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IP Deal Breakers

THE FIVE INTELLECTUAL PROPERTY RIGHTS
DEVELOPERS SHOULD NOT BARGAIN AWAY

Stephen Rubin, Esquire

This is a discussion of general principles of intellectual property and contract law from the perspective of the independent video game developer. It supplements the author’s presentation of the same topic at the Game Developers Conference in San Francisco on March 9, 2005. This paper does not create an attorney/client relationship, nor does it constitute legal advice. Legal representation should be obtained in the event of specific questions regarding this subject.

INTRODUCTION

Virtually every component of a video game falls within the definition of intellectual property (IP). The perceptible “on screen” features that define a game and give it is identity–the visual and audio aspects and even the tactical feedback of a controller–are governed in the United States and the rest of the industrialized world by laws creating patents, copyrights and trademarks. Included are such basic game features as characters, names, storylines, text, scenes, costumes and props, sounds, music, dialogue, lyrics and methods of play. Underlying the perceived game components is another equally important set of IP assets. Game tools and technology, including the engine and other rendering software, empowered by ever more sophisticated chips, displays, and connectivity, operate “behind the screen” to transform ephemeral ideas into engrossing game play. Here, too, patents, copyrights and trademarks are invoked to secure ownership of the programming, methodology and hardware technology, with the added prospect that some devices, techniques and methods may remain confidential and be protectable as trade secrets.

Intuitively, the creator and the owner of the game IP are the same. Legally, the picture is far more complicated. In countries that recognize the “moral rights” of an artist, laws prevent the creator from assigning all of its rights. In the United States, moral rights are not recognized on the national level. Complete assignment of rights by developers is not only possible but it is also the norm.

To be sure, a few dominant companies both develop and publish their own games. For them, creation and ownership remain connected. Another group of owners licenses IP created in a different medium, such as books or film, for development into a video game. Here, too, the original creator typically retains ownership of the IP, with the game developer operating under a license. There are also independent companies that are able to develop games without surrendering ownership rights. However, the rocketing cost to develop commercially viable games has virtually eliminated the opportunity for self-funding of games by most independent developers. As will be discussed, these developers are most vulnerable to loss of ownership and control of the IP they create. New technologies enabling Internet distribution, the lower development costs of mobile games, and the growing interest of outside investors in developers that owner game IP, may allow some creators of video game IP to retain ownership. Such alternative avenues are well worth watching. Nonetheless, as this paper is being written, such opportunities remain limited.

Today, for most independent developers, the first cost of securing funding for a video game is the surrender of ownership and control of the game IP. In what has become a seemingly iron rule, developers assign all on screen IP and broadly license all underlying game code and technology to the publisher providing funding. Creation and ownership are sharply separated. As the balance of bargaining power tilts in favor of a few large publishers, the shrinking field of independent developers is reduced to the status of a worker receiving nominal pay, a highly-conditional loan to be repaid from foreseeable profits, and the limited chance of participation in post-loan profits, to create an asset that the publisher owns and is largely free to exploit as it deems fit. To be sure, the publisher has money at risk and rightly claims a reward. Yet the ownership balance struck in publishing contracts seems not predicated, or justifiable, as much on publisher risk as it is on a current publisher monopoly over funding resources. Nor is the publisher necessarily the better for this bargain. At the end of the day, if developer loss of IP ownership and attendant inequitable compensation reduce the number of innovative and highly motivated creators, publishers lose a vital product source.

The disconnection between creation and ownership in video games is not inevitable. What is likely to restore a degree of creator ownership is, first, the realization by developers of the true costs of their surrender of ownership rights and, second, the use of practical negotiating options to reduce IP losses.

What is ultimately at stake is the viability of independent developers. With game ownership comes the opportunity to extract the full value of the IP in whatever form the market may maximize. Under copyright law principles, the owner not only possesses rights in the game IP itself, but rights to derivative works (such as game sequels, films, books and television programs) and derivative products (such as toys and clothing). A small percentage of so-called “evergreen” games account for the bulk of game profitability and these games take on a continuing existence through sequels and product merchandising. To take one example, if Eidos, the creator of the Tom Raider games, had assigned away its rights to derivate works and products, it would not have been able to capitalize on the phenomenal popularity of the Lara Croft character and the many game sequels, the two motion pictures, books, posters, action figures, Halloween costumes, T-shirts, and the like that became the Tomb Raider franchise. Eidos, however, acted as publisher as well as developer and retained complete ownership of the IP.

No one will question that the game industry is now permeated with sequels. When game development and ownership are divorced, the owner determines whether a sequel will be made and, as significant, who will make it. The owner/publisher, not the creator/developer, determines if the IP assets will be extended to other markets like movies, cartoons, T-shirts, and toys. Not only is the developer customarily not a participant in such decisions, but its participation in profits flowing from these other endeavors may be minimal. The developer loses in three ways. First, without the profit potential that comes with IP ownership, the ratio of entrepreneurial risks to rewards makes recruitment of the best talent more difficult and may discourage new developers from forming. Second, the present IP ownership and compensation scheme so reduces the developer’s potential share in profits that the developer is unlikely to amass sufficient funds internally to self-fund future games. Absent this opportunity, the developer is relegated to sign the same lop-sided publishing deal over and over. Lastly, lacking IP ownership, the valuation of the developer as a candidate for outside investment, acquisitions, or public stock offerings is sharply reduced. The loss of such options again drives the developer to publisher funds and attendant publisher IP ownership terms.

