, a developer will want a guarantee that credits
for the personnel and any other third party associated with the game appear in
the game’s credits. Developers need to be aware of the credit obligations they
sign off on with talent and third-party licensors, including those that provide
software that may require the company’s logo on packaging or in the game’s
credits.
451
Both the developer and the publisher should be aware that if development work
relating to a game has been done by personnel based in a country whose laws
recognize moral rights, including the so-called right of attribution or paternity right
(i.e., the author’s right to be recognized and named as the author, co-author, or
director of a copyrighted work), then all the individual developers that have
worked on the content (including any coding, artwork or music) of the game may
have a statutory right to appear in the credit section of the game. Because in
certain countries moral rights cannot be transferred to a third party (e.g., the
studio) and/or waived, both the publisher and the developer should be aware
that, independently of what they may agree or may have agreed in the agreement
between them, a physical person who has worked on the game may have a right
to be named in the credits section.
452
For games in which the publisher is only involved in the distribution, the
developer’s credits should be more prominent than those of the publisher.
However, depending on the publisher’s prestige it could also be very beneficial
for the developer to have the publisher’s logo appear with equal prominence, as
this could bring additional credibility to the game.
A further issue that is usually not addressed involves determining what happens
with the developer’s credit when a game is not completed by the developer. Many
agreements include language indicating that the developer’s credit is subject to
the developer providing all the services required under the agreement. What
happens if the developer fails to provide all such services, but provides the
majority of the work? How much work would need to be done to receive some
form of attribution? Could a developer be denied credit? The issue becomes
even more complicated when dealing with developers in countries that recognize
moral rights, as discussed above. Despite the language in the agreement, a
publisher may still provide a form of credit to the developer, but it may be in the
developer’s best interest to add additional language to the agreement stating that
if they feel they have been denied a proper credit, the parties will agree to the
involvement of a third-party mediator to resolve the problem.
451
If this is a requirement, the developer should make sure that it is subject to the discretion of any
of the applicable parties such as the platform holders, licensors and publisher.
452
See Chapter 2.
Mastering The Game
166
3.2.18 – Termination For Cause
Another major section in an agreement will cover the consequences of a party
failing to cure a material breach of the agreement which will allow the non-
breaching party to terminate the relationship and possibly seek damages. Rarely
are situations similar because of different facts leading to the potential
termination, and despite the inclusion of relevant language in agreements, the
situation can easily become expensive and complicated for both parties,
exacerbated by the potential for increasing levels of tension between them. It can
also be challenging to address many of the situations which may lead to
termination, especially when dealing with long-term deals and the uncertainty
that may occur in a constantly changing industry. In this section, some of the
language that typically appears in an agreement will be discussed. A number of
additional issues would need to be addressed when an agreement is terminated
by the publisher for cause. Some of those issues may include: (i) credits, (ii)
royalties if a game is completed without the developer’s services, and (iii) rights
of first negotiation and last refusal.
The termination section will spell out the obligations as well as the remedies that
may be triggered in the event of a breach of the agreement by either party.
453
Typically, a party may have the right to terminate the agreement upon the
occurrence of a material breach which the parties will list in the agreement. In
this situation, the breaching party either fails to perform one of its contractual
obligations or exceeds its rights under the agreement (i.e., acts in a way
prohibited by the agreement), thereby allowing the other party the right to end
the relationship. Because termination can result in major consequences for both
parties, each party will attempt to limit the grounds for termination and request
the opportunity to cure any breach.
The most common grounds for a material breach by the developer include:
1. Failure to deliver an approved deliverable;
2. Failure to submit a deliverable on time;
3. A breach of a representation and warranty;
4. Failure to maintain proper insurance; and
5. Bankruptcy.
454
For the publisher, possible grounds for the developer to terminate the agreement
could include:
453
Most agreements end when the term expires, with the various rights reverting back to the
respected parties. Agreements should include post-expiration language covering what obligations
and rights might continue after the term (survival clause) and what materials would need to be
returned.
454
With regard to bankruptcy as a termination event, both the developer and the publisher should be
aware that under the national insolvency laws of certain countries, only the official receiver is entitled
to decide whether or not they should terminate existing agreements involving the (insolvent) party.
As a general rule of private international law, the law of the country of incorporation of the entity that
has become insolvent will apply to the insolvency proceedings, irrespective of the governing law of
the agreement chosen by the parties. For a discussion on dealing with bankruptcy issues in the US
see Cannady, Cynthia, Technology Licensing and Development Agreements, Oxford University
Press, 2013, pp. 208-213.
167 Mastering The Game
1. Failure to pay any development costs, advances, guarantees, or
royalties when owed;
455
2. Failure to issue statements;
3. A breach of a representation or warranty;
4. Failure to fulfill any obligations such as a marketing commitment; and
5. Bankruptcy.
In order for a party to claim breach, the non-breaching party must first provide
notice of the breach and if the accused breaching party fails to cure within a
certain period of time, then that party will be deemed to be in breach. Cure
periods may vary depending on the type of breach.
456
For example, failure to
deliver a milestone or failure by the publisher to pay for a milestone may have a
shorter cure period compared to other breaches, such as a breach involving a
representation and warranty which may require more time to cure. Furthermore,
cure periods may be based on business days or calendar days. In some
situations, such as bankruptcy, a breach may not allow for a cure period because
of the type of breach that has occurred, and no matter what the cure period the
breach cannot be cured.
In the event of an uncured material breach, the non-breaching party will have the
right to terminate the agreement and seek remedies which may include
damages. Depending on the breaching party, the type of breach, form of
distribution (e.g., retail or digital product), and when the breach occurs (e.g.,
during development, after the game’s release or providing live services), the
remedies will vary. The most serious breach that the developer could cause
would be its failure to deliver the milestones pursuant to the delivery schedule. If
the developer is unable to submit an acceptable deliverable on time, and unless
the parties revise the deliverable schedule the publisher will generally have the
right to terminate the agreement.
457
In this situation the publisher may seek the
return of any advances paid, and suspend any of its obligations, or depending
on the stage of development, may request access to the underlying source code,
providing a possible opportunity for the publisher to finish the game.
458
In some situations, the publisher will insist that the code developed during the
making of the game should either be delivered as soon as possible to the
publisher or placed in an escrow account on an ongoing basis pursuant to the
milestone schedule in case the publisher needs to access the original code (in
455
If royalties are the subject of a dispute, failure to pay might not be deemed a material breach
unless and until the developer can show payment was owed by providing appropriate documentation
(e.g., an audit report) subject to the publisher first providing the appropriate books and records to the
developer (failure by the publisher to provide books and records would be separate grounds for a
material breach); or in the case that the publisher has failed to cure the breach and a final judgment
has been rendered by a mediator, arbitrator or court (whichever was agreed to by the parties in
resolving this type of dispute).
456
Situations may arise in which the accused breaching party denies breach, thus making it
impractical to ‘cure’ and making litigation probable.
457
In most situations, the developer will have the right to resubmit a disapproved deliverable,
assuming the deliverable can be fixed. Contracts should address how long the developer will have
to fix the deliverable, how long the publisher will have to review the deliverable, and how many times
the developer will be allowed to resubmit. It is in the interests of the parties to resolve the problem,
but resubmissions cannot be ongoing, since at some point, the publisher may elect to either hire
another developer to fix the problem or complete the game, assuming that is a possibility, or may
terminate the agreement.
458
If the publisher was going to finish the game either using internal developers or hiring a third party
then those costs would be recoupable against the developer's share, assuming the developer was
still entitled to royalties.
Mastering The Game
168
contrast to licensed code) to finish the game. On paper, this may appear to be a
possible solution, but the developer may be reluctant to provide code to either a
publisher or third party since the code could be considered a trade secret.
459
In
addition, depending on the type of game and the complexities associated with
the source code, it might be unrealistic to assume that the publisher or third party
could understand the code to be able to finish the game. However, this is
becoming less of an issue as more developers use licensed software that is
publicly available.
In situations where the publisher has invested in the development of the game,
then the publisher will typically insist on language that prohibits the developer
from seeking injunctive relief in the event of a material breach by the publisher.
Because a publisher has invested money to create the game, it does not want to
be in a situation where its investment is at risk because of a material breach that
could result in the game being pulled from distribution. As a result, language may
appear in the agreement that states that in the event of a material breach by the
publisher, the developer’s only remedy will be for monetary damages.
A major clause tied to termination and the remedies provision will be a limitation
of liability associated with the type of damages that may be awarded to a non-
breaching party as well as the amounts that a non-breaching party may claim.
Because of the severity of limiting a party’s rights, the language will typically
appear in bold and also in capital letters, highlighting its significance.
Language in this section typically states that damages would not include
consequential (i.e., loss profits), specific, and punitive (i.e., damages awarded
as punishment for the actions of the breaching party to serve as a deterrent for
future activities). In addition, the parties may set limits on the total amount of
damages. The publisher will generally request a limit on the amount of monies
paid to the developer and the developer may seek to limit damages based on
monies received.
The limitation of liability is usually not absolute, and the parties typically carve
out exceptions to the limits. In most agreements, the limitation does not generally
cover breaches of the confidentiality provision, either party’s obligations under
the indemnification clause, gross negligence or a breach of data protection
obligations. A breach of confidentiality could reveal the trade secrets of a party,
which may exceed the value of any damages received by the non-breaching
party. In addition, a non-breaching party does not want to be responsible for
possible damages for any awards or settlements under the indemnification
provision that exceed any cap under the limitation of liability.
3.2.19 – Termination For Convenience
Because of the risks and uncertainties of development, the publisher may want
to have the right to terminate the agreement at will (typically referred to as
termination for convenience). In this situation, the publisher may feel that the
game will not turn out the way it was originally envisioned and perform poorly,
even if the developer has delivered on time and pursuant to the design document
459
If a developer is required to deliver code to the publisher (this is the case in most situations) then
the developer may request that access to the code be limited to approved internal developer teams
of the publisher and third party developers. This would avoid a situation in which the code is provided
to a developer's competitor.
169 Mastering The Game
and milestone schedule. A design concept for a game may satisfy all the parties
before work begins, but when executed it may be different from what the
publisher had envisioned for the game. Other reasons may also come into play,
such as changes in the publisher’s business strategies, market conditions, and
negative consumer feedback.
The publisher may feel that additional monies paid for development and
eventually manufacturing, sales, and distribution, as well as lost business
opportunities because of a shift in resources, would not justify the continued
investment in the game. As a result, termination for convenience allows the
publisher to stop the development of the game for any reason prior to the final
acceptance of the game. For the developer, a termination for convenience
should be accompanied by some form of payment to compensate the developer
for the publisher’s decision. Typically, the publisher will pay the developer a fee
usually referred to as a ‘kill fee’, which is a predetermined sum to be paid by the
publisher to the developer at the time that the publisher elects to terminate the
agreement. The developer would be allowed to keep any monies it has received
for development and would also be entitled to receive any monies owed for
previous milestones that have been accepted but have not yet been paid, and
any milestone the developer was working on when the publisher elected to
terminate the agreement. In some agreements, the ‘kill fee’ payment may involve
additional payments, possibly including additional milestone payments.
If the underlying story was created by the developer and acquired by the
publisher then the developer should request that all rights in and to the game,
including code and the right to make derivatives, would revert back to the
developer so that the developer could try to seek a deal with another publisher
or even self-publish. If the publisher does agree to a reversion of rights, they
might insist that if the developer is able to publish the game, then they would be
entitled to some form of compensation, which might cover its previous costs in
the development of the game if they had not been repaid or did not constitute a
passive royalty for its initial investment in the game. The parties would then also
need to negotiate the procedure and time frame for the payback and the actual
costs.
3.2.20 – Governing Law And Jurisdiction
One particular aspect that is sometimes overlooked in contracts by non-lawyers,
but which is critical to the entire document, is the governing law and jurisdiction
clause.
460
Parties need to consider that laws can vary among countries (and even
within a particular country), and the potential costs in filing and defending against
a claim in a particular jurisdiction can be substantial.
This section will specify which country’s law will govern the interpretation of the
contract (for example Chinese law, US law or French law) and separately which
country will have jurisdiction over the contract. It is common for the same country
to have the governing law and jurisdiction, but this is not universal: some
businesses may prefer to have the governing law and/or jurisdiction of the
contract as a neutral venue. For example, it is quite common in the business
world generally for business contracts involving parties from different countries
to specify English law and/or jurisdiction, since the UK is considered a neutral
460
For additional information on governing law, jurisdiction and legal fees, see Chapter 12 covering
common clauses.
Mastering The Game
170
jurisdiction with a well-regarded legal system. In practice, governing law and
jurisdiction is often a matter of bargaining power and the stronger party will
specify terms that are most favorable to it.
When drafting governing law and jurisdiction clauses, it is important to be precise
as to which countries or regions are being used in the governing law and
jurisdiction clause. For example, ‘American law’ has no meaning; instead one
must use the appropriate US State (California and Washington state law are by
far the most frequently used jurisdictions in the Western game industry contracts
since the states contain a great many video games companies). Similarly, ‘UK
law’ means little (one must specify English, Scottish, or Northern Irish law), which
is also the case for ‘Cyprus law’, as there are two different Cypriot republics.
3.2.21 – Dispute Resolution
Linked closely to the question of which country or countries will govern the
interpretation and enforcement of the contract is the question of how any
disputes between the parties will be resolved. The most common approach is for
any dispute to be resolved by the courts of the governing country (either on an
exclusive or non-exclusive basis). It is also possible that a different form of
resolution may be applicable depending on the dispute between the parties.
However, some parties may prefer to specify alternative dispute resolution
mechanisms. One partial alternative is to require the parties to have an informal
resolution process (for example, the respective chief executive officers or other
officers negotiating for a specific period of time). Otherwise, they may require the
parties to engage in a formal mediation process involving a mediator specializing
in the gaming industry or entertainment industry. In both cases though, the final
resort is usually to have recourse to the courts.
A complete alternative is arbitration. Very simply, arbitration is a dispute
resolution process in which the parties can choose everything about how to
resolve the dispute: who will adjudicate it (and there can be multiple arbitrators),
where, under which law and rules, when, and so forth. Most importantly,
arbitration is usually confidential (whereas court proceedings are public).
Arbitration can therefore provide a useful alternative to litigation and may also be
faster and cheaper. However, neither arbitration nor litigation is better than the
other: which option is chosen depends very much on the deal in question and
the attitudes of the parties to the issue.
One final matter worth bearing in mind is that having a good governing law and
jurisdiction clause and dispute resolution process is all well and good, but
ultimately if there is a problem between the parties then the successful party will
need to enforce its claims against the unsuccessful party. Sometimes this may
be straightforward if the unsuccessful party is able to pay the damages claim,
but if it cannot or if it refuses, then the successful party can face a distasteful
choice between trying to enforce its claim against the assets of the other party
(which may even involve having to go overseas to foreign courts with possibly
substantial costs of time and money), or writing off some or all of its claim.
Consequently, running through all of the risk allocation, governing law, and
dispute resolution sections of the contract is the need to be aware of the financial
strengths of the parties and the locations of their resources, since this will be a
171 Mastering The Game
material factor in how the parties approach all of these clauses. Finally, the
parties will want to address which party would be responsible for legal fees if
there is a dispute that is not settled either by mediation or arbitration (typically,
in these types of resolutions, the parties will be responsible for their own costs).
Do the parties assume responsibility for their own costs whether or not they are
successful, or does the unsuccessful party pay the costs for the successful
party? Furthermore, the parties need to decide when a party would get paid, and
whether legal costs are capped or limited by reasonable expenses.
3.2.22 – Additional Provisions
The publishing agreement will also include ‘boilerplate’ language, as outlined in
Chapter 12, and a confidentiality section, even though the parties may have
already signed a separate confidentiality agreement. The confidentiality
provision will reiterate the language in the signed document and is included to
cover new situations not addressed in the confidentiality agreement. In addition,
it is possible the parties never entered into a confidentiality agreement and
should therefore include language to cover this area.
Two other provisions that may be included in the agreement involve the
prohibition of either party from soliciting the other party’s employees and the
assurance that neither party will disparage or criticize the other party, including
their products and any personnel, whether in written or oral form or in any media.
This can be very broad language that could include a number of situations, so
the developer needs to understand what is included even if the language is
reciprocal. Furthermore, what is the resolution if one party does disparage the
other? How can a comment be determined as disparaging in nature, for example
in cases where the information is true or has also been noted by a third party?
3.3 – A Changing Role
Since the introduction of next-generation platforms, publishers have played a
significant role in the industry by financing and publishing games as well as
building relationships with retailers and creating the infrastructure to take a game
from concept to retail. However, that role is changing with the growing
importance of alternative ways in which consumers can play games and
increased opportunities that allow independent developers to deal directly with
digital and mobile distributors, thereby reducing their reliance on publishers. How
much that role will change will depend on the success independent developers
have in financing, marketing, and distributing their products. In the meantime,
while the role of publishers may not be as significant for the developer community
as in years past, they will still continue to play an important role in the industry
financing and publishing projects, especially for higher-end titles.
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3.4 – Scenarios
SCENARIO 1: Questions For The Developer When The Publisher
Owns The IP To The Game
I. TECHNOLOGY
1. Which party will own the new technology and code created by the
developer?
2. If the code is owned by the publisher, will the developer have the right to
use it for other projects? Will there be any restrictions on the developer’s
use?
3. If the publisher is allowed to use code owned by the developer in
subsequent products, will the developer be entitled to a royalty?
4. If the developer owns the new code or technology, will there be any
restrictions placed on the developer?
5. If additional third-party software and first-party tools are needed, which
party will be responsible for paying any licensing fees?
II. DELIVERY OF MATERIALS
1. Is it clear, based on the milestone schedule, what the publisher is
requesting for each milestone deliverable?
2. If the milestone schedule is revised, will the developer be required to do
more work? How will the developer be compensated and how will it affect
the delivery schedule?
3. Is the acceptance/rejection procedure clearly spelled out? Is the publisher
required to inform the developer in writing within an agreed-upon time
period if a deliverable is rejected, and to provide the reasons for rejection?
4. What happens if a deliverable is rejected?
5. If a deliverable is rejected, will the developer receive any money for the
milestone?
6. How much involvement will the publisher have in overseeing the
development of the game?
7. What happens if there is a disagreement regarding the direction of the
development of the game? Will the publisher have the right to terminate?
8. What will be the procedure for deciding on new content after the game has
been released? What will be the business model for revenues earned?
Will the parties enter into a new agreement?
173 Mastering The Game
III. PAYMENT
1. How will milestone payments be determined?
2. How will royalties and the publisher’s share be determined?
3. What costs will be deducted from gross revenues before the developer is
entitled to any royalties?
4. Will deductions be made from gross revenue or from developer’s revenue
share?
5. How and when will the publisher report to the developer on sales of the
game?
6. Will the developer have the right to audit statements?
IV. FUTURE PROJECTS, PRODUCT SUPPORT, AND NON-
COMPETE
1. Will the developer be allowed the opportunity to work on future projects
based on the game? If so, what would be the process to allow the
developer to work on the project?
2. What type of support will the publisher request after the game is finalized?
Will the developer need to work on updates or additional content?
3. Will there be any non-compete clauses limiting the developer’s ability to
work on similar games for a certain period of time?
V. REPRESENTATIONS, WARRANTIES AND
INDEMNIFICATION
1. What assurances will each party need to make to the other party under the
representations and warranties?
2. Do representations and warranties have to be absolute or can there be
exceptions? Can any be reciprocal?
3. What responsibilities will the developer have to undertake as part of its
indemnification commitment?
4. If the developer is sued because of a breach of a representation or
warranty, will the developer be able to control the defence?
5. Will the developer be required to carry E&O insurance? Even if not
required, should the developer obtain E&O insurance?
6. Should the developer obtain insurance coverage against possible patent
claims?
7. Can the developer’s E&O insurance fall under the publisher’s policy?
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174
VI. CREDIT
1. What type of credit will the developer receive? Will the developer’s logo
and name appear on packaging, and if so, where?
2. Will developer’s logo appear in the game? As part of marketing or on press
materials?
3. What will the size and length of the developer’s credit be when it appears
in the game and on any other materials?
VII. TERMINATION
1. What grounds will either party have in terminating the agreement because
of a breach?
2. What actions or failure to act will be considered material breaches in the
agreement?
3. Will there be a right to cure and how long will the cure period be in the
event of a breach of the agreement?
4. What happens if the publisher claims breach and there is a dispute as to
whether or not a breach has occurred?
5. What happens in the event of a breach? What are the remedies?
6. Who owns the IP if the publisher breaches?
7. Will the publisher be permitted to terminate without cause prior to the
game being completed? If so, what obligations will the publisher have to
the developer?
8. In the event of a dispute that cannot be resolved among the parties, how
does the dispute get resolved and where does it get resolved? Will the
parties have to go to court or is there an arbitration option? Can different
problems be resolved differently?
9. Will the parties be entitled to recover legal fees if there is a dispute?
10. Can either party limit its liability if a claim is made by the other party? If
so, how will the number be determined?
VIII. PUBLISHER’S OBLIGATIONS
1. What obligations will be undertaken by the publisher?
2. Will publisher agree to a marketing spend? How will the publisher promote
the game?
175 Mastering The Game
SCENARIO 2: Questions For A Distribution Agreement Only
Some of the questions below which have not been previously mentioned are
also applicable to Scenario 1 and vice versa.
I. CONSIDERING A PUBLISHER
1. Why consider working with a publisher?
2. What services can the publisher provide?
3. How good are the publisher’s relationships with first parties? Distributors?
The media?
4. What is the publisher’s history of working with other developers in
distributing products?
5. Are there common strategies regarding the release and marketing of the
game between the developer and publisher?
6. Will the publisher need to sub-license rights? Do they have access to
markets such as China?
II. GRANT OF RIGHTS
1. What rights is the developer granting to the publisher (i.e., platforms,
territory and term)?
2. What happens if the publisher fails to release the game in a particular
country/region?
3. Who will control the digital distribution rights?
4. What approval rights will the developer have regarding the distribution and
marketing of the game?
5. What happens if there is a disagreement regarding the publisher’s
decisions? Whose decision is final?
III. OBLIGATIONS OF THE PARTIES; DELIVERY
1. What will the developer be required to deliver to the publisher, and when?
2. Which languages will the game be localized in and which elements will be
localized?
3. What happens if there is a problem with the delivery of the game?
4. What happens if the delivery is late? Will a delayed delivery affect the
publisher’s payment obligations?
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176
5. What are the publisher’s obligations?
6. Who will be responsible for marketing? Will there be a certain amount of
money required to be spent on marketing?
7. Which party will be responsible for ratings, testing, community support, and
submissions?
8. Who controls the inventory for retail sales?
9. What information will be required to be provided by the publisher when
submitting a sales and marketing plan? When would the plans need to be
delivered?
10. Will the developer create additional content? Who will pay the associated
costs? Which party will decide on what will be included as part of the new
content?
11. If data is collected, who collects it? Which party owns it? Will the
information be shared? Which party will be responsible for complying with
regulations regarding the collection of data?
IV. CONSIDERATION
1. Is the publisher paying an advance or guarantee for the rights? If yes,
when are these payments made?
2. Will a certain Metacritic score for a game trigger a bonus for the developer
or decrease the guarantee for the developer?
3. What is the fee that the publisher will receive for providing its services?
4. What costs will be fronted by the publisher?
5. What costs will the publisher be allowed to deduct before remitting monies
to the developer? Will there be caps on deductions?
6. What will be the order of deductions taken?
7. What happens if the publisher is unable to recoup its costs?
8. When will statements along with payment need to be made to the
developer?
9. What information will be included in each statement?
10. What rights will the developer have regarding audits?
V. REPRESENTATIONS, WARRANTIES AND INDEMNIFICATION
177 Mastering The Game
1. What assurances will each party need to make to the other party under the
representations and warranties?
2. What responsibilities will each party have to undertake as part of their
indemnification commitment?
3. Do representations and warranties have to be absolute or can there be
exceptions?
4. If data is being collected about players, how will it be used, who will have
access to it and who will control it?
VI. CREDIT
1. Where will the developer’s and publisher’s credits appear on various
materials?
VII. TERMINATION
1. What grounds will either party have with regard to the right to terminate the
agreement because of breach?
2. Will there be a right to cure and how long will the cure period last? Will
cure periods vary depending on the breach?
3. What happens in the event of a breach? What are the remedies?
4. In the event of a dispute that cannot be resolved among the parties, how
does the dispute get resolved? Where does it get resolved? Will the parties
have to go to court or is there an arbitration option?
5. Will the parties be entitled to recover legal fees if there is a dispute?
6. Can either party limit liability if a claim is made? If so, what limits will be
allowed?
SCENARIO 3: Publisher Helps Finance A Game Based On
Developer’s Concept
I. GRANT OF RIGHTS
1. Who owns the rights to the game? And who owns to the underlying code
and technology used to create the game?
2. If the developer owns the IP, what rights will be granted regarding
platforms, term and territory?
3. Will the publisher sub-license rights? In the event that the publisher sub-
licenses, how will this affect the economics of the deal?
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178
II. DERIVATIVE WORKS
1. What business terms will be considered if the rights of first negotiation and
last refusal are included in the agreement?
2. Are there certain requirements that trigger a right of first negotiation and
last refusal?
III. OTHER ISSUES
1. Publisher considerations, delivery, milestone schedules, obligations,
representations and warranties, payment, credit, payment, credits and
termination: see above scenarios.
179 Mastering The Game
CHAPTER 4
LICENSING CONTENT
4.1 – Introduction
Throughout the evolution of the gaming industry, developers have incorporated
licensed materials to help distinguish their games from others in the hope of
attracting a wider audience with recognizable brands and more realistic
gameplay.
461
A developer or publisher
462
(for purposes of this chapter both will be referred to
as the ‘Licensee’) may want to incorporate the intellectual property (IP) of third
parties into their game, primarily within the following scenarios:
(1) basing the game on another party’s IP and/or
(2) incorporating IP owned or controlled by another party into their game to
provide more realism for the players
463
and/or
(3) in-game event and character integrations.
Licensees will also license other IP such as music and software to help with the
development of the game.
464
Licensed IP will usually consist of copyrighted material and trademarks
associated with a particular brand as well as the rights of an individual’s likeness.
Licensees hope that visibility and recognition of the licensed IP will carry over to
players. For example, a game is based on a story of a successful motion picture
461
This chapter will mainly focus on Primary and major Secondary Licenses.
462
Because of the costs associated with most licenses, especially for games based on a hit film or
sports league, Licensors only dealt with publishers that were able to afford the guarantees and other
commitments required by the Licensor. Many of these deals also became exclusive licenses. Over
the years, the licensing landscape has looked a little different as more AAA publishers focus on their
own IP, reducing their reliance on games based on licensed IP, and with more opportunities for
developers to release their games directly to the consumer without a publisher, rights owners are
licensing properties directly to independent developers, especially for mobile, tablet, and online
games. While costs may still be high, they may be lower for particular platforms or games with a
unique take on a particular sport or film that could help expand the fan base. Although more Licensors
are willing to work with independent developers it can still be a challenge to obtain a license if the
Licensee does not have a proven track record of developing and distributing games.
463
Examples include logos from sports teams (e.g., Electronic Arts’ Madden football game based on
licenses from the National Football League and NFL Players Association, FIFA and car
manufacturers).
464
Licensees may license software to help in the development of a game such as middleware. See
Boyd, S. Gregory, Pyne, Brian and Kane, Sean, Video Game Law: Everything You Need to Know
About Legal and Business Issues in the Game Industry, CRS Press, 2019, pp. 89-95 for more on
middleware licensing.
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180
franchise or for an upcoming motion picture,
465
television show, book or toy.
466
Basing a game on a known brand can be less expensive than building a new
brand from scratch. This chapter will refer to this type of license as a Primary
License.
In other situations, a Licensee may want to incorporate various licenses that
create a realistic gaming environment but are not necessarily the focus of the
game. These might include names, locations, cars, planes, items
467
or other
identifiable IP.
468
The Licensee would pay considerably less, although some
licenses involving such IP can still be costly to use, compared to the game being
based on one underlying property, though many of the contractual issues will be
the same. This chapter will refer to those licenses as Secondary Licenses.
For the owner or party that controls IP (the “Licensor”), an association with a
video game can bring significant benefits. In addition to potentially receiving
revenue from Licensees, which may be in the form of guarantees or royalties (or
both),
469
it can offer them an opportunity to expand into new markets and product
465
Traditionally, the parties would generally coordinate the release of a game with the premiere of a
motion picture. For the Licensee, this could take advantage of the press, advertising, and promotion
accompanying the motion picture’s worldwide release and consumer familiarity with the film's stories
and characters. For the Licensor, the release of a game could provide additional publicity for the
brand and expand the target audience. Furthermore, there could be opportunities to cross-promote
the video game with the movies (i.e., tagging film posters or advertising with a mention of the video
game, or placing advertisements in the video game materials promoting the film). Today, fewer
Licensees are releasing a retail game in tandem with the release of a film. Instead, they are focusing
more on the brand, allowing for longer development times to launch an initial game and then providing
ongoing content updates. It is increasingly common for Licensees to create new stories that are
separate from past or future films, but which retain the traits of the characters and storylines from the
film's franchise. In contrast, many mobile games tied to a film license will aim for a simultaneous
release with a film since they tend to deal with smaller development time frames. See “Category:
Video games based on films”, www.wikipedia.org. Movie licenses associated with video games have
been a major part of the industry for almost 40 years, but with mixed results. Some licensed games
have been hugely successful while others have been major disappointments. A number of factors
may contribute to the success or failure of a game, including poor reviews either for the games
themselves and/or the associated movies. One famous licensing mishap involved the 1982 version
of the film ET, which was poorly developed during a period of five weeks instead of the normal
development cycle of about six to eight months to meet the Christmas season. It was released for
the Atari 2600 with such disastrous results that it led shortly thereafter to Atari’s bankruptcy and a
profound downturn for the video game industry. See Morris, Alex, “How E.T. the Extra-Terrestrial
Nearly Destroyed the Video Game Industry”, allbusiness.com. For a look at games tied to movie
licenses in the 1980s, see Aldred, Jessica, “A Question of Character: Transmediation, Abstraction,
and Identification in Early Games Licensed from Movies” in Wolf, M.J.P., Before The Crash: Early
Video Game History, Wayne State University Press, 2012, pp. 90-104. The financial success of
licensing games based on movies has led some studios to create their own video game development
studios to exploit their properties. However, that has also led to mixed results. Many film studios
created video game divisions acting as publishers of their products, but at the time of writing, other
than Sony, Warner Bros. (now owned by AT&T) remains the only film studio acting as a developer
and distributor of video games. Ironically, video game companies are now more active in film
production including Ubisoft (Ubisoft Film & Television formed in 2011) Sony’s PlayStation division
(PlayStation Productions formed in 2019), and Activision/Blizzard (Activision Blizzard Studios formed
in 2015).
466
Some games based on toys, such as Lego or the Teenage Mutant Ninja Turtles, have proven very
successful over the last three decades.
467
Licensors and Licensees need to be aware that certain products might be prohibited from
appearing in video games due to laws and ratings. In addition, platform holders may restrict certain
content such as drugs, tobacco and pornography. Also, Licensees need to be aware of potential
negative publicity for the inclusion of certain items, for example, the portrayal of realistic guns in video
games. See Fussell, Sidney, “Why It’s so Hard to Stop Marketing Guns in Video Games”,
theatlantic.com, August 19, 2019.
468
Some games have been based just on one particular car, such as Need For Speed Porsche
Unleashed. For a fascinating look at the cars that have appeared the most in video games, see “The
Cars Most Featured in Video Games” Carwow, March 17, 2020.
469
For some Licensors, video games have become a significant revenue generator among licensed
products, especially for sports and movie franchises. In 2019, the NBA and its player union signed
181 Mastering The Game
categories while reaching new consumers and providing additional publicity and
promotional value for their brand.
470
Professional sports, for example, have
successfully entered new markets assisted by video games and esports
471
in
territories that may have taken longer to penetrate in the past with more
traditional means such as television and live events. Moreover, the Licensor can
expand on their IP when the Licensee creates new storylines and characters,
etc., based on the original licensed property.
Traditionally, licensing in games has been focused on console and PC games.
While the major publishers are focusing less on Primary Licenses and more on
their own IP (although they still license the biggest movie franchises and sports
properties), the market has shifted more towards mobile, online, and digital as
Licensees try to distinguish their games in those increasingly crowded markets.
Prior to deciding on whether a license would be desirable, especially one on
which a game would be based, a Licensee should consider a number of
factors:
472
1. Which party owns or controls the rights to the license? What may seem
like an easy answer can become very complicated, and therefore it is
critical that a Licensee obtains proof of the proper owner(s) of the IP. For
example, a developer is interested in a movie or television based on a
comic book. Does the film studio own the rights? Does the comic book
company own the rights? Does the original author of the comic book
maintain rights to the property? It also may depend on what rights the
Licensee wants to acquire. Perhaps, the Licensee wants to use
characters that were created by the film studio as well as original
characters from the comic book. In this situation, the Licensee may need
to enter into two separate agreements and must also confirm that they
can use characters from both properties in the game.
2. Does the Licensor have a licensing program, and does it handle inquiries
internally or through a licensing agent? A Licensor will either have people
within the organization dedicated to licensing or be represented by
agents that will negotiate the deal with potential Licensees on their
an estimated $1.1 billion multi-year deal with Take-Two for the NBA license. Rollins, Khadrice, “NBA,
NBPA Agree to $1.1 Billion Licensing Deal with Makers of NBA 2K”, www.si.com, January 15, 2019.
In 2020, EA signed a five-year deal worth a reported $1 billion to the NFL, $500 million to the players,
and a $500 million marketing commitment. Sarkar, Samit, “EA Maintains Exclusive Madden NFL
License in Multiyear Renewal”, polygon.com, May 28, 2020.
470
An additional benefit for the Licensor is that it allows them to expand their trademark portfolio by
entering into new classifications.
471
It could be argued that the success of video games in certain markets has resulted in significant
financial gains for Licensors with new licensing opportunities outside of the video game market.
Record-breaking television and online broadcasting deals by professional sports leagues including
Fédération Internationale de Football Association (FIFA), the Premier League based in England, the
National Basketball Association and the National Football League based in the US have been fueled
to a degree by video game consumers. The popularity of the Premier League in the US in many ways
sprung from young fans playing EA’s FIFA and becoming fans not only of the league but of specific
teams. According to Take-Two’s 2019 Annual Report, their NBA free-to-play simulation game had
over 45 million registered users in China at the time of the report’s release. Take-Two Interactive
Software, Inc., “2019 Annual Report”, ir.take2games.com.
472
A Licensor will also consider a number of issues when deciding on whether to work with a
Licensee. Some of the business issues would include: (i) how successful has the Licensee been in
developing games on time for the platforms licensed? (ii) has the Licensee developed the type of
games requested per the license (e.g., genre, platform)? (iii) which personnel will work on the game,
what is their experience, and have they worked together in the past? (iv) is the Licensee financially
secure and will they be able to pay any advances, guarantees or royalties, if applicable? (v) what will
be the business model for earning revenue? (vi) has the Licensee worked with Licensors in the past
and how successful were those games? (vii) what are the Licensee's worldwide distribution
capabilities? and (viii) how would the Licensee market the game?
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182
behalf. Many of the major Licensors such as movie studios, sports
leagues, player associations, and some of the major corporations like
Coca-Cola have internal licensing programs, while other Licensors use
agents. A Licensor may not have the resources or capability to engage
in a licensing program, and therefore hires an agent in return for a fee
based on sales. In this situation, the agent typically seeks opportunities
for the Licensor; negotiates deals; reviews financial statements and
submitted materials for acceptance or rejection; and deals with day-to-
day issues with the Licensee.
473
In some situations, a Licensor may hire
a number of different agents to represent them across various territories
because of their expertise and connections with licensees, retailers and
distributors in those territories.
3. Will the inclusion of a license result in additional sales and marketing
exposure (especially true for free to play mobile games) and attract new
players, justifying the costs of the license? What is the Licensee’s budget
and has it factored in licensing costs which may include advances,
guarantees, royalties, and a marketing commitment? The demand for a
particular property, the success of the property, and the rights sought for
exploiting the licensed property are among the factors that will affect the
licensing costs.
474
4. What rights does the Licensee want to obtain? Will the Licensor allow
the Licensee to alter the licensed property and create new content (e.g.,
new stories, characters) for a game? What restrictions, if any, will the
Licensor impose that may affect the development and marketing of the
game? Will the License require a specific rating for the game? It is critical
that this issue be discussed before entering into a deal so that the parties
understand what a Licensee wants to do with the licensed property.
Licensors can vary quite a bit on how much discretion they will allow a
Licensee, although over the past few years it appears that many are
providing more flexibility.
475
5. Does the license have worldwide recognition and is it reaching the
Licensee’s target audience? This is not as significant if a Licensee’s goal
is to reach a limited market and therefore the licensing fee if required,
should reflect the limited territorial rights. In most situations a Licensee
should try to obtain worldwide rights initially and if they are unable to do
so, they should request the right to an option to exploit the rights in other
territories, assuring access to those rights in the event that the property
473
See Section 4.5.1 for a more detailed discussion on Licensors and the use of agents in
representing properties.
474
In many ways similar to a publisher determining whether a particular game might be financially
successful, parties will typically conduct a profit and loss (P&L) study to determine potential revenues.
With free-to-play games it has become more of a challenge to predict outcomes because of the
difficulty in forecasting ongoing user acquisitions and development costs against revenue and the
fact that free-to-play games can take a few years to become profitable for Licensees. In contrast, the
results of P&L studies for console games were easier to predict (although still a challenge) since
costs were clearer to determine, such as units ordered and fixed development costs. As a result,
minimum guarantees, which used to be based on a percentage of forecasted revenues, have evolved
and are not as relevant as in the past, although this will also depend on the particular licensed
property. In some licensing situations the minimum guarantee might be primarily determined by what
fits in the Licensee’s P&L to make it a viable business option, and this has led to lower minimum
guarantees and different royalty calculations.
475
For a discussion on movie licenses and creativity see Takahashi, Dean, “The DeanBeat: After All
These Years, Hollywood Still Doesn’t Get Games”, venturebeat.com, September 20, 2019.
183 Mastering The Game
receives greater international recognition. Negotiating the fees for those
rights in advance could also save significant money in case the game is
a hit, and prevents a situation where the rights might not even be
available.
6. For games that incorporate IP but for which IP is not the basis for the
game, is there enough time to contact the Licensor(s), negotiate a deal
or deals (a deal memo may be required), and put the licensed IP in the
game prior to the anticipated release date? As the shelf life of a game
goes beyond its initial release with added downloadable content, more
opportunities might exist to allow Secondary Licenses, including
characters from pop culture, to be added to a game after its initial
release.
7. How difficult is it to work with the Licensor? Does the Licensor
understand the video game industry and do they have personnel who
are dedicated and knowledgeable about the industry? Does a Licensee
have to deal with a number of people and is the Licensor slow to respond
to requests? If so, development could be delayed and problematic, and
result in additional costs involving multiple submissions to the platform
holders for approvals.
8. What will be the major business terms, including rights granted,
platforms, territory, term, exclusivity vs. non-exclusivity, compensation,
and how will revenue be determined?
9. Additional business and marketing considerations: (i) what will the
market conditions look like for the type of game planned by the Licensee
when released? (ii) are there similar games on the market and how will
the Licensee distinguish its game? (iii) will the price point change
because of the licenses? (iv) will the Licensee develop additional content
after the game’s release and how will they monetize the game? and (v)
will the Licensor need to approve the Licensee’s business plans on how
they will earn revenue, which may change in the long term (e.g., token
economics)?
10. How does the Licensor protect their IP? Do they pursue infringers? This
is important because a failure to protect licensed IP reduces the value
for the Licensee if they are competing against illegal goods. A Licensor
may not go after every infringer, but they can take certain steps to reduce
infringements including filing registrations and maintaining them in
popular markets; issuing takedown notices; and pursuing legal action
when appropriate.
476
As already discussed in Chapter 2, not all uses of marks or materials need to be
licensed, as the IP may fall into one of the exception categories. In the United
States, First Amendment (the right to free speech) protections, fair use, parody,
476
Some courts in the United States have ruled that an exclusive Licensee can pursue actions for
infringement. However, many agreements include language that expressly prohibits a Licensee from
taking actions against infringers. A concern for a Licensee might be what happens when the Licensor
does not take action and the parties have a disagreement on which actions to take, if any? Is the
cost of pursuing the infringer, which can be expensive and time-consuming worth the expense?
Because of these uncertainties, a Licensee should negotiate language that allows them to pursue an
infringer subject to the approval of the Licensor which should not be unreasonably withheld or
delayed. If this was to be allowed, a Licensor would also request the Licensee to indemnify the
Licensor against any losses or damages and to have the approval of Licensee's counsel and any
settlement. If the Licensee can pursue infringers, the parties will also need to negotiate how the costs
are recouped and how damages, if any, would be divided between the parties.
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184
incidental or de minimis use, and materials in the public domain are examples of
some such exceptions. Of course, the available exemptions depend on which
country’s legal system applies to the Licensee’s usage of the IP in question, and
therefore while an exception may be allowed in one country it may not be
recognized in another. Furthermore, in deciding whether IP needs to be licensed
or not, the Licensee must be extremely careful as an incorrect decision may
result in huge costs to defend against any claims. Litigation, whether valid or not,
can be costly and can drain a Licensee’s financial resources, as well as costing
time and potentially harming their reputation.
Depending on the outcome of the litigation or settlement, a Licensee may:
1. Be forced to pay damages (including profits made from any actual use
of the unlicensed IP); and/or
2. Stop selling the disputed game; and/or
3. Redesign the game to avoid any infringements which could cause delays
in the game’s release and increase expenses; and/or
4. Enter into a license agreement which, if available, might be on
unfavorable terms
477
; and/or
5. Replace or remove the unlicensed IP with new downloadable content or
through a patch, assuming this is an option. In that case, damages may
still need to be paid but might be less than they would have been without
the removal.
Furthermore, an infringement claim could result in a breach of the Licensee’s
representations and warranties in their console, mobile, or digital distribution
platform agreements, making the Licensee liable also vis-à-vis its distributors.
As a result, before proceeding to use any third-party IP, the Licensee must
discuss these issues with a legal expert in IP rights and clearances.
As video games try to capture as much realism as possible, including games in
an historical setting, issues involving whether or not a license is needed for a
game have become more prominent. Since the US Supreme Court ruled that
video games include protected speech similar to movies and books, Licensees
have sought broader rights in using the IP of third parties as part of the game. In
doing so they have attempted to create more realistic scenarios without obtaining
a license, claiming they are replicating current or historical events and are
therefore protected by First Amendment rights.
478
477
An infringement action brought by a Licensor could also ruin any potential relationship between
the Licensor and potential licensee. A Licensor understandably may decide not to work with a
company that has knowingly or negligently infringed on the rights of the Licensor. As a result, a
Licensor may not even want to enter into an agreement with such company.
478
The US Supreme Court in Brown v. Entertainment Merchants Association, 131 S. Ct. 2729 (2011)
in a challenge to California Civil Code Section 746-1746.5 (‘Act’) which prohibited the sale or rental of
‘violent video games’ to minors and required their packaging to be labeled “18”, ruled that video
games like protected books, plays, and movies qualify for first amendment protection in the US
subject to a few limited exceptions such as obscenity, incitement, and fighting words. The Act covered
games ‘in which the range of options available to a player included 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’ Section 1746(d)(1)(A). Violation of the Act would be punishable by a
185 Mastering The Game
Although cases will vary depending on the facts and the use of the licensed
material, courts in the US appear to be moving in a direction that is providing
Licensees with more latitude than in the past. However, Licensees will still need
to carefully evaluate whether a license is still needed since courts may have
inconsistent guidelines and some matters may have only been settled out of
court thereby providing little guidance. It should also be recalled that some
exclusions are only applicable in the US.
While Licensees have made significant efforts to seek greater protections for free
speech, given that the issue is still in flux they should also consider whether they
have the resources to challenge an infringement claim since it involves money,
time, and resources that might be better used for other projects. It should be
recalled that fair use in the US is a defense against a claim which may or may
not be successful. The more established licensees are more likely to challenge
on First Amendment grounds as it will be a recurring issue in future games, and
they will be seeking better guidance on what they can and cannot do.
4.2 – The Licensing Agreement: The Long-Form
Agreement
If the Licensee decides that they want to include a licensed property in a game
and they determine that a license is required, they will need to enter into an
agreement which should spell out, among other issues: the rights granted; the
obligations of the parties; the length of time for the exploitation of the rights; the
way in which the rights can be exploited; the costs involved in securing a license
(which may include advances, guarantees and royalties); approvals;
representations and warranties; indemnification; and how and where disputes
get settled.
Depending on how the Licensee wants to make use of the licensed IP, the terms
and conditions of the agreement will vary. In most situations,
479
the Licensor will
draft the agreement and will include terms that are favorable to the Licensor,
which should be expected. The drafter of an agreement always has an initial
advantage, since that party will include all of the provisions it requires and with
favorable terms. It is then the responsibility of the Licensee to request additions
to and deletions from the agreement. Unless the Licensor has experience in the
video game industry it may not include specific provisions required from a
Licensee. Therefore, it is essential for the Licensee’s counsel and any party that
civil fine of up to $1,000. The court rejected California’s claim that ‘interactive’ video games present
special problems in that the player participates in the violent action on screen and determines its
outcome, noting that California’s law was too broad as written and couldn’t satisfy the ‘strict scrutiny’
legal test. The Court further went on to say that video games ‘communicate ideas through familiar
literary devices and features distinctive to the medium and ‘the basic principles of freedom of speech
….do not vary with a new and different communication medium’ Joseph Burstyn, Inc. v. Wilson, 343
US 495, 503.
479
There are situations in which the Licensee will draft an agreement. For example, this may occur
if the Licensor is licensing a trademark which is not the focus of a deal (e.g., a Secondary License)
and is not familiar with the gaming industry and does not have a form agreement. In some situations,
companies that do not have experience with video game licensing agreements will submit their form
licensing agreement to the Licensee, which is a blanket template to cover a number of licensing
scenarios, but will most likely have sections that are not applicable as well as sections that might be
missing.
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might incur responsibilities and obligations to review the agreement
480
and
include language relevant to the Licensee. Some of the issues to consider
include ownership of IP such as source code and content; how content updates
and live services, will be handled, if applicable; how royalties are calculated and
what deductions will be allowed; and issues dealing with future distribution
platforms (i.e., the metaverse) .
The next section of this chapter will discuss the major issues of an agreement
incorporating licensed IP, with a focus on Primary Licenses. Most of the sections
will be relevant in any type of licensing agreement, but there will be a few
differences that will be addressed in the chapter. For example, if the game is
based on a license such as a movie, then the movie owner will require a much
greater degree of control over the exploitation of the game and seek higher
advances and royalties in comparison with the use of a Secondary License.
4.3 – The Major Issues In Licensing Agreements
4.3.1 – Rights
The rights section and the compensation section are perhaps the two most
significant parts of the License Agreement. The rights section will cover a number
of important issues including:
1. What is included as part of the licensed property/content?
2. What new content can be created by the Licensee?
3. Which product(s) can be developed using the licensed property (i.e.,
video games)?
4. How can the licensed property be exploited?
5. Which platforms can the game be distributed on?
6. How long does the Licensee have the rights to exploit the licensed
property?
7. Where can the licensee exploit the game?
8. Are the rights exclusive or non-exclusive?
Any rights not spelled out in the agreement will be reserved by the Licensor
(usually in express language to that effect) and if later sought by the Licensee
will most likely cost the Licensee additional fees, provided they are available.
4.3.2 – The Licensed Property
In this section, the parties will define the nature of the licensed property that can
be used in the game, additional content (i.e., downloadable content or
microtransactions), and marketing and press materials. Licensors have
traditionally limited the scope of rights, but with the increased financial and
480
Agreements impose several obligations on the Licensee involving development, financing,
marketing, and compliance with regulatory issues. As a result, Licensee’s personnel working in these
areas should review the agreement with their counsel to confirm they can comply with any requests
or negotiate revisions.
187 Mastering The Game
marketing value of games more Licensors are making more content accessible
providing greater creative possibilities for Licensees. Furthermore, Licensors
especially those that have worked with a particular Licensee on an established
motion picture franchise have become more flexible in allowing Licensees to
expand on the IP, resulting in new stories and characters, etc.
In licensing rights to a book or a comic book, the Licensee will, at the very least,
want the right to use the title, logos, story, images, settings, characters in the
game, and the right to use the author’s name in publicity materials. When dealing
with items that have unique or well-known designs such as toys, planes, or cars,
the Licensee must also obtain the rights to use what many call the ‘look and feel’
of the item in the game, including the designs and marks associated specifically
with the items.
481
Licensing IP based on a movie can be complicated by the number of parties
associated with the property.
482
A Licensee interested in making a game based
on a movie property will want the rights to incorporate all the elements from the
movie (which may also comprise past and future movies, depending on the rights
granted), including the story, title and logo, characters (plus voice and likeness
of the actors, if possible),
483
themes, images, graphics, names, settings, and
original music.
484
481
Licensors will usually want to have creative input, if not creative control, over how that recreation
and new content (if allowed) is developed and used in the game. This will be especially true for
Primary Licenses involving new content originating from a film franchise. However, it can also be
applicable for Secondary Licenses such as car manufacturers that may insist that any damage done
to licensed cars is realistic, not disproportionate, and in keeping with its overall brand and marketing
guidelines.
482
Movie licenses may require the input from the producer, director, and talent involved with a film
along with people working in the video game division of the studio. Coordinating approval rights can
sometimes be difficult, time-consuming, and result in contradictory responses.
483
The right to incorporate an actor’s likeness and use music from a film may cost additional money
if the Licensor has not secured those rights for use in a video game. Licensors realize the value of
games to help promote a movie and a franchise as well as the potential financial gains, and are
therefore most likely to try to obtain these rights with the actor and composer, especially with big-
budget films. However, when talent agreements are signed, it might be unknown whether or not a
game will be developed, therefore a Licensor may not want to incur any additional costs for video
game rights. Alternatively, a Licensor could include an option to obtain these rights at a later time.
As a result, the Licensee might be responsible for securing the necessary rights. Furthermore, a
Licensee would typically have to pay the actor for additional voice-over and motion capture services.
At the very least, it would be advantageous for the Licensor to use their influence to ensure that the
rights can be obtained. If the rights are not part of the license, then the Licensee would have to enter
into a separate agreement with the talent to obtain services and the accompanying rights. If the actor
is a member of a guild or union, the Licensee would need to meet certain union obligations involving
pay and working conditions. The Screen Actors Guild and the American Federation of Television and
Radio Artists (SAG-AFTRA), which is the largest union for actors in the US, defines an actor under
the interactive media agreement as voice-over, on-camera (motion capture, stunt) performers, stunt
coordinators, singers, dancers, puppeteers, and background performers. Signatories to the
agreement need to pay union wages as well as pension and health benefits and bonuses, if
applicable while complying with minimum working requirements and work restrictions. See Chapter
5 for more information about actor agreements and SAG-AFTRA.
484
Some licensing deals will involve a film’s franchise and include a number of films under the license,
especially if the parties enter into a long-term deal. As a result, rights would include all the stories
and characters from the various films. This can be very advantageous for the parties since it allows
the Licensee greater access to content for games and downloadable content. There can be situations
whereby a property may have two licensors, and therefore if a Licensee is unable to obtain a license
from one licensor, it might try to obtain a license from the other licensor, although the rights will
slightly vary. For example, a comic book made into a film could potentially have two licensors. One
licensor would be the original creator of the comic book and the other licensor would be the copyright
owner of the motion picture. Subject to their agreement with the movie studio, the comic book
company may be able to license rights to the story and characters in the comic book but would be
unable to license any of the actual actors (e.g., names and likenesses) and any revisions made to
the comic book story created by the movie studio. Consequently, the movie studio could have the
right to license the film based on the comic book, which would include all the elements in the film.
For the video game Walking Dead, Telltale Games had the rights from the author of the comic book
series and Activision had the rights to the AMC television show.
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LICENSING HYPOTHETICAL
Skyvision Productions (SVP) wants to create a racing game, but the
company is not sure which direction to take the game. It has been
considering incorporating a number of licensed properties including car
manufacturers. Before making a decision, SVP will need to consider:
• Which party owns or controls the rights to license the cars?
• For each car manufacturer, does the car manufacturer have a
licensing programming to license the cars? If so, does the car
manufacturer handle licensing opportunities, or is it done by an
agent representing the car manufacturer?
• What is SVP’s budget for potentially paying licensing fees?
• Will potential licensing costs, which may include advances,
guarantees, and royalties, justify the inclusion of licences into the
game to generate additional sales?
• What cars are they considering for the game? Does SVP just
want current cars or older models? (Can the game have
exclusivity for a specific model?)
• If the game is sold worldwide, which car manufacturers would
SVP want to include to appeal to a worldwide audience? Are
there specific brands in Europe or Asia that may add extra
appeal for the game in these markets?
• In addition to obtaining rights to cars, what other rights does SVP
want to obtain (i.e., logos, drivers)? If additional rights are
required, who controls those rights?
• Is there enough time to contact car manufacturers, negotiate
deals (a deal memo may be required) and put the licenses in the
game prior to the anticipated release date?
• What restrictions, if any, will the car manufacturers impose on
SVP that may affect game development and marketing of the
game? For example, will crashes be permitted? Can cars be
remodeled? (Will certain manufacturers ask that their cars
perform better than other cars or no worse than cars of equal
value?) Can new cars be added to the game after the game’s
release as downloadable content? Also, how long is the approval
process? (If a car manufacturer works with an agent, will that
extend the approval time requested by the car manufacturer?)
189 Mastering The Game
• What will be the major business terms including rights granted,
platforms, territory, term, exclusivity vs. non-exclusivity,
guarantees, royalties, and approvals? Will parity involving
economic terms be required among the car manufacturers? Can
the SVP establish a revenue pool whereby a percentage is
allocated for all the car manufacturers and from that revenue the
Licensors receive their royalty percentage? How will royalties
work with downloadable content? Can SVP obtain similar rights
from the various car manufacturers? If not, how will that affect
development and distribution rights, assuming SVP would still
be interested in a license?
Additional Business And Marketing Considerations:
1. What will the market conditions look like for the type of game planned by SVP
when released? How successful have recent racing games been in the last few
years? Have games on certain platforms performed better than others?
2. Are there already competitive racing games on the market which would make
it difficult for SVP to sell their game? If so, what will distinguish SVP’s game
from other games?
Sports Licensing
Professional sports games
485
are somewhat unique compared to other licenses.
While a Licensee could develop a team sports game especially if it is a
simulation, without a license, there is more of a challenge as to whether or not
the game will be successful, since most fans want to play their favorite team and
control their favorite players. To do so, when dealing with American professional
sports a Licensee would need to obtain a license from both the sports league
which controls the rights to license team names, logos, uniforms, and league
logos, while the players associations represent the players, including with regard
to the use of their names and likenesses. As a result, the Licensee would need
to negotiate two separate agreements, each with different guarantees and
royalty rates, although they generally like to be treated equally.
486
This would
typically be achieved by including a ‘most favored nation’ clause where terms are
applied equally to all licensors.
Many sports games with league and player association licenses also include an
incredible number of Secondary Licenses such as new and old stadiums,
signage, retired players, coaches, referees, announcers, equipment
485
Supposedly EA’s deal in 1984 with Larry Bird and Julius Erving (‘Dr. J’), two of the top basketball
players at the time, was the first sports license agreement in the video game industry. Their names
and likenesses (although difficult to ascertain because of technological limitations) were used in the
game Dr. J and Larry Bird Go One-On-One, which was released on the Apple II and Commodore 64.
“The Licensing Game”, Next Generation, July 1998, p. 39.
486
However, see Note 469 above. It was reported that in the most recent EA deal with the National
Football League and the player’s union, the parties received different remuneration.
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190
manufacturers, apparel, officials, mascots, and music associated with a team.
487
Some may be part of a license with a league or players association, but many
involve separate agreements. Games such as EA’s FIFA involve worldwide
licenses and rights to players (both current and retired), leagues, and
tournaments that are owned or controlled by a number of different entities
throughout the world, illustrating the incredible amount of work involved in
securing rights.
488
For some sports games, the potential returns can be extremely lucrative. Games
such as the Madden American football game series and the Take-Two NBA
franchise (all of which feature extensive licensing from their respective sports)
are amongst the most profitable in the entire video game industry. EA’s FIFA
series of soccer games is even more successful, becoming one of the bestselling
franchises in video game history.
489
4.3.3 – Rights Granted
Under this section, the Licensor will specify the rights granted and how the
licensed property can be exploited by the Licensee, and whether the rights are
exclusive or non-exclusive. In almost all situations, the rights granted are
conditional upon the Licensee fulfilling its obligations under the terms of the
agreement. At the very least, the Licensee must have the right to develop,
manufacture, sell, distribute (either directly or indirectly through distribution
partners such as console manufacturers or digital distributors including app
stores), market, promote, and publicize the game throughout the licensed
territory (which can be limited to certain countries or can be worldwide,
depending on the deal) during the term and sell-off period, if applicable. As part
of the grant of rights, the Licensee might need the ability to alter the property
subject to the Licensor’s approval.
The above rights will be conditional on the Licensor’s approval, and the extent to
which the Licensor enforces its approval rights will vary primarily depending on
the Licensor, the platform, the relationship between the parties, and how the
license is used. For example, game development and marketing will be closely
487
According to EA, FIFA 21 featured more than 30 official leagues, over 700 clubs, 95 licensed
stadiums, and over 17,000 players. France, Sam, “FIFA 21 Stadium List: All 125 Grounds on Xbox
One and PS4 Versions of New Game”, goal.com, October 7, 2020.
488
An example of the complications and novel issues involving sports licensing is illustrated by the
Manchester United and Sega controversy. In 2020, the Manchester United football team (‘MU’) sued
Sega Publishing Europe Limited and Sports Interactive Limited, the publisher and developer
respectively, in England, covering a series of games called Football Manager. MU claimed that the
use of their name, which appeared next to unofficial team crests, was an infringement of their
trademark. MU, argued that using unofficial crests deprived them of licensing opportunities. In
response, Sega claimed, among other things, that the way in which the logo was used would not
indicate that the logo was licensed. PA Media, “Manchester United Sues Football Manager Makers
Over Use of Name”, theguardian.com, May 22, 2020. The case was settled out of court in August
2021, thereby providing no guidance on how this issue might be resolved. As part of the settlement
Sega agreed to rename MU for games beginning with “FM22”. Bliss, Nathan, “Manchester United to
be Renamed on Football Manager Following Trademark Settlement”,
manchestereveningnews.co.uk, August 6, 2021.
489
As of 2021, EA’s FIFA franchise, has sold more than 325 million copies worldwide becoming the
number one sports video game franchise in unit sales. Batchelor, James, “EA Extends UEFA
Exclusivity, Working On Multiple FIFA Mobile Games”, gameindustry.biz, February 2, 2021; and Kidd,
Robert, “As FIFA Game Passes Sales Milestone, EA Sports Seeks New Markets And To Clear Up
Image Rights ‘Misunderstanding’”, forbes.com, February 2, 2021. Assuming EA’s sales numbers stay
relatively consistent, the game will continue to generate substantial revenue with in-game purchases,
live services combined with new distribution channels and growing markets. It is expected that EA
will earn more revenue from live services associated with the game than unit sales.
191 Mastering The Game
overseen by many Licensors pursuant to the approval process to ensure that the
game’s development and marketing are consistent with the direction of the
licensed property.
In contrast, the Licensor should probably have less oversight in sales and
manufacturing. Regarding sales, although the Licensor cannot dictate the price
of a game, it will want to ensure that the price of the game does not drop to a
price point that may lead to consumer perception that the property’s value is
diluted if the game is sold below the prices of similar titles. While the prices of
games will drop over time, and earlier than expected if the game does not sell as
projected, one way in which the Licensor may protect itself, although rare, is by
requesting a minimum royalty for each unit sold. However, this approach may be
difficult or impossible in mobile or free-to-play/games as a service (‘GaaS’)
games for which revenue can be structured differently to traditional games.
Therefore the Licensee may not be able to give per-unit price guarantees even
though overall revenues may nonetheless prove substantial.
It is important, however, that the Licensee maintains control of the development
and exploitation of the property as the Licensee will be in the better position to
understand the market since this is their area of expertise. While Licensors need
to have approval rights regarding game development, they should give
Licensees the flexibility to create a game. That may mean giving video game
Licensees more freedom in using the licensed property than they would other
licensees dealing with consumer products such as apparel.
The rights section will also specify whether the rights granted are exclusive or
non-exclusive. In most licensing situations where the property is the basis for the
underlying game, the Licensee will want to have exclusive rights for the video
game category including platforms or, at least, the relevant game genre.
490
This
decision will mostly depend on the type of license requested, how the licensed
property will be incorporated into the game, costs, and the Licensee’s reputation
and track record. An exclusive license will cost more for the Licensee although
in some situations it would be counter-productive for a Licensor were to license
the same property to different Licensees although it is becoming more common
for Licensors to split rights based on game genres. For example, it would not be
490
A sports league, like other Licensees such as the holders of very successful IPs (e.g., Star Wars,
Spiderman, Lord of the Rings, Harry Potter) will typically grant exclusives, although more are limiting
exclusivity to a platform and a particular type of game (e.g., a simulation game for sports). As the
industry continues to expand, combined with fierce competition among Licensees to acquire rights
to some of the biggest brands, these Licensors have seized on an opportunity to expand their fan
base (different genres may attract a different demographic) while also receiving significant revenue
for the rights. See Batchelor, James, “Star Wars Has Made $3bn for EA”,.gamesindustry.biz,
February 3, 2021; and Shreier, Jason and Kharif, Olga, “Ubisoft to Make Star Wars Game, Marking
End to EA Exclusivity”,.bloomberg.com, January 13, 2021. At one time, many sports leagues entered
into deals with multiple licensees resulting in three or four different simulation sports games per year.
Although several of the games were well received, the costs of development and marketing and the
fierce competition left just a few standing. As a result, with fewer Licensees the leagues and player
associations shifted gears and decided to go with exclusive deals, which led to higher guarantees
while working with fewer established publishers. A Licensor may decide to grant an exclusive license
or split rights believing the guarantees and royalties paid will exceed those of a number of Licensees
and less oversight will be needed since the Licensor will only need to work with one Licensee. On
the other hand, a Licensor may want to grant a non-exclusive license for a number of reasons
including: (i) more competition may result in better products although there is also a risk that a bad
game could damage the brand in the category; (ii) more companies providing guarantees in
exchange for the license might result in receiving more revenue than one exclusive license; (iii)
reduction of risks in the event that one of the Licensees has problems with development and is either
unable to release a game or the game is delayed then a game created by other Licensees may still
be released on time; and (iv) greater possibilities in creating different types of game (genres) and
concepts working with more development teams while also expanding on the demographics. While
this is still true, some Licensors are instead granting exclusives for genres.
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192
a good idea to have several games based on a new Spiderman movie developed
by different Licensees unless the original Licensee was unable to develop for
certain platforms. Even then, one would normally expect that other Licensees
would be involved to port the licensed game to other platforms rather than
creating entirely new and rival games based on the Spiderman IP.
Non-exclusive licenses are common but are usually tied to situations in which
the licensed property is a Secondary License. For example, IP may be licensed
for an in-game event, or a character may be added to an existing game, or a car
manufacturer may license vehicles for a number of games although they may
grant an exclusive license for certain car models to a Licensee.
491
If a Licensee obtains a licensed property like a movie that will serve as the basis
for a game, they should request the right to make games based on sequels,
prequels, or television shows. Some agreements with Licensees may extend for
many years and incorporate a film's franchise as compared to just one film
(especially the most popular licenses) and therefore rights to numerous films
would typically fall under the license. If the Licensee is going to invest tens of
millions of dollars in a game in addition to providing financial benefits to the
Licensor, then the Licensee should also benefit from its success (assuming it is
successful) in making a game by obtaining the rights as part of the original
agreement or having the right to option future IP created using the same source
material. This is becoming more important with continuing content provided to
players. Otherwise, a Licensee may feel that its time and investment for a game
based on just one film may not be worth it. They may decide that the same
investment would be better spent on creating its own original IP. If the parties do
agree to an option on future films, it is just as important that the parties negotiate
the business terms for those rights when they enter into the original agreement.
If not, the Licensee may find itself in a vulnerable bargaining position.
4.3.4 – Crossover Integration
One of the most popular trends in game development and licensing is crossover
integration, which primarily involves the inclusion of video game characters, but
also specific items, and possibly stories, settings, and universes from one
property into another game whether appearing within a publisher’s own circle of
games
492
or those of another publisher (e.g., Sonic characters and Pac-Man in
Minecraft, Lara Croft in Fortnite). In addition, in game integration can also include
film, television, manga/anime, and comic book characters,
493
athletes, musicians,
personalities, influencers, and various forms of IP. The majority of the content is
downloadable requiring an additional upfront payment, and accessibility may be
limited by time, a special event, and what the character can do in the game.
491
It is possible that a Licensor will not agree to draft language in an agreement providing for an
exclusive deal, even though that may be the intent of the parties. This is done primarily to protect the
Licensor in the event of a bankruptcy, which may allow a Licensor to find another Licensee during
bankruptcy proceedings. Battersby, Gregory J. and Simon, Danny, The New and Complete Business
of Licensing: The Essential Guide To Monetizing IP, Kent Press, 2018, pp. 604-605.
492
For instance, Nintendo characters from Donkey Kong, Mario Bros. and The Legend of Zelda have
appeared in the Animal Crossing series of games, and characters from Square Enix’s Final Fantasy
have appeared in Kingdom Hearts, as did Disney characters including Donald Duck.
493
See Howard, Jessica, “From ‘Resident Evil’ to “SAW,” Here Are All of the Dead By Daylight Killer
Crossovers”, Uproxx.com, May 25, 2021, where Dead by Daylight introduced a host of characters
from horror films, a science fiction show and other video games.
193 Mastering The Game
Besides the potential financial rewards, if part of downloadable content,
crossover integration requires less development time, and it helps continually
refresh a game while simultaneously building the player base by attracting
audiences of the licensed integrated IP. For the Licensor it can be an opportunity
to showcase IP, a new band, song, or album, or product to a potentially vast
audience.
Although video game characters have previously crossed over into other games,
typically as part of an AAA title where development ended upon certification by
the hardware platform, it is happening with more frequency. This is primarily
driven by the growing reliance on live service business models based on frequent
content updates, while also engaging players with new characters and items.
Nowhere has in-game integration been more evident than in Nintendo’s Super
Smash Bros. with over 80 crossover characters including many from Nintendo
properties,
494
and in Fortnite with over 70 crossover skins including IP from pop
culture and sports.
495
For example, in Fortnite, the NFL and NBA featured
downloadable content including the skins of team jerseys and tournaments
providing various rewards ranging from in-game currency to cosmetics.
496
4.3.5 – Platforms
Once the parties agree on the property to be licensed, the next issue will concern
the platforms on which the Licensee will be allowed to develop and distribute a
game.
497
Typically, the more licensed platforms, the higher the licensing fee
since this will most likely result in more revenue. However, more Licensors are
also entering into agreements that may only involve one platform, especially
mobile. With mobile becoming the leading platform for video games, this has
become an attractive alternative.
The Licensee should also be aware that platforms not licensed to one Licensee
may be licensed to another party. From the Licensor’s standpoint, it will want to
have the property exploited on as many platforms as possible to help generate
additional royalties and marketing exposure. However, more Licensors wanting
their properties exploited in the video game space are entering solely into mobile
deals. This has been primarily driven by the broad audience that has now
become important in helping to drive a brand and more established mobile
494
Nintendo also introduced characters from other games that included Bandai Namco’s Tekken,
Capcom’s Devil May Cry, and Microsoft’s Skyrim. Totillo, Stephen, “Nintendo’s ‘Smash Bros.’ is
Gaming’s Biggest Crossover”, axios.com, June 28, 2021.
495
Some of the crossover integration has included characters from films (e.g., Star Wars,
Terminator), television (e.g., Rick and Morty), comics (Batman (DC) and Black Panther, Captain
America (Marvel)) and video games including Halo, Street Fighter, Metal Gear Solid, Tekken, God
of War. Paez, Danny, “Fortnite or Smash Bros: Which Has More Crossover Characters?”
screenrant.com, March 19, 2021.
496
Fortnite, “The Crossover: the NBA Arrives in Fortnite”, epicgames.com, May 19, 2021. To some,
Fortnite represents the future for a certain genre of games that are transformed also into a platform
hosting events and introducing new characters and IP into a game which is often referred to as a
metaverse. Licensors and Licensees can see this as a branding opportunity serving to some degree
as a marketing platform. At the same time, it provides the Licensee with access to new content to
continually update a game. However, Licensees need to be careful not to alienate fans if the content
is not enhancing gameplay.
497
When determining which platforms to license to a Licensee, the amount of money paid for the
rights will probably be the most important consideration. However, the Licensor will also want to
consider the Licensee’s ability to develop, sell, distribute, and market the game on different platforms.
