Tuesday, April 28, 2009

Customer Notification and the Cost of Lost Data

It seems like we hear about hacked websites and stolen digital data more and more these days. It’s unquestionably a big headache to repair the damage done by hackers and get a website or server back up and running after an attack. What is often overlooked is the even bigger legal headache of complying with customer “notification” laws after a digital security breach.

California’s Civil Code §1798.82 is a good example of a customer “notification” law, and many other states have followed California by enacting similar laws. California Civil Code §1798.82 requires business to disclose any data breach involving California residents.

“Any person or business that conducts business in California, and that owns or licenses computerized data that includes personal information, shall disclose any breach of the security of the system following discovery or notification of the breach in the security of the data to any resident of California whose unencrypted personal information was, or is reasonably believed to have been, acquired by an unauthorized person.”

This law applies to any business keeping “personal" information about California residents, no matter where the website or server collecting the information is physically located. So, a company with a website accessible by California residents, sending advertisements into California, or selling a game in California must comply with this law, even if the business stores its customer information in a database outside of California.

The definition of "security breach" in the law is the “unauthorized acquisition of computerized data that compromises the security, confidentiality, or integrity of personal information maintained by the person or business.” A security breach could be anything from a malicious hack to a misdirected email to a lost laptop. The expense of notifying customers about compromised data is the big reason that, on average, a lost or stolen laptop costs a business almost $50,000, according to a recent Intel-commissioned study.

The California law does not provide a specific timeframe to send notification to affected customers after a security breach, only that notification must be made "in the most expedient time possible and without unreasonable delay." Non-compliance with the notification requirement opens the door for affected customers to sue the business for damages. To mitigate this risk, customer “notification” laws should be carefully examined by all businesses that collect customer information, preferably before an actual breach occurs.

Lastly, just because a business follows the notification procedure under California Civil Code §1798.82, it won’t be immune from suit on other grounds. Customers affected by a security breach may still file lawsuits based in tort or other commercial causes of action.

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Tip: Video Game Patent Re-exam Strategies

As we've mentioned before, patent re-exams can be a successful tactic in patent disputes. One of the major benefits is the potential to obtain a stay in the proceedings before the District Court. The stay pauses the litigation (and the costs associated with the litigation) while the patent undergoes an analysis for validity in the Patent Office.

However, that is not the only benefit of filing the re-exam.

First, in re-examination, the patent will be assessed by a patent examiner who has training in the applicable technical field of the patent. On the other hand, if the patent were to be assessed at the District Court level, it would be an untrained judge and jury reviewing the patent.

Second, when a patent is being re-examined in the Patent Office, the patent is not presumed valid, whereas, the patent would be presumed valid in the District Court.

Third, in order to invalidate a patent at the District Court, you would need to meet the heightened standard of "clear and convincing evidence." It is a lower, and easier to meet, standard in the re-examination process.

Fourth (and finally, at least for this posting), in re-examination the patent claims are given their broadest reasonable interpretation. This interpretation is broader than is permitted at the District Court level.

As you can see, there are many potential benefits to filing re-exams. However, one of the hardest things to overcome is convincing the litigators that "everything will be OK" if you file a re-exam. By filing the re-exam, you are effectively taking the invalidity argument away from the litigators (and judge and jury) and putting it into the hands of the patent attorneys (and Patent Office). So, there are many factors that need to be reviewed when considering re-exams, but our statistical analysis shows that re-exams have a more effective chance at invalidating a patent than placing the invalidity arguments in front of the jury.

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Wednesday, April 22, 2009

I'm in ur base, buyin ur studio

Two upcoming DJ-themed rhythm games are set to compete in the market this fall, and now the publishers of these two games are set to compete in a lawsuit, as well. The history of this dispute is a bit convoluted, but it contains several important lessons for game publishers and developers concerned about maintaining control over their Intellectual Property.

Scratch DJ Game, LLC, a joint venture between DVD distributor Genius Products and turn-table manufacturer Numark Industries, is the publisher of the upcoming game "Scratch: The Ultimate DJ." Scratch DJ Game commissioned independent game studio 7 Studios to develop the Scratch game, which was originally targeted to ship this fall. Activision (publisher of the Guitar Hero series) plans on entering into the same game space with the upcoming game "DJ Hero," which is currently also set for release this fall.