Ownership rights are just one of five categories of game IP rights that are at stake in the publishing agreement. Each of the other rights—to create, sell, receive compensation and attribution—align with the right to ownership to establish the independent viability and going-concern value of the developer. The preservation of these rights by the developer can make the difference between perpetual dependence upon publisher funding and control and the ability to direct its own destiny.

THE FIVE CATEGORIES OF IP RIGHTS

Intellectual property is a bundle of legal rights to certain intangible inventions, discoveries and creations. Broadly, the rights cover creation, ownership, sales, compensation and attribution. The remainder of this paper will address the nature of each of these rights as pertains to video games and propose strategies developers may use to retain a portion or all of these rights in the context of the publishing relationship. The analysis assumes the developer brings to the transaction a record of successful game development and, consequently, some bargaining leverage with the publisher. The relative bargaining strengths the parties bring to the negotiations will largely determine the success of the strategies.

A. Right to Create

(1) -Description. In the conventional relationship, the independent developer originates the concept and design of a particular game and pitches it to a publisher. At this point, the developer is free to pursue any idea and to embellish it as the developer sees fit. Yet even here, the practicality of what form of game will be commercial and technologically possible intrude into the developer’s range of creative choices. Assuming a publisher is interested, the publisher will then add its “suggestions.” Most publishers, at least the successful ones, appreciate that their strength is in administration. They seek to channel the developer’s creative choices rather than to dictate precisely what the game should include. This give and take is inevitable and not necessarily undesirable if it combines and plays off the strengths of the two parties.

Publishing agreements commonly regulate the developer’s creative input in three direct ways. First, they establish a budget that dictates the amount of effort and other resources that can be devoted to realizing the developer’s vision of the game. This is financial control, and it is a constraint that arises even in self-published games. Second, publishers insist upon inspection and “acceptance” of the developer’s work at preset milestones according to agreed specifications. This is content control. Third, to varying degrees today, publishers demand staff control, that is, the ability to determine which of the developer’s employees can work on the game, which must work on the game (key personnel), what work they will do, and who will supervise them.

A second tier of indirect creative controls exist in the form of exclusivity, noncompete, nondisclosure and right-of-first-refusal clauses in publishing contracts. The apparent goal of the publisher in insisting on such contractual restrictions is to avoid the developer using its creative powers in another game for another publisher that draws sales from the game purchased by the publisher. But a clear side effect is to narrow the available outlets of the developer’s creativity in making other games for other publishers. In its most invidious form, such contractual clauses render the developer a captive of the publisher. This has the effect of limiting the ability of the developer to negotiate advantageously the terms of future games with the publisher with whom it has become locked. For example, a developer may acquire valuable and generalized knowledge and technical know how in its work on the game. This skill is not specific to the game, but rather the natural outgrowth of experience. Yet a publisher may claim such routinely acquired skills are encompassed within the noncompete, nondisclosure and nonuse clauses of the agreement. If the developer wishes to work for another publisher, it must leave these experience-based skills behind. This further ties the developer to the publisher as its only realistic opportunity of future funding.

(2) Strategies. Regarding content control, the developer’s goal should be to get a definition of publisher “acceptance” of submissions that is as specific as possible in terms of criteria and feedback. The parties should agree on detailed game and technology design specifications at the outset as an attachment to the agreement. The authority of the publisher to order changes once specifications are in place should be limited and result in compensating remedies for the developer. The latitude granted the publisher in acceptance of a milestone deliverable should be similarly well defined by contract language. For example:

Publisher will evaluate each milestone Deliverable based upon the Specifications set forth in Exhibit A and shall promptly provide Developer with a written evaluation in the form of Exhibit B [a detailed evaluation form]. Developer shall promptly remedy each deficiency identified in the evaluation to the reasonable satisfaction of Publisher. In the event Developer’s remedy is not reasonably satisfactory to Publisher, Publisher shall provide Developer with as much specificity as to the deficiency as possible. The parties acknowledge that compliance with a Deliverable has subjective elements and the parties will cooperate and assist each other in the approval process.

In this and later quoted provisions, the capitalized terms should be assumed to be defined elsewhere in the Agreement. The following is alternative language taken from the Contract Walk-Through (Second Release) prepared by the International Games Developers Association (IGDA) and available at the IGDA website: igda.org/biz. The IGDA author characters this provision as “developer friendly.”

  1. Upon receipt of a Milestone or the Work from Developer, Publisher, in its sole discretion, shall review, test and evaluate the Milestone or the Work for conformity with the creative and functional requirements for such Milestone or Work contained in the applicable Statement of Work.
  2. Publisher shall then provide Developer with Approval or Feedback within five (5) business days of receipt of the Milestone or Work. Absence of Approval or Feedback within five (5) business days shall release the corresponding Milestone Payment to Developer, but shall not constitute Approval. In such an event, upon receipt of Feedback, Developer shall remedy any deficiency as described in Section 3, below.
  3. Developer shall have five (5) business days to make all requested revisions and to correct such defects, if any, and return the work to Publisher for retesting, review and reevaluation.
  4. The foregoing procedure shall be repeated until Approval or until Publisher, in its sole discretion, and after no fewer than three such submission cycles, elects to terminate the applicable Statement of Work or this Agreement under Section X, below.

A publisher may seek to hold back the next advance payment until the “deficiency” is cured to the publisher’s satisfaction. Most developers exist from advance to advance so that the treat of delayed payment can be ruinous and result in the complete surrender of game design to the publisher. Provision should be made for continuation of advance payments during the period the developer is working reasonably to address the publisher’s objections. The IGDA Contract Walk-Through, for example, provides for release of the Milestone Payment within five days if there is no Approval or Feedback in that time. While this addresses the issue, its practicality is somewhat questionable. In fact, it may have the unintended effect of causing the Publisher to give quick and imprecise Feedback to avoid the payment, rather than taking adequate time to understand the submission and react more helpfully.