For example, the Licensor should review the track record of the Licensee to determine how
successful previously released games performed and how successful the Licensee has been in
distributing and marketing games in the territory and on different platforms where rights are
requested. Distributing a poorly received game can be very detrimental to a brand and future games.
Mastering The Game
194
developers producing higher quality games. If a Licensee does not have the
capability to develop games for a certain platform, then the Licensor may want
to license those platforms to another Licensee.
498
As a result, the Licensee, usually the one paying the higher licensing fee
(although this can also depend on which Licensee provides the greatest
commercial opportunity for the Licensor)– will need to coordinate with the
Licensor on the release schedule for the game on the different platforms to
ensure that they have the opportunity to release their game first. Although this is
rare, a Licensee, depending on their bargaining power compared to other
Licensees may request that the other party be prohibited from releasing their
game until an agreed-upon date thereby granting a limited exclusive window to
one of the Licensees.
499
One additional issue involves the release of new platforms and technologies,
including new means of distribution that emerge during the term. How has
platform been defined in an agreement that it captures future technologies? For
example, do PC distribution rights include cloud gaming? the metaverse? One
way in which some Licensees address this issue is by including language that
the right includes all present and future technologies now known or later
introduced during the term. Some Licensors may feel uncomfortable granting
rights without an understanding of the business model associated with those
future revenue streams. The concern is that granting a license without knowing
all of the economic factors could result in undervaluing the property for a
particular platform. Some Licensors will want to restrict the license from applying
to future platforms that are not specifically mentioned in the agreement. They
hope that they will earn more revenue later by selling rights for those future
technologies, although any future iteration of a current platform would usually be
included in the grant of rights. Language will typically appear in an agreement
saying that the rights which are not specifically granted are reserved by the
Licensor.
If future technologies are not covered in the agreement, then the Licensee should
ask for a right of first negotiation and maybe even a right of last refusal to try to
secure these rights during the term. A right of first negotiation would require the
Licensor to first negotiate in good faith with the Licensee for a certain period of
time for the rights under consideration. In the event that the parties are unable to
come to terms, then the Licensor would be free to discuss and enter into a deal
with other parties for the rights. The right of last refusal, which may also be
referred to as last negotiation, allows the Licensee an additional opportunity to
acquire the rights since the Licensee has the right to match and improve the
terms of any verifiable offer that the Licensor has negotiated with a third party.
Licensors are reluctant to grant rights of last negotiation because a grant hinders
their negotiations with other parties, since those parties know that they may not
get the rights if another party has the right to match their offer.
498
This can be a delicate situation depending on the platforms granted to a Licensee, since a poorly
received game developed by one Licensee may adversely affect the other Licensee. A consumer
may not distinguish between different Licensees and different platforms. On the other hand, a very
well-received game could help future releases.
499
This may also be referred to as a ‘holdback period’ whereby one party is prohibited from releasing
their game for a certain period of time providing an exclusive window to the other party. In addition,
if there is a holdback provision, the Licensor will request that there be an outside release date for the
Licensee with the exclusive window in the event there is a delay with the Licensee’s release.
195 Mastering The Game
Recently, with the push toward cross-platform compatibility whereby a game can
be developed for one platform but played on another platform through the
Internet, parties will need to address this form of distribution and how revenues
earned will be recognized. The parties will need to consider whether the Licensor
will collect the same royalties and permit the same allowable deductions for the
various platforms. In addition, will this form of distribution be considered a sub-
license or an assignment of rights thereby requiring additional approval from the
Licensor? This should also be clarified in the agreement.
4.3.6 – Territory And Term
These sections will identify the countries where the game can be exploited and
for how long. As distribution becomes easier and more accessible, including the
ability to continually provide content as a result of digital capabilities, more
Licensees are seeking worldwide rights (including the right to distribute in any
language) and longer periods to exploit their game.
If a Licensee was to request worldwide rights then they would also want the right
to sub-license distribution in certain territories, which would typically be subject
to the Licensor’s approval, not to be unreasonably withheld. The countries listed
in each territory should be clearly defined to eliminate potential issues with rights
and possibly allocation of royalties which may vary by territory. Furthermore,
using general territorial designations such as the European Union could cause
problems if countries join or leave the bloc during the term.
Regarding the term, a Licensee will need it to be long enough to exploit the game
and to have the possibility of providing downloadable content on an ongoing
basis, with a view to earning revenue long after the launch of the game. Typically,
the longer the term, the higher the minimum guarantee because of anticipated
additional sales, even though the sales of a game will generally decrease in
future years. Nonetheless, for some games, revenue may continue with ongoing
downloadable content.
500
In fact, Licensees are embracing strategies in which
games will continue to provide new content on an ongoing basis, thereby
extending the life of a game and also providing a greater opportunity to build a
community around the brand. For many of the major licensed properties that are
licensed by AAA publishers, terms last between 7 and 10 years.
501
The term will commence upon execution of the agreement (usually referred to
as the ‘effective date’) or a binding deal memo so that development can begin
immediately. Time will be critical if the parties want to release the game upon an
event such as a movie’s release, the start of a sports season or a holiday. A
Licensee will generally want the deal to start upon execution of the agreement
and to continue for a fixed number of years from the release of the game.
502
500
Although sales of games traditionally have decreased over time, a successful game can still do
very well several years after its initial release with new content including downloadable content and
microtransactions, price reductions, and qualifying for participation in ‘greatest hits’-type programs
offered by console manufacturers.
501
EA’s exclusive agreement with the Walt Disney Company for the Star Wars property lasted for 10
years. The agreement, set to expire in 2023, has generated over three billion dollars as of February
2021, according to EA. Batchelor, James, “Star Wars Has Made $3bn for EA”, gamesindustry.biz,
February 3, 2021. Interestingly, Lucas Films Games, part of the Disney company, ended EA's
exclusivity (although EA will continue to have a relationship with Lucas Films Games) by entering
into an agreement with Ubisoft to create an open-world Star Wars game which would likely be
distributed after the exclusivity period ends. One issue is whether during EA's exclusive period,
Ubisoft will be able to market their game.
502
Although it may be difficult, the Licensee could try to have different terms for various platforms
given that release dates may vary.
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196
While this language would be favorable to the Licensee, it may pose a problem
for the Licensor unless an outside date is agreed upon by the parties for the
release of the game in order to avoid a term extending indefinitely. For example,
a term may start upon execution of the agreement and continue for a period of
three years from the release of a game, but in no event will the term extend past
an agreed-upon date. In addition, if a game is tied to a film’s theatrical release
and the release is delayed, or the film is released initially on a different platform
(e.g., television instead of theatrical) then the Licensee should request that the
term be extended for the period of time the film’s release is delayed or the
duration of an agreed-upon extension.
503
Licensees should also consider the
possibility of an option to extend the term. Doing so allows the Licensee to notify
the Licensor at a pre-determined time that they wish to extend their rights to
exploit the game. An option may be extended if a Licensee achieves certain
performance guarantees involving revenue or an agreed upon number of sales
of a game.
504
However, in some situations, the Licensor may not be willing to allow for such an
option. For example, a movie studio will most likely not want to extend a license
for a movie-based game if the studio is planning to release a sequel since this
might interfere with future video game deals involving sequels. A previous game
might reduce the value of a subsequent video game license. In order to avoid a
disadvantaged bargaining position, the Licensee would need to negotiate the
guarantees, advances, and royalty rates for the extension while negotiating the
original agreement. Otherwise, the Licensor could be in a much stronger position
to dictate the terms if the original licensed property exceeded expectations.
One recent issue regarding the term is the likelihood for games to have longer
life cycles with continuing digital updates of content. Some parties have entered
into longer terms, but there also may be some hesitancy from Licensees since a
licensed game may not do as well as planned, in which case the Licensee would
not want to commit to additional guarantees to obtain a longer term.
How the parties deal with this issue will depend on a number of factors including:
(i) how long the Licensee wants to continue using the content depending on
changing consumer demand; (ii) whether the original license was exclusive and
if so, whether it becomes non-exclusive; (iii) whether other licensing
opportunities are being considered by the Licensor; and (iv) how the Licensor
will be compensated. It should also be considered whether the Licensor will
require an additional guarantee covering a fixed period of time, or whether
royalties will suffice as compensation. Moreover, if the Licensor accepts a
continuation of royalties, will the royalty be higher, lower, or calculated in a
different way?
503
The term of an agreement may also be extended by a force majeure event or the duration of a
Licensor's breach which adversely affects Licensee’s rights, including the development and
distribution of the game. One issue that comes up with sports games is how the term (as well as
compensation) is addressed if there is a strike and the start of a sport's season is delayed or a season
is interrupted.
504
While it is a good idea for a Licensee to ask for a term extension that can be exercised if the
Licensee hits certain revenue numbers, a Licensor may want to consider other factors before
considering an extension. For example, a Licensor may not have a good working relationship with
the Licensee, or there may have been other problems between the parties, and therefore the Licensor
may not necessarily want to continue working with the Licensee.
197 Mastering The Game
In some agreements (usually in exclusive deals), if the Licensee fails to exploit
certain rights in a particular territory or within a certain period,
505
those rights
either become non-exclusive or revert to the Licensor without any reduction in
the guarantee.
4.3.7 – Licensing Fee
Other than the rights being granted, the costs associated with obtaining a license
will be the most significant issue negotiated between the parties. For some
licenses, the competition is intense, resulting in higher costs for the Licensee.
The more rights requested by the Licensee, the higher the fees that the Licensor
will require in the deal. The cost to obtain a license will vary but will largely be
dependent on the factors below:
FACTORS INFLUENCING THE COST OF OBTAINING A LICENCE
• The type of property: if the game is based on a famous book or
sequel to a blockbuster movie, the minimum guarantee and
royalties will be higher since there will be less of a perceived risk
of a game’s commercial failure.
• Is the underlying property the sole basis of the game or one of
many elements of the game?
• What is included as part of the property? For example, if it is a
movie, in addition to including the story and characters, will it also
include music, talent? If the game is based on a sports license, will
it include teams, logos, players (typically negotiated separately
with the player’s union), numbers, sponsors, stadiums, jerseys
including logos of the team and sponsors that appear on a jersey,
and special events conducted by the league such as an All-Star
game or tournament?
• Is there interest in the property from other potential licensees?
• What is the length of the term?
• Is the territory limited or worldwide?
• Which platforms will the game appear on and what are the forms
of distribution?
• What is the projected revenue which may include such factors as
the projected sales of the game based on the wholesale price,
expected revenue from downloadable content and
microtransactions?
• Is the licence exclusive or non-exclusive?
• What is the royalty structure (this could affect the advance and/or
guarantee)?
505
This could also include a situation in which a Licensee fails to continue providing additional
content.
Mastering The Game
198
• Is a marketing commitment being requested that will impact a
guarantee, advances, and the royalty percentage?
Except in a few instances (e.g., a cross-promotional deal), Licensors will request
a minimum guarantee. This is a total, fixed minimum amount, that is guaranteed
to the Licensor by the Licensee. The guarantee is an assurance that no matter
how well or poorly a game does, the Licensor will receive at least that amount of
money for the rights granted to the Licensee. In the event that the Licensee fails
to reach the minimum guarantee payments through a combination of advance
payments (which will most likely also be required by the Licensor) and royalties,
then the Licensee must pay the shortfall near or at the end of the term.
506
If the
Licensee is distributing across different platforms and/or in different territories
they should try to negotiate that all revenues received will be used to recoup any
guarantees paid to a Licensor even if separate guarantees were paid for different
platforms and/or territories.
507
If the property is a Secondary License, the parties could agree to a one-time
payment to the Licensor. This possibility is preferable from an administrative
standpoint for a Licensee since it eliminates the need to issue statements.
However, it also adds to uncertainty for both the Licensor and Licensee in
determining the value for the license and therefore the fee paid for the rights. A
Licensee may be concerned that it has overpaid if the game does poorly, and a
Licensor may feel that it was underpaid if the game exceeds expectations.
The minimum guarantee amount will vary depending on a number of factors,
including the royalty structure, projected revenue, popularity of the license, the
length of the term, and current market conditions. In many situations, the
bargaining power of the companies will be the most significant factor. The
Licensee may have great arguments on why the guarantee and other payments
should be at a certain rate, but if other parties are interested in the same property,
then the Licensor will have more leverage to negotiate more favorable terms. In
some situations, especially when dealing with character integrations, the
Licensee of a successful game may have more leverage since Licensors may
want to be part of the game to take advantage of the huge fan base.
If the value of the license is dependent on any representations regarding future
actions by the Licensor, the Licensee should try to secure written confirmation of
those future actions in the agreement, although doing so may be difficult. For
example, if the license is based on an upcoming movie, then the Licensee will
want written assurances that the movie will be released on a certain date, as the
game development schedule may be timed to the release. A Licensee may
request a guarantee involving a marketing (i.e., advertisement spending) and
theatrical distribution commitment (i.e., number of screens and which countries)
for the movie. For a television show, the Licensee may request a guarantee that
the show will be aired for a certain length of time on agreed-upon outlets in
certain territories. If the Licensor fails to satisfy those guarantees, then there
506
Some agreements may require that the Licensee pay any remaining guarantee a few months prior
to the actual term ending since it might be easier to collect any outstanding payments.
507
See Chapter 3 for a more detailed discussion on cross-collateralization.
199 Mastering The Game
should be a reduction of any guarantees or royalties and/or an extension of the
term. Termination of the agreement would be an unusual remedy if the Licensee
had invested in development costs although it would depend on the stage of
development. Another option is that the parties agree to a liquidated damage
clause whereby a Licensee would receive pre-determined compensation for the
damage caused by the Licensor’s failure to meet their release commitments.
The minimum guarantee is an advance on royalties that is usually fully
recoupable and non-refundable. Unless the Licensor has breached the
agreement the Licensor keeps any advances even if the Licensee is unable to
recoup all of its advances. The minimum guarantee can be paid at various stages
during the term triggered by either date(s) and/or event(s) that are all subject to
negotiations.
The amount of the advance payments will vary and may be paid during different
stages of the relationship. For example, payments may occur upon signing,
during various stages of development, and/or upon the release of the game on
a particular platform.
508
In addition to a minimum guarantee and probably
advance payments, a Licensee will need to pay a royalty (i.e., a fixed fee which
can either be a percentage of revenues or a specific dollar amount) for each unit
of a game sold or manufactured (and/or each downloadable content/in-game
item sold) based on net sales. Net sales will typically be defined as the gross
revenues received by the Licensee from the exploitation of the game (e.g., sales
of the game, microtransactions, downloadable content, any form of in-game
advertising associated with the game, subscriptions) less allowable
deductions.
509
Royalty rates will vary depending on the rights requested, the popularity of the
licensed property, and other financial commitments from the Licensee. Royalty
rates may also vary depending on: (i) the item being sold (e.g., whether it is a
boxed game, downloadable content or microtransaction); (ii) the platform, with
royalties higher for platforms in which first-party fees are not applicable (i.e., PC
games), and (iii) the means of distribution where there may be fewer costs to
distribute, such as digital and mobile distribution. For instance, the royalty rate
owed by the Licensee may be higher for games distributed on digital or mobile
in comparison with retail, because there are no costs for manufacturing, although
the distinction is becoming less relevant because of the high costs associated
with user acquisitions (e.g., for advertising). Furthermore, royalties can vary
during the term depending on the success of the game. For example, the parties
agree to a sliding scale royalty rate with the royalty percentage increasing with
greater sales or increased revenue. The parties may agree to a 10% royalty for
the first $300,000 earned, increasing to 11% for revenue exceeding $300,000.
510
It is also possible that the parties will start with a higher royalty and decrease it
as revenue hits certain benchmarks.
508
A Licensor should request an outside date if the game misses its scheduled release date, which
was not caused by the Licensor or a force majeure event.
509
In some agreements, when dealing with a retail product, Licensors may insist that the royalty rates
should not be calculated based on revenue received but rather on all products sold, shipped, or
distributed by the Licensee even if revenue is not received, thereby putting the risk on the Licensee
in the event that a third party fails to pay (this would be associated with retail sales). Other issues
that will need to be factored in when determining royalties will include units sold at discount and
copies, subject to a possible cap, distributed for free to third parties.
510
If a sliding scale royalty is used for retail sales, it is important to determine how those sales
numbers will be calculated. Does it include any sale of a game at any price, or must the game be
sold at a minimum price?
Mastering The Game
200
A major part of negotiations will involve how the royalty rate is calculated. All
forms of distribution will involve deductions, and some will only be applicable to
retail or digital, although most will involve retail sales. The Licensee will usually
be permitted to deduct the following from gross revenues when calculating net
sales: (i) actual out-of-pocket third-party service charges incurred in the
distribution of the game (e.g., an app store or console manufacturer retains a
certain fee for distributing the game on their platforms); (ii) sales taxes and
shipping costs; and (iii) allowances such as price protection and returns, quantity
discounts, refunds, rebates, chargebacks, and taxes (including withholding).
Licensors will typically allow these allowances, but may also insist that they are
capped, and anything over the cap would therefore not qualify as a deduction.
Depending on the platform, certain deductions may not be permitted if they are
not applicable when calculating royalties. For example, price protection, co-op
marketing, sales commissions, cost of goods and quantity discounts would not
be relevant for mobile distribution. However, at the same time, the parties might
negotiate that the Licensee can deduct user acquisition costs, live-ops, and costs
involving back-end support for particular platforms such as cloud computing.
In general, Licensors will not allow for the Licensee to deduct costs incurred in
development, manufacturing, selling, distributing, advertising, uncollectible
accounts, or currency conversions. As the costs for games increase, especially
console games, this is an area that the Licensee may want to consider
negotiating more aggressively in order to recoup some of these costs, especially
when dealing with free-to-play mobile games and providing ongoing content. To
date, it has been very rare for a Licensor to allow deduction of these expenses.
511
However, if a Licensee is required to commit to spending a certain amount of
money on one of the Licensor’s marketing initiatives for the underlying property,
then the Licensee should negotiate for those funds or a percentage thereof to be
deductible.
512
4.3.8 – Statements And Audits
In all licensing situations involving royalty payments to the Licensor, the Licensee
will be required to provide financial statements specifying the revenue generated
from the sales of the game, the deductions permitted and the royalty payments
due to the Licensor. The Licensee will issue statements at specified times
(typically 30 to 60 days after the close of a quarter, which may be tied to a
calendar or Licensee’s fiscal) and concurrently pay any royalties indicated.
The information required in the statements will vary depending on the
negotiations, but generally, the Licensee will need to specify (i) total revenue
earned (gross revenues) from the exploitation of the license, which would include
but may not be limited to the number of units sold (if retail is involved), revenue
from microtransactions, downloadable content and advertising during an agreed
period of time (e.g., quarterly), usually separated by country or territory (e.g.,
North America, Latin America, Europe, Asia); (ii) net receipts that show allowable
511
Licensees might want to consider an additional deduction involving development costs for new
content or alternatively try to get the Licensor to pay for some of the costs in return for a higher royalty
(i.e., downloadable content).
512
One possible scenario to consider is that the parties agree to split marketing costs and allow for
a certain percentage of the costs to be deducted from revenue with the possibility of increasing the
cap, subject to approval from both parties.
201 Mastering The Game
deductions from gross receipts, including but not limited to any advances paid to
the Licensor, price protection, returns, withholding taxes; (iii) the distribution
partners that may have distributed the game via a particular platform (i.e., mobile
and digital distributors);
513
(iv) any monies spent on a marketing commitment if
required by the agreement or if it can be deducted, and how the money was
spent; (v) currency exchange rates, if applicable; and (vi) remaining guarantee
amounts owed. In most situations, the Licensor will supply the template for the
statement and will attach it as part of the license agreement.
Licensors typically have the right to audit the books and records of the Licensee
to verify the accuracy of statements. While the Licensor should have the right to
audit, it is important that the Licensee limit the Licensor’s audit rights; if
parameters are not set, the process can become very costly and time-consuming
for the Licensee, even if the Licensee has properly reported to the Licensor. As
a result, the Licensee will want to limit the number of audits that can be
conducted by the Licensor (usually once a year); the location of the audit (usually
the place of business of the Licensee); the time when an audit can take place
(during normal business hours); when notice must be sent requesting an audit
(10-30 days in advance); the length of the audit; and who can conduct the audit
subject to the auditor also signing a confidentiality agreement.
It is important for the auditor to understand the video game business and the
agreement entered into by the parties so that time and money are not wasted
during the audit. Generally, a Licensee may require the auditor to be a Certified
Public Accountant or to have a similar title (if the audit takes place outside of the
US), to work for a major accounting firm, and not to be conducting an audit on a
contingency basis.
An auditor will require that they have access to all books and records that may
determine the royalty amount owed to the Licensor. This can result in a huge
amount of documentation and therefore the Licensee should insist on narrowing
the scope of the records the auditor can request. At the very least, prior to
conducting an audit, the auditor should be required to provide a specific list of
documents that may be requested for the audit to allow for the Licensee to
compile the records and also to contest a requirement if they feel that the
requested records are not relevant.
Furthermore, a Licensee should try to restrict the time period within which
statements can be challenged and audited. For example, a Licensee might try to
limit the right of a Licensor to contest a statement to one or two years. Anything
longer than two years usually imposes an administrative burden on the Licensee,
not only in terms of keeping the records, but also because relevant employees
may leave a company, making it more difficult to accurately answer inquiries.
The Licensee will want to include language indicating that in the event that a
Licensor does not contest a statement within a certain period of time, the
statement is deemed final and cannot be contested unless fraud was involved,
in which case a statement can be questioned at any time.
The issues involved in contesting a statement can create further complications.
If a mistake is obvious, it may be as simple as a calculation error and there should
513
It is often good practice to attach a sample of a statement that both parties can agree on so there
is no disagreement on what the Licensee reports in a statement.
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be no problem with the Licensee paying the difference to the Licensor.
514
However, in most situations when a statement is contested it involves a
discrepancy in the allowable deductions. As a result, resolving the issue
becomes more of a challenge. At the very least, the Licensor’s auditors must
provide the Licensee with a copy of the audit report within a certain period of time
explaining the accounting discrepancies and the Licensee must be allowed to
respond to the alleged errors. Often, an explanation of how the net receipts were
determined leads to a resolution. It is very important that any deductions taken
by the Licensee are supported by proper documentation, or else they will be
challenged by the Licensor’s auditor and difficult to dispute.
If the parties are still in disagreement, they will have to discuss a settlement. Any
disagreement that creates problems in the business relationship needs to be
settled in a timely fashion. A disagreement could lead to termination and possibly
litigation. If the parties need to settle a disagreement and avoid litigation, they
might mutually agree on a third-party mediator. If the parties do reach an
amicable settlement, the Licensee should obtain a release from the Licensor
stating that no additional claims will be made against them related to the audited
statements that were covered under the audit to avoid the threat of future
litigation.
The audit provision will also specify who bears the cost of the audit, and, if
necessary, costs associated with any dispute over the results. Generally, the
cost of the audit is the obligation of the party conducting the audit, but it shifts if
the audit shows that a mistake had been made that exceeds a certain percentage
(usually 5 to 10 %) of the difference between what was paid and what was owed.
If the Licensee is responsible for the audit, then they should try to negotiate
limitations on their responsibility for the costs of the audit. First, the Licensee will
want the rate to be as high as possible to trigger the Licensee’s obligation to pay
for the audit, and they should also insist that the mistake meets a certain
minimum dollar amount. For example, the parties could agree that the Licensee
will pay for the audit in the event that an accounting mistake is 10% or more on
what was reported in the contested statement, provided that the mistake is at
least $5,000. If the mistake only amounts to $3,000, then the costs would be
borne by the Licensor. In addition, the parties need to determine which audit
costs will be covered. Costs should be actual and reasonable expenses that may
be incurred by the auditor. These costs can include the auditor’s reasonable
professional fees, as well as reasonable travel and lodging expenses.
4.3.9 – Ownership Issues
While the Licensor owns the IP provided to the Licensee, the Licensor also
typically requires that any materials derived from the original property are also
owned by the Licensor, whether they are created by the Licensee or by any
personnel or third parties on behalf of the Licensee. For example, even if the
Licensee has created new characters and/or stories for the game, the Licensor
514
Unless there is a legitimate or bona fide dispute regarding an amount owed to the Licensee then
the failure by the Licensee to pay royalties on time will require the Licensee to pay interest on the
amount owed. Typically, agreements will include language on what the interest rate will be if
payments are late. There can be situations in which the auditor uncovers a mistake that is favorable
to the Licensee. In that situation, the Licensor should repay any monies overpaid by the Licensee or
provide a credit against future revenues that might be earned by the Licensor, if applicable.
203 Mastering The Game
will claim ownership of those creations. As a result, the Licensor will often include
language in the agreement indicating that the work created by the Licensee will
be a ‘work for hire’, which is a US copyright concept whereby in this situation,
the Licensor rather than the Licensee owns the work pursuant to the license
agreement (though as discussed in Chapter 2, this does not always apply and
alternative language may be needed depending on the jurisdiction in question).
In the event that work has not been done as part of a work-for-hire arrangement
or has not been recognized, then the Licensee would be required to assign (i.e.,
transfer) all of their rights to the IP they created to the Licensor, perpetually and
throughout the world. If there is any doubt that a work-for-hire clause and
assignment may not be recognized, the agreement may also have language that
provides for a perpetual royalty-free worldwide license to the Licensor. In all of
these situations, the Licensor will usually be free to use the materials created by
the Licensee by any and all means without further compensation to the Licensee
even after the expiration of the term. That said, as it becomes more common for
Licensees to create original content based on the underlying license, they should
at least try to negotiate some form of compensation. The way in which the
Licensor uses the content created by the Licensee (e.g., how they incorporate a
character into a film or the production of merchandise) could determine the form
of compensation, whether it be royalties or a fee.
515
In addition, if the Licensor
was to use the new material created by the Licensee, then the Licensee would
want to prohibit the Licensor from licensing the content to another gaming
company for a certain period of time.
While the Licensor will own all of the derivative IP created from the underlying
property, the Licensee will still own any of the source code and tools used to
make the game that they created or licensed.
516
It is important for the Licensee
to maintain ownership or control of this IP for future projects. Since the Licensor
is usually not in the business of making games, this should not be an issue.
4.3.10 – Representations And Warranties
For the Licensee, the representations and warranties are critical because without
these guarantees associated with the licensed property the Licensee would be
taking on unknown risks in its attempt to exploit the property. The Licensor will
also require reciprocal representations and warranties from the Licensee
involving the distribution and marketing of the game and any new materials
created by the Licensee.
The Licensor is in the best position regarding knowledge about ownership issues
and, in most situations, the Licensee is paying a minimum guarantee and/or
royalties based on these assurances. Consequently, the Licensee should insist
that the Licensor provide the necessary representations and warranties to the
Licensee to allow them to develop and distribute a game without any concerns
about possible litigation involving infringement related to the materials and rights
515
It may be challenging to determine how a Licensee would be compensated since this will vary
depending on how the Licensor uses the content created by the Licensee. For example, if the
Licensee uses a character as an important part in an upcoming movie, should the Licensee receive
a royalty or a fee that might be comparable to what a writer on the movie would receive, potentially
including a flat fee with a possible back-end royalty? If the same character is instead used in a small
role, then perhaps the Licensee would receive a one-time fee. However, if the same character was
used in merchandise, then the Licensee should ask for a royalty which should be calculated
differently from a royalty based on revenue for the movie.
516
The Licensee cannot assign source code and tools licensed from the console manufacturers and
third parties.
Mastering The Game
204
delivered by the Licensor. While Licensors will try to limit their exposure, the
Licensee must at the very least obtain the following representations and
warranties involving the IP:
1. The Licensor either owns or controls the rights being licensed to the
Licensee to allow the Licensee to exploit the licensed property pursuant
to the agreement. The Licensee does not want to be in a situation in
which another party claims rights to the licensed property since this could
result in litigation and a demand to stop development or distribution of
the game.
2. The licensed property does not violate the rights of any third party
including the rights to copyrights, trademarks, rights of publicity, privacy,
or patents (although patents are not typically relevant in the licensing of
entertainment or sports content, though they would be relevant for
software licenses).
517
3. There is no pending or threatened litigation involving the licensed
property that would affect the Licensor’s grant of rights and other
obligations, and the Licensor’s actions will not violate any third-party
agreements. If there is litigation that might affect the game’s
development or release, then the legal risks may not justify the potential
financial benefits.
If the license involves a property based on a television show or movie series, the
Licensee may also request a representation that the Licensor will continue to
exploit the property for a certain period of time. This could include confirmation
that a new television series or film will be released within an agreed-upon period
during the term.
518
The Licensor will also request representations and warranties from the Licensee,
including that the game and any elements contained in the game such as
software, and music (other than music and IP that may have been provided by
the Licensor) used in the development of the game, as well as any marketing
materials, do not infringe on the rights of any third party. This provision will
include infringements involving copyrights, trademarks, patents, privacy and
publicity. This provision is the most significant for the Licensor since they usually
will have greater resources and will therefore be named as a party in any IP
lawsuit involving the game, even if the licensed property is not the subject of the
litigation. The fact that the Licensor is associated with the game might be enough
for a third party to also initially make a claim against them.
The Licensor may also require the following additional representations and
warranties, but the Licensee should keep them as narrow as possible to avoid
disputes over their interpretation. If the Licensee is required to agree to the
representations and warranties below, and in most cases, they will be, the
Licensee should think about whether any of them can be mutual, whether a ‘best
517
Licensors will seek limitations on this absolute representation and warranty conditioned upon
Licensor’s approval with regard to rights and exclusions to any alterations to the licensed property,
whether approved or not by the Licensor.
518
In 2003, Activision sued Viacom, the owners of the Star Trek property, claiming that Viacom failed
to promote and maintain the quality of the franchise by only releasing one new film and removing two
television shows from the air decreasing the value of the five-year license. Bramwell, Tom, “Activision
Sues Viacom Over Lack of Decent Star Trek”, gameindustry.biz, July 2, 2003. The parties settled
their disagreement out of court. Jenkins, David, “Activision, Viacom Settle Star Trek License Lawsuit”,
Gamasutra, gamedeveloper.com, March 14, 2015.
205 Mastering The Game
of knowledge’ qualifier can be applied, and whether they can be limited by a
period of time and territory.
1. There is no pending or threatened litigation against the Licensee that will
preclude them from fulfilling their obligations.
2. The Licensee is a validly existing legal entity, whether a corporation or
limited partnership, and the party signing the agreement has the
authority to sign on the entity’s behalf.
519
3. The game is of a high quality. This is a very subjective standard and
therefore, the Licensee should try to eliminate it provided that the
Licensor has approval rights or instead represents that the game will be
of similar quality to another game with a similar budget on the same
platform developed by the Licensee, assuming that is an option.
4. It will not harm, misuse, or bring into disrepute the licensed property
(although this can also be highly subjective, and provided that the
Licensor has approved materials it should be considered eliminated from
the agreement).
5. It will not incur any costs chargeable to Licensor unless approved by the
Licensor in advance.
6. It will comply with all laws and regulations involving the development,
sale, marketing, and any other form of exploitation of the game and/or
will not violate any third-party rights (without any specification as to the
nature of these rights). This is also very broad language and can cover
privacy (i.e., data collection), consumer protection, advertising and labor
laws and other regulatory issues. The licensee should try to narrow this
down, especially if the rights are worldwide, by limiting it to territories
where the most revenue is projected or by adding ‘best of knowledge’
language, although this is likely to be difficult.
7. It will maintain adequate arrangements for the distribution of the game
throughout the territory. Originally drafted to ensure that Licensees
sustained sufficient inventory at retail, it could also be important in
providing a guarantee to the Licensor that the Licensee will enter into
deals with agreed-upon digital or mobile distributors.
8. An agreed-upon rating to assure that the game will not include content
that is inappropriate for the Licensor’s suggested audience.
9. There are no material defects, viruses, worms, Trojan horses, time
bombs, or hidden content (e.g., Easter eggs) that may negatively affect
the game or change a rating. This provision is unique to video games
since a Licensor does not want to be the subject of bad publicity in the
event that unknown and/or damaging elements are hidden within the
game or downloadable content.
10. It will fulfill all obligations and requirements of any third-party agreement
entered into including hardware manufacturers (e.g., Sony, Apple) and
distributors.
519
If the person signing an agreement on behalf of a corporation does not have the authority, then
the corporation will not be legally bound.
Mastering The Game
206
11. It will maintain proper insurance as required by the agreement
throughout the term.
Furthermore, the Licensor will probably require the Licensee to use commercially
reasonable efforts to release the game on a minimum of one platform (if multiple
platforms have been licensed) on an agreed-upon launch date, and may even
insist on a marketing commitment.
520
If the Licensee is required to agree to any
of these requests then they should add language absolving themselves of this
obligation if it is the result of any delay in the Licensor’s fulfillment of any of their
obligations, including the delivery of materials and timely approvals under the
agreement.
521
4.3.11 – Indemnification
While each party will be required to make representations and warranties, the
parties will also need to indemnify each other (as the indemnifying party) for their
actions or failure to act in breach of the agreement that results in any claims
made by a third party against the non-breaching party (the indemnified party).
In almost every agreement involving indemnification, the same concerns that
arise with the developer and publisher relationship as discussed in Chapter 3
also need to be addressed in any licensing agreement, including:
1. Determining which claims will be covered under the indemnification;
2. Determining which costs the indemnifying party will be responsible for,
including but not limited to third party damages, (reasonable) legal
fees, court costs, and settlements;
3. Determining when payment will be owed (e.g., after a final judgment of
a claim, after appeals have been exhausted, when legal fees are
incurred);
4. The extent of the indemnified party’s involvement with a claim,
including participating in the defense or even taking over the defense;
5. When notice must be provided to the indemnifying party of a claim; and
520
In many licensing agreements, the Licensor will also require the Licensee to agree to a marketing
commitment to be mutually agreed upon by the parties which provides a guarantee that the Licensee
will spend a certain amount of money on marketing initiatives. The amount might either be a fixed
sum or a percentage based on projected revenue of the game (e.g., five percent of projected net
revenues). Projected revenues can pose a problem for the Licensee if dealing with free to play and
if revenue far exceeds actual revenue and there is not enough revenue to recoup marketing costs.
Marketing initiatives could cover marketing involving television, print, internet, events, etc. If the
Licensee agrees to this then the Licensee should tie this into the overall consideration paid to the
Licensor, although hopefully the marketing dollars will eventually help both parties by increasing
awareness of the game, which should result in greater sales. A higher marketing commitment might
result in reduced royalty rates or a minimum guarantee. The parties will need to negotiate what
marketing opportunities the money will be spent on, when the money will be spent (usually within the
first few months of a game’s release), and in which countries the money will be spent. In some
situations, the Licensor will want some money allocated to marketing programmes initiated by the
Licensor, for example, the sponsoring of a Licensor event. This should only be agreed to if it will help
drive sales and awareness.
521
A Licensor should require that the Licensee provide the Licensor with notifications informing them
of any government or legitimate consumer complaints that might lead to litigation or governmental
action, or may affect the reputation of the licensed property, and how the Licensee plans to deal with
the potential issue(s). This can include issues such as IP, privacy, monetization, advertising, and
ratings.
207 Mastering The Game
6. How settlements will be handled. Parties will attempt to limit their
indemnification obligations by limiting the claims that may be covered
under the clause, type of damages, and the amount of damages.
522
Because of the increased threat of litigation involving video games and concern
by Licensors that Licensees may not have the funds necessary to defend against
potentially costly litigation, Licensors typically require Licensees to obtain Errors
and Omissions (“E&O”) insurance to protect against these risks.
523
In addition,
Licensors may also require that Licensees maintain product liability insurance,
comprehensive general liability, and possibly data security and advertising
liability insurance.
524
E&O primarily insures against claims associated with unauthorized use of
copyrights and trademarks, invasions of publicity and privacy, and defamation. If
the Licensee has obtained E&O, and a claim is made against the Licensor, the
insurance company would be responsible for a certain amount of the damages
or settlements incurred regarding the litigation, subject to the deductible and
amounts covered under the policy.
525
In this case, the insurance company also
has the right to help determine the Licensee’s legal representation.
526
For
example, the Licensee and the Licensor are sued for an alleged copyright
infringement involving the game that is separate from any of the materials
provided by the Licensor. Under a typical indemnification provision, the Licensee
would be responsible for defending the case and paying for any and all damages
or settlements. Assume that the claim is for $300,000 and the Licensee’s policy
covers up to $500,000 for any single claim and $1 million for all claims with a
$100,000 deductible. In this case, if we also assume that the Licensee settled for
$150,000 then the Licensee would be responsible for paying $100,000, which
covers the deductible, and the insurance company would pay the remaining
$50,000 in addition to any legal costs.
522
See Section 4.3.13 on termination rights.
523
Within a certain period of time (usually 30 days), the Licensee will need to provide proof of
insurance coverage to the Licensor by submitting a certificate of insurance outlining the insurance
coverage and naming the Licensor as an additional insured party and possibly a beneficiary. As
mentioned previously, a party receiving a certificate should also ask for a copy of the policy to confirm
that it accurately covers the insured parties per the agreement, since a certificate may not provide
some critical information. The Licensee should also require that the Licensor has E&O coverage.
524
For further information on what is typically covered under data or cyber security insurance, see
Brook, Chris, “What is Data Breach or Cyber Security Insurance?”, digitalguardian.com, December
4, 2018.
525
There are typically two types of limits related to E&O policies. One is for each claim and the other
is for all claims combined. Standard policies in the US will have limits of $1 million/ $3 million. The
first number is the limit per claim and the second number covers the limit on all claims under the
policy. Therefore, the insurance company will not pay out any amounts exceeding $1 million for any
one claim under a policy of $1 million/ $3 million. In addition, an insured party must understand how
the policy is written and whether it is a claim- or occurrence-made policy, since this will impose an
additional restriction. Under a claim-made policy, the policy will only cover claims made during the
policy period. For example, if the claim policy runs from January 1, 2022, to January 1, 2023, and a
claim is made against the insured on February 1, 2023, even if an alleged copyright infringement
occurred in December of 2022 then the policy will not cover the claim. As a result, it does not matter
when the infringement occurred. In contrast, under the occurrence-made policy, the policy does not
go into effect when the claim is made but when the event that gave rise to the claim occurred. In the
above example, if the insured had an occurrence-made policy then the alleged copyright infringement
claim would have been covered under the policy. See Gerges, Ted et al., Counseling Content
Providers In The Digital Age, New York State Bar Association, 2010, pp. 281-291.
526
As part of the E&O policy, insurance companies will usually want to direct the insured party to the
law firm that will represent the Licensees since the insurance company wants to ensure that the law
firm is knowledgeable and capable of defending a claim in the jurisdiction in which the claim is
brought, and their fees are within the insurance company’s range. However, this issue should be
discussed, addressing whether the policy would alternatively allow the policyholder to work with a
firm of its choosing. See Section 3.2.16 for additional information on insurance.
Mastering The Game
208
E&O may not be easily available for Licensees in certain territories, and both the
Licensor and the Licensee should carefully assess whether the policies that
insurance companies offer in the relevant market actually meet their needs;
otherwise the Licensee may simply end up spending a lot of money for nothing.
4.3.12 – Approvals
Another standard provision of the agreement will be the right of the Licensor to
approve all materials involving the licensed property which will include the game,
additional content, marketing, packaging, publicity materials, music and possibly
even the voice-overs used for the different languages included in the game.
527
The Licensor might also have approval rights over the distribution and sales
strategy of the Licensee, including how the Licensee plans to make money with
downloadable content and microtransactions. Approval language will appear in
every licensing agreement but, depending on the license granted (e.g., Primary
License or cross-promotion), the extent of approval will vary from agreement to
agreement. Since games based on an underlying property may be released in
conjunction with a particular event such as the release of a movie or the start of
a sport’s season, the Licensee must be careful to build in enough time for the
Licensor to review and approve the various submitted elements involving the
game to avoid potential delays. Furthermore, if a game includes a number of
licenses then the Licensee needs to manage their time carefully to provide
themselves with enough time to obtain approvals.
528
In most relationships, the Licensor will require prior written approval over all
materials involving the game and any subsequent game content released. The
Licensor needs to protect the integrity and value of their copyrights and
trademarks and wants to make sure the game is consistent with the direction of
their property. Although they should understand the risks, and most do since
many have already been associated with some type of video game, Licensors
do not want to be in a position where a game is of poor quality, as this could
undermine the goodwill and value built up over the years by the Licensor. While
the possibility will always exist because of challenges in development, the
Licensor will want to reduce its risks. It is therefore standard for them to request
broad approval rights. Furthermore, as some Licensors allow Licensees to
expand on their IP with the creation of new storylines, characters, trademarks,
and environments, the Licensor will want to have approval of all of these
elements.
Typically, a Licensor will require a fixed number of days to approve any materials
submitted. The amount of time will vary depending on the bargaining position of
the parties and can be anywhere from 5 to 30 days depending on the item being
submitted for approval. For example, reviewing the game towards the end of the
development cycle will involve more time to review as compared to reviewing a
press release. In addition, parties could even agree to reduce time periods under
527
The Licensor will require the Licensee to include the company’s logo, trademark and copyright
notices, and possibly a URL address for the Licensor's website and in the game, downloadable
content, and any other materials publicly released. The extent of the notice might vary depending on
the material released and space limitations. Generally, the Licensee's style guide will include
information on the various notices required and how they should appear.
528
For some Secondary Licenses, a Licensee might try to avoid obtaining approvals and instead
represent and warrant that the use of the license will not disparage the Licensor and that the use of
any of the Licensor’s IP will be treated equally to that of other similar secondary licensors.
209 Mastering The Game
certain circumstances that may require immediate responses to prevent losing
an opportunity, perhaps in a sales or marketing situation (e.g., showcasing a
game on the app store).
The Licensor might require additional time because of the number of parties
involved in the approval process. A movie license, for example, may need
approval from the people working on the video game that might be very different
from the approval by the people associated with the movie which is the subject
of the license. Unfortunately, this puts an extra burden on the Licensee and,
given that there is potential for a negative impact on the Licensee, it is critical to
try to lock in very specific time frames for approval. In addition, a Licensee should
consider adding language to the agreement that places an obligation on the
Licensor to obtain timely approvals from third parties involved with the licensed
property (i.e., approvals or reasons for rejection must be done within the agreed-
upon approval period).
Although it might be difficult to obtain, a Licensee should try to get a concession
from the Licensor that if the Licensor fails to respond to an approval inquiry within
the allocated time period, the materials are deemed to have been approved.
529
Otherwise, the Licensee could be waiting for an excessive period of time, which
would create uncertainty in moving forward with game development and the
release of the video game, which would not be in the best interests for either
party. Furthermore, the Licensor will require that, following approval, the
Licensee cannot depart from the approved item without first obtaining additional
approval from the Licensor.
In a perfect scenario, materials are submitted to the Licensor for approval and
the Licensor approves the materials within the allocated time period. In the event
that the materials are rejected, then the Licensor must provide clear and precise
written explanations of the reasons behind the rejection so that approvals can
later be obtained based on the Licensor’s feedback. It is in the interests of both
parties for the Licensor to be involved early on in the development process, so
that they understand the direction of the game and how the license will be
incorporated into it, in order to avoid any surprises that could lead to delays and
increased costs. It is most likely that the Licensor will already be aware of the
game’s direction, as this would most likely have been part of the initial
discussions to determine whether to form a relationship.
One way in which the Licensee can avoid potential approval-related delays is by
including language in the agreement stating that once materials have been
approved, they cannot later be disapproved during a subsequent submission
provided they have not been altered. This is significant since the Licensee will
be relying on the previous approved milestones, and an unexpected rejection of
a milestone involving previously approved materials whether in the game or as
part of marketing materials will result in potential delays and increased costs for
the Licensee. A Licensee must receive in writing all approvals from the Licensor
so there can be no disagreements in the future. Also, materials approved for one
529
Many agreements will include language indicating that if the Licensor fails to respond within the
approval period, then the submission is deemed not have been approved. The Licensee should try
to delete this language or at the very least include language that provides for some additional
response by the Licensor. For example, if the Licensor fails to respond with reasons for its
disapproval within seven days of a subsequent follow-up by the Licensee, then the submission is
deemed to have been approved.
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210
territory should be deemed accepted for other territories unless material changes
have been made.
The Licensor might add language to the agreement that states that their approval
of a submission does not include approval of any third-party rights and that even
though the Licensor may approve materials other than the materials created by
the Licensor, in the event of any legal action the Licensee will still be required to
indemnify the Licensor. Subject to approval rights regarding the game and
marketing materials, the Licensee should have the right in its sole, reasonable,
discretion to determine the logistical aspects associated with the distribution,
marketing and sales of the game, including the channels of distribution and
pricing of the games and any additional content.
WAYS THAT A LICENSEE CAN REDUCE ITS RISKS REGARDING
APPROVALS:
• Deeming materials to be approved in the event that they have not
been approved by the Licensor within a certain time period.
• Applying different approval time periods depending on the materials
submitted and the possibility of reducing time periods subject to
mutual agreement in the event that an opportunity requires a faster
turnaround.
• Ensuring that previously accepted materials cannot be rejected at a
later date unless materially altered.
• Ensuring that materials accepted for one territory do not need to be
approved again for another territory unless material revisions have
been made to the previously submitted items.
• Requiring the Licensor to designate a representative responsible for
submissions and approvals.
4.3.13 – Termination Rights
In certain situations, a party will have the right to terminate the agreement
because of the failure of one party to fulfill and/or perform its obligations.
Typically, the non-breaching party will be allowed to terminate the agreement in
the event of a material breach of the agreement if the breaching party fails to
cure the breach within a certain period of time following written notification
(known as the ‘cure period’). Most licensing agreements will tend to have more
scenarios allowing the Licensor to terminate the deal because of the greater
obligations imposed upon the Licensee.
211 Mastering The Game
The primary material breaches for the Licensee, which would also include any of
their sub-licensees,
530
might include: (i) breach of representations or warranties
by the Licensee; (ii) failure to pay any monies owed to Licensor when due,
whether royalties or advances; (iii) failure to fulfill any marketing commitment;
(iv) failure to obtain approvals; (v) failure to issue statements; (vi) continuing
breaches even if cured; (vii) failure to maintain proper insurance; and (viii) failure
to complete or release the game which can include failure to be certified by a
platform holder within a certain period of time. However, a Licensee should try to
avoid committing to a specific release date for the game, if possible, because
problems could occur in development (some which may be caused by the
Licensor). The agreement should also include language indicating that the
Licensor could be in breach of the agreement, which could be caused by breach
of their representations or warranties or failure to perform any of its obligations,
including timely approvals.
In order for a party to claim breach, the non-breaching party should first provide
written notice of the material breach and if the accused breaching party fails to
cure within the cure period, then that party will be deemed to be in breach. Cure
periods may vary depending on the type of breach. Failure to pay an advance
may have a 10-day cure period, while a breach involving a representation and
warranty may have a 30-day cure period. Furthermore, cure periods may be
based on business days or calendar days. In some situations, because of the
type of breach, there may be no possibility of a cure period. For example, if the
Licensee becomes insolvent, or is unable to pay its debts when due, or makes
an assignment for the benefit of creditors, or files a petition in bankruptcy, then
the agreement would typically terminate immediately (provided this is possible
under applicable law, which may not necessarily be the case outside of the US).
However, what happens next will depend on applicable law and the bankruptcy
court.
The termination language in the agreement will also include the remedies that
may be sought by the non-breaching party. Clearly, termination for breach can
have significant ramifications for both parties. Therefore, it should not be taken
lightly and should be avoided, although that is not always possible depending on
the severity of the breach. For example, even the non-breaching party will have
to commit time and money to dealing with the breach and missed opportunities
if a game is not released.
For the Licensee, depending on the type of material breach and when it occurs,
the Licensee may have to:
1. Stop development or stop the distribution and exploitation of the game;
2. Accelerate payments upon termination if any advances or guarantees
are owed;
3. Provide a final royalty report for sales of the game;
4. Return all materials delivered by the Licensor and created by the
Licensee, except for any materials that they retained rights to including
source code and development tools; and
530
Licensees will be liable for any breaches by their sub-licensees and will also be required to
indemnify the Licensor against any third-party claims arising from such a breach.
Mastering The Game
212
5. Either return any remaining inventory or destroy the physical units of the
game and provide proof of destruction if there is a retail version.
The Licensor may also seek additional damages such as lost profits depending
on agreed-upon limits on liability due to termination for material breach, as well
as the right to injunctive relief.
Under certain conditions, such as an infringement involving a copyright or
trademark, the Licensor might seek a preliminary injunction against the Licensee.
This could result in the immediate termination of any exploitation associated with
the game subject to a court order.
531
This can happen if the Licensee releases
the game without the Licensor’s final approval, or if the Licensee sells the game
beyond the term or in an unauthorized territory. If an injunction is granted, the
Licensee might be required to immediately remove all games from the market in
the territory in which the injunction was granted. This is a difficult and costly
requirement, especially if a retail product is involved with which the Licensee will
have to comply in order to avoid further damages. Because injunctive relief is an
extreme remedy and, in most jurisdictions, requires a number of preconditions in
order for it to be granted by a court, contracts will typically include language
whereby the parties acknowledge certain facts, making it easier for a party to
obtain injunctive relief.
The agreement will usually include language indicating that: (i) a Licensor has
the right to seek injunctive relief (this would be true in many jurisdictions even
without the contractual language); and (ii) the Licensee acknowledges that in
certain situations in which injunctive relief is sought, a material breach would
result in irreparable or immediate harm to the Licensor, and that monetary
damages would not remedy the damage. By including such language in the
agreement, the Licensor will find it easier to prove to the court one of the main
conditions for granting an injunction since the Licensee will have acknowledged
that the material breach has caused irreparable harm. In addition to showing
irreparable harm, in most jurisdictions the Licensor will also have to prove to the
court that there is a likelihood of success on the merits.
If the Licensor materially breaches the agreement depending on when the
breach occurs, the Licensee should seek a return of any advances or royalties
paid (even though doing so may be difficult). In the case of a Primary License,
they should also seek a return of development costs if the game would not have
been developed if not for the underlying licensed property. It is most likely that
disputes involving the return of revenue will result in litigation and be determined
by a court or arbitrator depending on how the parties have elected to settle
disagreements.
A major clause associated with termination for a material breach and remedies
is a limitation of liability. This limitation is typically tied to the type of damages
that may be awarded and the amount that can be claimed by the non-breaching
party. For example, a party may not claim damages that are consequential (i.e.,
loss profits), special, incidental, indirect, or punitive (i.e., damages awarded as
punishment for the actions of the breaching party to serve as a deterrent for
531
In the US, the party seeking injunctive relief must show that they will suffer irreparable harm if
equitable relief is denied. For cases in which money damages are adequate to remedy the problem,
injunctive relief will not be granted. For an example of injunctive relief dealing with confidential
information. see Delphine Software International, S.A.R.L. v. Electronic Arts Inc., 99 Civ. 4454 (AGS),
1999 U.S. Dist. LEXIS 12629, S.D.N.Y. August 18, 1999.
213 Mastering The Game
future activities). The parties may also set limits on the total amount of damages,
which is generally tied to the amount of revenue either received by or paid out
by the breaching party over a period of time. The Licensor most likely will require
that the amount of damages it would be liable for in the event of a breach would
be capped by the amount of money it has received for a specific period
(e.g.,revenues received during the preceding year from the alleged breach). A
Licensee’s exposure would be capped by the amount of money it paid, whether
as advances or royalties, to the Licensor, and possible monies owed (i.e.,
guarantees). Like the Licensor, the Licensee will want to limit this to a certain
time frame. Otherwise, the damage limitation could include the guarantee, which
may or may not have been met at the time of the breach.
If there is a cap (and typically there is), the amount needs to be carefully
considered depending on the type of damages that a party may be exposed to
or could be awarded. For example, a Licensee may suffer significantly more
monetary damage than the amount of money that it paid to the Licensor prior to
Licensor’s breach, especially if development costs are factored into the
damages.
The limitation of liability should not be absolute, and the parties will carve out
exceptions to the limits, although they may vary. In certain jurisdictions, limitation
of liability clauses require additional formalities to be valid and claims such as
fraud and gross negligence would not be limited. In most agreements, the
limitation will not cover breaches of the confidentiality (including data leaks)
provision or either party’s obligations under the indemnification clause. A breach
of confidentiality could reveal valuable trade secrets whose value may exceed
any potential compensation. In addition, a non-breaching party does not want to
be responsible for possible damages for any awards or settlements under the
indemnification provision that exceeds any cap under the limitation of liability.
The parties could also agree to a set damage award in the event of a breach by
one of the parties, referred to as a liquidation clause. This liquidated damage
clause would set a fixed amount of money for any damages incurred by the non-
breaching party for a particular type of breach. However, the amount must be a
fair amount and cannot serve as a penalty against the breaching party (since
under the law of many countries, penalties are liable to be challenged and can
be held as unenforceable if they are clearly excessive). However, if a liquidated
damage clause exists that would be triggered by a particular event, injunctive
relief would be inappropriate in that situation since that parties have determined
that a monetary amount could cover the damage incurred by the non-breaching
party. Both parties need to be careful when reviewing the language relating to
the limitation of liability. Often, drafters (although more common with Licensors)
may only apply limitations to the party they represent, or if there is reciprocal
language, it may only apply to certain situations.
In addition to termination for material breach, the parties may agree to allow the
Licensee to terminate for convenience. In this scenario, the Licensee decides to
terminate the agreement even though no party has breached the agreement.
Instead, a Licensee may feel that the game they are working on is not up to the
standards they had hoped for, or that the economics do not justify the continuing
development or release the game. By terminating the agreement, the Licensee
is reducing their losses which can include development, manufacturing,
marketing, and future licensing fees, whether in additional guarantees and/or
royalties. If the Licensor were to allow for a termination for convenience, thereby
Mastering The Game
214
agreeing to possibly waive some of the consideration that may be owed to them
at a later date, then the Licensor would need to negotiate a final fee which would
most likely be less than the amount required under the terms of the agreement.
4.3.14 – Expiration Of The Agreement
Language will be included in the agreement covering each party’s obligations
upon the expiration of the term. Unlike termination of the agreement, in this
situation the term of the agreement has expired and neither party has breached
the agreement. Since retail games may still be on the market, the Licensee will
want to include language in the agreement which allows for the Licensee, on a
non-exclusive basis (even if the parties have entered into an exclusive
relationship), to sell off the remaining retail product inventory in any of the
distribution channels permitted under the terms of the agreement. This right,
which will be at the sole discretion of the Licensor, will generally be granted by
the Licensor provided that the Licensee: (i) is not in breach of the agreement; (ii)
accounts to and pays any royalties owed to Licensor from sales during the sell-
off period, although typically these sales would not be applied to any shortfall of
the guarantee; and (iii) does not manufacture any new games during the sell-off
period (only applicable for retail sales). The sell-off period may vary depending
on the platform and the length of the term. Typically, sell-off periods will range
from 60 to 90 days for retail products, but as terms get longer the sell-off period
may do the same. Nonetheless, it most likely that the sell-off period would be
shorter for other forms of distribution (i.e., digital) since the removal of games
can be done in a shorter period of time.
4.3.15 – Miscellaneous Provisions
Finally, the agreement will also contain common terms (see Chapter 12) that
appear in all agreements (referred to as ‘boilerplate’ provisions), such as
confidentiality, how disputes will be resolved, law to apply, where a legal
proceeding between the parties can be heard, force majeure,
532
notices, sub-
licensing and assignment.
533
Although the language looks similar in many
agreements, it is very important to review it carefully to ensure that nothing
unexpected is included in the section.
532
Some Licensees, including a few in the video game industry, have invoked the force majeure
clause to terminate deals as a result of the coronavirus pandemic. See Section 12.8 for a discussion
on force majeure.
533
The right to sub-license may vary by jurisdiction, but it is typically permitted by courts in the US
even in the absence of any related language in an agreement. As a result, it is common to see
specific language restricting the Licensee’s right to sub-license without the prior approval of the
Licensor. Licensees may need to use sub-licensees to help with distribution in certain countries
where the Licensee may not have connections and expertise. Typically, a Licensor will approve the
use of sub-licensees provided that the financial arrangement does not reduce the Licensor’s share
and that they honor the contractual obligations and restrictions agreed to by the Licensee.
Licensors will prohibit the Licensee's right to assign the agreement without their prior written approval,
which will typically be at the Licensor's sole discretion. The reasoning behind this is that the Licensor
entered into the relationship with the Licensee for a number of reasons, including their belief that the
developer has the talent and resources to develop and distribute a high-quality game and therefore
wants to continue working with them. However, in some situations, a Licensor may approve an
assignment, but it may be subject to some additional concessions. At the very least, the assignee
will need to fulfill the original contractual obligations. A Licensor might also require additional financial
benefits, including an increase in the guarantee or the royalties, or both.
215 Mastering The Game
4.4 – Music
Music
534
has always been part of the video game landscape, evolving from the
8-bit jingle of Super Mario Bros. to today’s fully orchestrated versions. With the
continuing improvements in platform and distribution technology, music has
taken on unprecedented significance in how it is used in games, and the way in
which games are developed and played.
535
Music has not only enhanced the gaming experience; it has also created a new
format to distribute music, providing additional revenue and exposure for artists,
songwriters, composers, music publishers and music recording labels, ranging
from the introduction of new groups and songs to in-game concerts.
Many games have soundtracks of cinematic quality with full orchestras. The
music for several games has been composed by famous film composers,
536
and
many video game composers have become just as famous and have
subsequently worked on films.
537
Music from games has also spawned live
concert events across the world including some at iconic venues such as the
Royal Albert Hall in London and The Hollywood Bowl in California.
538
During the
opening ceremonies of the Tokyo Summer Olympics, athletes heard music from
video games including Final Fantasy XIII, the original Sonic the Hedgehog,
Monster Hunter, Kingdom Hearts, and Chrono Trigger.
539
The type of music that will be used in a game will depend on a number of factors
including the budget, the developer’s vision, and the intended use of each piece
of music.
540
Music for games primarily involves pre-existing music that is licensed
and/or original scored music whereby a composer is either hired to provide work-
for-hire services, or licenses scored music to the developer.
534
Every piece of music consists of two separate copyrightable interests: (i) the composition (which
includes the lyrics, notes, orchestrations, and arrangements), and (ii) the master sound recording
(which is the actual recorded version of a particular composition). Unless otherwise noted, the use
of the term ‘music’ in this section will denote both the composition and the master sound recording.
535
Throughout the 1970s and up until the mid-1990s, there were memory and disc space limitations
which severely limited the amount of music in games. With the introduction in 1994 of the CD-ROM
game discs for the Sega Saturn and Sony PlayStation in Japan (which allowed for more music and
provided CD audio quality), music, whether composed or licensed, came to play a more important
role in game development.
536
Hans Zimmer, who has composed over 100 film scores including Rain Man, The Lion King,
Gladiator, The Dark Knight Rises and Dunkirk has scored multiple games, including Modern Warfare
2. “Hans Zimmer Discography”, wikipedia.org. Bear McCreary, who has composed numerous
television shows, including The Walking Dead and Outlander, also composed the God of War video
game soundtrack. Ramin Djawadi composed the scores for Iron Man, Game of Thrones, and the
video games Medal of Honor: Warfighter and Gears of War 4. Danny Elfman, the composer for many
of Tim Burton’s films and former member of the musical group Oingo Boingo, has also composed
music for games. “Danny Elfman is Well Known For His Work as a Film Composer and Front Man of
the Rock Band Oingo Boingo”, giantbomb.com.
537
See Stuart, Keith, “‘Mozart Would Have Made Video Game Music’: Composer Eímear Noone on
a Winning Art Form”, theguardian.com, October 22, 2019. For a history of music in games including
a list of some of the top composers, see Aska, Alyssa, “Introduction to the Study of Video Game
Music”, lulu.com, 2nd ed., 2017.
538
Halder, Arwa, “Why Video Game Concerts Are a Growing Phenomenon”, ft.com, September 29,
2019.
539
Park, Gene, “The Music for the Tokyo Olympics Opening Ceremonies? It Comes from Video
Games”, washingtonpost.com, July 23, 2021. A number of radio stations dedicated to video game
music have joined the airwaves and the music service Spotify has a separate music gaming category
which includes original compositions and soundtracks from games. Some songs have been
accessed more than 25 million times.
540
Once the script for the game is finalized, the developers will typically go through what is called a
spotting session to analyze the script to determine which scenes require music, what kind of music
works where, and whether the scenes should be scored or whether licensed music should be
sourced.
Mastering The Game
216
4.4.1 – Hiring A Composer
Typically, a composer is hired by a developer to either write or modify a score
(i.e., to compose, orchestrate and arrange the composition) and to deliver a
finished master recording of the score.
If the composer is hired under a work-
for-hire contract in the US, it is the developer and not the composer who owns
all of the music created by the composer (which may include the composition
and/or the master recording).
541
This allows the developer to own the copyright
to the music and provides them with the maximum rights in terms of its
exploitation. The music could then be used for any purposes including for
marketing materials, online, and even in future games without having to obtain
any additional rights. In contrast, a hired composer that retains ownership issues
a license that imposes limitations on how the developer can use the music.
As is the case with any agreement, the terms of a composer agreement are
subject to negotiation and primarily depend on the bargaining power of the two
parties and on whether the composition/master sound recording is produced as
work for hire or is licensed. In any event, the composer should try to negotiate
reciprocal language covering representations and warranties
542
where
applicable, indemnification, limitation of liability, and confidentiality. The main
issues to be addressed while negotiating a composer agreement typically include
the following:
1. Services to be provided, including how much music is to be delivered,
which will be set out in a milestone schedule. It is possible that a
developer will request slight revisions or additional music after the
delivery of the final milestone. Depending on the amount of work
requested, this may require further compensation, especially if the
revision is the result of a developer's mistake. Furthermore, the parties
will need to negotiate who will be responsible for hiring and
compensating any additional musicians that may assist the composer in
creating a master recording, such as an orchestra.
2. Ownership of the music and whether the composition/master sound
recording is produced as work for hire (the most preferable for the
developer), or is assigned or licensed.
543
If the composer's work is not
work for hire, then the parties need to discuss the ways in which the
music can be exploited in other formats besides the game and
downloadable content, such as soundtracks and digital music services.
If the composer retains ownership of the composition/master sound
recording then the parties need to negotiate which rights will be granted
by the composer. These include permitted uses, such as public
performance rights involving the composition, territory, term, exclusivity
restrictions, and the media (e.g., platforms, games, marketing materials
541
A developer could consider hiring a composer to create original songs for a game. This scenario
is becoming more popular with AAA developers/publishers but can be a complicated and time-
consuming process when dealing with major artists because of the various parties involved as well
as ownership and rights issues, including exploiting the music outside of the game.
542
As discussed throughout the book, a party may try to limit their obligations under the
representations and warranties by including additional language such as ‘best of knowledge’
qualifiers or limitations on territory or term.
543
If a composer is hiring an orchestra or any other musician then they must enter into separate
agreements with these musicians to ensure that the proper rights are acquired and can be assigned
to the developer if the developer is to own all of the rights.
217 Mastering The Game
and social media) in which the composition/master sound recording can
be used.
3. Compensation, which is usually a fixed fee, although composers might
also try to negotiate for royalties and even a bonus,
544
especially if they
are well known. The amount of compensation will generally depend on:
(i) the popularity of the composer and compensation received in the past
for similar work and rights granted; (ii) the ownership and exploitation
rights; (iii) the amount of minutes of music to be delivered; (iv) the
budget, and whether or not the composer will be responsible for covering
the costs of additional musicians and singers as well as recording and
studios costs, etc.; and (v) whether or not royalties are being paid. If
royalties are being paid then the initial compensation tends to be lower.
4. The payment schedule, typically paid in installments based on the
amount of music delivered other than a payment made upon execution
of the agreement or commencement of services. If royalties or a bonus
payment are part of the agreement, then the parties will need to
determine how royalties and/or a bonus are calculated. Any royalty or
bonus obligation would also require the developer to provide statements
within an agreed-upon time frame and allow the composer the right to
audit.
5. The delivery schedule, including what the composer is required to
deliver, and the approval process involving submissions, which will
include what happens if a deliverable is rejected and the reasons for
rejection.
6. Representations and warranties including that the music is original; that
its permitted use by the developer will not violate the rights of third
parties; and that all rights have been properly obtained from anyone who
may have contributed to the music (i.e., musicians, engineers, etc.).
7. Indemnification including what would be covered and how the process
would work.
8. Grounds for termination including the right for the developer to terminate
for convenience,
545
the right to cure, and recourse.
9. Credit which would cover the wording, where the credit would appear,
size, length of time in the game and, if applicable, how credits would be
handled for other musicians hired by the composer or developer. All
other credit issues would be handled at the discretion of the developer
and any credit would be subject to the developer using the music.
Developers will also include language on how a problem would be
resolved if an error was made with a credit (e.g., no injunctive relief).
544
A bonus payment may be a good compromise if there is a difference between the two parties in
terms of compensation. A bonus payment is typically triggered on the basis of the game achieving
certain revenues. A composer will also want to negotiate additional compensation if the music is
exploited on a soundtrack or licensed to a third party (e.g., if it used in a commercial or on a digital
music service).
545
If the developer is to terminate the agreement for convenience, the composer must make sure
they are compensated for any work that has been accepted by the developer and for any deliverables
being worked on, which might include full payment for the next milestone or a prorated payment
based on the amount of work done on the next milestone. It is also possible for a composer to
negotiate an additional payment representing a ‘kill fee’. The parties would also need to discuss who
would own the music, which might be different from what was originally negotiated in the agreement.
Mastering The Game
218
10. The developer’s right to use the composer’s name and likeness in
marketing, publicity, and packaging materials, which may be subject to
the composer’s approval.
11. Confidentiality.
12. The right to assign, which will only be permitted for the developer.
13. The fact that there is no obligation to use the music or parts thereof,
since the developer may not release the game or may only want to use
some of the music.
546
14. Limitations on composer’s remedies. For example, the composer can
only seek an action for direct damages rather than injunctive relief. In
addition, a developer will typically impose a cap on damages tied to an
amount received by the composer during a period of time.
15. Boilerplate language including how and where disputes get settled and
the law that would be applied.
4.4.2 – Licensing Music: Master And Synchronization Rights
Developers may also elect to license pre-existing compositions and master
sound recordings, which might include a popular song or ‘library music’
547
for use
in their game,
548
or downloadable content or marketing materials, including
websites. When licensing music,
549
in most situations the developer needs to
obtain both synchronization and master use rights to the music (i.e., the
composition and the master sound recordings).
550
Synchronization rights
551
allow for the composition to be synched to the game or
any marketing materials. Synchronization rights are usually acquired from the
composition’s writer or music publisher and often include rights from several
writers and publishers, as compositions usually have split ownership.
552
546
Provided that the composer has met their obligations under the agreement they should receive
their compensation whether the music is used or not.
547
Music houses will provide the synchronization and master rights to their music, which can usually
be licensed for any use.
548
Licensed music will generally be synched to the visual elements in the game but it can also be
included in game radio stations whereby a player can select from a host of songs to play covering a
number of different genres. This feature most notably appears in driving games such as the Grand
Theft Auto (which is credited with starting the trend and included licensed and original compositions)
and Forza Horizon franchises, but has also appeared in a number of other genre type games
including the Fallout games, Mafia III, and Just Cause. Yarwood, Jack, “Radio Ga Ga: An Exploration
of Video Game Radio Stations”, egmnow.com, December 23, 2019.
549
When deciding whether to use previously recorded music, a developer needs to determine: (i)
whether the music needs to be licensed (e.g., it might be in the public domain); (ii) what type of
licenses are needed; and (iii) who owns the copyrights to the music, which can include multiple
copyright owners such as the owners of the compositions and master recordings.
550
Failure to obtain the necessary rights could lead to a claim of copyright infringement which, among
other things, could lead to a game being removed from distribution and damages against the
developer.
551
As part of the synchronization rights the developer would also obtain public performance rights,
which are required in the US if the music is performed publicly.
552
For many licensees, one of the biggest obstacles in licensing music is finding out who owns the
copyrights to the compositions and master recordings. Compositions are often owned by a number
of authors and ownership can change, which sometimes makes it a challenge to find the right parties
to negotiate the rights to a song. Unfortunately, there is no universal database with information
covering copyright ownership. However, a good place to start in finding rights owners for a
composition are the websites for the American Society of Composers, Authors and Publishers
(ASCAP) and Broadcast Music Inc. (BMI), the two major music performing rights organizations in the
219 Mastering The Game
The master use rights allow for the original master recording of a particular artist
to be used in the game or in any marketing materials. These rights are either
owned by the recording company (i.e., the record label) or held onto by the artist.
In some situations, it is possible to acquire just the synchronization rights to the
composition and the developer would create their own master recording of the
music by hiring artists to perform the composition. This may or may not be
cheaper than acquiring the master use rights, although the original recording will
usually bring additional value since it will be better recognized. In most situations,
the owner of the synchronization rights (which could be multiple parties) and
master use rights will be different companies (e.g., the publisher(s) and the
record label), and therefore two or more negotiations will need to occur in order
to obtain the music.
For any developer, one of the major factors involving licensed music will be the
costs associated with the license, which will vary depending on the intended use
of the music, the term, and the forms of exploitation by the developer. The
developer will want to obtain the broadest rights possible, but with the request
for more rights comes a higher price tag.