In a complaint filed in L.A. Superior Court, Genius asserts that in January, 2009, it began receiving offers from several major game publishers, including Activision, to purchase the rights to the Scratch game under development with Studio 7. On February 3, Genius claims that it signed a nondisclosure agreement with Activision, pursuant to which it provided confidential information about the Scratch game and 7 Studios’ progress. Genius says that Activision then proposed that it would buy the Scratch game intellectual property and associated music licenses from Genius at a break-even price, enough to cover Genius’ development costs up to that point. On February 26, Genius says that it demonstrated the Scratch game for Activision.

Genius claims that it rejected Activision’s initial offer, and during the next few days, it and Activision exchanged a series of offers and counteroffers. Then, on March 19, Genius says that Activision suddenly advised that it was lowering its offer price back down to its opening offer, the break-even price.

According to Genius, Activision explained that this reduction in price was due to the fact that Activision had just purchased 7 Studios! Genius’ competitor in the DJ rhythm game market now owned the studio that had been developing the Scratch game.

Genius contends that, after Activision bought out 7 Studios, Activision hampered work on the Scratch game by reassigning programmers to new projects. Genius also says that 7 Studios refused to finish the Scratch game unless it was paid more than double the originally agreed-upon development fees. Genius alleges that 7 Studios said that if payments were missed, all intellectual property rights to the Scratch game would revert to 7 Studios.

Genius’ complaint goes on to say that Genius eventually had to terminate its agreement with 7 Studios and that Genius subsequently tried to retrieve an alpha build of the Scratch game, and other property, from 7 Studios. The complaint claims that 7 Studios rejected Genius' termination notice and refused to turn over the Scratch game hardware and software assets, including a prototype controller based on one of Numark’s turntables.

During an initial hearing in L.A. Superior Court on Genius’ complaint, the judge said, “There isn’t any evidence against Activision. ...There is no reason to restrain Activision from doing anything.” However, the judge added that “7 Studios has a duty to return the work product, source code, and software of the plaintiff [Genius].” The next hearing in this case is scheduled for May 6.

Success on either side of a “deal-gone-south” lawsuit like this one is often dependant on the language of the contracts between the parties. Its important for a game publisher to carefully consider contract provisions such as intellectual property ownership, termination, and source code escrow (see Ryan’s post today) before something unexpected happens, like another company acquiring the studio developing the publisher's game.

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Tip: Source Code Escrow -- Saving Your Game...Literally

Ascaron Entertainment's new action RPG, "Sacred 2: Fallen Angel," has sold over 400,000 copies worldwide, is topping international PC sales charts, and is about to see release on Xbox 360 and PS3. Nevertheless, the German game development studio went into administration a week ago in order to obtain the protection of German insolvency laws. Ascaron's press release cites development delays associated with Sacred 2 as the reason for its decision to enter banruptcy and reorganize.

Ascaron's announcement officially puts a "game developer FAIL" trifecta into play for early 2009. Midway Games announced, in February, that it had filed a voluntary petition for bankruptcy under U.S. law after a late-2008 change in ownership triggered financial obligations that the company was "unable to satisfy." Midway anticipates that its operations will continue ininterrupted, but one has to wonder: what would happen if the next installation of Unreal Tournament or Mortal Kombat (Midway's flagship franchises) was torpedoed by a more devastating financial hiccup?

The past decade has seen dozens of games killed or interminably delayed by their developer or publisher for a variety of reasons. But what if development of the latest hot title was stymied, mid-development, by the bankruptcy of the developer and the publisher wished to see the game completed? These days, the real possibility of that happening has game publishers taking a hard look at the stability of their developers.

Enter the source code escrow arrangement.


For years, companies that license custom software applications have used escrow arrangements as a means of preserving their access to application source code in the event that the licensor fails to cooperate or meets its demise. In light of the current economic climate and the recent bankruptcy of Ascaron and Midway, the potential importance of source code escrow ever increases.

However, while the escrow arrangement itself is important -- it is even more important to understand that the realities of the bankruptcy laws can potentially undermine the escrow arrangement. It is altogether possible for an escrow arrangement to successfully enable the publisher to use the source code in the situation where the developer fails to perform its obligation but yet that same escrow arrangement may fail to give that publisher the same rights should the developer file bankruptcy.

