Famous Last Words January 2010 - New Year's Resolution - Reread the Boilerplate

DISCLAIMER: This column is intended for general educationaland entertainment purposes and is not legal advice. Every situation is unique. Anyone entering into a contract should have a lawyer who can provide counsel.

Jim Charne,

Attorney at Law

New Year's Resolution - Reread the Boilerplate (January 2010)

Dear Readers:

Welcome to Y2.1k.  At the start of a new decade, it’s a good time to reassess, reconsider, and take another look at the way we all do business.

A good place to start is in the boilerplate of every contract we negotiate and sign.

The “boilerplate” of a ship is the steel that keeps the sea out of the hull.  In a contract, the “Boilerplate” is that back ¾ of the paperwork, the “fine print,” the language that remains in place in every agreement, a guaranteed cure for insomnia (!), and oh-so-very easy to overlook. 

Boilerplate is in the contract primarily to protect the party writing the contract from risks that can arise in any transaction. 

But times change, deals change, and risks change.  So it is a good idea from time-to-time to reread and reassess that boilerplate to make sure it still serves its purpose.

One example recently leaped out at me.

Most royalty clauses have a provision for a “reserve.”  The “reserve” is developer’s earned royalties that are not paid when earned, but rather held by the game publisher because of the risk of returns, mark-downs, and defectives.  Reserves are justified because some sales may not really be sales when the dust settles.

A “reserves” clause may provide for some liquidation schedule when the amounts withheld, to the extent not reduced by returns, mark-downs, defectives, etc., would be paid out to the developer.

Here’s one example of such a clause, as may be found in a game development deal:

“(Publisher) shall … deduct or credit such amount from royalties, if any, as shall be necessary in order to maintain a reserve for returns equal to the lesser of: (i) (Publisher’s) estimate of its inventory exposure, or (ii) thirty percent (30%) of the Average Quarterly Royalty (such reserve to be adjusted as soon as practicable and at least on a nine (9) month rolling basis and finally liquidated when the last royalty payment hereunder is made).”

This “reserves” concept comes to games contracts from similar agreements in the book publishing and recorded music businesses.  In each of these industries, as in games until recently, the nature of the products sold have been physical – books and cds, where inventory must be manufactured and placed at retail locations.  Historically, there was no ability for “manufacture on demand.”

In such a model, a sale does not occur until a consumer makes a retail purchase of some sort.

And this was certainly the model in our own games industry where console and computer games were manufactured and sold by the big retailers, either in-store or by direct distribution of hard goods.

But times change.  And I noticed a reserves clause remaining in a deal for an Xbox Live Arcade game.  With no physical inventory, and little chance of a return after a day or so, there is really no need for a game publisher to hold my client’s royalties after it receives its own accounting and payment from Microsoft!

Changing the boilerplate, in this case, requires a change in the royalty accounting practices of the publisher.  That is not an easy job. 

But when Developer money is to be withheld, it must be justified by a good reason.  I am sympathetic to the risk of returns and markdowns of physical goods.  But where the risk is virtually zero, as in the case of a download game, all royalties should be paid to Developer.  Reserves for such sales are in appropriate and should not be withheld simply because that is the practice of the game publisher and its accounting staff.

Changing times require reexamination of our deals and resultant shifts in negotiation practices. The start of the new decade is a good time to focus on this.

Jims Bio

Jim Charne practices law in Santa Monica, CA (www.charnelaw.com) where he represents developers, designers, composers and other clients in the games industry.  Jim has been a frequent speaker at GDC, is active in IGDA from whom he received an “MVP” Award at GDC 2006, in 2010 will chair the Practicing Law Institute video game law segment the week after GDC at its annual Entertainment Law Symposium in New York, and is a member of the Advisory Board of G.A.N.G.  Jim served as President of the Academy of Interactive Arts and Sciences from 1998 to 2001.

Is there language in your contract that has you scratching your head?  Found something confusing or worse?  Send it to “Famous Last Words” for developer-oriented analysis.

Famous Last Words is intended for general educational and entertainment purposes and is not legal advice.  Every situation and circumstance is unique.  Anyone entering into a software-related contract should have an experienced lawyer who can provide counsel throughout the process.

©2010 Jim Charne.  All rights reserved.