Publisher intrusion in the developer’s staffing is becoming more prevalent. Here is one such clause, tempered only by the lawyer’s favorite waffle-word “reasonably:”

Developer shall utilize the efforts of the personnel of Developer listed on Exhibit A for the development of the Game. Developer shall advise Publisher in the event Developer’s personnel listed on Exhibit A leave the company or new personnel are hired, and Exhibit A shall amended from time to time to reflect such personnel changes. If Developer desires to either (1) employ personnel in managerial positions or (2) utilize contractors who are not Developer’s employees and who have not been previously approved by Publisher, Developer shall (i) promptly notify Publisher in advance of such desired change, (ii) provide satisfactory evidence of the qualifications and technical capabilities of the proposed replacement or additional personnel, and (iii) provide Publisher the opportunity to give or withhold Publisher’s consent to the personnel change, which Publisher’s consent shall not be unreasonably delayed or denied. Developer agrees that Publisher shall be entitled to review Developer’s technical capabilities and related development resources prior to payment of any portion of Developer’s compensation; provided, however, that Publisher’s approval of Developer’s technical capabilities and related development resources shall not be unreasonably delayed or denied.

A publisher may be able to argue for such control if the developer has only a few employees, all of whom are deemed essential to the project, or if the developer’s reputation is based on the past work of one or two key people. Otherwise, there is no justification for such language. The reciprocal term would be for the developer to have approval authority over the producer assigned to the game by the publisher. The publisher will not agree to this and, on a parity of reasoning, the developer should not surrender staffing control.

Publishers impose restrictions on the ability of the developer to create other games either while working on the contracted game (exclusivity) or after the game is completed (noncompete and nondisclosure). This is longstanding practice and hard to unseat. Exclusivity is best addressed by determining at the outset the staffing resources the developer needs to devote to game completion. If the developer is then able to add to its staff to create additional games it should have the right to do so. The publisher has a legitimate concern that resources it pays for will be drawn away or diluted. However, this generalized fear can be addressed with narrow language preventing such misuse of resources, rather than the blanket exclusivity clause in common use.

Noncompete and nondisclosure clauses attempt to tie a developer’s hands in working on other game projects that derive from or use publisher owned rights. The greatest overreaching occurs in the overbroad definition of the games or technology the developer is barred from using or duplicating. Careful wording of the types of games the developer is precluded from making, for example, can make the burden of a noncompete clause manageable. The publisher’s goal is to prevent the developer from creating directly competing games that will diminish sales. The definition should peel down from broad genre classifications to the particular storyline and game play involved.

Developer agrees not to engage or assist, directly or indirectly, in the development of any science fiction based first person shooter game involving human combat against alien invaders using imaginary weapons in an urban setting during the term of this Agreement, and for a period of one year after termination.

It is also common to find such restrictions on post-contract game development even when the publisher has terminated the contract for publisher “convenience.” Termination in such circumstances is devastating to the developer and the restriction on work on other games, even if for a brief period, can force the developer to disband. Such prohibitions are inherently unfair and should be strongly opposed during negotiations.

As owner of the game IP, the publisher has the right to determine whether future versions of the game will be made and by whom. Future work can be assigned by the publisher to another developer, even though the original game is closely associated with the first developer. This famously occurred when the original developers of the Crash Bandicoot and Spyro the Dragon game franchises severed their respective relationships with the publisher and subsequent sequels were made for the publisher by other developers. The publisher has incentives to continue with the original developer of a successful game, but may use the threat of reassignment as a powerful negotiating tactic.

A number of “continuing rights” clauses have evolved to mitigate the situation in which a developer gives up all future IP ownership. Developers should seek a right-of-first-negotiation or a right of first or last refusal to work on future games derived from the original as a means to level the negotiating table. Such a right enables the developer to be the first to learn of the publisher’s plans and to bargain from a more advantageous, but by no means assured, position. It is important that the publisher’s negotiations with another developer be completely at arm’s length and transparent. The offered terms must be clear and not subject to later revision. The following is possible language for a developer right-of-first-negotiation.

“Right of First Negotiation” shall mean the right of Developer to submit the first bid to Publisher for performance of development services in the event that Publisher, in its sole and absolute discretion, elects to use Developer’s Materials [see definition and discussion in Section B(1) below] in connection with a Derivative Work [term defined in Copyright Act and including prequels, sequels, localizations, and ports]. In the event that Publisher elects to make such use of Developer’s Materials, it shall so inform Developer in writing and invite Developer to negotiate a suitable contract for such development. Within ten business days of receipt of such notice, Developer shall in writing either accept or reject the invitation to negotiate. A failure by Developer to timely provide such written acceptance or rejection shall be deemed a rejection. If Developer has accepted the invitation, the parties shall negotiate in good faith and without delay a suitable and mutually agreeable contract. Neither party makes any promise hereunder that a suitable contract will be concluded. In the event the parties fail to execute a contract for such development within forty-five days of Developer’s acceptance of the invitation to negotiate, or in the event Publisher’s invitation to negotiate is rejected, Publisher shall, subject to the terms of this Agreement, be free to enter into an agreement with a third party for the development of the Derivative Work, or to develop such Derivative Work in-house, in its sole discretion.

