Thursday, May 28, 2009

Tip: Contract Indemnification

Indemnification provisions are pretty common in software development agreements. The key with an indemnity is determining the appropriate trigger events. For example, should a only third party claim trigger the indemnity is should any loss by the other party? Perhaps only certain kinds of losses will be covered by the indemnity?

Another point to consider is whether the indemnity obligation should be capped by the limitation of liability in the agreement. Consider whether the indemnity should be separated from the limitation, or that a separate cap should apply.

Lastly (for this post), if the indemnifying party has an obligation to defend the other party, be sure to consider the full practical effect of that obligation. Sure, it may be all well and good that the cost of paying lawyers to defend the lawsuit has been shifted to the other party -- but, do you really want that other party to be defending you? Are they going to do a good job? Will they really have your best interests in mind?

Negotiating the indemnification is often left to be handled "by the lawyers," but it is important to focus on the cost-shifting and scope of the indemnification. If an indemnification clause is triggered, it generally means big money.

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Wednesday, May 20, 2009

Tip: Buying Video Game Assets Out of Bankruptcy

Like many industries, the video game industry has seen a rise in Chapter 11 bankruptcy filings. Large corporate bankruptcy cases can be complicated and intimidating affairs, but for the savvy investor (or the savvy competitor), they can present tremendous opportunities. Traditionally, companies filed Chapter 11 to restructure their debt and emerge from bankruptcy as a more efficient going concern. It is becoming more common, however, for companies to file bankruptcy and quickly sell some or all of their assets and liquidate the remainder. These transactions are commonly referred to a “363 sales” (named after the applicable Bankruptcy Code section). Such sales can involve any asset of a bankrupt company, including intellectual property rights, and a prospective buyer has an opportunity to acquire a desired asset at a discounted price. However, because of the particularities of the bankruptcy proceeedings, there are some choppy waters that a prospective buyer needs to successfully navigate.

An asset sale in bankruptcy is usually conducted pursuant to procedures approved by the bankruptcy court and often involves a public bid solicitation process and an auction. The court-approved bid procedures may dictate matters such as the minimum required bid and the bid increment amounts. Bidding procedures may also provide certain protections to the party that performed the due diligence associated with determining the initial bid amount, referred to as the “stalking horse bidder.” As seen in the extreme examples of the Lehman Brothers and Chrysler bankruptcy cases, asset sales sometimes take place very shortly after a bankruptcy case is filed, but in most cases, more notice is provided. Potential bidders should monitor a bankruptcy case closely to ensure that they are aware of bidding deadlines and other procedural requirements associated with the sale. The failure to comply with these procedures, or to meet these deadlines, may result in a lost opportunity to purchase valuable assets of a bankrupt competitor.

Purchasing these assets can have several benefits. In addition to acquiring assets at what may be bargain prices, the bankruptcy court order approving the sale usually results in conveyance of the assets free and clear of liens, claims, or any other type of encumbrances. In other words, with an appropriate bankruptcy court order, purchasers can rest assured that they will truly take ownership of the assets and that no other party will have a valid claim against the assets.

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Tuesday, May 19, 2009

Take-Two and 3D Realms are All Out of Gum

A soured game publishing deal has ended in litigation between the developer and publisher. Last Friday, Duke Nukem Forever publisher Take-Two Interactive sued developer 3D Realms' parent company, Apogee Software Ltd. Take-Two is accusing 3D Realms of failing to deliver on a contract to produce Duke Nukem Forever after Take-Two paid $12 million in 2000. The success of Take-Two's suit may depend on how well-defined the obligations are within its publishing agreement with 3D Realms.

Earlier this month, there had been rumors that 3D Realms had shut down, and 3D Realms did confirm that the Duke Nukem Forever development team was let go on May 6. However, today, 3D Realms issued a statement declaring that it is not going out of business. The statement said 3D Realms has not closed down entirely, and 3D Realms still retains ownership of the Duke Nukem-related intellectual property. 3D Realms says it will continue to operate as a company and to license games to support the Duke Nukem franchise.