More specifically, some of the factors that might determine the costs of a licensed
song include: (i) the popularity of the artist and song; (ii) the total amount of the
song used in a game (e.g., 30 seconds or the entire song); (iii) how the song will
be used and how many times the song will be used in the game; (iv) previous
rates paid for the song; (v) the length of the term,
553
which has become more
complex with downloadable content extending the length of games and
competitive online multiplayer games having active communities even decades
after their launch; (vi) whether the song can be included in a game and be
broadcast as part of a live or on-demand streaming service; and (vii) whether the
song will be used in marketing materials and what type of materials.
A song used in an advertisement (whether on television, the radio, online, or as
part of other forms of marketing) will increase costs substantially if also used in
a game. In some situations, a developer might license the rights to a song for
marketing materials, such as a trailer or advertisement, which may or may not
be part of the game.
554
Furthermore, publishers typically seek a most-favored-
nation clause whereby the fees paid for a licensed song from an established
US. Each has its own database providing copyright information on millions of songs. See
www.repertoire.bmi.com and www.ascap.com/ace. For British songwriters, see
www.prsformusic.com/works/searching-works. The site https://www.prsformusic.com/our-global-
network/partners links to performing rights organizations websites in over 80 countries, some of
which have song repertoires on their websites.
553
Previously, the length of a term was primarily based on the projected shelf life of a boxed product
of a game. Typically, a developer would seek a short term of about two to three years for music in
order to keep costs down. However, with downloadable content extending the life of games,
determining a term has become an important point in an agreement. Developers should at the very
least try to negotiate rights to an option that would allow them to extend the term for additional years
at agreed-upon prices, depending on the use of the music. One of the problems connected to bringing
older games back into distribution is that the licensed rights to the music have probably expired and
therefore the developer would need to contact the owners of the music, which might be difficult, and
negotiate for the rights. Otherwise, the developer would need to remove the licensed music from the
game if they decide to distribute it.
554
Other factors that may lower the overall costs for a developer when negotiating with a publisher
include: (i) the number of songs licensed by the developer, whereby the more songs licensed results
in a lower cost for each song, and (ii) the developer decides to feature a song from an upcoming
group to help their promotion in return for a reduced fee. Furthermore, music owners may be more
flexible on pricing since the worldwide reach of games can provide tremendous publicity value for an
artist, and the ability to reach potential consumers unachievable in other ways.
Mastering The Game
220
artist must be at least as great as the fee paid for the master rights. Some
publishers may even request parity with other licensed songs in the game.
The challenge for the developer is determining which rights they should pay for
when signing the agreement, as failing to secure rights at that time may increase
their costs at a later date. Pre-negotiating optional uses is a useful tactic, but the
developer needs to consider whether paying more money for rights upfront (or
specifying an allocated cost) will be better, even though there may be uncertainty
as to whether certain rights will eventually be needed.
Typically, the owners of licensed music will provide their template agreements
for synchronization and/or master use licenses. The main issues in the
agreement will include:
1. Rights granted, including the ways and media in which the music can be
used in context with the game (e.g., in-game, downloadable content,
marketing and promotional materials which may be subject to additional
fees depending on their use (e.g., television, websites, social media),
platforms, and distribution formats, which may be specific or include any
gaming device or means of distribution, including those that are
introduced to the market during the term, and whether the rights are
exclusive or non-exclusive.
2. Consideration and payment schedule. Typically, a developer will pay a
flat fee for the rights, although for downloadable content it may be based
on a percentage of revenue received for a song if that song can be
downloaded on its own.
555
3. The territory (which needs to be worldwide if the developer is seeking
worldwide distribution) and term. The term can vary from a set number
of years (with a possible option to extend) to the length of the game’s
distribution; alternatively, it can be perpetual. If a term is limited by a
number of years and a retail version is being sold then the music
licensors will allow for a sell-off period of remaining inventory for a limited
time, depending on the length of the term and provided that certain
preconditions are met. However, this would be a rare situation since the
game would most likely be distributed digitally as well.
4. Music licensor’s representations, warranties, and indemnification, which
can be extremely limited depending on the publisher and record label.
556
5. Royalties, if applicable.
557
555
Brabec, Jeffrey, and Brabec, Todd, Music, Money & Success: The Insider’s Guide To Making
Money In The Music Business, 8th ed., , Schirmer Trade Books, 2018, p. 453.
556
Record labels and publishers generally limit their representations and warranties and may only
grant rights on a quitclaim or ‘as-is’ basis, especially for older music, thereby shifting the risk to the
developer of the music. As a result, developers alternatively should try to obtain a representation that
there has been no litigation regarding a particular song.
557
Agreements that include royalty payments may provide a payment on each unit sold or
downloaded and may also require a most-favored clause with other songs. One issue that needs to
be considered is how royalties would be recognized for music that is part of a subscription service or
is bundled with other songs as part of downloadable content. Developers should generally avoid
paying royalties and instead insist on a flat fee for the rights, unless paying out royalties would reduce
the upfront costs to obtain the rights and be economically advantageous. If royalties are to be paid
then the developer should consider capping payments at a certain amount. If the developer agrees
to pay royalties, then they will need to issue statements and may also be subject to an audit.
221 Mastering The Game
6. Approvals involving the use of the music from where it may appear to
revisions made by the developer and/or game player. The developer will
want to have rights to edit for any objectionable lyrics, rating purposes,
content restrictions, and maybe to fit a particular scene in the game.
7. Developer’s representations and warranties,
558
and indemnification.
559
8. Ownership issues.
9. Grounds for breach and termination.
10. Delivery.
11. Rights to use the name of the artist or songwriter as part of packaging,
marketing and any other materials.
12. Limitations on the use of the music including making any changes to the
music, which may even involve a player being allowed to remix songs or
using the name of the song as the title to a game.
13. Limitations on liability whereby the music licensors will usually limit it to
the amount of money received for a license.
14. Credit and copyright notices.
15. Boilerplate language and issues dealing with how and where disputes
get resolved, similar to other agreements discussed throughout the
book.
4.4.3 – Music Libraries
A third alternative regarding music is licensing the use of music from stock music
libraries, which provides music at reduced rates while usually maintaining very
high quality.
560
In this situation, the stock music house provides both the master
use and synchronization rights for music and tends to grant very broad rights for
the music. Many developers will include stock music in their games in
combination with licensed songs if music has not been composed for a game.
This alternative can be very useful, especially for developers working on low-
budget games.
Alternatively, the parties might consider a flat fee and pay additional fees in the event that the game
reaches certain benchmarks such as sales numbers or revenue numbers. For instance, a bonus of
$5,000 will be paid to the music rights holder if the game sells 500,000 units at the original suggested
retail price (this option would not be applicable for free-to-play games) or generates an agreed-upon
dollar amount in revenue which may be more applicable for free-to-play mobile games. If the parties
elect to incorporate a bonus payment based on sales of the game, it is important the parties decide
the pricing for games that will qualify as part of the bonus numbers. Selling games at 50% off the
initial suggested wholesale price might not trigger a bonus payment. The developer will also need to
be aware of any possible music fees other than fees associated with obtaining the master and
synchronization fees. For example, are there any union fees that might be owed to musicians or
reuse or residual fees? This might be the case when an original score is being produced using a live
orchestra in the US or in some cases using an existing orchestral piece of music from a record label
that utilized a live orchestra.
558
The developer will often need to represent and warrant that the game and any marketing materials
incorporating the music do not infringe on the rights of third parties and will also need to indemnify
the music licensor for any breach of such representations and warranties.
559
In addition to the language discussed in this chapter, the indemnity will also include language
indemnifying the music licensors against any revisions, if allowed, made by the developer or any
players to the original song.
560
Some of the music library companies in the US include Associated Production Music (APM),
Manhattan Production Music, Megatrax, Universal Production Music (UPM) formerly known as Killer
Tracks, and Opus 1.
Mastering The Game
222
4.4.4 – Public Domain Music
A fourth alternative is using public domain compositions, which allows a
developer to record their own version of a public domain composition. Public
domain songs can be used by anyone to record since the copyright to the song
has either expired or was never copyrighted. However, there are many risks and
limitations with the use of public domain songs. For example, the fact that a
composition is in the public domain does not allow a developer to use a third-
party recording of a public domain arrangement of the public domain composition
unless the developer obtains a master recording license from the owner of that
sound recording. In addition, what might be in the public domain in the United
States may still be protected under copyright in other countries, and therefore
the developer must do the appropriate research to ensure that they are not
infringing on the rights of the copyright owner.
561
4.4.5 – New Opportunities: Virtual Concerts And Live Performances
Today, the popularity of music in games has grown to not only include scores
from famous composers and soundtracks containing songs from popular groups,
but also in-game concerts through the use of avatars. Although the idea of
concerts in games first became popular early in the decade,
562
the potential
audience reach throughout the world has grown substantially, along with the
economic benefits. Today, some in-game concerts have been incredibly
successful, generating huge audiences; in these scenarios, one appearance
alone can outdraw audiences equivalent to an entire year of touring by an artist.
DJ performer Marshmello played an in-game virtual concert in Fortnite Battle
Royale which, according to the developer Epic Games, attracted an audience of
over 10 million people.
563
Travis Scott’s 10-minute virtual concert, which took
place in the same game at a later date, was even more impressive. According to
Epic Games, 27.7 million unique viewers and 45.8 total viewers watched five
shows which included the initial show and four replays spread over three days.
564
However, those numbers were later surpassed by Ariana Grande’s Fortnite
concert, which drew an incredible 78 million viewers.
565
With huge numbers comes an opportunity to generate additional revenue and
worldwide notoriety for the publisher, the developer and the musician. For most
musicians who make most of their revenue from touring (other revenue is
561
Fishman, Stephen, The Public Domain: How To Find And Use Copyright-Free Writings, Music,
Art And More, 6th ed., Nolo, 2012, pp. 87-126, pp. 297-314. See also “Public Domain Resources”,
copyrightfree.blogspot.com, January 11, 2008.
562
According to Game Industry Biz, virtual concerts became popularized with Second Life in 2003.
Ombler, Mat, “Are video games the future of live music”, gameindustry.biz, June 10, 2020.
563
The audience was even larger if you include other outlets which broadcasted the concert. Webster,
Andrew, “Fortnite’s Marshmello concert was the game’s biggest event ever”, theverge.com, February
21, 2019. The concert can also be accessed on YouTube.
564
The initial performance was seen by over 12 million people and can now be accessed on YouTube.
Hogan, Marc, “Where Can Virtual Concerts Go After Travis Scott’s Fortnite Extravaganza?”,
pitchfork.com, May 5, 2020. Coverage of the concert was reported by over 9,000 media outlets.
Ombler, Mat, “Are Video Games the Future of Live Music?”, gamesindustry.biz, June 10, 2020.
Fortnite wasn’t the only game in town. Lil Nas X’s virtual performances across four shows in Roblox
drew 33 million. The music group American Football also played a recorded concert in Minecraft.
Andrews, Travis M., “Thousands gathered Saturday for a music festival. Don’t worry: It was in
Minecraft”, washingtonpost.com, April 15, 2020.
565
Wickes, Jade, “Inside Ariana Grande’s Fortnite virtual concert”, theface.com, August 9, 2021; and
White, Abbey, “How Epic Games Built “Fortnite” Rift Tour for Gamers and Ariana Grande Fans”,
hollywoodreporter.com, August 7, 2021. The concert can also be accessed on YouTube.
223 Mastering The Game
primarily generated from music publishing, merchandise, and streaming), virtual
concerts can provide a valuable alternative, especially with the uncertainty of live
concerts as a result of the COVID-19. Virtual concerts help to promote the
musicians in a way that was similar in some ways to the functions of MTV and
music videos in the 1980s, and can also lead to increased album and
merchandise sales, as well as royalties from streaming. With Fortnite, Travis
Scott introduced a whole line of merchandise based on his association with the
game, including apparel, action figures, and even a nerf gun. According to a
Forbes report, Scott grossed $20 million from the performance, which included
sales of merchandise.
566
Furthermore, he saw an instant spike in listeners as one
of the songs that debuted in the concert thereafter reached number one on the
Hot 100 Chart in the US.
567
The virtual concert raises a number of business and legal issues, including:
1. How does the developer split revenues with the musician from sales of
merchandise? Do the parties enter into a separate licensing
arrangement covering issues such as type of merchandise permitted,
revenue splits, approvals, term, territory, and distribution channels?
2. How does the developer split revenues with the musician from sales of
items sold as microtransactions?
3. Will the parties charge a fee in the future to attend a concert, and how
will revenue be split?
4. Who covers the cost for development?
5. What rights, if any, does the developer have to use the music?
At present, only very few well-known musicians will have the opportunity to
perform in games. Such performances may only work in the context of the most
successful online games, and there are a number of issues that need to be
addressed including costs, development, server, and technology capabilities,
selecting musicians, and of course negotiating various rights agreements.
Despite some hurdles, a growing trend of virtual concerts can be anticipated,
with the ability to reach worldwide audiences at relatively low costs compared to
concert tours.
568
4.4.6 – Anticipating Costs And Time
Because certain licensed and composed music can be expensive, it is very
important for the developer to determine anticipated costs for music in their game
budget. In some situations, to balance the music budget, games may include
licensed music from lesser-known or new songwriters or recording artists with
little following at the time in which the game is in development, since the rights
to their music will be at significantly reduced rates or even free in exchange for
exposure for the group. In certain situations, the songwriters or recording artists
themselves may be video game players, and being part of a game as well as the
exposure is worth the trade-off in asking for minimum compensation. In addition
to costs, developers need to allocate enough time if they are interested in
566
Ziwei, Puah, “Travis Scott reportedly earned $20 million from ‘Fortnite’ event”, nme.com,
December 2, 2020.
567
See also “RS Charts: Travis Scott and Kid Cudi’s ‘The Scotts’ Explodes to Number One With Help
From Fortnite”, rollingstone.com, May 4, 2020.
568
It may be only a matter of time before esports tournaments involving sports games incorporate
virtual music concerts during half-time.
Mastering The Game
224
pursuing licenses, as multiple parties may have an interest in a piece of music
and therefore the negotiation process may take longer than expected.
4.5 – Licensing Out IP
With the continuing worldwide mass appeal of video games accompanied by
record numbers of players and fans interacting and watching others play, and
growing interest in licensed products,
569
greater opportunities have emerged for
developers to exploit their original IP outside of the video game category. Not
only are games such as Fortnite, Call of Duty, and Minecraft drawing greater
attention from licensees and retailers, but so are some of the old classic
properties including Sonic the Hedgehog, Pokémon, Super Mario, and Pac-Man.
According to License Global, a major licensing industry news source, licensing
of video game IP has started to outpace traditional entertainment categories.
570
While a few developers in the past have achieved tremendous success with the
licensing of video game properties such as Pac-Man and Mario,
571
more and
more properties are attracting the attention of licensees showcasing the
continuing crossover between video games and consumer products. This group
includes film production companies and studios,
572
television broadcasters,
digital distributors,
573
advertising agencies,
574
as well as merchandisers licensing
rights for various items such as apparel, costumes, figurines, board games,
books, comics, slot machines,
575
theme parks,
576
school supplies, and even a
hotel chain.
577
Not only has new IP attracted an audience, but also there has
569
According to a survey released by Licensing International, formerly known as the Licensing
Industry Merchandisers’ Association (LIMA), global retail sales of licensed merchandise and services
reached $292.8 billion in 2019. The entertainment/character was the largest sector accumulating
$128.3 billion in revenue and representing close to 44% of all sales of the different types of properties,
followed by corporate brands with $61 billion. “Licensing International’s 2020 Global Licensing
Survey reveals that sales of licensed goods have climbed 4.5 percent”, licenseglobal.com, June 8,
2020.
570
“License Global’s April issue highlights the rapidly expanding gaming sector within the licensing
industry”, licenseglobal.com, April 29, 2021.
571
Parker, Garrett, “How Much is the Pac Man Franchise Worth?”, moneyinc.com.
572
According to the website Den of Geek, there were over 40 motion pictures based on video games
in development at the end of December 2018. Byrd, Matthew, and others, “41 Video Game Movies
Currently in Development”, denofgeek.com, December 31, 2018. A few of the films made it to the big
screen in 2019 and 2020 and were financially very successful, including Angry Birds 2, Pokémon
Detective Pikachu, and Sonic the Hedgehog. See Tait, Amelia, “What happened to all the video
games based on movies?”, newstatesman.com, June 14, 2017.
573
See Park, Gene, “Tired: The Marvel Cinematic Universe. Wired: The Video Game Cinematic
Universe”, washingtonpost.com, March 6, 2020; and Fahey, Rob, “The Witcher heralds an era of
game Ips on TV | Opinion”, gamesindustry.biz, January 24, 2020.
574
See Bud Light Super Bowl XLIX “Coin” Ad – Pac Man (Full Length)”, January 23, 2015 at
https://www.youtube.com/watch?v=w-7AacHGVR8.
575
In 2017, Bandai Namco internally developed and introduced video slot machines based on Pac-
Man for casinos. Aljic, Admir, “Game maker Bandai Namco ready to join gambling market”,
calvinayre.com, April 26, 2019.
576
Nintendo, working with Universal Studios, opened a reported $550 million theme park area called
Super Nintendo World as part of Universal Studios in Osaka, Japan. AFP-Jiji Reuters, “Super Mario
attraction opens at USJ in Osaka after postponements”, japantimes.co.jp, March 18, 2021. It is one
of the first major attractions in the world to be based on a video game franchise and other parks are
scheduled to open in the near future in the US and Singapore. Albeck-Ripka, Livia, “Ride on Yoshi.
Race in a Mario Kart. Try to Forget the Pandemic.”, nytimes.com, March 18, 2021; and Yeo, Julia,
“Super Mario creator confirms plans for Super Nintendo World to open in S’pore”, mothership.sg,
December 19, 2020.
577
Atari is developing Atari themed hotels which will also serve as esports venues. Bryson Taylor,
Derrick, “Atari, Video Game Pioneer, Plans to Open 8 Hotels to ‘Eat, Sleep and Play’”, nytimes.com,
January 29, 2020.
225 Mastering The Game
been a resurgence of more classical properties, helped by the introduction of
retro-game systems.
578
The continued growth of esports has also created opportunities for a new
category of video game licensing focused around team-related merchandise,
similar to that of professional sports teams.
579
Importantly, esports team-related
merchandise can also take the form of branded in-game items, which are
generally presented as a way for players to support their favorite teams (esports
teams usually being entitled to a significant share of the revenues coming from
sales of their branded in-game items). In addition, the increased exposure of
esports tournaments on the internet and television broadcasts provides partners
with even more exposure.
Just like a film property that might have brand recognition which results in a built-
in audience, provides instant credibility and makes it attractive for a video-game
developer to create a game based on such property, a licensee also has the
same interests in video-game property that has a known audience. In fact, many
younger film producers and directors who are gaining more prominence in the
film industry probably grew up playing video games, and therefore might show
more deference to games than to other forms of IP. Furthermore, video games
provide additional value that is unique in comparison to other forms of
entertainment, as new content can be created quickly and can reach a mass
audience through downloadable content. However, exploiting a property outside
the video game market rarely happens overnight, and many successful programs
take years to build up in tandem with the ongoing success of a video game
franchise.
580
Some of the most recent successful game-based licensing
programs have included Angry Birds, Fortnite and Minecraft.
581
In many ways, the issues previously addressed in Sections 4.2 and 4.3 between
a developer interested in licensing IP and a licensor are very similar, but with the
positions reversed. Developers will need to negotiate:
1. The rights granted, including what is the licensed product (e.g., apparel,
figurine, book), permitted distribution channels (i.e., retail, online), term
and territory;
2. Desired release dates;
3. Advances/guarantees;
4. Royalties and how they will be determined (i.e., deductions);
5. Statements and audit rights;
578
In the last few years there has been a resurgence of retro-game consoles which include several
games that were once popular on particular consoles. Some of the retro consoles have included the
Sega Genesis Mini, NES Classic, SNES Classic, Sony PlayStation Classic, Atari Flashback (Atari
2600), and the C64 Mini (Commodore).
579
According to a survey conducted by Licensing International, worldwide revenue from sports
merchandise and services reached $28.9 billion in 2019. “Sales of Licensed Goods and Services Up
4.5 Percent”, licenseglobal.com, June 8, 2020.
580
Traditionally, Licensees would commit to original licensed properties once a project was given the
green light for a film or television show since that would give the property instant recognition and the
likely support of a national marketing campaign, which in turn would help publicize licensed
properties.
581
Fortnite may have been an exception for which Epic Games was able to take advantage of the
incredible initial success of the game and enter into licensing arrangements relatively quickly. The
number of players of the game and its broad appeal to various age groups also attracted licensees
to the property. Because Epic Games probably did not have the capabilities to undertake the
opportunities, they may have hired an external agency.
Mastering The Game
226
6. Approvals;
7. Product liability insurance;
8. Manufacturing guidelines;
9. Various legal provisions dealing with IP, including ownership, protection
and enforcement of trademarks and copyrights;
10. Representations and warranties, indemnification;
11. How and where disputes get resolved, and choice of law;
12. Termination; and
13. Boilerplate language.
While many of these terms will be similar in different licensing agreements, there
will be some variation depending on the type of product that will either be
manufactured or developed by the licensee. One of the most significant factors
that can affect the structure of a licensing agreement involves production
companies and studios interested in licensing IP for a possible motion picture or
television series.
582
It is critical that a developer seeks proper advice from an
experienced attorney that deals with film and television licensing, since these
particular deals address issues that are unique to these mediums.
583
For example, film licensing deals address issues relating to the procedures
undertaken to get a film made. These can be time-consuming and do not offer
any guarantee that a film will eventually be produced. Some of the issues include
approvals which might be limited, ownership rights possibly involving new
storylines and characters, how royalties are determined, and allowable
deductions which are considerably more than those allowed under standard
licensing agreements, and can greatly restrict a developer’s opportunity to
receive any back-end revenue.
Film Options
Production companies are reluctant to commit to actually making a film
when an initial agreement is signed with a licensor because of high budgets
and the uncertainty associated with obtaining financing and the desired
talent. As a result, typically a production company will first enter into an
option agreement, sometimes referred to as an option/purchase
agreement, as it will specify a purchase price for the rights as well as a
price for an option to purchase those rights within a specified amount of
time. Generally, the option price is 10% of the purchase price, but it could
be as low as nothing, and the option period is usually between one and
two years, (typically 18 months). Simply put, the production company is
582
A few video game publishers have established separate divisions to oversee development based
on their IP, providing them with greater control over production but with greater risks and potential
rewards. Sony created a new division in 2019 called PlayStation Productions to handle film and
television productions based on Sony games. Fahey, Rob, “Putting PlayStation on the silver screen”,
gamesindustry.biz, May 24, 2019. Activision-Blizzard and Ubisoft also have film production divisions.
See also, Shanley, Patrick, “Ubisoft Planning Animated TV Adaptations of Popular Games
Franchises (Exclusive)”, hollywoodreporter.com, October 10, 2019.
583
This issue is addressed in greater detail in the WIPO publication “From Script to Screen”. See Aft,
Rob H., From Script to Screen: The Importance of Copyright in the Distribution of Films, WIPO, 2022.
227 Mastering The Game
buying time, and usually at a very low price. This is generally done because
the production company wants to ensure that they can assemble an
acceptable creative package (script, director, cast), secure the financing,
and possibly find a distributor for the project.
Once the decision is made to proceed with the production, the producer
exercises the option and pays the purchase price in accordance with the
terms of the option agreement. Typically, the purchase price represents
the greatest amount of money that a licensor will receive from the
production company. A number of factors will determine the purchase
price, including the rights being granted, the length of the term and, most
importantly, how much interest there is in the property. The more producers
interested in the property, the higher the likelihood that the competing
parties will drive up its value. Even if the production company purchases
the property, there is still no guarantee that the film will get made.
Turning a property into a film or television show can be a long, potentially
frustrating process: even if a property is optioned, it can still take time for
a production company to decide whether the project should move forward
to principal photography. At the end of the option period, all rights should
revert to the licensor (at no cost to the licensor and without having to return
any monies), and the agreement is terminated. However, many option
agreements contain renewal clauses that give the producer the right to
renew the option in exchange for an additional payment, and/or upon
completion of certain milestones (usually completion of a script,
attachment of director or cast).
4.5.1 – Licensing Agents
For many developers, licensing may not be an area of expertise. Therefore, it
might be advantageous to hire an agent who is knowledgeable about both the
gaming and licensing industries. Even major publishers that have established
properties will work with outside agents that may oversee their worldwide
licensing programs or focus on specific territories.
Prior to hiring an agent, a developer needs to determine whether a particular
agency will meet their needs. Some of the questions that should be asked
include:
1. Is the agency familiar with the video game industry? What is the
background of the agency’s employees who will actually work on the
licensing program, and are there any other projects that they may be
working on at the same time?
2. Has the agency worked with video game publishers and developers? Are
they currently working with any video game publishers and developers?
How successful were the licensing programs in the various territories?
3. What services does the agency provide?
4. What type of relationship does the agency have with licensees,
manufacturers, retailers and influencers?
5. What is the agency’s revenue share on deals? If applicable, how do they
deduct costs?
Mastering The Game
228
An agency should first advise a developer on whether the IP has the potential to
be a merchandisable product based on the value and interest in the property,
market conditions, competitive products, and industry trends.
584
If the property is
merchandisable then an agency should devise a licensing strategy outlining
opportunities and covering products with potential licensees in targeted markets.
The value of the agency’s services will also greatly depend on their relationships
with licensees and retailers to discern interest in the developer’s property.
Without these relationships, it might be difficult for most properties to draw
interest from licensees.
Assuming an agency is able to enter into agreements, the agency is responsible
for managing the relationships among the various parties, including serving the
interests of the developer and working with licensees and possibly retailers.
Some of the responsibilities may include:
1. Seeking potential deals with licensees;
2. Negotiating agreements;
585
3. Undertaking due diligence in determining that a licensee is financially
sound and can meet their obligations of an agreement;
4. Reviewing the product, packaging, marketing, and business plans of the
licensee;
5. Collecting payment and confirming the accuracy of those payments;
6. Remitting payment to the developer;
7. Creating a style guide together with the developer;
586
8. Promoting the licensed product, which may include exhibiting at trade
shows;
9. Confirming that the obligations undertaken by the licensees are fulfilled;
and
10. Assisting the developer in combating potential infringements.
In hiring an agency, some of the most important contractual terms between the
agent and the developer/licensor include:
584
Not all IP is worth introducing to a market immediately, and a bad launch could weaken a brand
for a later and more beneficial release. In some situations, it might be better to launch a property
slowly in specific markets in order to build recognition and value.
585
The agent would negotiate deals with licensees although the terms of the deal should be subject
to the Licensor’s approval. Typically, the agent will have a template agreement that they will use
when signing licensees with an additional attachment covering specific business terms of the deal
such as the name of the property, licensed products, rights, term, territory, payment, and release
dates. The Licensor should review the agent’s agreement and approve the language to ensure that
it is consistent with the Licensor’s agreement with the agent and that there are no obligations imposed
upon the Licensor that have not been agreed to by the Licensor.
586
The style guide sets forth the guidelines on how the licensed IP should be used by a licensee in
creating their products and accompanying materials. This provides for consistency involving the
Licensor’s IP among all licensed products. This will typically cover the specific designs, colors, sizes,
characters, the rules related to dealing with characters, trademarks, storylines, and the use of legal
notices on materials and products. Style guides will vary in terms of the amount of information
provided, but more information usually leads to fewer problems with approvals. Battersby, Gregory
J. and Simon, Danny, The New and Complete Business of Licensing: The Essential Guide To
Monetizing IP, Kent Press, 2018, pp. 604-605.
229 Mastering The Game
1. The specific rights granted to the agent. It needs to be very clear what
property the agent is representing and whether or not it includes
derivatives.
2. Specific services and obligations of the agent and whether they are
exclusive. An agent will want an exclusive deal, ensuring that they are
the only party representing the property in a particular territory to avoid
confusion among licensees on who they need to work with to obtain
licensing rights. However, it is important for the licensor to determine,
especially if they grant a worldwide license, that the agent has the
capabilities to perform their services throughout the world. If not, then
the licensor should limit the agent’s rights to specific territories unless
the licensor permits the agent to sub-license rights in certain territories.
3. The specific responsibilities of the licensor to ensure that the agent can
fulfill their duties. For example, what type of materials need to be
submitted to the agent so they can create promotional and marketing
items? Also, which party would be responsible for creating a style guide
if one has not already been created by the licensor?
4. The territory that will be represented by the agent. Also, a licensor needs
to discuss whether the agent works with other companies within certain
countries and how are they compensated. Does their payment come out
of the agent’s share?
5. For how long will the agent represent the property? A number of issues
need to be addressed when discussing the term, which may include the
right to shorten or extend it. In addition to terminating the agreement, if
the agent materially breaches and fails to cure, a licensor might want to
terminate the entire agreement or terminate rights for certain territories
if the agent is unable to secure a minimal amount of revenue for a
particular region or country. At the same time, an agent may try to
negotiate an extension of the term if they have achieved certain minimal
revenues for the licensor. For example, if an agent secures $500,000 in
revenue for the licensor,
587
they therefore have the option to extend the
term, typically under the same terms and conditions of the current
deal.
588
6. Dealing with a potential licensee. A licensor must negotiate the right to
approve any deal considered by an agent. They want to have approval
of the financial terms of the deal as well as approval of the licensee, to
ensure that they are satisfied with the quality of the products
manufactured by the licensee. The amount of time to approve a potential
deal will need to be negotiated, and the licensor should include language
indicating that if they fail to respond within the allocated time then the
deal will be deemed disapproved. However, a procedure should be
worked into the agreement that allows the agent to resubmit for the
licensor’s feedback. Otherwise, without any feedback, the agent is
unable to perform their duties nor get the value of the deal.
587
If the parties were to agree to this type of language, they would also need to decide whether the
agent can pay any shortfall to secure an option, or whether an option can only be secured using
revenue derived from licensees.
588
It is important to factor in the business relationship: if it is not ideal, then the licensee may choose
to work with another agent.
Mastering The Game
230
Prior to entering into any deal with a licensee, it is advisable for the
licensor and agent to consider establishing financial parameters that
may include minimum guarantees and royalty rates for potential deals.
Although every deal is different, and economic terms could depend on
other contractual factors, setting minimums can be helpful in quickly
determining whether a potential deal would be considered by a licensor.
7. Information on the agent’s personnel. A developer might consider
including a list of the personnel who will actually work on the licensing
program. One of the main reasons a licensor typically enters into a deal
with an agency is based on the personnel. If a licensor decides to enter
into a deal with an agency because of particular person or personnel,
then they should ensure that those people actually work on the property
in a continuing and meaningful way. Otherwise, the licensor may want
the right to terminate the agreement.
8. Financial matters. The fee that the agent receives for their services and
how the fee is determined are two of the most important points in
deciding on an agency. Typically, the agent will receive a fee based on
revenues received from deals that they have entered into on behalf of
the licensor. This would include any advances, guarantees, and royalties
paid by the licensee.
589
It is possible that the fee may vary depending on
the type of deal that the agent enters into with a licensee. For example,
a deal for a television series might be higher than a deal for apparel.
One of the major negotiating issues involves whether an agent should
receive their fee or part of their fee when a deal is signed after the term
has expired or terminated, but based on a deal initiated by the agent.
590
How this issue is resolved will primarily depend on the reason for the
agreement ending and what services have been performed for a
particular deal during the term.
The parties will also need to negotiate the parties’ responsibilities
covering costs incurred in promoting the brand. Such costs may include
expenses associated with creating materials, appearances at trade
shows, and travel. In most situations, the agency would pay for these
expenses. However, the parties would need to negotiate whether those
expenses are the sole responsibility of the agency or recouped from
revenues, or a combination of both depending on the deduction. If costs
are to be deducted, then the licensor should have approval rights and
may also ask that costs be capped. Since revenue will be paid by the
agent to the licensor based on any third-party licensing deals, the
agreement must include language about statements and audit rights
covering issues similar to those discussed in the licensing section.
589
One issue that may come up in relation to an agent’s compensation is whether an agent should
be further compensated if they are able to secure a marketing commitment from a licensee.
Hopefully, a guaranteed marketing spend by the licensee would help increase sales, which would
translate into more revenue for the agent. However, what happens if the licensor wants to take a
smaller advance payment for a bigger commitment in marketing?
590
In this situation, the agent has negotiated a deal during the term, but the deal is not signed until
after their term has expired. Therefore, the parties would need to negotiate the compensation that
the agent would be entitled to even though they would not be performing any services in
administering the deal. There are also situations in which the agent has negotiated and administered
a deal, but the deal continues after the agent’s services have expired. Typically, in this situation, the
agent would still be entitled to a fee.
231 Mastering The Game
In addition to the above terms that should appear in an agreement, the parties
also need to discuss various legal issues covering representations and
warranties, indemnification, how and where disputes are settled, termination,
and other boilerplate provisions covered throughout the book.
4.6 – Product Placement: A Different Form Of
Licensing
There are also other types of licensing situations that can be advantageous to
both Licensor and Licensee (developer), but the license is generally smaller in
scale and can take the form of a product placement, cross-promotional
591
or free
license.
592
In the product placement situation, the Licensor pays or provides
some other form of compensation to the Licensee for the licensed IP (usually in
the form of a trademark or product) to appear in a game.
593
For the Licensor, the appearance of their brand’s mark or product in a game may
provide a marketing opportunity to reach an audience including a demographic
that may have been difficult to attract in the past. With popular games potentially
played and watched by millions of people throughout the world, brand recognition
opportunities can be substantial for a Licensor, involving numbers that would
probably be difficult to match through other forms of advertising for their
investment. In addition, compared to someone watching television, who may be
doing other things simultaneously, a person playing a video game is a more
captive audience given that their focus is solely on playing.
While product placement agreements have some similarities to a licensing
agreement, certain terms may vary, including those dealing with performance
guarantees by the Licensee and consideration. One major concern for the parties
is ensuring that the use of product placement complies with any advertising
regulations, especially with regard to children.
594
The basic terms for a product placement agreement typically include:
1. Licensing rights. This should cover the licensed rights granted by the
Licensor for use not only in the game but also for any other materials
created involving the exploitation of the game, such as marketing
materials (if this is of interest to the Licensor). In addition, the Licensee
requires the right to manufacture, distribute, market and sell the game,
any additional content, and marketing materials by any and all means
known at the time of signing, as well as new mediums later devised
591
In a typical cross-promotion opportunity, the developer incorporates the Licensor’s brand into the
game and in return, the Licensor promotes the game with their brand. For example, a company that
manufacturers basketballs grants a Licensee the right to use the name of the manufacturer on the
balls in the game and in return, the ball manufacturer attaches a tag about the game with the
basketball at retail or cross-promotes the game on their website and social media.
592
If the Licensee is unable to enter into any of the other types of licensing agreements then there is
the free-license scenario whereby the Licensee receives permission to incorporate the Licensor’s IP
but no money or cross-promotional opportunities are exchanged. This is done to provide realism in
the game in exchange for providing branding opportunities for the Licensor. For example, a stadium’s
name and design are provided to the developers creating a sports game (e.g., Oracle Park, home of
the San Francisco Giants US baseball team).
593
For an early history of product placement, see Glickman, Len, and Kim, Anita, Product Placement
and Technology, Developments, Opportunities, And Challenges, Entertainment and Sports Lawyer
1, Spring, 2012.
594
See Section 10.4.
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232
subject to any agreed-upon approval rights by the Licensor. It is possible
that a Licensor may request exclusivity in the game for their product
category. However, that might depend on the type of game developed
and whether that would interfere with the realism of the game as well as
the compensation paid by the Licensor.
2. Territory and term. The Licensee will want to have worldwide rights and
a term that would allow the Licensee to exploit the licensed property for
as long as the game is in distribution, in order to avoid the possibility of
having to remove it from the game. A Licensee should ask for worldwide
rights even if they initially plan a limited territorial release, since their
distribution strategy could change, and it is typically easier to ask for
rights upon the commencement of a deal instead of negotiating later. In
most situations this would be beneficial for the Licensor as it would
provide more exposure, but the Licensor needs to confirm that they can
license the rights in the additional territories.
3. Payment. There are a number of ways in which the Licensee can be
compensated for the product placement arrangement.
595
One scenario
is for the Licensor to pay the Licensee a fixed fee, which is paid pursuant
to an agreed-upon payment schedule. The payment schedule might
involve payments upon signing and upon the release of the game.
Another possibility is that some money may be exchanged, and the
parties also agree to cross-promote one another’s products. For
example, the Licensee would include the licensed property in the game
and the Licensor would promote the game with their product and related
materials. A third possibility may only involve a cross-promotional
relationship.
4. Use of the licensed property. The parties will need to agree on how the
licensed property will be used in the game and, if applicable, related
materials. Depending on the consideration paid by the Licensor, the
Licensor should ask that they receive some type of guarantee that their
brand will appear in the game for a certain period of time and, if possible,
in certain scenes. For sports games, there is the possibility of an oral
call-out by the announcers during a game. The Licensee will also want
to include language indicating that they have no obligation to include the
licensed property in the game. This may occur for a number of reasons,
including because the licensed property is no longer associated with a
property (e.g., an advertiser no longer advertises in a stadium), changes
in the game, and approval issues. In this situation, the licensee would
not be in breach of the agreement provided that they return any
consideration they may have received as per the agreement.
5. Approvals. Whenever dealing with trademarks, the owner of the
trademarks must include language in the agreement allowing them to
approve materials to protect the quality of their brand. Although this is
extremely rare, failure to do so has led some courts in the US to rule that
595
How much the Licensor pays typically depends on a number of factors, including the popularity of
the game in development, distribution plans, how much properties have been paid for in similar
games, and the amount of exposure for the licensed IP.
233 Mastering The Game
a trademark has been lost.
596
As a result, Licensees should expect some
form of approval language, although language will vary depending on
factors such as which materials need to be submitted to the Licensee,
the time period for approvals, and what happens if a submitted item is
not approved.
Typically, the Licensor should ask for approvals regarding the game
including the story, gameplay, and rating, and how their IP will be used
in the game. The discussion about the game should occur even before
a deal is done, subject to a confidentiality agreement,
597
to confirm that
there is no issue with the brand’s association with the game. For
example, a brand involving children’s products would not want to be in a
game that might be violent. As a result, while a story for a game would
probably not be complete when discussions between the parties begin,
the Licensee should be required to make a representation and warranty
on the type of game and rating the Licensee would hope to obtain from
the various ratings boards around the world. Furthermore, a Licensor
may also request language indicating that the game and any other
materials will not damage the reputation of the Licensee.
6. Legal issues. Since a product placement agreement involves the use of
IP, the Licensee should request that the Licensor represents and
warrants that the IP will not infringe on the rights of third parties, and is
either owned by the Licensor or that it has the right to properly license
the IP pursuant to the terms of the agreement. In the event that there is
a subsequent issue, the Licensor should also indemnify the Licensee
against possible infringement claims by third parties involving the IP.
598
At the same time, the Licensor will request reciprocal representations
and warranties that the game and materials associated with the game
do not violate the rights of third parties and will need to indemnify the
Licensor against any claims.
Product placement can be a sensitive issue in some jurisdictions, where it could
be considered surreptitious advertising and therefore be prohibited. That is why,
outside of the United States, the Licensor will typically request that the Licensee
also represents and warrants that they will comply with all applicable rules on
advertising and product placement. In addition to representations and warranties
and indemnification, the parties will need to agree on how a dispute will be
resolved, what law will apply, where the dispute will be resolved and remedies in
596
Licensing without supervising the quality of the trademarks is often referred to as a ‘naked license’,
and in the US could lead to its abandonment. As a result, the trademark owner must assure that their
licensed trademarks maintain a certain consistent level of quality (although there is no established
level). If the Licensee does not maintain the same type of quality as the licensor then consumer
expectations involving products might not be met. Therefore, it is important for the licensor to maintain
approval rights and supervision can vary depending on factors such as product and costs. Schechter,
Roger and Thomas, John, Intellectual Property: The Law of Copyrights, Patents and Trademarks,
Thomson West, 2003, pp. 781-785.
597
The parties will want to sign a confidentiality agreement if information about the game is being
disclosed prior to its public release. Also, it is possible that the Licensor is introducing new IP as part
of the game and therefore want it to remain confidential until the time of its release.
598
In some situations in which a Licensor is only receiving publicity for their brand, they may only
provide their IP ‘as is’, and thereby make no representations and warranties nor agree to indemnify
the Licensee. While these situations may be rare, a Licensee may be reluctant to include the IP in
the game although they would need to evaluate the risk. If the Licensor has not been sued for an IP
claim and they have properly registered their copyright or trademark then the Licensee may consider
it a small risk.
Mastering The Game
234
the event of a breach.
599
This decision can have significant economic
consequences in the event that a party has to defend or pursue a case in a
different state or country.
600
599
Licensees should include language indicating that if they were to breach the agreement, then the
only remedy for the Licensor would be monetary damages, prohibiting the Licensor from seeking
injunctive relief and other types of damages.
600
See Chapter 11 on legal issues typically addressed in an agreement.
235 Mastering The Game
CHAPTER 5
ACTOR-TALENT AGREEMENTS
5.1 – Introduction
The use of actors and sports athletes in games and promotional material has
evolved considerably since the days of the Atari 2600, when only a person’s
name and picture might be used to package and market a game. Developers
would either sign athletes for sports games, or actors for games based on movies
or television shows. At the time, graphics were too simplistic to capture a
person’s image, sometimes only consisting of a straight line. With advances in
technology developers began creating realistic renditions of a person’s likeness:
synchronized their voices with characters and motion captured them to
incorporate their signature moves, whether scoring a goal in a soccer game,
performing at a concert, or jumping between buildings in a single bound.
601
Today, developers are increasingly relying on actors to provide a variety of
services. This chapter will examine a number of the business and legal issues in
hiring actors for games.
602
5.2 – Who Negotiates The Deal?
When negotiating deals with actors,
603
determining who should negotiate on their
behalf can present a challenge. First, is there a relevant union and is the actor a
member?
604
601
See GameSpot Staff, “33 Hollywood Actors Who Appear in Video Games”, gamespot.com, April
6, 2020.
602
References in this chapter to actors’ unions that have entered into agreements with video game
companies mainly concern the Screen Actors Guild - American Federation of Television and Radio
Artists (SAG-AFTRA).
603
A developer entering into an agreement with a well-known actor might need to sign an agreement
with the actor’s corporate entity, or “loan-out” company, which controls the right to the actor, and
primarily provides the actor with tax advantages and reduces their personal liability. In such cases,
the actor would similarly need to sign an inducement agreement, guaranteeing that they will comply
with the loan-out agreement and would bear responsibility if the loan-out company breached the
agreement. In the event of such a breach and, in the absence of an inducement letter, the developer
would have to sue the loan-out company, which may not have any assets. Appleton, Dina and
Yankelevits, Daniel, Hollywood Dealmaking: Negotiating Talent Agreements for Film, TV, and Digital
Media. 3
rd
ed. Allworth, 2018, p.180.
604
It is recommended that you contact the actor’s union (assuming one exists) in the country that you
wish to produce a game if you decide to use union talent to verify an agreement covering the video
game industry. Alternatively, a developer could also contact counsel knowledgeable about talent
unions.
Mastering The Game
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Second, is the actor negotiating alone, or are they represented by a talent
agency,
605
agent, and/or an attorney? Third, is the actor a minor?
606
While most of the world’s actors’ unions represent their members in the motion
picture and television industries, at the time of writing, very few do so in the video
game industry.
607
Consequently, most video game actors have to negotiate
directly with developers. The complexity of these negotiations can vary
considerably depending on the actor and whether they are represented by an
agency, an agent and/or lawyer or negotiate on their own behalf. Negotiations
with prominent actors will most likely involve the most time in negotiating and
drafting an agreement since they will involve clauses unique to that deal in
comparison to an actor with a small role representing themself who will sign the
developer’s form agreement with few if any, revisions.
For those actors that are members of SAG-AFTRA, the union has created
template contracts (or performer agreements), establishing minimum terms and
conditions between the union and developer signatories
608
that are signed by
many actors and developers. These minimum terms and conditions, including
payments, working conditions and health benefits, have been negotiated
between the union and video game companies.
609
Actors who are union
members cede a certain amount of control to the union, which then negotiates
certain rights on their behalf.
Depending on the situation, the union actor and a SAG-AFTRA developer
signatory will either: (i) add additional terms to the SAG-AFTRA performer
agreement which may reflect better terms for an actor such as compensation,
and address matters that may not be covered in the union agreements including
605
Some actors, whether represented by a union or not, hire talent agents to assist them to negotiate
deals with developers. The biggest such agencies in the United States include William Morris
Endeavor, United Talent Agency, International Creative Management Partners, Paradigm, Gersh,
Creative Artists Agency and Agency for the Performing Arts. Actors may equally be represented by
smaller agencies, or agencies specializing in specific services, such as voice-over, or may represent
themselves.
606
Developers hiring minors (under 18 years of age in many jurisdictions), whether for voice-over or
as an esports player or for any other service, must be aware of any relevant national or state
regulations and limitations. In the United States, protections for minors have been enacted to prevent
economic and employment exploitation, covering areas such as working conditions, compensation,
and the legal capacity to enter into binding minor contracts. In the United States, while minors do not
usually have such legal capacity, some states, including California and New York, limit minors’ rights
to disaffirm signed contracts. There are additional guidelines on minors who are SAG-AFTRA
members. For instance, the SAG-AFTRA Interactive Media Agreement (IMA) requires that a parent
must be within sight and sound of a minor subject to production requirements and, if the minor needs
to travel, the parent must be provided with the same transportation, lodging, per diem allowance and
meals (at the same time) as the minor. Developers must also be aware that SAG-AFTRA rules apply
whether a minor is used in a television commercial or online.
607
With a few exceptions, actors’ unions worldwide have yet to be engaged with video games as they
have been with motion picture and television. By way of example, SAG-AFTRA and the Alliance of
Canadian Cinema (ACTRA), are the only two actors’ unions in the Americas with agreements with
the video game industry. At the time of this writing, the British actors’ union, Equity, has had
preliminary discussions with video game companies, but does not have a collective bargaining
agreement. Expect unions to be more involved in the years ahead.
608
For purposes of this chapter, the party entering into a performer agreement with an actors’ union
will be understood to be a developer. However, signatories to such agreements can be developers,
publishers, or producers.
609
At the time of writing, the following companies were signatories to the SAG-AFTRA IMA: Activision
Productions Inc., Blindlight LLC, Disney Character Voices Inc., Electronic Arts Productions Inc.,
Formosa Interactive LLC, Insomniac Games Inc., Take 2 Productions Inc., VoiceWorks Productions
Inc. and WB Games Inc. McNary, Dave, “SAG-AFTRA Extends Video Game Contract to 2022”
variety.com, November 5, 2020. However, other publishers, developers, and producers have also
entered into deals with SAG-AFTRA without signing the IMA, and instead sign alternative union
agreements which incorporate many of the IMA terms.
237 Mastering The Game
the actor’s conduct, additional representations and warranties,
610
or (ii) negotiate
a deal using a developer's agreement incorporating the minimum terms and
conditions of the SAG-AFTRA deal and depending on the actor, more favorable
financial terms than the union minimums.
Signatories to SAG-AFTRA agreements hiring union talent must satisfy SAG-
AFTRA’s minimum requirements. SAG-AFTRA members cannot waive these
benefits, but can negotiate better terms. Furthermore, union agreements take
precedence over any conflicting provisions in alternative agreements signed
between developers and actors.
Dealing With Athletes In The United States
Deals with athletes in the major American sports leagues involve negotiating
with a union, team, agent, or a combination thereof. While an athlete’s rights
are represented by both a union and an agent, depending on the desired use
and number of athletes requested for a project, a developer may not
necessarily have to deal with a union.
If the game is based on active rosters and teams, the developer should
negotiate with the players’ union. A license involving a minimum number of
players set by the union is known as a group license. The advantage for
developers dealing with US sports unions is that they only need to deal with
one party to obtain the rights to use the athletes in the game.
611
However, the
licensing rates are expensive.
While the developer would not be required to negotiate with the union if the
number of players was below that set threshold, the union may have to
approve any deal signed between the union and the athletes’ representatives
or agents. These deals are known as highlight agreements, as the athletes
concerned feature in the game more prominently than other athletes. A
developer may want a specific athlete to be the face of the game, for example,
by featuring them in a commercial, on packaging, or in advertisement
materials. Like in the case of an actor agreement, the parties must negotiate
terms and conditions, such as the services provided, when such services will
be performed, compensation (usually a one-time fee), exploitation rights,
term, exclusivity, ownership rights, approvals and legal issues, such as
representations and warranties, indemnification, termination, confidentiality,
and where and how disputes are settled. It is important to note that the right
610
Some SAG-AFTRA signatory developers that draft their own agreements and incorporate SAG-
AFTRA’s terms will forward the agreements to SAG-AFTRA for their review to confirm that the
language in the agreements that deal with specific SAG-AFTRA terms are consistent with the
applicable SAG-AFTRA agreement. Some developers may feel this is beneficial since an
inconsistent provision could cause problems later while others may not feel comfortable sharing
certain information even with a confidentiality obligation. If a signatory wants their agreement
reviewed by SAG-AFTRA then then need to make sure they work into their schedule enough time
for SAG-AFTRA to review and provide feedback.
611
In very rare situations, an athlete may elect to “opt-out” of a union’s licensing deal and therefore
negotiate separately with a licensee to use their likeness. Michael Jordan and the baseball player
Barry Bonds were two athletes who elected to opt-out of the union deal, thinking that they might make
more money negotiating a deal on their own. As a result, if you wanted to make a basketball game
with all the players and wanted to include Michael Jordan, the developer would need to sign two
agreements for them to appear in the game: one with the player’s union to obtain the rights to the
players; and a separate agreement with Michael Jordan to include him in the game. See
https://www.espn.com/blog/playbook/tech/post/_/id/4185/michael-jordans-erratic-video-game-
history; and https://www.quora.com/Why-has-MLB-The-Show-2006-2018-not-list-Barry-Bonds-as-a-
record-holder-in-their-list-of-records-and-accolades.
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238
to use an athlete in marketing materials does not include the right to use logos
and other indicia of the team. These rights must be negotiated separately with
the team or league.
5.3 – The Most Common Terms In The Agreement
Whether providing services such as voice-over,
612
motion capture, or the right to
use a talent’s likeness in a game or marketing materials, the developer will
typically need to enter into an agreement with the talent to secure these rights.
613
Agreements vary depending on, for example, whether the actor is a union
member, the rights and services requested, the actor’s popularity, and the
parties’ leverage. Certain contractual terms should be included in all agreements,
such as the rights granted and how they can be exploited, ownership,
compensation, approvals, representations and warranties, indemnification,
confidentiality, and how and where disputes are settled.
Many of the principal terms included in actor agreements discussed below
appear in performer agreements entered into by actors who are SAG-AFTRA
members. In accordance with SAG-AFTRA rules, these terms are mandatory
and developers cannot negotiate terms below the minimum requirements.
However, the parties can negotiate terms above the minimum requirements. An
actor may receive, for example, compensation higher than the minimum. Unless
stated otherwise, the following contractual terms only involve those between a
developer and a non-union member.
5.3.1 – Services And Rights
For the developer, the rights obtained and services performed are among the
most important aspects of the agreement. The agreement should include
provisions on the services to be provided by the actor, which might include voice-
over, motion capture, and active marketing obligations (i.e., appearances) and
specify that all services would be performed subject to the developer’s
instructions, artistic taste, and judgment. In this part of the contract, developers
will need to outline a schedule when services (whether for voice-over or
612
Given the importance of localizing games, more developers are using voice actors for languages
other than the traditional EFIGS languages. For some games, well-known actors in a particular
country have been used to provide the localized voice over. See https://genshin-
impact.fandom.com/wiki/Voice_Actors for a list of voice talent covering Japanese, Chinese and
Korean translations for Genshin Impact. Games based on licensed property, namely, film, that use
alternative talent rather than the original film actors’ voices, are subject to the licensor’s approval.
613
See Section 2.5 on publicity rights. Certain licensing agreements involving a property such as a
motion picture may include rights to an actor. However, if the actor is a member of a union and
services are required, a separate agreement might still be needed to cover additional union issues
(e.g., working conditions). Studios and production companies realize the ever increasing value of
tying films to video games and thus include rights to actors in licenses to make them more attractive
although this may increase the licensing fee. If the actor’s rights are included in the license
agreement, it is important to negotiate which rights are included therein and whether they cover
services required for the game’s development, such as voice-over. In the event that rights to an actor
are not included in the licensing agreement, the licensor should work with the developer to secure
those rights, and a separate agreement must then be signed with the actor.
239 Mastering The Game
marketing) will be performed and should include days (costs could increase on
weekends), and times (costs might be higher for evening sessions), and location
which may vary depending on the services being provided. A developer should
also be aware that they will most likely be responsible for travel, and
accommodation expenses for certain actors required to travel to a location.
Typically, all of these issues would be part of the negotiations subject to union
requirements, if applicable.
614
At times scheduling an actor’s services can be trickier than it appears, if an actor
is providing services for other companies including possibly working on a motion
picture, then there could be scheduling conflicts-sometimes unexpectedly. At the
same time, a developer has to balance their development schedule and studio
time, which may involve renting space to record voice-over or motion capture.
Failure to consider all these different factors and provide for backup plans can
be costly for a developer, even if the actor may have caused the problem. Some
agreements may include language that if there is a conflict with scheduling that
the developer would have first priority in the use of the actor’s services.
Depending on the types of services a prominent actor provides, a developer may
request that the services and rights granted be exclusive to the video game
category for an agreed period. For example, a developer may require that an
actor’s likeness can only be used in the developer’s game for one year from the
game’s release.
615
Depending on the role played by the actor, rights might consist of the proceeds
from using the actor’s likeness, voice, motion capture moves, or a combination
of these in the game and any additional content. The developer will also want to
exploit the rights for marketing and publicity materials, such as trailers,
616
packaging, and for advertising, including for print, broadcast, and online media.
Furthermore, a developer may request the right to link to the actor’s social media
accounts.
The parties must also negotiate how the rights granted by the actor to the
developer can be exploited: through which platforms, where, and for how long.
With digital media now providing unlimited worldwide distribution, developers
should seek to obtain worldwide rights to distribute their games by any future or
currently available means, including by disc, download, or streaming. Likewise,
they should seek to secure the right to exploit the game perpetually on all
currently available platforms, including consoles, PCs, and mobile devices, and
on any platforms developed in the future.
617
A developer does not want to be in
a situation where the ways in which they can distribute a game is limited because
the developer did not foresee new forms of distribution. Should it not be possible
to negotiate a perpetual license, the developer should try to negotiate the right
to renew the license upon set terms. As with any type of agreement, the more
rights a developer seeks, the higher the fees for the developer. Furthermore, the
614
Depending on the recognition of an actor, a developer may also need to factor in costs associated
with an actor’s appearance whether dealing with make-up artists and hairdressers.
615
To avoid an unlimited exclusivity period, especially if the game is delayed, an actor may want to
add an outside date.
616
THE SAG-AFTRA IMA contains specific rules on additional payments for union actors featured in
trailers. If a trailer or teaser exceeds 12 minutes in length the actor is entitled to compensation in
addition to the payment received for performing in the scenes used in the trailer.
617
This request will be subject to any underlying license for a game. For example, if a game is based
on a licensed property such as Spiderman then the actor’s rights will only be needed for the length
of the underlying license. Even if a developer does not intend to exploit a game on a particular
platform, it should be noted in the agreement that the developer has the right to market on that
particular platform.
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240
developer should opt for a pre-determined fee based on the amount of work
required to use the actor’s services for derivative works, such as sequels and
downloadable content. This is especially important when an actor’s voice
becomes associated with a character in a game.
5.3.2 – Ownership
The developer needs to own all the rights to the services the actor provides for
the game. In the United States, this ownership is covered by a “work for hire”
agreement, provided that certain conditions are met.
618
If the services provided
do not qualify as work for hire, provisions should appear in the agreement
assigning the rights to the developer. Furthermore, any marketing materials
(which may be subject to approval rights) created by the developer and
incorporating the actor’s services should be owned by the developer, although
they can usually only use these materials to promote the specific game. If the
rights are obtained pursuant to a work for hire agreement, the developer, as
copyright owner, is entitled to exploit the actor’s proceeds by any means in
perpetuity, subject to any negotiations and, if applicable, union restrictions.
5.3.3 – Compensation And Credit
This is probably the most challenging issue to negotiate and depends primarily
on whether the actor is a SAG-AFTRA member, and whether they are well-
known, as they would want to be compensated above the union minimums.
The amount of compensation is determined by a number of factors, besides
whether the game falls under the SAG-AFTRA agreement, such as the actor’s
popularity, the rights requested by the developer, the services to be performed,
the length of term, and exclusivity. Like in the movie industry, the higher the
budget and projected revenues, the greater the likelihood the actor will ask for
higher compensation.
Most deals involve a one-time fee, paid in installments, based on the progress of
the project. For example, an agreement may involve three payments: the first
due upon signing the agreement, the second upon performance of the services
and the third upon release of the game, subject to an outside date, where
permitted by union agreements, some of which require payments to be made
within a set time frame after the rendering of services. This is all negotiable,
except for actors who are SAG-AFTRA members and unless payment is
provided earlier than required by the SAG-AFTRA agreements. While
developers should try to backload payments, the possibility of doing so depends
on the actor’s leverage. Actors may seek royalties if they perform services for
the game and play a critical role, rather than simply licensing their name and
likeness. If the parties agree to royalties, they will need to negotiate the royalty
amount and calculation method. Unless paying royalties results in a lower fee,
developers should try to avoid doing so, as it involves issuing statements and
granting audit rights, among other things, as well as a further financial
commitment. If royalties are paid, the developer should consider capping the
amount. Alternatively, the developer could include a bonus provision, whereby
618
See Section 2.2 on work for hire. The SAG-AFTRA IMA may limit the re-use of materials unless
additional compensation is paid to the talent. See the section on Limited Integration under the SAG-
AFTRA IMA.
241 Mastering The Game
they pay the actor additional compensation if the game generates a set amount
of revenue, instead of paying a higher fee or royalties.
For well-known actors, they typically require the entire payment, even if the game
is not completed, whether their services were provided or not, unless they have
breached the agreement. The actor may justify this position by noting that they
may forego other job opportunities to work on the game. Developers may then
seek to counter this requirement by establishing an alternative settlement
amount, by means of a liquidated damages clause, for example.
When negotiating compensation, it is essential that the parties address whether
any additional payment will need to be paid for services other than those
performed specifically for the game (i.e., voice-over, motion capture). For
example, if the developer wants to use scenes from the game in a television
commercial or create marketing materials using the actor’s likeness or wants the
actor to appear at trade events. Would these costs be included as part of the
overall fee, or will they be additional costs?
619
All of this should be spelled out in
the agreement. In some situations, a developer may not know what they want
the actor to do, possibly a year or two from the signing of the agreement, and
therefore faces the challenge of dealing with unknown variables. As a result, a
developer may want to include options in the agreement that will allow them to
decide at a later date if they desire to use the actor’s services and would also
lock in a price for those services to avoid uncertainty.
The parties will also need to negotiate the actor’s credit in the game and any
other materials, and that will mostly vary depending on the actor’s reputation and
their role in the game. As games take on greater significance, actors will want to
receive more prominent credits realizing an attachment to a successful game will
increase their market value and prestige similar to starring in a well-received
motion picture. At the same time, developers will want to promote well-known
actors since this allegedly will help market a game. As a result, it would appear
that providing credits for well-known actors should not be a problem. However,
the issue becomes a little more challenging when a game may employ a number
of well-known actors. A developer, therefore, needs to be careful when
negotiating the type of credit provided to the actor, its placement,
620
size and
even the length of time of a screen credit. For other actors, the discretion of the
type and where the credits appear typically will be at the developer’s sole
discretion.
Agreements generally also include clauses on the eventuality that a developer
makes a mistake in a credit, specifying that the actor’s only remedy would be
direct damages, thereby prohibiting them from terminating the agreement or
seeking an injunction to prevent the continuing distribution of the mistaken item.
Developers usually agree to correct any mistakes for all future releases of the
item.
619
If the developer has the right to license the actor’s likeness for potential merchandising
opportunities (assuming the game is not based on a licensed property), the parties will need to
discuss how the actor might be compensated. It is unlikely that an actor would not request additional
compensation. See Chapter 4 on licensing.
620
This would include in the game, marketing materials and social media.
Mastering The Game
242
5.3.4 – Conduct
One unique provision that may appear in an actor’s agreement is a morals
clause.
621
A developer may request the right to terminate the agreement if the
actor’s conduct, even if it has nothing to do with their work on the game, is
detrimental to the developer or to the game. This can be a difficult clause to
negotiate and introduce into an agreement, since actors may feel that it is
insulting. Yet it is also important for developers to protect their image and to be
able to cut their losses if a scandal jeopardizes the game’s potential success or
results through negative consumer feedback. Therefore, to avert any potentially
uncomfortable situations, developers should investigate the prior conduct of their
talent by carrying out some initial internet research, while being careful to only
use reliable sources. Morals clauses may provide for the termination of the
agreement in the event of the actor engaging in unsavory conduct, particularly
any criminal or morally reprehensible behavior. Developers usually define such
conduct in broad terms, while actors seek to remove the clause or limit the
definition. In addition, the developer should not only consider conduct during the
term of the agreement, but also any act occurring prior to the agreement that
reflects negatively on the talent, but that is not revealed until during the term of
the contract or after the game’s release.
Moral clauses should also provide for the possibility that the event triggering the
termination occurs after the actor has performed their services, and before or at
the time of the game’s release. If the game has already been released and,
assuming the actor has been paid, what would be the remedy, if any, for the
developer? How would the parties deal with a situation where the developer has
been harmed by bad publicity or a loss of sales, or had to incur costs to remove
the actor from the game or marketing materials, bearing in mind that it may be
impractical to remove the actor, depending on their presence in the game?
5.3.5 – Approvals
Like with most licensing agreements, under which licensors require that their
prior approval be given for all uses of their licensed property, actors, particularly
those who are well-established,
622
may seek to obtain similar rights before
materials are publicly released. How the actor appears in materials, what
materials are used and how they are used might all be subject to negotiations.
An actor’s approval rights will most likely be very limited however, and whether
an actor can negotiate them mostly depends on their status. A well-known actor
may request very broad approval compared to a day player who might have no
approval rights. If approval rights are granted, the agreement will need to include
provisions covering the process by which materials are approved. This is
important, since delays in approvals could impede the release of the game and
marketing materials.
621
Morals clauses, which originated in Hollywood contracts under the old studio system, meant that
actors could be fired for engaging in improper conduct on and off set. This was especially significant
during the anti-communist scare in the United States during the 1950s. Crowell, Thomas, The Pocket
Lawyer For Filmmakers: A Legal Toolkit for Independent Producers. 2
nd
ed. Focal Press, 2011, p.
221.
622
Licensors, sports leagues and player associations, as part of their licensing agreements, request
approval rights that include the teams’ or unions’ trademarks or other indicia in the materials including
the use of a player's likeness. Therefore, a developer may need to factor in the additional time
required to seek approval from the appropriate licensors.
243 Mastering The Game
These provisions vary among agreements and may or may not include approval
of all uses. If approval rights are granted, the developer will likely impose certain
limitations. One such way is to seek pre-approval of marketing materials that can
be used continuously without the need for additional approvals, provided the
materials are not substantially altered. Furthermore, if the actor fails to respond
within a certain period, which may vary depending on the items that need
approval, the item would be deemed approved. The developer should include
provisions indicating that certain publicity or marketing opportunities that arise
may require swift approval so as to not be lost, and accordingly the actor agrees
to respond within a shorter time period, perhaps 48 hours. However, an actor
may require that if no response is provided during the set time period, the
materials be deemed disapproved.
It is also important to stipulate that, once materials have been approved, they
cannot then be disapproved, unless they have been substantially altered.
Otherwise, a developer could, on the basis of prior approval, move forward with
the development of their game and marketing materials only to have to later
revise them, costing them time and money. If materials are disapproved, the
actor must provide the reasons thereof within an agreed time period so the
developer can make the necessary corrections for approval.
An actor may want to share with the public materials developed for the projects
they are working on. Provided that they coordinate with the developer’s
marketing and publicity efforts; this can be beneficial for the developer, as it
increases the game’s visibility. With social media, it is easy to reach a huge
number of people across the globe. However, the developer should make sure
that the materials are released subject to the developer’s prior approval, in order
that no materials are released prematurely.
5.3.6 – Termination
Another key point in negotiations between an actor and developer centers on the
right to terminate an agreement for an uncured breach. The grounds for
termination and its timing must be established, as well as the possible remedies
for the non-breaching party. For the developer, the possibility of terminating an
agreement could be allowed if the actor fails to provide their services, materially
breaches any of the representations or warranties, or conducts themself in a way
that violates the morals clause.
Conversely, an actor could seek termination if the developer fails to pay, violates
terms and conditions under the guild or union agreements, or materially
breaches a representation or warranty. However, even if a developer fails to cure
a material breach, the developer should insist on provisions stipulating that, if the
actor’s services have been provided and are included in the game, the actor
would only be entitled to direct monetary damages and would not be entitled to
prevent the distribution of the game or marketing materials by seeking injunctive
relief.
623
Agreements also usually contain provisions limiting the developer’s
liability. Monetary compensation should be capped at a set amount, which might
be based on the agreed amount of compensation, although it becomes more
complicated if the actor was entitled to royalties.
623
For more information about injunctive relief in the United States, see Section 3.2.18.
Mastering The Game
244
In the event that either party breaches the agreement, the breaching party will
have the opportunity to cure the breach within a certain time period. However,
given that a cure might not restore the parties to their positions prior to the
occurrence of the breach, the applicability of a cure period depends on the nature
of the breach.
5.4 – SAG-AFTRA: A Closer Look
In the United States, most professional actors are members of SAG-AFTRA
which is the most active union involved in video games throughout the world and
has the most active number of members.
624
It’s jurisdiction extends only to
activities within the US where a SAG-AFTRA performer is engaged, but also
includes when an agreement with a SAG-AFTRA performer originates from the
US.
625
If a developer would like to use SAG-AFTRA talent in a video game, they must
first become a signatory to and abide by one of SAG-AFTRA’s three interactive
agreements.
626
These agreements include the SAG-AFTRA Interactive Media
Agreement (IMA),
627
the SAG-AFTRA Low Budget Interactive Agreement (LBA),
and the SAG-AFTRA Interactive Localization Agreement (ILA).
628
Each
agreement incorporates the terms of the IMA and any subsequent amendments,
and each also contains additional terms unique to their agreement such as
624
Actors in “right to work” states, where non-union work may be more prevalent, may find a number
of opportunities without joining SAG-AFTRA. However, actors may decide to become SAG-AFTRA
members if they work on a production in a state such as California where developers are more
commonly SAG-AFTRA signatories.
625
The IMA also notes “or anywhere else in the world for which the Performers are engaged in the
United States by Employer.” This would include situations whereby an actor may be hired in the US,
contracted in the US, or the deal is negotiated with their US agent, but the performance takes place
outside the US.
626
Alternatively, some developers may hire an actor through a 3rd party which is a signatory to the
SAG-AFTRA agreement while the developer remains a non-signatory. Furthermore, a developer can
enter into a one-production only (OPO) agreement with SAG-AFTRA whereby they commit to abide
by the SAG-AFTRA agreement entered into for a specific project. Currenty, there is no limit on the
amount of OPO agreements a developer can enter into with SAG-AFTRA. In this scenario, a
developer could develop games with union actors under the OPO agreement and develop other
games without union actors provided those games do not employ SAG-AFTRA members. SAG-
AFTRA can involve a number of agreements and amendments which can be challenging to navigate
and therefore it may be worth speaking with counsel experienced in this area to understand the
obligations required by the union. Additionally, you may contact SAG-AFTRA directly to discuss and
clarify the procedure to follow if you would like to hire union members in the United States. A party
seeking to hire a SAG-AFTRA actor must also provide the union with various paperwork for its
approval before engaging in the production. Some of the paperwork includes information about the
company, production and a list of actors to confirm that they are union members.
627
See https://www.sagaftra.org/production-center/contract/820/ for links to the various SAG-AFTRA
agreements. The IMA agreement has been amended by the SAG-AFTRA 2017-2020 Memorandum
of Agreement https://www.sagaftra.org/files/2017SAG-AFTRAIMAMOAwSchA_final.pdf and the
2020 Extension Agreement https://www.sagaftra.org/files/2020SAG-AFTRAIMAExtension.pdf.
628
The ILA, which is a temporary agreement and is scheduled to be renewed on November 13, 2022,
covers actors providing dubbing, or localizing English language soundtracks, for games originally
produced in a language other than English. Actor’s pay under the ILA is slightly higher than the IMA,
but allows for integration and reuse rights for future games without any further compensation. If a
developer is a SAG-AFTRA signatory, they must first seek approval from the union to determine if
they are eligible to sign the ILA. SAG-AFTRA will check that: (i) the game was scripted in a language
other than English; (ii) the English recording is synched to a finished visual product; and (iii) the IP
owner is based outside the United States. Releasing a foreign version game prior to undertaking any
localization for an English version of the game would qualify under the ILA. If a game does not qualify,
the IMA would need to be signed to use SAG-AFTRA performers. The ILA incorporates the terms in
the IMA and all subsequent amendments.
