14

Legal Issues

14.1Intellectual Property

The code, art, and other elements that make up a game are not tangible items like, say, a car. They are known as “intellectual property” (IP). This goes for stories, concepts, and so on. A very specific branch of law deals with intellectual property and lawyers who specialize in it will be the folks to turn to when you discuss publishing or distributing your game. Selling your game to a publisher means that you are also selling the IP involved with the game. All of this must be laid out in the contracts involved with publishing.

Another factor regarding IP in your game involves the individual employees working for you. Make sure that it is written in their employee contracts that all IP made by them (code, art, and so on) belongs to the company. If you have not done this, you probably will not get a deal with a publisher—they will not want to deal with ownership issues down the line.

Contracts are just one way that intellectual property laws affect you. Piracy laws are also in place to make sure that your property is not stolen or improperly licensed. In addition to protecting you, IP law also protects others—you may have to license IP from other people as well. If you use other people’s music in your game or if you are basing your game on a book or movie, you will have to license that for your game. An attorney is the best person to make this happen.

Legally, one of the first steps to take to protect your game is to file any copyrights or trademarks.

14.2Copyrights and Trademarks

Copyrights are used throughout the world to protect an original piece of work from being stolen or illegally used by someone else. They can be obtained for everything from books to music to pieces of art to programs. The main thing to understand about copyrights is that they can protect only tangible items. You cannot copyright an idea. This means that although you still have a great idea, it’s probably not a good idea for a lot of people to know about it! Once you have created something from your idea, it is protected—and the good thing is, it’s protected right then. Registering your copyright is something that you should definitely do, but the law says that you are protected from the moment you have created your product.

When you are working on your independent game, make sure that everyone involved understands and assigns the copyright for the game to you (or the company). No publisher or distribution channel will take the time to consider your title if you do not possess ownership of the game and all copyrights and trademarks involved.

Trademarks work a little differently than a copyright. Trademarks are usually identifying symbols, logos, or marks that represent your company or game. Once you have set up your company and come up with a suitable logo, you will brand your game with this logo— essentially giving it your stamp of ownership. By registering your trademarks for your company and game, you protect yourself from other people who may try to capitalize upon your name or products. Make your logos distinguishable from similar names and concepts and to try to use uncommon spellings or words. As there are many different types of trademarks, research what category your items fall under before getting them registered.

Using trademarks and copyrights is one of the most basic ways to protect your game from theft. Research use of copy protection in your game so that it is difficult to copy and pirate. Though a school of thought regarding piracy is that it is free advertising (and increases word-of-mouth buzz), just know you can take steps to protect your game (it will just take time and money that could be spent on other areas of the game).

14.3Nondisclosure Agreements and Contracts

As mentioned earlier, keeping a lockdown on your concept is of the utmost importance early on in development. The most basic form, which you will get to know very well in this regard, is the Nondisclosure Agreement (NDA)—the agreement that swears everyone working on your project to secrecy. You will use this when discussing the title with potential employees, external vendors, and everyone at the company. The only hitch with using an NDA in the game industry is that publishers typically won’t sign one for you. When you begin the pitching process and working with distribution channels early on, you simply have to assume that they will keep your idea a secret. As mentioned previously, you are already protected by copyright (when your game is finished), so the chances of them stealing your idea and producing a similar product are slim-to-none.

Also, once you have secured a publisher for your game, they may flip the script and want you to sign an NDA as well! This is common practice and should not cause any concern. Much like you, they are concerned with keeping competition low and don’t want rival publishers to be aware of future products.

In addition to NDAs, work out a good standard consultant agreement with an attorney—but this doesn’t mean that the attorney is a consultant! It takes an attorney to actually draft a legally binding agreement for you to use. As you will have people working for you as a contractor or consultant (probably most of your employees), you need some sort of contract that basically states that all the work that the consultant does is owned by the developer (you). This document protects your IP from possible theft. Sometimes this is also known as a “work for hire” contract with a vendor or contractor.

Making sure you have a contract in place like this for every outside source for assets ensures that everything created belongs to you.

14.4Developer and Publisher Agreements

Contracts between you and a publisher usually center around the expectations that each of you have for the other. These expectations reflect budget, schedule, and the minutia of every logistical detail regarding the development of the game. Just as you will set a schedule for external parties to deliver assets to you on schedule, a publisher will also make similar demands upon you regarding the game. The most important part of the contract, though, will focus on the ownership of the intellectual property (the game).

In this area lies the major difference between a publisher and a distributor. A publisher will essentially purchase the game and pay you for developing the product, but in the end, the publisher owns the game. Your contract will basically oversee the transfer of the IP from you (the developer) to the publisher. As publishers already have distribution channels covered, they take care of getting your game on shelves, launching a marketing campaign, and doing all the little things that ensure a game’s success.