This “right of first refusal” language is taken from the IGDA Contract Walk-Through:

Prior to engaging any third party to render development services in connection with the Project, Publisher will provide Developer with written notice of the proposed terms thereof, and Developer shall have the opportunity to be engaged on those terms. If the parties cannot enter into an agreement within ten (10) business days, Publisher may enter into an agreement with a third party for the provision of those services on terms and conditions no less favorable to such party than those offered to Developer.

The distinction between a right of first refusal and a right of last refusal is not inconsequential. In the first instance, negotiations between the developer and publisher set the floor; the publisher can contract with another developer, theoretically, by paying a dollar more. In the second case, the original developer has the benefit of knowing what the publisher would have to pay in the open marketplace for the same work and can accept those terms. The original developer may then be able to complete the work for less than the agreed payment due to its previous experience and knowledge of the game.

B. Right to Own

(1) Description. A main objective of the publishing agreement from the publisher’s standpoint is to secure all rights to the game IP. Here is a typical clause:

Developer acknowledges and agrees that, except for Developer’s Materials [a defined term including underlying game code and tools], all materials created under this Agreement shall be works made for hire and therefore the sole and exclusive property of Publisher throughout the universe in perpetuity, whether created, developed, contributed or provided as part of Game development or otherwise. Developer hereby irrevocably assigns, transfers, releases and conveys to Publisher, from the moment of its creation, all right, title and interest in and to the materials created under this Agreement, except for Developer’s Materials, free and clear of any and all rights, liens, claims and encumbrances by Developer or any other third party. To the extent that this assignment does not transfer all ownership of the above-described materials to Publisher under applicable law (e.g. moral rights in a jurisdiction in which an attempted transfer of moral rights is void or voidable), Developer grants to Publisher an irrevocable, exclusive, perpetual, royalty free, fully paid license, throughout the universe, to such nontransferable rights. The rights granted above include, but are not limited to, the unfettered right to modify any and all of such materials. Developer hereby designates Publisher as its attorney-in-fact for the purpose of executing such assignments and other documents in the name of and on behalf of Developer and its employee(s). Nothing herein shall give Developer any right, title or interest in any intellectual property rights in the Game other than the intellectual property rights in Developer’s Materials, or any right to develop, use or exploit any of the foregoing. Developer shall not do or cause to be done any act or thing contesting or in any way impairing or tending to impair any of Publisher’s rights or title.

Publishing agreements customarily draw a distinction between “on screen” game IP and what is variously called the developer’s materials, the developer’s proprietary technology, or the underlying game code and tools. The meaning is the same. IP rights that define the game for users, the perceptible aspects of the game, are transferred to the publisher outright. IP rights to programming in the form of game engines and development tools are owned by the developer, but with the express condition that the publisher is granted an unrestricted license to use and sell the developer’s IP in connection with the game under development, and often in connection with future versions of the game whether or not the developer is involved in their creation. Here is such a provision:

Developer shall retain all rights, title and interest in and to Developer’s Materials. Developer hereby grants to Publisher a worldwide, non-exclusive, irrevocable, perpetual, royalty-free and fully paid-up license to make, have made, use, modify, rent, sell, copy, display, publicly perform, broadcast and otherwise exploit (including via its parent, subsidiary and affiliated companies) Developer’s Materials in connection with, and limited to, the exploitation of the Game and any Derivative Works by any known or future means whatsoever.

In theory, the retention of ownership rights by the developer to underlying game code and tools means the developer can use these assets to undertake other projects once the game covered by the publishing agreement is completed. In practice, exclusivity and noncompete clauses limit the post-game opportunities of the developer, often forcing the developer into the financial arms of the same publisher for future game development.

(2) Strategies. A publisher’s claim to ownership of the game IP is a contractual citadel that few developers have been able to surmount. Success usually entails a significant participation by the developer in the development costs of the game. This may take the form of the developer waiting to approach prospective publishers until an advanced demo of the game is available that depicts substantial features, levels, and gameplay. It is still possible for developers targeting the PC market to sacrifice and maintain “day jobs” to self-fund games to this stage. Creators of mobile games or games for the so-called casual player also may find this to be an option. At some point, the publisher no longer serves as publisher but merely as distributor of a completed game. As such, the publisher cannot lay claim to blanket ownership rights, or even to any such rights if it has not provided financing.

For many independent developers, the option of self-financing simply is not available. This is particularly true for top-of-the-line console games whose costs can easily exceed $10 million. Still, there are strategies to chip away at the categorical IP ownership transfer demanded by publishers, in ways that may be beneficial to both parties. One such device is to limit the duration of the transfer. A second is for the developer to retain rights to derivative works or products outside the making of games. For example, the developer may retain rights to cartoon shows or comics that the publisher has no interest or capability promoting itself. A third strategy is for the developer to retain what is essentially a reverse right-of-first-refusal with regard to future uses of the game IP.