245 Mastering The Game
financial terms
629
and re-use fees. For many developers costs to hire union
actors will increase the game’s budget compared to a non-union production
because of minimum requirements involving payments and other benefits. The
trade off however is that the pool of union talent consists of the most experienced
and professional actors.
630
One of the most significant terms in the SAG-AFTRA agreements establishes
certain hiring requirements for games employing union talent.
631
On the one
hand, according to SAG-AFTRA’s Global Rule One, SAG-AFTRA members can
only enter into a deal with a developer if the developer is a signatory to a SAG-
AFTRA agreement.
632
On the other hand, besides a few limited circumstances,
signatory parties to the SAG-AFTRA agreements generally engage union
members.
633
As per the SAG-AFTRA agreements, absent an exception, a
signatory must employ union members during the term of their agreement with
SAG-AFTRA. One possible exception is when a signatory can employ a non-
union member under the Taft-Hartley Act.
634
In this situation, the actor possesses
unique talents for a particular production that could not be provided by a union
member
635
and agrees to apply for SAG-AFTRA membership within the allotted
time period after the beginning of employment. The developer would then submit
a Taft-Hartley form to the union detailing the actor’s employment, the production,
and the reasons why the actor is necessary for the game.
629
For instance, the LBA provides performers with additional payments (capped once it reaches a
certain amount) using a sliding scale based on the number of unit sales of a game. For example, a
game that sells over 500,000 units would entitle a performer to an additional payment of $225.50
based on the LBA in effect at the time of writing. If the same game was to sell 1 million units, then
the performer would be entitled to another $225.50, etc. Since business models will vary among
games and one based on unit sales might not be appropriate, the developer and the union would
need to determine a different form of contingent compensation.
630
The decision to become a signatory should be discussed with counsel to weigh your options for
using talent. Many voice over recording studios may also be able to provide insight into union
productions.
631
Under the IMA, talent includes voice-over, (which may include singers and atmospheric voices)
on-camera (which may include performance motion capture, stunt performers, stunt coordinators,
singers and dancers) puppeteers and background performers. See
https://www.sagaftra.org/production-center/contract/820/getting-started. Prior to joining the union, an
actor must first submit various forms to see if they qualify for admission and upon acceptance, must
pay initiation and on-going yearly fees.
632
A rarely used exception to this rule which originates from a US Supreme Court decision and is
applicable to any union member no matter what their employment, is when that union member
requests “financial core status”. In this situation, as it relates to SAG-AFTRA, a union and non-union
member can work on both SAG-AFTRA and non-union projects. if they declare financial core status
and abide by certain rules. Actors may declare financial core status as a dues paying nonmember of
SAG-AFTRA, or if already a member, resign and seek financial core status. Actors who declare
financial core may enjoy more flexibility to do union and non-union work but would lose certain rights
and benefits offered by SAG-AFTRA, including voting and running for union office, to name a few.
There are benefits and drawbacks in deciding whether to declare financial core status, so it is highly
recommended that an actor seek legal counsel specializing in this area to discuss the consequences.
Additionally, developers in “right to work” states may have additional flexibility when engaging union
and non-union talent.
633
US labor law prohibits SAG-AFTRA from preventing non-union members from participating in a
union project, or requiring that actors auditioning for a role already be SAG-AFTRA members to be
hired (although nonmembers can be required to pay initiation fees and membership dues within a
certain period after employment).
634
The Taft-Hartley Act is a US federal statute passed in 1947 that among other things places limits
on unions by prohibiting unions from requiring workers in a unionized work place to join a union. See
National Labor Relations Board, "1947 Taft-Hartley Substantive Provisions", nlrb.gov.
635
Another example would be a well-known person who portrays themself (i.e., a musician plays
herself as a singer in a game). See https://www.sagaftra.org/what-taft-hartley-report for other
possible reasons why a non-union member may qualify for work on a SAG-AFTRA production, but
certain qualifications may apply. If a non-union actor is hired instead of union actor who could play
the role in a game, then the developer could be subject to a fine by the union. See Preference of
Employment in the IMA where the IMA requires developers to give “preference of employment” to
performers under certain conditions who live within a defined geographic proximity to the site of the
production.
Mastering The Game
246
The SAG-AFTRA agreements which are scheduled to be renegotiated in
November 2022, require signatories to pay talent the union’s minimum wages,
referred to as “scale”,
636
pension and health benefits and, if applicable, overtime
pay, and bonus payments based on number of sessions worked on a project in
which the actor’s performance is used.
637
The various payments may vary
depending on the applicable agreement, which could be based on budget or
localization services, as well as the role played by the talent. For example, in
2018, SAG-AFTRA sought to incentivize low budget games developers to use
union talent, by creating an agreement with lower minimum wages for games
with budgets below $1.5 million.
In addition to payment requirements, including when payments need to be
made, SAG-AFTRA also requires signatories to disclose certain information
about a production before an actor agrees to participate and adhere to specified
working conditions. Under some such conditions, developers must notify actors
on the length of their possible role, disclose a project’s code name (instead of its
real name to protect confidentiality), its genre, whether the game is based on
previously published intellectual property (IP), and whether the performer.is
reprising a prior role. Furthermore, to help actors decide whether to accept a role,
developers must also inform them whether: they will be required to use any
unusual terminology, profanities or racial slurs; memorization will be required;
there will be content of a sexual or violent nature, and whether stunts will be
required.
638
5.5 – The Growing Role Of Actors And The
Importance Of The Actors Unions
As games employ more professional talent, the role of unions will most likely
become more prominent and developers will thus need to gain an understanding
of the rules and regulations to which union actors are subject around the globe.
As revenues increase in the game industry, it is to be expected that established
unions will seek to negotiate higher pay and benefits.
639
Finally, as games
become even more prominent in society and more well-known actors become
involved with games, many terms contained in film and television union
636
The minimum payment requirements apply, whether an actor is providing voice-over, motion
capture or appearing in a television commercial for a game, and will vary depending on the services
provided.
637
At the time of writing, pension and health benefits was an additional 16.5% of the talent’s wages.
The bonus payment, which is due no later than the game’s release date, is based on the number of
sessions worked on each game, beginning with a $75 payment on the first session and totaling
$2,100 after 10 sessions worked. See https://www.sagaftra.org/files/2017SAG-
AFTRAIMAMOAwSchA_final.pdf.
638
What the SAG-AFTRA agreements define as “vocally stressful sessions” in voice-over work
provide one example of limitations imposed on working conditions using SAG-AFTRA talent. Under
the IMA, these sessions are limited to two hours per day (payment is for four hours, however) and
are defined as “any work that risks damage or undue strain to the Performer's voice which may be
due to prolonged requests for the actor to enact: yelling/shouting/screaming, fighting sounds, death
sounds, battle cries, complicated creature sounds, unnatural vocal textures, extensive whispering,
high pitched vocal sounds, or any other voice/sound that is difficult/challenging for the performer to
deliver”. This clearly illustrates the importance for a developer to fully understand the regulations
involving actors in advance, to avoid development delays and unexpected costs. See
https://www.sagaftra.org/files/2020InteractiveLocalizationAgreement.pdf.
639
The longest strike in SAG-AFTRA’s history involved a dispute over benefits between the video
game industry and voice-over talent. Handel, Jonathan, “SAG-AFTRA Video Game Strike Ends”,
hollywoodreporter.com, September 25, 2017.
247 Mastering The Game
agreements (whether involving compensation, working conditions, approvals,
etc.) will likely migrate more and more to video game actor agreements.
248 Mastering The Game
CHAPTER 6
VENDOR AGREEMENTS – INDEPENDENT
CONTRACTORS
As the development and exploitation of games has become more complex, many
developers, whether major publishers or small mobile developers are
increasingly relying on third parties to help with various aspects of their games.
This can range from development aspects, such as providing additional artwork,
programming, music, storytelling, motion capture, and voice-over, to distribution
and marketing, including producing a trailer, organizing an event or even hiring
an influencer to help promote a game or esports competition, or hiring a sales
agent for a particular territory. These third party vendors can provide the required
expertise and assistance in a particular area at potentially lower costs, and if
done correctly, enable the developer to own the proceeds of the vendor. The
vendor is usually hired as an independent contractor, thereby creating a
relationship different from that of an employee, and with, it different rights,
responsibilities, and limitations that are imposed on the hiring entity and the
vendor.
640
In some jurisdictions, the developer must enter into a written agreement with the
person, whether they are deemed an employee or independent contractor, for
the parties’ rights and responsibilities to be enforceable. Moreover, this ensures
that both parties understand their responsibilities, and establishes ownership and
the amount to be paid in compensation or salary to the vendor or employee for
their services. This chapter illustrates the main points from a US perspective
while many of the key legal considerations regarding this type of agreement are
relevant from an international perspective, readers must be aware that laws and
regulations might differ substantially between jurisdictions.
When hiring employees, the employment agreement should cover, at the very
least: ownership matters, namely, of an employee’s work product;
responsibilities; salary; rules of conduct, which can cover the treatment of fellow
employees, to restrictions on social media involving the developer:
confidentiality, which should include the handling of trade secrets, and a
representation that the employee will not use any confidential information or
trade secrets of others during their employment and for a limited time
thereafter.
641
640
Are esports athletes deemed to be employees or independent contractors? See Winn, Audrey,
“League of Legends gamers could become California’s newest workforce”, qz.com, January 9, 2020.
According to an article on the Quartz website, while League of Legends players are not deemed to
be employees of the teams that hire them according to their agreements, this could conflict with CA
law. See also Hankins, Patrick, “Here Comes a New Challenger! Esports and California AB 5”,
Marquette Sports Law Review, vol. 31, (2020). p.129.
641
See ZeniMax Media Inc. et al. v. Oculus VR, Inc. et al., Civil Case No. 3:14-cv-01849-P (2017),
where ZeniMax sued Facebook for trade secret violations, a breach of confidentiality, and copyright
249 Mastering The Game
Compared with employment agreements, vendor agreements include more
detail in certain areas, and additional provisions. Some of the major points in the
vendor agreements should include:
• the services to be provided by the vendor;
• obligations and responsibilities of each party;
• the developer’s ownership rights;
642
• payment amount and when payment will be made;
• the delivery schedule, listing what will be delivered and when (this can
be both physical assets and services to be performed);
• acceptance of materials;
643
• representations and warranties focusing primarily on intellectual property
(IP) provided to either party and that it is original, has been licensed
properly, or is in the public domain;
• indemnification covering claims by third parties against the improper use
of IP, trade secrets, and confidential information; and
• legal issues, such as limitations of liability, confidentiality, termination,
boilerplate language, the legal status of the vendor as an independent
contractor, and how and where a dispute will be settled as well as which
law governs.
• credits.
644
Most companies draft a form agreement that includes the above terms, as well
as an attachment or appendix covering specifics to the deal. The form agreement
provides the developer with consistent terms when dealing with various vendors,
especially when a number of agreements need to be signed for several games.
Agreements can of course still vary, depending on the facts, and the parties’
leverage.
infringement involving the Oculus Rift headset. Although the jury did not find a trade secret violation,
it did find for the other causes and the court awarded ZeniMax $250 million. The parties, however,
settled out of court. See Matney, Lucas “Facebook Settles Oculus VR Lawsuit with ZeniMax”,
techcrunch.com, Yahoo, December 12 2018.
642
While some jurisdictions adhere to a “work-for-hire” doctrine, others do not allow freelancers to
assign all or certain rights and, where such assignment or rights is allowed, the formal requirements
differ. These differences are often solved in practice through the transfer of rights, unless this is
forbidden by law or broad exclusive licenses. Some countries also grant extra protection to artists,
such as active exploitation, best seller clauses, and reporting requirements.
643
The agreement should contain the procedure for accepting the vendor’s material, including the
time period within which the developer can review the materials. The agreement should also specify
the procedure for resubmitting the material if the developer rejects the material. Failure by the vendor
to deliver acceptable materials could result in termination. However, this can be a delicate matter
with regard to independent contractors, due to the oversight involved, which could determine whether
the vendor is deemed to be an employee or an independent contractor.
644
The recognition that an employee or a vendor should receive for working on a game has drawn
an increasing amount of attention in recent years. This is due to the fact that credits are usually given
at the developer’s discretion, yet, when an employee or vendor has worked on a successful game,
credits can help to improve future career opportunities - a fact long recognized by actors’ unions and
US courts when dealing with credits in the film industry. Most agreements provide the developer with
wide discretion to determine whether to give a credit, as well as its type, placement, and size.
Vendors and employees generally have to negotiate to receive a credit, which can be challenging,
and they should be aware that receiving one will most likely be subject to certain pre-conditions,
including remaining on the project from their recruitment until the project’s completion. Given that
some games’ development cycles last several years, this is a major issue for many employees and
vendors who have to leave before the project’s completion, because they are replaced, were only
hired for a limited period, or move onto another opportunity.
Mastering The Game
250
The specific matters in the attachment typically cover: (i) the services to be
performed and their delivery schedule; (ii) if applicable, an asset delivery
schedule covering what is to be delivered and when; and (iii) a payment
schedule. For example, an attachment signed with a public relations firm might
include, among the services to be provided: writing and issuing press releases,
contacting media outlets, and dealing with influencers and the press, along with
the delivery dates and payments associated with each service.
Two critical points to consider when dealing with independent contractor
agreements involve ownership, and the vendor’s legal status, namely, whether
they can, in fact, be deemed to be independent contractors. In the United States,
certain pre-conditions must be satisfied in both cases, in order for a work to be
considered a work for hire, and for a person to qualify as an independent
contractor.
As mentioned previously, under US law, an employer can own the work created
by an employee provided it is done within the scope of their employment
645
or
as an independent contractor under a work for hire pursuant to a written
agreement. Otherwise, the author of the work would be considered the owner of
the copyrighted material.
646
In order for the work to be deemed a “work for hire”,
the agreement must be in writing and signed before work starts and the work
must fall within one of nine categories of service.
647
While audiovisual works,
which include video games, are among the nine categories, software is not, and
falls instead under the category of literary works for copyright purposes. This
poses a potential issue as to whether creating software qualifies as a work for
hire.
648
Some courts have ruled that it does, but did so by ruling that software
creations are both “contributions to collective works” and “compilations”.
649
Due to the potential uncertainty as to whether services performed can qualify as
a work for hire and the fact that jurisdictions may not recognize the concept, it is
critically important that the agreement also contains provisions stipulating that
the vendor assigns their rights to the developer. The assignment of rights
transfers the vendor’s rights to the developer, although an assignment could
pose a number of long-term problems in certain jurisdictions. Under US copyright
laws, authors, under certain conditions, have the right to reclaim their copyrights
in what is known as the termination of transfers.
650
In this situation, if the author’s
645
See Mattel, Inc. v. MGA Entertainment, Inc., 616 F.3d 904, United States Court of Appeals for the
Ninth Circuit 2010, involving the creation and ownership of the Bratz line of toy dolls.
646
Dannenberg, Ross and Dravenport, Josh, “Top 10 video game cases (US): how video game
litigation in the US has evolved since the advent of Pong”, Interactive Entertainment Law Review,
(2018), vol.1, pp. 89-102.
647
United States Code, Title 17, Sect. 201.
648
United States Code, Title 17, Sect.101.
649
Rutkowski, Chad A., “Can Software Be Created as a Work-for-Hire?” lexology.com, 2016.
650
United States Code, Title 17, Sects 203, 304(c). See Johnson, Ted, “Legal Landmark: Artists Start
to Reclaim Rights to Their Music”, variety.com, Penske Media Corporation, April 16, 2013. This has
become relevant in the age of new distribution formats, as copyrights can be more easily exploited
through new media worldwide. Content that might not have previously generated much revenue
years after its initial release due to distribution limitations imposed on physical goods can now
generate greater revenue. The music industry has seen a number of artists claims ownerships of
some of their original music, including Don Henley of the Eagles, Tom Petty, Bob Dylan, Blondie,
Fleetwood Mac and film composer, Ennio Morricone. However, while the legislation initially focused
on musicians, the right can apply to other media forms besides, such as film and video games. See
“Little-known aspect of US copyright law means creators can reclaim their work: when franchises get
‘terminated’’, thenextweb.com, Financial Times, November 9, 2019 regarding the motion picture
industry. See also Jefferson, Richard B., “The Music Professionals Guide to Copyright Termination
Rights”, lawyersrock.com, October 1, 2017 with regard to music rights. The video game industry’s
251 Mastering The Game
rights were assigned and not provided as a work for hire, the author, after 35 or
40 years (depending on when the grant was made) and, provided they serve
notice of termination to the current rights holder, can reclaim ownership of their
copyright within very specific time frames.
If there is no written agreement, it is highly possible that a vendor could own the
source code. And, while the developer may have an implied license for the
specific project, a developer would have to license the rights back from the
vendor for any future project.
651
This is a painful position for the developer,
especially when there is uncertainty as to whether a license can be obtained and
how much it will cost. However, such a situation can be avoided by ensuring that
an agreement is properly drafted beforehand.
Another concern for a developer is determining whether an individual who is an
independent contractor on paper is deemed to be an independent contractor
under the laws of the United States. The language used in a contract may not
stand up to close scrutiny under the various state employment laws.
In the United States, provided certain conditions are met, an individual, that is, a
vendor, can almost always be hired as an independent contractor rather than as
an employee.
652
This provides benefits for the developer, who is not then
required to take on responsibility for taxes and worker benefits, such as sick
leave, and unemployment and disability insurance. Likewise, it allows the vendor
to work on various projects for different companies and have greater control over
their projects, although they are not entitled to the benefits they may receive as
an employee.
653
However, there are also limitations to this possibility, including
regarding the amount of oversight a developer can maintain on a project. The
line can easily be blurred and can vary by state, or by national jurisdiction.
Developers therefore need to be careful that they label vendors accurately,
otherwise they can be subject to various fines and back taxes. In addition, a
vendor who was misclassified can file claims against the developer to seek back
pay to cover any time not compensated for, such as overtime, meals, and rest
breaks.
Recently, the distinction between an independent contractor and employee has
taken on greater significance with the growth of the gig-economy
654
, illustrated
by companies, such as Uber and Lyft, whose business models rely on
future in this regard is unknown, since earlier games were not as content intensive as they are today,
although source code could pose a problem for some earlier games if the work was assigned. It
would appear that it would not nearly be as easy to exploit an author’s rights in video games and
films as it is in music. Therefore, a license for a film production company or game developer to retain
the rights might suffice. Since this is a relatively new area of potential controversy with specific
procedural issues and restrictions, including derivatives, it is advisable to contact a lawyer with
expertise in copyright and familiarity with termination of transfers.
651
Dannenberg, Ross and Dravenport, Josh, “Top 10 video game cases (US): how video game
litigation in the US has evolved since the advent of Pong”, Interactive Entertainment Law Review,
(2018), vol.1, pp. 89-102.
652
See S.G. Borello & Sons, Inc. v. Department of Industrial Relations, No. S003956, Supreme Court
of California, 1989. Furthermore, the Internal Revenue Service has adopted a test to determine
whether a person qualifies as an employee or independent contractor. See IRS, “Independent
Contractor (Self-Employed) or Employee?”, irs.gov, “Independent Contractors IRS 20-Factor Test”,
regent.edu. Failure to classify a person properly can result in civil penalties; criminal penalties may
apply if the misclassification was intentional. See Messina, Frank, “Employee Versus Independent
Contractor: The IRS and Department of Labor’s Focus on Worker Classification”, cpajournal.com,
January 2019.
653
Independent contractors cannot claim unemployment insurance from the hiring entity, nor are they
entitled to the minimum wage. These issues were addressed by California’s Assembly Bill 5.
654
A gig-economy is characterized by temporary jobs and companies’ tendency to hire independent
contractors and freelancers instead of full-time employees. See Brock, Thomas, “Gig Economy”,
investopedia.com, February 4, 2021.
Mastering The Game
252
independent contractors to move passengers around. This issue has drawn even
more attention, as a result of California’s Assembly Bill 5 (AB5), which came into
force in 2020 and is the strictest law in the United States regarding the
classification of workers as independent contractors. Under this law, the state
imposed a test adopted from a California Supreme Court decision
655
to determine
whether an individual is an employee or independent contractor, the burden
being on the hiring entity to show that the person meets the requirements to be
deemed to be an independent contractor. The person is assumed to be an
employee under the law unless proven otherwise by the hiring entity. For a
person to be considered an independent contractor, the hiring entity must
complete what is known as the “ABC test” and show that:
1. The person is free from the control and direction of the hiring entity as
regards the performance of their work, both in the work contract and in
fact;
2. The person performs work that is outside the usual course of the hiring
entity’s business; and
3. The person is customarily engaged in an independently established
trade, occupation, or business of the same nature as that involved in the
work performed.
656
If the hiring entity cannot demonstrate one of the above factors, the person would
be considered an employee unless they are covered by one of the exemptions
under the law. Under AB5, there are a number of professions that are exempt,
which may be relevant to the video game industry, including marketing
professionals,
657
graphic designers, fine artists, still photographers, and
freelance writers, as defined by the bill and who work under a written contract
that specifies certain terms, subject to prescribed restrictions.
658
In 2020, more exemptions for workers were added to AB5 with the passing of
Assembly Bill No. 2257. Under the bill, translators, editors, content contributors,
narrators, producers, illustrators, musicians, and music professionals, such as
recording artists, songwriters, composers, record producers, vocalists,
659
and
engineers, whose work is primarily original and inventive are now exempt.
660
While an individual may be covered by one of the exemptions, they are not
automatically deemed an independent contractor. Instead, a hiring entity would
need to apply the so-called Borello test, which was used prior to the adoption of
655
See Dynamex Operations West Inc. v. Superior Court of Los Angeles, 4 Cal. 5th 903, Supreme
Court of California, 2018.
656 Assemb. Bill 5, 2019 (Ca. 2020).
657
A marketing professional can qualify, “provided that the contracted work is original and creative in
character and the result of which depends primarily on the invention, imagination, or talent of the
employee or work that is an essential part of or necessarily incident to any of the contracted work.
Assemb. Bill 2257, 2020 (Ca. 2020).
658
Id.
659
“Musicians and vocalist who are not royalty-based participants in the work created during any
specific engagement shall be treated as employees solely for purposes of receiving minimum and
overtime wages for hours worked during the engagement.” The bill also excludes from the exemption
musicians performing for a symphony orchestra, at an amusement park or in a musical theatre
production. Cole, Aaron H., and Luster, Julia A., “AB 2257 Enacts Significant Changes to AB 5 on
Classification of Workers as Independent Contractors”, The National Law Review, vol.11, ser. 319,
November 15, 2021.
660
Assembly Bill 2257, 2020 (Ca. 2020).
253 Mastering The Game
the ABC test. The Borello test considers more factors, possibly making it easier
to qualify as an independent contractor.
661
Another important provision of the law is that it gives the California Attorney
General’s office, local prosecutors, and cities in the state the right to sue
companies for violating the law and the right to seek injunctive relief, to prevent
employees from misclassifying.
662
The various tests involving independent contractors are very fact specific. AB5
is still relatively new and in a state of flux, with new legal challenges, additions to
the list of exemptions, and questions will take time to clarify. Developers wishing
to hire in California need to monitor the various laws, which will continue to evolve
over the next few years.
661
The Borello test considers the following factors:
(a) The individual (defined in this subdivision as an individual providing services through a sole
proprietorship or other business entity) maintains a business location, which may include the
individual’s residence, that is separate from the hiring entity. Nothing in this subdivision
prohibits an individual from choosing to perform services at the location of the hiring entity.
(b) If work is performed more than six months after the effective date of this section, the individual
has a business license, in addition to any required professional licenses or permits for the
individual to practice in their profession.
(c) The individual has the ability to set or negotiate their own rates for the services performed.
(d) Outside of project completion dates and reasonable business hours, the individual has the
ability to set the individual’s own hours.
(e) The individual is customarily engaged in the same type of work performed under contract with
another hiring entity or holds themselves out to other potential customers as available to
perform the same type of work.
(f) The individual customarily and regularly exercises discretion and independent judgment in the
performance of the services.
See S.G. Borello & Sons, Inc. v. Department of Industrial Relations, No. S003956, Supreme Court
of California, 1989.
662
In May 2020, the California Attorney General sued Uber and Lyft, claiming the companies
wrongfully classified their drivers as independent contractors, rather than workers, which is a violation
under California’s Assembly Bill 5. However, before a court could decide the merits of the case, the
voters in California supported a proposition that allowed the drivers to be classified as independent
contractors, thereby making the lawsuit moot. In California, a proposition allows voters to change the
state’s constitution, or other state laws, and overturn previous legislatively enacted laws. See
Legislative Analyst’s Office: The California Legislature’s Nonpartisan Fiscal and Policy Advisor,
“Ballot Initiatives and Propositions: Voter Initiatives”, lao.ca.gov. However, a California court
subsequently ruled that sections of the proposition were unconstitutional since it violated the state’s
constitution. At the time of writing, the decision is under appeal. See Siddiqui, Faiz, “California judge
rules unconstitutional the measure classifying Uber and Lyft drivers as contractors”,
washingtonpost.com, August, 20 2021. How important was Proposition 22 to ride-hailing and delivery
apps? According to the Washington Post newspaper, Uber, Lyft and DoorDash spent more than $200
million on Proposition 22 challenging AB5. Faiz Siddiqui and Nitasha Tiku, “California Voters Sided
with Uber, Denying Drivers Benefits by Classifying Them as Contractors”, washingtonpost.com,
November 4, 2021.
254 Mastering The Game
CHAPTER 7
CONSOLES
7.1 - Introduction
One of the most important relationships that a publisher or developer forms is
with the platform owners that manufacture game consoles and provide the
software
663
and hardware tools necessary for publishers and developers to
develop and publish their games, whether a retail or digital version, on each
respective platform.
The console manufacturers (“CM”), of which three dominate the market, are
usually referred to as first parties. Since the introduction of Microsoft’s Xbox in
2001, the primary CMs have been Nintendo, Sony, and Microsoft. Nintendo has
been in the industry the longest, having entered in the late 1970s. It competed
primarily with Sega until 1994, when the PlayStation was introduced in Japan.
That would be the first time that three major console manufacturers would
compete for market share. Sega would eventually leave the console market in
1998, due to disappointing sales with the Dreamcast console. However, only a
few years later in 2001, Microsoft would introduce the Xbox. At various times,
different manufacturers, including Sega, have led yearly worldwide console sales
driven by the hardware and games developed for their consoles.
664
663
Software tools can consist of object code, source code, libraries, and firmware.
664
See van Dreunen, Joost, One Up: Creativity, Competition, and the Global Business of Video
Games, Columbia Business School Publishing 2020, pp. 36-37, which charts sales of the worldwide
console gaming market from 1984-2018. A few historical facts about each CM and their significance
in the industry: Nintendo, the only company of the three whose primary business today is video
games, manufactured its first console, called Color TV-Game, in 1977, with distribution limited to
Japan. Six years later, it introduced in Japan the Nintendo Entertainment System (NES), originally
known as Famicom followed by a US release two years later. Many believe that the 8-bit system
saved the video gaming industry, which was near collapse in the early 1980s, with groundbreaking
games, such as Super Mario Bros. and The Legend of Zelda. Nintendo’s hand-held video game
device, the DS, is the most successful line of handheld dedicated video game devices in terms of
sales, with over 154 million units reported sold. “Global unit sales of Nintendo DS as of November
2021, by region", statista.com, November 10, 2021. Nintendo’s Wii console, introduced in 2006,
helped expand the video game audience with its motion-sensing technology. Sony entered into the
video game console market in 1994 in Japan with the introduction of the PlayStation after Nintendo
abandoned a partnership with them to build a CD-ROM drive for Nintendo’s SNES. Sony would soon
become the leader among the console manufacturers, and its early success was attributed to a
number of factors, including the introduction of 3D graphics, the use of a CD instead of cartridges
used by Nintendo, which allowed for more memory for games, and a reduction in manufacturing
costs, helping entice developers, strong third party developer support, and strong brand and
infrastructure in manufacturing, marketing, and distributing products. The PlayStation sold over 100
million units, followed by the PS2, which would become the best-selling console in history, selling
over a reported 158 million units. “Global unit sales of PlayStation 2 as of August 2021, by region",
statista.com, August 11, 2021. Microsoft entered the console business in 2001 with the Xbox, later
adding Xbox Live, an online gaming service that allowed subscribing end-users to download content.
Microsoft has been at the forefront of online and cross-platform play. For further information on the
various CMs, see Harris, Blake, Console Wars: Sega, Nintendo, and the Battle That Defined a
Generation, Dey St, 2014; Sheff, David, Game Over, Press Start to Continue: How Nintendo
Conquered The World, Cyberactive Media Group, 1999; Takahashi, Dean, Opening the Xbox; Inside
255 Mastering The Game
According to Newzoo, revenue from console distributed games, which includes
both retail and digital, will account for $49.2 billion in 2021 and represent the
second-highest revenue generated platform, only behind mobile.
665
Although
more consumers are playing games using alternative platforms, consoles still
remain extremely popular, most notably in the United States and Europe. A 2020
report by the Entertainment Software Rating Board (ESRB) indicated that 73%
of gamers own a console device in the United States.
666
With the releases of the
PS5, Xbox Series X, and the continuing success of Nintendo’s Switch,
667
as well
as the growing popularity of subscription based services, publishers will continue
to derive a significant amount of their revenue from products distributed on these
platforms, even if an increasing amount of revenue will come from digital sales
as compared to retail. In addition, a growing number of independent developers
will likely distribute their products digitally through the CMs’ online distribution
channels, thereby providing them with access to a huge installed base of gamers.
As a result, understanding what a party is required to do in order to publish and
develop games for a console platform, and the legal and business issues
involved in any relationship with the CMs, is essential for a publisher.
668
This chapter will briefly examine some of the significant business and legal
issues
669
involving the CMs so that publishers are aware of some of their basic
obligations and liabilities.
7.2 – Agreements: Development And Hardware Tools
As the gatekeepers to their proprietary systems, the CMs have each established
their own procedures and guidelines, although these are similar in many
respects, as they permit parties to publish and develop games for their
platforms.
670
Some of the rights, procedures, and guidelines that may be updated
continuously will vary, depending on whether the party is distributing a retail or
digital product. In addition, publishers will need to sign separate agreements with
each CM. However, unlike in the past, publishers will only need to enter into one
master agreement with each CM, covering the different worldwide territories
although each CM agreement applies in certain situations different terms for a
specific region. For example, an agreement may use different language when
Microsoft's Plan to Unleash an Entertainment Revolution, Prime, Prime Publishing, 2002; Pettus,
Sam, Service Games: The Rise and Fall of Sega, 2013; and Geeks Line The PlayStation Anthology,
Geeks-Line, 2015/2017.
665
Wijman, Tom, “Global Games Market to Generate $175.8 Billion in 2021; Despite a Slight Decline,
the Market Is on Track to Surpass $200 Billion in 2023”, newzoo.com, May 6, 2021.
666
“2020 Essential Facts About the Video Game Industry", theesa.com.
667
In 2020, Nintendo sold 26.3 million Switch consoles: the highest yearly number of sales for any
console in Nintendo’s history. Batchelor, James, “Ampere: PS5 and Xbox Series X|S sales in line
with, not ahead of, previous gen”, gamesindustry.biz, February 11, 2021.
668
With the growing importance of downloadable games through the CMs’ digital distribution platform,
and the recognition of the growing importance of independent developers, it is expected that
procedures, barriers to entry, legal issues and guidelines established by the CMs will continue to
evolve to deal with the changing video game landscape. All three CMs have increased outreach
efforts to the independent development community, but is still a greater challenge to distribute
digitally compared to other digital platforms such as Steam and mobile.
669
Privacy rights, IP, end-user created content, content regulation, and monetization policies,
including those involving virtual currency, are some of the potential areas that might take on greater
legal relevance in the future.
670
See the following platform manufacturer sites regarding information for developers and publishers:
https://developer.nintendo.com/ https://partners.playstation.net/ and
https://www.sie.com/en/blog/how-to-pitch-your-game-to-playstation/; www.xbox.com/en-
US/developers?xr=footnav; http://www.xbox.com/en-us/ developers/id; and
http://msdn.microsoft.com/en-us/aa937791.aspx.
Mastering The Game
256
addressing dispute resolution, replication issues, limits of liability, and approvals,
to name a few for North America, Asia and Europe.
671
Subject to satisfying the pre-requisites established by each CM, both a publisher
and developer can enter into agreements with the CMs to create games for a
particular platform. However, traditionally, only publishers have been entitled to
distribute their games at retail, subject to a platform license agreement.
Consequently, if a developer wants to distribute their product at retail, they would
either need to become a publisher (although this is very rare) or enter into a
relationship with a publisher.
672
Many developers, in exchange for granting
distribution and possibly other rights, will enter into relationships with publishers,
as publishers will typically provide the financing and services associated with the
distribution, manufacturing, marketing, submissions and testing (QA) for a game.
In addition, publishers potentially have relationships with retailers and, with
possibly more products and franchised properties, they may be able to use their
leverage with retailers and CMs to obtain more favorable terms and
commitments, including additional marketing opportunities for a game.
For a company to become a licensed publisher it must enter into the CM’s
publishing agreement, which allows the publisher to publish games as a digital
and/or retail version. This agreement establishes between the CM and publisher
the rights, limitations, obligations, and submission procedures, which will vary to
some degree depending on the publisher’s form of distribution.
Given that CMs have significant bargaining power, there may be few
opportunities to negotiate terms with the CM, although ultimately this depends
on the parties’ leverage and the possible limitations imposed by applicable law.
If the CM is attempting to enter into an exclusive deal with a developer or
publisher, or either party provides a product that is important for a particular
platform’s success, in all likelihood there will be room to negotiate various
business points.
Under the publisher agreement, the publisher would typically have the non-
exclusive, non-transferable right to publish, develop, and distribute games, as
well as any additional content, such as downloadable content (DLC) and
microtransactions (referred to collectively in this chapter as “Game Content”) on
the console platform; to manufacture retail versions of a game through the
hardware manufacturer or approved CM vendors, and market games.
673
The publisher will also need to follow specific procedures for the submission of
games, and commit to a number of other important obligations, which may
671
Historically, publishers would have to submit materials separately for different regions, namely,
the United States, Europe and Japan, for certain CMs, with each possibly having different acceptance
criteria. Consequently, a game accepted in Europe might not have been accepted in Japan. CMs
eventually moved towards single submissions and a single final candidate game may contain a
number of different versions to satisfy various rating boards and regional customs, although
consumers would only be allowed to play the version of their designated country.
672
See Chapter 3 regarding the publisher-developer relationship.
673
In addition, the publisher would have the right to use the CM’s trademarks, subject to the CM’s
approval, but only in connection with the publishing, that is, the manufacturing, sale, and marketing,
of the game. The agreement will also state that the publisher is granting non-exclusive rights to the
CM to exploit the content material and publisher’s trademarks on their platform, as well as any
marketing materials. This would also include the right of the CM to allow the game to be streamed
on the CM’s platform and to allow third-party applications and services by players, although the
publisher would have the right to disable the streaming of their game. If the publisher allows for
streaming, it is important for a publisher to exclude any content that may not be licensed for that
purpose, namely, music.
257 Mastering The Game
include, depending on whether the publisher is distributing retail and digital or
just digital, platform royalty payments to the CM, approvals, representations and
warranties, indemnification, manufacturing procedures, use of development tools
provided by the CM, product warranties, minimum orders, specific procedures
involving the delivery of the publisher’s Game Content, restrictions and
obligations regarding online gameplay purchases of downloadable content, and
collection of end-user information.
7.2.1 – Development And Hardware Tools
Either as part of the publishing agreement or a separate agreement on tools, a
CM may grant a non-exclusive license, for a certain period, in a designated
territory for the developer to utilize the CM’s proprietary hardware equipment and
tools, such as software development kits (SDKs), test kits, development kits,
programming tools, emulators, and any other materials provided by the CM
needed to develop a game for a platform.
674
The license will cover several areas, whether in the master agreement or
separate agreement, including the conditions of use, access to and care of the
materials (which may include the right of the CM to inspect the publisher’s place
of business to confirm their compliance with the requirement to take care of and
secure the tools), costs, rights, representations and warranties, indemnification,
confidentiality, the CM’s limitations of liability, including that materials provided
are “as is”, termination, injunctive relief if materials are used improperly,
limitations on rights to assign, the law that would apply in the event of a
contractual dispute, in what jurisdiction the dispute would be heard, and other
boilerplate provisions.
675
7.3 – Development, Manufacturing, And Distribution
Issues
7.3.1 – The Submission And Approval Process
Each CM requires that Game Content, together with a game’s packaging (retail
only) and marketing materials, including press materials, be submitted for
approval.
676
Some CMs also have the right to approve in-game dynamic and
674
Some of the hardware development systems needed by developers and publishers can be costly,
depending on the number required by the developer. As a result, the publisher and developer need
to factor these costs into their development budgets if they are developing for multiple platforms. In
some situations, CMs are reducing some of the costs associated with obtaining development kits, in
an effort to promote development for their various systems. See http://us.playstation.com/develop
and http://www.xbox.com/en-us/developers/id.
675
See Chapter 12 for a discussion on common clauses that appear in many agreements, including
the various CMs’ tool agreements.
676
At one time, CMs exercised broad discretion regarding approvals and could reject game
submissions and other materials for almost any reason. In Europe, the courts and regulatory bodies
looked unfavorably towards CMs’ blanket discretion. Over the years, the CMs have reduced their
discretion, with regards to game concepts, not only due to policies in Europe, but also as a result of
competition, for example, Apple’s more liberal approval process compared with that of CMs gave rise
to a number of changes. However, CMs still exercise broad control over technical issues and maintain
the right to disapprove video games and remove them from their platforms, although this is rare after
a game’s release.
Mastering The Game
258
static advertising.
677
Each CM has its own submission policies and guidelines
covering technical and content requirements involving game development. While
a developer or publisher may begin development on a game at any time once
they have signed the appropriate agreements, at some time before a game can
be released on a console platform, certain information about the game, including
the game’s concept, will need to be approved by the CM. However, it is probably
best practice to submit a game’s concept as early as possible, to avoid any
unnecessary costs and time involved in developing a game concept that is later
refused by the CM.
Prior to submission for the CM’s final approval, referred to as a game’s
certification, the publisher must first test the game to ensure that it is compatible
with the appropriate hardware and configurations; works with any approved
peripherals; and that there are no bugs, viruses, or defects in the game that
would prevent it from playing on a platform. Once the publisher has tested the
game, it would submit a final version to the CM for its approval
678
to ensure that
the game meets the CM’s technical and quality requirements and is functional,
and therefore ready to be released for distribution.
679
Following the CM’s
approval, the master candidate is then ready for duplication or digital
distribution.
680
Publishers should also be aware that they must comply with all
certification requirements on an ongoing basis and, in most cases, they must
obtain approvals for updates and patches. Finally, CMs might also require that
all games be localized to the same extent as the localization carried out for any
other CM. This would include, at the very least, languages, text, voice, and
packaging.
The publisher will also need to submit all retail packaging materials, including
related artwork, user instructions, warranty information, brochures, promotional
inserts, and packaging. Furthermore, all marketing and promotional materials
must be approved by the CM that incorporates its trademarks or name on, for
example, press releases. These requirements are quite broad and cover any
activities involving the use of any of the CM’s trademarks, brand names, and any
other intellectual property. For example, this could include advertising materials,
such as online, television, radio, print, promotions, posters, public relations,
677
In-game advertising is also usually subject to other provisions in the agreement, including
compliance with a countries’ advertising regulations, which may prohibit certain products targeting
children.
678
The CM will conduct so-called first party checks to verify that the software works on the platform
and does not violate any technical requirements or guidelines established by the CM. Publishers or
developers must not submit a game to the CM expecting it to do the initial testing, since this will only
delay the approval process and increase costs.
679
If the submission is approved, the CM will release the master candidate to manufacture, that is,
for retail versions, this would include duplication and packaging. If the master is rejected, the
publisher would need to resubmit, and the CM would need to review it again. A publisher might be
allowed to request an expedited review, in order to respect a projected release date, although that
would usually result in an additional charge.
680
To date, CMs have required that all manufacturing for game discs, cartridges, and demos be
carried out, either by the CMs or by their certified vendors. European publishers have the option to
use other vendors, although CMs will still need to approve anything manufactured. This ensures that
the quality and security measures required by the CM are carried out pursuant to the CM’s
requirements. All the CMs have a number of approved certified manufacturers to duplicate their
products throughout the world. In contrast, for games on PC, the publisher can contact and enter into
a deal with any DVD replicator. Even after materials have been approved by a CM, the CM will be
entitled to require a publisher or developer to correct any defects in a game or mistakes in materials,
such as an incorrect use of a CM trademark. This could entail a recall of products or the publication
of an update for a game in order to correct the problem.
259 Mastering The Game
press releases, contests, web pages, and retail displays. Failure to submit such
materials could result in a breach of the agreement.
CMs may also stipulate the following requirements:
1. Each game, whether sold at retail or digitally distributed, must receive a
rating and include the assigned content descriptors by the region or
country’s rating board. In addition, the rating can be no more restrictive
than a mature rating in the United States and its equivalent in any other
territory with a rating system.
681
2. Unless approved by the CM, restrictions may apply to the bundling of
games and the use of peripherals.
3. Once the game is in distribution, the publisher will be required to provide
customer support for the game, including technical support for issues
relating to game play.
4. The publisher must provide a standard defective product warranty on all
products sold.
5. The publisher will have the right to provide their own end-user license
agreements, subject to restrictions. Some of these restrictions may
include that the publisher’s terms and conditions do not conflict with
those of the CM’s end-user license agreement, or disclaim any
warranties and damages on behalf of the CM.
6. The publisher must correct on a continuous basis any bugs and errors
once a game has been certified.
7.3.2 – Distribution
If the developer elects to have their game distributed digitally through the CM’s
online distribution channel,
682
the publisher agreement will include specific
sections covering digital distribution. Those sections usually contain various
business terms similar to those in PC digital distribution agreements,
683
including:
1. The submission and approval process for Game Content, which can vary
between retail and digital, and accompanying marketing and publicity
materials.
2. Rights granted by each party, which will also include matters pertaining
to end-user rights after the removal of a game.
3. Term of the agreement, and the rights of either party to terminate for
breach, which includes the publisher’s right to terminate for convenience,
subject to fulfilling certain obligations.
4. Territory in which a game may be distributed.
681
See Chapter 10 regarding ratings. For some CMs, if a rating board does not exist in a territory,
the CM will have the right to approve the game and has the right to reject the game if it contains
excessive violence, or sexual content, inappropriate language and any other elements they may
deem unsuitable. Furthermore, all additional content provided digitally must be consistent with the
game’s rating.
682
Sony’s PlayStation Network, Microsoft’s Xbox Game Store, formerly known as Xbox Live
Marketplace, and the Nintendo eShop.
683
See Chapter 8.
Mastering The Game
260
5. The revenue share between the parties from the exploitation of the
Game Content.
6. When payment is made by the CM and what information will be provided
to the publisher regarding the payment, such as statements and the right
to audit.
7. What materials will need to be delivered.
In addition, sections in the publisher agreement will apply both to retail and
digital, including such sections as representations and warranties,
indemnification, dispute resolution, ownership rights, limitation of liability, and
boilerplate language.
7.4 – Business Issues
The major business matters for a publisher in a CM publishing agreement usually
involve: (i) minimum order requirements for packaged goods; (ii) the platform
royalty fees paid to the CM for packaged goods and the revenue share split for
digitally downloaded content;
684
and (iii) possibly marketing support from the CM.
For the independent developer who is not dealing with a publisher and is
interested in digitally distributing their product through a CM’s online network, the
most important business issues involve the revenue share split for their digital
download content, and confirming a release window for the digitally downloaded
game, and visibility on the platform.
7.4.1 – Minimum Order Requirement For Packaged Goods
For retail sales, the CMs require minimum orders for packaged goods for each
defined region or territory.
685
A publisher must therefore commit to a certain
minimum payment. These costs will cover manufacturing, printing, and
packaging, and typically must be paid prior to shipment.
7.4.2 – Licensing Platform Royalties
Licensing platform royalties are fees paid by publishers for each retail product
manufactured for use on a CM platform. The royalty covers a license fee, as well
as the publisher’s right to use the CM’s name, and proprietary information. CMs
can unilaterally revise the licensing fee, and it may vary based on a number of
684
CM's primarily make money from: (1) the sales of each unit of a game manufactured by the
publisher, whether or not the product is ultimately sold in the form of a platform royalty; (2) sales of
their hardware, although this is usually done at an initial loss as the CMs subsidize the costs to help
drive software sales; (3) a share in all sales of digital content on their online network; (4) sales of
games developed by the CMs, whether by internal teams or third parties hired pursuant to a
developer agreement; (5) sales of licensing fees for any peripherals compatible with the hardware;
and (6) licensing involving their IP, such as films and merchandising.
685
These might include, for example, North America, South America, Europe, Australia, Asia, and
Japan.
261 Mastering The Game
factors including the region in which the product is sold, the number of units
ordered by the publisher,
686
and the pricing of a game.
687
Even if the publisher is unable to place the units ordered in retail, whether this is
due to a lack of demand for the minimum order requirements, the publisher
incorrectly ordering more units than needed based on sales forecasts, for
example, the units being returned by the retailer, or the price being lowered to
incentivize consumers, the publisher will still be responsible for the entire
payment of an order based on the initial wholesale price, and will not be entitled
to a refund.
688
The publisher must determine, therefore, even before developing
a game, that the anticipated numbers of packaged goods sales combined with
digital sales make its efforts economically viable.
689
In some situations, although very limited compared to past years, publishers
receive manufacturing discounts for packaged goods if the publisher is eligible
for any of the CM’s qualified programs. In this scenario, the game has achieved
a certain number of sales established by the CM, as well as a certain shelf life
and would be re-released and re-branded subsequently at a reduced price,
under the CM’s special sales program. These types of programs can extend a
game’s brand recognition and help distinguish the game for the end user as a
previously top-tier selling game, providing an additional incentive for the end user
to purchase the product at a reduced price. Furthermore, for the publisher, it
provides an opportunity to sell its product later in the game’s distribution cycle at
a reduced price, with lower royalty commitments and, if applicable, with the goal
of selling additional content digitally.
Manufacturing and minimum order requirements are not relevant to digitally
distributed content. Instead, like with other forms of digital distribution channel,
the CM receives a percentage of the sales price of the item sold. Traditionally,
CMs have taken a 30% fee. The price of the items would be determined by the
publisher, and sales revenue would be received by the CM and remitted with a
statement to the publisher.
7.4.3 – Marketing
For video games, the marketing budget is one of the most significant expenses
incurred by a publisher outside development and manufacturing. In a highly
competitive market, a video game may have a very short window of time to attract
consumers. A marketing “spend” can therefore increase customer recognition of
686
Like with the purchase of any type of goods, royalty rates may decrease as the number of orders
increases for a particular region. Unlike the CMs that require a royalty payment for each unit of a
game manufactured, there are no royalty payments paid to PC hardware manufacturers.
687
Historically, publishers paid their licensing/royalty fee based on, either the initial wholesale price,
or SRP, even if the price was subsequently lowered.
688
An additional challenge with retail sales is the fluctuation of pricing between digital and retail
games. The growing popularity of digital games has brought about widely fluctuating price points and
dynamic price changes. In the traditional retail market games, prices tend to drop if the game is not
selling as well as hoped, in a sale, or during a promotion, but not to the same extent as in the digital
marketplace. Moreover, digital allows for games to be sold significantly more cheaply when initially
released, at prices that would not be sustainable for most games in the retail market, especially if set
below $10, not to mention all the costs and time needed to even place a game on the retail market.
Furthermore, a market saturated with low priced digital games poses an additional challenge for other
games, which despite higher development and marketing costs, may have to reduce their retail price
to compete.
689
See additional information on retail sales matters in Section 3.2.8.
Mastering The Game
262
a game.
690
Developers should consequently try to negotiate a marketing
commitment from a CM, which could even include premium placement on the
CM’s website While this can be difficult to negotiate, it could be possible if the
publisher enters into an exclusive distribution opportunity with the CM for a set
time period or provides unique content.
7.4.4 – Exclusivity
One way that may help increase the visibility of a video game is by entering into
an exclusive distribution relationship with a CM. However, this can be challenging
for many publishers without a successful track record. Publishers may elect to
release a game on a single platform, or release unique content for a certain
period of time in return for possible development and/or marketing costs and/or
improved placement on the CM’s storefront. The developer would need to gauge
whether the exclusive window with one platform, assuming that it is provided with
relevant support from the CM, outweighs distribution across various platforms.
7.5 – Legal Issues
All the CM agreements contain a fair amount of legal language that is beneficial
to the CM. There is usually little, if any, room to negotiate any such terms,
although this may be possible on rare occasions, depending on the publisher.
While agreements differ among CMs, each will, at the very least, address
matters. such as representations and warranties, indemnification, confidentiality,
limitations on the collection of end-user data, termination, and limitations on
liability. This section will discuss some of the legal terms that may appear in the
publisher agreements with the CM.
7.5.1 – Representations And Warranties, Indemnification, Limitation
On Liability
In the various CM deals, CMs have, not unexpectedly, traditionally limited their
representations and warranties, thereby limiting their liability, subject to the
applicable law. Typically, the only representations and warranties CMs usually
make, pertain to their right to enter into the agreement, and stipulate that they
will fully perform their obligations under the agreement’s terms. Like other
manufacturers of hardware, not only do CMs limit their representations and
warranties, they also do not make any claims that their platform and materials
provided to the publisher do not infringe the rights of third parties, as well as any
690
Typically, the marketing spend for a retail console game will be a percentage of projected sales
and revenue. Publishers, in determining what percentage to allocate to marketing a game, will usually
consider the following factors: (i) anticipated revenue, including units forecasted and possibly in game
purchases; (ii) the game’s budget; (iii) current market conditions; (iv) marketing spends for similar
games; and (v) past sales of a franchised game, if applicable. Marketing plans might encompass
television, print, and online advertising, event sponsorships, outdoor advertising, direct mail, and
cross-promotion. In addition to marketing, publishers will spend on retail or channel marketing, which
may include pre-sell giveaways, point-of-purchase displays, and coop retail advertising campaigns.
Actual marketing numbers for games are difficult to obtain, as they are sometimes combined with
development costs. For AAA titles, marketing dollars can easily run into the tens of millions, especially
if there is a television campaign.
263 Mastering The Game
implied warranties of merchantability.
691
As a result, materials provided to the
publisher are typically on an “as is basis” to the greatest extent permitted by
law.
692
On the other hand, the publisher will be required to make a number of
representations and warranties, reducing the CM’s risks and liabilities as much
as possible, and indemnifying the CM against any loss, liability, and expenses,
including any settlements and legal fees resulting from any claims against the
CM involving the publisher’s goods and services, marketing, sale, or collection
of data. The CM will establish the indemnification procedures, namely, notice,
and control of the defense, including the CM’s right to approve counsel selected
by the publisher and any settlement. It is conceivable that, in some cases, the
interests of the parties may be different, further complicating how indemnification
will be handled.
In addition to the indemnification responsibility, a publisher is required to
maintain various forms of insurance, including errors and omissions insurance,
covering claims in which the CM is indemnified, for example, for IP infringement.
As part of the insurance coverage, CMs require (i) coverage amounts and
deductibles at certain levels, (ii) proof of insurance indicating the coverage
obtained and naming the CM as an additional insured party under the policy, and
possibly as a beneficiary, and (iii) notice to be provided to the CM within an
agreed time period in the event that the policy is terminated or modified.
693
The most significant representation and warranty made by the publisher involves
the Game Content, which includes content created by end users, the tools
(excluding the development tools provided by the CM), and any other game-
related materials, such as marketing materials owned or licensed by the
publisher and that they do not infringe upon the rights of any other party. These
rights would include names, trademarks, copyrights, patents, trade dress, trade
secrets, rights of publicity and privacy, moral rights, and any other IP rights
worldwide. This representation and warranty is critical, in view of the potential
risk of the CM being named in a lawsuit involving a publisher’s game infringing
the rights of a third party, whether the naming of the CM in the lawsuit were
justified or not.
Other representations and warranties typically also stipulate that: (i) the Game
Content will be free of major bugs or viruses; (ii) the Game Content will be rated
and will not be altered, which would invalidate the rating, and that the Game
Content will not include any illegal data, images, or messages, such as obscene,
defamatory, pornographic material; (iii) the publisher will not violate any rules,
laws or regulations, including through the collection and sharing of data; (iv) the
rights granted will not conflict with those granted to another party, and (v) the CM
will not incur any financial liability for Game Content namely, for the talent and
music. In the event of the breach of any of these representations and warranties,
691
For example, in the United States, an implied warranty of merchantability means that the goods
must meet certain criteria: they must be fit for the ordinary purposes for which such goods are used,
be adequately packaged and labeled and conform to any affirmations of fact made on the container
or label. Uniform Commercial Code (U.C.C.) Sects 2-315 and 2-314(2)(c).
692
In the United States, state law may limit the enforceability of limitations of liability, and courts will
not limit liability if a party has engaged in gross negligence, fraud, unlawful acts, or intentional torts.
See Cannady, Cynthia, Technology Licensing and Development Agreements, Oxford University
Press, 2013, p. 275 and California Civil Code, Sect.1668.
693
See Sections 3.2.16 and 4.3.11 for a more detailed discussion on E & O insurance.
Mastering The Game
264
and that the publisher fails to cure the breach (assuming that it can be cured),
the CM would then be entitled to terminate the agreement.
CMs will also restrict their liability, in the event of a breach on their part, by limiting
the potential amount of monetary damages and the type of damages, such as
consequential and indirect damages, which may include lost profits, opportunity
costs, loss of goodwill, and damage to reputation, that could be claimed by a
publisher. For example, if a CM’s online network went down, or there was a
problem with the hardware or software, this could result in a loss of potential
sales for a publisher. Agreements also include provisions limiting the publisher’s
liability, but these are more limited in scope and typically exclude certain
breaches by the publisher.
7.5.2 – Confidentiality
Even though the publisher may have signed a separate confidentiality
agreement, subsequent agreements will contain a confidentiality clause and will
generally supersede the previous confidentiality agreement, given that the
relationship between the parties will have developed since their initial
communications. Since the publisher and CM would both be exchanging
extremely sensitive business information, whether orally, in writing, or in machine
readable format, each party is required to maintain the confidentiality of the
disclosing party’s information.
The CM will likely receive information from the publisher that might include: (i)
product proposals, and (ii) game designs and other information about the game
planned for development. Later, the parties may exchange business and
marketing plans, followed by yet-to-be-published game software and marketing
materials. Likewise, depending on the type of agreement between the CM and
publisher, which could consist of an exclusive development deal, or a distribution
deal, which may involve more information exchange, the CM will be providing
confidential information about the hardware and software, including development
tools, and any marketing or business strategies.
Due to of the important nature of the confidential information exchanged, each
party will be required to maintain confidentiality for a fixed period of time and take
the necessary steps to maintain confidentiality. Furthermore, both parties will
generally only be permitted to share confidential information on a need-to-know
basis with employees, developers, and subcontractors, who may also have to
sign a separate confidentiality and non-disclosure agreement. However, in
certain circumstances, confidential information may be disclosed publicly, upon
a decision by the parties or by a court, government, or administrative order.
694
7.5.3 – Assignment
As in the case of a licensor-licensee relationship, the CM is specifically entering
into an agreement with the publisher based on a number of factors, which may
include the company’s expertise and financial security. The publisher will be
prohibited from assigning the agreement or transferring their rights and
obligations to another party without the CM’s prior approval.
694
See Section 11.3.2 on the common exceptions in confidentiality agreements.
265 Mastering The Game
7.5.4 – Term And Termination
The length of the agreements is set by the CM and can either expire at the end
of the term, or be terminated earlier under certain circumstances, such as an
uncured material breach by either party, or termination for convenience by the
publisher after the expiration of the initial term. The material breach provisions
that can be invoked by the CM are usually very broad and can have
repercussions affecting any other agreement, such as a tools agreement.
Consequently, the termination of an agreement due to an uncured breach can
result in the termination of other agreements.
While the publisher is entitled to terminate the agreement if the CM materially
breaches it and fails to provide a cure, the agreement provides for more
situations under which the CM could claim materially breach. A publisher’s
material breach of agreement may differ slightly according to the agreement and
depending on the CM, but might include:
1. Failure to pay monies owed to the CM.
2. Failure to cure a breach of a representation and warranty or any other
material term in the agreement subject to indemnification.
3. Failure to follow the guidelines for the submission and approval of games
and any other materials.
4. Failure to safely secure materials provided to the developer or publisher,
such as development tools.
5. Improper use of a CM’s trademarks.
6. Use of materials that have not been approved by a CM.
7. Failure to comply with ratings rules and regulations.
8. Bankruptcy or insolvency.
9. Unauthorized disclosure of confidential information.
10. Selling of games outside approved territories.
11. Game Content and any other materials associated with the game causes
harm or is likely to cause harm to the CM, its end users, and third parties,
namely, networks, such as a security breach or damages the reputation
of the CM.
12. A publisher is in any IP dispute or litigation with a CM company or
affiliate.
If a publisher were to breach the agreement, they would usually be given a fixed
amount of time to cure the breach, depending on the type of breach and
assuming it is curable. For example, a bankruptcy filing or an assignment for
benefit of creditors may not entitle the publisher to a cure period. Furthermore,
in certain circumstances, especially when dealing with IP, the CM may have the
right to seek injunctive relief caused by a potential breach.
In the event that an agreement expires in certain circumstances involving a retail
product, the publisher would be allowed to sell off remaining inventory, within a
period typically between 90 and 180 days, depending on the CM agreement. Any
inventory remaining after the sell-off period would need to be destroyed within a
set period. In addition, publishers might still be required to provide customer
Mastering The Game
266
support for online features, and any CM materials in the possession of the
publisher, whether the materials consist of developer kits or confidential
information, would need to be returned or destroyed subject to the CM’s decision.
For digital products and content (associated with retail games with downloadable
content), the CM may require the publisher to provide adequate notice to the end
users that the video game will be removed from the catalogue, thus becoming
unplayable or some features might be removed. However, in some cases, a
video game can be removed immediately on account of legal issues or the
termination of an underlying license.
7.5.5- Choice Of Law, Venue
This section will discuss: how disputes are settled, whether it is done through
initial informal discussions, arbitration, court (which may or may not allow for a
jury trial depending on the dispute), or a combination of these possibilities; the
law to be applied in the event of a dispute; and where they are resolved.
As a result of the CMs’ bargaining position, the publisher must agree to the CM’s
choice of law and venue, which may vary depending on the region in which the
CM deals with the publisher. For example, a publisher who wants to distribute in
Asia on the PlayStation would need to resolve any legal issues in Tokyo. For
publishers, especially smaller companies, this is a significant issue in the event
of a dispute arising between the parties, since travel and other expenses, and
the possibility of needing local counsel can be a huge burden on any company,
especially if a CM requires all disputes to be resolved in one venue.
7.6 – Moving Forward
The role of the CMs will change in the next few years, in line with the shift in the
way consumers can play games. Many consumers who have played on hand-
held devices and consoles may now largely play on alternative platforms on
mobile and tablet devices. While some consumers may change their gaming
habits, many will continue to play on consoles, and others will start playing (by
purchasing retail games or by playing online) on a console platform. Even though
there are currently more economic and procedural barriers to developing and
publishing games on console platforms, compared to other platforms and
distribution methods, the rewards can be great, especially for successful AAA
titles. It is therefore an option that developers should consider when planning to
develop games. However, before undertaking any development, a developer and
publisher must know how each CM operates; what they require; what guidelines
they will need to follow; and what obligations, including financial, will be required
of them.
267 Mastering The Game
CHAPTER 8
PC DIGITAL DISTRIBUTION
8.1 – Introduction
Digital distribution means delivering content through the internet without the use
of physical media. Digital distribution provides many advantages compared to
retail, as it bypasses the associated limitations and expenses.
695
Digital
distribution provides players with instant access to the game, downloadable
content (DLC),
696
updates, and enhancements.
697
It facilitates innovative
monetization strategies, such as microtransactions while providing an easier and
faster mechanism for developers to acquire feedback from players.
While retail sales of console games still play an important part in the gaming
industry, digital sales from mobile, PC, and consoles are now the leading form of
distribution. It is easy to understand why this has happened, although for many,
it happened faster than expected. Within the last ten years, the number of players
spending on digital games compared to retail games shifted dramatically. In
2009, retail sales reportedly accounted for approximately 80% of all sales and,
by 2019, they accounted for less than 18%,
698
eventually dropping to around 10%
in 2020.
699
This is a remarkable turn of events that has affected almost every
aspect of the video game industry, including how games are developed and
monetized, retail, accessibility to games, and the platforms consumers use to
play games.
For many console manufacturers and publishers, games that are digitally
distributed on console now exceed retail sales. Digital sales have been steadily
increasing in the console market and reached unprecedented levels in 2020,
695
The traditional retail channel continues to provide a major source of revenue for publishers who
have built up the relationships and infrastructure to support retail distribution of physical content.
Generally, unless a developer has signed an agreement with a publisher to distribute the developer’s
game, traditional retailers will probably not represent a viable option for independent developers, due
to the costs and logistics of retail distribution. Such costs include manufacturing, shipping, storage
and inventory risk, coop advertising, insurance, returns, and price protection. In addition, there could
be problems or delays with reporting and payment, while digital distribution platforms (DDPs) tend to
report and pay earlier. Even for major publishers, retail costs in certain countries pose an even
greater challenge due to taxes and government regulations.
696
Downloadable content (DLC) generally refers to online content and features unique to a specific
game that can be purchased, downloaded, or accessed separately from the game or through in-
game store purchases. Online content and features may include virtual items, new game scenarios,
or levels and additional functionality to enhance user experience. DLC can be for both digital and
retail games.
697
Games and other content can be downloaded or streamed. Downloading involves transferring a
file from a remote server that is then saved onto an end-user’s computer hard drive. Streaming, on
the other hand, consists of the transmission of data, that is, a game, to a device as required, instead
of downloading and saving an entire game. An advantage of streaming is that the game can be
picked up on another device and continued at the place the gamer stopped. Unlike downloaded files,
which remain on the computer until the user deletes them, streamed content is automatically deleted
from the computer by the operating system after it has been played or watched.
698
Clement, J., “Digital and physical game sales in the US 2009-2018, by format” statista.com, May
5, 2021.
699
Smith, Mina, “91% of 2020’s Game Industry Revenue was Digital”, gamerant.com, December 24,
2020.
Mastering The Game
268
accelerated by people staying at home as a result of COVID-19. For many
publishers, digital console game sales exceeded 50% of overall sales in 2020,
and this trend is expected to continue. Both Sony and Microsoft’s next-
generation platforms introduced models without disc capabilities that rely solely
on digital distribution, further illustrating the growing importance of this form of
distribution. At the time of the launch of the PS4 and Xbox One, digital sales
accounted for approximately 5-10% of sales on those platforms. Today, they
account for more than 50%.
700
In the second quarter of 2020, Nintendo reported
for the first time that digital sales, which included software, online subscriptions,
and DLC, had exceeded retail sales over the course of a single quarter.
701
This
represented a huge jump from the first quarter of 2019, when digital sales
accounted for 22.3% of sales.
702
While sales continue to grow with digital on
console,
703
only time will tell what impact COVID-19 had on sales and whether
these increases are expanding the overall market, and/or increasing digital sales
at the expense of retail.
PC is even more pronounced illustrating the rapid move to digital distribution. In
recent years, PC digital sales have dominated the market compared to retail PC
sales, which have dipped to as low as 2 % of all sales.
704
Worldwide digital distribution revenue in 2020, excluding mobile, generated
$52.8 billion, with PC accounting for $31.1 billion and console $19.7 billion
705
and
led to an unprecedented number of games being released by independent
developers and publishers. This revenue growth has primarily been driven by
improvements in technology, greater access to the internet and digital platforms,
extra content made available digitally and growth in bandwidth capabilities
providing many players with a relatively easy way to obtain a huge assortment
of current and catalog games worldwide.
The transition from retail to digital has helped expand publishing opportunities
for developers and publishers
706
providing them with new markets and greater
and direct access to players worldwide - many of whom may have been
previously denied access, primarily due to software and hardware costs.
Furthermore, developers could participate in seasonal discount sales, and offer
price differentiation among different countries, thereby providing consumers with
access to games that were previously unattainable for many due to the retail
costs.
707
700
Sony reported that from April to June 2020, digital sales accounted for 74% of full game sales,
compared to 53% the previous year. Nintendo also reported record digital sales. Good, Owen S.,
“COVID-19 pandemic turns console gamers to digital sales in record numbers”, polygon.com, August
11, 2020.
701
Coulson, Josh, “Nintendo Is Selling More Digitally Than Physically For The First Time Ever”,
thegamer.com, August 17, 2020.
702
Ibid.
703
Morris, Chris, “One year into the pandemic, video game sales aren’t slowing down”, fortune.com,
April 16, 2021.
704
Ibid.
705
Valentine, Rebekah, “Digital games spending reached $127 billion in 2020”, gamesindustry.biz,
January 6, 2021. Most industry reports also calculate mobile sales as part of digital sales.
706
Established publishers may have greater leverage when dealing with DDPs because they may
have stronger IP and a more extensive catalog, to which DDPs would like to access. Consequently,
publishers may be able to negotiate more favorable terms, including marketing and placement
commitments from DDPs.
707
van Dreunun, Joost, One Up: Creativity, Competition, and the Global Business of Video Games,
Columbia Business School Publishing, 2020, p.19. But see below for information about the issue of
geo-blocking in the EU.
269 Mastering The Game
As shelf space continues to shrink in many retail outlets,
708
digital distribution
provides a significant and cheaper alternative for releasing new and older
products.
709
First, developers and publishers earn more revenue on a digital sale
than a retail sale when all the costs are factored in, providing for higher profit
margins. Second, digital has provided a more financially beneficial means of
extending a game’s life cycle, whether through the sale of older games, such as
catalog titles, or through continuous downloads of new content, reducing the
need to publish sequels as frequently as in the past, while generating revenue
and maintaining a franchise’s visibility at lower costs.
710
Third, with new PC digital
distribution platforms (DDPs) entering the market and competing for content,
more will offer unique opportunities, which might include better financial terms
for developers granting distribution rights, namely, minimum guarantees,
marketing commitments,
711
and/or lower fees charged by DDPs for their
services. This can mean significant amounts of money for developers. Fourth,
games in most situations can reach consumers faster, avoiding the longer
console certification process. And finally, while still a problem, there is less piracy
which deterred publishers from distributing retail versions of games in certain
territories, such as Russia,
712
especially when games are given away free of
charge.
Consumers have also benefited in a number of ways. First, digital distribution
has given them access to an incredible range of games that may not have been
accessible to them at retail. This includes new games created by independent
developers, which may result in innovations in gameplay and business models,
and classic games from a publisher’s library. Second, the number of games now
available, which is very beneficial for a consumer, yet a challenge for a
developer, has created a more competitive market that helps keeps games
competitively priced and has led to new customer features as DDPs compete for
players. Third, more and more games continue to provide new downloadable
708
Over the years, the amount of space allocated in retail outlets has dwindled substantially, or has
been eliminated altogether for certain formats, such as PC, in certain regions. This has mostly been
driven by the growing popularity of digital distribution on various platforms. With retail space limited,
retail stores focus on selling the potentially most successful games, thus keeping other games off the
shelves. Retail space is largely dominated by games from AAA publishers and by sequels, reducing
opportunities for independents (unless distributed by a AAA publisher). Consequently, competition
for shelf space can be intense. In contrast, digital DDPs provide a significantly wider selection of
games. In 2021, Steam had more than 50,000 games available on their platform. Bailey, Dustin,
“Steam just reached 50,000 total games listed” pcgamesn.com, February 12, 2021.
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For older games that a developer or publisher may be interested in bringing back to market, it
must be confirmed that any licensed content, including music, is still under a valid license. Otherwise,
the developer will need to (i) remove the game, or (ii) pull the content from the game, depending on
the content’s significance in the game, and may not be possible due to technical issues; or (iii) enter
into a new license for the content, which may be time consuming and expensive to obtain.
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See the commitment of Electronic Arts (EA) to live services, which has been echoed by many
other developers. Valentine, Rebekah, “EA ‘Doubling Down On Live Services’ As Digital net Revenue
Share Grows in Q2” gamesindustry.biz, October 29, 2019. Some developers are able to exploit other
IP rights, such as the music soundtracks of their game on a DDP site.
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The Epic Games Store and Borderlands 3 deal is an illustration (albeit, probably a unique
agreement due to the amount of money involved), of a business deal that probably would not have
been offered in the past because of the limited competition in the PC digital market. During the Epic-
Apple antitrust trial in the United States, it was disclosed that Epic Games paid $146 million for a six-
month PC exclusivity for Borderlands 3. The deal included an $80 million guarantee, a $15 million
marketing commitment, and $20 million non-recoupable fees. Batchelor, James, “Epic Expects Epic
Games Store to be Profitable by 2024” gamesindustry.biz, May 4, 2021. According to court
documents, it was also revealed that Epic recouped $100 million in the first two weeks of the game’s
release and reported a 50% increase in users. Zhang, Carol, “Borderland 3’s Exclusivity On Epic
Games Store Cost $115 Million” screenrant.com, May 5, 2021.
