More and more disputes in the gaming industry
Andrzej Sapkowski’s demands for more money for copyrights to The Witcher is the tip of the iceberg. Changes in the gaming industry, like increased production costs and the dominance of digital distribution platforms, will give rise to an increasing number of disputes, in particular over intellectual property rights. What could trigger these disputes and how can they be prevented?
Two events in the gaming industry captured particular public interest this October: a claim for higher licensing fees for The Witcher, raised against CD Projekt by the author of the Witcher book series, Andrzej Sapkowski, and the financial troubles of studio Telltale Games. Both these topics have already been the subject of numerous articles, and almost every gaming blog or website has expressed its opinion on the subject. These are indeed interesting cases, but mainly because they are indicative of a broader trend.
Companies in the industry should expect the number of disputes and legal issues they face to increase, and not only (but probably most often) with respect to intellectual property rights.
Video game business—difficulty level high
Game development, which is significantly more profitable today than it once was, has also become a lot riskier in business terms. This higher risk means in turn greater potential for conflicts of various kinds.
It is hard to identify only one cause for this higher risk. A major factor is certainly the virtual disappearance of mid-priced games and the skyrocketing budgets for top-level productions (so called triple-A or AAA titles) (the reason for this is well explained here). Budgets for productions of this kind have begun to exceed in some cases budgets for some of the highest-grossing movies of all time (for example, Rockstar Game’s Grand Theft Auto V allegedly cost USD 250 million to produce—USD 50 million more than the budget for James Cameron’s Titanic). Due to the frequent and significant discounts on which the digital distribution model of platforms like Steam or Origin is based (discounts on relatively new titles can be as high as 75%), and the flood of niche indie games getting released, financed through crowdfunding, each new premiere can entail for a developer or publisher a significant risk of a financial flop, unless of course it proves to be a spectacular success (a painful lesson learned by developer THQ, Inc. in 2013). This forces both producers and publishers to seek new ways of managing the risk involved in releasing new titles.
Press start to play: intellectual property as a risk management tool
One of the ways this risk can be dealt with (though by no means the only one), and one already employed by the movie industry for quite some time, is to focus on well-known and established series, releasing sequels to already successful titles based on highly recognisable content. This content can be either organically developed by the producer through a trial-and-error method or, more commonly, acquired from a third party from a different sector of the entertainment industry (mainly movies or TV series) which already has well-established content that could be licensed. In both cases, licensed intellectual property rights become the key to a future game’s success, whether they are copyrights to a specific character or an entire fictional world, or trademarks to a particularly recognisable title or brand. When a venture’s success hinges almost entirely on a single card, it’s only natural that it can become a spark igniting disputes of various kinds.
One such dispute is the case of claims recently raised by Andrzej Sapkowski against CD Projekt, the publisher of one of the most popular Polish game series, The Witcher (or to be precise, the most recent, third part, which was the most successful one). For the information of readers who only recently moved to the solar system, Sapkowski is the original creator of the character of the witcher Geralt of Rivia, and writer of the fantasy novels featuring him on which the games are based. Interestingly, it is the licensee in this case that likely played a bigger part in developing the current value of the intellectual property which is The Witcher, with the original author and licensor now effectively trying to renegotiate his licensing fee to obtain a larger share of the revenue generated by the game. The dispute essentially concerns the question of whom the success and revenue generated by the game can be attributed to, and to what extent, i.e. whether it was actually determined by the intrinsic quality of the Witcher brand alone and Sapkowski’s creativity, or the hard work put into the game by its developer and the marketing efforts of the publisher.
Another example of an intellectual property dispute is the case currently pending between Bethesda Softworks LLC, publisher of the popular game series Fallout, and a representative of the movie industry, Warner Bros. Entertainment, Inc. Bethesda claims that Warner Bros. has breached the copyright to its hit mobile game Fallout Shelter by copying the source code in Warner Bros.’ own mobile game. Although from a formal point of view the dispute is concentrated on technical issues, in particular the copying of the game’s source code (incidentally, as evidence for its allegations Bethesda points to the competitor’s game repeating the same bugs as those existing in Fallout Shelter’s code), the key issue is actually that the Warner Bros. game, which features a very similar game mechanic to Fallout Shelter, also includes characters from the popular HBO series Westworld, the rights to which are owned exclusively by Warner Bros.
The financial difficulties and creeping bankruptcy of Telltale Games to some extent are also related to this trend. The current situation of the producer of titles like Game of Thrones, Batman: The Telltale Series and its flagship series The Walking Dead demonstrates that a business model based solely on licensing others’ content can also prove to be highly risky, considering the high fees involved, especially if the company has been ill-managed.
