Lawyers Weekly, December 3, 2007.

All in the (video) game
Serving the legal needs of a strange, expanding industry
By Dick Dahl Staff writer

Business has never been better for lawyers doing video-game law, in any of its varied manifestations.

According to PricewaterhouseCoopers, sales of video games in the U.S. this year will reach $10.4 billion, exceeding the 2006 figures by a whopping 15.5 percent. The firm projects that the game industry will surpass the music industry in sales sometime next year - and could jump ahead of movies soon after.

Lawyers working in the video-game business occupy a variety of roles and perform a variety of tasks, ranging from IP work to First Amendment litigation. But if comments to Lawyers USA by a diverse group of video-game lawyers are any indication, they apparently hold something in common: a fascination with the industry and the creative people working within it.

Thomas H. Buscaglia, a solo in Seattle, was an employment litigator for years in Miami and gradually began doing video-game work in the mid-1990s as a direct result of his own personal interest.

“I started playing games and I thought they were really cool,” he said.

Out of curiosity, he traveled to Atlanta in 1998 for the Electronic Entertainment Exposition, and the following year he went to the Game Developers Conference in San Jose.

“I never told people I was a lawyer. I felt like such a voyeur. I was surrounded by these people who take these pure ideas from their imaginations and manifest them in these games through magic and hard work. And there I was, just a lawyer,” he said.

But as Buscaglia met more developers, he realized that he had skills to offer them. He began volunteering with the International Game Developers Association, and soon his practice began to reflect his personal interest in the world of video gaming.

His client list was soon dominated by game developers - usually small shops of creative people hoping to land deals with video-game publishing companies willing to invest in their ideas.

But southern Florida isn’t exactly a prime area for this kind of work. Seattle is, and earlier this year Buscaglia and his wife made the move to the Pacific Northwest.

Working out of his home office, Buscaglia performs a variety of functions for his developer clients. He is the outside general counsel for some, providing business advice on an ongoing basis. For others, the focus is contract work.

“A lot of these guys get together and make a game and then they think the first contract they’re going to see is the publisher’s contract, and that’s a naí¯ve view,” he said.

Buscaglia has developed a “kit” for them that contains the kind of documents they’ll need before they go to a publisher - such as contributors’ agreements that transfer assets from the individuals to the company that owns the game.

Lawyers describe the video-game industry as being similar to the music and movie businesses. Like record labels and movie studios, developers finance projects they believe have a chance of success. Most fail, so they seek to recoup those losses by negotiating terms that give them a big pay-off if the product is a hit. Experienced developers - like famous-name musicians or directors - get better deals.

“There’s been this tradition in the [video-game] industry that everybody gets screwed on their first deal,” Buscaglia said. “I’m doing my best to make sure that that becomes a historical anecdote instead of the way we do business.”

Securing intellectual rights

Intellectual property law involving video games has changed dramatically over the years, according to John W. Branch, a partner in the Seattle office of Darby & Darby, an IP firm.

The earliest cases, in the 1970s, dealt with the simple question of whether video games were entitled to copyright protection, he said. Since then, cases have addressed questions involving “reverse engineering” of consoles by competitors to allow their games to be played on those consoles, devices that tweak games to give players more powers, and copyrights and trademarks of features within games.

Branch said one of the more interesting recent cases involved Immersion Corp.’s patents on “haptic feedback technology,” a feature that vibrates players’ video-game controllers when, for instance, they are hit by shrapnel from an explosion. In 2005 Sony Corp. was found to have infringed on those patents. The company has appealed that decision.

Meanwhile, a similar suit filed by Immersion against Microsoft Corp. recently settled, with Microsoft paying $25 million to acquire a 9 percent interest in the company and a license to use the technology.

Branch explained that most video-game developers don’t make their own technology - the raw stuff used to build their virtual worlds. Most buy “game engines” - the two most popular are called Unreal and Id - for which they pay licensing fees.

Since the raw material is already licensed, that aspect of the game isn’t relevant to the IP work lawyers do for developers.

“So what is there to protect?” Branch asked. “There’s the artwork, which people can get copyrights on to protect people from copying their characters. And you can trademark the names of games.”

But full-blown patents remain relatively scarce in the video-game industry. The majority of video-game innovations are unpatented, Branch said.

This is due partly to the nature of the industry. A video game can cost millions of dollars and require several years to create, with no assurance that it will succeed. In fact, most don’t. Patent applications can take three years or more. And even if a game is initially successful, it may not be by the time the patent is approved.

In the last few years, bigger video-game companies have begun to step up their patenting activity and Branch predicted that “as the industry matures, that’s when the patents are going to come into play and that’s when the long knives are going to come out.”

New developments

Video-game lawyers say the industry has begun to change dramatically in several ways.

Games have grown increasingly complex, requiring a greater investment of time and money to create a hit game. An industry dominated by cowboy entrepreneurs has recently become more sedately corporate.

But the popularity of new portable devices has created a rapidly expanding sector within the industry where the old cowboy spirit is thriving once again.

They’re called “casual games,” which are simple, fun, nonviolent and addictive. They feature repetitive activity, such as popping balloons, and they’re proving to extremely popular with women over 40, retirees and office workers.