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van Dreunun, Joost, One Up: Creativity, Competition, and the Global Business of Video Games,
Columbia Business School Publishing 2020, p.149.
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content, allowing even older games to reboot.
713
Fourth, digital has expanded
opportunities for cross-platform play, provided the DDP allows for it and the game
is cross-platform enabled.
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Even though there are many benefits associated with digital distribution, there
are certain caveats of which developers should be aware. For example, while
lowering the barrier to entry helped the industry grow, it also led to an abundance
of games of varying quality and distinguishing one from another, known as
discoverability, on a highly saturated digital market is a challenge in and of itself.
DDPs can only promote a limited number of games on their banners and the
front pages of their stores, which give the first and, probably, most important
impression to consumers. This space has become the equivalent of prominent
positioning within a retail store, rather like endcaps and store windows.
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On
account of these hurdles, many independent developers are relying on
algorithmic curation, or word-of-mouth marketing campaigns, for example, which
can be challenging. As a result, it is critical that the developer try to negotiate
some commitment from the DDP to highlight their game(s). This might not be
possible however depending on the developer’s bargaining strength and the
game’s attractiveness. In addition, piracy and the growing importance of
localizing games for various markets are relevant issues for digital, as well as
other, forms of distribution and must also be taken into consideration.
It is also important to note that not all games may be accepted for distribution,
and a developer must choose carefully which DDPs to work with, according to
their needs and, only after careful and thorough consideration of, among other
things, exposure, the DDP’s reach and audience, term arrangements, obligations
and responsibilities, as well as revenue share and pricing. Furthermore, if a
developer chooses to license distribution rights to more than one DDP without
any unique arrangement, then in some situations, the various DDPs might seek
parity, which might be referred to as “most favored nation”, including in regards
to release dates, content, fixing bugs, customer care, pricing, and game
localization.
There are several independent and highly successful DDPs, such as, Valve’s
Steam, developed by Valve, which is the dominant player in this space followed
by, Epic Game Store, GOG Galaxy, Humble Bundle, and Itch.io. In addition,
many AAA publishers have digital stores as well as dedicated software, such as
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Digital distribution, including mobile, allows developers to revise games by modifying them with
additional content continuously. This can be advantageous for both a developer and consumer since
it extends the opportunity to attract and maintain end-users while generating revenue. In a growing
number of situations, revisions in games have been driven by community feedback from end-users
providing commentary on what they like, dislike, and what they would like to see in the game. In no
other form of entertainment can consumers impact the development of a product like video games.
714
All the major console manufacturers now embrace, to various degrees, cross-play. Initially, unlike
Microsoft, Sony was slow to adopt to cross-play on their platform. This decision was probably
primarily driven by economic reasons since exclusive content on their platform presumably helps
drive platform sales. It was revealed during the Epic lawsuit against Apple that Sony permitted cross-
play involving Fortnite in 2018 subject to Sony receiving royalty payments. The payments would be
triggered if revenue fell below a certain threshold involving end-users playing on a PlayStation but
paying on another platform (i.e., iPhone) and therefore denying Sony revenue from the game. Goslin,
Austen, ”Epic Boss”: We Paid PlayStation for Cross-Platform Fortnite”, polygon.com, May 4, 2021.
This royalty payment appears to have been applied to any publisher in which Sony allowed a
publisher to cross-play a game that included the PlayStation 4 console. However, as cross-play
becomes more important for end-users, especially for games distributed on multiple platforms, it may
make more sense to allow for cross-play.
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DDPs will provide prominent placement based on a number of factors, which may include: the
publisher or developer’s previous success and recognition; publicity generated about the game; pre-
sales; algorithms and positive feedback and support from the DDP’s staff.
271 Mastering The Game
PC clients and/or launchers, that allow players to purchase and download PC
games. A few examples include, Origin, developed by Electronic Arts, Ubisoft
Connect, formerly known as Uplay, Bethesdas Softworks, Battlenet, by Activision
Blizzard, and Wargaming Game Center. Consoles such as the PlayStation,
Switch, and Xbox have their own digital ecosystems, and many games are
exclusively distributed through their online services.
The evolution of video game development has also benefited from online
distribution. Many AAA games now exceed last generation’s digital disc space
requirements, often shipping with total data of more than 100GBs. This makes it
challenging to fit everything on an optical disc drive or game cartridge without
negatively impacting gameplay and quality in a cost-effective manner. Generally,
digital distribution alleviates this problem as all relevant content is hosted online
and can be downloaded when needed, eliminating any constraints associated
with offline storage. Digital protection measures are also easier to enforce as all
activity is streamlined, monitored, and performed in an online ecosystem,
eliminating problems caused by - and significantly reducing the risk of -
counterfeit optical disc drives or cartridges.
DDPs are enhancing accessibility for independent developers and smaller
studios by supporting and promoting a form of self-publishing, an increasingly
successful alternative to a publishing agreement, given the challenge for
developers to even enter into a relationship with a publisher. The risks associated
with investing in traditional physical distribution are also significantly reduced,
allowing for experimentation and increased risk-taking, promoting innovation,
benefiting the industry as a whole. These online platforms also strengthen the
relationship between developers and end-users, allowing for increased
interaction through direct player feedback that can be used to improve games
and increase their appeal to a wider audience.
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Finally, a fundamental difference is that unlike retail,
717
digital distribution does
not generally allow for players to resell the acquired game.
718
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Players now also have greater access prior to a game's release with beta and alpha versions.
This also expands communication between players and developers, providing developers with
valuable information on possible bugs in the game, and what their players like and dislike about it,
enabling them to tweak it accordingly.
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Initially, publishers were against the resale of games because they believed it hurt sales and they
received no form of compensation. Publishers therefore tried to create mechanisms to discourage
re-sale, including by requiring codes to play a game. However, publishers eventually accepted them,
in order to support their retail partners, which earned a little revenue from resales, and counter
negative publicity from the gaming community. Rogers, Dan Lee, “Reselling Video Games in A Digital
World [Industry Contributor]” gamedaily.biz, October 1, 2019.
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While retail purchases of games are sales and, therefore, subject to the first sale doctrine in the
United States (United States Code, Title 17, Sect.109(a)) and the exhaustion of the right of
distribution (the European Union (EU) equivalent), the situation is more complex for digital sales.
First, they are not actually sales as such, but non-transferable licenses to access/use. Second, digital
“first sale/exhaustion” is not accepted globally; in particular there is arguably no digital first sale
doctrine in the United States and, in the EU, for copyright work that are not only software. See Capitol
Records, LLC v. ReDigi Inc., case No.16-2321, United States District Court for the Southern District
of New York, March 30, 2013; Directive 2001/29/EC of the European Parliament and of the Council
of 22 May 2001 on the harmonization of certain aspects of copyright and related rights in the
information society; Directive 2009/24/EC of the European Parliament and of the Council of 23 April
2009 on the legal protection of computer programs (Codified version); UsedSoft GmbH v Oracle
International Corp, C-128/11, European Court of Justice, 3 July 2012. See Trapova, Alina and Fava,
Emanuele, “Aren't We All Exhausted Already? EU Copyright Exhaustion and Video Game Resales
in the Games-as-a-Service Era” Interactive Entertainment Law Review (IELR), 3(2) 2020, pp. 77-93.
See also Entertainment Software Association v. Society of Composers, Authors and Music
Publishers of Canada, case No. 33921, Supreme Court of Canada, July 12, 2012. In France, the
District Court of Paris noted – some believe incorrectly – that under European law there is no
difference between digital and the permitted resale of games. See Bulleri, Fabrizio, “French High
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8.2 – The Long Form PC Digital Agreement:
Introduction
The type of PC digital agreement that would be entered into by the developer will
depend on a number of factors, primarily relating to the DDP’s market share, the
relationship between the parties, the developer’s library of games, and
bargaining power. For example, on one end of the spectrum is Steam, which
deals with thousands of publishers and developers and usually involves a
developer clicking their acceptance to a template agreement that is generally
non-negotiable. However, a well-established publisher/developer, because of
the attractiveness of their games, may be able to secure better commercial and
other contractual terms. On the other end of the spectrum, there are DDPs that
are probably more open to negotiation because of their need to attract
developers. Some of these DDPs may cater to a niche audience. And then, there
is also a third group that shares some of the characteristics of both types of DDPs
noted above. These DDPs, such as the Epic Game Store, have established
themselves as significant players in the space, yet they do not possess the library
of games that Steam distributes. Therefore, to attract developers, they have set
more favorable business terms, especially to attract exclusives to their platform.
In most cases, the PC digital distribution agreement (referred to hereafter in this
chapter as “the Agreement”) is drafted by the DDP and tends to include terms
favorable to them.
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For well- known developers and publishers, there is more
flexibility in negotiating the deal, since the success of a platform will depend on
the quality of the games. In contrast, an independent developer that may only
have one or a limited number of games (assuming none have become “hits”) will
have little room, if any at all, to negotiate and will typically need to agree to the
DDP’s form agreement. While the terms will be favorable to the DDP, this
provides them with consistent terms covering business and legal areas when
dealing with several different developers.
8.2.1 – Rights Granted
This section in the Agreement describes the rights granted to the DDP by the
developer and usually covers four areas: (i) the properties licensed to the DDP,
including any applicable games, DLC, updates, demos, etc., (“Products”); (ii) the
Court Rules Against Steam, Says the Company must Allow the Resale of Game Licenses”
reclaimthenet.org, September 20, 2019. While this case is being appealed, it is too early to tell
whether it will have any effect outside of France. Publishers are obviously reluctant to allow digital
resales, but they might be more open to them if they could receive a share of revenue. This idea has
been floated by at least one DDP, whereby both the publisher of a game and a consumer, through
the use of blockchain technology, would receive some financial renumeration. See Senior, Tom,
“Robot Cache takes aim at Steam with digital store that lets you resell your games”, pcgamer.com,
September 27, 2018.
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Since more games may be added to an agreement during the term when it comes to dealing with
established developers, which tend to release a number of games during the year and have a catalog
of games, the DDP and developer will often enter into a template agreement whereby the standard
terms to the relationship will be spelled out in an agreement and supplemented at later dates with an
attachment that may be referred to as an Appendix, Schedule, or Exhibit (“attachment”) outlining the
specific business points for each subsequent game added to the agreement. The attachment will list
the name of the game(s) added to the agreement, revenue percentage splits, specific territories,
delivery and release dates, term, marketing obligations, suggested retail pricing by currency and
recoupable advances, if any, and any other unique business terms, such as exclusivity. Terms and
territories might vary among products if there are restrictions on underlying rights. By adding an
attachment, the parties do not have to draft a new agreement every time additional games are
licensed to the DDP.
273 Mastering The Game
length of time (i.e., term) during which the rights can be exploited; (iii) the territory
in which the Products can be exploited;
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and (iv) the rights the DDP has to
exploit the Products, including selling and marketing. Typically, the developer will
grant a non-exclusive, non-transferable license during the term and within the
territory, allowing the DDP to sell, license, advertise, promote, market, modify,
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and otherwise distribute the Products.
Many developers enter into non-exclusive deals so they can exploit their games
on several different platforms, on the assumption that doing so will generate the
most revenue for them. If the developer is not receiving any consideration other
than a percentage of the revenue earned or guaranteed meaningful marketing
commitments by the DDP, the deal should always then be structured on a non-
exclusive basis. And, while most developers enter into non-exclusive deals, there
are situations where a DDP will seek an exclusive deal as a way to distinguish
their platform from the competition. These types of deals will offer incentives,
which may include one or more of the following: advances, guarantees,
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higher
revenue share, and marketing support. However, the benefits and risks must be
weighed by a developer since a DDP, for example, may require pricing and
release parity for games and updates, thereby prohibiting games from first being
exclusive on another DDP. Furthermore, it has been reported that Steam
prohibits games from being pulled off its platform and becoming exclusive on
another platform.
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The licensing grant will also include a non-exclusive license for the DDP to use
the developer’s trademarks for selling and marketing the developer’s Products.
This extra marketing and publicity are always beneficial for the developer,
especially when it may be difficult to distinguish between most games on a DDP.
At the same time, not only does the developer license rights to a DDP, but rights
are typically licensed by the DDP, on a non-exclusive basis, to the developer.
These rights may include tools, such as a software development kit (SDK)
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720
But see “Antitrust: Commission fines Valve and five publishers of PC video games €7.8 million for
‘geo-blocking’ practices” ec.europa.eu, January 20, 2021. In January 2021, the European
Commission fined Valve and five publishers (Bandai Namco, Capcom, Focus Home, Koch Media,
and ZeniMax) a total of €7.8 million for enacting restrictions on the sale of video games within the
European Economic Area (EEA) which violated EU antitrust laws. These restrictions, referred to as
geo-blocking, prevented the cross-border sales of certain PC games, including the use of Steam
activation keys. According to the Commission, one of restrictions imposed meant that consumers in
certain countries within the EEA were unable to purchase restricted games because the keys could
not be activated in those territories. If contractual territorial limitations are imposed upon the DDP,
the agreement may include provisions stipulating that publishers acknowledge that end-users may
be able to access content on the DDP’s platform outside the territory, which would not be a breach
of the agreement. On the other hand, since it is very difficult to restrict cross-territory purchases,
DDPs might specify in agreements with publishers that they are not responsible for such sales in
unauthorized territories.
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DDPs may request the right to modify the games to enable them to be downloaded via the DDP’s
service. For example, a DDP may need to wrap a game with their download manager and/or their
digital rights management (DRM) solution.
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The DDP guarantees that the developer will receive an agreed amount of revenue at a particular
time. If the developer has not received the revenue, the DDP will then make up the difference.
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Amjad, Talha, “Valve Makes Changes to Steam Distribution Agreement to Counter Epic Store”
respawnfirst.com, September 9 2019. It is unknown whether this policy also applies to publishers
that have their own DDP. See Leonard, Mike, “Valve Corp.’s Steam Platform Monopolizes Game
Sales, Suit Says”, news.bloomberglaw.com, January 29, 2021; and Yin-Poole, Wesley, “Lawsuit
accuses Valve of abusing Steam market power to prevent price competition”, www.eurogamer.net,
Gamer Network, January 30, 2021.
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SDK, typically consisting of a set of software development tools, allows for the creation of
applications for a certain software package, hardware platform, software framework, computer
system, video game console, operating system or similar development platform. For example,
Steam’s SDK, known as Steamworks, can include digital rights management (DRM), matchmaking
services, statistics and achievements, an anti-cheat detector, community information, and integrated
voice communications.
Mastering The Game
274
specific to a platform that the developer can use only on the DDP’s platform. In
addition, DDPs will allow developers, subject to the DDP’s guidelines and prior
approval, to use certain trademarks associated with the DDP to promote their
game on the DDP’s site with an approved store page (what Steam calls the
”developer’s page”).
8.2.2 – Delivery Of Materials
This section outlines the procedures for delivery, the materials and formats that
a game, or any other content, require to be delivered to the DDP, and when
delivery must occur.
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The delivery date is more of an issue when a developer
enters into a deal with a DDP that may be exclusive or may be part of a promotion
tied to specific dates. However, DDPs may require that, if a game has yet to be
released (assuming that it is not subject to an exclusive deal with another DDP),
the DDP will have the right to release the game on the initial release date as any
other platform, assuming that the platforms’ delivery requirements are the same.
The developer will be required to submit to the DDP a final build, subject to the
DDP’s system requirements, which may vary among DDPs and do not always
require DRM.
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With some DDPs, a developer can decide whether or not to
include DRM, while other DDPs may require DRM-free versions. In addition, the
developer will also be required to deliver certain marketing assets, such as game
descriptions, logo icons, screenshots, and videos, as well as demo versions, that
the DDP will use to promote the game via its platform. Upon receipt of the final
build, the DDP will then determine whether the game is technically acceptable
for distribution. Each DDP has its own submission procedures and approval
processes, some of which may be more stringent than others.
What would happen if the developer was unable to deliver the materials to a
DDP? The answer varies depending on the type of deal struck between the
parties and whether any monies were paid to the developer for the distribution
rights. If the developer is unable to deliver the game and has not received any
advances, they should simply have the right to remove the game from the
Agreement, assuming that they were similarly unable to deliver materials to any
other DDP with the same delivery requirements. However, if an advance was
allocated to the game, the situation would be more complicated, and solutions
will vary.
8.2.3 – Continuing Obligations
Throughout the term of the Agreement, DDPs may require the delivery of
additional content, such as DLC, updates, enhancements, localized versions,
add-ons, changes or fixes, and improvements for any games made available to
players on PC, or possibly any format, to ensure parity with other distribution
platforms. It is important that the developer negotiates with the DDP to clarify the
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In some cases, the DDP may pay for assistance with the delivery of materials if additional work is
needed to comply with the requirements of its platform.
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Typically, the gold master will be a final build of the game and it may include DRM (Digital Rights
Management), which encrypts the game to help minimize the risk of unlawful copying. There are no
requirements to deliver different masters for different countries unless (i) localized versions are
provided to one DDP then others may require parity; and (ii) required because of ratings, language
(e.g., French versions for Quebec and all text in simplified Chinese for games distributed in China),
government regulations, or social norms. However, in today’s market, localization of games plays an
important role in the greater success of a game.
275 Mastering The Game
specific requirements of each request, including the fixing of material defects,
which may be required as part of the developers’ warranties, and whether those
requests require any unforeseen additional work on the part of the developer that
might impose an unexpected financial burden. Clearly, if the game has significant
bugs, it would then be in the developer’s best interests to correct them to avoid
an erosion of sales and damage to the company’s reputation. However, if a fix is
required to conform to the DDP’s system requirements, the developer should
avoid being contractually obliged to resolve potential problems if the economics
do not justify such corrections. In addition, if a developer elects to release any
updates or DLC to third parties or to the public, some DDPs seek to also receive
those materials, to ensure that they are being treated the same as other DDPs
and retailers. unless a promotion is undertaken by the DDP or it is providing
unique or special content to a DDP or retailer.
Each party, as part of their continuing obligations, will be required to supply
customer support. Generally, the DDP will be responsible for providing technical
and other customer support to its end-users, with respect to problems
downloading the game from the DDP’s site, or any billing issues. At the same
time, the developer will be responsible for providing technical support to the DDP
for specific issues involving the actual game, such as problems with operating or
playing the game. Both parties should ensure that the assistance provided is of
a high standard, on a par with than quality of the support offered for other games
of comparable quality, and that responses are provided in a timely manner. In
addition, the developer is usually required to provide the same level of support
that they provide to other DDPs for the game and any additional content.
8.2.4 – Term
The length of the term will again vary depending on the type of agreement signed
with the DDP. In situations where no monies have been exchanged, and the
developer agrees to the DDP’s form agreement, there is usually no set term,
other than perhaps an initial one-year period. The developer will have the right
to remove the game at any time, provided that they meet certain pre-requisites,
which may include providing enough notice to the DDP and fulfilling any
obligations as required by the Agreement, such as providing notice to players
and satisfying their obligations under their terms of use. Likewise, when a click-
through agreement has been signed, the DDP is entitled to terminate the
Agreement for any reason, including for a breach of the Agreement by the
developer, as discussed in Section 8.2.8.
However, in certain situations, a term may be specific. For agreements involving
some form of consideration, whether it be money, such as an advance, or
marketing commitments, the DDP will most likely request a fixed term, without
the right to terminate other than for an uncured material breach. In some
situations, these may be exclusive deals.
The term for a game will usually commence on the DDP’s acceptance of
materials and continue for an agreed period, unless terminated earlier, in
accordance with the Agreement. For deals that include multiple games, the
terms may vary, on account of the different delivery dates and approvals for each
game.
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A DDP may prohibit termination for convenience by the developers, especially is the DDP is
providing some form of consideration.
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Some Agreements, provided neither party is in breach, permit automatic term
renewals,
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usually for successive one-year periods. If a party wants to
terminate an Agreement, it would need to provide notice within an established
time period, such as 30 days, before the expiration of the renewal term. Parties
should be aware of this requirement, so as not to miss the opportunity of
terminating an agreement, unless it is entitled to terminate the agreement for
convenience. Furthermore, a term may also be extended for an additional period
of time as a result of a force majeure.
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Likewise, a term may also be shortened
as a result of an uncured breach of the Agreement or through termination for
convenience.
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The parties must also decide whether a breach of the
Agreement involving a single game would allow for termination of the entire
Agreement, or would only allow for the removal from the Agreement of the game
concerned.
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8.2.5 – Marketing Issues
As the quantity of games on digital platforms continues to improve, differentiating
games for the consumer becomes more challenging. Even if a developer has
created a well-received game, consumer awareness could pose a challenge for
most developers. To navigate this crowded marketplace, as well as marketing
their game by themselves, such as through social media, their website, and/or
live streams, developers should try to negotiate some form of minimum
marketing commitment from the DDP and/or featuring/wish listing of a game for
an agreed period. In some situations, a developer may choose to work with a
publisher since a publisher may have greater leverage than a developer in
dealing with DDPs and therefore, may be able to obtain some or better,
marketing and promotional commitments from a DDP.
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Some games, such as the major releases, games with proven IP, social
followings, strong pre-orders, and games involved in sales promotions, will be
positioned prominently on the DDP’s website because the game will help drive
sales for the DDP. For other games that do not have the same draw, the
exposure, even if short-lived, is critical to help its sales, and marketing
commitments will need to be negotiated. A game featured on the front page of a
DDP’s storefront could drive an immense amount of traffic to the game’s page,
resulting in a tremendous increase in sales.
A DDP is usually permitted to market a game at its own sole cost and expense,
which might be subject to the developer’s prior approval. At the same time, while
a developer will want to give their approval, it should seek to avoid lengthy
approval processes that may prevent the game from being highlighted, as such
promotional opportunities may be limited. The developer therefore needs to
resolve the approval process carefully and, at times, quickly. In order to reduce
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Some agreements may require one party to provide notice to the other party within a certain time
period to permit additional term extensions. Failure to provide notice will result in termination.
729
See Chapter 12.
730
See Section 8.2.8.
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The developer may also seek to have the right to terminate the agreement for a specific game if
one of the game’s underlying licenses is due to terminate or if, in the developer’s judgment (and that
of the publisher), a game may potentially become the subject of litigation and removing the game
may therefore minimize possible damage from any pending, threatened, or possible suits or
proceedings involving a game’s potential infringement.
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A publisher may have a more extensive catalog, including franchised properties, that a DDP will
want to license for its platform.
277 Mastering The Game
concerns about approvals, many agreements provide for extremely quick
approval turnaround times and/or delivery of pre-approved materials, that the
DDP can use without approval, provided the materials are unaltered. The only
concern the developer might have is the context in which the pre-approved
materials are used. If the marketing is carried out and the developer is not
satisfied, it can notify the DDP to correct the marketing or to remove it.
A significant way in which a developer may attract consumers is by allowing the
DDP to run a special, temporary promotion. Accordingly, the developer’s game
receives prominent placement on the DDP’s home page, in exchange for
providing a discount for their game. For example, the parties decide to reduce
the price of a game for a limited period, during a seasonal sales event, such as
a Christmas holiday sale.
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If the developer is to engage in this type of temporary
promotion, it must make sure that it is not required to provide the same deal to
other DDPs, unless they offer a similar benefit in return, such as prominent
placement. While in some situations the revenue earned from the sale of a game
may sometimes decrease for both parties, a promotion can be beneficial to both,
in that it may help drive traffic to a site and provide the exposure needed for a
title to build awareness. On the other hand, the spike in overall sales is often so
considerable that the reduced revenue from the sale of each game is outweighed
by the increased sales volume. However, the developer also needs to take into
consideration that once the price is reduced, consumers may wait for that price
to be reduced again, and sales at the initial suggested retail price (SRP) may
therefore be eroded.
8.2.6 – Revenue Share And Pricing
The biggest business issue for a developer will be the percentage of revenue it
earns from the sale of its products, including premium games, in-game
purchases, DLC, and, if applicable, subscription fees. Prices for games and any
other content will be determined by the developer. However, some DDPs may
most likely require price parity, unless the game and any other content sold are
part of a special promotion on a particular site.
Both the developer and DDP receive a revenue share based on an agreed
percentage of the net revenue earned by the DDP. Net revenue will be defined
as gross revenue received, less agreeable deductions. Typically, deductions will
be very limited compared to other deals based on net revenue and may only
include taxes (usually, only consumer taxes, such as VAT and sales tax)
chargebacks (including refunds), and credit card or payment processing fees.
For most digital distribution deals, the developer receives a revenue share of
70%, with the remaining amount retained by the DDP, less any agreed upon
deductions that are taken from gross revenues prior to any revenue share.
However, as more DDPs enter the market attempting to attract publishers and
developers, the percentages retained by DDPs have shifted, providing greater
percentages to publishers and developers. For example, at the time of writing,
Epic Games Store takes a 12% fee, and if the game is built using their Unreal
Engine, they forego the 5% licensing fee for games sold on their storefront.
734
Beginning on August 1, 2021, Microsoft reduced their fee to 12% for the Microsoft
733
Some DDPs may request the right to reduce the selling price of the games unilaterally.
734
“Welcome to Epic Games”, epicgames.com. Robot Cache announced their revenue share would
be a 95-5% split favoring the publisher-developer. Desatoff, Sam, “Brian Fargo Announce Robot
Cache, Digital Games Marketplace that Will Allow Players to Resell Games”, yahoo.com, December
11, 2018.
Mastering The Game
278
store.
735
Steam, in late 2018, perhaps in response to Epic Games Store’s
revenue split, lowered their fee based on the success of a game. For sales
between $10-$50 million, Steam takes a 25% fee, and for every sale after $50
million, it is lowered to 20%.
736
However, it is widely believed that this locks out
most developers and publishers, as they are unable to attain these figures. For
the companies that can, this arrangement generates millions of dollars in
additional revenue.
A different scenario emerges if the DDP has provided an advance to obtain rights
to a game that includes development costs. In this situation, the Agreements will
typically enable the DDP to recoup some or all of the advance they paid to the
developer unless the parties agree to a non-recoupable advance. When, how,
and the amount the DDP recoups will all be subject to negotiation. In other
situations, a DDP may offer the developer a guarantee, rather than an advance.
If the developer’s revenue share does not reach the guarantee agreed to with
the DDP, they will make up the difference at an agreed time. In both situations,
the DDP will most likely seek exclusivity for a certain period.
8.2.7 – Statements And Audits
In any contract involving the payment of royalties, the party receiving payment
must receive statements and have the right to audit. The developer should insist
on either quarterly or monthly statements, although some DDPs can provide
sales estimates to the developer on a daily or monthly basis through an online
dashboard. However, usually DDPs commit to deliver a monthly or quarterly
statement and issue payment with each statement.
737
It is worth noting that this
is still much faster than dealing with retail. DDPs tend to use a standard form that
will be applicable for all developers. When dealing with different territories and
possibly different games, the developer should request the following:
1. Statements broken down by each game and by territory indicating gross
revenues received from all forms of exploitation involving the game;
2. Allowable deductions, if applicable;
3. Developer’s net revenue from all forms of exploitation involving the
game;
4. The number of units sold for any item (e.g., premium game, add-on,
battle passes); and
5. Amount of withholding tax, if any.
735
Tom Warren, “Microsoft Shakes Up PC Gaming by Reducing Windows Store to Just 12 Percent”,
the verge.com, April 29, 2021.
736
Statt, Nick, “Valve’s new Steam revenue agreement gives more money to game developers’’
theverge.com, November 30, 2018. Revenue includes DLC, game packages, in game sales and
community marketplace game fees. Kuchera, ‘Ben, “Valve now rewards successful games with a
larger cut of Steam revenue”, polygon.com, December 3, 2018.
737
Some DDP’s will limit their payment obligation if revenue owed to the developer falls below a
minimum amount. (e.g., $100) for a reporting period.
279 Mastering The Game
Furthermore, all revenue should be stated in the currency of such sale followed
by the equivalent amount of such revenue in the currency in which final payment
is made.
738
8.2.8 – Termination
The termination provision allows either party, at their choice, to terminate the
Agreement under two circumstances: (i) if a party materially breaches the
Agreement and fails to cure the breach within the agreed cure period;
739
and (ii)
for convenience. However, termination rights vary depending on the type of
agreement entered into, and whether financial or other benefits were provided to
the developer/ or publisher. For example, in click through agreements, where no
consideration was paid by the DDP
740
either party will have the right to terminate
at any time outside a possible fixed initial term, provided that certain conditions
are met in accordance with the Agreement. For example, providing proper notice
of termination to the other side and fulfilling any outstanding obligations with end-
uses.
Under termination for convenience, a party can terminate without cause, subject
to sending a notice to the other party within an agreed period, which can vary
from 30 to 90 days. The reason for termination does not matter, provided that
the reason is not to avoid any obligations, such as payment, although certain
clauses will survive termination, including any payments that may become due,
representations and warranties, and indemnification.
Either party, in addition, will also have the right to terminate for cause, namely,
an uncured material breach, which may include any of the reasons listed below.
For the DDP, a material breach could involve:
1. Failure to pay monies owed to the developer;
2. Distribution of a game outside the agreed territory or beyond the term;
3. A material breach of a representation or warranty;
4. Failure to issue a statement;
5. Distribution of a game prior to the agreed launch date; and
738
The parties will need to agree to: (i) the currency that the developer will be paid in; (ii) the exchange
rate that will apply; (iii) the time at which the currency will be calculated; and (iv) which party will pay
for the currency conversion. Generally, the DDP would be responsible for the currency conversion
costs and for any decline in the currency’s value after the date on which the DDP was obliged to pay
the developer.
739
Termination rights, which can have significant consequences, should only be triggered by a
material breach of the agreement, rather than for any type of breach. In addition, for certain material
breaches, the developer may add provisions that makes it easier to seek an injunction to prevent a
continuation of a breach, such as the selling of a game beyond the term, or outside the territory, in
violation of the agreement. In the United States, an agreement might state that a breaching party
acknowledges that certain actions may cause irreparable harm and determining damages might be
difficult, thereby providing some of the prerequisites for an injunction.One of the interesting issues
with digital distribution is that many of the terms continue to survive the expiration or termination of
the agreement because of the ongoing licenses for end-users when they purchase a game. End-
users will still want to have access to the game, new content, including materials offered by other
DDPs that are not unique to that DDP, and customer support, regardless of whether the relationship
ended between the developer and the DDP.
740
If advances were paid this would be a problem, since the DDP may not have received the value
of its bargain if a game can be removed prior to the expiration of the term. As a result, if some form
of consideration, such as an advance is paid to the developer, then only the DDP should have the
right to terminate for convenience.
Mastering The Game
280
6. Failure to obtain approval; or failure to provide appropriate customer
support.
For the developer/publisher, a material breach could involve:
1. A breach of a material representation and warranty or material
obligation;
2. Failure to deliver materials for a game if some form of consideration has
been paid to the developer, or while delivering materials to other DDPs;
3. Failure to provide customer support;
4. Improper use of any tools or software provided by the DDP;
5. Improper use of any intellectual property(IP) rights owned by the DDP;
6. A breach of the DDP’s policies, namely, the use of prohibited content in
a game or review manipulation;
741
and
7. Failure to deliver an update/DLC when agreed.
Furthermore, either party will generally have the right to immediately terminate
the Agreement without the right to cure if a material breach is incurable, a party
becomes insolvent or is unable to pay its debts when due or makes an
assignment for the benefit of creditors.
Upon the expiration or termination of the Agreement, whether for convenience
or material breach,
742
all rights granted to the DDP will cease, and the DDP will
be required to stop all selling, distribution, and marketing of the licensed game(s),
except for those that have already been licensed by end-users (this might be,
however, temporally limited).
743
Other obligations and terms that should survive
the Agreement should include:
1. The DDP making a final payment of any revenue owed and issuing a
final statement, which is usually subject to allowing the DDP to withhold
a reserve for a fixed time against future end-user obligations, such as
refunds and chargebacks;
2. The developer’s right to audit;
3. Warranties, representations, and indemnification;
4. Limitations of liability;
5. Confidentiality;
6. Governing law and venue; and
7. Cumulative remedies.
744
741
See Wales, Matt, “Valve bans developer who sneakily named his company Very Positive on
Steam”, eurogamer.net, February 17, 2021.
742
In case of agreements involving multiple games, it should be noted that a party may choose to
terminate rights to a game, but the agreement still remains in effect.
743
Subject to the end-user license agreement (EULA), the DDP or the developer or publisher has the
right to prohibit or limit access to the game and any additional updates.
744
This section confirms for both parties that the rights and remedies under the agreement are
cumulative and are not exclusive of any rights or remedies available at law or equity or by any other
agreement that the parties may have entered into.
281 Mastering The Game
8.2.9 – Limitation Of Liability
In many Agreements, the parties will usually agree to limit their liability, which
can chiefly be in three ways. First, the parties may limit the amount of damages
that either party can claim in the event of a termination of the Agreement due to
a breach. If agreed upon, the two parties will need to determine a formula for
capping damages. In many situations, the DDP will insist that the cap is tied to
the amount of monies paid to the developer, such as the developer’s revenue
share and it might be further limited for a certain period of time. For example,
revenue earned for the preceding 12 months. However, this formula may not
serve a developer’s best interests, especially since the severity of the breach
might not match the amount in damages that the developer may have incurred.
As a result, it may be more beneficial for the developer to request a cap that may
be a certain percentage of the developer’s revenue share, such as 200% or
greater. Be aware that a cap will be applied equally and, therefore, if the parties
agree to raise the cap, the developer will also be responsible for any damages
that fall within the new cap. It is important to note that the cap on damages
typically excludes any claims involving indemnification, breaches of
confidentiality, and may also include data protection breaches and gross
negligence.
Secondly, the parties may agree to cap the type of damages to be excluded from
any claims between the parties, such as punitive, consequential, namely, loss of
profits, special, and speculative.
Thirdly, both parties may want to further limit their liability with regard to their
products by disclaiming any and all statutory, express or implied warranties,
except as specifically expressed in the Agreement. This may include warranties
of merchantability, fitness for a particular purpose, and any warranties arising
from a course of dealing, usage or trade practice covering the product and the
software used to distribute the products.
745
8.2.10 – Assignment
An additional matter that the parties will need to negotiate concerns whether
either party would have the right to assign its rights under the terms of the
Agreement. In this situation, the party transfers its rights and obligations to
another party. In some Agreements, a party might have the right to freely assign,
or would have the right to assign, subject to the other party’s approval, which
might be at the party’s absolute discretion or not to be unreasonably withheld. A
valid justification for refusing an assignment could be to avoid requiring the non-
assigning party to possibly now work with a company that may be a competitor,
or a company that may have had a previously poor relationship with the non-
assigning party, or concern regarding the financial stability of the party acquiring
the rights, namely, the assignee.
In other Agreements, the developer might insist that it has the right, at its
discretion and without limitations, to determine whether to approve an
745
DDPs usually seek to include provisions to the effect that their products are provided “as is’”,
thereby disclaiming any representations and warranties, except for those expressly provided for in
the agreement, including that any products or other materials will be error-free or operate without
interruption or be compatible with DDP’s system. At the same time, the DDP will insist on disclaiming
that the distribution system will be available at all times, operate as intended and that the system will
be free of errors and that its use with the products will not result in uninterrupted errors.
Mastering The Game
282
assignment, unless the rights are assigned to a parent or affiliate.
746
Quite often,
developers enter into agreements with DDPs largely on the basis of a particular
relationship. Therefore, any such change could undermine the relationship
between the parties.
In the event that an assignment is permitted, the non-assigning party should
require that the assignee assumes and agrees to all of the obligations and
responsibilities of the original DDP and that, in the event that the assignee
breaches the Agreement, the original DDP would be responsible for any
damages.
8.2.11 – Other Terms
Other important terms that will appear in the Agreement include representations,
warranties, and indemnification which are very similar to other agreements
discussed throughout the book. These representations and warranties may
include:
1. The DDP will seek guarantees that the developer owns or controls all the
rights in and to the game and any new content;
2. That the exploitation of the game (including any new content) permitted
under the Agreement will not result in a violation of any rights of third parties;
3. The game and any new content will comply with all laws and regulations
(whether international, national, state, regional or local) where the game is
distributed, including issues with privacy and the collection of data,
marketing, age ratings if a rating has been obtained, and content
restrictions;
4. The game won’t contain materials that may be unlawful, defamatory, or
libelous, which will vary by jurisdiction;
5. The game and any new content do not contain any computer viruses, time
bombs, worms, or other contaminants intended to modify, damage, or
disable DDPs or any other party’s computer systems. Furthermore, some
DDPs, without their approval, may prohibit open source if it binds the DDP
to any obligations; and
6. The parties will not engage in any activities covered by anti-bribery and anti-
corruption legislation and will also comply with any penalties.
It is also important that the developer also receives representations, warranties,
and indemnification, covering the actions of the DDP. For example, (i) the DDP
should warrant that the distribution platform and any marketing materials created
that are not approved by the developer will not violate the rights of third parties,
including any copyrights, trademarks, and patents; and (ii) it will comply with all
applicable international, national, state and local laws and regulations in the
performance of its obligations.
Finally, the Agreement may also cover:
• Confidentiality;
746
In some situations, the developer’s right to assign will be subject to the DDP's prior written
approval.
283 Mastering The Game
• Credits, use of developer’s logos, and legal notices and where they will
appear;
• Press releases;
• End-user license agreements (EULAs);
747
• Procedures and precautions taken when dealing with infringers; and
• Ratings.
748
747
Both the DDP and developer may have their own EULA. The EULA primarily establishes the
conditions and restrictions for the end-user (i.e., consumer) when playing the game. In addition, the
developer’s EULA should include provisions regarding: (i) ownership and other rights issues; (ii)
acceptable conduct for end-users, including online play and chat sessions; (iii) grounds for
termination; (iv) limitations on damages; (v) privacy; (vi) the process by which EULAs can be updated
by the developer; (vii) indemnification; and (viii) ways in which disputes are settled. If the end-user
does not accept the terms of the EULA they cannot then play the game and must return the game
for a refund. Furthermore, the DDP will also establish its own guidelines with which end-users must
comply before using the system.
748
Some DDPs do not require a rating although certain content may still be prohibited from the site.
See Chapter 10.
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284
CHAPTER 9
THE MOBILE GAMING MARKET
9.1 – Introduction
Mobile gaming, which includes games playable on mobile devices such as
smartphones and tablets, is now the leading platform for video games and
captures more than 50% of the total global market. In terms of consumer
spending, mobile gaming revenues exceeded $73.8 billion in 2020
749
and grew
to $116 billion in 2021 .
750
By 2021, 85% of internet users used smartphones to
play games, compared to 63% in 2015.
751
Mobile games are now the most
popular applications (apps) on mobile devices.
752
Market entry barriers for mobile gaming are relatively low and, as a result, there
is an unprecedented abundance and variety of content available to gamers.
Mobile games are played by almost every demographic, particularly hyper-
casual games, which are quick to download, easy to play and lend themselves
to being played in short sessions throughout the day. These games have,
therefore, become extremely popular and have contributed significantly to the
growth of the global gamer base.
The demographics of mobile players are split almost evenly and women now
account for up to 51%, although different sources indicate slightly different
percentages and percentages vary depending on territory.
753
With regards to
age, the average player is 36 years old, while over 33% of gamers are 45 or
older.
754
This could help explain why, according to one report, more than 50% of
gamers play mobile games while in the bathroom,
755
although we may assume
that it is not while taking a shower.
749
NewZoo, “Newzoo Global Games Market Report 2020” (light version), newzoo.com. According
to App Annie, a mobile analytics company, 70 cents out of every dollar spent in Apple App Store and
Google Play Store involved mobile games. “State of Mobile Gaming 2021,” appannie.com. Sensor
Tower, a mobile app analytics company, reported revenue to be as high as $79.5 billion. “Global
Consumer Spending in Mobile Apps Reached a Record $111 Billion in 2020, Up 30% from 2019,”
sensortower.com, January 4, 2021.
750
data.ai, “State of Mobile 2022, data.ai.
751
“Share of internet users worldwide playing games on selected devices as of 1st quarter”,
statistica.com, September 7, 2021.
752
“Global games market to generate $175 billion in 2021- Newzoo”, gameindustry.biz, May 2021.
See chart in Section 1.4.1.
753
McConnell, Nicolas, “Mobile gaming audience guide for app publishers”, mopub.com, March 31,
2020.
754
Ibid.
755
For some interesting statistics on mobile gaming, see Knezovic, Andrea, “141 Mobile Gaming
Statistics for 2021 That Will Blow Your Mind”, blog.udonis.co, May 5, 2021.
285 Mastering The Game
The shift towards an older audience reflects to some extent the advantages of
mobile devices, which are easily accessible and allow games to be played
quickly. It should also be noted that most mobile games are free of charge. As a
result, it is much easier for people to play a game that they otherwise might not
feel comfortable playing, without having to invest in other platforms to do so.
These numbers are important and reflect a major shift since the early days of
gaming when the audience was primarily young teenage males. This is
significant because developers need to be aware of the different preferences for
a given territory and the players they wish to reach.
Mobile gaming is a truly global market. Following rapid growth over the last five
years,
756
China currently dominates, unchallenged, the global mobile gaming
market, with revenues of $29.2 billion in 2020 and projected revenues of $40.5
billion by 2025.
757
The figure for 2020 represents 25% of the global mobile
gaming market. Countries such as the United States, Japan, South Korea and
the United Kingdom
758
lag far behind, while India, which has the second highest
number of smartphone users after China,
759
continues to progress.
For developers, the mobile market offers advantages that may be unattainable
in other sectors of the video game market: low entry barriers, including lower
development costs compared to other platforms;
760
ease of global distribution
since, compared, for example, to the more elaborate and lengthy process
required to publish content on consoles, games can be made available relatively
quickly in app stores with practically no advance costs because, unlike with
consoles, mobile distributors are generally paid only if the game generates
revenues; and the ever-growing availability of mobile devices throughout the
world. As of 2020, 2.6 billion people had played a game on a mobile device,
which represents a third of the world’s population
761
Furthermore, consumers
who would not necessarily wish to spend hundreds of dollars on a console
system or PC to play games can now play high-quality, sophisticated apps on a
phone. All these factors have contributed to the tremendous growth of apps on
mobile devices.
This is not to say that it is easy for developers to make money with mobile games.
Mobile gaming does pose challenges for developers: an intensely competitive
marketplace due to the abundance of products,
762
where product visibility or
“discoverability” is increasingly an issue, particularly for independent developers
756
Wallach, Omri, “How Big is the Global Mobile Gaming Industry?”, visualcapitalist.com, December
9, 2020.
757
“China Mobile Games”, nikopartners.com, May 2021.
758
“Mobile Games”, statista.com.
759
“Top Countries by Smartphone Users”, newzoo.com.
760
Development costs for apps can vary considerably depending on the resources and time allocated
to development as well as the complexities of an app. Some apps may cost as little as tens of
thousands of dollars, while higher-end games are averaging millions of dollars. Costs are expected
to increase with improvements in technology, which will allow developers to expand on features and
create more elaborate artwork, resulting in bigger development teams. Marketing costs are also
increasing rapidly as the mobile game market becomes a more crowded ecosystem and developers
and publishers find themselves fighting for product visibility both inside and outside the app stores.
At the same time, the market will become even more competitive because more of the major
publishers are actively distributing their AAA titles on the mobile market including games specifically
developed for mobile, which will increase the average costs of development and marketing.
761
Valentine, Rebekah, “Mobile games to see the least negative impact from COVID-19”,
gamesindustry.biz, May 8, 2020. By 2011, smartphones had more computing power than the original
PlayStation console. See “All the World’s Game”, The Economist, December 10, 2011.
762
In 2020, the Apple App Store and the Google Play Store offered approximately 957,000 and
427,000 games, respectively, on their platforms. See “Number of available apps in the Apple App
Store from 2008 to 2020”, statista.com, July 6, 2021; and “Number of available gaming apps in the
Google Play Store from 1
st
quarter 2015 to 1
st
quarter 2021”, statista.com, May 26, 2021.
Mastering The Game
286
which have to rely on much smaller marketing budgets than the bigger players;
the seamless introduction of new devices
763
and technologies;
764
constant
updates to operating systems;
765
new and rapidly-evolving revenue business
models
766
and regulatory landscapes;
767
and, last but not least, the ever-present
threat of game cloning. Moreover, unlike PC and console gamers, mobile gamers
seem reluctant to spend money on mobile games. A recent survey confirmed
that, despite being the most popular gaming platform, mobile platforms have the
lowest player-to-payer ratio.
768
Moreover, the cost of acquiring and retaining
763
A handful of devices dominate the mobile market, with a growing number of companies originating
from China. A few of these companies have made inroads into other countries due to their lower
costs, but political and economic barriers may play a role in their expansion and possible rollback.
According to a report by Statcounter, as of June 2020, the leading mobile devices were Samsung,
Apple, Huawei and Xiaomi; although additional vendors had a strong presence in certain regions,
such as Mobicel and Oppo. Listed below are the top vendors in various countries and regions, as
reported in June 2020 by Statcounter:
United States: Apple (58.17%) and Samsung (25.59%).
Europe: Samsung (34.43%), Apple (26.25%), Huawei (18.17%) and Xiami (8.39%).
China: Huawei (29.58%), Apple (20.68%), Unknown (9.96%) and Xiaomi (8.5%). In China, one
percentage point represents close to 10 million people.
Asia: Samsung (29.52%), Apple (16.5%), Xiaomi (12.6%), Huawei (9.78%) and Oppo (8.75%).
South America: Samsung (46.64%), Motorola (17.3%), Apple (10.5%) and Huawei (9.1%).
Africa: Samsung (33.71%), Huawei (17.3%), Apple (12.3%) and Teeno (8.2%).
Oceania: Apple (48.9%), Samsung (26.23%) and Huawei (12%).
India: Xiaomi (26.02%), Samsung (21.13%), Mobicel (12.89%) and Oppo (11.16%).
United Kingdom: Apple (46.5%), Samsung (30.5%) and Huawei (10.38%).
Germany: Samsung (40.97%), Apple (27.69%) and Huawei (17.06%).
“Mobile Vendor Market Share Worldwide”, statcounter.com.
764
For instance, Google launched its cross-platform cloud gaming service, Stadia, and Amazon
introduced its service, Luna. Solotko, Simon, “The Emergence of Cloud Mobile Gaming”,
tiriasresearch.com, April 2020. In general, the development of cloud gaming could boost mobile
gaming market growth. In fact, the mobile gaming market could benefit from new and advanced
technologies and provide users with a faster, low-latency experience suitable for massive multi-user
interactions. This should eventually allow mobile gaming to keep up with other platforms, particularly
regarding esports titles that have heavy graphics. See McGregor, Jim, “Cloud Is Mobile Gaming
Ready With Emergence Of Arm Infrastructure And High-Performance Video Streaming”, forbes.com,
April 14, 2020.
765
The smartphone operating system market is now completely polarized, with Android and iOS
sharing the market. As of May 2020, Android stands at 70.68% and iOS at 28.79%. “Mobile Operating
System Market Share Worldwide, May 2019 - May 2020”, statcounter.com. Nonetheless, an app that
is developed for one operating system cannot automatically work on the other one and, more
importantly, apps must be optimized and constantly updated in order to work with different versions
of operating systems and device software updates. Apple uses the iOS operating system, and other
mobile device manufacturers, such as Samsung, Huawei, Xiaomi and Oppo, use the Android
operating system. In the context of the China–United States trade war, the US government is, at the
time of writing, blocking US companies from trading with Huawei, thereby preventing Google from
supplying certain services associated with the Android operating system. In particular, some Huawei
smartphones using Android will have to do without Google Mobile Services (GMS), which include
useful apps, such as Maps, Photos, Play Store and Drive. See McGregor, Janhoi, “Here’s How
Huawei’s Android Ban Affects You [Updated]”, forbes.com, May 20, 2019; and Moon, Angela,
“Exclusive: Google suspends some business with Huawei after Trump blacklist – source”,
reuters.com, May 19, 2019. Even though Huawei is not currently banned from using Android’s open-
source code per se, a Huawei executive described an in-house operating system, such as Huawei’s
HarmonyOS, as a "plan B" if Huawei is prevented from using Android on future smartphone products.
Phelan, David, “Move Over Android: Huawei’s Harmony OS Is Plan B, But Could Be Implemented
‘In Days’ If Needed”, forbes.com, August 10, 2019.
766
See Section 9.3.2.
767
See Chapter 10.
768
Valentine, Rebekah, “Newzoo: Mobile most popular platform, least popular to spend money on”,
gamesindustry.biz, June 26, 2018.
287 Mastering The Game
users and convincing them to pay for content is rising; yet, at the same time,
many mobile games have very low retention and conversion rates.
769
Yet, for many developers and publishers, the mobile market has been an
extremely profitable opportunity,
770
all the more so in light of the surge in
popularity of esports and the advent of new technologies, such as the 5G
network,
771
which will enable large volumes of content to be delivered at high
speeds. This could support cloud gaming and facilitate the integration of apps
with television and other platforms, including other gaming platforms, to allow
cross-platform play.
772
Esports, in particular, have opened up opportunities for
the development of games designed specifically for competitive video gaming,
which benefits from and to a large extent effectively requires building large player
communities, and mobile devices appear to be particularly suitable for this.
All of these elements including improved hardware and bigger screens have
contributed to making mobile gaming the most rapidly-evolving sector in the
video game industry and perhaps the one with the biggest potential for further
growth.
This chapter will discuss some of the business and legal issues specific to mobile
gaming that developers and publishers wishing to operate in this sector should
consider when evaluating not only the opportunities but also the risks inherent in
769
According to a 2019 report prepared by Liftoff, a mobile analytics marketing company, it costs an
average of $4.37 to acquire a new gaming app user. The cost to acquire a user and have him/her
register was $9.17 and the cost to convince a user to make a first-time purchase was $35.42. These
costs make it very difficult for many developers, and some may even lose money. These costs also
affect licensed properties since they need to be factored in when determining royalties. Costs to
acquire users can vary by platform (e.g., iOS or Android), channel (e.g., Facebook or Instagram) and
country. For example, the costs in China ($1.32), Brazil ($1.42) and Russia ($2.17) are on the low
end, while those in Japan ($5.35), Canada ($5.12) and the United States ($4.71) are on the high end.
Nguyen, Kathy, “New! 2020 Mobile Shopping Apps Report”, liftoff.io, June 17, 2020; and Valentine,
Rebekah, “On average, it costs $35.42 to get a mobile gamer to make first in-app purchase”,
gamesindustry.biz, October 1, 2019.
770
According to data.ai formerly known as App Annie, the mobile analytics company, in 2019, 140
mobile games generated over $100 million, while more than 1,100 reached at least $5 million. Iqbal,
Mansoor, “App Revenue Data (2021)”, businessofapps.com, August 4, 2021. Five games hit the
$1 billion mark in 2020, including PUGB Mobile ($2.6 billion), Honor of Kings ($2.5 billion), Pokémon
Go ($1.2 billion), Coin Master ($1.1 billion) and Roblox ($1.1 billion). “PUBG Mobile Tops List of
Billion-Dollar Mobile Games in 2020”, sensortower.com, December 15, 2020. In May 2021, Activision
Blizzard announced that, 19 months after its release, Call of Duty had reached the $1 billion mark.
As of May 2021, it has hit 500 million downloads. It also became the fastest game to reach 100 million
downloads. Jordan, Jon, “Call of Duty: Mobile hits 500 million downloads, over a $1 billion revenue”,
pocketgamer.biz, May 5, 2021.
771
5G connections in combination with cloud storage are projected to revolutionize the mobile gaming
industry with higher data speeds and lower latency. Lower latency will remove the hardware barriers
for games such as AAA titles, which could only be fully appreciated on PC and consoles, thus
allowing players to play these games on any device with similar quality. The type of device will no
longer be important when playing games, except for other limitations such as screen size, sound and
the possibility of receiving a phone call. This should also help grow esports and perhaps virtual and
augmented reality. It may, however, take some time for the 5G network to be adopted worldwide, as
rollout has been limited to certain countries and, even within those countries, to certain cities.
Consumer costs may also affect initial acceptance. According to Newzoo, in 2020, less than 1% of
all active devices were 5G ready, although that figure is expected to grow quickly to around 22% by
the end of 2022, with China representing the largest market. Gu, Tianyi, “5G and the Games Market:
How the New Era of Mobile Networks Will Impact Gaming”, newzoo.com, May 11, 2020. Highly-
dedicated players will most likely want to adopt the 5G network. In contrast, the more casual gamer
may not want to spend more money on 5G for games but perhaps for other services. Despite some
initial growing pains, major publishers are investing in the 5G network and see it as an excellent
opportunity to expand the mobile gaming market. South Korea (the first country to adopt 5G), the
United States, China, Canada, Japan, Australia, Brazil, the Scandinavian countries, France,
Germany, the United Kingdom and Italy are among the 58 nations that had to some extent launched
the 5G network by June 2021. Buchholz, Katharina, “Where 5G Technology Has Been Deployed”,
statista.com, August 3, 2021.
772
Cross-platform play is becoming a reality for more and more titles, the most significant of which is
probably Epic Games’ Fortnite, which can, at the time of writing, be played on Android, Windows,
Nintendo Switch, PlayStation 4 and 5, Xbox One and Xbox Series X/S.
Mastering The Game
288
this increasingly complex and rapidly-changing sector of the industry. Attention
will also be given to some of the key contractual clauses that may appear in the
contracts that developers and publishers must enter into with mobile digital
distribution platforms in order for an app to be distributed.
That said, several of the topics discussed more generally throughout this book
also apply in many respects to developers and publishers operating in the mobile
market, such as development, intellectual property (IP), clearances, licensing
considerations, publisher-developer relationships, ratings, regulatory restrictions
and the common legal language that appears in many other video game-related
publishing, distribution and licensing agreements.
9.2 – The Major Players
9.2.1 – Mobile Developers And Publishers
Unlike cross-platform AAA publishers, which are mostly concentrated in Asian
countries and the United States, mobile publishers are spread evenly throughout
the world,
773
showing that a successful mobile game can be developed almost
anywhere. Another characteristic of mobile publishing is that the traditional
distinction between developers and publishers, as discussed in Chapter 3, is
significantly blurred. Good examples of this are Niantic, Supercell (part of
Tencent) and King Digital Entertainment (part of Activision Blizzard), which
together constitute the golden circle of mobile game production, since these
organizations are both the developers and publishers of their most successful
games. Niantic’s Pokémon Go has promoted and popularized augmented reality,
while popular games like Supercell’s Clash of Clans and Clash Royale attract
millions of players and make millions in profits.
774
King’s Candy Crush franchise
had more than 273 million users in 2020
775
and had surpassed 2.75 billion
downloads since the first game in the series was launched on mobile markets in
2012.
776
The mobile game market will probably continue to evolve and expand rapidly,
allowing new actors to enter and entertain players with mobile apps.
Furthermore, the production of mobile games may benefit from the investments
being made by both private sector investors and national governments. The latter
are injecting more and more public money into building international hubs and
incubators that support technology start-ups and foster creativity.
777
At the same
time, even though many first-party console manufacturers and AAA publishers
were slow to adapt to the mobile market as a result of business decisions and
hardware and broadband limitations, they are now pushing to expand their
worldwide market presence with well-known franchises. For instance, Activision
Blizzard’s Call of Duty illustrates the significance of the mobile sector: since the
773
“Top 30 Mobile Gaming Companies in the World 2019”, blog.technavio.com, May 13, 2019.
774
Supercell’s profits before taxes (EBITDA) amounted to $577 million in 2019. See Paananen, Ilkka,
“My Take on Supercell in 2019 As We Enter Our Second Decade”, supercell.com, February 11, 2020.
775
Curry, David, "Candy Crush Revenue and Usage Statistics (2021), businessofapps.com,
November 11, 2021.
776
Takahashi, Dean, “Candy Crush Saga: 2.73 billion downloads in five years and still counting”,
venturebeat.com, November 17, 2017.
777
Kaplan, Omer, “Mobile Gaming is a $68.5 billion global business, and investors are buying in”,
techcrunch.com, August 22, 2019.
289 Mastering The Game
game was released on mobile in October 2019, it has grossed over $1 billion and
has been played in countries where distribution was previously difficult.
778
The potential availability of investment money combined with low market entry
barriers, such as virtually non-existent distribution costs, has already allowed a
multitude of independent developers and publishers to step into the mobile
market, and this trend is very likely to continue. In fact, there are now billion-
dollar publishers dedicated only to mobile development and distribution.
9.2.2 – Mobile Distribution Platforms
Digital distribution is the delivery of content to mobile devices, such as Apple/iOS
and Android phones.
At the time of writing, Google’s Google Play Store platform and Apple’s App Store
platform dominate the global market and hold the largest share of Western
markets.
779
In Asia, the limited accessibility of Apple App Store and Google Play
Store has left room for other players, notably Tencent with its My App, which
holds the lion’s share of the Android market in China.
780
Moreover, distribution in
China through Apple App Store is made more challenging by increased ISBN
control over mobile titles and the requirement to have a local publisher.
Google and Apple’s business models for their Google Play Store and Apple App
Store are very similar. They both provide an app development platform,
encouraging mobile developers and publishers to create apps for their platforms
while providing minimal editorial selection and interfering very little in the
development process. In fact, both Google and Apple essentially act as agents
vis-à-vis app developers, leaving them free to set the pricing for the app and
monetizing by retaining a percentage of all the revenue generated through the
app.
In 2020, one third of all mobile app downloads worldwide were games. Total
spending in Apple App Store and Google Play Store reached a record high.
Revenue amounted to nearly $111 billion, which represents a 30.2% increase
from 2019, and games accounted for $79.5 billion.
781
According to Sensor Tower
research, 71.7% of all in-app spending for 2020 involved games.
782
It took
however, one year for the record to be shattered as revenue increased to $170
778
“Call of Duty: Mobile”, wikipedia.org; and “Activision Blizzard 2019 Annual Report”,
investor.activision.com. Takahashi, Dean, "Call of Duty: Mobile has 500 million downloads, $1 billion
in player spending since 2019”, venturebeat.com, May 4, 2021.
779
Google is able to reach more players, but players that use iOS are more willing or able to spend
money on apps. See “Global Consumer Spending in Mobile Apps Reached $133 Billion in 2021, Up
Nearly 20% from 2020”, sensortower.com, December 7, 2021.
780
Nevertheless, the Android app store market in China is fragmented, with Tencent’s My App,
Huawei’s App Market and Oppo’s Software Store holding the largest market shares. See “App Store
Index”, appinchina.co. In 2019, Apple earned 20% of its revenue from the Apple App Store in China.
Porter, Jon, “Apple closes Chinese App Store loophole, causing thousands of games to be removed”,
theverge.com, June 22, 2020. According to a 2021 Niko report, approximately 25% of Chinese
gamers play games on iOS smartphones. “Take Rates in China – Will Quality Development Beat Out
Traditional Distribution?”, nikopartners.com. In this context, TikTok owner ByteDance has recently
built a gaming division aiming to compete with market rival, Tencent. It recently released in China its
first internal developed game, One Piece The Voyage, which was reported to have earned $50 million
in the first two months after its release. Ye, Josh, "ByteDance scores its first mobile game hit in China
in ongoing battle with market leader Tencent", scmp.com, June 15, 2021.
781
Revenue covers money generated by iOS and Android and includes advertising, in-app
purchases, subscriptions and app purchases. See “Global Consumer Spending in Mobile App
Reached a Record $111 Billion in 2020, Up 30% from 2019”, sensortower.com, January 4, 2021;
and Iqbal, Mansoor, “App Revenue Data (2021)”, businessofapps.com, August 4, 2021.
782
Ibid.
Mastering The Game
290
billion in 2021 which includes third-party Android app stores in China with games
representing approximately $116 billion in revenue.
783
There is no doubt that, even though the mobile gaming market is very competitive
for game content supply, there are still very few mobile distribution platforms
playing a significant role in downstream distribution.
784
Despite the small number
of distributors, competition continues to intensify as they compete for games for
their own subscription services. In many ways, the situation is similar to what
first-party console manufacturers have done by offering business incentives to
publishers and developers in exchange for distribution rights that may include
some form of exclusivity or restrict the distribution of games on other platforms.
Apple – The App Store And Apple Arcade
The App Store is one of the main digital distribution platforms and hosts hundreds
of thousands of gaming apps. In 2020, consumer spending in the App Store
reached $ 72.3 billion
785
and games accounted for almost 66% of that spending,
which is equivalent to $47.6 billion.
786
Even though Apple does not develop
games, it is considered to be one of the largest gaming firms globally,
787
with
revenue projections around $85 billion in 2021, with 70% originating from
games.
788
The App Store integrates with the pre-installed Apple Game Center app, which
allows users to synchronize game progress across all iOS devices and facilitates
competitive playing and social interaction among gamers.
Riding the wave of the gaming phenomenon, in September 2019, Apple
launched a unique subscription service for mobile, desktop, and the living room:
Apple Arcade, which makes App Store games available on different devices,
such as iPhone, iPad, Mac and Apple TV.
Apple Arcade constitutes the first gaming subscription service that allows mobile
games to be played on less-casual devices, such as desktop computers and
televisions. The service offers a catalog of games that are selected by Apple,
indicating that Apple is beginning to take more editorial control over its game
distribution business, which may potentially have positive effects on the quality
of App Store games in general. Arguably, what Apple is also trying to achieve
with Apple Arcade is offer a different mobile game environment, which does not
rely on continuous cash draws and where driven purchasing and loot boxes have
783
“Global Consumer Spending in Mobile Apps reached $133 Billion in 2021, Up Nearly 20% from
2020”, sensortower.com, December 7, 2021; and data.ai, “State of Mobile 2022”, data.ai.
784
With the noticeable exception of China, which has hundreds of Android distributors but is
dominated by 10 to 20 companies. See Niko “Take Rates in China – Will Quality Development Beat
Out Traditional Distribution”, nikopartners.com.
785
Statista Research Department, “Worldwide gross app revenue of the Apple App Store from 2017
to 2020”, statista.com, July 6, 2021.
786
“Global Consumer Spending in Mobile Apps Reached a Record $111 Billion in 2020, Up 30% from
2019”, sensortower.com, January 4, 2021.
787
Clement, J., “Gaming revenue of leading public companies worldwide during 4
th
quarter 2020”,
statista.com, June 24, 2021. According to Apple, as of January 2022, it has remitted $260 billion to
app developers since 2008 with $60 billion from 2021. “Gurman, Mark, “App Store Developers Made
About $60 billion in 2021, Apple Says”, bloomberg.com, January 10, 2022. With a 30% share, it is
clear why Apple is one of the major gaming companies. Bursztynsky, Jessica, "Apple v. Epic ruling
reveals 70% of App Store revenue comes from a small fraction of customers playing games",
cnbc.com, September 10, 2021.
788
“Global Consumer Spending in Mobile Apps Reached $133 Billion in 2021, Up Nearly 20% from
2020", sensortower.com, December 7, 2021.
291 Mastering The Game
been replaced by a monthly subscription fee of $5 (as at the time of writing). In
doing so, Apple is creating a venue for independent and big developers
789
where
gaming content overrides additional in-game purchases, limited levels and in-
game advertising and where “free-to-play” takes on a different meaning.
790
With this relatively new service, Apple is also strengthening its relationship with
developers, acting almost like a publisher by fronting, at times, developers’ costs,
entering into exclusive deals with developers and taking control of the end-user
monetization model.
791
Google – Google Play Store And Google Play Pass
Google Play Store is the digital distribution platform operated and developed by
Google, and it also serves as the official app store for the Android operating
system, allowing Android users to browse, purchase and download games. In
2019, Android announced that there were more than two and a half billion active
Android devices worldwide,
792
which would make Android the most popular
operating system for apps and games. In 2020, consumers spent $32 billion on
games in the Google Play Store, an increase of about 27% from 2019.
793
In 2013, Google introduced Google Play Games, an online gaming service for
the Android operating system, featuring gaming-related services, such as
leaderboards, achievement systems and cloud saves. Like Apple’s Game
Center, it operates as a dashboard through which the user has access to a
plethora of services, such as in-game achievement systems. It promotes social
interaction between players through a system of leaderboards designed to
increase engagement and encourage competition among hardcore and casual
players.
794
In September 2019, only a few days after the launch of Apple Arcade, Google
also launched its first app subscription service, Google Play Pass, intended only
for mobile use and, again, offering a hand-picked selection of games. This
service was originally launched only in the United States, but now has expanded
to 90 countries.
795
The main features of this service appear to be very similar to
those of Apple Arcade, namely a subscription service providing advertisement-
free games designed by selected developers. Unlike Apple,
796
Google did not
explicitly announce that it would support a portion of the development costs for
Google Play Pass games but highlighted the advertising potential that this
subscription service could have for mobile developers. However, a major
concern about the service was the way in which royalties would be determined
for developers. Originally, the Google Play Pass monetization model involved
789
At the time of writing, there are over 100 publishers and developers participating in the Apple
Arcade subscription service. For many of the developers, the service provides a better chance to be
discovered because a select number of games are offered as part of the service. Furthermore, as
content improves on a platform, it tends to attract new publishers and developers.
790
Games on Apple Arcade do not contain in-app purchases, and all features and any updates are
included as part of the subscription price. Barrett, Brian, “How Apple Arcade Will Reshape Mobile
Gaming”, wired.com, September 19, 2019.
791
Farough, Amanda, “Apple Arcade invests in developers while ensuring studios retain rights to
their games”, gamedaily.biz, September 18, 2019; and “Apple Arcade: What This Really Means for
Mobile Game Developers (Updated)”, gameanalytics.com, October 11, 2019.
792
Brandom, Russell, “There are now 2.5 billion active Android devices”, theverge.com, May 7, 2019.
793
“Global Consumer Spending in Mobile Apps Reached a Record $111 Billion in 2020, Up 30% from
2019”, sensortower.com, January 4, 2021.
794
Google Play Game Services, “Achievements”, developers.google.com.
795
For a list of countries as of December 2021, see https://play.google.com/about/pass-availability/.
796
Batchelor, James, “Why are developers betting on Apple Arcade?”, gamesindustry.biz, November
25, 2019.
Mastering The Game
292
paying developers according to the amount of time their games were played, and
this created an unexpected problem because it connected royalties to the time
spent playing a specific game. The model, therefore, encouraged a re-playable
gaming experience rather than a short gaming experience and eventually led
developers to design games that required heavy grinding from the player in order
to increase payments.
797
However, the practice appears to have changed, as
Google now states that developers earn a royalty that is based on algorithmic
methods, which take into account how users value all types of content.
798
New Players
As cultural barriers become less of an issue worldwide and the market for games
becomes more and more global, with Western consumers becoming increasingly
interested in Asian games and vice versa, the market for digital distribution
platforms, particularly mobile platforms, is likely to become even more
competitive in the years to come.
Unsurprisingly, the success of mobile gaming in Asia is leading Asian companies
to invest in mobile gaming platforms in an attempt to carve out a slice of the
global mobile gaming market. While Silicon Valley is still the center of the mobile
gaming market, a few interesting competitors are emerging in the East, perhaps
taking advantage of the crisis between Google and Huawei, which may have
been an excellent opportunity for new players to attract Android users recently
orphaned from the Google Play Store,
799
and using the chance to leverage the
immense power that Asian technology companies have acquired in the
smartphone market.
The limited accessibility of the Chinese market appears to be playing a key role
in supporting Chinese mobile industry players. In fact, aside from the specific
political relations between China and the United States, compliance with the
Chinese regulatory framework poses a great obstacle to Western businesses
operating at a global level, and this can be leveraged by China-based tech
giants.
800
The attractiveness of the mobile market from a business perspective is also a
factor capable of increasing competition among distribution platforms because it
drives new players to capitalize on the opportunities offered by new technologies
and take advantage of the intrinsic flexibility of the mobile gaming sector
compared, for example, to the console sector where platform owners exert
significant control over their platforms with strict processes, rules and
requirements. The mobile market has demonstrated a peculiar ability to come up
797
Kim, Matt T.M., “Developers Raise Alarm Over Their Cut of Google Play Pass’ Subscription
Money”, ign.com, September 23, 2019.
798
“Grow with Google Play Pass”, play.google.com
799
Chinese smartphone giants, which together control 40% of global smartphone shipments, have
joined forces and are planning to launch a new platform that is intended to challenge the international
dominance of Google Play Store. Porter, Jon, “China’s smartphone giants reportedly unite to
challenge Google’s Play Store”, theverge.com, February 6, 2020.
800
A large number of games were removed from the Apple App Store because of failure to comply
with Chinese regulations. Peters, Jay, “Apple removes thousands of games from the Chinese App
Store, alarming observers”, theverge.com, August 18, 2020.
293 Mastering The Game
with new and innovative business models and solutions that could enable new
players
801
to acquire commercial relevance if they appeal to consumers.
802
9.3 – Dealing With Mobile Distributors And Publishers
9.3.1 – What You Need To Know
Apps become available for consumers by accessing ‘app stores’ via the internet
from a mobile device or tablet connected to a mobile or wireless network.