3D Realms claims that Take-Two did not give 3D Realms the $12 million, but instead paid the $12 million to publisher GT Interactive, which was absorbed by Infogrames way back in 1999. 3D Realms contends that the only money it ever received for Duke Nukem Forever was $400,000 from GT Interactive. 3D Realms says it has been financing Duke Nukem Forever on its own, to the tune of about $20 million thus far. Late last year, 3D Realms said it began negotiations with Take-Two to get enough money from the publisher to finish the game.

3D Realms claims to be satisfying milestones set by Take-Two, despite not having a financing agreement finalized. 3D Realms says Take-Two made a last-minute proposal to acquire all rights in the Duke Nukem franchise and the development team. Those final negotiations fell through on May 4, and the development team lost their jobs two days later.

Several former development team members have posted art and clips of the unfinished game on the internet. In its suit, Take-Two seeks an temporary restraining order preventing the release of any Duke Nukem Forever assets by 3D Realms. However, Take-Two may have difficulty going after former employees of 3D Realms, since 3D Realms apparently owns the intellectual property being posted.

This scenario highlights many issues that need to be considered when entering into a development and publishing agreement. While contracts cannot avoid all problems, they can certainly assist in setting forth each side's rights ad obligations. Publishers can consider reserving certain rights in the intellectual property related to the game, while developers may want to ensure steady funding before hiring a development team and commencing development. Well-defined funding obligations and milestones, contemplated all the way through game completion, can lessen the chance of vaporware and the need for last-ditch efforts to save an unfinished game. Escrow clauses and intellectual property ownership/licensing provision in the event of a "divorce" can also become highly valuable.

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Tuesday, May 12, 2009

Paltalk v. Microsoft Settles

The PalTalk v. Microsoft case we've been following settled out last week in the midst of trial.

Back in 2006, Paltalk sued Microsoft, alleging that communications through Xbox LIVE (either on the original Xbox or the 360) infringes two of its patents, 5,822,523 and 6,226,686.

The trial began in March, and was ongoing until Microsoft and PalTalk filed a stipulation with the court saying that the claims and counterclaims between the parties should be dismissed, and that each party would cover their own costs and attorneys’ fees.

Unfortunately, we won't get any idea of who came out on top, since the terms of the settlement are confidential. But, at least we know that Xbox LIVE won't be going offline as a result of this infringement suit.

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Friday, May 8, 2009

Rights of Publicity: Its in the game

The law surrounding an athlete’s right of publicity is fluctuating faster than Brett Favre’s retirement plans, and game companies ought to be paying attention. This week, Sam Keller, a former college quarterback, filed a class action in the U.S. District Court for the Northern District of California against Electronic Arts and the NCAA for using college athletes’ images and attributes in EA’s line of NCAA video game titles.

The right of publicity is the right of a person to control commercial use of his or her name, image, likeness, or some other identifying aspect of identity. According to the lawsuit, there are close similarities between real-life college athletes and the virtual athletes in EA's games. “Electronic Arts matches the player’s skin tone, hair color and often even a player’s hair style…” The complaint also alledges that EA’s virtual athletes are depicted with unique accessories, such as wristbands, glasses, visors and headbands, identical to those worn by their real-life counterparts.

This new suit against EA comes on the heels of another important right of publicity case decided last year, that one involving a fight over the use of athletes' statistics in fantasy sports. In that case, Major League Baseball lost its Missouri common law right of publicity claim at the 8th Circuit (and was denied an appeal by the Supreme Court) over the names, likenesses, and statistics of MLB athletes used by a fantasy baseball league operator. The 8th Circuit balanced the right of publicity in Missouri against federal First Amendment free speech protections, and decided the latter should triumph.

And just last week, the Minnesota District Court (located within the 8th Circuit) granted summary judgment in favor of CBS, saying that CBS Fantasy Sports should not have to pay licensing fees to the National Football League Players Union for NFL athletes’ names, likenesses, and statistics. The lower Minnesota court, not surprisingly, followed the 8th Circuit’s lead in holding that the First Amendment trumped Minnesota’s right of publicity laws when it comes to fantasy sports.