A pure distributor, however, only puts your game in stores or online for sales. Everything else will be up to you. If you are unable to make a deal with an established publisher, you will function as your own publisher (which means getting thousands of copies of your game duplicated if you intend to sell them in stores) and you will make a deal (or deals) with a distributor to circulate your game and track sales. Distributor deals focus mainly on percentages of sales that the distributor will get, locations for selling the product, and what level of distribution will take place.

Another of the many legal issues that you will face as a producer is the various contractors that work for you. Anyone that is not working directly for the company—everyone, if you are using the all-contractor business model—is a contractor. Contract artists, programmers, and so on will get your first game produced. Every single contractor requires that a contract be negotiated and drawn up. Usually, these agreements are based on “milestones” that must be met by certain dates in order for the contractor to get paid.

An example of this contract could be for an animator who is developing ten different character models for the game. There would be a different character due every ten days—basically, making a schedule of ten milestones. Every time a character model gets turned in, that animator gets a milestone payment. Sometimes, the assets being developed are called “deliverables”. Either way, pay is based on performance, and all of this will be tracked as efficiently as possible through your established pipeline.

14.5Covering the Bases

Sadly, the world of business law is a tangled jungle! We have not even scratched the surface of problems that can arise from illegal usage of licensing, end user license agreements, or the intricacies of negotiating contracts. Another legal form that you will definitely become familiar with is the “release”. Every actor you use must sign a release for you to use his or her image or voice in your product— this also goes for any locations that are real places (and private property). This is why a good game attorney is a must—if not in the early stages of setting up your company and getting your concept together, then for sure when you are in the hiring and negotiating phase of getting your game made.

One of the most essential tasks of the producer is to become accustomed to negotiating. As mentioned in earlier chapters, developing your “soft skills” when dealing with people is just as important as keeping up on technological trends and current business practices. Negotiating the best possible deal on every single logistical aspect of your game will lower your bottom line and help guarantee the game’s completion.

Good luck!

Interview: Tom Buscaglia, Game Attorney

Newman: What are some of the challenges involved with setting up a new, independent video game company/studio?

Buscaglia: Well, I always emphasize that it is more important to build a great studio than it is to build a great game. If you accomplish the former, the latter will follow. So, the most important thing, in terms of both legal and business matters, for anybody starting a new studio is for them to understand that their goal is to develop a solid, enduring business model and a business that will allow them to make their great game. And that means establishing a commitment to be serious about the success of their studio. Developers love the games they make, and I’m with them 100 percent on that, but they really need to learn to love the business part of it—at least enough to get the job done. And if they don’t, then they need to find somebody else that does and work with them.

The startup developer should initially form some sort of business entity (and company or LLC [limited-liability company], for example) with the understanding that you can’t sell what you don’t own. So you need to set up something that’s going to own the game. The second element of the model is that you have to make sure that anybody who contributes any assets to the project you’re working on has legally conveyed all legal rights to those assets to the owning entity—whether it’s an LLC or company/ partnership. It also wouldn’t be a bad idea to get an accountant, too, just to make sure that as you’re doing this you’re making your obligations to the government. You don’t want to get off the ground and realize that you now owe the government back taxes. You’ll just want to make sure you are in compliance with all employment regulations.

Newman: Are there any factors that apply specifically to setting up a video game company that independent producers would not find in generic business books?

Buscaglia: Two things. First, for the most part, the game industry is royalty-based. Second, it is all about intellectual capital. The record industry is the closest analogy to the first issue, where the record company would advance a band the money needed to record and then recoup the money from royalties. Because of this, there should be some skill involved with approaching the negotiation stages of development. Of course, not all deals as royalty-based. There’s something very simple and wonderful about a work for hire deal where somebody pays you “x” amount of dollars to perform “y” amount of work, and when you’re done, you’re done. The royalty model is still the dominant one, because it requires a spreading of the risk and a lower initial investment. Many developers shy away from the straight “work for hire” deals, because they want to have all the upside potential income if they make a hit. The simple truth, though, is that the upside potential does not yield anything in 90 percent of the cases—or maybe more. I think way too many developers cut themselves to the bone to get a deal that’s not worth taking.

As far as intellectual capital goes, don’t confuse the goose with the golden egg. A top team of artists, programmers, and designers will lay lots of them. Too often, the unenlightened think that a great game franchise is where the value is, not in the team that created it. But it is all too common for a publisher to acquire a great franchise and then turn it over to an internal team that just does not have the passion or talent to pull it off. Whet they don’t get is that it was the team that made the initial franchise that was great, not the game!

Newman: What’s the best way then to set up your initial company? Is it filing a DBA and then incorporating later, or should you just set up an LLC from the get go?