It is important that the escrow arrangement satisfy the requirements of Section 365(n) of the U.S. Banktruptcy Code (addressing licensee rights to continued use of intellectual property). Because the escrow arrangement may be structured across multiple agreements (for example, the original development agreement and a separate escrow agreement), one should consider what can (and should) survive post-bankruptcy and structure the documentation appropriately, rather than merely hoping/expecting that the escrow agent's document works.

And, of course, also consider detailing what materials must be deposited into escrow (and how frequently), what events trigger release of the escrowed materials to the publisher and what rights the publisher will have in the materials upon their release.

[From the Editor: The back of CRPG manuals back in the 80s seemed to always have a bullet list of tips, and one of the tips was generally along the line of "Save early. Save often." A proper source code escrow becomes your save game just before turning that down that door in the dungeon. There might be nothing there... or there might be a horde of lawyers and a bankruptcy judge trying to say you don't have rights to the source code. And nothing is scarier than that.]

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Tuesday, April 21, 2009

Activision and Gibson Settle

Activision and Gibson Guitar have settled the remaining issues in their ongoing dispute in California. A few months ago, the judge had ruled that Guitar Hero did not infringe Gibson's patent, and now the parties have taken care of the remaining elements to the case, bringing the California matter to a close.

However, Gibson has separately sued all of the major retailers that sell Guitar Hero for patent infringement, as well as Viacom and Electronic Arts (who market and distribute Rock Band). It remains to be seen what Gibson will do with those cases.

Additionally, the re-exam of the patent in the U.S. Patent Office is ongoing.

So, things are not completely done...

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Friday, April 17, 2009

Do Pirates Go Down With the Ship?

Over in Sweden, four individuals associated with The Pirate Bay were found both criminally guilty and civilly liable for copyright violations. The judge found that the crime "has been committed in a commercial and organized form." The monetary damages are approximately $3.6 million to be paid out among 17 media companies, including Blizzard, Sierra Entertainment, and Activision (which are all now smushed together anyway).

What I did not see in any of the news reports, though, was whether an injunction was being issued. Normally, I would say it will be interesting to see what happens next, but I think I can already guess. I'm sure that there are already contenders to take The Pirate Bay's place as a facilitators for BitTorrents.

The quest to slay the piracy dragon will surely continue.

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What's in a name?

Nadya Suleman made big news last week when she sought to register the “Octomom” moniker with the U.S. Trademark Office. Ms. Suleman’s two trademark applications indicate that she intends to use the mark “Octomom” in connection with a reality TV show and disposable diapers, among other things.

However, it turns out that video game company Super Happy Fun Fun, Inc., (I love the name) out of Austin, Texas, had already filed an intent to use application last month for the mark “Octomom” in connection with computer game software, toys, and entertainment services.

So who gets the right to use the mark?

Generally speaking, the first-filer gains the upper hand by winning the race to the Trademark Office. We talked a little about the advantages of filing for trademark protection as early as possible in a previous post. So, to the extent that the Trademark Office views Ms. Suleman's reality TV as overlapping with Super Happy Fun Fun's entertainment services, there could be some interesting fireworks in the Trademark Office.

Even though Super Happy Fun Fun filed first, there could be questions as to whether Octomom has become a distinctive nickname associated with Ms. Suleman. If that is the case, Section 1052(c) of the Trademark Act may come into play. This law says a trademark cannot be registered if it “consists of or comprises a name, portrait, or signature identifying a particular living individual except by his written consent…” And, we know from the case of In re Sauer, 26 F.3d 1340 (Fed. Cir. 1994) that this prohibition applies to nicknames, as well as proper names.

What are the lessons here? One - it is almost always better to file early to protect your intellectual property. Two – conducting searches for trademarks before filing can uncover other people's registered or pending trademarks, which can help you assess your risks and costs before filing for your own. Three - intellectual property legal issues are everywhere.

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Tuesday, April 14, 2009

Tip: Sweepstakes, Contests, and Lotteries. Ohmy!