Therefore, developers must first enter into agreements with the various
distributors, such as the Apple App Store, Google Play Store and Tencent My
App, which serve as distribution platforms.
Many developers often choose not to involve a publisher and prefer to deal with
the distribution platform directly, which allows them to monetize immediately
through game revenues.
803
Chapter 3 mentioned the blurred distinction between
the roles of developer and publisher. The advent of digital distribution has
arguably also blurred the distinction between the roles of publisher and
distribution platform, particularly when the platform embraces a selective
approach to content and thus effectively exercises editorial control over what is
published and what is not.
804
For most developers, entering into a deal with a distributor seems like an easy
process in which they sign a distribution agreement with the distributor simply by
accepting a click-through contract. The agreement is a form contract that sets
forth the rights and obligations of the developer and distributor, respectively, and
is non-negotiable unless perhaps the developer is negotiating an exclusive deal
or has extreme bargaining power. However, even in such a situation, there may
be little room to negotiate terms with the platform, except perhaps commercial
terms.
805
While it is true that, in the vast majority of cases, the contractual terms applicable
to the relationship between the developer and the distributor are standard terms
801
Regarding PC gaming platforms, a successful example of a new player entering the market is
Epic Games, Inc., which attracted 108 million PC customers in its first year with its Epic Games Store
and, according to Epic, had 180 million users in 2021. See Epic Games Inc., v. Apple Inc., 493 F.
Supp. 3d 817 (N.D. Cal. 2020); “Epic Games Store 2020 Year in Review”, epicgames.com, January
28, 2021; and Brightman, James, “Epic Games Store has generated $680M so far, with exclusives
being ‘critical’, says Tim Sweeney”, gamedaily.biz, January 14, 2020.
802
Consider, for instance, the Chinese multinational conglomerate, Tencent, which capitalized on the
interoperability opportunities offered by technological advancements and built on the growing appeal
of social games to integrate mini-games into its WeChat platform. Facebook subsequently replicated
this approach with its Instant Games platform. Another example relates to the adoption of new
monetization models by subscription-based platforms – whether cross-device platforms, such as
Vortex and Apple Arcade, or platforms specifically designed for smartphones, such as Google Play
Pass and Hatch Entertainment – which now offer cloud gaming content, generally stripped of all in-
app purchases and advertising.
803
The involvement of a publisher often implies that, under the terms of the publishing agreement,
the publisher will be entitled to recoup any minimum guarantee paid to the developer, in addition to
its right to make deductions and establish reserves.
804
Sometimes, a platform may be willing to pay a minimum guarantee to the developer to secure the
rights to distribute a specific game in its digital store. This distribution approach, which focuses more
on the quality of game selection than on the quantity of games available, has already proved to be
successful, as illustrated by the launch of the Epic Games Store platform for PC. It is now also being
tested for mobile games by Apple with Apple Arcade.
805
According to some of the documents presented by Epic Games in its lawsuit against Apple, the
Vice President of Developer Relations noted that Apple does not routinely negotiate the terms of its
developer program license agreement with developers and, to his knowledge, Apple offers the same
agreement to all developers.
Mastering The Game
294
that leave virtually no room for negotiation by the developer, it is important that
developers carefully read and understand the platform’s terms. This is because
one critical, but often overlooked, requirement set out in the distribution
agreement is that the app must comply with all the platform’s terms and
conditions, otherwise it will be denied distribution or, perhaps even worse, taken
down after launch. It is essential to understand the mobile platform’s admission
requirements to avoid the app being refused admission or removed because, for
example, it includes inappropriate content according to the standards set by the
platform or breaches the rules on the promotion of other apps.
806
Moreover,
developers should be aware that, before or even after their games are admitted
to the distribution platform, they may have to answer questions from the platform
about issues as diverse as IP right ownership or licenses, gambling law, data
collection or other types of regulatory compliance.
As a result, the best practice for developers wishing to avoid or minimize the risk
of having to substantially change or redesign an app in order to have it admitted
or re-admitted to the distribution platform is to review the relevant app store terms
and conditions prior to and during the design process. This will enable the
developer to ensure compliance with all the platform’s key terms and conditions
relating to content and monetization models.
Understanding all key platform admission requirements at an early stage is all
the more important when a developer is considering distributing its game on
several platforms, some of which may be based in different countries or
continents and may, therefore, have different admission requirements set out in
their terms and conditions. In this regard, it is important to consider, for example,
different cultural sensitivities and how they may impact content as well as
differences in regulatory requirements regarding, for example, gambling, and
how they may impact monetization models.
9.3.2 – End-User Monetization Models
In the early days of the mobile gaming business, the app store model designed
by Apple App Store or Google Play Store was based on the concept of making
as much content available as possible, with little editorial control or filtering by
the platform.
With this model, end users could choose between a wide range of apps and
monetization models. Due to the abundance of apps distributed in the mobile
marketplace, the rise in app costs and the multiplication of free apps, developers
have had to devise new ways of making revenue. Consequently, some of the
business models used for mobile games have evolved or been adapted from
other sectors of the game industry, particularly browser and online games, and
range from so-called premium games, where a fixed fee is paid for purchasing
an entire app, to free games, which are supported by advertising and/or, more
and more frequently, in-game purchases.
807
It has been reported that 95% of app
806
In early 2020, it was reported that Google removed almost 600 apps from Google Play Store and
banned the developers for violating the Google Play Store terms by including disruptive mobile
advertisements. Lyons, Kim, “Google bans hundreds of Android apps from the Play Store for
obnoxious ads”, theverge.com, February 20, 2020.
807
So far, this model has proved to be quite successful since mobile gaming generated revenues
close to $74 billion in 2020. As such, mobile gaming revenues are greater than those of all other
sectors of the game industry. See Newzoo, “Newzoo Global Games Market Report 2020” (light
version), newzoo.com.
295 Mastering The Game
store revenue from games comes from in-app purchases, including loot boxes,
XP boosts and time savers.
808
Depending on initial end-user reaction, the business model for an app may
change. In some cases, the pricing model for an app may vary depending on the
app store, and there may be restrictions on pricing changes if an app is initially
offered free of charge. A strong brand, for example, may be able to command
higher fees because the app has been well received and is popular with
consumers. Certain business models have worked well for some developers,
while those same models have failed for others, although many factors contribute
to the success or failure of a game. As a result, developers and publishers must
carefully consider what model works best for them since the transition from one
model to another, for example, from a premium model to a free-to-play one, may
be difficult due to consumer expectations and the distributor’s terms or technical
restrictions.
At present, the most popular monetization models all involve some form of
payment or free-to-play elements or a combination of both.
809
The table below
illustrates the ways in which a developer or publisher may earn money at different
stages of gameplay as per different business models.
At the “Start Game” stage, end users either pay money to start playing the app
or access the app for free. At the “During/Finishing Game” stage, end users can
either continue playing the game at no additional cost or can choose to pay a fee
to enhance their gameplay, perhaps with new characters or costumes, additional
or enhanced functionality to improve their playing skills or, more frequently, by
speeding up their game progress. For some titles, it may be considerably harder
to complete the game without paying additional fees and/or it may require the
player to spend more hours farming for resources than a paying user. However,
under most of the business models, payments made at the “During/Finishing
Game” stage are technically not necessary to complete the game. An exception
to this is the unlockable demo, where the end user can play a certain amount of
the game for free but must pay money to unlock the entire game; however, this
is becoming a less common business model for mobile gaming. A further
advantage to paying a fee may be that the game becomes advertisement free,
so the player is not constantly interrupted by advertisements during playtime.
WAYS TO EARN MONEY AT DIFFERENT STAGES OF GAMEPLAY
Business Model
Start
Game
During/Finishing
Game
Example
Premium
Pay
Free
Star Wars: KOTOR
808
Some interesting statistics are available in Jugovic Spajic, Damjan, “Mobile Killed the PC Star:
Mobile Gaming Statistics for 2020”, kommandotech.com, December 4, 2019.
809
In this context, a key tool for the mobile gaming business is game analytics, which involves the
collection and interpretation of data on consumer conduct and buying habits to help developers better
target their audience and learn what models and practices are most effective from a monetization
standpoint. Some areas of particular interest to developers and publishers may be (i) how many
consumers are paying and how many are playing for free; (ii) what purchases are being made by
consumers; (iii) how long consumers play the game; (iv) which application programming interfaces
(APIs) are most effective in encouraging consumer purchases; (v) how many consumers become
paying customers; (vi) what the game retention rate is after a given period; and (vii) what the
consumer’s average spend is.
Mastering The Game
296
Ad-supported,
optionally with
unlockable ad-free
version
Free
Free
or pay to unlock ad-
free version
2048
Freemium, also
known as free-to-
play
Free
Free
or pay for additional
ingame content
Clash Royale
Paymium
Pay
Free
or pay for additional
ingame content
Minecraft
Subscription
service
Pay
Pay for additional
content and features
FIFA
Unlockable demo
Free
Pay
Super Mario Bros
It is quite common for casual games to use a combination of these business
models, for example, in-game purchases combined with rewarded
advertisements or rewarded video advertisements. Monetization models based
on paid subscriptions are less common. Subscription-based models generally
allow for higher player retention rates but require stronger motivation for players
to invest their money in a single game. With such a model, distribution platforms
take their share of the game revenues generated by subscriptions and any in-
app purchases. Season and battle passes are part of the subscription model.
Season passes allow users to access new content released during a set period
of time at a discounted price. Battle passes allow users who have purchased the
pass to earn certain rewards for playing the game and achieving specific goals.
While any non-paying user can earn some rewards, the battle pass provides
additional and higher rewards.
Noticeably, a new monetization trend appears to be emerging, with distribution
platforms creating their own subscription models that allow them to determine
the commercial offer and monetization system, which would preclude the
developers and publishers of the games offered as part of the portfolio of games
made available on a paid-for subscription basis from deciding how a specific
game should monetize.
Whether or not a subscription business model will work depends on a number of
factors but, most importantly, it depends on the quality of the games, the number
of games, the price and the economic benefits for the developer. It is essential
to consider how the developer will make money; whether the service requires
the game to be exclusive; and whether the business advantages outweigh the
restrictions on distribution via other platforms. Small- and medium-sized
developers will probably find subscription services a viable option if they do not
have the time and resources or the expertise to deal with monetization issues
and/or if the economic and exposure benefits surpass those of alternative
distribution models. In contrast, a well-established developer that wants to keep
297 Mastering The Game
more control over its game, including the monetization method, may find that
subscription services will not be financially advantageous for some games,
especially new releases. However, as a distribution platform expands, it may
provide enough financial incentive and promotional value for it to be worthwhile
for a developer to create original IP and/or license a game. Since fewer games
are offered as part of a walled subscription service, a game may benefit from
promotional and marketing value that would have been more expensive and
more difficult to obtain on other distribution platforms. Catalog titles may also
provide economic benefits to major developers, especially if they receive
additional payments besides royalties. These issues are, in many ways, similar
to those encountered with other forms of digital distribution.
810
Due to the monetization limitations that the subscription business model imposes
upon publishers and developers, it may not be as economically viable as other
business models unless the subscription service has a large enough consumer
base to generate royalties or the distributor offers other financial consideration,
such as guarantees or development costs. However, one advantage for
publishers and developers is the additional marketing value provided by the
distributor, which otherwise may not be easy to obtain in a crowded market.
Since there are fewer games in a subscription service, there is more chance that
consumers will discover a game, and the platform provider is more likely to
feature and promote the game in order to showcase added value to the existing
subscriber base and attract new subscribers.
9.3.3 – The Publisher-Developer Relationship
Given the relatively low cost of app development and the ease of game
distribution through an app store, many developers choose to self-publish their
apps. As already mentioned, the biggest advantage for a developer is that it only
has to share revenue with, and seek approvals from, the distributor and any
licensors that may have provided IP-protected content for use in the app. On the
other hand, the developer must assume all the risks associated with developing
the game as well as sole responsibility for its publication and development
funding. However, as already noted, platforms may sometimes be willing to pay
minimum guarantees to secure game distribution rights and these may be used
for development and marketing costs.
In some situations, however, a developer may choose to work with a publisher.
Why would a mobile developer want to work with a publisher when it can arrange
for the distribution of the app on a mobile platform itself? There are at least four
possible reasons. The first reason is that publishers tend to be well-capitalized
and can, therefore, provide development funding. The second reason is that
publishers can leverage their greater market presence to provide marketing
support that would otherwise be unattainable or unaffordable for the developer.
Such marketing support may be vital to ensuring an app gets noticed in what is
currently an extremely crowded sector where discoverability is increasingly an
issue and can potentially impact the commercial success of a game. The third
reason is that, given the increasingly complex legal and regulatory framework
810
In April 2021, several major publishers and developers announced that they would develop for
Apple Arcade. Some of the games include a few notable brands, such as 2K’s basketball game NBA
2K21 Arcade Edition and a Star Trek game. In addition, some well-known developers, including the
ones behind Final Fantasy and Hot Shots Golf, signed on to create games for the service. McWhertor,
Michael, “Apple Arcade gets new games from Final Fantasy creators, PlatinumGames, and more”,
polygon.com, April 2, 2021.
Mastering The Game
298
applicable to games, the publisher may be able to provide the developer with
expertise and support, either through its in-house legal department or by
securing the services of a law firm, to ensure a game complies with all applicable
local laws as well as the platform’s terms and conditions, thereby avoiding or
minimizing the risk that the app be refused admission by the platform(s) or
subsequently removed for lack of compliance. The fourth reason is that a
successful publisher can include the app in its network of games and thus
provide more visibility.
From the publisher’s point of view, mobile gaming clearly offers economic
opportunities, sometimes publishers may have considerable experience (and in-
house studio talent) in the console and PC worlds but lack expertise in relation
to mobile games, and therefore, they may elect to work with a developer as a
strategic move to enter this segment of the market and develop internally,
through the relationship with the developer, the expertise they require to grow its
own mobile business. Developers should be mindful of the potential interest on
the part of publishers that may extend beyond the publishing of one or more
games of the developer so that the developer can leverage this factor in the
context of the discussions with the publisher around the terms of their
collaboration (including in respect of the economic terms).
There are various scenarios in which a developer and a publisher may enter into
an agreement with respect to a mobile game, including:
• the publisher provides financing to help pay for all or part of game
development expenses and for costs associated with game promotion
and marketing and, in return, acquires certain rights to the game,
including distribution rights;
• the publisher hires a developer to create a game that will be owned by
the publisher;
• the publisher/marketing agency is simply involved in marketing the game
and targeting the relevant player base, thereby increasing the game’s
visibility in the marketplace, but it is not otherwise involved in funding or
distributing the game;
811
• a developer ports a game for a publisher; or
• the publisher distributes the developer’s game and enters into
agreements with distributors. This may benefit the developer,
particularly in terms of managing relationships with distributors located
outside the developer’s zone of operation, for example, when a
developer intends to launch a European game for distribution on
Chinese mobile platforms. For some countries, such as China, a
developer is required to enter into a relationship with a Chinese
distributor for its game to even be considered for distribution.
811
This may be the case when a developer wants to retain control over the development and
publishing of its games but lacks the expertise to market them. In what is an increasingly crowded
ecosystem, a developer may find it more efficient or more effective to outsource only the marketing
of its app to publishers.
299 Mastering The Game
Example Of The Mobile Development Process
The rights and obligations between the developer and publisher will vary widely
depending on the kind of deal agreed between them. For example, if the
publisher is funding the developer to create one of the developer’s own apps, or
if the developer is creating an app as a work for hire for the publisher, then some
terms such as IP and revenue splits will be different. Key points that may require
negotiation between a publisher and a developer may relate to which party will
be responsible for carrying out various obligations and which party will pay for
costs. If the publisher makes commitments, for example, marketing
commitments, it is critical that the developer include language in the agreement
confirming those obligations. The key points for negotiation are:
1. Delivery of the app covering services to be provided and a milestone
schedule;
Pre-Production
Concept
•
theme
•
gameplay
•
monetization
Design document
Prototype
Production
Execution of
agreement
Milestone
delivery
•
first playable
•
alpha
•
beta
•
Gold
1.
Master
Candidate
Post-Production
Support
Product iteration
Updates
Greenlight
process
• financing approval
Approval
•
first playable
•
alpha
•
beta
• Gold Master
Candidate
Submission
•
platform
relationship
•
Apple
•
Google
•
Tencent
•
release to market
Marketing
• marketing &
sales support
•
advertising
•
distribution
deals
• negotiation &
confirmation of
platform support
(i.e., feature
placement,
co-marketing,
etc.)
Mastering The Game
300
2. Rights granted and, if limited, the term of exploitation of the said rights;
3. Operating systems (e.g., iOS and Android) and devices (e.g.,
smartphone and tablet) for which the game will be delivered;
4. Late delivery or failure to deliver an app, which may involve termination
or reduction in payments or royalties;
5. Update obligations
812
and delivery of possible new content;
6. Consideration of virtual reality (VR) and esports capabilities;
813
7. Testing of the various submissions for different devices;
8. Territory, which may also involve app localization;
9. Porting of the app to additional devices;
10. Customer support;
11. Ownership;
814
12. Revenue sharing (see below);
13. Distribution and marketing obligations, including which party will be
responsible for user acquisitions;
14. End-user agreement and enforcement;
15. IP enforcement and protection;
16. Game-content pricing strategy and/or business model to generate
revenue;
17. Data collection and ownership, for example, who owns the data, who
administers access to it and who ensures collection complies with
government regulations.
18. Personnel who will work on app development and personnel who will
work on app publication;
19. Licensing of software owned by the developer to the publisher, if
applicable;
20. Statements and audit rights if royalties are owed;
812
This refers to regular updates as well as to resolving technical issues or code shortcomings,
adding new gameplay functionalities and adding or updating game content, which may help extend
the app’s life cycle.
813
If the parties choose to conduct esports tournaments, (the parties may also decide to work with a
third party) they must govern the allocation of rights related to tournaments and events and address
the responsibilities of each party regarding, for example, regulatory compliance, hosting, managing
and administering the events and the corresponding revenue share.
814
In deals involving distribution only, the developer will, in almost every situation, own the copyright
in the game; however, in situations where one of the parties is paying all or part of the development
expenses, ownership of the copyright will require negotiation. Typically, the outcome will depend on
which party created the IP, including the underlying code and story, and the amount of money
invested by the publisher. Generally, the more money invested by the publisher, the greater the
likelihood that it will want to own the IP in the app. However, it appears to have become more common
recently for a developer to maintain its IP. When a developer is hired by a publisher to create an app,
the IP will typically be owned by the publisher, except for any licensed content or any underlying code
created by the developer. Ownership of the IP or the perpetual right to use it unrestrictedly will allow
for the creation of derivative works, including sequels, and the right to exploit the app and source
code on other platforms. If the publisher does not own the IP, it will probably want to have the
opportunity to distribute future products created by the developer based on the original app.
301 Mastering The Game
21. Approval of deliverables, marketing and business plans;
22. Publisher’s commitments and actions vis-à-vis the developer’s app
regarding territories where a publisher may only be allowed to submit a
certain number of games/apps for approval (e.g., China); and
23. Termination, for example, upon expiration of the agreement or failure to
cure a breach or termination for convenience by the publisher subject to
some form of compensation for the developer.
The most fiercely negotiated of these points will often be revenue terms. As with
most publishing agreements in the game world, mobile game publishers and
developers are typically remunerated through some form of percentage revenue
share. Similarly to other revenue share deals described elsewhere in this book,
the exact amount payable to the developer and the publisher (and how and when
it will be paid) will be a matter of negotiation and will be influenced by a number
of factors, including the parties’ respective bargaining positions and whether the
publisher has provided development funding it wishes to recoup. However, in
mobile publishing agreements, the distribution platform (e.g., Apple App Store,
Google Play Store or Tencent My App) will take its standard fee, following
deduction of taxes, such as withholding tax and digital value-added tax (VAT),
before the developer and publisher take their revenue share.
815
Finally, depending on the app’s business model, it may be necessary to negotiate
what qualifies as revenue and how the publisher and developer will recognize
and share revenue from advertising, virtual items, if any, within the game as well
as revenue from the sale price, if any, of the app itself. Moreover, it may also be
relevant for the agreement to cover the distribution of revenues generated by the
exploitation of the game and game elements in ancillary markets (e.g., derivative
works and merchandising), in the event that the game reaches a level of
popularity that justifies the widespread exploitation of the game’s elements,
which is rare, but not unprecedented, for mobile games.
816
More generally, regardless of the exact kind of publisher-developer agreement,
all agreements will also include a number of legal points similar to those in
standard distribution agreements elsewhere in the game industry, such as
representations and warranties, indemnification, how and where disputes will be
resolved, termination, confidentiality, limitations of liability, insurance and
“boilerplate” provisions.
9.4 – Entering Into An Agreement With The Distributor
Each distribution platform has its own contractual terms, so the content of an
agreement will vary depending on the distributor. Nevertheless, agreements with
distribution platforms typically cover and regulate key points, including, but not
815
For game businesses that have operated in digital distribution, this is really no different to what
they have already experienced. In fact, the digital platform usually deducts its share of the revenues
before it passes the balance on to the publisher for sharing between the publisher and developer in
accordance with the terms of the agreement between them.
816
Batchelor, James, “How Angry Birds broke the limits for mobile games”, gamesindustry.biz,
December 11, 2019.
Mastering The Game
302
limited to, the game submission process; approvals;
817
the grant of a non-
exclusive license of platform technology to the developer;
818
the distributor’s
share of revenue for distributing the app;
819
payments owed to the developer or
publisher; term; territory; ownership of IP rights; pricing; removal notices;
820
restrictions on data collection;
821
rating requirements;
822
testing; insurance
obligations;
823
restrictions on the use of open-source software; and app
certification by the distributor.
Developers should be aware that the agreement will almost inevitably require the
developer or publisher to represent and guarantee, among other things that all
IP rights related to the game are either owned by it or properly licensed from a
third party and that the developer or publisher will indemnify and take
responsibility for any liability, loss and costs incurred by the distributor arising or
resulting from any infringement claims related to third-party IP rights, such as
copyright, trademarks and patents. It should be noted that the agreement
between the publisher and the developer will typically allocate this responsibility
to the developer unless the publisher is providing the developer with IP. The
distribution agreement will also cover a number of other points, including how
and where disputes will be resolved, termination, confidentiality,
824
limitations of
liability, the distributor’s right to amend the terms of the agreement, disclaimer of
warranties and other boilerplate provisions.
825
When the distributor is also the manufacturer of mobile devices, it may, in some
cases, be interested in obtaining exclusive distribution rights, normally for a
817
A developer or publisher must ensure compliance with certain guidelines established by the
distributor in order to avoid sanctions, such as removal of the app or ban on the developer or publisher
from the platform. Generally, once the developer or publisher has signed the agreement, which refers
to and incorporates the guidelines, the distributor will carry out a general review of the app before
publishing it. Regardless of the review, the developer or publisher remains responsible vis-à-vis the
distributor for compliance with the guidelines at all times and, therefore, also with respect to any
future updates and patches. Furthermore, all app stores employ a removal process if an app violates
their guidelines. In the majority of cases, violations will be linked to incorrect use of a rating, offensive
content (e.g., pornography), promotion of gambling or issues related to IP (e.g., unauthorized use of
third-party content). For different guidelines established by storefronts for apps, see Developer Policy
Center, “Providing a safe and trusted experience for everyone”, play.google.com; and Developer App
Store, “App Store Review Guidelines”, developer.apple.com.
818
Distributors license software on a non-exclusive, non-transferable basis to developers to allow
developers to incorporate various features into their app.
819
In most situations, the current practice is for the distributor to receive a 30% revenue share.
However, this is in a state of flux as the 30% fee is the subject to a number of legal challenges. See
Section 1.8.5. In addition, developers or publishers may also have to pay an entry fee, which is
generally very low, to be allowed to publish their games on a given distribution platform.
820
Generally speaking, removal or take-down rights allow the developer or the publisher to remove
the app from the store, provided that certain requirements or conditions are satisfied, such as
obligations to refund consumers and provide customer support.
821
Distributors impose a number of restrictions on the collection of user or device data by a developer
or publisher. Developers or publishers are required to comply with all applicable privacy and data
protection laws and regulations and to obtain users’ consent for the collection, use and storage of
their personal data.
822
Generally, the distribution agreement and guidelines provide that the developer or publisher is
solely responsible for indicating the app’s age rating, subject to compliance with any statutory
obligations set forth in state classification systems. However, the distributor may provide support to
the developer or publisher by way of specific questionnaires designed to help it manage age-rating
certification.
823
Distributors may require that a developer or publisher hold or obtain insurance coverage for certain
named risks and that the relevant insurance policies name the distributor as an additional insured
party. See Chapter 3, which discusses insurance issues between the developer and publisher; similar
issues apply between the distributor and the developer or publisher.
824
Some distribution agreements explicitly state that information communicated to the platform by a
developer or publisher, including information relating to a submitted app, is not deemed confidential
for the purpose of the confidentiality obligations.
825
See Chapter 12.
303 Mastering The Game
limited period of time, as a way to promote an upcoming or newly released
device. In this situation, which is relatively uncommon, the parties enter into a
bespoke agreement amending the terms of the standard distribution agreement
to cover points such as app development; delivery dates; localization obligations;
the delivery process, including acceptance procedures; the exclusivity period
and territory; financials; and marketing. Given the issue of app discoverability,
the terms relating to the platform’s marketing commitments are often of key
importance to the developer or publisher, which is generally keen to leverage
fully the platform’s ability to promote the game since promotion can potentially
boost sales.
Mobile distribution agreements are generally less restrictive for developers or
publishers than, for example, digital distribution agreements for console games,
since mobile distribution platforms allow the developer or publisher to withdraw
its content from the platform at any time, without any particular formalities or
penalties.
The agreement between the distributor and the developer or publisher is often
characterized as a standard non-exclusive agency agreement. However, despite
many similarities, the level of sophistication and granularity of the terms of each
standard agreement may differ depending on the platform.
While the Google Play Store standard distribution agreement is straightforward
in that it applies to all content, irrespective of whether the game is free to play or
fee based, the contractual framework designed by Apple for its App store is
significantly more complex since it requires the developer or publisher to agree
to specific terms that vary depending, for example, on whether the app is free to
play or fee based, with apps containing in-app purchases being considered fee
based.
826
The Apple Developer Program License Agreement is currently much longer and
more detailed than the Google Play Developer Distribution Agreement. Some
notable differences between the two agreements include Apple dictating more
stringent requirements for app design,
827
prohibiting developers from
independently issuing refunds to end users of the app and imposing additional
confidentiality obligations.
Since these distribution agreements are normally characterized as agency
agreements rather than reseller agreements, distributors generally allow
developers or publishers to freely set the pricing for their app and related in-game
purchases. The distributor will then collect and remit revenues to the developer
or publisher after deducting its share of revenues.
826
For a list of business models, see https://developer.apple.com/app-store/business-models.
827
For example, the prohibition on distributing any additional app features or functionalities through
non-Apple channels, on including features or functionalities that create or enable a third-party
software store and on using or calling any private APIs; or the obligation for iOS apps to have at least
the same features and functionality on an iPad when run in compatibility mode. The Apple Developer
Program License Agreement also specifically states that, with the exception of consumable items
(e.g., virtual supplies such as construction materials), any other content, functionality, services or
subscriptions delivered through an in-app purchase (e.g., a sword for a game) must be available to
all of the devices associated with the account of the user who made the purchase.
Mastering The Game
304
9.5 – Major Terms Of The Distribution Agreement
9.5.1 – Rights Granted
Under the distribution agreement, the developer or publisher typically grants the
distributor a non-exclusive, royalty-free license covering the rights necessary for
the distributor to lawfully market and distribute the game on its platform (e.g.,
reproduction rights, right to display); analyze game-related data; and check if the
app is compliant with the platform’s distribution terms and guidelines. Moreover,
the license generally allows the distributor to use the developer’s technology
embedded in the app for the purpose of improving its platform.
While mobile distributors do not usually agree to any marketing commitments or
obligations in favor of the game or the developer, they do generally acquire fairly
broad rights from the developer or publisher, allowing them to legitimately
advertise the game in connection with their platform services. Such rights include
the right to display elements from the game, for example, characters and
gameplay videos, as well as the developer’s trademarks and trade names. The
advertising rights granted to the distributor’s platform are typically not restricted
to use in connection with the platform and, in fact, extend more generally to
online, mobile, television, out-of-home (e.g., billboard) and print advertising uses.
Such rights may also be granted to allow promotional incentives for paid
transactions, including in-game transactions, as well as gift card promotions,
including on third-party channels.
828
In addition, standard distribution terms
usually provide that, in the event of termination of the agreement, the distributor
will be entitled to retain copies of the app and continue to use the app for the
purpose of supporting and improving its platform and services.
9.5.2 – Delivery Of Materials And Acceptance
The delivery section of the distribution agreement outlines which game-related
materials must be delivered to the distributor and in which formats.
However, whenever the delivery process is to take place directly through the
distribution platform, as is the case for Apple App Store and Google Play Store,
the distribution agreement does not cover this point in detail because the
procedure is standardized, and development tools and processes are detailed
and explained by the guides and tutorials made available to developers on the
platform.
All distributors have the right to reject a game submission. Developers must,
therefore, be aware of a distributor’s reasons for rejecting games so that they
know in advance what is to be avoided and what is required when submitting a
game. Although these reasons may vary slightly among distributors, some
common ones include: (i) the game is untested and has material bugs; (ii) the
game alters device functionalities; (iii) inaccurate description or information about
the game; (iv) copycat of other games; (v) hidden or undocumented features; (v)
828
The distribution agreement for Google Play Store allows Google to use the developer’s brand
features for the purpose of marketing promotions in connection with Google Play and for gift card
promotions on Google-authorized third-party channels. See “Google Play Developer Distribution
Agreement”, play.google.com, agreement effective as of November 17, 2020.
305 Mastering The Game
use of the developer’s own payment system;
829
(vii) the developer does not have
proper licenses to distribute in a particular country, for example, China; and (vii)
the game fails to comply with the distributor’s guidelines or law, including issues
relating to privacy and IP.
9.5.3 – Continuing Obligations
In contrast to distribution agreements for console or PC games, agreements with
mobile app platforms rarely require the developer to provide upgrades,
enhancements, modifications and add-ons for its app. However, a developer
may be required to provide updates as part of its obligations under a publisher-
developer agreement or under a mobile platform agreement that involves some
form of financial consideration paid to the developer. Furthermore, mobile
distributors may require update/enhancement parity in terms of both content and
delivery. Finally, developers are typically bound to provide maintenance and
technical support to final customers for their mobile games.
830
Regardless of the
distributor’s requirements, for many games, it would probably be in the best
interest of the developer to update and refresh its game to help extend the
game’s life cycle, player engagement and monetization.
9.5.4 – Term And Termination
App stores rarely specify a term for distribution agreements. Instead, it is usually
stipulated that the agreement will endure until terminated by either party, and the
parties generally have flexible termination rights. Typically, the developer is
entitled to terminate the contract immediately and without cause by simply
removing the app from the platform.
831
However, the agreement may include a
reasonable phase-out period allowing the distributor time to discontinue its
distribution activities.
832
The distributor is normally allowed to terminate the
contract immediately for cause and remove the app from the platform, whereas
its right to terminate the contract for convenience will usually be subject to a
specific notice period.
833
Nevertheless, the distributor’s right to terminate or suspend an agreement can
be very broad and some agreements allow termination for any reason. While a
distributor may have complete discretion in terminating an agreement, some of
the justifications for termination may include:
1. breach of a representation and warranty that would involve potential
misuse of a distributor or third party’s IP;
829
This issue is currently the subject of litigation involving Apple. See Section 1.8.5.
830
The distribution agreement could, for instance, require the developer to indicate in the end-user
license agreement (EULA) that it is solely responsible vis-à-vis game customers for providing
customer support and technical maintenance for the game.
831
The delisting of a title by the platform owner does not automatically involve termination of the
agreement. The Apple Developer Program License Agreement, for example, provides the developer
with a “platform account”, which regulates the relationship between the platform and the developer.
Termination of the agreement means that the developer’s account and all its titles will be blocked
and deleted from the platform. However, taking down one title from sales does not mean termination
of the agreement.
832
In many situations, a game's life cycle may be limited by technical issues resulting from constant
changes in technology. It follows that a developer may choose not to update its game because the
costs do not justify the expenses.
833
For example, the distribution agreement for Google Play Store and Apple App Store provides for
30 days’ prior written notice.
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306
2. unacceptable content in a game, which could include violence,
discriminatory acts or illegal acts;
3. violation of the terms of service, including advertising guidelines;
4. violation of privacy regulations;
5. breach of confidentiality; or
6. violation of local rules and regulations, in addition to any rules set by the
distributor.
9.5.5 – Marketing
A mobile distribution platform rarely undertakes any marketing obligations vis-à-
vis the developer or publisher. In fact, the relationship between the distributor
and the developer or publisher is typically non-exclusive, and the developer or
publisher is allowed to distribute the app via other distributors and promote the
app independently.
The distributor normally acquires broad rights to promote and commercialize the
app so that it can distribute the app efficiently without having to obtain prior
approval from the developer or publisher. These rights include the right to offer
promotions involving the game, especially for themed and seasonal activities.
834
However, as already noted, in the vast majority of cases, the distributor will be
reluctant to agree to carry out specific promotional activities.
9.5.6 – Revenue Share And Pricing
The revenue share terms for mobile distribution do not necessarily differ from
those in online distribution agreements for other formats, such as PC; however,
this has begun to change with the introduction of Epic Store’s significantly lower
12% distribution fee for PC games. Current rates may also change depending
on current litigation in which Epic is challenging Apple and Google over their
fees, claiming that their rates amount to anti-competitive practices.
835
In most
situations, both Google Play Store and Apple App Store currently retain a service
fee equivalent to 30% of the app’s revenues, and the developer receives 70% of
the revenues. However, from 2021, Apple reduced its fee to 15% for businesses
earning less than $1 million in revenue the previous fiscal year.
836
Google
subsequently announced that, from July 1, 2021, it would reduce app store fees
to 15% for the first million dollars earned per year by developers on the Google
Play Store. However, unlike Apple’s reduction, every developer would be entitled
834
See, for instance, Apple App Store’s “What we’re playing this week” or “Game of the Day”.
835
The 30% fees taken by Apple and Google are currently being challenged by Epic Games, which
filed lawsuits in the United States, Australia and the European Union claiming the fees charged are
anti-competitive. See Section 1.8.5.
836
Leswing, Kif, “Apple will cut App Store commissions by half to 15% for small app makers”,
cnbc.com, November 18, 2020. According to a report by data. aie, 97% of publishers that monetize
through the iOS Apple store earned less than $1 million. See “The State of Mobile 2021”,
appannie.com. However, while the reduction will be very beneficial for small companies, it will,
according to some reports, have little impact on Apples' financials. Albergotti, Reed, “Apple cuts some
App Store fees, but critics call it a ploy to avoid regulation”, washingtonpost.com, November 18, 2020.
For more details on how Apple's program for small businesses will work, see “App Store Small
Business Program”, developer.apple.com.
307 Mastering The Game
to the reduction on the first million dollars earned, no matter how much money
the developer may eventually make.
837
In China, many of the storefronts retain a 50% fee, although a few publishers
have, in limited situations, negotiated better commercial terms for some of their
games. In other instances, some publishers have chosen not to release games
on certain platforms because of the fees and/or have decided to distribute their
games directly, instead of using traditional app stores.
838
Unlike Apple’s iOS
system, Android is an open platform that allows third-party stores to use it. This
has resulted in hundreds of Chinese Android app stores, although the market is
dominated by a few companies consisting mostly of the leading Chinese
smartphone manufacturers, such as Huawei, Oppo and Vivo.
839
In addition, the distribution agreement may provide that the service fee shall be
reduced if revenues are generated through qualifying subscriptions.
840
This is to
encourage the developer or publisher to update and improve the app in order to
retain users.
A mobile distribution agreement is often structured as a commercial agency
agreement, thus allowing the developers to lawfully set end-user prices at their
sole discretion.
A significant portion of mobile games adopt a free-to-play monetization model,
and developers should be mindful that mobile distribution agreements typically
do not allow the developer to switch to a premium model after a game has been
released on a platform using a free-to-play model. Games that were initially
offered free of charge to users may have to remain free of charge. Additional
charges are generally possible only if an alternative or supplemental version of
the game is released.
9.5.7 – Legal Commitments
When developing a mobile app for distribution via a specific app store, the
developer will be allowed access to the platform’s own development tools, the
rights to which are owned or controlled by the distributor and are licensed to the
developer for the sole purpose of developing the app.
It is crucial for the distributor that any party allowed access to these proprietary
tools, technology and, possibly, sensitive information, know-how and trade
secrets, undertake certain confidentiality obligations that will often continue after
termination of the agreement and potentially endure in perpetuity.
As a result, the developer must agree to relatively detailed confidentiality
obligation clauses that may be included directly in the distribution agreement or,
more frequently, in a separate license agreement, which covers access to and
837
Leswing, Kif, “Google cuts app store fees for developers on first million in annual sales”, cnbc.com,
March 16, 2021.
838
“Take Rates in China – Will Quality Development Beat Out Traditional Distribution”,
nikopartners.com.
839
In 2020, Huawei, Xiaomi, Oppo and Vivo became part of an alliance, called the Global Developer
Service Alliance, established by smartphone manufacturers to create a joint platform that would allow
developers to upload apps and games to all app store members simultaneously. Ibid.
840
More specifically, revenues generated through subscriptions will be considered qualifying
whenever they come from users that have been subscribed to the app for a certain period of time.
For instance, Google Play Store will decrease its service fee/commission to 15% with respect to
users that have been paying subscribers for at least 12 months. Play Console Help, “Service fees”,
support.google.com.
Mastering The Game
308
use of the developing tools and which a developer or publisher will be required
to accept when registering as a developer with the relevant platform.
9.5.8 – Indemnification And Limitation Of Liability
Distribution agreements for mobile apps typically include very broad
indemnification clauses in which the developer agrees to uncapped
indemnification obligations in favor of the distribution platform with regard to any
claim relating to the app that exposes the distributor to third-party damage claims
or regulatory fines. The distributor, however, will be unlikely to assume any
indemnification obligations in favor of developers with regard to any damages
they may suffer as a result of platform malfunction. In fact, the distribution
agreement or the license agreement relating to platform development tools will
most often state that, unless restricted by any laws, the platform disclaims any
representations and warranties in respect of the proper functioning of the
platform.
841
A distributor typically provides access to its platform and any software on an “as
is” basis, without any promises or warranties that either will work as planned,
thereby shifting most risk to the developer. Subject to any limitations that may be
imposed by a country’s laws, a distributor will also limit its liability if a problem
arises with respect to the platform or software provided to the developer. This
limitation of liability also includes any impact such problems may have on the
developer and its business, such as a loss of income and/or data. Furthermore,
if a distributor is liable for damages, it will limit them to a token amount, and the
type of damages that may be sought by a developer is subject to any limitations
imposed by law.
9.6 – Regulatory Considerations
As with any game, a mobile game must comply with extensive regulation
regarding, for example, consumer protection, child protection, data protection
and data privacy. Several key areas of game regulation are discussed in detail
in chapter 10.
However, it is important to bear in mind that, while such regulation is particularly
applicable in the mobile game sector, it is also particularly opaque. This is
because, while the mobile platform has the largest actual and potential consumer
reach compared with other game platforms, mobile smart devices employ very
recent technology, so regulators are only just beginning to understand how
existing regulation should apply to modern mobile games and what new
regulation will be required in the future.
Noticeably, in May 2018, the General Data Protection Regulation (GDPR)
became applicable in the European Union (EU), acknowledging, on the one
hand, the increased value of personal data and addressing, on the other,
concerns associated with new ways of, and purposes for, processing personal
data. The GDPR paved the way for the adoption of analogous legislation in other
841
However, such broad limitation of liability provisions may be considered unenforceable or not fully
enforceable under certain national laws, particularly in EU countries.
309 Mastering The Game
countries. It defines what constitutes “personal data” and ensures a significant
degree of protection of the data subject’s rights. Moreover, the protection
provided is sustainable vis-à-vis the latest technological developments.
In the United States, California was the first state to adopt regulations that are
very similar to the GDPR. In 2019, the California Consumer Privacy Act (CCPA)
was passed with a view to reinforcing the protection afforded to the residents of
the State of California regarding the collection and processing of their personal
data. The legislation became effective in January 2020 but was subsequently
amended by a statewide proposition known as the California Privacy Rights Act
(CPRA), which will supersede the CCPA on January 1, 2023.
842
The CPRA
revises consumer rights and business obligations under the CCPA.
843
Other
states in the United States are discussing making changes to their privacy laws
along the lines of the CCPA,
and other countries, including Brazil,
844
China,
845
Thailand
846
and South Korea,
847
have also adopted more stringent and/or
detailed legislation.
In view of the high number of reachable users in the mobile sector, the
importance of mobile devices in many consumers’ lives and the portability of
mobile devices, which means they are always with consumers, privacy
regulations are particularly relevant to mobile gaming. Mobile devices and apps
may be and are, in fact, used to collect a huge quantity of personal data. As a
result, it is crucial for distribution platforms, developers and publishers to comply
with applicable data protection and privacy laws to avoid the risk of regulatory
fines and bad publicity. However, at the time of writing, there has been little
enforcement action or other developments that could give developers or
publishers guidance as to how such often diverse rules should be implemented
in practice.
With the release of iOS 14.5 in April 2021, Apple introduced a new privacy
feature called App Tracking Transparency, which could impact the monetization
of apps that rely on advertising revenue. With this new feature, end-user
permission is required to track user data across apps or websites owned by other
companies (including any third-party software that may track information used
by the app - e.g., advertising or analytics).
848
As part of the permission request,
the developer must inform end users why it is tracking them. Unless permission
is granted, a developer will not be allowed to track end users. Furthermore, a
developer is not permitted to incentivize end users to allow tracking.
849
Another important regulatory consideration for mobile game developers and
publishers is the global regulatory dimension: if an app can be distributed
worldwide by default, then, in principle, the laws of every country will apply to
that app. Clearly, this would impose an intolerable burden on any business, even
the largest publishers in the game industry, so the task of lawyers in this industry
842
See Section 10.2 for further discussion of California’s new privacy regulations.
843
Bloomberg Law, “2021 Outlook on Privacy & Data Security”, bloomberglaw.com, November 23,
2020.
844
In Brazil, the Lei Geral de Proteção de Dados (LGPD) was passed in 2018 and came into effect
in February 2020.
845
In China, the Personal Information Protection Law (PIPL) was enacted in November 2021.
846
In Thailand, the Personal Data Protection Act B.E. 2562 (PDPA) was passed in 2019 and came
into effect in May 2020.
847
In January 2020, the Korean National Assembly passed multiple amendments to the Personal
Information Protection Act (PIPA) and other privacy-related laws along the lines of the GDPR.
848
“A Day in the Life of Your Data”, apple.com, April 2021.
849
Developer App Store, “User Privacy and Data Use”, developer.apple.com.
Mastering The Game
310
is to advise their clients on which regulations are particularly important and how
to chart a path through them.
A new field of regulation that is evolving rapidly and attracting much attention
from legislators and regulators relates to monetization models and practices,
which are becoming increasingly sophisticated and varied.
The widespread, and sometimes aggressive, use of advertising within games,
for instance, given the increased attractiveness of games as lucrative marketing
communication ecosystems, urges developers and platforms
850
to carefully
consider not only whether their game’s content in the narrow sense complies
with all applicable laws and regulations but also whether their in-game
advertisements and advertising practices are equally compliant. More and more
mobile game advertisements are being labeled as misleading because they
display content that is extremely unfaithful to the actual gameplay in order to
attract new audiences. This is especially true of playable advertisements, that is,
advertisements which are themselves interactive minigames within a mobile
app.
851
Advertisers are spending less and less of their advertising money on traditional
media and have become increasingly attracted to mobile games because of the
high number of reachable users and their appealing demographics. Advertising
agencies have also become interested in mobile games because apps have a
high “cost per impression” or “cost per install”, which is the rate payable by an
advertiser for each view of its advertisement. The rising interest in mobile
advertising may also be explained by the fact that, whenever an advertisement
is integrated into a game, the appearance of the advertisement will count as one
impression without the player even having to click on the banner.
Advertisers are, therefore, exploring digital entertainment as new ground for their
campaigns and in-game placements. While this may potentially benefit the
industry through the money injected, advertising-based monetization schemes
have the potential to negatively impact developers’ creativity with possible
repercussions at an industry-wide level.
A crucial aspect of in-game advertisements is their placement within the game
since it will potentially impact the smooth flow of gameplay. Placement is a
complex decision that involves considering and balancing various potentially
conflicting factors, such as the advertisers’ aims, game design and implications
for player experience. Developers and publishers should have a well-thought-
through advertisement placement strategy to guide decisions on, for example,
the most suitable spot(s) in a game to “place” advertisements and the use of
“static advertisements”, which are positioned in a fixed in-game spot, or “dynamic
advertisements”, which are usually billboards and posters that are positioned
850
In-game advertisements are usually controlled by the developer or the publisher, and the platform
generally requires the developer or publisher to comply with the platform’s policy on permitted
advertisements, which sets out limitations and rules with which developers and publishers must
comply. See Play Console Help, “Monetization and Ads: Ads”, support.google.com.
851
Sinclair, Brendan, “When do deceptive playable ads help, and when do they hurt?”,
gamesindustry.biz, January 28, 2020.
311 Mastering The Game
strategically throughout the game and can be updated or changed in real time.
852
Developers have also incorporated rewarded video advertisements into games.
This form of advertising rewards viewers who watch an advertisement, which is
typically 15 to 30 seconds in length. The rewards can vary from in-game
currency, such as coins, to additional content or power-ups.
The attractiveness of advertisement placement for advertisers inevitably
depends on the game itself. For instance, a sports brand may find racing games,
and sports games in general, more suitable to market its products.
853
As with all
forms of advertising, in-game advertising aims to raise brand awareness within
the targeted demographic, and ill-considered advertisement placement may
have the opposite effect. When making advertisement placement decisions,
developers and publishers should be mindful of the game’s age rating as well as
child protection legislation and regulation in general because the protection of
minors and other vulnerable categories of players against deceptive and
potentially harmful advertising has become an area of focus for regulatory
authorities worldwide.
In-game advertising is not the only sensitive issue when it comes to new
monetization models. In-app purchases and loot boxes have had a powerful
impact on the game industry and contributed significantly to the emergence of
the “games as a service” concept. This concept refers to the possibility that
regular updates and drops of new, generally purchasable, content such as loot
boxes, coupled with the use of in-app purchases and microtransactions, may
extend the life cycle of a game and enable continued monetization.
However, while these new and more complex monetization models have proven
very lucrative for developers and platforms, they have led to equally new and
challenging legal headaches in terms of consumer protection. Following an
increasing number of consumer complaints in connection with in-app purchases
in mobile and online games that all too frequently involved minors, national
consumer protection authorities in Europe decided to join forces to find a
common solution. As early as December 2013, the Consumer Protection
Cooperation Network issued a common position paper on in-app purchases and
microtransactions that offered an interpretation of existing legislation, which
could serve as practical guidance for developers, publishers and mobile
platforms, with a view to ensuring transparency vis-à-vis consumers and some
minimum safeguards aimed at protecting minors.
854
852
The contents of in-app dynamic advertisements, such as banners and interstitial advertisements,
can be, and often are, updated over time to serve different advertisers and target different segments
of the game’s user base. Static advertisements, on the other hand, are hardcoded in-game assets
(e.g., the shape of a billboard or banner on the side of an in-game sports field or racetrack) and, while
less common than dynamic advertisements in mobile games, they are arguably more effective. See
Turner, John, et al., “Scheduling of Dynamic In-game Advertising”, Operation Research, Vol. 59,
No.1 (2011).
853
For obvious reasons, mobile games are particularly attractive for advertising other mobile apps.
For instance, a recent study indicates that sports game apps primarily contain in-app advertisements
for strategy game, shopping, casino and bank apps. Yüce, Arif, et al., “Game in the Game: Examining
In-App Advertising in Mobile Sports Games”, podiumreview.org.br, January-April 2019.
854
More specifically, the position paper was communicated to Apple, Google and the Interactive
Software Federation of Europe and required that (i) games advertised as “free” should not mislead
consumers about the true costs involved; (ii) games should not contain direct exhortation to children
to buy items in a game or to persuade an adult to buy items for them; (iii) consumers should be
adequately informed about the payment arrangements for purchases and should not be debited
through default settings without their explicit consent; and (iv) traders should provide an email
address so that consumers can contact them in case of queries or complaints.
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312
Eventually this position paper, together with decisions by consumer authorities
on issues regarding monetization and the protection of minors,
855
led major
platforms to change their app advertising policies in order to enhance the
transparency of each app’s monetization systems (e.g., in-game advertisements
and in-game purchases) and ensure clear disclosure of key information before a
consumer purchases or downloads the app.
One category of in-app purchases that has proved particularly problematic, not
only within the gamer community but also for legislators and regulatory
authorities, is loot boxes. Loot boxes are a form of randomized reward that are
particularly popular in mobile games.
856
They are suspected to trigger state
gambling laws because the rewards they offer, which a user will discover only
after completing the relevant purchase transaction, may be regarded as “things
of value” for the purpose of gambling regulation. From this perspective, paying
for loot boxes may be regarded as an opportunity for players to engage in state-
regulated gambling activities.
Moreover, depending on how they are used by the developer in the game’s
mechanics and monetization scheme, loot boxes may attract the attention of
consumer authorities concerned that such microtransactions might involve
manipulative game design techniques featuring pay-to-win mechanics, which are
perceived by some as a type of video game dark-pattern design
857
targeting
minors and other vulnerable players.
For these reasons, the legality of loot boxes and the ethics of games that use
them have been questioned by national gambling commissions and legislative
committees,
858
with some countries taking steps to protect more vulnerable
consumers.
859
Loot boxes will be discussed further in Chapter 10.
This growing concern has cast a shadow on the game industry as a whole and
on the mobile gaming sector in particular. As a result, the main mobile distribution
platforms, which do not generally get involved in the design of game monetization
systems, have imposed transparency requirements on developers in relation to
loot boxes so that consumers are informed of the odds of receiving virtual items
855
For instance, in 2015, a decision by the Italian consumer authority against the publisher Gameloft
and app stores distributing the mobile game “Littlest Pet Shop” resulted in mobile platforms
undertaking to change their controversial practices. In particular, the distributors undertook to (i)
prevent multiple purchases with the same password input; (ii) prevent direct exhortation to children
pressuring them to make purchases and/or watch in-game advertisements; (iii) avoid using the term
“free” when a game includes inapp purchases; and (iv) provide more information about the
monetization model used by the app (e.g., if virtual currency can be purchased using real currency)
and the developer of the app (e.g., the address). Guardavaccaro, Gilberto and Venanzetti, Andrea,
“The In-App Purchase Cases Before the ICA”, Italian Antitrust Review, No. 3 (2015).
856
A study from 2020 found that 58% of the top mobile games in the Google Play Store and 59% of
the top mobile games in the Apple App Store contained loot boxes. By contrast, only 36% of the top
PC games in the Steam store contained loot boxes. Zendle, David, et al, The Prevalence Of Loot
Boxes In Mobile And Desktop Games, onlinelibrary.wiley.com, 2020.
857
A dark pattern is the intentional use of deceptive and underhand features within a digital product
for the purpose of forcing customers to agree to actions that they otherwise would not. Zagal, José
P., et al., Dark Patterns in the Design of Games, Foundations of Digital Games Conference, 2013.
858
In December 2018, the UK Parliament’s Digital, Culture, Media and Sport Committee initiated an
investigation to examine ethical and practical concerns regarding the use of loot boxes in some
extremely popular games, namely Epic Games’ Fortnite, EA’s FIFA and King’s Candy Crush. See
the video recording of the parliamentary proceeding: “UK Parliament Discussing Predatory Loot
box/Microtransaction with EA/Epic Games”, youtube.com. See also the US Federal Trade
Commission's 2020 report on loot boxes: “FTC Video Game Loot Box Workshop”, ftc.gov, August
2020.
859
For example, Belgium banned loot boxes because their inner structure met gambling parameters.
See “Gaming loot boxes: What happened when Belgium banned them?”, bbc.com, September 12,
2019.
313 Mastering The Game
prior to purchase.
860
This may also be with a view to limiting their potential liability
as distributors of potentially illegal products and services.
9.7 – Intellectual Property
Like all games, mobile games are subject to the same basic principles of game
IP law described in Chapter 2. However, two considerations are particularly
relevant in the mobile game sector.
The first is that game copying or cloning is still endemic on mobile platforms and
legal solutions can be difficult. Game copying is so common in mobile games
because it is extremely easy. As discussed above, development costs are
relatively low and distribution costs are tied to sales, making it easy for one
developer to imitate the most appealing and successful elements of a game,
such as its gameplay, look and feel, art or characters, and/or use a confusingly
similar name or even blatantly copy the entire game and pass it off as the original,
in order to make cheap revenue at the expense of the original inventor. Cloners
may also use deceptive methods, such as using confusable Unicode characters
or hiding cloning app icons in a different locale.
861
Moreover, research has shown
that cloned games may often contain malware.
862
As mentioned in Chapter 2, the legality of game clones can only be evaluated on
a case-by-case basis, depending, in particular, on what has actually been taken
from the original game. This practice does not inherently infringe copyright and
is becoming increasingly common, not only with lesser-known developers
cloning successful titles but also with well-known publishers cloning small
studios’ releases. Since there are so many apps in circulation and every case
must be evaluated on its own merits, mobile platforms usually claim it is
impractical for them to review each app ex ante to ensure it is an appropriate
addition to the platform. As a result, it falls to the developer or publisher to protect
its apps against cloning. This is usually achieved through a combination of
monitoring the relevant app stores for similar products, keeping in touch with the
game-playing community for warnings and, once identified, issuing takedown
requests through the mobile platform. To reduce the risk of a takedown request
being denied by the platform, the request should be as detailed as possible and
point out all the similarities between the clone and the original game. Google also
claims to be taking steps to combat copycat apps and to remove a large number
of them spontaneously.
863
Cloners can, nonetheless, easily republish the game
under a different account or slightly modify the name of the game package and
860
Sinclair, Brendan, “Google Play mandates odds disclosure for loot boxes”, gamesindustry.biz,
May 30, 2019.
861
Ahn, Andrew, “How we fought bad apps and malicious developers in 2018”, android-
developers.googleblog.com, February 13, 2019.
862
The research was conducted by the University of Sydney, Australia, and Data61-CSIRO on the
top 10,000 apps in the Google Play Store. The results showed that 2,040 potentially counterfeit apps
were identified as malware by at least five commercial antivirus tools, 1,565 asked for at least five
additional dangerous permissions, and 1,407 had at least five additional embedded third-party ad
libraries. Popular games such as Temple Run, Free Flow and Hill Climb Racing were the most
common targets for app impersonation. Rajasegran, Jathushan, et al., “A Multi-modal Neural
Embeddings Approach for Detecting Mobile Counterfeit Apps”, dl.acm.org, May 2019.
863
In 2017, Google claimed to have removed around 700,000 apps for violating its policies. According
to Google, around a third of those apps (250,000) were taken down because they attempted to
deceive users by impersonating famous apps available in the Google Play Store. Ahn, Andrew, “How
we fought bad apps and malicious developers in 2018”, android-developers.googleblog.com,
February 13, 2019.
Mastering The Game
314
its code to disguise the fact that the game is the same clone that was previously
taken down from the platform.
864
Based on Google data, over 80% of severe
policy violations are conducted by repeat offenders and abusive developer
networks: when malicious developers are banned, they often create new
accounts or buy developer accounts on the black market in order to return to the
Google Play Store.
865
It is, therefore, crucial that the developers of the original
games never lower their guard, even after a clone has been removed from the
platform a first time.
A second IP consideration worth noting in relation to mobile games is that mobile
games have become popular against a background of rising patent battles
between the major players in the mobile world, namely smartphone
manufacturers, mobile platforms, major software companies, non-practicing
entities (so-called ‘patent trolls’) and even, on occasion, small developers.
866
These wide-ranging patent battles do not yet appear to have affected mobile
game developers or publishers significantly, except in a few isolated cases,
867
but it remains to be seen what impact, if any, these battles will have on the
landscape of the mobile industry and thus, indirectly, on mobile games.
864
Hindy, Joe, “Google Play still has a clone problem in 2019 with no end in sight”,
androidauthority.com, November 9, 2019.
865
Ahn, Andrew, “How we fought bad apps and malicious developers in 2018”, android-
developers.googleblog.com, February 13, 2019.
866
“Smartphone patent wars”, wikipedia.org.
867
For example, in 2018, patent licensing company, GTX Corp., demanded the payment of $35,000
from Playsaurus, Inc., the developer of the popular Clicker Heroes games, for allegedly infringing a
patent on virtual currencies. Playsaurus publicly dismissed GTX’s demands as meritless through an
online post, which, in turn, led GTX to accuse Playsaurus of libel in addition to patent infringement.
GTX had also initiated proceedings, which were eventually voluntarily dismissed, against another
game developer, Caliburnus Ltd., based on the same patent. Farivar, Cyrus, “‘Patent troll’ doubles
down, now accuses Clicker Heroes maker of libel”, arstechnica.com, April 2, 2018. Playsaurus was
subsequently involved in another dispute concerning IP. This time, a Chinese company had
registered the trademark “Clicker Heroes” in China before Playsaurus, which led to the game being
removed from the Apple App Store, first worldwide then eventually only in China. Bell, Killian, “Apple
pulls popular iOS game after Chinese company steals its name”, cultofmac.com, May 24, 2019.
315 Mastering The Game
CHAPTER 10
REGULATION OF THE GAME INDUSTRY
10.1 – Introduction
As any industry develops, it becomes over time subject to increasing regulation
that is derived not only from legislation but also from case law, regulatory
guidance and self-regulation standards. The video game industry is no
exception, but its unusual status as both a creative and a technological industry
means that the application of existing regulation to video games is often less than
clear. Moreover, as the game industry enters a heightened phase of scrutiny,
we are beginning to see the application of regulation from other areas of the law
as well as the creation of regulation that applies specifically to the video games
industry. This chapter gives a brief overview of the key areas of regulation that
developers and publishers must consider when creating a game, namely data
privacy, consumer protection, advertising and marketing, monetization as well
as other regulations. This chapter also gives a brief overview of age ratings for
physical, online and mobile games.
10.2 – Data Privacy
Many modern games, particularly in the online, social and mobile sectors, are
built on the collection and exploitation of data.
868
The rapidly increasing use of
data in the modern game industry is the result of a number of interconnected
factors. New platforms have appeared, including smartphones and modern web
browsers, which make it relatively easy to collect all kinds of data, ranging from
an email address to how many times a user clicks on a particular button during
a particular period of time. Users have arguably become accustomed to
providing data about themselves in a way they never were before. Game studios
have developed game development models that not only permit, but actively
encourage, the regular collection of data to enable games to be redesigned in
line with customer preferences. However, the data collected is not only used to
improve games but increasingly for other purposes, such as more advanced
advertisement and monetization strategies.
At the same time, data privacy is becoming more regulated and the game
industry is not exempt. Although data privacy regulation has existed in the United
States for many years,
869
it is the European Union (EU) that currently has what
is arguably the most comprehensive and stringent data privacy regulation
868
See, for example, the following article on how Riot Games, creator of the game League of
Legends, leverages consumer data “Slashdot: For Riot Games, Big Data is Serious Business”,
blog.strom.com, December 7, 2012. Data mining is such a relevant topic that Rovio, creator of Angry
Birds, has created a policy for analytics and data usage in Rovio games, in addition to its privacy
policy. See “Rovio Services Privacy Notice”, rovio.com, last updated January 30, 2020.
869
See, for example, the US Right to Financial Privacy Act of 1978.
Mastering The Game
316
system; however, the United States and China are rapidly developing and
evolving their own data privacy rules, as discussed below. To put it simply,
developers require data to make most, if not all, games these days but, to get
that data without incurring legal difficulties, they must have at least a basic
understanding of data privacy laws.
In May 2018, the EU General Data Protection Regulation (GDPR)
870
replaced
the previous primary source for EU data privacy law, the Data Protection
Directive (DPD). Since then, the GDPR has served as a springboard for the
revision of data privacy laws across the globe, arguably earning it the title of one
of the most influential pieces of legislation of the past twenty years. A key
difference between regulations like the GDPR and directives like the DPD, lies
in their application. Regulations automatically have binding legal force across
the European Economic Area (EEA)
871
and, unlike directives, are not dependent
on national implementation to take effect. As such, the GDPR provides long-
awaited clarity on data privacy requirements for holders and processors of an
EU subject’s data.
The GDPR imposes obligations on any individual or business which is
responsible for the control of personal data (known as a “data controller”) and
those who process personal data on behalf of the data controller (known as a
“data processor”). The GDPR applies to the processing of personal data of any
EU data subject, regardless of the organization’s location.
872
“Personal data” is
data that, taken on its own or in combination with other data, may be used to
identify an individual. Under the GDPR, the definition of personal data was
updated to include IP addresses, mobile device identifiers, geolocation data
(e.g., GPS tracking) and biometric data (e.g., fingerprints). There is also a
separate category of “sensitive personal data”, which relates to an individual’s
genetic, physiological, economic, cultural or social identity. The GDPR requires
organizations to assess and document any privacy risks prior to commencing
any large-scale processing of personal data. Examples of potential privacy risks
include data being stored for longer than is necessary or the absence of
adequate measures to protect data during cross-border transfers.
Under the GDPR, each data processor must maintain records of personal data
and ensure that data is only processed when there is a lawful basis to do so.
Personal data must also: (i) be obtained only for one or more specified and lawful
purposes; (ii) be adequate, relevant and not excessive in relation to the purpose
or purposes for which it is processed; (iii) be accurate and, where necessary,
kept up to date; (iv) not be kept for longer than is necessary for that purpose or
those purposes; (v) be processed in accordance with the rights of data subjects;
and (vi) have appropriate technical and organizational measures taken
against unauthorized or unlawful processing of personal data and against
accidental loss or destruction of, or damage to, personal data. The transfer of
personal data out of the EEA is only permitted under certain circumstances, for
example, to a list of countries with “adequate levels of data protection”
870
Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the
protection of natural persons with regard to the processing of personal data and on the free
movement of such data (General Data Protection Regulation).
871
The EEA consists of all the member States of the EU as well as Norway, Iceland and
Liechtenstein.
872
EU General Data Protection Regulation, supra Note 4.
317 Mastering The Game
sanctioned by the European Commission.
873
This is of relevance to digital
entertainment businesses that store data on servers hosted outside the EEA or
have business partners located outside the EEA. One method of complying with
the GDPR’s restrictions on data transfers out of the EEA is to use the Standard
Contractual Clauses (SCCs) issued by the European Commission, which
safeguard transatlantic exchanges of personal data for commercial purposes.
874
When drafted into a binding agreement, these contractual clauses guarantee
protection of the data by the signatories.
875
In 2020, the Court of Justice of the European Union ruled in the so-called
Schrems II case that companies may no longer rely on the EU-US Privacy Shield
Framework to justify transfers of personal data from the EEA to the United
States. Template SCCs remain an acceptable alternative only when an EEA-
based data exporter has first: (a) considered the law and practice of the country
to which data is being transferred to ensure it grants adequate protection to
transferred data, as required under EU law; and (b) assessed the practical ability
of the data recipient to comply with the terms of the SCCs in light of the recipient’s
legal system. It will be particularly difficult to fulfill these requirements if public
authorities in the receiving country can access the data.
The GDPR introduces landmark rights for individuals to be informed about the
collection and use of their personal data. Individuals are granted greater rights
under the GDPR, including a right of access, that is, the right to access their
personal data and be provided with sufficiently detailed, yet concise and
understandable, information about the processing performed; and a right of
deletion, that is, the right to have personal information deleted. Data access and
deletion requests are evolving under the GDPR. Developers, publishers,
distributors and other stakeholders, such as broadcast networks, will need to be
more careful about defining the purpose of data processing, their role in it and
how they will comply with GDPR requirements on international data transfers
and data portability. These are important considerations for data controllers and
processors, as these data protection rights and requirements will feed into
stakeholder commercial contracts. The introduction of functionality on websites
and games to let players exercise data access and deletion rights is becoming
increasingly prevalent. Steam, for example, has dedicated player profile pages
where it is possible to view personal data related to Steam accounts, such as
playtime, trade history and discussion posts.
For the most serious violations, the GDPR provides for heavy penalties of up to
€20 million or 4% of the organization’s total global revenue from the preceding
fiscal year, whichever is higher.
876
As of October 2021, fines issued by
European Data Protection Authorities have totaled around €1.29 billion,
877
and
there have been more than 281,000 data breach notifications globally as of
January 2021.
878
The highest GDPR fine to date remains € 746 million by
CNDP, the Luxembourg National Commission for Data Protection, to
873
Intersoft Consulting, “GDPR Third Countries”, gdpr-info.eu.
874
European Commission, “Standard Contractual Clauses (SCC)”, ec.europa.eu.
875
“Using Standard Contractual Clauses”, termsfeed.com.
876
“What are the GDPR Fines?”, gdpr.eu. Lesser fines, as set forth in Art. 83(4) of the GDPR, can
be as high as €10 million or 2% of the organization’s total global revenue from the preceding fiscal
year. Ibid.
877
McKean, Ross, et al., “A report produced by DLA Piper’s cybersecurity and data protection team”,
dlapiper.com, January 19, 2021.
878
ibid.
Mastering The Game
318
amazon.com. Inc. involving their use of customer data for targeted advertising
purposes.
879
The United States, by comparison, has a comparatively less restrictive system,
which is gradually becoming more comprehensive but developing unevenly. US
data privacy law is derived partly from federal statute, state statute, case law and
from the guidance of the Federal Trade Commission. However, there appears
to be a new wave of state-based regulation. The California Consumer Privacy
Act (CCPA)
880
is a leading example of this. Even though the CCPA only came
into effect in January 2020, it has already been amended as a result of a voter-
approved proposition, that is, a ballot measure that becomes state law, which
created the California Privacy Rights Act (CPRA).
881
The CPRA will supersede
and extend the CCPA, providing additional protection to consumers but will not
become effective until January 1, 2023. Until then, the CCPA remains in effect.
Under the CCPA, businesses processing the personal information of California
residents will be subject to greater regulatory requirements and California
residents will have stronger rights. The CCPA applies to any for-profit entity
which: (i) does business in California; (ii) collects personal information of
California residents or has such information collected on its behalf; (iii) has the
means of processing that information; and (iv) meets one or more of the
following criteria:
• has at least $25 million in annual revenue (this applies to global revenue
regardless of where the revenue is generated);
• buys, sells, receives for commercial purposes or shares the personal
information of at least 50,000 California residents; or
• derives 50% or more of its annual revenues from the sale of California
residents’ personal information.
In practice, most medium-to-large digital entertainment businesses meet the
above thresholds and must comply with the CCPA, even if they have no physical
presence in California. Several of the obligations imposed by the CCPA mirror
those of the GDPR, for example, the promotion of transparent data processing.
879
“20 biggest GDPR fines so far [2019, 2020 & 2021]”, dataprivacymanager.net, October 8, 2021.
880
The California Consumer Privacy Act (CCPA), CA Assembly Bill No. 375, June 29, 2018, is the
first comprehensive consumer privacy law passed in the United States, post-GDPR.
881
The California Privacy Rights Act (CPRA) of 2020 will only apply to information collected on or
after January 1, 2022, and enforcement will start on July 1, 2023. Until then, the CCPA will govern.
Some of the key provisions of the CPRA include: (1) the addition of a sub-category of “sensitive
personal information”. Consumers will now have the right to limit the use and disclosure of sensitive
personal information, which includes: (i) social security, driver’s license, state ID or passport number;
(ii) account log-in information with a password; (iii) a consumer’s precise geographic location; (iv)
racial or ethnic origin, religious belief or union membership; (v) contents of a consumer’s mail, email
or text messages, unless the business is the intended recipient; (vi) a consumer’s genetic information;
(vii) processing of biometric information to identify the consumer; (viii) personal information analyzed
concerning a consumer’s health; and (ix) personal information analyzed about a consumer’s sex life
or sexual orientation; (2) the requirement for businesses to inform consumers of the length of time
the business intends to keep personal information. If the business is unable to determine the time
frame then it must inform consumers of the criteria used to determine the retention period, but, under
no circumstances, can the time frame be unreasonable; (3) the granting of the right for consumers
to correct any personal information that is inaccurate; (4) the prevention of businesses from “sharing"
their information with third parties; (5) the addition of protection for children’s personal information;
and (6) the creation of a privacy protection agency. See Harding, Elizabeth and Polishuk, Alex,
“CPRA – What This Means for Your Business”, natlawreview.com, November 9, 2020, Eversheds
Sutherland (US) LLP, “California’s new privacy law, the CPRA, was approved: Now what?”,
jdsupra.com, November 10, 2020, Reilly, Brandon P. and Lashway, Scott T. “The California Privacy
Rights Act Has Passed: What’s in It?”, manatt.com, November 11, 2020, and Morrison, Sara,
“California just strengthened its digital privacy protections even more”, vox.com, November 4, 2020.