Buscaglia: Although I am usually a great believer in the K.I.S.S. rule (Keep It Simple, Stupid!), it may not be the best way to go here. A DBA is easier, and frankly simpler, but the administrative costs of setting up a DBA or setting up an S-Corp or an LLC are not substantially different, and you’re going to be better off with a formal corporate entity in the long run. If nothing else, if you succeed, you will have much better control over self-employment taxes and social security—at least in the United States—which can have a huge impact. You can put yourself on a reasonable salary and take any other profits earned as distribution of profits and not have to pay social security taxes on the income. Another reason is that if you are switching from an S-Corp to a C-Corp, you won’t have to redo all the assignments of property. It’s nothing to setting up your company properly—you can go to a number of Web sites, such as MyCorporation.com, that will set up your company for you for around $300. If you can’t afford that, then you should probably not be trying to set up a company—you should be trying to find a job.

Newman: You offer a similar package on your Web site (http://www.gamedevkit.com), right?

Buscaglia: The GameDevKit that I developed years ago was in response to what I saw as an incredible need after attending the Indie Games Conference. I had been doing custom contributor agreements for clients over the years. But after meeting with a number of startup independent developers, I realized that these guys couldn’t afford that, so I put together a package. There are articles in it about how to form a company, how to secure intellectual property—and the heart of it is a generic version of the Contributor Agreement and it is, in itself, worth way more than the $295—and there is a discount rate for ten hours of legal time, if they want to use it, which is even more valuable than the cost.

It is important that people understand the contributor agreement, though. It’s the legal vehicle for transfer of ownership of assets created for the game to the company or legal entity that’s going to own the game. Typically with a new game, a couple guys get together and say “Hey, lets make a game,” then they get somebody to do some coding, somebody to do some artwork, and then somebody gets some music that they downloaded from the Internet—they put it all together and they think the first contract they’re going to look at is a publisher deal. That doesn’t work. Let’s say one of the guys who did some of the original character work graduates and moves away and then you have a publisher interested in your game and they ask, “Do you own your IP?” You’re pretty much dead, because you can’t use the guy’s artwork and you can’t find him to get his written consent. You have to have some kind of written document that transfers that property to you—you can’t do it by handshake agreement or anything else. It has to be assigned in writing. I kept seeing that scenario coming up with really talented people, so that was what drove me to put together my package, as well as write the articles that are available on my Web site.

Newman: How early in development should you be concerned with protecting your game with the use of trademarks and copyrights?

Buscaglia: Well, copyrights are automatic; when you create an original work, you have a copyright on it. It’s not enforceable until you register it, but the ownership or the creator or author in his or her works is automatic. Trademarks don’t come into play until you put something in the marketplace. You can reserve a trademark early on, but it’s a more expensive process. Trademark protects your names and logos—or a specific character that’s important to the game. Usually this is done after the developer secures the funding for the game—or better yet, as you may well end up conveying the game to a publisher to secure your funding, let them deal with that stuff. Chances are good that they’re going to change the name of the game anyway.

Newman: When you’re putting a new game together, the issue of NDAs comes up a lot. How important is it to use these?

Buscaglia: Well, for an independent developer, there are really two reasons to use them. The first is to protect you from people stealing your ideas. The other reason is to qualify the highly confidential material you are speaking about as a trade secret. You see, it is only protectable as a trade secret so long as you treat it as a trade secret. Once you tell an interested third party a trade secret, it’s not a trade secret any more. Then anyone with access to these materials can use them. So, just can tell anyone who doesn’t want to sign an NDA that it’s not about them. It’s about protecting your trade secret assets from any unscrupulous employees and contractors—and being able to enforce trade secret laws.

But, make sure that the NDA is just that; I recently had a client presented with an NDA that had a clause concerning use of his materials that included the words “including exact copy”, which made me think, “If you can use the exact copy of what we are showing you without our having any recourse, where’s our protection?” There wasn’t any. So, at my suggestion my client blew them off. Right now, so many people are hungry for a deal that there’s a tradition of people getting screwed in the game industry. I’m doing my best to make sure that this is a historical anecdote in our industry instead of the way we do business.

Newman: Once you are working with a publisher as an independent developer, what are some of the key bullet points to look for in a developer or publisher agreement?

Buscaglia: Well, this is a tough question, because it’s so broad. There are hundreds of points to consider in every deal (remember, that is how I make my living!). No startup developer is going to get a triple-A contract. It won’t happen. Nobody is going to give a new developer a $10 million deal to make a great game unless it’s a studio composed of industry veterans who have been producing triple-A games elsewhere else for ten or fifteen years. The economic risk is too high.

Newman: What should a first-time game producer expect then from a deal?

