"Famous Last Words"

Submarine Patents (June 2008)

Dear Jim:

I see Gibson guitars is suing Activision, Viacom, EA, MTV Networks, and others, including retailers (!), over Guitar Hero and Rock Band. What are they thinking?

What's up with that?

Dear What's Up:

This crazy lawsuit shows once again that patent litigation is a profit center in the videogame business. Fall-out from clashes like this can impact developers far down range.

Gibson claims Guitar Hero and Rock Band infringe its 1999 patent having to do with using technology to simulate a musical performance.

Gibson claims Activision has refused to license its patent. Activision, which did license the Les Paul guitar shape from Gibson, says the lawsuit was filed only after Activision advised Gibson it would not renew the two companies' marketing and support agreement. The lawsuit was apparently filed after Activision first went to court to try to nullify Gibson's patent.

Whether Gibson, or Activision and co-defendants, prevails is of lesser interest to us than the impact this litigation could have on game developers of these (or similar) titles.

Why should developers be concerned?

Every game dev deal contains IP representations. These are promises the developer makes to its publisher concerning originality and non-infringement of the work.

A typical IP rep looks like this:

“Developer represents and warrants that the Product , except materials provided by Publisher or its licensors: (i) will be free and clear of any liens, claims or encumbrances, and (ii) will not infringe upon or misappropriate the copyright, trademark , trade secret, patent, publicity or privacy rights of any third party.”

Subsection (ii) of this clause should always be parsed by developer, together with its counsel, so that developer can confidently agree with each of the six requirements. There are six separate representations here. The developer is agreeing that its product will not infringe or misappropriate any (1) copyright; (2) trademark; (3) trade secret; (4) patent; (5) publicity right; or (6) privacy right, of any third party.

Each of these reps merits a separate discussion. But our goal here today is to address #4, patent.

So-called “submarine patents” are nothing new in the videogame business. As recently as 2005, the industry was engaged in costly large scale litigation over what had become known as the “‘690 patent,” filed by Tektronix in 1987, granted in 1988, and titled, “Method and Apparatus for Spherical Panning,” This also became known as the American Video Graphics patent.

At least 12 publishers were named as defendants. Many, many games were cited as infringing.

The ‘690 patent litigation is not an anomaly. Another recent patent lawsuit was brought by iEntertainment Network against Epic Games, Atari, Valve Corporation, Sierra, Sony Online Entertainment and various Sony offices. As reported by Gamasutra, the suit was in connection with use of a method relating to “…latency in online games. The original patent, which seems to have been filed in 1996 by Dale Addink while working on early online flight sim title Warbirds, revolves around ‘minimizing the effects of time latency in multiplayer electronic games played on interconnected computers' by including ‘time dependent attribute information' in the packets. Patent owner iEntertainment, which was founded by Microprose co-founder JW 'Wild Bill' Stealey, demanded unspecified damages regarding the patent.” This litigation was ultimately settled.

Why are developers put at risk in patent litigation?

If a developer makes the patent representation in the section quoted above, it is promising that the game will not infringe upon any patents.

Such representations are almost always accompanied by indemnification language such as this:

“Developer agrees to indemnify, defend and hold Publisher harmless from and against any action brought against Publisher, including reasonable attorneys' fees, to the extent such action is based upon or arises out of a claim that, if true, would constitute a breach of Developer's Representations and Warranties set forth herein .”

If a claim were to be made, the publisher would be well within its rights to demand the developer assume financial responsibility for the defense and pay any settlement or judgment. For a developer working on a very slim profit margin, such a responsibility could easily lead to bankruptcy.

How can a developer protect itself from such a contingency?

These patents are called “submarine patents” for a reason. They are generally unknown, lurking below the surface, and appear unexpectedly to torpedo games, publishers, and developers who may have unknowingly (or otherwise) infringed.

Unlike copyright, where the test for infringement is “access + similarity,” there is no requirement of knowledge or access in litigating a purported patent infringement. In fact, if a defendant is accused of knowing and then infringing, damages can be much higher!

Patent infringement liability is a matter of risk allocation in a game dev deal. I believe game publishers are far better able, financially, and organizationally, to absorb this risk.

For this reason, when developers see the patent rep in their dev deal contracts, I recommend negotiating a revision as follows:

“Developer represents and warrants to Publisher that the Product (including any audio or visual aspects created by code), developed by Developer, except materials provided by Publisher or its licensors: (i) will be free and clear of any liens, claims or encumbrances, and (ii) will not infringe upon or misappropriate the copyright, trademark , trade secret, publicity or privacy rights, and Developer will not knowingly infringe upon or misappropriate the patent rights of any third party.” (emphasis added)

Risk arising from patent infringement claims can also be managed through insurance. But so-called “errors and omissions” coverage is expensive and policy limits of a typical low-limit developer policy may not pay for much more than a defense.