319 Mastering The Game
In addition to the right to access and delete data, the CCPA grants extensive opt-
out rights to individuals to prevent the sale of their personal data to third parties.
The California Attorney General has greater enforcement abilities than before,
including the ability to impose high fines for violations. It is important for digital
entertainment businesses to update their internal data use and protection
policies to comply with the new rights granted to California residents under the
CCPA, for example, by providing clear mechanisms for users to opt out of the
sale of their data to third parties.
The CCPA has triggered a new wave of US data protection legislation, including
Virginia’s Consumer Data Protection Act, which was signed into law in March
2021 and will come into effect in 2023.
882
A bill called the Information
Transparency and Personal Data Control Act
883
was introduced in Congress in
early 2021 to create a national privacy protection law; and, at the time of writing,
15 state legislatures
884
have introduced their own privacy bills. Most of the
proposed legislation, among other things, seeks to obtain opt-in consent for the
collection and use of personal information as well as consumer rights to access
and delete information. On the whole, the United States has fewer data privacy
laws than the European Union and those it does have are relatively diffuse, which
presents its own complexities. However, data privacy laws in the United States
are to be taken seriously. In 2019, for instance, the Federal Trade Commission
and Google agreed to a $170 million settlement
885
over Google’s subsidiary,
YouTube, allegedly breaching children’s privacy laws.
886
The position outside the United States and the EU varies considerably, with
some countries having absolutely no meaningful data privacy system, while
others have relatively well-established systems. Countries such as Russia and
Brazil, arguably influenced at least in part by the Brussels effect,
887
are rapidly
developing data privacy frameworks. China has enacted new privacy laws
introducing updates to its data privacy laws, which includes among other things,
banning online service providers from collecting and selling personal information
without user consent
888
the right of individuals to rescind their consent and
various obligations and regulations involving handlers inside and outside of
China.
889
Platforms are also revising their data privacy requirements in light of these
developments. Apple, for example, is continually updating its privacy practices
and launched one of its new privacy features as part of the iOS 14.3 software
update, which requires every application (app) in its App Store to include a
privacy label explaining how that app collects and uses user data. Developers
are required to state not only what data their app may collect but also how that
882
The Virginia Consumer Data Protection Act, 2021 Special Session I, HB 2307.
883
“Information Transparency & Personal Data Control Act”, H.R.1816.
884
International Association of Privacy Professionals, “US State Comprehensive Privacy Law
Comparison”, iapp.org, Kern, Rebecca, “Democrat Renews Data Privacy Effort With First Bill of
2021 (1)”, bloomberglaw.com, March 10, 2021.
885
“Google and YouTube Will Pay Record $170 Million for Alleged Violations of Children’s Privacy
Law”, ftc.gov, September 4, 2019.
886
This case concerned violations of the US Children’s Online Privacy Protection Rule (COPPA
Rule). COPPA is US legislation that governs operators of online services or websites directed at
children under 13 years of age. See “Part 312 - Children’s Online Privacy Protection Rule”, ecfr.gov.
887
The “Brussels effect” refers to the use of EU regulatory standards outside of Europe.
888
Sheng, Wei, “One year after GDPR, China strengthens personal data regulations, welcoming
dedicated law”, technode.com, June 19, 2019.
889
See Creemers, Rogier and Webster, Graham, “Translation: Personal Information Protection Law
of the People's Republic of ChinEffective November 1, 2021", digichina.stanford.edu, August 20,
2021, revised September 7, 2021.
Mastering The Game
320
data is ultimately used and for what purposes, for example, personalized
advertising or sharing geolocation data. This is in addition to the “Identifier for
Advertisers” (IDFA) changes that Apple rolled out in early 2021, which require
users to opt in to being tracked for advertising purposes. It is important
for digital entertainment businesses that release content via the App
Store to understand Apple’s new requirements before their next product
launch or update.
We are currently witnessing the rise of “privacy by design”, whereby data
privacy, security and protection must be the default mode of every
company, and data protection can no longer be an afterthought. In view
of the current trend of reviewing and updating data privacy laws and the
fact that each game business has unique data usage and needs, data
privacy compliance is one of the areas where legal advice is particularly
recommended. Legal counsel well-versed in this area will be able to
advise a developer about what it should and should not do when
balancing the cost of practical compliance with the risk involved in non-
compliance.
10.3 – Consumer Protection
Consumers have long benefited from certain legal rights and remedies regarding
consumer products that they buy or use, and, in legal theory, most of these rights
and remedies apply to games just as they apply to films, books or a newly-bought
kitchen appliance. However, the practical application of these rules to games is
often unclear, not least because of the evolving nature of games themselves.
Furthermore, as with data privacy laws, things are complicated by the fact that
there is little consistency across different legal systems, so consumer laws vary
widely from country to country.
Consumer protection laws are hugely important in the game industry, not only as
safeguards but also as benchmarks for businesses. We have seen a global shift
in favor of greater consumer rights, such as the right to return, exchange or ask
for a price reduction for games that are not as advertised or do not meet certain
quality requirements. There has also been a move towards regulators favoring
balanced, jargon-free contracts that are easily intelligible for consumers. Game
companies are receiving increased scrutiny from regulatory bodies as regulators
seek to redress the balance of power between businesses and consumers. For
example, in December 2018, German and Norwegian consumer advocates
challenged, as a violation of consumer law, the fact that Nintendo offers no
890
cancellation options for pre-orders of games in its online store. However, the
Frankfurt District Court ruled that the contract between Nintendo and its
customers begins at the time a pre-order is made, not when the game is actually
891
released. This ruling have been welcomed by publishers and platform
operators as further precedent that the right of withdrawal waiver at checkout for
890
Khan, Imran, “German Protection Agency Takes Nintendo To Court Over Eshop Cancellations”,
gameinformer.com, December 18, 2018.
891
Blake, Vikki, “Nintendo’s pre-order cancellation is lawful, says German courts”, mcvuk.com,
January 23, 2020.
321 Mastering The Game
digital content is compliant with EU law, an issue that has caused difficulties in
892
the past. The German and Norwegian consumer bodies have both confirmed
that they plan to appeal this verdict. Interestingly, Nintendo has since amended
its cancellation policies on pre-orders so that purchases may be cancelled up to
893
one week before a game’s date of release.
The EU has one of the most sophisticated consumer protection systems in the
world. The Consumer Rights Directive establishes certain basic consumer
rights, such as rules against excessive payment fees, pre-contractual information
rights (such as on costs and terms of delivery) and cancellation rights. Moreover,
the European Commission has finalized the latest iteration of its Digital Single
Market (DSM) strategy, a legislative package reviewing five key EU directives.
The DSM aims to respond to the needs of consumers in a changing digital
environment, for example, by harmonizing mobile roaming charges within the
EEA. The update to digital content laws has been particularly welcomed by
players in European territories, where the proportion of games purchased online
grows year on year. The Digital Services Act package (DSA), which is a
proposed modernization of the current EU framework for online services, will be
a major policy issue for the tech, digital and game sectors over the coming
894
years. The main provisions of the DSA include a modernized liability regime
and extensive transparency obligations for online intermediaries. The DSA aims
to place heavy responsibility on businesses to self-regulate with regard to illegal
content, such as hate speech, on their platforms. “Very large platforms”, namely,
those with more than 45 million active monthly users in the EU, must comply with
further requirements, such as designating a compliance officer and analyzing
895
systemic risk arising from the use of their platforms.
Most, if not all, countries have their own consumer protection systems, although
many are still geared toward physical goods rather than digital goods and
services. Non-Western countries, such as China and South Korea, have also
changed their approach to consumer protection over the past decade. The
Chinese gaming regulator, the State Administration of Press and Publication
(SAPP), has reassessed its 2007 anti-addiction laws and introduced new rules
896
to curb gaming addiction and excessive spending among minors. The rules
include curfews, age verification and spending limits for players under the age of
897
18. In the most severe cases, publishers that fail to comply with these
898
regulations risk losing their publishing licenses. In anticipation, NetEase ,
together with other Chinese publishing giants, pre-emptively implemented
892
Chalk, Andy, “Valve and Ubisoft fined over Steam and Uplay refund policies in France”,
pcgamer.com, September 19, 2018.
893
Lane, Gavin, “You Can Now Cancel Switch eShop Pre-Orders Up To One Week Before Release”,
nintendolife.com, September 1, 2020.
894
Von der Leyen, Ursula, “A Union that strives for more. My agenda for Europe. Political Guidelines
for the next European Commission 2019-2024”, ec.europa.eu.
895
Allen and Overy, “The Digital Services Act package is here”, allenovery.com, December 16, 2020.
896
Pilarowski, Greg, “Legal Primer: Regulation of China’s Digital Game Industry”, pillarlegalpc.com,
January 6, 2021, discusses a number of regulations in China, Lew, Linda, “China’s minors face new
limits on mobile games in war on gaming addiction”, asiaone.com, November 5, 2019.
897
Chinese regulators, claiming games cause nearsightedness and youth addiction, enacted new
rules in September 2021, restricting anyone under the age of 18 to one hour of play on Fridays,
weekends and holidays and only from 8 p.m. to 9 p.m. on those days. Minors are also banned from
playing during the school week. The regulations require game companies to ask for the real names
of minors, and minors must register with their real names. Liao, Shannon, “China Restricts Young
People to Playing Video Games Three Hours a Week”, washingtonpost.com, August 30, 2021; Ni,
Vincent, “China Cuts Amount of Time Minors Can Spend Playing Online Video Games”,
theguardian.com, August 30, 2021.
898
Handrahan, Matthew, “NetEase to impose restrictions on young gamers in China”,
gameindustry.biz, January 25, 2019.
Mastering The Game
322
899
restrictions across popular titles. Tencent also introduced a real-name identity
verification system and gameplay limits to its mobile title, Honor of Kings, in
900
2017. South Korean authorities monitor and review many game companies
on a regular basis, for example, the Fair Trade Commission of South Korea has
reviewed unfair consumer practices involving contract clauses for in-game
901
purchases by minors.. Practices highlighted as unfair included limited refunds
for in-game items, unclear requirements regarding parental approval for
902
underage player sign-up, and extremely limited periods of use for gifted
903
items.
As part of its ambition to make the United Kingdom the “safest place in the world
to be online”, the UK Government has proposed a radical overhaul of how online
904
content should be regulated. The recently published Draft Online Safety Bill
proposes imposing a duty of care on companies within its scope, requiring them
to take action to prevent user-generated content or other activity on their online
services from causing physical or psychological harm to consumers. To do this,
companies will be required, among other things, to complete risk assessments
and take steps to reduce the risk of harm they have identified as occurring. In
addition, online platforms that have a broad reach or are deemed particularly
risky will be subject to additional requirements, including a controversial
requirement to screen for “legal but harmful” content. The new regime will be
enforced by Ofcom, an existing UK regulator, which will be given extensive new
powers to investigate, prosecute and issue GDPR-style fines based on global
turnover.
As a result, the average game developer has a challenging job when it comes to
protecting itself in a sector where full global compliance is effectively impossible
and even substantial compliance is a challenge. It is essential for the developer
not only to seek expert legal advice but also to focus initially on its country of
incorporation and, subsequently, on its main operational and revenue-generating
territories. However, the following pointers can be offered:
1. It is important to think consumer. How would you, as a consumer,
respond to a particular feature, development or issue with the game?
Thinking consumer first can help resolve many problems before they
become legal issues.
2. Most countries will have certain minimum requirements regarding the
fulfillment of a developer’s obligations to consumers. For example, in
the EU, there is a requirement that goods or services sold to consumers
must effectively be of “satisfactory quality”, for example, a software
product has to actually work. This can and has caused controversy when
899
Restrictions imposed by NetEase include limiting users under the age of 12 to one hour of
gameplay on weekdays and two hours on weekends. For users aged 13 to 18, gaming time is limited
to two hours on weekdays and three hours on weekends. Underage players are also banned from
logging in from 9:30 p.m. to 8:30 a.m. daily. At the time of writing, these restrictions apply to 15 of
NetEase’s titles, including Fantasy Westward Journey and Knives Out.
900
“Honor of Kings Restricts Play for Minors”, nikopartners.com, July 11, 2017.
901
Lanier, Liz, “South Korea’s FTC Reviewing In-Game Purchase Clauses”, variety.com, April 19,
2019.
902
For example, a character skin purchased and transferred to another user’s account would be a
“gifted item”.
903
Valentine, Rebekah, “South Korean FTC examining consumer regulations surrounding in-game
purchases”, gamesindustry.biz, April 19, 2019.
904
Draft Online Safety Bill, May 12, 2021.
323 Mastering The Game
a game is released with bugs or errors or otherwise lacked features that
had previously been associated with the game.
3. The majority of consumer complaints can be settled directly with
consumers provided that a sensitive and proactive approach is taken.
4. However, in some situations, consumers may group together to take
action against the developer, for example, via a class action in the United
States and in some EU member states,
905
or a consumer regulator may
take on a claim against the developer or the industry more widely. An
example of this is the class action taken against Lilith Games in 2019 for
allegedly promoting gambling through in-game loot boxes.
906
A good way to deal with consumer protection issues is to have an End-User
License Agreement (EULA) and/or Terms of Service which set out exactly what
a consumer can and cannot do with a game and what happens if the consumer
goes beyond those terms. It is important to note that such documents are
bilateral – they set out what a consumer can and cannot do as well as what a
developer or publisher can and cannot do. Moreover, because these are
consumer documents and are not negotiated by the parties, particular attention
should be taken to avoid terms that might be considered unfair. Terms should
also be intelligible to consumers, which means keeping legalese and technical
jargon to a minimum. Indeed, in many countries, a developer must localize terms
entirely if it wishes them to be enforceable, for example, a developer seeking to
enforce a EULA in China may find it very difficult if the document is not in
Chinese. Different countries can also have different laws and interpretations
involving EULAs and, as a result, what may be accepted in one country may not
be accepted in another. Getting such documents right both legally and cost-
effectively can often, therefore, be much more complex than the ubiquity of these
documents in the video game industry may suggest.
10.4 – Advertising And Marketing
Marketing a game usually accounts for a significant portion of a game’s budget.
Moreover, advertising and marketing must comply with local laws and
regulations set out by governments and voluntary rating bodies. In this regard,
it is judicious to focus first on laws and regulations in the country of incorporation,
then in other operational and revenue-generating territories. Laws relating to
marketing and game content are as much a product of culture as they are of law,
and this leads to variations between countries. For example, Germany is well
known for its stringent requirements on game content and marketing and only
907
lifted its total ban on the use of Nazi symbolism in games in 2018, while
countries in East Asia, Eastern Europe and the Middle East have strong, often
905
Under the EU Collective Redress Directive, as of 2023, EU member states must allow “qualified
entities” (i.e., consumer organizations and public bodies) to commence representative lawsuits on
behalf of consumers in a number of areas, such as data protection and consumer law. Qualified
entities can seek various forms of redress including compensation, injunctive measures as well as
costs of proceedings if the party wins the dispute, otherwise the “loser pays” principle applies. Faegre
Drinker Biddle and Reath LLP, “The EU’s Collective Redress Directive—The Potential for Collective
Consumer Lawsuits: An Introduction”, jdsupra.com, May 6, 2021; and Anderson, Gemma, et al., “The
EU Collective Redress Directive is Coming to Town”, mofo.co, December 9, 2020.
906
Rizzi, Corrado, “California Class Action Says In-Game Loot Boxes in ‘Rise of Kingdoms’ Equate
to Illegal Gambling”, classaction.org, December 18, 2019. See Keith Coy v. Lilith Games (Shanghai)
Co., Ltd., Case 3:19-cv-08192, N.D. Cal., filed December 17, 2019.
907
“Germany lifts total ban on Nazi symbols in video games”, bbc.co.uk, August 10, 2018.
Mastering The Game
324
morally influenced, rules on advertisable content. Activision Blizzard, for
example, self-censored an online comic in Russia that featured two female
Overwatch
908
characters kissing. Industry insiders believe that this censorship
was related to a conflict with Russian laws prohibiting “propaganda” promoting
same-sex relationships. Similarly, Electronic Arts (EA) did not release its fighting
game, EA Sports MMA
909
, in Denmark because of a Danish law restricting in-
910
game product placement of energy drinks. Finally, in 2019, the Chinese State
Administration of Press and Publication (SAPP) released new game content
911
guidelines which render some genres, such as poker and mah-jongg games ,
ineligible for approval and ban games that contain blood or corpses or touch on
912
the imperial past of China.
Most countries targeted by publishers have a system that regulates what
marketers can say about their products and services and how they can say it;
and, while each system has its own nuances, there are some common threads.
However, in practice, advertisements are often cleared on short notice, with
insufficient time or budget to obtain detailed advice for each territory in which the
advertisement will run. In those circumstances, it is not uncommon for game
companies to pick one or two jurisdictions known for having a well-established
and relatively strict regulatory system to use as a yardstick for the rest of the
world. The United Kingdom and the United States have some of the most robust
advertising regulation systems and are both key markets in the video game
industry. As a result, the rest of this section is written with particular focus on the
UK regime, which is not an uncommon choice of yardstick, and comparisons are
drawn, where appropriate, with other jurisdictions and the United States.
In the United Kingdom, advertising is governed both by consumer protection law
– some of which stems from EU Directives – and a separate self-regulatory
system. In this field, consumer protection law is ultimately enforced by regulators
such as Trading Standards and the Competition and Markets Authority (CMA)
through civil court actions.
913
The UK self-regulatory system was established in
1961 and is one of the oldest in the world. It is administered by the Committee
of Advertising Practice (CAP) and the Advertising Standards Authority (ASA),
which work alongside each other. In broad terms, the CAP writes policy and
issues guidance, while the ASA deals with complaints and code enforcement.
The ASA administers two sets of rules, the BCAP Code for broadcast advertising,
such as TV and radio advertisements, and the CAP Code for non-broadcast
advertising, such as online advertisements.
914
The codes are broadly consistent
with the laws that underpin them, but they go into considerably more detail.
908
Nabel, Dan and Chang, Bill, Video Game Law in a Nutshell, 1
st
ed., West Academic Publishing,
2018, pp. 293-4.
909
Good, Owen, “Danes Won’t Get EA Sports MMA Thanks to Energy Drink Ban”, kotaku.com,
August 28, 2010.
910
Nabel, Dan and Chang, Bill, Video Game Law in a Nutshell, 1
st
ed., West Academic Publishing,
2018, p. 296.
911
Liao, Rita, “China’s new gaming rules to ban poker, blood and imperial schemes”, techcrunch.com,
April 21, 2019.
912
ibid.
913
Court actions are not uncommon, but the need for regulators to allocate a finite amount of
resources means that they usually focus on the more egregious infractions or on cases of persistent
non-compliance.
914
The CAP and BCAP Codes have 22 and 32 sections, respectively, dealing with matters ranging
from the definition of advertisements and what is misleading to specific subject areas such as alcohol,
vehicles, gambling and health or nutritional claims.
325 Mastering The Game
The ASA receives and deals with around 30,000 complaints every year.
Complaints can be submitted free of charge by anyone, including competitors.
The ASA can also, if necessary, proactively investigate advertisements and
receive referrals from other regulators, such as the CMA. If a complaint is upheld
after a formal investigation, the ASA will issue a ruling that the advertisement
“must not appear again in its current form”, requiring the advertisement to be
changed. The ASA will typically also ask the advertiser to sign an undertaking
confirming that it will abide by the relevant codes in the future.
As a self-regulatory body, the ASA has no statutory powers of enforcement and
cannot issue fines or bring prosecutions directly, but it does have access to
various other enforcement measures. Its primary enforcement tool is the threat
of bad publicity. It publishes decisions on its website and notifies the press,
which may, and often does, cover the story. For advertisers which do not comply
with a decision, the ASA can add their names to a list of non-compliant
advertisers, which is published on its website. It can issue “Ad Alerts” to its
members and the media, advising them to withhold services such as access to
advertising space. It can also ask search engines to remove a marketer’s paid-
for search advertisements or take out advertisements of its own to draw attention
to a particular advertiser’s non-compliance. If all else fails, its legal backstop is
a referral to Trading Standards, which has the power to investigate and
prosecute for breaches of the relevant laws. Trading Standards has the power
to bring both civil and criminal proceedings. Despite its apparent lack of teeth,
the ASA has proven effective and, on the whole, tends to achieve compliance.
In the United States, the National Advertising Division (NAD) is a self-regulatory
program offered by the non-profit organization, Better Business Bureau (BBB),
and performs a similar function to the ASA. The NAD hears and evaluates
thousands of complaints each year, brought by businesses against competing
businesses with respect to misleading advertisements and offers a non-binding
resolution to disputes with the aim of enforcing a high standard of truth and
accuracy. An NAD resolution is carefully articulated after a formal examination
of case law, federal advertising statutes and input from experts in marketing and
research and development. Like the ASA, the NAD writes press releases for
each of the disputes it handles. Therefore, businesses which opt to use the NAD
dispute resolution process should be aware that both the advertisement
concerned and the NAD resolution will be publicly accessible.
As mentioned above, the CMA also has a consumer protection function. This is
perhaps the closest equivalent to the Federal Trade Commission (FTC) in the
United States. However, the CMA has more extensive statutory powers of
investigation and enforcement and sometimes carries out pro-active
investigations into a particular sector or business practice. For example, in 2019,
the CMA opened an investigation into the supply of online gaming memberships
for the Nintendo Switch, Sony PlayStation and Microsoft Xbox, focusing, in
particular, on auto-renewals of online gaming contracts, cancellation and refund
policies, and terms and conditions.
915
In the United States, automatic subscription renewals have been drawing greater
attention from regulators, law enforcement officials and some state legislatures
due to the growing reliance on digital commerce and the increasing numbers of
complaints relating primarily to the difficulty of canceling subscriptions and the
915
Competition and Markets Authority, “Online console video gaming”, gov.uk, April 5, 2019; and
“Sony, Nintendo and Microsoft investigated over online games”, theguardian.com, April 5, 2019.
Mastering The Game
326
lack of disclosure regarding renewals.
916
In 2021, several states introduced bills
regulating automatic renewals.
917
Video game companies should be aware of
current and evolving state laws to avoid potential problems with respect to
subscription services. There have been a few high-profile cases involving
prominent companies such as Apple, Direct TV and Sirius XM, which led to
settlements in the millions of dollars.
918
When conducting an investigation, it is not unusual for the CMA to focus on the
most prolific players in a particular market, as demonstrated by the above
example. The CMA has the power to bring enforcement actions through the
courts; however, in most cases, it will first write to traders and give them the
opportunity to agree to change their practices and provide written undertakings
as a way of resolving the issue.
In the United States, the FTC, using the powers granted to it by the Federal Trade
Commission Act, enforces antitrust and consumer protection laws. Consumer
protection includes regulating practices that are considered “unfair and
deceptive” and, as a result, the FTC polices activities such as television
commercials, online tracking and privacy breaches. As in the case of the CMA,
the FTC or attorneys general acting on behalf of the consumer can bring actions
through the federal court system. It should be noted that state laws also play a
significant role in further regulating and defining misleading advertising in the
United States.
Finally, rating boards, such as the Entertainment Software Rating Board (ESRB),
the International Age Rating Coalition (IARC), the Pan European Game
Information (PEGI), the Australian Classification Board (ACB), the Game Rating
and Administration Committee (GRAC) and the Computer Entertainment Rating
Organization (CERO), require publishers’ marketing material to comply with their
guidelines on age and content regulations. Although such requirements are
voluntary and only enforceable by agreement with the relevant rating board,
major publishers rarely bypass established rating boards.
919
10.4.1 – What Forms Of Advertising Are Regulated?
The ASA’s responsibility extends to virtually all marketing communications in
broadcast and non-broadcast media. The latter is very wide and includes, for
example: ads in print, out of home media (such as posters, billboards, etc.),
direct mail campaigns; a game developer or publisher’s own website; a game
developer or publisher’s social media channels; and any other online content,
including live online streams and pre-recorded videos, paid for and, at least to
some extent, editorially controlled by the publisher or developer. This is
discussed further in Section 10.4.4 below regarding influencers.
Generally speaking, regulatory regimes are territorial. The UK regime will only
apply to advertisements that originate in the United Kingdom or are targeted at
916
Torbati, Yeganeh, “Federal officials look to crack down on deceptive subscription marketing
practices at broad range of firms”, washingtonpost.com, June 2, 2021.
917
Faegre Drinker Biddle and Reath LLP, “Automatic Renewal Laws: Legislation to Watch in 2021”,
jdsupra.com, March 12, 2021, Berge, Ellen Traupman, et al., “Your Renewal Reminder: Enforcement
Actions, Lawsuits and Legislative Updates under Autorenewal Laws”, venable.com, September 15,
2020.
918
Torbati, Yeganeh, “Federal officials look to crack down on deceptive subscription marketing
practices at broad range of firms”, washingtonpost.com, June 2, 2021.
919
See Section 10.7 below.
327 Mastering The Game
UK consumers. As a result, a US advertisement targeted at US consumers that
is shared online and goes viral will generally not be subject to the UK regulatory
regime. Overseas advertisements targeted at UK consumers are subject to the
jurisdiction of the relevant authority in the country in which they originate if that
authority operates a suitable cross-border complaint system.
920
If it does not, the
ASA will take action to whatever extent it can.
Most EU member states and some non-European countries have a self-
regulatory organization that is a member of the European Advertising Standards
Alliance (EASA). EASA coordinates the cross-border complaints system for its
members, which include the ASA.
10.4.2 – Common Issues
Advertising codes are very detailed and cover many different scenarios. It is
beyond the scope of this book to provide an exhaustive examination of the codes,
but the following paragraphs explore some of the more common issues that
affect the video game industry.
10.4.3 – Recognition Of Marketing Communications
The principle of separating advertising content from editorial content is almost as
old as advertising itself. For decades, marketers have looked for ways to make
their advertisements blend into their surroundings in order to improve
engagement. Advertorials and native advertising fall into the category of
advertisements that seek to blur the line between the two types of content.
In most countries, it is a regulatory requirement that editorial and advertising
content be kept separate in a clear manner. The UK regime sets a high bar
because it requires that advertising content be “obviously identifiable” as such to
the average consumer before that consumer begins to engage with the content
in any way. Previous ASA decisions have held that simply clicking on a video
thumbnail amounts to engaging with content.
The growth of video and streaming platforms has made compliance with this
requirement more difficult in some respects and easier in others. Given the
limited space available, it can be difficult to flag a video as advertising in a
thumbnail and a truncated title, particularly in a way that is palatable to marketing
teams; however, most platforms now provide additional tools for marking content
as advertised, promoted or sponsored. These tools should be used when they
are available, but they will not always serve as a get-out-of-jail free card because
the burden is ultimately on the advertiser to show that it has identified the
advertisement in a way that is obvious to the average consumer.
In the video game industry, ensuring that advertising content is obviously
identifiable is one of the most common pitfalls encountered in influencer
marketing, which is considered in more detail below.
920
If such complaints are filed with the ASA, the latter will redirect them to a responsible authority
under a cross-border complaint system.
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328
10.4.4 – Influencers
The past decade has seen an extraordinary rise in influencer marketing; and
921 922
global regulators have responded in kind. The CMA and the FTC have
produced best-practice guidelines for influencers regarding advertising
disclosures. The general point of these regulations is that it must be clear when
a commercial relationship underlies an influencer’s endorsement. In September
2019, the FTC charged two social media influencers for promoting an online
gambling service in which they had a financial interest they had failed to
disclose.
923
Moreover, in early 2019, the CMA secured formal commitments from
16 prominent celebrities, who had repeatedly broken advertising rules, to clearly
label any endorsements as such. The CMA clarified that it is not only the job of
influencers to comply with advertising rules, but also that of the brand they are
924
representing. Significant players in the gaming market, such as EA and
925
Epic, have introduced sponsored content policies in response to the increased
regulatory scrutiny. EA’s sponsored content policy requires that all influencers
and streamers promoting sponsored content of its games clearly mark it with
926
specified hashtags and watermarks.
The use of influencers as a marketing tool is now widespread in the video game
industry. Almost anyone can be an influencer and, as such, can be targeted by
regulators – even an advertising agency employee can be considered to be an
influencer.
927
There are many ways in which an influencer can become liable for
an endorsement, for example, a tag, share or like can each constitute an
endorsement, even though they are subjectively unbiased. The exponential
growth in influencer marketing has led to new challenges for regulators, the most
common of which is the failure to properly identify posts as advertising or
sponsored content.
Influencers can be commissioned directly or through a media agency, which may
have many influencers on its books. In most cases, a written contract is
advisable. When an agency is involved, it will typically have a standard form
agreement, and there will probably be less scope for negotiation than with a
direct agreement. However, a well-known influencer will have more bargaining
power to negotiate more favorable terms.
The FTC requires that influencers (1) give their honest opinion about a product
and (2) disclose their material connection to the gaming company, such as a
personal, family or employment relationship or a financial relationship, i.e., there
is payment or an exchange of free or discounted products or services.
Depending on the platform, it can be difficult to satisfy the full legal requirements
for a disclosure, but the disclosure should, in general, be clear and conspicuous.
921
Competition and Markets Authority, “Social media endorsements: being transparent with your
followers”, gov.uk, January 23, 2019.
922
“The FTC’s Endorsement Guides: What People Are Asking”, ftc.gov.
923
“CSGO Lotto Owners Settle FTC’s First-Ever Complaint Against Individual Social Media
Influencers”, ftc.gov, September 7, 2017.
924
Alexander, Julia, “EA puts influencers in check with disclosure rules for sponsored content”,
polygon.com, November 16, 2016.
925
“Fan Content Policy”, epicgames.com.
926
“Mehr Transparenz bei Influencer-Kampagnen”, ea.com.
927
“The lawsuit also charged that Sony’s advertising agency, Deutsch LA, had employees post rave
tweets about the PS Vita without disclosing their connection to Deutsch or Sony”. See Fair, Lesley,
“Game over: FTC challenges Sony’s claims for PlayStation Vita and tweets by Deutsch LA”, ftc.gov,
November 25, 2014.
329 Mastering The Game
The FTC provides Endorsement Guidelines for influencers and spokespeople to
follow.
928
The FTC’s concern is whether disclosing a material connection will
fundamentally affect how consumers view the influencer’s opinion and the
credibility of the endorsement. Furthermore, FTC guidelines apply to
endorsements outside the United States that can be reasonably foreseen to
affect US consumers. If this is applied to video games, an influencer playing a
game who comments that the game is good, even in passing, must disclose any
material connection to the game company or advertising agency, if such a
relationship exists, for example, if a publisher paid for the influencer to play the
game, provided the influencer with a free copy of the game or reviewed the
content of a video before it was posted.
In the United Kingdom, after a wave of adjudications on this subject, the ASA
and the CMA issued joint guidance intended to help influencers and brands
understand how content should be identified.
929
In the United States, the FTC
released guidelines in 2019.
930
At the time of writing, the United Kingdom has one of the strictest approaches,
so it is worthy of more detailed examination. There are two variables for
determining whether or not content must be identified as advertising or the like:
“payment” and “control”.
In broad terms,
1. when an advertiser pays an influencer and has at least some control over
the content created, the end result is considered to be advertising and
must be obviously identifiable as such;
2. when an advertiser pays an influencer but has no control whatsoever
over the content created, the end result is considered to be sponsored
content and should be identified as such;
3. when an advertiser has neither paid the influencer nor exercised any
control, the content is considered to be organic content and does not
need to be identified in any way; and
4. a situation where an advertiser does not pay an influencer but controls
the content is rare in practice and is not included in the UK regulators’
guidance. However, on the grounds that the influencer is effectively
acting as the brand’s spokesperson and is probably doing so in the hope
of further, more lucrative engagements with the brand in the future, the
prudent approach would be to disclose the relationship.
It is important to note that the concepts of “payment” and “control” are interpreted
widely. Payment includes not only cash but also the gifting or lending of goods
or services to the influencer, payments for travel or accommodation, the promise
of future work or other benefits in kind. Control includes not only telling the
influencer what to say but also more subtle input, such as telling the influencer
how to say it, requiring the use of specific brand names or hashtags, telling the
influencer when to post and at what frequency, or having a contractual right to
review the content before it is posted, even if that right is never exercised.
928
“Guides Concerning the Use of Endorsements and Testimonials in Advertising”, ftc.gov.
929
“Influencers’ guide to making clear that ads are ads”, asa.org.uk, February 6, 2020.
930
“Disclosures 101 for Social Media Influencers”, ftc.gov; and “FTC Releases Advertising
Disclosures Guidance for Online Influencers”, ftc.gov, November 5, 2019.
Mastering The Game
330
The presence of an existing commercial relationship between a brand and an
influencer, such as a brand ambassador, is considered by the ASA to be a strong
indication that content posted about the brand by that influencer constitutes
advertising. If a complaint is made and, in the course of the investigation, it is
argued that the influencer posted the content voluntarily, the ASA can request to
see a copy of the brand ambassador agreement or an equivalent document. If
the agreement is not disclosed, the ASA can take this into consideration and infer
that the brand must have exercised some control over the content.
The inclusion of discount codes or affiliate links is another strong indicator that
the content is probably advertising.
In the United Kingdom, there is no prescribed way of identifying advertising as
such, as long as it is done in a manner that is obvious to the average consumer.
The most reliable method is to include the word “Ad”, “Advert”, “Advertising”,
“Advertisement” or “Advertisement Feature”, with or without a hashtag. The ASA
and the CMA take the view that other labels are less clear and should be avoided,
for example, “Sponsored”, “Supported by/Funded by”, “In association with”,
“Thanks to [brand] for making this possible” and “@[brand]”. Likewise, the FTC
has found that non-compliant disclosures include, but are not limited to, “sp”,
“spon”, “collab”, “ambassador”, “Thanks [brand]”, “Thanks to my friend at
[brand]”, any disclosure after the “more”, disclosures in a Comments section,
disclosures in an About section or a Biography section, hyperlinks and
disclosures that do not travel with the content.
When the brand commissions sponsored content, in other words, it pays for the
content but exercises no control over it, a “Sponsored” label would be
appropriate. However, “Ad” would also be acceptable and is sometimes
preferable when space is limited; it also enables consistency across multiple
jurisdictions. In equivocal cases where it cannot be said definitively whether any
control was exercised, using the “Ad” label is the safer option.
The label must be displayed in a location that is prominent and “up front” so that
it is seen by consumers before they engage with the content. In the context of
video content, there are a number of options: the label can be displayed in the
video itself, on the thumbnail or spoken by the influencer. All or any of these
could work, provided the end result is obvious to the average consumer.
Past decisions have shown that labels placed in social media biographies or
video description boxes, particularly if the box has to be expanded to see the
label, or buried in a sea of other hashtags are not considered reliable and should
be avoided or supplemented with more prominent tags.
10.4.5 – Misleading Advertising
As a general principle, advertising which is likely to mislead consumers is
prohibited. The most obvious example is when an advertisement makes
misleading claims about a game. Claims include not only text or verbal
statements but also visuals, sounds and anything else that the consumer might
interpret as an objective claim.
A common pitfall is overpromising the features or performance that a game can
deliver. Care should be taken to distinguish between pre-rendered and in-game
331 Mastering The Game
footage.
931
If any game features shown in the advertisement, such as game
modes, characters or skins, require separate purchases, this should be made
clear. It is important to remember that this applies to most online content,
including the developer’s own website and the sub-pages of digital stores. In the
context of early-access beta versions of games, care should be taken not to
make claims about features that may not be in the final release.
An advertisement may be misleading if it omits material information or presents
such information in an unclear, unintelligible, ambiguous or untimely manner.
Material information is information that the consumer requires to make informed
decisions about a product. This includes, for example, the fact that an internet
connection and subscription are required to play the game or experience the
advertised features.
If any particular claim or feature is subject to limitations or qualifications, these
must be displayed clearly in the advertisement. Limitations and qualifications
can be used to clarify, but must not contradict, the claim. For example, it is best
practice not to affix a disclaimer with the label “test footage” or “development
footage” at the bottom of a game advertisement containing test footage.
Although the text is truthful and, by itself, not misleading, when combined with
the game footage, the full message conveys to a reasonable consumer that the
final version of the game will include all of the aspects and visuals that are in the
footage. Development or test footage is only permissible while the game is still
in development and not yet officially released. Otherwise, advertisers should
strive to use footage of the official final version of the game in their advertising.
Advertisers should also take care to specify on which type of platform the game
is being run to display such footage. As another example, advertisers must
refrain from showing a real-time mobile multiplayer game over a cellular network
unless it is available over most cellular networks.
One recent case in point is Shepherd v. Google, where consumers sued Google
for over-promising that Stadia could deliver a 4K playing experience for all games
and claiming that the cloud-based service was more powerful than gaming
consoles. The advertisement neglected to inform consumers that Google
Chromecast Ultra is required to play Stadia Games at 4K resolution instead of
the 1080p and 1440p resolution experienced by consumers.
932
An advertiser is also required to hold documentary evidence capable of
substantiating claims in its advertising before those claims are made. That
evidence may be called upon in the event of an investigation.
933
However, it is
the game company’s responsibility to only approve pitches that can be
substantiated because the game company or a qualified third party is in the best
position to conduct tests on the software or hardware. For instance, estimating
frame rates and compatibility with hardware, data plans or internet is within the
scope of the game company.
934
Therefore, it is critical for the game company to
work with the advertiser to validate substantiation claims.
As a general rule, advertisers should be cautious with substantiation claims,
innovation claims, market superiority claims, astroturfing, and coupons and
931
Green, Dominic, “Sega Sued Because Scenes in Ads For Video Game Weren’t Identical to Actual
Game”, businessinsider.in, May 2, 2013.
932
“Shepherd v. Google LLC et al.”, unicourt.com.
933
For the United States, see “Advertising Substantiation Principles”, ftc.gov.
934
Batchelor, James, “ASA bans misleading Homescapes, Gardenscapes ads”, gamesindustry.biz,
October 13, 2020.
Mastering The Game
332
discounts. Such claims and, in the case of the astroturfing,
935
tactics are more
likely to influence customers to make a purchase decision and are, as a result,
more likely to impose liability on the advertiser and the game company if the
product does not deliver what the advertisement claims. It is important to always
be honest and disclose any information necessary to make the claim truthful.
936
10.4.6 – Microtransaction Disclosure
Games that incorporate microtransactions can easily mislead consumers,
especially since they initially appear to be free to play. These games bait
consumers into a fun experience, then require them to pay to progress or
succeed in the game. Advertisements for freemium games should take care not
to underplay the significance of microtransactions in achieving what consumers
would consider to be normal gameplay. Unless made clear in the advertisement,
a game which is described as “free” but contains onerous time-gating
mechanisms if no premium currency is spent could, therefore, be considered
misleading.
The ESRB in the United States and PEGI in Europe have both set rating
standards for platforms and game companies to follow. Past decisions have
shown that relying on microtransaction warnings displayed as standard in app
stores may not be sufficient since, in most cases, they do not appear in the body
of the advertisement.
937
If a game includes microtransactions, both platforms
and game companies must label the game appropriately or face regulatory action
from the ASA or the FTC.
Public reaction can also be compelling, as was the case when EA pre-released
Star Wars Battlefront II. The pre-released version had a steep retail price and
required further payments for players to advance characters. Such
microtransactions, however, were tied to loot boxes, which are randomly
generated virtual property (loot boxes will be discussed in Section 10.5).
Following public backlash, which led to an EA post becoming the most
downvoted post in Reddit history, EA overhauled the game by disabling
microtransactions and changing loot box rewards to ensure a more balanced
playing field.
10.4.7 – Email Advertising
In the United States, the CAN-SPAM Act and the Telephone Consumer
Protection Act (TCPA) govern email and telephone communications,
respectively. The CAN-SPAM Act does not cover transactional messages that
are primarily intended for the benefit of the consumer and not to convey a
marketing message. A commercial message, on the other hand, is actionable
and violators face a fine of up to $16,000 for each email violation. If an email
recipient reasonably interpreting the subject line would conclude that the
935
The deceptive practice of presenting an orchestrated marketing or public relations campaign in
the guise of unsolicited comments from members of the public.
936
Game companies should remember that investors may have grounds to make a claim against
them for damages suffered as result of misleading claims. See, for instance, the ongoing saga of the
2020 release of Cyberpunk 2077.
937
For a recent case in the United Kingdom, see “ASA Ruling on PLR Worldwide Sales Ltd t/a
Playrix”, asa.org.uk, September 30, 2020.
333 Mastering The Game
message contains an advertisement or promotion, it is considered to be a
commercial message.
Senders must identify the message as an advertisement at the beginning of the
message. This can be achieved by refraining from using deceptive subject lines,
domain names and email addresses as well as other deceptive routing
information that the recipient will see immediately. More importantly, senders
should provide recipients with a clear and conspicuous method to opt out of
future communications.
Unlike the CAN-SPAM Act, the TCPA provides a private right of action and a
potential fine of $500 per violation. As a result, a large number of cases are filed
each year for TCPA violations, with settlements in the tens of millions of dollars.
Callers must obtain prior written consent to make robocalls and texts. The
consent must be obtained without being required as a condition of purchasing a
good or service.
Callers are also liable for robocalls to reassigned wireless numbers when the
new subscriber or customary user of the number has not consented to the
communication. This is subject to a limited, one-call exception for cases where
the caller did not have actual or constructive knowledge of the reassignment.
Like senders under the CAN-SPAM Act, callers under the TCPA must inform the
recipient that the message is for marketing purposes and provide a clear and
conspicuous method for opting out of future communications.
10.4.8 – Sweepstakes And Contests
Game companies may use sweepstakes and contests to generate buzz around
a game and solicit new players. In the United States, sweepstakes and contests
are clearly demarcated; however, game companies may conflate the two,
causing frustration among participants due to the improper application. Some
states even view these marketing tactics as parallel to gambling. It is, therefore,
crucial to know what constitutes sweepstakes, contests and gambling to avoid
criminal prosecution under these state laws.
Gambling has three elements: chance, consideration and a prize. States differ
on what constitutes chance, but generally speaking, any game mechanic that is
based on luck rather than skill will probably be considered to involve chance.
Consideration is anything of real value, from substantial effort to cash money. A
prize is also anything of real value.
For sweepstakes, a winner is determined by chance but, unlike gambling,
participation cannot require consideration. In other words, game companies
should not charge an entry fee or demand that participants invest substantial
time and effort to enter, unless they include an alternative entry method that is
free, such as mail-in or online entries. All participants must be treated equally,
no matter the entry method. Alternative titles for sweepstakes are “giveaway”,
“drawing” and, for charitable organizations, “raffle”.
A contest winner is determined by skill, which can be demonstrated using
substantial time and effort. Most states permit game companies to charge an
entry fee, unlike sweepstakes.
Game companies may also choose to hold a “surprise and delight” promotion.
In this scenario, there is no marketing or disclosure beforehand; it truly is a
Mastering The Game
334
surprise. The promotion must also be infrequent to maintain the surprise
element.
10.4.9 – Social Responsibility
Advertisements must not cause serious or widespread offense, nor must they
cause fear or distress without any justifiable reason. This is a broad category
and breaches can take many forms, including cultural or religious insensitivity,
gender stereotyping, graphic imagery, jump scares and shock tactics.
In all cases, advertisements should be appropriately targeted. The steps taken
by the advertiser to ensure that an advertisement is not served to inappropriate
audiences are a key consideration in investigations under this category.
Advertisements in untargeted media are likely to be construed as being
addressed to the public at large, including children.
It is also relevant to mention behavioral advertising at this point. Behavioral
advertising involves tracking web users across different websites to create web
user profiles in order to deliver targeted advertisements and draw them towards
specific websites. Game companies or advertising agencies that use behavioral
advertising in the United States must comply with three rules. They must
1. license the AdChoices icon from the Digital Analytics Association;
2. place the AdChoices icon on each advertisement that uses behavioral
advertising; and
3. disclose in their privacy policy or privacy statement that they use
behavioral advertising.
For online advertisements, it is recommended to use the targeting and age-
gating mechanisms offered by online platforms, particularly the advanced
targeting mechanisms. However, responsibility for targeting ultimately lies with
the advertiser. Relying on a platform’s mechanisms will not automatically mean
that this obligation has been discharged, particularly since many “soft” age-
gating mechanisms are easily circumvented by underage audiences. Particular
care must be taken when an advertisement features violence, anti-social
behavior, alcohol or sex or could be seen as condoning dangerous or unsafe
practices.
As you would expect, societal norms vary by country and region: something that
is considered harmless in one country may be considered extremely offensive in
another. Some countries have very specific restrictions, which can also evolve
over time. For example, in the United Kingdom, members of the royal family
should generally not be shown in marketing communications without prior
permission; only incidental references unconnected with the product being
advertised may be considered acceptable.
10.4.10 – Children
It is worth making a special note regarding children. The marketing of products
to children is heavily regulated, from food products to toys, and the resulting legal
requirements also apply to video games. The CMA has produced guidelines on
335 Mastering The Game
938
the marketing of free-to-play games to children. The basic requirements are
that game marketing should be truthful and supported by factual evidence, not
misleading to consumers and targeted at appropriate consumers. Failure to
meet these requirements can result in both consumers and local marketing law
authorities taking action against game developers.
Game advertisements which are targeted at or likely to appeal to children or
which themselves feature children are treated more stringently and are subject
to additional rules. In the United Kingdom, for example, there are strict rules for
preventing the exploitation of children’s credulity, loyalty, vulnerability or lack of
experience. Among other things, when an advertisement is addressed to or
targeted directly at children, it must not include a direct exhortation to children to
buy an advertised product or persuade their parents or other adults to buy an
advertised product for them. Past decisions have shown that the concept of
“direct exhortation” is interpreted widely, as is the concept of what is “addressed
to or targeted directly at children”. As an example, pop-up messages within a
mobile game encouraging players to purchase additional currency or a premium
subscription have been held to breach this rule.
In some cases, direct exhortations can be avoided by adjusting language and
presentation, for example, by not using the imperative mood or employing nudge
and push tactics, such as displaying a large “Buy” button next to a much smaller
“Cancel” button.
Whether or not a game is targeted at children is ultimately determined by the
regulator, which may not take the same view as the game company. Regulators
may consider a wide range of factors, such as whether a game contains bright
colors or animated characters, as many games do.
The ICO Age-Appropriate Design Code in the United Kingdom
939
and the
German Youth Protection Act
940
are the latest examples of regulators in Europe
setting out principles for advertisements in games likely to be accessed by
children.
In the United States, the Children’s Online Privacy Protection Act (COPPA) and
the Children’s Advertising Review Unit (CARU) are important names to know.
COPPA applies to all forms of digital games that (1) are directed towards children
who are 13 years old and younger, and (2) knowingly collect personal information
from those children. In order for a game to be directed at children, many
elements must be considered, such as graphics style, audio and subject matter.
Personal information is also broadly defined, so game companies should
exercise caution and always ask for consent.
Game companies must ask for parental consent before collecting personal
information from children in the above age group. This can be achieved by using
a neutral age gate to verify the age of the consenting user prior to accessing the
game. Parents must also have the right to review, edit and opt out of collection.
938
Office of Fair Trading, “The OFT’s Principles for online and app-based games”,
assets.publishing.service.gov.uk.
939
Denham, Elizabeth, “Age appropriate design: a code of practice for online services”, ico.org.uk.
940
Hilgert, Felix and Sümmermann, Philipp, “New obligations for providers and platforms: Germany
reforms youth protection law”, gameslaw.org, February 10, 2020, Croll, Jutta, “New youth
participation law in Germany: PARTICIPATION of children is a top priority”, blogs.lse.ac.uk, March
12, 2021.
Mastering The Game
336
A good privacy policy or privacy statement should include the types of
information that are collected, how the information is used and whether or not
any third parties will be involved or have access to the information.
CARU is an FTC-approved, self-regulated body that enforces COPPA by
providing guidance on compliance with its provisions. Its primary purpose is to
protect children from deceptive or inappropriate online advertising. As with NAD,
CARU rulings require the voluntary participation of the offending advertiser;
however, cases can be referred to the FTC for review and for enforcement of a
CARU ruling. CARU is also very prestigious in the United States, so it is
advisable for advertisers to adhere to CARU recommendations.
10.4.11 – Third-Party IP Rights
The inclusion of third-party material that may be protected by copyright, designs
or (un)registered trademark rights in an advertisement involves additional risk
given the prominence of the content and its consumer-facing nature. There are
nuances to this but, as a general rule, it is prudent to keep advertising and all
other consumer-facing elements as free of third-party material as reasonably
possible, unless a license has been obtained.
941
10.4.12 – Where To Find Additional Resources
If an advertising or creative agency has been instructed on an advertising
campaign, it would generally be expected to flag potential regulatory issues. In
some cases, the agency may also have access to its own lawyers. When
contracting with an agency, it is important to identify which party is responsible
for clearing an advertisement in each relevant territory and which party bears
liability if something goes wrong.
Otherwise, advertising codes tend to be reasonably accessible and easier to
read than raw legislation. Most regulators, including the ASA and the CMA in
the UK, also publish guidance on code interpretation, which is worth consulting
as a first port of call.
In the United Kingdom, the CAP offers a bespoke copy clearance service,
through which advertisers can obtain advice on potential issues with their
advertisements. At the time of writing, the service is free of charge with a 24-
hour turnaround or can be accelerated at a cost. This can be useful for smaller,
more straightforward queries. However, it should be noted that the advice given
is not binding on the ASA or any other regulator, so following the advice does
not guarantee compliance.
In the United States, the FTC publishes and updates Endorsement Guidelines
and Frequently Asked Questions on its website.
942
Ultimately, it may be necessary to consult an advertising lawyer for more
complex or problematic queries or in cases where it would not be desirable to
disclose the content of an ad to a regulator in advance is not a desirable option,
obtaining input from an advertising lawyer may be necessary.
941
For more information on IP rights and licensing, see Chapters 2 and 4.
942
“The FTC’s endorsement guides: what people are asking”, ftc.gov.
337 Mastering The Game
10.5 – Monetization And Loot Boxes
943
Game monetization has evolved considerably since one of the industry’s
earliest models – the “insert-coins-to-play” model. Monetization methods
continue to diversify with the evolution of games and gaming devices. World of
Warcraft
944
is considered to have pioneered the subscription model by charging
a monthly fee in addition to its base price. Today, there is a plethora of
945
monetization models, including, but not limited to, premium games,
946 947 948
downloadable content (DLC), free-to-play models, season passes,
949 950 951
rewarded videos, battle passes, games as a service, and in-game
952
advertising. Each of these models is perceived differently by the public and
treated differently by regulators.
One model that has recently attracted scrutiny from regulators is loot boxes. Loot
boxes are randomized mechanisms within games that yield in-game items of
varying rarity. For example, in Counter-Strike: Global Offensive, players can
pay $2.49 for a sealed “weapon case” that can provide anything from a desirable,
953
rare skin (i.e., a cosmetic upgrade) to an undesirable, common gun. Prices
may vary for individual loot boxes, but revenue generated by this form of
monetization reaches tens of billions of dollars. According to a study by Juniper
Research, loot boxes generated an estimated $15 billion in 2020, with mobile
gaming accounting for the majority of the revenue. Revenue is projected to reach
$20.3 billion by 2025. However, the growth rate may slow due to new business
954
models, governmental regulation and end-user frustration.
Loot boxes have been widely criticized in the media for their resemblance to
955
gambling mechanisms. There has also been a global push to regulate loot
boxes in order to protect vulnerable players, such as children, from excessive
spending and gambling. Regulatory bodies around the world are questioning the
legality of randomized loot boxes, whether they qualify as a gambling mechanism
and, if so, whether they are exploitative. There is no consistent global approach
943
Monetization refers to the process of generating revenue from a game. This is often achieved
through advertising (e.g., banner advertisements, icon drops and incentivized downloads), limitation
removal (e.g., removing advertisements for a price or paying for more energy, turns or lives), a virtual
economy (e.g., paying for characters, resources, advantage-giving items, upgrades or
customizations) and/or merchandising (e.g., branded shirts).
944
A subscription model is a model in which players pay at regular intervals, e.g., monthly, to access
the game, and there are often continual releases of new content. There is also another type of
subscription model that is closer to the Netflix model, in which a payment is made on a monthly basis
to access a library of content. Apple Arcade is an example of this type of model.
945
Premium games are games that have a high up-front cost but do not feature in-app purchases.
946
Downloadable content is additional content that can be downloaded for a game, such as extra
maps or levels.
947
Free-to-play models are games that are free but often make heavy use of in-app purchases.
948
Season passes are discounted packages for current and future DLC packs for a video game, in
addition to its base price.
949
Rewarded videos are video advertisements placed in games that reward users, for example, with
free in-game items, virtual goods or content.
950
Battle passes are season passes that encourage further gameplay to unlock tiered cosmetic items
and/or in-game currency to progress in the game. Most battle passes include a free option to unlock
some items. There is also an option to pay a premium to obtain greater rewards from the battle pass.
This is the monetization model used in popular games such as Fortnite and Apex Legends.
951
See Chapter 1.
952
In-game advertising corresponds to advertisements within games, including, but not limited to,
rewarded video advertisements, playable advertisements, interstitial advertisements and banner
advertisements.
953
Zendle, David, et al, “Adolescents and loot boxes: links with problem gambling and motivations
for purchase”, Royal Society Publishing, Issue 6, June 2019.
954
Dealessandri, Marie, “Loot boxes to generate $20bn by 2025”, gamesindustry.biz, March 9, 2021.
955
Busby, Mattha, “Loot boxes increasingly common in video games despite addiction concerns”,
theguardian.com, November 22, 2019.
Mastering The Game
338
to loot boxes. Gambling regulators in the Netherlands and Belgium have
deemed loot boxes to be subject to local gambling laws. Conversely, the Polish
Ministry of Finance reviewed loot boxes in 2019 and determined that they were
956
not gambling mechanisms. Slovakia has determined that loot boxes fulfill its
957
national gambling criteria and is considering taking regulatory steps. The
Chinese Ministry of Culture has introduced a regulation requiring developers to
reveal the odds of loot boxes. The Korea Association of Game Industry, K-
Games, requires members to disclose the drop rates, even though there is no
strict legal requirement to do so. In the United Kingdom, at the time of writing,
most loot boxes do not fall within the current legal definition of gambling, but they
continue to be a thorny, headline-making topic, and there are growing calls for
the law to be reviewed. The result of this international inconsistency is that loot
boxes, and occasionally entire games, are removed in some countries yet remain
operational in others. The topic attracts scrutiny not only from gambling
regulators but also consumer regulators. The Swedish Consumer Agency, for
example, has also been instructed to investigate loot boxes. The prominence of
this topic in global media indicates that there may soon be further regulation.
Game creators remain divided about loot boxes, but there is a clear movement
towards industry self-regulation. In the United States, the FTC loot box
investigation resulted in several large publishers, including Nintendo, Microsoft
and Sony, committing to disclose the odds of loot boxes in their games. Other
publishers have stated that they will “implement a similar approach”, including
Activision Blizzard, Bandai Namco Entertainment, Bethesda, Bungie, Electronic
Arts, Take-Two Interactive, Ubisoft, Warner Bros., Interactive Entertainment and
958
Wizards of the Coast. Although it is unclear what this similar approach will be,
there has been some implementation in a number of these publishers’ new
games. For example, Ubisoft announced that its Assassin’s Creed series will no
959
longer have loot boxes or random gear; Bungie announced that it will no
longer be offering loot boxes in Destiny 2
960
; and Riot Games announced that
Valorant
961
will not include loot boxes.
Gambling industry regulation increasingly impacts the game industry, particularly
with the nascent convergence of the two industries in some fields. In a highly
controversial decision, the World Health Organization (WHO) classified “gaming
962
disorder” as a new type of mental health condition. This disorder is
characterized by impaired control over gaming, with the continuation or
escalation of gaming despite the occurrence of negative consequences. It
appears that the WHO decision was partly informed by the increased regulatory
scrutiny of loot boxes. One year after it added “gaming disorder” to its list of
addictive behaviors, WHO praised games for their usefulness during the COVID-
956
Giuffré, Vincenzo, “Gaming loot boxes reviewing in Poland and in Australia”, gamingtechlaw.com,
March 11, 2019.
957
Cerulli-Harms, Annette, et al, “Loot boxes in online games and their effect on consumers, in
particular young consumers”, europarl.europa.eu, July 2020.
958
Hall, Charlie, “Microsoft, Nintendo and Sony to require loot box odds disclosure”, polygon.com,
August 7, 2019.
959
Hargreaves, Jim, “Assassin’s Creed Valhalla won’t have loot boxes or random gear”,
thesixthaxis.com, May 29, 2020.
960
Valentine, Rebekah, “Bungie will no longer sell randomized loot boxes in Destiny 2”,
gamesindustry.biz, March 10, 2020.
961
Brown, Fraser, “Valorant will have a battle pass and sell cosmetics, but it won’t have loot boxes”,
pcgamer.com, March 5, 2020.
962
“Addictive behaviours: Gaming disorder”, who.int, September 14, 2018.
339 Mastering The Game
19 pandemic as a healthy way to socially distance while maintaining a social
963
connection.
10.6 – Other Regulations
Game industry regulation continues to develop in many directions that are
beyond the scope of this book. Physical products, such as games and
merchandise, are subject to product liability laws as well as various regional
product labelling requirements.
Antitrust law, or competition law as it is known outside the United States, has
taken on greater prominence with the recent cases involving disputes between
some of the largest players in the game industry challenging existing market
structures with potentially billions of dollars at stake. . In August 2020, Epic
Games launched separate antitrust lawsuits against Apple and Google, alleging
the platform operators abused their respective market positions by mandating a
share of transaction fees on every in-app purchase. This followed Epic Games’
Fortnite being removed from both stores for term violations after Epic Games
introduced a direct payment mechanism to intentionally bypass each store’s
mandatory 30% fee.
In September 2021, the first of what may be many decisions from various courts
operating under different laws and regulations throughout the world and even
within a country dealing with antitrust issues was handed down by a CA court,
which ruled that Apple was not a monopoly. Nevertheless, it had violated CA’s
anti-competitive laws with its anti-steering rules payment rules (at the time of
writing, the case is currently under appeal).
964
These cases are particularly interesting because these types of issues usually
come from external sources, such as government regulators, although that will
happen as well.
With the growth of esports, sport regulation may become applicable to some
parts of games. The interaction between games and broadcasting on platforms
such as YouTube may, over time, lead to broadcasting regulation having an
impact on games. The growth of the cloud both as a means of distribution and
a factor in game production will also raise issues as the cloud gradually becomes
subject to greater regulation. This is essentially the result of the increasing
success and prominence of the game industry as well as its convergence with
other creative and digital media.
It is not yet known how regulated the game industry will become, although there
is certainly a trend towards increased regulation. The video game industry is
evolving rapidly and not afraid to innovate. A pertinent example here is the
increasing popularity of non-fungible tokens in video games and the related issue
of cryptocurrency regulation. It follows that, as the game industry becomes a
more complex sector in which to operate, the time is fast approaching (if it is not
already here) when game developers and publishers will need to tread carefully
in their business endeavors and seek more frequent legal advice.
963
Canales, Katie, “The WHO is recommending video games as an effective way to stop the spread
of COVID-19, one year after adding ‘gaming disorder’ to its list of addictive behaviors”,
businessinsider.com, April 1, 2020.
964
See Section 1.8.5.
Mastering The Game
340
10.7 – Ratings
10.7.1 – Age Ratings And Content Descriptors
965
In all the major video game markets, a developer or publisher (“submitter”) will
typically need to obtain a rating for a game prior to its release, irrespective of
whether the game is sold at retail, digitally downloaded or released on a mobile
device. Since several different parties may be involved in the rating process,
especially if a game is released worldwide, it can be challenging for a first-time
submitter to navigate the various steps. However, it is essential to get age
ratings correct not only because it is a legal requirement in many countries but
also because it is important to provide some guidance to consumers on what
might be appropriate content for specific age categories (i.e., children) and
ensure that consumers are not misled, failing which there may be considerable
reputational harm to a game’s business. This section will briefly discuss the
various issues associated with obtaining a rating for a game.
966
A game’s rating indicates the suitability of the game for various age groups
and, depending on the rating board, also provides guidance to consumers,
usually parents, on whether a game is suitable for a consumer under a certain
967
age.
The Pan European Game Information (PEGI) rating system, for example, which
968
was launched in 2003 and is currently used in more than 35 countries, has five
age categories. These are depicted in the table below. Certain elements in a
game will automatically result in a particular rating no matter how extensive it
appears in a game. For example, a game that contains illegal drugs, alcohol or
tobacco will receive either a PEGI 16 or PEGI 18 rating.
965
For the purpose of this section, a submitting party includes both publisher and developer.
966
Rating boards do not determine whether a game is good or bad, nor do they indicate the level of
difficulty or skill.
967
See “Video game content rating system”, en.wikipedia.org, for a chart of the various age
classifications used in a number of countries. Many of the video game rating boards are government
bodies and may also rate other entertainment content such as films, television and publications.
968
PEGI was formed in 2003 and replaced a number of individual national rating systems with a
single system. It is used by the following countries: Albania, Austria, Belgium, Bosnia and
Herzegovina, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France,
Greece, Hungary, Iceland, Ireland, Israel, Italy, Kosovo, Latvia, Lithuania, Luxembourg, Malta,
Moldavia, Montenegro, the Netherlands, North Macedonia, Norway, Slovakia, Slovenia, Poland,
Portugal, Romania, Serbia, Spain, Sweden, Switzerland and the United Kingdom. See “The PEGI
organization”, pegi.info. Germany is not a member of PEGI and instead has its own rating board
called the Unterhaltungssoftware SelbstKontrolle (USK). In view of the past political climate in
Germany, the rating board is extremely restrictive, especially with regard to hate crimes, symbols
and extreme blood. The USK states on its site that it has “the strictest age classification rules in the
world.” See “Types of classification procedures”, usk.de. Given the strictness of USK rules, it is fairly
common for games to be released later in Germany than in other major game markets and/or with
significant graphical or other changes.
341 Mastering The Game
THE PAN EUROPEAN GAME INFORMATION (PEGI) RATINGS
The content of games with a PEGI 3 rating is considered suitable
for all age groups. The game should not contain any sounds or
pictures that are likely to frighten young children. A very mild form
of violence (in a comical context or a childlike setting) is
acceptable. No bad language should be heard.
Game content with scenes or sounds that can possibly be
frightening to younger children should fall in this category. Very
mild forms of violence (implied, non-detailed or non-realistic
violence) are acceptable for a game with a PEGI 7 rating.
Video games that show violence of a slightly more graphic nature
towards fantasy characters or non-realistic violence towards
human-like characters would fall in this age category. Sexual
innuendo or sexual posturing can be present, while any bad
language in this category must be mild.
This rating is applied once the depiction of violence or sexual
activity reaches a stage that looks the same as would be expected
in real life. The use of bad language in games with a PEGI 16
rating can be more extreme, while the use of tobacco, alcohol or
illegal drugs can also be present.
The adult classification is applied when the level of violence
reaches a stage where it becomes a depiction of gross violence,
apparently motiveless killing or violence towards defenseless
characters. The glamorization of the use of illegal drugs and of
the simulation of gambling, and explicit sexual activity should also
fall into this age category.
© PEGI S.A. All Rights Reserved.
Moreover, ratings are typically accompanied by content descriptors, which may
969
also be accompanied by icons. Under the PEGI system, for example, the
content descriptors cover the following areas, as illustrated in the table below: (i)
970
Bad language; (ii) Discrimination; (iii) Drugs; (iv) Fear; (v) Gambling ; (vi) Sex;
971
(vii) Violence; and (viii) In-Game Purchases.
969
In Japan, for example, a content icon appears on the back of packaging, indicating why a game
received a certain rating from the Japanese rating board (CERO). The icons are grouped into nine
categories, which include: (i) love; (ii) sexual content; (iii) violence; (iv) horror; (v) drinking or smoking;
(vi) gambling; (vii) crime; (viii) controlled substances (drugs); and (ix) language.
970
Since 2020, PEGI has assigned an 18+ rating for any game that teaches gambling to players.
Examples of gambling according to PEGI would include games that teach the rules of card games
or explain the rules of horse racing. However, the rule does not apply retroactively involving games
re-released provided the game is not altered, and is not triggered by the presence of loot boxes in a
game.
971
For more information, see the PEGI website, www.pegi.info.
Mastering The Game
342
CONTENT DESCRIPTORS
Bad Language – The game contains bad language. This
descriptor can be found on games with a PEGI 12 (mild
swearing), PEGI 16 (e.g., sexual expletives or blasphemy) or
PEGI 18 rating (e.g., sexual expletives or blasphemy).
Discrimination – The game contains depictions of ethnic,
religious, nationalistic or other stereotypes likely to encourage
hatred. This content is always restricted to a PEGI 18 rating
(and likely to infringe national criminal laws).
Drugs – The game refers to or depicts the use of illegal drugs,
alcohol or tobacco. Games with this content descriptor are
always PEGI 16 or PEGI 18.
Fear – This descriptor may appear on games with a PEGI 7
rating if they contain pictures or sounds that may be frightening
or scary to young children or as ‘Horror’ on higher rated games
that contain moderate (PEGI 12) or intense and sustained
(PEGI 16) horror sequeces or disturbing images (not
necessarily including violent content).
Gambling – The game contains elements that encourage or
teach gambling. These simulations of gambling refer to games
of chance that are normally carried out in casinos or gambling
halls. Some older titles can be found with PEGI 12 or PEGI 16,
but PEGI changed the criteria for this classification in 2020,
which made that new games with this sort of content are always
PEGI 18.
Sex – The game depicts nudity and/or sexual behavior or
sexual references. This content descriptor can accompany a
PEGI 12 rating if the game includes sexual posturing or
innuendo, a PEGI 16 rating if there is erotic nudity or sexual
intercourse without visible genitals or a PEGI 18 rating if there
is explicit sexual activity in the game. Depictions of nudity in a
non-sexual context do not require a specific age rating, and this
descriptor would not be necessary.
Violence – The game contains depictions of violence. In games
rated PEGI 7, this can only be non-realistic or non-detailed
violence. Games rated PEGI 12 can include violence in a
fantasy environment or non-realistic violence towards human-
like characters, whereas games rated PEGI 16 or 18 have
increasingly more realistic-looking violence.
343 Mastering The Game
In-game purchases – The game offers players the option to
purchase digital goods or services with real-world currency.
Such purchases include additional content (bonus levels,
outfits, surprise items, music), but also upgrades (e.g., to
disable ads), subscriptions to updates, virtual coins and other
forms of in-game currency.
© PEGI S.A. All Rights Reserved.
972
In the United States and Canada , ratings from the Entertainment Software
973
Rating Board (ESRB), which was formed in 1994, comprise three components:
(i) rating symbols suggesting what the appropriate age should be for players,
974
based on the six rating categories depicted in the table below; (ii) content
descriptors; and (iii) interactive elements, which indicate interactive or online
features of a game, such as in-game purchases or location sharing or the
presence of unrated content generated through user interaction. Under the
ESRB system, there are more than 30 descriptors covering different levels of
violence, sex, nudity, gambling and drug, alcohol and tobacco usage.
Furthermore, in April 2020, the ESRB modified the “In-Game Purchases” label
to add “(Includes Random Items)” when a game offers randomized items for
purchase, including loot boxes and gacha mechanics. The original “InGame
Purchases” label will continue to be used when games offer only non-
975
randomized purchases, such as skins, DLC and cosmetics.
972
While individual countries in Latin America have not adopted the ESRB ratings, Mexico and other
parts of Latin America have, unofficially and without any known objection or opposition from the
ESRB, embraced the ESRB rating system due to the abundance of US edition games and/or
dedicated SKUs for Mexico being imported from the United States. Some of these games may
include localized Spanish packaging or English/Spanish bilingual versions that may feature the ESRB
icons and content descriptors. The ESRB originally created bilingual editions to help expand
awareness of the rating system within the Hispanic market in the United States.
973
The ESRB, which is part of the Entertainment Software Association, was formed in response to
congressional hearings examining the connection between violence and video games in 1993. For a
video of the full hearings, see “1993 Senate Committee Hearings on Violence in Video Games”,
youtube.com. As early as 1983, the US Surgeon General suggested that soon-to-become iconic
arcade video games, such as Asteroids, Space Invaders and Centipede, were a leading cause of
family violence. You make the call. For an Asteroids clip, see “Asteroids - Arcade - Top 70s Video
Games (Atari 1979)”, youtube.com.
Until the ESRB was formed in 1994, there was no universal rating board and, instead, the two biggest
companies at the time, Nintendo and Sega, imposed their own rules for regulating content. Sega
introduced a rating system, while Nintendo regulated content but did not have a rating system. Sega’s
rating system comprised three categories: GA (General Audience): Suitable for all; MA13 (Mature
Audiences - Ages 13 and over); and MA-17 (Mature Audiences - Ages 17 and over). See “List of
video game rating systems organized by country”, gamicus.fandom.com. Following the Senate
committee hearings in 1993, the game industry was informed that it had one year to propose a self-
regulatory system or else the government would step in. Shortly thereafter, the ESRB was born,
avoiding some form of government oversight.