Buscaglia: You should expect to get a deal that you can’t take because it’s so bad. When publishers fund a project, generally they rate their value of their funding of a project at 35-36 percent of the total net revenue from sales and licensing of the game. In reality, the value of the funding is worth more like 22-24 percent of the net revenue. In effect, the publisher is charging 50 percent more than the money’s worth to lend you the money!

There are some other core issues to watch for: Does the deal involve the transfer of all intellectual property rights in the game? Do you get a percentage of ancillary revenue related to the game, like sublicenses, hint books, and even movie deals? Do you retain the rights to your tools and technology or not? I have seen some contracts where not only did the publisher take all rights to the game and any sequels, they also obtained ownership of all tools and technologies used by the developer, or developed by the developer, in the process of building the game. As a result, the developer builds no long-term value in their studio. They don’t even retain the processes and procedures they used to develop the game to build their next title. Basically, you are an underpaid employee with no benefits.

Newman: So, at the very least, if you’ve created your own proprietary game engine for your game, you should at least try to protect that.

Buscaglia: Yes, then you retain the rights to that and the rights to exploit that you can begin to build long-term value in your studio. And if you are able to license your technology, you get the additional royalties and license fees associated with its use by third-party studios. In addition, there are a lot of other delicate points to watch for—especially with second-tier publishers or quasipublishers that don’t really do anything but provide some funding and have contacts around the world. With these guys, you sign a deal with them, then they advance you money on the game and they get worldwide rights. They don’t distribute anywhere—they sublicense the game to other publishers, like a European publisher—then they get an advance and 30 percent of the royalties. Because your deal is probably 20 percent of sales with them, you are essentially getting 20 percent of their 30 percent, which is only about 6 percent of wholesale! These distributors offer nothing in the realm of marketing, but they benefit from simply having business connections. The developer should also always look for ancillary income—what I call the “lunch box bonus”.

Newman: You mean merchandising?

Buscaglia: Merchandising. Movie deals. You can usually get additional potential revenue through those avenues, if you have the sense to ask for it. I usually push for a 50/50 deal in those areas.

Newman: So, is it more advantageous for a first-time producer to look at alternative means of distribution—like digital distribution or online distribution through their own site rather than a publisher? Is it better for a person to use alternative channels for their first game?

Buscaglia: Absolutely, 100 percent, yes. Direct digital distribution of your game can yield as high as a 60–70 percent royalty to the developer. And that is based on retail price, not on a net wholesale less the cost of goods (COGS). This is in contrast to a traditional publisher deal, which is probably going to be 20 percent. And if your publisher does the same thing (goes to a digital distribution channel with your game), they are going to get the 60–70 percent, and you’ll just get the 20 percent of that. Do the math; that’s 12 percent instead of 60 percent. Quite a bite for just setting up the deal with the online distributor!

I recommend that people get the digital distribution first. You may still need what is referred to as brick-and-mortar or retail distribution for other reasons (people still want a product in boxes). But, it’s nice to have the digital distribution first, because you can then tell the brick-and-mortar publisher that you can’t give them the legal rights to the IP because you already have a contract with somebody else that ties it up. But in order to do that, you will have to be able to independently fund your game without a publisher.

In this regard, the independent film industry model can be really helpful, because if we can separate the funding from the publishing, like Hollywood has with independent production companies, it would have a positive effect on the quality that we see in games and greatly benefit developers. The only problem is, you can get a bond for a movie, but try and do it for a game. As far as I know these sorts of bonded deal structures are just starting to become available.

Moreover, the revenue models for the game industry don’t look that good—10 percent of the games make 90 percent of the money. Then 20 percent of the games make 95 percent of the money! That means 80 percent of the games don’t make money, which means the chances of a game recuperating development costs are less than 50/50—and even if they succeed, the chances of getting any kind of return of investment that angel or venture capital investors are looking for is almost nonexistent.

Newman: At what stage should a studio look at getting legal counsel?

Buscaglia: As soon as they can afford it. I’ve seen too many situations where it would have been cheaper to hire me early on and to do things right, than for them to hire me later and have to pay more to me to clean everything up. It’s a real, “pay me now or pay me more later” sort of industry. Part of it is the fact that startup developers just may not have the money to pay counsel when they need them, so they want to wait until later. But even if they have to do it that way, there’s a ton of information available on the internet. I’ve done articles for Gamasutra that are also on my blog (http://www.tombuscaglia.com) concerning legal issues in the game industry. Also, the IGDA has a lot of materials in the business and legal forum, where we answer legal questions for developers.

Finally, when you are getting juniored in your first negotiation and somebody says, “That’s just the way it’s done in the industry”, don’t believe them! Every deal is a new deal and every deal is a fresh deal. It may be the way they do things, but if they cannot provide a rational basis for any deal point in a contract, then it should not be in there. And, “That’s just the way thing are done, [rookie]” is not a good enough reason, ever.