So, you're looking to generate some energy and buzz for your game and you're considering running a promotion, possibly a random drawing or a sweepstakes tied to the game. You see everyone in every industry running some form of sweepstakes, and you hear them advertised on radio ads and on TV.

Please be careful, though. Running a sweepstakes or promotion can have a big upside, but if you don't comply with the legal requirements, you might find your company's name splashed across the blogosphere as violating criminal laws.

While the specific laws governing sweepstakes and lotteries are different for each state, the laws generally define a lottery as a promotion having three characteristics: (i) a prize; (ii) a random winner; and (iii) a payment for a chance to win. If your promotion has those three elements, you could be running a-foul of your state's lottery criminal laws.

You probably have seen promotions talking about "No Purchase Necessary". That's an effort to not have the "payment" portion. Please know, though, that certain court cases and attorney general opinions have held that payment for a chance to win can be the payment for a product that came with a chance to win. So, just because your customer is getting a game valued at fifty-dollars (plus a chance to win) does not mean you are safely out of the woods.

On top of that issue, there are many others that can derail your promotion. Are you bonded in New York? Florida? Rhode Island? Is your promotion targeting people under the age of 18? Are there specific prize restrictions? Fun stuff to think about, right?

So, before you launch your marketing campaign announcing your sweepstakes, check with your attorney to make sure that you are running a legal sweepstakes and not an illegal lottery.

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Friday, April 10, 2009

To DRM or not to DRM

The FTC recently held a "Town Hall” meeting to address the use of Digital Right Management (DRM) technologies on March 25, in Seattle. Several consumers groups, including the Entertainment Consumer’s Association (ECA), were there to push for better disclosure of DRM on game packaging and better communication between gamers and game publishers on the issue of DRM. You can check out the ECA’s website, where you will see an attempt to outline a set of standard DRM rights for consumers and for copyright owners.

My two favorite PC games of 2008 were World of Goo and Sins of a Solar Empire. What is unusual about these two games is that neither of them are packaged with conventional DRM restrictions. 2D Boy, the publisher of World of Goo, reasoned that “people who pirate our game aren’t people who would have purchased it had they not been able to get it without paying.” Stardock, the publisher of Sins of a Solar Empire, feels that “the most effective way to increase sales is to protect IP in a way that doesn’t seem to punish legitimate customers.” Similar to the analysis conducted by 2D Boy and Stardock, each video game company needs to ask itself how it wants to balance the different business and legal issues surrounding whether or not to use DRM -- just as piracy is a problem, we have also seen that using DRM can result in consumer backlash and legal problems, which may be just as harmful as the piracy.

For example, at the other end of last year’s video game DRM spectrum was EA’s Spore. Spore generated quite a gamer backlash with its DRM policies, such as a three install limit. EA eventually eased the game's DRM restrictions by increasing the install limit to five and implementing a de-authorization process for old installs. Nevertheless, a group of gamers filed a class-action lawsuit in the Northern District of California last September, claiming that consumers were not warned about Spore’s DRM program, which is installed without notice and cannot be uninstalled, even if they uninstall Spore. The DRM program implemented by EA was developed by Sony, who, as you may recall, was involved in the CD Rootkit DRM lawsuits a couple of years back.

These lawsuits indicate that consumers are willing to bring lawsuits against DRM that conflicts with the consumers' expectations of what they can and cannot do with purchased games and music. Whether or not EA or Sony believed that these lawsuits had merit does not remove the practical reality that EA and Sony had to defend against the lawsuits and deal with the resulting publicity. While not necessarily a true cause-and-effect, it is noteworthy that EA has already announced that its next hotly-anticipated game, Sims 3, will not include the same type of DRM restrictions as Spore.

Discussion like the FTC’s Town Hall and organized consumer groups like the ECA may lead to more standardization of DRM policies across the video game industry, such as disclosures on game packaging and standards for DRM technologies. These future developments may help to minimize the risk of unpleasant surprises for game publishers when DRM in a new game conflicts with consumer expectations and/or triggers lawsuits. In the meantime, a careful analysis should be performed when considering the whether to implement DRM, and if so, the type, mechanism, and the actual implementation.