These courts denied the NFL Players Union's and MLB's claims against fantasy sport operators because the courts felt that athletes' names and statistics are in the public domain, and therefore enjoyed First Amendment protection. These two cases, along with the new suit against EA, deserve attention because the courts have not yet given straightforward guidance on where to draw the line between permitted and prohibited uses of athletes' statistics and likenesses. This uncertainly is perhaps even more opaque when we take into account that states like California and New York typically rule more strongly in favor of plaintiffs with right of publicity claims, due to the importance of personalities on those markets.

Are the facts a basketball player stands six foot six inches tall, plays guard for the Bulls, and wears jersey number 23 in the public domain? Or, under what circumstances will the facts that the player has dark skin, is bald, wears Nikes, and sticks his tongue out when he dunks merit First Amendment protection?

Game companies need to take stock of the law surrounding the use of names, images, likenesses, and statistics, and evaluate the associated risks, before including any aspect of a real-life athlete's or other person’s identify into a game.

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Thursday, May 7, 2009

Lunch with Steve Ballmer, Xbox Rumors?

I attended a lunch today and the keynote speaker was Steve Ballmer. Despite the monikers that Mr. Ballmer has earned about his speaking capabilities, he was entertaining and informative to listen to. Of particular interest to our readers -- he touched on the future of the Xbox a tiny (very little) bit...

A question was asked of him of "do you have any tips or secrets that I could use to impress my far-more technology literate 17 year old son". He talked about some aspects of Microsoft Office, but recognized that a 17 year old probably isn't all that interested in the deep dark secrets of Word and Excel. He then said "tell your son to pay attention, because we've got some big announcements for the Xbox in the next thirty days."

Not the most specific of rumors, to say the least, but it nevertheless piqued my interest. He also offered some other (non-Xbox) technology business and management nuggets, and I'll try and cover them in a later post.

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Tuesday, May 5, 2009

Tip: Contracts and the Right to Set-off

As you may or may not have seen, Valve Corporation filed suit against Activision Blizzard, Inc. on April 28, 2009. The subject matter of the long-standing dispute is about royalties, audits, and overpayment of royalties, which brings us to today's tip.

When drafting contracts that involve the payment of royalties, consider including audit provisions and set-off provisions.

Audit provisions enable a licensor/developer to verify the accuracy of royalty payments and can provide the timing, framework, and process for conducting these reviews. Without an audit provision obligating the licensee to allow the audit to happen, the only option to getting access to the appropriate books and records may be filing a lawsuit and going through the discovery process.

Set-off provisions enable a licensee/payor to set-off payments (i.e., I owe you $10, but you owe me $4, so I'll just pay you $6). Set-offs can ease administrative paperwork, while also providing better cash-flow management and negotiating position in the event of a dispute.

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Friday, May 1, 2009

Trademarks in Virtual Worlds

Taser International, Inc., recently filed a trademark infringement lawsuit against the publisher of Second Life claiming that the publisher is illegitimately selling virtual Taser stun guns.

Specifically, Taser says that these virtual stun guns are being sold next to pornographic material, which harms its brand. The suit states that, by associating Taser products with such content, the defendants have damaged Taser's reputation. This concept is known in trademark law as "tarnishment." Taser complains that the defendants sell virtual Taser stun guns and also sell adult-only explicit images and scenes, thus attaching such content to the Taser mark.

While there have been a number of cases addressing tarnishment of a mark used without authorization in the context of sexual activity, obscenity, or illegal activity, providing virtual explicit materials within the same virtual environment as the virtual use of the trademark may not be enough to establish trademark tarnishment.

Taser is also using straight trademark claims, as well as design patent claims, to try and stop the virtual activity.

When applying trademark law designed for the bricks-and-mortar retail environment to a virtual environment, previous assumptions and categorizations will not always make sense. Regardless of the outcome of Taser’s suit, brand owners should be thinking about formulating effective strategies for dealing with infringement online, particularly virtual worlds, as well as taking steps to obtain protection for their intellectual property before the infringement occurs.

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