Game IP ownership conventionally is permanently assigned to the publisher. Yet the typical commercial lifespan of a game is one year or less. It is common for game unit sales to dribble down to a few and then none. The game becomes “out of print.” The publisher, especially a large publisher with many games to promote, no longer has an interest in expending staff time or marketing or distribution funds to squeeze out further sales of the game. The developer may have a different perspective. It may have the focus and scale to use unconventional means to keep the game on the market, to garner additional sales and to keep interest alive in a sequel. Under the current practice, the developer has no incentive—in fact, no right—to assume distribution of the game. A reversionary rights clause would correct this, and benefit both publisher and developer. Provision would be made for the circumstances that trigger the reversion and provide for compensation to the publisher from any revenues the developer is able to generate. A reversionary rights clause, in this case providing for a license, might provide the following:

The failure of Publisher to release the Game for a period of one year following Publisher’s acceptance of the last of the Deliverables, or the failure of the Publisher to sell any units of the Game in the ordinary course to end users for two consecutive calendar quarters, or the filing of a declaration of bankruptcy regarding the Publisher, shall entitle Developer to terminate this Agreement and shall entitle Developer to a worldwide, non-exclusive, irrevocable, perpetual, royalty-free and fully paid-up license to make, have made, use, modify, rent, sell, copy display, publicly perform, broadcast, and otherwise exploit the Game, including derivate works, provided any such exploitation by Developer shall entitle Publisher to recoupment of the Royalty Advance and a royalty payment after such recoupment of twenty-five percent of Net Receipts.

A reversion of rights clause should be included if the publisher insists on the right to terminate at any time for the publisher’s convenience. In the usual instance, a developer finds itself in the untenable position of losing funding and the right to take the game elsewhere for completion. The precipitate end of funding, without any required notice, can force the developer to close. The alternative is the following provision:

In the event of termination of this Agreement by Publisher for the convenience of the Publisher, the Publisher shall have no further obligation or liability to Developer, Developer shall have no further obligation or liability to Publisher, Developer shall retain exclusive ownership and control of all intellectual property rights in and to the Game and Publisher shall waive for itself and its employees all right, title or interest it has or may claim to have, if any, to intellectual property rights resulting from its participation in or contribution to the work of Developer, excluding any intellectual property furnished by Publisher. Publisher shall execute any documents and take other steps reasonably required by Developer in order to confirm such retention by Developer of all intellectual property rights.

Contract language also can provide for a return of ownership rights to the developer in the event the publisher elects or is unable to fully exploit the game IP in other markets such as film, TV, and merchandise. To be sure, care must be exercised to avoid the possible conflict between the publisher’s intended marketing program and that of the developer. However, the publisher can retain approval rights over the developer’s actions. A number of publishers appear content to limit their focus to game distribution and do not make any attempt to consider possible off-shoot opportunities. The developer may be more focused and committed to the fullest exploitation of its game. The publisher is benefits by the extension of the game IP into new markets with the added sources of revenue they may bring.

C. Right to Sell

(1) Description. The exclusive right to sell conferred by IP is a subset and perhaps the most important aspect of the ownership right. The customary publisher practice of demanding a complete assignment of all game IP rights, denies the developer the ability to segment sales rights through such contractual devices as non-exclusive licenses. For example, the right to sell the game could be allocated based on geographic markets. The initial publisher could be authorized to sell the game in North American and Canada, with the developer reserving the right to sell or to license others to sell in Europe, Japan, Latin America and other markets. This may make particular sense when the developer is based in a country different from the publisher and may possess better insight into sales prospects locally. While it is true that distribution of major games is today a global undertaking, not all games are designed or suitable for such distribution. The one-size-fits-all nature of publishing contracts removes the developer from the sales equation entirely.

It is important not to view the right to sell narrowly. The bundle of IP rights includes not only the game under development but also all future games that derive from it and all products that are based upon it. Such derivative works and derivative products can amount to may millions of dollars in added value for a success game. Indeed, this potential value in future sales of a successful title is not hypothetical. It can be readily seen in the difference in the market capitalization of publicly listed publishers between those that own the vast percentage their game IP, such as Electronic Arts, and those that make many of their games under license from others, such as THQ, Inc.

The right to sell also should be considered in its broadest context to include the right of the developer to sell its services. The discussion of restrictions on the right to create applies in this context. The independent developer views its output as the finished game, yet in the current scheme the developer’s product is its ability to make games. Modern publishing agreements reflect this latter view. The developer is selling its services; the publisher is controlling the completion of the game. Contractual restrictions on the developer’s ability to sell its services to other publishers through noncompete and other clauses may have a more detrimental effect on the developer’s advancement than the ability to market and sell a particular game.

(2) Strategies. Ownership strategies previously mentioned apply with equal effect to preservation of sales rights by developers. Thus, one approach is to limit the scope of the rights granted to the publisher, preserving rights to sell in other markets or through other companies. If the publisher is focused on a particular market, and the developer has special abilities elsewhere, the publisher may decide to permit this segmentation to secure a portion of revenues it might otherwise never realize on its own. A second approach is to provide for the reversion of rights in the event the publisher is in default of the agreement or elects to terminate for its own convenience.

In some cases, it may be sufficient to provide that the publisher shall consult with the developer before making marketing decisions. While the publisher is free to ignore the suggestions of the developer, the publisher’s interests in successful game sales are in line with the interests of the developer. Many developers complain that their publisher failed to invest sufficiently in the marketing and distribution of the game. Whether this is true, it certain would benefit the relationship between publisher and developer if each knew of and discussed the views and expectations of the other.

Recall the fact that ownership rights are customarily divided between “on screen” features assigned to the publisher and “underlying game code and tools” licensed to the publisher on a nonexclusive basis. While not the financial opportunity many originally envisioned, there is nonetheless a market for the licensing of engines and other rendering software. In fact, companies such as Renderware and Criterion, recently acquired by Electronic Arts, have developed very successful businesses. As a general proposition, developers appear ill equipped to market their game engines, perhaps believing their engine is unique or fearful of disclosing proprietary information to potential licensees. A broker network has not emerged to facilitate such transactions. This is an area deserving of greater developer focus.

