"Famous Last Words"

It's a Big World Out There! - Part 2 (May 2005)

Dear Jim,

As contracts get longer and more complicated, where do you see the greatest potential areas of risk for developers? And what can you do about them?

New MBA looking for a games industry job

Dear MBA:

Last month we examined several aspects of the broad intellectual property reps and warranties in many dev contracts and considered where there is risk for developers.

This month, we go back to the I.P. reps and finish our discussion by dissecting the final clause:

Take a moment to remember the language we were discussing:

“(Developer) represents and warrants that (the game) does not contain any indecent, scandalous, defamatory, blasphemous, obscene or unlawful material, and does not infringe upon any right of privacy or publicity or any other intellectual property rights of any third party.”

Can a developer comfortably represent that “(the game) does not infringe upon any other intellectual property rights of any third party”?

I.P. rights fall into four general categories:

1. copyright;
2. trademark;
3. trade secret;
4. patent.

When a developer says no I.P. rights are being infringed, it is saying the game does not infringe on copyright, trademark rights, trade secret rights, or patent rights.

Let's look at each of these separately.

1. Copyright: Under United States copyright law, copyright subsists in the creator of a work from the time it is fixed in a tangible form of expression.

This means as the developer writes its original code, copyright in that code is established in the name of developer. Developer can, in turn, hand over rights to publisher under its development contract. (There are details to which attention must be paid for developer to assure that it holds copyright in work created by its employees, but that's a topic for another day.)

Since copyright attaches at the time of creation of the original work, if code or other game assets are taken from a third party without consent, that taking may constitute copyright infringement. Even innocent copying can constitute infringement if both access and similarity to the copied work can be established.

Use of an engine, routines or other code, and tools, without consent of the copyright owner, could constitute infringement. Use of graphics, music, or sounds provided by a third party could constitute infringement unless there is paperwork showing such use is authorized.

Since certain elements of a game project may be provided by the publisher, a content licensor, or some other third party, developer should be cautious about making a broad “no infringement” copyright rep. Developer's rep should be limited to game elements developed by developer in its studio or by its own subcontractors.

2. Trademark: Developer's representation that there is no trademark infringement should also be limited to game elements within developer's control. It is certainly appropriate, for example, to warrant that developer's company name and logo do not infringe, particularly if they are to appear in the game, packaging and documentation. But to the extent game elements, including the underlying property, are provided by publisher or a third party content licensor, no developer representation should apply.

A good strategy in negotiating this rep is to ask the publisher to be specific in connection with where it feels there is risk of trademark infringement. From there, work together to determine who controls each element and limit your own developer liability to elements within your own control.

3. Trade Secret: Trade secret law is important to software development because it can apply to ideas, processes, methods, and any sort of thing that has value or can add incremental value to the development process and the software.

Protection of trade secrets is the reason we all sign non-disclosure agreements before projects, business opportunities, or technologies are discussed. Trade secret law is the reason why studios maintain sign-in logs at the front door, and the reason why employees are required to sign non-disclosure and employee agreements when they join a development studio.

Trade secrets are not protected by registration or by filing papers. Trade secrets are protected through contractual obligations of secrecy.

While no one can restrict an employee from using general knowledge and know-how gained at a former employer, developers must be vigilant to prevent their studio employees from using code, processes, techniques or development strategies taken from former employers that may be regarded as trade secrets.

Every developer should at a minimum have an employee manual that makes clear that no trade secrets from former employers can be used in the studio.

While trade secret claims are rare in game development, studio managers must be conscious of the risk attached and take steps to prevent use of former employer's material in the studio.

It is unlikely that a developer can limit a rep against infringement of trade secrets in game code it develops and delivers to the publisher. But it should also not make any rep in connection with game elements provided by others.

4. Patent: It is extremely risky for any developer to represent that any game does not infringe upon patent rights of any third party. Patent is an enormous field, patents are being issued every day. Ignorance of the existence of a patent is no excuse (though knowing infringement can subject the infringer to triple damages). Several of the great battles of the video game industry have been fought not at retail outlets between opposing hardware and games, but in patent court. Magnavox was a loser in the videogame wars with its Odyssey system, but its parent, Philips Corporation, cleaned up when it later litigated its patent covering the most basic of videogame elements -- collision of objects on a CRT screen.

There is a current very real and chilling example making the rounds.

McKool Smith, a Texas law firm, has sued 12 major game publishers and threatened others, for infringement of U.S. Patent no. 4,734,690, titled “Method and Apparatus for Spherical Planning.” This patent was originally filed in March, 1988 and covers a method for using a moving plane to show 3-D images on a monitor. The on-line newsletter, Game Biz Daily said it “could affect nearly every 3-D video game ever made.”

Game Biz Daily identifies the defendants as Electronic Arts, Take-Two Interactive, Ubisoft, Activision, Atari, THQ, Vivendi Universal Games, Sega, Square Enix, Tecmo, LucasArts, and Namco Hometek.

Any developer who makes a representation that its 3-D game does not infringe upon the patent rights of any third party may well have become a guarantor of its publisher against any claim from McKool Smith.

I recommend that patent be stripped out of the general I.P. reps and that at best, developer represent that the game will not infringe upon patents to the best of its knowledge and belief.

If you are doing work in the 3-D field, you may also want to expressly disclaim any rep for the McKool Smith 4,734,690 patent. Otherwise, if the publisher becomes a party to this litigation because of your game, it may come back to you asking for indemnification (at worst), or will take the eventual patent license fee and defense costs out of your royalty earnings (at best).

*****UPDATE***** -- Greg Boyd, a patent attorney who practices at Kenyon & Kenyon in New York City has advised me that everyone making new games now is safe from the “'690 patent.”  It expired on March 29, 2005.  So, there is no need to expressly disclaim that one on future contracts. However, the general recommendation to disclaim or limit patent representations continues unchanged!

For a thorough discussion of I.P. download the IGDA's "IP Rights White Paper".