Round two: new distribution model and balance of power as another source of disputes
In 2003 Valve Corporation launched its online platform Steam, offering the option of distributing games digitally instead of through traditional brick-and-mortar retailers. From that moment on, the traditional model of publishing games and the entire market have changed dramatically. Due to the relatively lower costs involved, easier post-sales support, and the ability to respond more rapidly to changes in the market, digital distribution is gradually eliminating conventional retail distributors such as the multimedia chain Empik (the Polish equivalent of Virgin Megastore). In the US, digital distribution is currently estimated to account for approximately 74% of total revenue from game sales, and experts predict that conventional retail distribution will be eliminated entirely by 2020. In Poland, the situation of retailers is not much better. The declining position of conventional distributors results in an increasingly assertive approach on the part of publishers and developers. One such example is the termination of cooperation with Empik by the publisher of The Witcher, CD Projekt (formerly CDP), in 2013 and lawsuits filed by it shortly after, with a total value in dispute of some PLN 10 million, for unpaid invoices and compensation for acts of unfair competition.
The change in the distribution model has also affected relations between publishers and producers. Development studios are gaining increasing independence from publishers. As crowdfunding (which can also entail certain legal problems in itself, if the campaign fails to deliver) becomes more popular, there are more and more cases of developers choosing to self-publish. In light of this change in the balance of power between parties involved in game production, disputes can also be expected to arise more frequently in the case of developers that continue to cooperate with publishing companies based on publishing agreements. One potential source of disputes of this kind could be provisions requiring the publisher to pay a bonus to the developer if a new game is sufficiently highly ranked on opinion-aggregating sites such as Metacritic. This is well illustrated by the case of Obsidian Entertainment, which was said to be promised a high bonus from its publisher if its new game Fallout: New Vegas got a score of 85 or more on Metacritic. Soon after the premiere, its rank rose and fell, eventually stopping at 84. In some cases even minute details, such as the exact time from which the opinions should be considered for a bonus payment, could therefore prove decisive.
The dominance of digital platforms can also lead to disputes regarding the terms of cooperation between platform holders and publishers. A dispute of this kind arose as early as 2012 between Valve Corporation and Electronic Arts. The direct result of that dispute was the withdrawal of all Electronic Arts products from Steam and the launch of its own distribution platform (called Origin, mentioned above). Some claims of anticompetitive practices by platform holders can also be expected (e.g. abuse of dominant position or agreements restricting competition on the distribution market).
In addition to all of this, with games themselves, as well as the form in which they made available to customers, becoming more complex, more and more areas of law are becoming relevant to the industry, such as personal data protection, payment services, and even gambling regulations (as demonstrated by the recent interest in loot boxes offered in some games shown by Belgian and Dutch regulators, classifying them as forms of gambling requiring an appropriate licence to offer them; the Polish Ministry of Entrepreneurship and Technology and the Ministry of Finance are also said to be looking into this issue).
“You must gather your party before venturing forth”—or how to prepare for all this
How can someone be prepared for all of this? Well, apart from the obvious solution, i.e. awareness of current market trends, concluding contracts in plain and simple language, but at the same time addressing all of the crucial issues typically arising in the relevant type of relationship, will also prove to be a key factor.
In the case of agreements regulating the game development process, a balance needs to be struck between securing the developer’s artistic freedom and the predictability of the entire process from the publisher’s standpoint. It is particularly important in agreements of this kind to correctly set the various milestones for the production process, in a manner that reflects the iterative method of working on games. This is a method in which successive, more elaborate versions of a product are developed one after the other, instead of dividing the process into a sequence of individual phases concerning different types of work (never believe a lawyer who says the gamedev process can be planned the same as the construction of a house or an office building). A good starting point could be to use the development agreement generator called contract ( ) (i.e. “do contract”), but it would also be a good idea to have it checked afterwards by a lawyer acquainted with the particular legal system that will ultimately govern the agreement (e.g. Polish, English or even Japanese law).
It will also be important to have the licensing agreements appropriately drafted. This applies not only to agreements concerning content borrowed from other areas of the entertainment industry. A licensing agreement is also necessary to make use of a game engine supplied by external developers (for example Unity), which provides the skeleton source code of the future game, responsible for its most basic functions such as physics and the artificial intelligence of opponents.
With respect to development, publishing and licensing agreements, it’s always worth keeping in mind that there are many alternatives to the default dispute-resolution option of going to state court. When entering into an agreement, a clause can be included stating that, for example, any disputes will be resolved by mediation or arbitration. And finally, if a dispute proves impossible to avoid, you should strive to pick appropriate legal counsel, who have an understanding of how the industry works but can also translate all the relevant issues into the language of law.
Jakub Barański, adwokat, Dispute Resolution & Arbitration practice, Wardyński & Partners