D. Right to Compensation

(1) Description. Just as publishing contracts appear to have settled on one approach to allocation of game IP ownership, so to have these contracts evolved a dominant form of financial arrangement: the recoupable advance. Ands just as the routine transfer of ownership to the publisher has detrimental consequences for the developer, the recoupable advance stacks the deck against developer participation in the profits generated by the game. In fairness, it must be said that the publisher’s funds are at direct risk. If video game development was a secure investment activity the marketplace would respond with multiple sources of funding vying for the opportunity. In fact, this may now be occurring as video games are increasingly being viewed as mainstream entertainment.

The recoupable advance is, in essence, a loan secured by the game to be built from the funds advanced. It must be repaid by the developer from the first revenues generated by the game, revenues that otherwise would be paid to the developer in the form of a percentage of net game revenues. Because the advances are repaid with only the percentage of revenues to which the developer and not by all revenues received, the repayment takes longer and is made less certain of occurring, even for successful games. Until the publisher’s advance is recouped, the developer customarily receives no revenue from the game. In the event the advance is fully repaid, then the developer receives a minority percentage of net game receipts. In the typical scheme, the publisher begins to draw revenues from the outset at a percentage rate that is commonly significantly greater than the percentage allocated to the developer. The following is a simplified version of recoupable advance contractual language:

As an advance, Developer shall receive 000 Dollars as a recoupable royalty advance (“Advance”), payable as provided in the Milestone Schedule attached hereto as Exhibit A and incorporated by this reference. All Advances shall be recoupable from any and all royalties due to Developer under this Agreement, on a fully cross-collateralized basis with royalties due for ports, localizations and derivative works, if any. Such recoupable Advances shall be non-refundable in the event not fully recouped, provided however that Developer shall remain liable for any expenses or other costs resulting from its material breach of this Agreement. Developer shall apply the proceeds of Advances only to costs and expenses directly incurred in the performance of this Agreement. Developer shall not apply such proceeds to any other cost or expense, such as salary cost for other projects, repayment of previously incurred debt, or the acquisition of assets not necessary for the completion of the Title. All Advances paid by Publisher shall be charged against and recouped from any actual Royalties accruing to Developer.

Developer shall be entitled to receive a royalty (“Game Royalty”) of 00 Percent of the Adjusted Gross Receipts (as defined in Exhibit B attached hereto and incorporated by this reference) with respect to all units of the Game developed and produced by Developer pursuant to the terms of this Agreement that are sold or licensed worldwide by Publisher. In addition to such Royalty for the Game, Publisher shall pay Developer a royalty on sales of “Derivative Products,” as next defined, of 00 Percent of the Adjusted Gross Receipts for any such Derivative Products with respect to all units sold or licensed worldwide by Publisher (“Derivative Products Royalty”).“Derivative Product,” as used in this Agreement, means any ancillary product which is based upon or uses the copyrighted or trademarked rights of Publisher in the Game provided in this Agreement, including without limitation use in connection with clothing, toys, printed material, television programs, and motion pictures.

A key element of the recoupable advance model is the definition of the “net revenues” or “net sales” to which the royalty percentage is applied. What may appear on first look to be an acceptable royalty rate can be negated by a net revenue definition that allows for undue or unrelated expense deductions by the publisher. There are many definitions of net revenue and the details of each must be careful reviewed. The inclusion of publisher overhead is often the first place to look for overly generous deductions, especially a publisher producing multiple games and that is involved in other activities as well. Also, it is customary for advertising and promotional expenses to be paid by the publisher (which after all has total control over such expenditures) without counting as a reduction to net revenues. The following is a fairly straight forward definition of net revenues:

“Net Revenues” means the sums actually received by Publisher in respect to all sales of the Game less (i)sales taxes collected for the game, (ii) actual returns and price protections, (iii) direct manufacturing costs, and (iv) freight.

Here is more involved phrasing appearing in the IGDA Contract Walk-Through:

“Net Sales” means all amounts received in connection with the sale, lease or license of units of the Game, less the following amounts: (1) taxes on sale, lease or license, such as sales, use, excise, value-added and other taxes; (2) costs of insurance, packaging, customs duties, shipping and similar charges, if not reimbursed by customers; (3) costs of manufacturing and packaging not to exceed $____ per unit; (4) all royalty and/or license fees payable to proprietary system licensors and/or third party licensors for the right to publish and manufacture units of the Game; and (5) amounts for credits, returns, refunds, price protection or promotional allowances.

A further issue to consider is the timing of payment. This can arise with both advances and royalties. Concerning advances, the publisher may chose to withhold the next advance until its acceptance of a pending deliverable, even if the developer is acting diligently to address the publisher’s objections. Also, publishers typically insist on a holdback period in which revenues are retained by the publisher until the amount of returned games can be assessed. Because returns often occur soon after purchase, and work their way through the distribution chain with reasonable promptness, a holdback period of one or two calendar quarters may be reasonable. Some publishers demand a full year, which is both excessive and damaging to the typical thinly-capitalized developer. The timing of disbursement can become a problem. Customarily, royalties accrue from quarter to quarter, with disbursement made within 45 days of the end of each quarter. Some publishers insist that disbursement be delayed a full quarter, again placing the developer in an unfair financial position and strengthening the position of the publisher in any future development negotiations.

(2) Strategies. Making games is a difficult enough task. Developers do not want to add a battle for fair compensation. Yet compensation is a key negotiating point in every publishing agreement. The developer needs to come armed with options to secure the most favorable compensation possible.