The games are cheap to make and a couple of developers can produce a finished product in a couple of months.

“Guys are making them in their basements,” said Branch. “They don’t the need the publishers anymore.

“There’s a big change going on right now,” he continued. “People are trying to sell these games directly to the consumer. They’re trying to make end runs. The publishers are losing their grip.”

But according to Branch, the “real action” today is in PC games, which people download from a growing number of game sites.

Another factor pushing computer game playing is a hybrid form of online gambling. Gregory R. Gemignani, a partner in the Las Vegas law firm Lionel Sawyer & Collins, focuses much of his practice on the crossover of video games and online gaming.

“These are games where, generally, you have to pay to play in order to win,” he said.

The legality of these games varies from state to state, with the critical factor being whether the game is primarily one of skill or chance.

“It’s kind of a moving target,” said Gemignani. “In some states, it’s okay if the game is primarily skill-based, but in other states that can be a problem.”

Skill-based games - those in which players direct an avatar to slay monsters or hit a baseball - are legal in most states. But chance games, like poker, are not, said Gemignani.

When counseling the sponsors of these games, Gemignani provides “a survey of the different laws regarding the risks involved in running those tournaments. I can’t tell you whether your game is skill or chance; that’s a question of fact, rather than law. But I can tell you where the law comes down.”

He said online-gaming video games will always be risky, “particularly because a lot of the games appeal to children. There’s always a chance that a prosecutor somewhere will get upset.”

Video games and the First Amendment

The inherent violence of many video games has been the subject of an ongoing, intense debate: To what degree does video-game violence prompt violent behavior in players?

There have been many studies, with varying conclusions and interpretations. But the courts have been consistent. Without venturing into questions of causation, the courts have repeatedly found that efforts to pin responsibility on game makers do not pass constitutional muster.

Paul M. Smith, a partner at Jenner & Block in Washington, D.C., is a litigator who has represented industry groups in a variety of successful lawsuits filed against states and cities for passage of laws and ordinances restricting or banning the sale of violent video games to minors.

The first of these lawsuits resulted from an ordinance passed in Indianapolis in 2000 that applied only to arcade games. A group representing video-game manufacturers sued to enjoin the ordinance and Smith took the case. A U.S. District Court denied the motion, but Smith and the plaintiffs were victorious in an appeal to the 7th Circuit.

The courts have been unanimous since, and Smith hasn’t lost.

“The politicians love to pass these laws because it makes for good politics,” he said. “There’s really no down side to beating up on violent video games, so they’ll just keep passing them. But so far what the courts have said is that there’s no exception for violence in the First Amendment and parents are the ones who are supposed to decide these issues.”

On two occasions - in lawsuits stemming from school shootings at Columbine High School in Littleton, Colo. and Paducah High School in Kentucky - the video-game industry was named as defendant, but Smith prevailed at trial in both cases.

Questions or comments can be directed to the writer at: dick.dahl@lawyersusaonline.com

© 2007 Lawyers Weekly Inc., All Rights Reserved.

Two years ago at GDC I was approached by Neil Kirby, one of the leaders of the IGDA Artificial Intelligence SIG. One of their founding members, Eric Dybsand, had died and the SIG wanted to do a Scholarship in his honor. And being a bunch of really smart guys, they though that it should be done through a charity. The IGDA, though a non profit, is not a charity because from time to time in participates in political advocacy on issues important to its members. But most non profits have a companion charity that can accept charitable contributions under section 501(c)(3) of th IRS code that are tax deductible. I told Neil that I would work to get a foundation formed if he agreed to help run it.

I got the Foundation approved by the IGDA Board f Directors in time for us to provide apass for the first recipient of the Eric Dyband Memorial Scholarship to GDC last year. A nice first step.

Of course, the Foundation would have to do a lot more than that to meet its true potential. Well here it is almost a year later and the Foundation is gettign off the ground, with yours truly as Foundation Chair and Neil o Secretary and a member of the Board of Trustees!. We finally got our IRS application in and aa bannk account open and are now able to accept donations. We have a slate of proposed programs and are working to get a professional association management company to help run the operations.

An initial solicitation for contributions will be going out tin the IGDA Newsletter this week and the Foundation web site is ready to go. It has been and will continue to be a huge task to get the Foundation to the point it should be. But I believe that it is an effort well worth pursuing.

If you are interested in supporting the work of the Foundation, go HERE.

Tom B

Game Law: Discipline and the Up Sell

A few years ago one of my client studios was just starting out and had landed their first game deal. It was a bare bones sort of deal with minimal funding. But the game that they pitched could have probably been delivered within budget. The game was a PC FPS built around a multiplayer theme, with a ladder system for the single player using the same maps as the multiplayer. The AI for the single player was pretty much within the scope of what was built into the engine they were using. The PC release was to be followed, at the publisher’s sole option, by an X Box version.