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Tuesday, April 7, 2009

Makin' $$ in a Virtual World

Second Life continues to increase its "mainstream" presence. This article from CNN.com explains how musicians have created careers for themselves in Second Life, illustrating with the example of a single mother who has earned $10,000 through her performances. Further, her performances are arranged by her Second Life booking agent.

Although this article does not itself explore the various legal aspects presented by Second Life, here the interactions so closely parallel traditional "real world" arrangements, they are readily apparent: tax implications for the artist's income based on tips; the contractual relationship, if any, between the artist and her booking agent; potential copyright issues with the artists music as it is streamed to her audience, etc.

All this is particularly interesting considering the artist, her agent, and the audience members are essentially anonymous, even as they interact. Further, one entering a virtual world such as Second Life should consider what court, if any, has jurisdiction over these legal issues. Presumably the court where either the musician or booking agent is physically located, for example, would have jurisdiction. Other considerations include which state's (assuming United States) law would govern. Does it matter that the parties would not know the governing law at the time of the transaction? (That the law be known is an underlying principle of any society based on rule of law.) All of the above are points to consider as virtual interactions become more a part of our everyday lives and people and companies enter these worlds to do business.

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Monday, April 6, 2009

Blizzard v. MDY Update: $6.5 Million Judgment Stands, Appeal is Imminent

If botting on World of Warcraft can get you a 48 hour ban, what does coding a bot and selling it to thousands of other players get you? The answer (for now) appears to be a $6.5 million dollar penalty. We’ve referenced the Blizzard v. MDY case in a few previous entries here at LiaGW. The latest ruling has come down from the Arizona District Court.

As you may recall, the case went to a bench trial on the issue of damages, and the Court awarded $6.5 million to Blizzard back in January, along with a permanent injunction on the sale of Glider. After trial, Blizzard argued that under the DMCA, it was entitled to between $200 and $2,500 for each violation, so MDY should be liable for at least $24 million. MDY countered that the $6.5 million judgment should be decreased based on the “innocent violators” provision under the DMCA.

Well, last Wednesday, the District Court rejected both contentions, and upheld the initial $6.5 million in damages. We're getting closer to seeing this matter come to a close, but we'll keep everyone posted in the event that an appeal is filed.

For a recap of the case, please follow the jump.


The company MDY (which appears to be just one person, Michael Donnelly) makes a program called “Glider” for World of Warcraft players. Rather than spend hundreds of hours of playtime to level-up an avatar, some World of Warcraft players instead pay twenty-five dollars for Glider, which essentially plays the game on autopilot.

Blizzard Entertainment was apparently not happy with players running Glider, resulting in a suit in the Arizona District Court. Blizzard contended that the use of Glider alienates legitimate players who think Glider players are cheaters and also reduces Blizzard’s revenue by allowing Glider players to more quickly level-up their avatars and acquire rare assets. MDY responded that the Glider software actually enhances the player’s experience by removing the tedium, and encourages more casual gamers to purchase World of Warcraft without fear they would never be able to complete with more dedicated players.

The license language in the World of Warcraft End User License Agreement (“EULA”) prohibits the use of bot software running simultaneously with Blizzard’s software. Blizzard made a direct copyright infringement claim that relied heavily on an earlier Ninth Circuit holding that copyright infringement may be proved in software cases by showing an unauthorized reproduction of a copyrighted software program in a player’s RAM. Blizzard claimed that this license to copy its software into RAM is expressly conditioned on compliance with the contractual restriction prohibiting bot software. Blizzard argued that, because the EULA did not permit a RAM copy of the World of Warcraft software when Glider was also running on the same computer, Glider players were infringing Blizzard’s copyright in the World of Warcraft software by copying it without a license. Blizzard then could sue MDY on a theory of secondary liability for Glider players’ direct copyright infringement, since MDY induced those players to create the unlicensed RAM copies of the World of Warcraft software.

After considering the arguments, the Arizona District Court agreed with Blizzard. The Court found that because use of the World of Warcraft software in conjunction with Glider falls outside the scope of EULA, Glider players therefore infringe Blizzard’s copyright. The Court accordingly granted summary judgment in favor of Blizzard with respect to liability on its secondary infringement claims against the MDY. Following a bench trial on the issue of damages, the Court awarded a $6.5 million judgment to Blizzard back in January, along with a permanent injunction on the sale of Glider.

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