If the developer is to be paid a recoupable advance, the first matter to address is the percentage of royalty to be applied to the recoupment. This percentage should be larger than the percentage allocated to the developer once the advances of the publisher are fully recouped to permit acceleration of the recoupment. Because both developer and publisher are contributors to the game, there is no basis to impose the full burden of the cost to produce the game on the developer by allowing only a small royalty percentage to be applied against a large advance. The budget paid from advances commonly provides for only a basic salary to the owners and key personnel of the developer. With little prospect of a substantial royalty from the game, there is limited incentive for these individuals to expend the effort and undertake the risks required. Moreover, the financial risk justification of the publisher is mitigated to a fair extent by the many controls and unilateral termination rights granted the publisher during game development. A developer royalty rate of at least 50 percent during the recoupment phase recognizes the contribution of the developer and provides a needed incentive. After the advances are recouped, the percentage granted the developer may decline to allow a fair publisher earn back. However, if sales exceed expectations, provision should be made to allow the developer’s percentage to rise to give due reward to the developer and its staff for their contribution. An alternative to royalties based on a percentage of net revenues is a per unit payment. For example, if the wholesale price of a game is $28, and the developer is paid $7, the effective percentage rate is 25 percent. However, the developer does not have to contend with the publisher’s subjective determination of “net revenues.” Again, the per-unit payment should be adjusted to different circumstances such as the recoupment of advances and the possibility of extremely favorable sales.

As mentioned, the timing of payments due the developer is a critical factor. Control of the flow of payments to the developer gives the publisher inordinate power to insist on performance standards that are unreasonable and beyond what the developer understood in the publishing contract. Provision should be made for the payment of a milestone advance even if the publisher has delayed acceptance of a deliverable, provided the parties are making reasonable progress towards resolving the publisher’s objections. Here is suggested language:

The parties shall act at all times in a reasonably prompt and diligent manner in the performance of their respective obligations provided in this Agreement. Developer shall promptly remedy each Deliverable deficiency to the satisfaction of Publisher. Provided the Developer acts diligently and in good faith to address any such deficiencies, Publisher, without waiving or derogating from any of its rights, shall pay the next recoupable Advance prior to approval of the applicable Deliverable. Payment of a recoupable Advance shall in no way imply final approval.

While such language leaves undefined what constitutes developer “diligence” and “good faith,” it establishes the concept that the publisher has a responsibility to continue to fund the developer while resolvable deficiencies are being addressed. It places an obligation on the publisher to act expeditiously in its identification of deficiencies and to maintain focus on their resolution. A publisher that is slow to respond to developer corrective efforts, and then uses the lack of resolution as a pretext to delay an advance payment, is restrained by such a clause.

Another contractual clause to consider is the publisher’s often asserted right to terminate the publishing contract at any time for the publisher’s convenience, that is, without cause. Publishers argue for such a right as a means to moderate their financial risk in the event changed market circumstances make the game less viable than predicted. There is no comparable risk moderation for the developer, which finds itself with a large payroll and facility costs and suddenly no income. The solution for the developer is a “kill fee.” Such a fee would be paid to the developer if the publisher terminates under certain conditions, such as the developer’s completion of a specified percentage of the game. The fee would enable the developer to maintain at least a portion of its staff while it attempts to move forward with a new publisher or new project.

In the present game development climate, it is accepted practice that the independent develop will turn over its ownership rights in exchange for the opportunity to collect royalties after the recoupment of advances. The end result is that the developer loses the ability to build long term value in its enterprise through ownership of game IP and receives royalties that in most instances are inadequate to break the developer from the cycle of reliance on publisher financing. A developer willing to forego short term gain may decide to trade some amount of its royalties for a greater participation in game IP ownership. Of course, publishers would also have to accept this break from the norm. They might agree to do so if developers were willing to sacrifice significant royalties and to enable the publisher to participate in future Game IP profits, much as the developer now receives royalties on derivative works based upon game IP.

E. Right to Attribution

(1) Discussion. Perhaps receiving the least attention but certainly an important category of IP rights for the game developer is the right of attribution, namely to receive public recognition for development of the video game. With recognition comes brand identification. When players purchase games because the trust the skills and admire the style of the developer, the developer has created enterprise value that is reflected not only in the marketplace, but also at the publishing contract bargaining table. Certainly, a number of independent developers are able to rise above the multitude and become valuable brands in themselves, even if they do not own the game IP responsible for their fame. This recognition comes from attribution as the creator of the game.

It may surprise foreign developers that a developer has no inherent “moral” right to attribution in the United States, although both sentiment and the law are changing. All matters of attribution are governed by the terms of the publishing contract and can be as generous or onerous as the parties agree. The practice is still prevalent for developers, as part of their assignment of IP rights, to waive any moral rights they may have to the fullest extent permitted by law. Because the law is changing in the United States to provide for some level of moral rights, developers should not casually continue to waive their rights through contract boilerplate.

The starting point in most publishing agreements is one-sided control over all aspects of game advertising and promotion by the publisher. Here is a sample:

Publisher shall have the sole and exclusive right to determine, at its sole and absolute discretion, all matters regarding the method, manner and extent of publishing including release, advertising, packaging, promotion, marketing, distribution, bundling, channels, pricing, terms, ports, and territories. In connection therewith, Developer grants Publisher the right to use the name, logo, likeness, voice and biographical information of Developer and its management and key employees in connection with the marketing and publicizing of the Game.