The agreement with the publisher was a typical staged milestone deal and had the design document attached to it. These guys were in heaven. After doing contract work for a few years, they finally had their own game based on their own original IP. They went out and rented cool offices, got new computers and brought on a few additional developers to bring their team up to size. Everything was good. Each of the members of the team was extremely talented and as a team, they were amazing. And they were totally stoked. But, it was their passion, combined with a lack of discipline that was their downfall.

As they began development in earnest, they realized that although the single player ladder model would be OK for the PC, it would not make it on a console where multiplayer had not yet gained any acceptance. Without a solid single player experience, the game would never be green lighted by Microsoft. The publisher contract was back end weighted, so the X Box part of the development followed the PC with more money allocated for the development of the console version of the game.

The multiplayer design was done, but that single player design challenge was out there. As they brain stormed about all the cool things that could be incorporated into the single player game, they began to develop their design. A 21 level linear adventure with AI driven NPC allies and enemies. A real multiplayer experience in a single player game. Awfully ambitious. But they believed that they had the talent to do it. (And in my opinion, they did.)

When they took this new and substantially enhanced design to their publisher, the publisher was thrilled. The team also told the publisher that rather than waiting to do this for the X Box version, that they thought it would just make more sense to do it in the PC version first and then port it to the X Box. After all, why not deliver all of these cool features on the PC as well. The publisher was all for it. This was gonna be great! This is also where the title to this article comes into play…Discipline and the Up Sell.

At this point they should have taken into account more than just how cool this game was going to be. But their passion blinded them to the harsh realities of running a business. The scope of the project had changed substantially. More features, more levels, a more demanding AI; all would necessitate more time to completion. And as we all know (or should know) more time means more money out the door for salaries and expenses. Sure, publishers get upset when a game slips. But the real problem with slippage is the addition operational and personnel costs to the studio. And this was not even a slippage situation. This was a situation where the studio knew that the new expanded design would require significantly more time to complete. And while the game that they sold originally could have been made within the original budget, this new game would ultimately take twice as long to build, which meant it would cost twice as much to make.

This did not have to be a disaster in the making. If properly addressed, it could have been a huge opportunity to make the game they wanted to make and get enough money to do it. It’s called “Up Sell.” We have all had it happen to us. You go in to buy a used car and they show you new ones. You want the simple version but all you are hearing from the guy in the appliance store is all the features that the high end model offers. “But we’re game developers, not cheesy appliance salesmen,” you say. Sure, but the example still holds. And the point is even more important because we are not salesmen trained to do this.

Many new developers just want to make the best game that they can. But if they do not condition that desire with discipline to, “We want to make the best game we can within our budget,” their dreams of having their own studio may well never come true. Call it slippage, feature creep, “going the extra mile” or whatever else you want. But if you commit your studio to do it anything without getting paid for it, I call it just plain foolish.

Our example was a perfect opportunity for an up sell. The game budget was back-end loaded with most of the advances tied to the X Box option. But under the new model, by shifting revenue from the X Box to the PC version, which would now have many of the features reserved for the console title, more money would be available for the PC development. And the additional features and expanded design would also require more time and, therefore, a larger total advance. But the publisher loved the new design. The selling part of the up-sell was already done. The part that was lacking was the new price. This ultimately cost the studio everything.

They brought me in to help out in late in the project. I was able to renegotiate the milestone payment structure to move more of the back end payment to the front end because they were getting into difficult financial straights. But by that point they were already fully committed to the revised game design. So, reverting back to the original game they sold to the publisher was not an option. So, though the game was released, the studio took a huge loss on it and shut down shortly thereafter.

Using the magnificent magical prism of 20-20 hindsight, it is easy to see what they should have done….after all; figuring out what should have been done is always way easier than figuring out what to do in the first place. But maybe this article will help someone else avoid this particular pothole on the road to building a successful studio. Here the additional features and revised game design were great. And getting publisher buy in was also right on point. In fact, the more the publisher is salivating for the enhanced project, the better off you are. But (here’s where the discipline comes in) at this point a full realistic analysis of the revised project schedule and the impact that this will have on the budget needs to be done. Yeah, I know…this is not what you got into game development to do. But if you want to run a studio, you better cowboy up and do it or find someone else to do it for you!

With the publisher fully bought into the new design and features is the right time for the Up Sell. Just go to the publisher with the revised budget and let them know how much more time and money they will have to advance to get this great “new and improved” game. Of course, at that point you also need to be disciplined enough to say (and mean) that if you don’t get the new budget, you just can’t make the enhanced version and then just deliver the game as you initially sold it. If the publisher sees the additional value, they will pony up the additional dollars to make it happen. And if not, you’ll just have to save all these cool additional features and enhancements for the sequel or your next title. This combination of “Discipline and the Up Sell” can go a long way toward helping build a successful development studio.

A few parting thoughts - OK, one reason I picked the topic of “discipline” is because I figured the editors at Gamasutra would come up with some really kinky pictures to go with the article. And, in case you are wondering what happened to the folks at the studio in our example, well, it seems that every cloud does have a silver lining. Although their studio is long gone, all of the developers involved are doing well and have extremely successful careers at some of the top studios in the industry.

Til next time, GL & HF!

Tom Buscaglia
The Game Attorney © 2007
www.gameattorney.com