974
Over the years, some rating tiers have been retired and new ones introduced. In 2005, the ESRB
introduced the E10+ rating. In 2018, it retired the EC (Early Childhood) rating. Ratings can also
influence how games are promoted and marketed, since rating boards also impose guidelines in this
area. For example, under the ESRB guidelines, it is not possible for a rated game to cross-promote
a game with a more restricted rating. As a result, a T-rated game is prohibited from cross-promoting
an M-rated game, but an M-rated game can promote a T-rated game. Advertising is overseen by the
Advertising Review Council (ARC). See https://www.esrb.org/ratings/principles-guidelines covering
advertising guidelines imposed by ARC.
975
“Introducing a New Interactive Element: In-Game Purchases (Includes Random Items)”, esrb.org,
April 13, 2020.
Mastering The Game
344
THE ENTERTAINMENT SOFTWARE RATING BOARD (ESRB) RATINGS
EVERYONE
Content is generally suitable for all ages. May contain minimal
cartoon, fantasy or mild violence and/or infrequent use of mild
language.
EVERYONE 10+
Content is generally suitable for ages 10 and up. May contain
more cartoon, fantasy or mild violence, mild language and/or
minimal suggestive themes.
TEEN
Content is generally suitable for ages 13 and up. May contain
violence, suggestive themes, crude humor, minimal blood,
simulated gambling and/or infrequent use of strong language.
MATURE 17+
Content is generally suitable for ages 17 and up. May contain
intense violence, blood and gore, sexual content and/or strong
language.
ADULTS ONLY 18+
Content suitable only for adults aged 18 and up. May include
prolonged scenes of intense violence, graphic sexual content
and/or gambling with real currency.
RATING PENDING
Not yet assigned a final ESRB rating. Appears only in advertising,
marketing and promotional materials relating to a physical (i.e.,
boxed) video game that is expected to carry an ESRB rating and
should be replaced by a game’s rating once it has been assigned.
The ESRB rating icons and other marks are trademarks or registered trademarks
of the Entertainment Software Association
345 Mastering The Game
Depending on the platform, a rating will generally be required by a governmental
976
body, the hardware manufacturer,
977 978
an app store or content licensors.
Participation in the ESRB and PEGI is voluntary; however, businesses that
choose not to rate their game may find that many retailers, particularly in the
United States, will refuse to distribute the game as a result.
979
One of the challenges faced by a submitter is dealing with the various rating
boards since they each employ different procedures and criteria when rating a
game. Rating boards may have different (i) standards for achieving particular
ratings; (ii) submission policies and processes, including the elements to be
submitted for different platforms; (iii) classifications and content descriptors; (iv)
time frames for reviewing materials; (v) procedures for challenging a rating; and
(vi) submission fees.
In response to the plurality of rating systems, the International Age Rating
Coalition (IARC) was founded to provide a globally streamlined age classification
system. IARC was created by a coalition of rating authorities from across the
globe, including the ESRB, PEGI, USK (Germany), ClassInd (Brazil), GRAC
(South Korea) and ACB (Australia). As such, most of the major rating agencies
participate in IARC. In order to obtain an IARC rating, which only applies to
digital products and participating storefronts, developers must complete an IARC
questionnaire about the game’s content. A rating is then assigned instantly by
an automated process that is based on the different factors examined by each
participating rating system. The IARC system analyzes international standards
and assigns a localized rating for the game and also provides a generic rating
980
for countries not covered by one of the participating rating authorities.
Regional IARC authorities monitor the game after it is made available to the
981
public to ensure the rating is accurate. At the time of writing, participating
storefronts include the Microsoft store, the Nintendo eShop, Google Play,
982
PlayStation Store, Microsoft’s Xbox Live Store, and the Oculus store.
Compared to the more formalized process of submitting games to each individual
rating authority, this approach to game rating is attractive since it allows
developers to submit a single application that covers a number of regions. It is
also quick and free of charge, although there are other costs involved in using
983
the IARC system.
976
Console manufacturers require games to be rated prior to their release. See “Frequently Asked
Questions”, esrb.org. Furthermore, in the event that a country does not have a rating system, some
console manufacturers will have the right to reject a game if, in their opinion, it contains elements
with excessive violence or sexual content, inappropriate language or other elements they deem
unsuitable. See PlayStation, “Global Developer & Publisher Agreement”, sec.gov.
977
“App Store content rating system”, rating-system.fandom.com.
978
Owners of intellectual property that license rights to a submitter for its game will typically require
that the game be rated and, in most situations, receive a specific rating. A licensor of a children’s
property will not want to be associated with a rating stating that content in the game is not suitable
for children in a particular age category.
979
If a developer has entered into an agreement with a publisher to have its game distributed, the
parties will need to determine which party will submit the game to the various rating boards.
Depending on how many rating-board submissions are required, the parties will also need to
negotiate which party will bear the costs and whether those costs can be recouped from revenues
earned from the distribution of the game.
980
“IARC Ratings Guide”, globalratings.com.
981
“How IARC works”, globalratings.com.
982
“About IARC”, globalratings.com.
983
Although game submission is free of charge, there are underlying costs associated with using the
IARC rating process. Participating in the IARC program involves paying a licensing fee to use the
platform and its backend technology, which integrates with IARC-approved digital storefronts and
provides publishers access to generic ratings. In addition, developers must pay a license or access
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THE INTERNATIONAL AGE RATING COALITION (IARC) GENERIC RATINGS
Suitable for all age groups. Some violence in a comical or fantasy
context is acceptable. Bad language is not permitted.
May contain some scenes or sounds that are frightening for
children. Mild violence (implied or non-realistic) is permitted.
Violence involving fantasy characters and/or non-graphic violence
involving human-looking characters or animals is permitted. Non-
graphic nudity, mild language and simulated gambling are also
permitted but sexual expletives are not.
Realistic violence, sexual activity, strong language, use of tobacco
and drugs and the depiction of criminal activities are permitted.
Graphic violence, including depictions lacking motive and/or
directed towards defenseless characters and sexual violence are
permitted. May also include graphic sexual content, discriminatory
acts and/or the glamorization of illegal drug use.
At the time of writing, China has no comprehensive age-rating system like PEGI
or ESRB, although the government announced in December 2020 that a new
system called the “Online Game Age-Appropriateness Warning” will be
fee to the different rating boards with which they choose to generate a rating using the IARC
submission process. The fees depend on the number of apps or products released as well as the
developer’s annual revenue. As result, fees may fluctuate from year to year. If a developer is only
releasing one game in a few territories, it may be more economical to submit the game manually to
each rating board; however, this may be more time-consuming. If a developer plans to submit a
number of games for a rating, the IARC system may be a useful alternative.
347 Mastering The Game
implemented. China’s new age ratings will be divided into three categories: 8+,
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12+ and 16+ distinguished by the colors green, blue and yellow, respectively.
Games in China are heavily regulated so the ratings will probably add another
layer of oversight and focus on providing information on the suitability of a game
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for a particular age category.
10.7.2 – Factors In Rating A Game
When determining a rating for a game, most rating boards will primarily focus on
potentially contentious scenes that may include: : (i) violence; (ii) language; (iii)
sex and nudity; (iv) drug use; (v) criminal acts including hate crimes; (vi) content
which is deemed culturally or otherwise inappropriate; and (vii) the theme of the
game itself. In addition, many rating boards will also factor in gambling, possible
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discrimination and any rewards for acts such as violence, drug use or sex.
The level of player involvement in any of the aforementioned contentious scenes
will be considered. For example, whether players simply observe a criminal act
taking place or actively participate in one will impact the age category to which a
game can be marketed. Rating boards may also consider structural elements of
the game, such as monetization and reward or advancement systems.
While the various rating boards list the factors they use to determine a rating, the
way in which some of the broad limitations may be applied can sometimes make
it difficult for a submitter to determine what may or may not be acceptable within
a certain age category or even in a game. For example, GRAC may consider
the presence of anti-societal or anti-governmental messages in its rating
decision. Similarly, the Entertainment Software Rating Association in the Islamic
Republic of Iran is responsible for classifying games according to (among other
things) the presence of violations of religious values or social norms.
Furthermore, various countries may treat a particular subject matter such as
violence differently and, as a result, certain types of violence may be acceptable
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in one country but not in another. EA’s simulation game, The Sims 4, for
example, received a plethora of different ratings globally, from 6+ in Germany to
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18+ in Russia. Age ratings in Germany are mostly concerned with violence
and, although it is possible to kill a character in The Sims 4, there is no explicit
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violence, which led to this low age rating. The 18+ rating in Russia is believed
to be related to The Sims 4’s
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portrayal of same-sex relationships. A game’s
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See Dealessandri, Marie, “China introduces new age rating system”, gamesindustry.biz,
December 18, 2020. This article is based on an article that first appeared in the South China Morning
Post.
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Moreover, Chinese regulators prohibit content that violates or threatens the Chinese constitution,
national security or political climate; games that promote racism or religious cults; and obscene
content featuring drug use, extreme violence or gambling. Extreme violence would include images
of dead bodies and pools of blood. See “A new online game ethics committee is formed in China,
nikopartners.com.
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For example, when determining a rating for a game, the ACB takes into consideration rewards to
players engaging in certain acts, such as violence. See “Australian Classification”,
classification.gov.au.
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In the United States, the video game Saints Row IV received a Mature rating. However, in
Australia, the ACB banned the sale of the game based on the initial game rating submission citing
sexual violence and the use of incentives or rewards for illicit or proscribed drug use. It was the first
game to receive an RC (Refused Classification) in Australia. Golding, Dan, “Australia’s Ban of Saints
Row 4 is emblematic of a conservative culture”, theguardian.com, June 25, 2013. Mortal Kombat, an
extremely popular and violent game, was banned in Germany when it was first released worldwide.
Lober, Andreas, “A short history of banned games in Germany”, gameindustry.biz, March 17, 2020.
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Marvin the Robot, “How are age-based gaming ratings set?”, kaspersky.co.uk, March 24, 2016;
and “The Sims 4 rated ‘mature’ in Russia”, bbc.co.uk, May 12, 2014,
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Ibid.
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“The Sims 4 rated ‘mature’ in Russia”, bbc.co.uk, May 12, 2014.
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348
rating is a strong indicator of what a particular culture deems appropriate, and
the global range of ratings shows how widely this can vary. For this reason,
game developers must think carefully about the content of their games and the
impact this may have on their rating.
10.7.3 – Submissions And Review
Ratings For Physical Games
While physical game submissions vary depending on the country or region, the
submitter must typically provide: (i) a completed application with a description of
the game and the most contentious scenes involving, for example, violence and
sex; (ii) a video that captures an overview of the game and all its pertinent
content, including gameplay, cut scenes and hidden content, along with the most
extreme instances of how any contentious content appears in the game; (iii) the
appropriate submission fees; and (iv) a signed terms and conditions agreement.
Upon receipt of the submitted information, the rating organization will review the
material and determine the rating and any appropriate content descriptors.
The PEGI rating process is outlined in the table below. The process consists of
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pre-release verification via PEGI and post-release verification via IARC. For
games that are only downloadable, for example, from digital and mobile
platforms (e.g., Google Play, Nintendo eShop and Oculus VR Store), both the
992 993
ESRB and PEGI generally use IARC to provide immediate ratings and
content descriptors, as determined by answers to a questionnaire.
THE PEGI RATING PROCESS
PEGI
(pre-release verification)
• all packed games for Microsoft
consoles
• all games (downloadable and physical)
for Sony PlayStation consoles
• all packed games for Nintendo consoles
• most PC games (downloadable and
physical)
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Pan European Game Information, “How we rate games” pegi.info.
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Entertainment Software Rating Board, “Ratings Process”, esrb.org.
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Pan European Game Information, “How we rate games”, pegi.info.
349 Mastering The Game
IARC
(post-release verification)
• all games and apps in the Google Play
Store (for Android devices, since Spring
2015)
• all games and apps in the Microsoft
Windows Store (for Windows PCs,
smartphones and tablets, since
December 2015)
• all games and apps in the Nintendo
eShop (since December 2015)
• all games and apps in the Oculus VR
Store (since January 2017)
In the event that submitted content, whether sold at retail or digitally
downloadable, is not accurately or fully disclosed, there may be significant
repercussions for the submitter, including (i) fines; (ii) removal of games from
sale; (iii) withdrawal of a rating; (iv) in the case of a retail game version, a
request for the game to be re-labelled or stickered to reflect the new rating; or (v)
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a change in the rating or accompanying rating descriptors. As a result, it is
critical for the submitter to understand and follow the procedures and regulations
imposed by the various rating boards.
When a game receives a rating, a submitter can generally (i) accept the rating;
(ii) revise the game or delete contentious scenes in order to receive a less
restrictive rating; or (iii) appeal the rating. It is important that the submitter allow
enough time not only for the submission process but also for any revisions that
might be required for a particular country or region in order to achieve a desired
rating.
A submitter should have an understanding of the applicable rules and regulations
when planning a game so that it has a general idea of what rating it would like to
achieve and what material may pose a problem. Submitters should also consider
whether it is worth jeopardizing a desired rating for the sake of a particular scene
containing potentially contentious material, such as a character being shot or
using profanity, that could lead to a more restrictive rating and cause a delay in
the game’s release.
Once a game receives a rating, the submitter must ensure that the rating and
any applicable content descriptors are displayed in the appropriate places, such
as in the game, on the packaging and in the marketing materials, if applicable,
pursuant to the rating board’s guidelines. In addition, submitters may need to
abide by rules that restrict where advertisements for certain categories may
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appear and what type of content may be shown. It follows that, depending on
the circumstances, there can be a powerful incentive to attempt to achieve a
particular rating, for example, if a higher-than-expected rating may prevent the
game from reaching significant audiences.
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In some situations, retailers have removed games from shelves and requested that the game
publisher accept product returns. Activision Blizzard, “2020 Annual Report”, investor.activision.com.
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“Ratings Guide”, esrb.org.
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350
For DLC, the content does not generally need to be reviewed, provided it is
consistent with the game’s rating and content descriptors. In this situation, the
rating assigned to the game will be applicable to the DLC. The ERSB and PEGI
only require the material to be submitted if the content exceeds the rating
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assigned to the existing game. For example, there may be more violence or
more intense violence in the DLC than in the game, resulting in a different rating
for the DLC. A project called Bonaire, believed to be online DLC for Rockstar’s
game, Red Dead Redemption 2, was refused classification in Australia prior to
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its publication, meaning that it was effectively banned. It has been speculated
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that the ban was due to the use of illicit drugs in the DLC.
Ratings For Online Games
Rating bodies have traditionally focused primarily on ensuring that offline PC and
console games obtain ratings, partly because such games historically constituted
the largest sector in the game industry. However, as discussed elsewhere in this
book, there has been a significant rise in online gaming in recent years, usually
with players being able to interact through multiplayer functionality. It is possible
with digital taking on greater relevance that in the foreseeable future games will
be required by the various platforms to list a rating that may come about from
federal and/or state pressure.
It has become fairly common for “traditional” core PC and console games, such
as massively multiplayer online games like Activision Blizzard’s World of
Warcraft, to be given ratings under the ESRB, PEGI and other standards. In one
sense, this appears relatively straightforward because such games share many
similarities with traditional games rated by these authorities. However, the
methodology is often slightly different: whereas a traditional game, such as
Super Mario, can be played solo several times in virtually the same way by an
examiner exploring its content, a purely online game such as Wargaming’s World
of Tanks is dependent on simultaneous play by many people and, as a result,
the audiovisual content displayed in any one session can vary significantly.
Games accessible by digital download from third-party platforms such as Steam,
Epic Games Store, Ubisoft Connect (formerly Uplay) and Origin are essentially
unregulated unless the platform implements its own system. There is no
consistent approach across platforms. Steam, for example, allows for age gating
before a game’s page is viewed, leaves space on store pages for PEGI ratings
and also allows pages to feature mature content warnings. Nonetheless, it is
important for developers and publishers of online games to remember the basic
purpose of age ratings, namely, the protection of children and the explanation of
game content to consumers.
Ratings For Mobile Games
Many mobile game ratings differ from console and PC game ratings because
they are primarily governed by age-rating requirements defined by the platforms
themselves. The Apple App Store, for example, utilizes its own rating system. A
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“Ratings Process”, esrb.org; and “How we rate games”, pegi.info.
997
Prescott, Shaun, “A Rockstar title called ‘Bonaire’ has been refused classification in Australia”,
pcgamer.com, August 19, 2019.
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ibid.
351 Mastering The Game
rating is typically determined instantly on the basis of a submitter’s declarations
regarding game content. Games in the Apple storefront are rated according to
four different categories:
THE APPLE APP STORE AGE - RATING SYSTEM
4+
Apps in this category contain no objectionable material.
This rating has two sub-classifications:
• made for ages 5 and under: this app is suitable for children aged
5 and under, but people aged 6 and over can also use this app.
• made for ages 6 to 8: this app is suitable for children aged 6 to 8,
but people aged 9 and over can also use this app.
9+
Apps in this category may contain mild or infrequent occurrences of
cartoon, fantasy or realistic violence; and infrequent or mild mature,
suggestive or horror-themed content which may not be suitable for
children under the age of 9.
This rating has one sub-classification:
• made for ages 9 to 11: this app is suitable for children aged 9 to
11, but people aged 12 and over can also use this app.
12+
Apps in this category may also contain infrequent mild language;
frequent or intense cartoon, fantasy or realistic violence; mild or
infrequent mature or suggestive themes; and simulated gambling
which may not be suitable for children under the age of 12.
17+
The consumer must be over 17 years old to purchase the app. Apps
in this category may also contain frequent and intense offensive
language; frequent and intense cartoon, fantasy or realistic violence;
frequent and intense mature, horror and suggestive themes; and
sexual content, nudity, alcohol, tobacco and drugs which may not be
suitable for children under the age of 17.
Conversely, Google Play Store’s rating system for Android games adheres to the
ratings defined by the relevant country’s rating authority, for example, the ESRB
for North and South America, PEGI for Europe and GRAC for South Korea.
When a territory is not represented by a participating rating authority, the IARC
system is used to suggest the age appropriateness of an app or game.
Ratings have become an important part of game development and publishing,
but determining what a submitter must do to comply with the various rules and
regulations can be a challenging undertaking. As a result, it is critical for the
submitter of a game to understand when a game must be rated, how a game is
rated and what factors are considered during the rating process in each country
Mastering The Game
352
or region and for each device type, in order to reduce costs and potential delays
in a game’s release.
353 Mastering The Game
CHAPTER 11
CONFIDENTIALITY AGREEMENTS AND DEAL
MEMOS
11.1 – The Purpose Of Confidentiality Agreements
The confidentiality agreement,
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also referred to as a non-disclosure agreement
(NDA) in most situations,
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is typically the first agreement that the developer
will engage in when considering entering into a business relationship with a third
party. Such an agreement might be signed with (i) a publisher interested in
distributing or financing the developer’s game; (ii) a licensor that controls a
property or software that the developer may be interested in for a game; (iii) a
console or mobile manufacturer that is interested in distributing a game under
development; (iv) an investor; or (v) talent or a contractor/vendor that may
provide services on the development, sales and marketing of the game. In all
these situations, one or both parties will be providing information to the other
party that is not publicly known and the disclosing party will want to maintain
confidentiality, as the information may provide it a competitive advantage. The
disclosing party will thus provide confidential information to a receiving party only
on the condition that the information remains confidential, except under specific
and limited circumstances.
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Confidentiality agreements should be in writing, thereby providing important
benefits, one of which is avoiding subsequent disagreements on what was
agreed upon by the parties. Moreover, the written agreement will be required
under various jurisdictions to protect trade secrets and will make enforcement
easier in the event of a dispute.
The question of which party is providing confidential information will determine
some of the negotiating points in the NDA. In most situations between a
developer and publisher, the developer might be providing the most sensitive
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Certain confidential information may also be protected by trade secrets. For more information on
trade secret protection, see Chapter 2.
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Developers and publishers will want to enter into confidentiality agreements with employees to
ensure that any information provided to the latter, including trade secrets, remains confidential.
Indeed, failure to take reasonable proactive steps such as requiring employees to sign confidentiality
agreements could result in the loss of a trade secret. Typically, developers and publishers will ask
employees to sign separate confidentiality agreements as part of their employment relationship.
Alternatively, employers can include clauses covering confidentiality in an employment agreement.
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A party that is merely receiving information may decide not to enter into a confidentiality
agreement out of concern that the agreement makes them more liable to litigation. In this event, the
disclosing party must determine if it wants to proceed with discussions, as there may indeed be
claims that can be made if the receiving party uses confidential information without approval and
without a signed agreement. The best practice is for the disclosing party not to disclose the
information until the initially sought after agreement is signed.
Mastering The Game
354
information, such as a game design but the publisher could also be providing
confidential information that it does not want to release publicly, such as
information about its business and future sales and marketing plans.
To determine if there is an interest to publishing the developer’s game, the
publisher will need to obtain information about the game, including the type of
game the developer is hoping to discuss with the publisher, the game’s story, the
gameplay, the projected release schedule, monetization models and the budget.
At the same time, the developer will want to know certain information about the
publisher, to feel reassured about the latter’s financial strength and distribution
capabilities. It will also want to learn about previous publishing commitments that
might be relevant. For example, a developer might want to know certain financial
information about a publisher that may not be publicly disclosed, especially if it
is not publicly traded. If the parties negotiate a deal by which the publisher
finances the game, the developer will need reassurance that the publisher has
the financial resources to finance, market, exploit and sell the game. In a
licensing situation, the licensor (i.e., the owner of the intellectual property that is
the subject of a license) will generally want to obtain information about the
licensee (i.e., the party interested in licensing a property for a product, such as a
video game), to confirm that the licensee has the resources and capability to
distribute a product using the license.
Another example of when confidentiality agreements will need to be signed is
with the introduction of new platforms and devices between the console
manufacturer and a publisher creating a game. Because of the time it may take
to develop a game, a publisher will want to start development as soon as possible
so that the game potentially could be released at the same time or shortly after
the console’s street date. In this case, the console manufacturer or mobile device
manufacturer will need to share design and hardware specifications and other
information about the device prior to its public release, to allow the publisher to
develop the game. At the same time, the publisher will need to share non-public
information with the platform owner about the game, including its design and
projected release. Typically, whenever a platform manufacturer is releasing
information about a new platform or device, the NDA will be very favorable to the
platform manufacturer, as it is crucial that none of the features be disclosed prior
to any public announcement about the device.
NDAs are usually temporary if the parties form a relationship, as they are in time
replaced by confidentiality clauses in a subsequent agreement between the
parties. Sometimes, the NDA will be referenced and incorporated into the
agreement. At the same time, companies will also want to take other measures
to protect their confidential information, including trade secrets, as previously
discussed in Chapter 2.
355 Mastering The Game
11.2 – The Major Issues In A Confidentiality
Agreement
The major issues covered in a confidentiality agreement will include the names
of the parties, what the parties consider confidential for the purposes of the
agreement, what the confidential information can be used for, what information
will not be considered confidential, the level of care in treating confidential
information, the circumstances in which confidential information might need to
be disclosed, what happens in the event that information is disclosed in breach
of the agreement, and an acknowledgment that discussions between the parties
do not mean that the parties have entered into any deal other than the
confidentiality agreement. Agreements will specifically state that the
confidentiality agreement is neither exclusive nor a license.
Another issue involving the confidentiality agreement between a publisher and a
developer – or between a console manufacturer and a developer – will be the
publisher’s request that the developer acknowledge that the publisher receives
other submissions for games and may also be working on projects that may
seem similar to the game being revealed to the publisher.
Indeed, the publishers may be working on multiple games and communicating
with third parties about potential games, so it will want to ensure that the
developer providing confidential information will not sue for misappropriation of
the developer’s concept in the event that the two sides decide not to form a
relationship and a game is later released that the developer considers to
resemble the game it tried to pitch to that publisher. The agreement’s language
(i.e., the legal terms) therefore may stipulate that the developer acknowledges
that the publisher receives numerous submissions of similar concepts from other
parties and may also be working on a similar project and that no consideration
will be owed in the event the publisher releases a similar game.
This is a difficult area because the developer needs to determine if there are
parties interested in distributing and/or financing its game and yet will also have
to acknowledge that the publisher may release a game with similar aspects. A
publisher could be currently working on a game with a similar concept, or it could
receive a proposal for a similar game later. Consequently, a developer that
accepts this language in the agreement – and in most situations they might have
to – should try to negotiate additional language stating that the publisher must
show, if need be, that they had independently created materials or designs for a
similar game prior to having entered into the confidential relationship with the
developer.
Another potential controversial issue may be a request by the receiving party that
the disclosing party acknowledge that some persons receiving confidential
information may retain that information because it stays in their memory (i.e., the
residue of a negotiation).
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While the receiving party will agree not to use the information prohibited by an NDA, there is
always the possibility that a person may use that residual information in another unrelated project.
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356
11.3 – The Major Terms In The Confidentiality
Agreement
11.3.1 – Preamble
The first section will typically include a preamble that introduces the parties to
the agreement. It should include the address of the companies’ principal place
of business, the date on which both parties sign the agreement, and the date the
agreement comes into effect (the “effective date”).
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Generally, this section will
be filled in by the second party signing the agreement. In addition, it is advisable
to include, if applicable, the country or state where the company was
incorporated or where the business entity was formed. This will be helpful in the
event that there is a dispute with the agreement and the jurisdiction of applicable
laws must be determined.
In addition to the preamble, some parties will also include information about the
agreement and the reasons why the parties are entering into the relationship.
For example, language may be included stating that the parties are interested in
possibly entering into a business relationship and therefore have decided to
enter into a confidentiality agreement whereby either one or both parties will
exchange confidential information.
The preamble will also probably include language stating what each company
does. In a publisher-developer relationship, the agreement might state that the
publisher is in the business of publishing, distributing, marketing and selling
video games and that the developer has developed or is developing a game.
The preamble can be helpful in determining the intent of the parties in discussing
a confidentiality agreement. However, US courts have been split on whether the
information in a preamble that discusses the reasons for a party entering into an
agreement has any effect on establishing the intent of the parties. At the very
least, each party should ensure that the language in the preamble is accurate, to
avoid any potential problems later in the event of a dispute between the parties.
11.3.2 – Confidential Content, Exclusions And Permitted Uses Of
Confidential Information
The content deemed confidential by the parties will be the subject of another
section that the parties will need to negotiate, the terms of which will vary
depending on the type of deal signed between them. Confidential information will
most often include information provided by the disclosing party, whether
disclosed orally or in writing, that is labeled as confidential or that the receiving
party should know is confidential under the circumstances. In developer-
publisher NDAs, the terms of the confidentiality agreement and discussions
Often, it is difficult to determine what information may fall within this residual exception. For
developers, this language is problematic and should be avoided; however, depending on the
bargaining power of the parties, it may be difficult to remove from an NDA.
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The effective date can be prior to the day the agreement was signed, as the parties will want to
consider treating any information that may have been exchanged prior to the signing of an NDA as
confidential.
357 Mastering The Game
between the parties, as well as the developer’s game designs, story, budget,
programming, and technical information, will be considered confidential.
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A publisher will want to include other aspects as part of the confidential
information, such as potential marketing and sales information, business
forecasts, any unannounced release schedule, and company business
information that the developer may want to know to ensure the publisher’s
financial viability and business plans. In addition, in most situations, any
information created by the receiving party based on the confidential information
provided by the disclosing party might also be deemed confidential and owned
by the disclosing party. For example, if a publisher suggests game design
features based on the confidential information provided by the developer, this
information would then be owned by the developer.
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Certain information that may be deemed confidential can still be disclosed if it
falls within one of the exceptions agreed on by the parties. These exceptions
ordinarily include:
• information that can be shown by documentation to have been
independently developed prior to the parties having entered into
discussion;
• confidential information that had already been disclosed publicly through
no fault of the receiving party;
• confidential information that was disclosed by a third party to the
receiving party with no obligation to maintain the confidentiality of the
disclosed information; and
• confidential information that was disclosed pursuant to a court order or
legally required to be disclosed by a public company.
Although each party may want to stipulate information as confidential in the
agreement and therefore kept from public disclosure, the parties may agree that
in certain circumstances confidential information may be released. Those
circumstances might include a requirement by federal, state or local law; a court
order; legal proceedings; or a securities filing (e.g., in accordance with United
States Securities and Exchange Commission regulations). However, the party
obliged to disclose the information must provide reasonable advance notice to
the disclosing party so that the latter has the opportunity to seek a court order to
prevent or limit the disclosure of that confidential information.
The NDA will also discuss what the receiving parties will be permitted to do with
the confidential information. The language will typically state that the information
can be used only to help determine whether the parties desire to pursue a
business relationship. Consequently, the NDA will impose limitations on who can
receive and review confidential information, usually allowing disclosure on a
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If the developer provides software to another party, language may appear in the agreement
stating that the receiving party will not reverse engineer, decompile or disassemble any software.
1005
However, the agreement may also contain language stating that information in any feedback
provided by the receiving party shall not become part of the original disclosing party’s confidential
information. On the other hand, it may also state that both parties are free to use that information
without any restrictions and that it is provided as a perpetual, worldwide, royalty-free “as-is” license.
This language protects the receiving party from any claims for using the feedback information.
Mastering The Game
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“need-to-know” basis to people who will be required to abide by the confidentiality
agreement. These are the persons involved in the decision-making on whether
to establish a business relationship. Confidentiality agreements will also typically
allow advisors, contractors, outside counsel and financial personnel to have
access to the confidential information, subject to their signing a confidentiality
agreement or other legal document binding them to confidentiality.
11.3.3 – Level of Care And Length Of Term
As part of the agreement, the parties will commit to a certain minimum level of
care in handling confidential information. In doing so, the disclosing party will be
guaranteed that the level of care will at least be equivalent to the level of care
the receiving party would use to protect its own confidential information. If the
parties agree to a level of care standard determined either by the receiving or
disclosing party or by an industry standard, then each party must make sure that
it knows exactly what that level of care will include. Depending on the significance
of the confidential information, the disclosing party may also request that certain
measures be taken to protect the confidential information, including:
1. limiting access to it by employees of the receiving party, so that only
those involved in decisions based on a potential deal would be entitled
to access the information;
2. requiring employees or any approved third parties who have access to
the confidential information to sign a separate confidentiality agreement,
although in many situations employees could already be covered under
their employer-employee agreement, which should include a
confidentiality provision covering these situations; and
3. the information must be stored in a secure place with limited accessibility
(e.g., locked cabinets or software files with restricted access).
The parties will also need to agree on the amount of time the information must
remain confidential.
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This varies widely and usually depends on the type of
information being exchanged and the potential deal between the parties. In some
instances, the period may be relatively short, since the information may become
obsolete in a few months. But other agreements may impose a requirement of a
few years or even perpetual confidentiality. However, the period should be
reasonable and in relation to the type of information exchanged. For example,
marketing information might have a term of one to three years, while technology
might be much longer.
Upon expiration or termination of an NDA, the parties will establish the
procedures by which the confidential information is either returned or destroyed,
at the disclosing party’s option. In the event that there are software files or many
documents or other material, it may be easier and more cost-effective for the
1006
Confidentiality agreements typically have terms shorter than the obligation to maintain the
confidentiality of information. For example, a confidentiality agreement may have a term of only six
months, but the obligation to maintain the confidentiality of information may last longer and therefore
survive the expiration or termination of the agreement. In addition, the parties generally have the right
to terminate a confidentiality agreement at any time without cause, subject to the survival clauses.
359 Mastering The Game
receiving party to either delete or destroy the material and provide confirmation
of destruction, usually through a certificate of destruction signed by an officer of
the receiving party who verifies the destruction. However, in some situations it
might be impractical to acknowledge that all the confidential information has
been destroyed, as files can be stored in a backup network system. The parties
thus need to negotiate additional language to deal with this scenario.
11.3.4 – Breach And Injunctive Relief
What happens when a party breaches the agreement and discloses confidential
information? Mitigating the damage can be challenging even with a proper
agreement: not only can the damage be difficult to prove, but there are also
severe obstacles to recapturing information once it is publicly disclosed.
Nevertheless, the benefits of having a confidentiality agreement that covers
limiting exposure of information and monetary damage, etc., far outweigh the
obstacles.
If an unauthorized disclosure of confidential information occurs and does not fall
under one of the exceptions to the agreement, the non-breaching party will
generally first seek to put a halt to the distribution of that confidential information.
In some situations, the disclosing party might need to seek a court order to do
so. For example, the disclosing party may seek injunctive relief, whereby the
court might issue an order to prevent the further distribution of any confidential
information. To obtain injunctive relief in the United States, the moving party (i.e.,
the claimant) must show at least that the damage is irreparable and that
monetary damage cannot be determined. However, different jurisdictions have
different requirements for obtaining injunctive relief, and that which is required in
one country may thus be different in another country.
Since the value of confidential information is based on its secrecy, it may be
difficult to ascertain its value if it is disclosed (especially if it has future value) and
thereby qualifies for equitable relief. For this reason, the parties will generally
agree that a party disclosing confidential information in violation of the agreement
acknowledges that the above requirements will have been met without any need
for a court to decide the issue, thereby making it easier to obtain injunctive relief.
They will also agree that the non-breaching party is not required to post a bond
or guarantee. In addition to having the right to seek injunctive relief under the
terms of the agreement, the non-breaching party will also have the right to pursue
any other remedy that may be available by law or otherwise available to them.
11.3.5 – No Commitment To A License Agreement
Confidentiality agreements will often include language stipulating that the
execution of an NDA does not mean that the parties will subsequently enter into
any other type of agreement, whether it be a distribution, licensing or publishing
agreement, and that the parties have no expectations that they will enter into a
subsequent agreement. In addition, while either one or both parties will own or
control the confidential information being shared with the receiving party, the
disclosing party will note that it is making no representations or warranties as to
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the accuracy of the information and that it is being provided “as is.” This term is
used avoid any later claims by the receiving party that it relied on the
representations and warranties made by the disclosing party to move forward
with signing the confidentiality agreement.
11.3.6 – Additional Terms
The confidentiality agreement will also include language generally referred to as
“boilerplate” language and will include some of the terms discussed in
Chapter 12.
1007
While the term “boilerplate” is used to describe provisions that
are typically standard in agreements, it is very important that the developer
review the provisions and make sure they are acceptable. In most instances,
very few revisions may be needed, except when dealing with issues about what
law will be applied in the event of a dispute (e.g., the law of a particular country
or the law of a particular state); where disputes would be resolved (e.g., what
country or state or county) and how disputes will be resolved (e.g., arbitration or
court proceedings).
For a developer, these are important issues because the place where a matter
is litigated may greatly affect the costs of the litigation and enforceability. Costs
will have a big impact on whether a party decides to even proceed with litigation.
Big companies undoubtedly realize that the burden of cost may be greater for
small companies, including developers, and thereby are aware that developers
may be reluctant to file a claim. One significant clause that must be added by the
developer is that, in the event of a dispute, the prevailing side will be entitled to
compensation for any legal fees and other costs incurred as a result of the claim.
Usually, such compensation is limited to “reasonable” costs and expenses but
provides for court costs and expert witness fees.
11.4 – Deal Memos: Purpose, Benefits, And Potential
Problems
“It took longer to make one of Mary Pickford’s contracts than it
did one of Mary’s films.”
Sam Goldwyn, one of the big studio bosses in the 1930s and 1940s said this
about negotiating a deal with the famous actress Mary Pickford, who later
became one of the founders of United Artists.
1008
Although Sam Goldwyn’s quote dealt with negotiating a deal involving talent in
the film industry, it can be just as true in other sectors of the entertainment
industry, including video games, music and licensing. Because of the urgency in
1007
Even though it has nothing to do with confidentiality, some agreements may also include a non-
solicitation clause whereby one or both parties agree not to solicit or hire employees from the other
party for a given period of time. If the parties accept this language, they need to be careful that the
period not necessarily be the same period applied to maintaining the confidentiality of information,
especially if it is long. The non-solicitation provision may be unenforceable in some jurisdictions if the
language is not specific enough.
1008
“Mary Pickford”, yourdictionary.com
361 Mastering The Game
starting game development, launching distribution, acquiring a license for a
game or locking in the services of talent, there are many situations in which the
parties may not necessarily have enough time to negotiate a long-form
agreement that would include the complete agreement and all the terms and
conditions between the parties. This could be particularly true if a developer is
trying to release a game to coincide with a film’s release, an event (e.g., the start
of a sports season) or the Christmas holiday season. As a result, the parties
might negotiate what is typically referred to as a deal memo, term sheet or memo
of understanding.
The deal memo will usually be a binding agreement between the parties,
although enforceability may vary according to the jurisdiction. It generally covers
the major business terms of a deal, thereby allowing the parties to proceed with
the understanding that a long-form agreement will eventually be signed between
the parties. However, as developer-publisher deals become more complex, deal
memos might slowly phase out.
For example, a publisher might be interested in releasing a developer’s game in
November or December, which have traditionally been the biggest sales months
for video games.
1009
With development time taking an average of two to three
years for a major budgeted console and for PC games (that for annual sports
games take less than a year), a publisher will most likely want to sign a deal
quickly to confirm the major terms in a development deal with a developer if it
hopes to release the game during the holiday season. Thus, by entering into a
binding deal memo, development can begin as soon as it is signed.
1010
This can
also be advantageous for a developer, as a deal with a publisher might provide
it with the necessary funds to begin development. For publisher-developer deal
memos involving development whereby the publisher finances development, the
agreement might include:
1. a description of the game to be developed;
2. a milestone schedule, which would include the developer’s delivery
obligations and deliverables, the amount of money paid to the developer,
and when payments would be made;
3. rights granted, including rights involving potential sequels;
4. ownership issues dealing with the game, development tools, and source
code;
5. royalty amounts and how they are calculated;
6. when statements will be issued;
7. representations and warranties at least covering the rights in the game;
and
8. specific legal issues such as (a) where a dispute would be resolved, (b)
what law would be applied in the event of a dispute, and (c) confirmation
1009
“Video Game Sales Are Extremely Seasonal”, statista.com, November 25, 2020.
1010
In some situations in which a long-form agreement is pending, a publisher that has signed a term
sheet will supply the developer with monthly payments.
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that the deal memo will remain in effect until a long-form agreement is
entered into between the parties subject to a time frame.
As deal memos will typically be drafted by the publisher, the initial terms will
usually tend to be more favorable to it. However, it is important that the developer
negotiate certain terms in addition to the ones listed above. Indeed, as these
terms might be binding, depending on whether the parties agree to a binding
term sheet, any additional business commitments made by the publisher should
be listed in the deal memo. This may include any type of marketing expenditure
by the publisher or obligation to obtain rights for the game (e.g., trademarks,
music).
While deal memos serve many useful purposes, they also present some
significant potential risks. Since deal memos usually cover only the major
business points, there will be some terms that may not be covered, and
ambiguities in the deal memo may result in problems later between the parties.
For example, during development, it is possible that issues may arise that were
not addressed in the deal memo, and, in the event the long-form agreement has
not been signed, issues may go unsolved, possibly resulting in disputes between
the parties.
One of the main goals behind a deal memo is to formalize an agreement quickly.
For this reason, they tend to have few pages and therefore do not address every
issue. Nor will they include the detail that is usually included in a long-form
agreement. Therefore, if a deal memo is binding, it is essential to make sure that
all of the major business points, responsibilities and obligations are addressed,
even if just briefly, so that the parties are not surprised by an important term in a
long-form agreement.
Because long-form agreements may take time to negotiate, draft and execute,
deal memos are now incorporating more terms, including representations and
warranties as well as accounting provisions to name a few. However, as more
terms become part of the negotiations, there is a greater risk that negotiations
will take longer, defeating the purpose of a deal memo. That which eventually
gets incorporated into a deal memo may depend on the relationship between the
parties as well as the money involved in the deal. If it is a new business
relationship and little is known about the other party, then most likely additional
terms will be added to the deal memo to provide further protections and
assurances for the parties. If the parties have done business in the past and have
already established a relationship, then fewer provisions may be needed in the
deal memo because of the previous trust built up between the parties. Whatever
the case, developers should be cautious when relying only on a deal memo, and
they need to ensure that their rights are protected and that obligations are clearly
spelled out to avoid unnecessary costs and risks.
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363
CHAPTER 12
COMMON CLAUSES IN AGREEMENTS
All agreements contain common clauses, usually referred to as “boilerplate
provisions.” These will typically appear at the end of an agreement, under the
“miscellaneous” section. Many lawyers recycle boilerplate language from
previous agreements, but, even though lawyers will probably be the only people
reading this section, it contains important provisions that will have an impact on
the signatories in the event of a problem with the agreement. For this reason, the
signatories should carefully read and understand these clauses. Their
importance has become all the more apparent since the coronavirus crisis, which
has led to problems because of the “force majeure” clause (See Section 12.8).
Agreements will vary in scope according to how the clauses are defined, and
some may not include all the clauses. Typically, the drafter of the agreement will
favor their client, but, with the exception of assignment rights, the terms
described in the sections below should be reciprocal. Furthermore, different
countries may treat some of these provisions differently. For example, a court in
a country may allow for litigation to proceed in that country despite the jurisdiction
stipulated by the parties in the original agreement.
12.1 – Jurisdictional Issues
In this section, the parties will agree on how disputes will be settled, what law will
be applied in the event of a dispute and where the dispute will be resolved. This
is a sometimes-overlooked section because it typically appears at the end of an
agreement, but it is also critical as it will have huge impact on not only deciding
disputes but also on costs, which can include hiring local counsel, travel and time
away from the workplace.
Because of the high costs of litigation, it is important to determine which party
will pay for legal fees, including attorney fees, court costs and expenses for
witnesses. Will each party pay their own costs regardless of the outcome of a
dispute, or will the party that loses the dispute pay for agreed-upon costs of the
other party, which might be actual or reasonable costs? The answers may not
be so clear-cut, as a litigation case could include numerous disputes. In this
event, what happens if one side is successful on some disputed matters but not
others, and what will be considered reasonable compensation?
The parties first must agree on whether court proceedings or arbitration
1011
will
be the forum for resolving a possible dispute. Each has its advantages and
1011
In binding arbitration, a third party resolves the disputes. Its decisions are usually binding on the
parties, and most arbitration judgments have very limited appeal rights. (See 9 U.S.C. Section 10.)
However, certain matters cannot be decided by arbitration. Cannady, Cynthia, Technology Licensing
and Development Agreements, Oxford University Press, 2013, pp.194-197. Whether arbitration is
binding or not, the parties must decide on procedures for the arbitration as well as the process for
selecting one or more arbitrators. Typically, these are former judges or lawyers with experience in
the particular area in dispute.
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disadvantages. The main difference is widely perceived to be that arbitration can
result in a faster resolution; lead to a settlement that can remain confidential;
and, depending on the jurisdiction, incur lower costs.
1012
However, this will
depend on the complexities of the dispute.
1013
The fact that arbitration may cost
less is a reason why some parties may not want to arbitrate, with the reasoning
that the higher costs of litigation will serve as a deterrent against lawsuits.
In addition to deciding how a dispute will be resolved, the parties will also need
to agree on where it will be resolved and what law will apply. In the United States,
state law and interpretation of the law will vary from state to state. Laws will also
vary according to country. For example, depending on where the parties are
located and where they conduct business, the parties may agree to use the law
of one of the US states where they are located, but in many situations, the parties
may operate out of different states or countries, thereby creating a problem. In
most situations, the party enjoying greater leverage will typically be able to
dictate the law that will apply, as well as the location where any dispute will be
resolved. This is significant because of the costs that will be incurred by the other
party for travel and/or for hiring local counsel to advise it on the contract or
provide help in any litigation.
If the parties have equal bargaining positions and opposing choices on where a
case would be heard, there are some possible options that the parties may agree
to on this issue. However, there are drawbacks with any of those options. One
option, though not ideal, is that the parties select a neutral site, provided there is
some form of business conducted in that jurisdiction. For example, in the United
States, a publisher in California and a developer in Michigan may elect to hear
any litigation in New York. Because the entertainment industry has played a
dominant role in both California and New York, there is an advantage to having
cases heard in those jurisdictions, which are more familiar with entertainment-
related issues. A similar scenario may exist for two companies located in different
countries, which is becoming more and more common as developers can now
be found worldwide. For example, a game developer in continental Europe and
a publisher in the United States may agree to settle their dispute in England. The
fact that both companies would need to spend a lot of money to litigate a dispute
may, moreover, serve as a deterrent against proceeding with litigation.
Another option for the parties would be to agree that the claimant party would
need to bring the action in the jurisdiction where the other party is located. For
example, a company located in New York suing a California publisher would
need to bring the action in California. However, one problem is that a court from
one jurisdiction may apply law from another jurisdiction, which could lead to
uncertainty and increased costs. In such cases, arbitration and UNCITRAC might
be a good alternative.
1014
1012
One reason why arbitration may be a less costly alternative is that the parties agree to limit
discovery and interrogatories, thereby limiting legal fees, which will often be the party’s biggest
expense. Also, there are no juries in arbitration proceedings.
1013
The parties can decide that an arbitration is confidential, subject to certain terms and conditions.
1014
Latham and Watkins, Guide to International Arbitration,, 2017.
365 Mastering The Game
12.2 – Waiver, No Joint Ventures And Severability
Each of these sections of the agreement relate to issues of contractual formation,
construction and enforcement, which are local and not harmonized. Some are
dealt with by local laws but can be deviated from by contract.
Regarding Waiver, a party’s decision not to enforce the other party’s strict
performance of any provision of the agreement does not constitute a waiver of
its rights to later enforce such a provision or any other provision in the agreement.
For example, a publisher does not lose its right to pursue an action against the
developer at a later date if it believes a problem can be resolved without litigation.
The “No joint ventures” section confirms that an agreement does not create a
joint venture, a partnership or any other type of business relationship that would
allow one party to bind or commit the other party to any deals.
The “Severability” section comes into play when a particular provision of the
agreement is held to be unenforceable or invalid under the law, provided the
provision is not material that would change the intent of the parties. According to
severability, the parties agree that the agreement will continue in full force and
effect as if that provision was not part of the agreement. To avoid doubt, it is a
good idea to list those sections that might be so significant that, if one is removed,
the affected party would not have entered into the agreement, and then to
negotiate and agree on replacement language.
12.3 – Assignment
Assignment provides the right for a signatory to the agreement to either transfer
all its rights and obligations or parts of the agreement to a party not a signatory
to the agreement. This is a significant provision because a party that enters into
a deal may want to deal only with the other party that signed the agreement. For
instance, when a party decides whether to enter into a business relationship, it
will typically consider factors such as the quality of the work of the other party
and its reputation. As a result, the first party may want to restrict the rights of or
impose additional obligations on the other party with regard to assignments. For
example, an agreement can provide for the following in the event that one party
wants to assign its rights: (i) assignment shall be subject to the prior written
approval of the non-assigning party;
1015
(ii) a party assigning its rights must
guarantee that the assignee assumes all responsibilities under the terms of the
agreement; and (iii) if the assignee fails to perform, then the party originally
assigning the rights must be held accountable for the failures of the assignee.
Whether a party can assign or not will also depend on the bargaining position of
the companies and the type of agreement. In a publisher-developer agreement,
the developer will typically not be allowed to assign, as the publisher has
specifically entered into the agreement because of the developer’s talents in
creating a game. On the other hand, a publisher may be allowed to assign its
1015
Usually, this limitation may include language stipulating that approval will not be unreasonably
withheld. However, this can cause problems, as there could be a dispute on what is deemed
reasonable. The parties may therefore elect to list parties that an agreement may not be assigned to
(i.e., competitors of one of the signatories to the agreement).
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rights under the possible restrictions listed above or in the context of mergers
and acquisitions.
In licensing agreements, the licensor will generally have unlimited right to assign
its rights, whereas the licensee’s rights will permit assignment only when subject
to licensor approval. In addition, in certain circumstances, the licensor may
require additional payment or other obligations to permit the assignment, based
on the assumption that the licensed property may bring additional value to the
parties engaged in the assignment and that the licensor should consequently be
further compensated as a result of the assignment.
One exception to the assignment usually agreed upon by the parties is that a
party will be allowed to assign its rights to an affiliate. An affiliate will usually be
defined as an entity that directly or indirectly controls, is controlled by, or is under
common control with the party seeking to assign its rights.
It is important that the agreement contain language stipulating that the parties
have the right to assign, as some jurisdictions may prohibit an assignment if it is
not specified in the agreement.
12.4 – Survival
This section notifies the signatories to the agreement that certain sections in the
agreement will remain in effect even after its expiration or termination. Generally,
this obligation will include some of the representations and warranties,
indemnification, possible payment if money is owed after the term, issuing of
statements, sell-off period for retail inventory, audit rights, issues dealing with
lawsuits, confidentiality, and the right for the distributor to continue honoring
previous agreements with consumers such as subscription services. The parties
may want to add a time limit (which can vary) on how long clauses would survive.
For example, a representation and warranty may continue for one year from the
expiration of the agreement.
12.5 – Notices
This provision will detail the procedures and the personnel who will need to be
notified in the event a notice needs to be sent to the other party as required under
the terms of the agreement. For example, a notice will have to be sent by a
publisher to a developer in the event of a breach of the agreement. The language
in the section will specify the circumstances under which notice must be
provided. These will typically include a breach, a change of address, and an
assignment of rights. Otherwise, notices involving day-to-day activities such as
approvals can be provided by e-mail. In addition, the agreement will specify the
person or parties that must receive notice for it to be effective. Generally, notice
will be provided to the signatory of the agreement, with a copy to the legal
department of the company, if applicable. It is sometimes better to have more
than one person listed to ensure that the notice reaches the right people. It is
also important to remember that people leave companies, making it important to
ensure that the other party receives its notice.
367 Mastering The Game
The notice provision will also specify where notice needs to be sent (usually the
address listed in the preamble of the agreement) and how notice will be sent.
Notice should be sent in a way that enables verification of receipt of the notice
and of the date the notice was sent. Most companies will therefore agree that
overnight courier, hand delivery or “return receipt requested” registered mail will
suffice as proof that notice has either been delivered or received. This is
important because the agreement will state when the notice becomes effective,
and acknowledgment that the notice has been sent is required if a party needs
to respond within a set period. Finally, an agreement may state when the notice
shall be deemed effective, and this date will usually be a few days from the
sending of the notice or the date on which notice is received. This becomes
important when a party needs to cure a potential breach within a set period.
12.6 – Entire Agreement And Revisions
This section notes that the expressed language in the agreement is what will
dictate the relationship between the parties and that any previous or later
discussions on the deal will have no relevance to the agreement. Consequently,
any revisions to the agreement must be in writing and signed by either both
parties or the party affected by the revision. This is important because making a
promise to the other party entails taking on certain obligations, and if it is not
included in the agreement, it will not be part of the deal.
12.7 – Reserved Rights
In agreements in which property is licensed or is granted to a licensee, the owner
of the intellectual property should add language to the agreement that states that
all rights not expressly granted to the licensee by the licensor are reserved by
the licensor. Indeed, since the licensee will want to obtain the broadest grant
possible, the licensor will want to limit the rights granted because additional rights
would typically result in additional consideration and certain rights may have
been granted to another party. Furthermore, as new forms of distribution and
new platforms emerge, the licensor may not want to give rights away without
understanding the potential business models for these emerging platforms and
distribution channels.
12.8 – Force Majeure
This is a clause that protects one or more parties from a breach of an agreement
caused by an occurrence that is beyond the breaching party’s control and may
force the suspension of the agreement. For example, a force majeure event may
occur and materially affect a party’s ability to either perform its obligations or
resolve a breach, and as a result the agreement will be suspended for an agreed
length of time. In the United States, this clause is contractual and is not mandated
by law. Therefore, inclusion of a force majeure clause in an agreement and the
content included under force majeure are subject to negotiations between the
parties.
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Parties should be careful when reviewing what is considered as a force majeure
event, as the draft agreement might include a number of events that might not
justifiably be an act beyond the control of the party claiming it. At the same time,
a force majeure clause may not include all the events that a party should consider
included under the clause. The recent coronavirus pandemic is an example in
which parties may not have been covered under the force majeure language of
their agreement. In many jurisdictions in the United States, courts interpret the
force majeure language narrowly. Courts may thus be hesitant to consider an
event as one of force majeure if it is not included in the language of the clause,
even if this latter contains “catch-all” language such as “including but not limited
to.”
Acts that might fall under a force majeure clause include acts of God, natural
disasters such as earthquakes and floods, war, epidemics/pandemics, disease,
contagion, and acts of terrorism and explosions, provided the act is not caused
by the party claiming force majeure. Government acts including enactment of
new laws may also be included. In addition, some agreements may also include
labor disputes, riots, cyber-attacks on computer systems, shortage of materials
and any other cause reasonably beyond the control of the parties.
The coronavirus pandemic is a recent example of parties claiming force majeure,
as there have been unprecedented disruptions to the global economy. The
pandemic was very quick to hit all aspects of the video game industry worldwide,
leading to delays in game development, shutdown of businesses and supply
lines causing delays in hardware and software distribution, labor shortages,
cancellations of major industry events, and the closing of retail outlets and
corporate headquarters to name just a few effects. As a result, some companies
claimed they were unable to perform many of their contractual obligations and
sought relief based on the force majeure clause in their agreement.
If a force majeure event occurs, the contract will typically be suspended for a
length of time equivalent to the duration of the event. During this time, the
affected party will usually be required to at least employ good faith efforts to
either perform its obligations, including seeking alternative means to perform
them, or to cure a possible breach. However, the suspension cannot continue
indefinitely, and a limitation therefore exists, of usually 30 to 90 days. But the
time frame is subject to negotiation, and it is possible that even a short delay
caused by a force majeure event may in some instances make the agreement
worthless. If the affected party is unable to perform its obligations or cure its
breach prior to expiration of the suspension period, then the other party may
have the right to terminate the agreement.
It is important that an agreement list the following: (i) what qualifies as a force
majeure event; (ii) how long it can continue until one of the agreed-upon
remedies goes into effect; (iii) the remedy if the agreement cannot be cured,
which may include termination, lowering of fees, or the refund of money; and (iv)
how it affects contractual obligations such as payments, especially if services
have been performed or revenue received from past actions but not yet paid.
The challenge of the force majeure clause in the United States is that, while force
majeure events by nature might be hard to predict, the drafter of an agreement
should list as specifically as possible what they want to include under the clause.
Courts appear to be construing this clause narrowly and are reluctant to grant an
event not listed in the force majeure clause as qualifying as a force majeure
369 Mastering The Game
event. Furthermore, an event that may make an obligation difficult or impractical
(including for financial reasons) to fulfill does not mean that it falls under a force
majeure event.
Finally, when a party claims force majeure, it is important that they: (i) review the
agreement and facts carefully to determine whether a force majeure event may
have occurred; (ii) provide proper notice as per the agreement; and (iii) consider
alternative ways in which to resolve the problem prior to claiming force majeure.
Otherwise, courts, such as those in the United States, will probably take an
unfavorable view of an argument that an agreement could not be performed
because of an alleged force majeure event.
370 Mastering The Game
FURTHER READING
Law And Business
• Boyd, Greg, Pyne, Brian and Kane, Sean. (2019). Video Game Law:
Everything You Need to Know About Legal and Business Issues in the
Game Industry. CRC Press.
• Dannenberg, Ross. (ed.). (2016). Video Game Development (2 ed.).
American Bar Association.
• Festinger, Jon, Metcalfe, Chris and Ripley, Roch. (2012). Video Game
Law (2 ed.). Lexis Nexis.
• Gard, Ron and Gard, Elizabeth Townsend. (2020). Video Games and
the Law. Routledge.
• Hoppe, David. (2020). Esports in Court, Crimes in VR, and the 51%
Attack. Vision 2020 Press.
• Interactive Entertainment Law Review. Edward Elgar.
• Jacobson, Justin. (2021). The Essential Guide to the Business of Law
of Sports & Professional Video Gaming. CRC Press.
• Lipson, Ashley and Brian, Robert. (2016). Videogame Law: Cases,
Statutes, Forms, Problems & Materials. Carolina Academic Press.
• Nabel, Dan and Chang, Bill. (2018). Video Game Law In A Nutshell.
West Academic.
• Scelsi, Chrissie and Dannenberg, Ross. (eds.) (2018). Computer
Games and Immersive Entertainment: Next Frontiers in Intellectual
Property Law (2 ed.). American Bar Association.
• van Dreunen, Joost. (2020). One Up: Creativity, Competition, and the
Global Business of Video Games. Columbia Business School Publish-
ing.
About The Industry
• Amos, Evan. (2019). The Game Console: A Photographic History from
Atari to Xbox. No Starch Press.
• Daglow, Don. (2018). Indie Games: From Dream to Delivery. Sausal-
ito Media LLC.
• Demaria, Rusel and Wilson, Johnny. (2002). High Score! The Illus-
trated History of Electronic Games. McGraw Hill-Osborne.
• Donovan, Tristan. (2010). Replay: The History of Video Games. Yel-
low Ant.
• Goldberg, Harold. (2011). All Your Base Are Belong To US: How Fifty
Years of Videogames Conquered Pop Culture. Three Rivers Press.
371 Mastering The Game
• Hansen, Dustin. (2016). Game On: Video Game History From Pong
and Pac-Man to Mario, Minecraft, and More. Feiwel and Friends.
• Harris, Blake (2014). Console Wars: Sega, Nintendo, and the Battle
That Defined a Generation. Dey St.
• Kent, Steven. (2000). The First Quarter: A 25-Year History of Video
Games. BWD Press.
• Kent, Steven. (2001). The Ultimate History of Video Games: From
Pong to Pokemon-The Story Behind the Craze That Touched Our
Lives and Changed the World. Three Rivers Press.
• Kent, Steven. (2021). The Ultimate History of Video Games, Volume
2: Nintendo, Sony, Microsoft, an the Billion-Dollar Battle to Shape
Modern Gaming. Crown.
• Kushner, David. (2012). Jacked: The Outlaw Story of Grand Theft
Auto. Turner.
• Kushner, David. (2004). Masters of Doom: How Two Guys Created an
Empire and Transformed Pop Culture. Random House Trade Paper-
backs.
• Lapetino, Tim and Terpestra, Arjan. (2021). Pac-Man: Birth of an Icon.
Titan Books.
• Markey, Patrick and Ferguson, Christopher. (2017). Moral Combat:
Why the War on Violent Video Games Is Wrong. Ben Bella Books.
• Mellado, Fabien, et al. (2017). PlayStation Anthology. Geeks Line.
• Pettus, Sam. (2013). Service Games: the Rise and Fall of Sega.
• Ryan, Jeff. (2011). Super Mario: How Nintendo Conquered America.
Penguin Group.
• Schreier, Jason. (2017). Blood, Sweat and Pixels: The Triumphant,
Turbulent Stories Behind How Video Games Are Made. Harper Pa-
perbacks.
• Schreier, Jason. (2021). Press Reset: Ruin and Recovery in the
Video Game Industry. Little, Brown & Company.
• Sheff, David. (1999). Game Over Press Start To Continue: The Matur-
ing of Mario. Cyberactive Media Group Inc/Game Pr.
• Stanton, Richard. (2015). A Brief History of Video Games: The Evolu-
tion of a Global Industry. Running Press.
• Takahshi, Dean. (2002). Opening The XBox. Prima Publishing.
• Taylor, T.L. (2012). Raising The Stakes: E-Sports and The Profes-
sionalizations of Computer Gaming. MIT Press.
• Taylor, T.L. (2018) Watch Me Play: Twitch and the Rise of Live Game
Streaming. Princeton University Press.
• Wardyga, Dr. Brian. (2019). The Video Games Textbook. CRC Press.
• Wolf, Mark. (ed.). (2008) The Video Game Explosion: A History From
Pong to PlayStation and Beyond. Greenwood Press.
• Wolf, Mark. (ed.). (2015) Video Games Around The World. MIT Press.
• World Video Game Hall of Fame (2018). A History of Video Games in
64 Objects. Harper Collins.
Mastering The Game
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Web Sites
There are hundreds, but these are some of the author's favorites. Law firms
also have set up sites and there are podcasts and blogs on games.
• Esports Observer - Esports observer.com/https://www.sportsbusi-
nessjournal.com/Esports.aspx
• Eurogamer - https://www.eurogamer.net
• FeedSpot - https://blog.feedspot.com/video_game_news/
• Game Developer f/k/a gamasutra - https://www.gamedeveloper.com
• Gamerheadlines - https://gamerheadlines.com
• Gameindustry.biz - https://www.gamesindustry.biz.com
• Game informer - https://www.gameinformer.com/
• GamesRadar - https://www.gamesradar.com
• IGN - ign.com
• Kotaku - https://kotaku.com
• Operation Sports - https://www.operationsports.com/
• Pocketgamer - https://www.pocketgamer.biz/
• Polygon - https://www.polygon.com
• Protocol - https://www.protocol.com
• Siliconera - https://www.siliconera.com
• The Verge - https://www.theverge.com/gamegamesheadlne.com
• Video Game Law - https://videogamelaw.allard.ubc.ca/au-
thor/jfestinger/
• The Washington Post (Launcher section) - https://www.washing-
tonpost.com/video-games/
373 Mastering The Game
ACKNOWLEDGEMENTS
We would first like to thank the various contributors from across the globe who
provided their generous assistance, time, knowledge and various
contributions during very challenging times
We would also like to thank Dimiter Gantchev of WIPO for his assistance,
dedication and incredible patience that made this publication possible. The
seeds for the 2nd edition were planted a few years ago and it was his
continuing support that resulted in the book becoming a reality.
And finally, we would like to give special thanks to Donna Hill of WIPO for all
of the support and guidance she has provided over the years.
Rob H. Aft is President of Compliance Consulting LLC, a Los Angeles based
media finance and distribution consultancy currently serving banks, law firms,
producers, distributors and directors worldwide. He has taught film business
courses at USC, UCLA Extension and Loyola Marymount University. His
writings include chapters on distribution and “Getting Paid” for the fourth
edition of The Movie Business Book; The Rules of Attraction, an IFTA
publication providing a framework for creating a production-friendly
community; and the WIPO publication, From Script to Screen: The Importance
of Copyright in the Distribution of Films.
Alexandros Alexandrou serves as IP legal counsel at Wargaming Group
Limited and is also a Ph.D. candidate in IP Law at QMUL.
India Atkin is an associate in the interactive entertainment team at Wiggin LLP
based in London. India was raised in China and Japan (and recognizes that
her name is very confusing in this context). Before joining Wiggin, India
worked at boutique gaming law firm Purewal & Partners, games company
Miniclip and cryptocurrency exchange Wirex.
Christopher R. Chase is a partner with Frankfurt Kurnit Klein & Selz. He is a
transactional and intellectual property attorney for the marketing and
entertainment industries, with a focus on music and sports issues.
Saphya Council is an associate in the Interactive Entertainment Department
of Frankfurt Kurnit Klein & Selz in New York.
Michael David Dunford is a Ph.D Candidate at QMUL.
Jason “The Captain” Enos brings 25+ years of interactive entertainment
experience from Sega, Psygnosis, Konami, EA, Bandai Namco, Intellivision
Entertainment and his own consultancy ENO7. Entering the industry at 14,
Jason’s career spans 100+ games, including top 10 and multi-million selling
industry franchises as Metal Gear Solid, Castlevania, Contra, Silent Hill, Ace
Combat, Dragon Ball Z, Naruto, PAC-MAN, Dark Souls and Dance Dance
Revolution - where he was solely responsible for bringing the game to
consoles in the Americas, becoming a massive award-winning franchise.
Jason provides guidance to developers, publishers and content creators
across creative, design, production, business, marketing and publishing.
Emanuele Fava is an Italian qualified lawyer who currently works with Andrea
Rizzi & Partners, specializing in intellectual property law. He holds both an
Mastering The Game
374
Italian and a French law degree, as well as an LL.M. in intellectual property
from the CEIPI of Strasbourg. He has authored several publications in the field
of intellectual property and interactive entertainment.
Salvatore Fasciana is a lecturer in IP and Business at Newcastle University,
and currently is a Ph.D candidate at QMUL.
Lee Jacobson is an entertainment executive with over 30 years in the video
game and entertainment industry. A recognized and accomplished engineer,
producer, licensing and publishing veteran, he has led operations for some of
the most well-known companies in the world including; Virgin Entertainment,
Viacom, Midway Games and Atari, where he served as Senior Vice President
of Publishing and Licensing. Lee co-founded and currently serves as the CEO
of Robot Cache US, Inc.
Frances Jensen is an associate in the Interactive Entertainment Group at
Frankfurt Kurnit Klein & Selz in Los Angeles. She is a business attorney in the
video game industry with a background in music and entertainment issues.
Olaf Kleyn is a South African attorney specializing in intellectual property and
technology law. He is the author of a number of articles about developments
surrounding NFTs and blockchain gaming.
Kostyantyn Lobov co-heads the Interactive Entertainment Group at Harbottle
& Lewis, a London-based law firm which has been advising the games
industry since the days of the 8-bit console. He specializes in matters involving
IP, advertising, regulatory and commercial issues. His gaming brag is that he
led a World of Warcraft progression raiding guild for several years, making
lifelong friends in the process, some of whom are now his clients.
Dr. Michaela MacDonald, Lecturer in Management, School of Electronic
Engineering and Computer Science, Queen Mary University of London.
Michaela teaches and researches on the impact of laws, norms, and
environmental constraints on users’ behavior and interactions in cyberspace.
She is also the editor of the Interactive Entertainment Law Review, and a
consultant at Moorcrofts LLP.
Micaela Mantegna is a lawyer based in Argentina specializing in video games
and artificial intelligence and is the author of “ARTficial: AI and copyright”. She
is the co-founder of Women In Games Argentina, Geekylegal, and a Women
In Games international ambassador. Micaela is currently an affiliate at the
Berkman Klein Center at Harvard, leading the Video Game Policy Working
Group, doing research on XR and the Metaverse.
Niko Partners is a market research firm that covers video games, esports, and
streaming in Asia. The firm provided information covering the regulations
impacting China's video games market from their 2021 China Regulations &
Business Report.
Olivier Oosterbaan, a partner at the Amsterdam law firm Leopold Meijnen
Oosterbaan, works in the creative and services industries. Olivier has been in
this game industry for some 20 years, and advises game developers,
publishers and tech firms both on negotiating commercial contracts and
enforcing IP.
375 Mastering The Game
Greg Pilarowski is the founder of Pillar Legal, P.C., a boutique international
law firm with offices in Shanghai and the San Francisco Bay Area. Pillar Legal
represents many technology, media and entertainment companies, including
some of the largest developers and publishers of online games.
Gary Rosenfeld is a senior business development executive with over 25
years experience negotiating development, publishing, and distribution
agreements as well as developing and executing strategies for development
and distribution of video games, digital entertainment media and intellectual
property. Gary is the founder and President of BD Labs, Inc, a digital media
business development consulting company. Gary is an active member of the
State Bar of California.
Tamara Sakolchik is the Head of Business & Legal at Wargaming. In her
everyday tasks she deals with all sorts of issues surrounding game
development and publishing. On an academic side, Tamara is a guest lecturer
at various universities, including Moscow High School of Economics and
Moscow Digital School. She is also one of the organizers of the Legal
Challenge taking place annually under an umbrella of Games Industry Law
Summit. In her rare free time Tamara disguises herself as King Boo and
competes with her friends for the title of the best MarioKart player.
Nicoletta Serao is an Italian qualified lawyer specializing in IT and IP law. She
currently works with Andrea Rizzi & Partners, a Milan-based boutique law firm
focusing on video games, esports, and digital media. Previously, Nicoletta
worked in-house for an international TV broadcaster and with a leading
international law firm as part of the Digital Business team. She holds an LL.M.
in intellectual Property Law from WIPO and University of Turin and an
Executive Master in Esports Management from LUM School of Management
of Milan.
Juan Dario Veltani, a partner at AVOA-Abogados law firm, is a professor of
Intellectual Property and Technology Law at Austral University and
Universidad Católica Argentina. He is the author of several articles and
contributions, and serves as the Director of the Intellectual Property and
Technology Law Institute of the Buenos Aires Bar Association.
Michael Wang is a student at Santa Clara University School of Law and the
Co-Vice President of the video game law organization, Society for Interactive
Entertainment and Gaming Law (SIEGL), the first law school video game
society. His studies have concentrated on video game law and issues dealing
with game cloning/re-skinning and IP with a focus on the Asian region.
Phil Wildman has worked in the insurance industry since 2007, and has sat
on the management teams of a number of large insurance companies. He
founded GG Insurance Services located in London specializing in insurance
covering the video game industry.
Yahor Yefanau is General Counsel at Vizor Interactive with more than 12
years of legal experience, Yahor has extensive experience in the video game
industry with a particular focus on mobile gaming business.
Rick Zou is an associate in the Interactive Entertainment Department of
Frankfurt Kurnit Klein & Selz in New York.
Mastering The Game
376
THANK YOU
Jas Purewal, Matthew Datum, Newzoo, Andrea Dufaure, Marc Mimler, Florian
Koemple, Carlos Martin, Adriene Laurer, Kiley Cristiano, Katie Watson, Kinga
Palinska, Ron Goldberg, Fay Li, Kelly Reilly, Tam Nguyen, Aldo Fabrizio
Modica, José Roberto Herrera, María José Arancibia Obrador, Luciana
Renouard, Rodolfo Tsunetaka Tamanaha, Marcela Fuscaldo, Andreea Per,
data.ai formerly known as App Annie, Sensor Tower, Ginny Cheung, and Kelly
Flock.