Whether and to what extent the publisher/owner of the game gives credit to the contribution of the developer/creator is governed by the agreement. The following is one such provision:

Developer shall receive name, trademark and copyright treatment in the following forms and under the following terms:

Front and back of the box (packaging) credit as follows: Developer’s trademark, in an area of the packaging which is not surrounded by other high detail artwork, and which is no less conspicuous than the trademark treatment of any other party.

On screen and printed material credit for the Game as follows: “Source Code © 200__, ______________ [name of developer]. Created and Developed by ____________ [name of developer].”

Developer trademark to appear on game before the title sequence each time the Game is started. Developer trademark shall appear in full color for a minimum of two (2) seconds and for a reasonable time thereafter, including during animation footage surrounding the trademark, in conformity with Publisher standards.

Developer personnel shall appear in the manual credits. Developer shall submit a list of personnel names and titles for inclusion in the credits.

Publisher shall use reasonable efforts to place the Developer trademark on advertisements and promotional and marketing materials prepared or directed to be prepared by Publisher. In the event space does not permit such trademark display, then the phrase “Created and Developed by _____________ [name of developer]” shall be added to any copyright notice. Notwithstanding the foregoing, Publisher shall not be obligated to credit Developer on Publisher multi-product demo disc title screens, packaging or advertising, on any merchandising materials such as caps, t-shirts or plush toys (or other merchandise where the addition of a credit or logo is not feasible) or other multi-product advertisements or materials. The size and placement of the trademark and/or credit in advertising, promotional and marketing materials will be determined solely by Publisher.

No person except Developer shall be given credit by Publisher, expressly or by implication, as the creator, developer, or words of similar meaning, of the Game.

At all times, Publisher will use reasonable care to provide all trademark and copyright notices on all displays of the Developer’s trademark and copyrighted work.

If the requirements for developer attribution are not provided with great specificity, the developer can find that its involvement only can be detected by turning the game packaging upside down and resorting to a magnifying glass. The cost to the publisher of crediting the developer is negligible, and publishers will want to promote known developers to help sell games. But unless provided in the contract, a new or relatively unknown developer may find it remains so because the publisher has decided to promote its own identity to the exclusion of the developer.

The right to receive credit arises as an issue also in the context of confidentiality. Most publisher agreements contain comprehensive confidentiality sections preventing developer disclosure of game-related information. Confidentiality may extend beyond conventional proprietary information such as budgets, marketing, sales figures, and the like, to include any statements by the developer about the game itself, or any use by the developer of game IP such as depictions of any images on the developer’s web site. The following is representative of the latter form of confidentiality:

Developer shall not, without the prior written approval of Publisher, make any press release or other public announcement, display images of the Game, or give any interviews concerning the Game or transactions contemplated by this Agreement, except as and to the extent that Developer obtains the prior written consent of Publisher, which consent Publisher may deny in its absolute discretion.

(2) Strategies. A publisher is likely to be accommodating regarding the game credit to be given the developer. The cost of providing such credit is nominal and in many instances the publisher benefits from exploiting the existing developer recognition, or even creating or expanding it with a view to benefits in future games. Problems do arise when the publisher is seeking to build its own recognition for a particular game franchise and does not want to developer to become too closely associated with the creation of the game. The publisher’s intentions and the credit that will be provided should be addressed at the very outset of publishing agreement negotiations. What is key for the developer is to know exactly what it wants and to be prepared to provide the contract text to achieve this goal. The point to be made is the right to attribution is a fundamental asset that the developer should make a focus of its contract demands.

The issue with respect to confidentiality and developer credit boils down to the publisher’s typical insistence in complete control of game marketing. Thus, the publisher will insist on the right to control the timing and content of publicity, and with justification in light of the need to develop a coherent marketing program and to build anticipation prior to the game’s release. But the publisher is poorly served if it arbitrarily excludes the developer from this aspect of the game. If the developer is strongly opposed to the publisher’s approach to promotion, then the developer may be less effective in the interviews and appearances the publisher may want. Moreover, the developer may know the intended player demographic better than the publisher and can provide very helpful input. Rather than fear developer interference, the publisher should invite developer participation. The publishing contract may retain ultimate marketing authority in the publisher, who after all is paying for it, but it should provide for reports of the marketing plan to the developer and allow the developer opportunity for nonbinding input.

The developer should also insist on the opportunity to promote the game on its own website, consistent with the overall marketing plan of the publisher. Developer websites are a very effective means of building fan recognition and loyalty for the developer. The publisher’s ability to ban all use of game images and to otherwise control the website content with respect to the game, to the point of censorship, is unacceptable. It unnecessarily diminishes the opportunities of the developer to establish its own identity without any offsetting justification. The judicious use of the term “reasonable” should make possible a clause which permits the developer to make use of game IP on its website. For example, to the last quoted contract text above might be added the following:

Publisher acknowledges the legitimate interest of the Developer in promoting the Game and the Publisher acknowledges the legitimate interest of the Developer in promoting the Game and the Developer’s contribution to the Game on the Developer’s website. Developer may make reasonable, noncommercial use of the Game images and may make accurate references to Developer’s involvement in the Game, provided Developer submits such website content to Publisher in advance for its approval, which approval Publisher shall not unreasonably delay or deny.

Attribution is one right that can be mutually beneficial to the developer and publisher, without requiring the loss by one to achieve the gain of the other. With that approach, and the good will of both parties, reasonable terms can be written.

CONCLUSION

Even for developers experienced in the negotiation of contract terms, it is important to have in mind that ownership and compensation are not the only game IP rights at issue. Many factors figure into a successful negotiation. The better prepared the developer is to understand what is important to both immediate and long-term success, the more likely the outcome will be favorable to the developer.