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Selling Your Intellectual Property

February 20, 2009 Intellectual Property One comment

    Copyright law presents a simple premise: that creators, artists, and authors should be rewarded economically for contributing to the marketplace of ideas. The system in place protecting copyright gives authors the exclusive ability to transfer and negotiate their copyrights through assignment, transfer, and licensing. Not all rights are treated equally, however, and it is important to understand exactly what you're transferring away when you sign the dotted line.

    Having a Right to Sell

    Before you can think about selling your work, you need to know that you are the owner. If multiple people contribute to a work (e.g. collaboration project for software creation), each contributor is a joint author and owns the work much in the same way that a tenant in common in real property owns land: each joint author has an undivided possessory interest in the whole work. This means that without a contract stating the contrary, everyone who contributes to the project is a joint owner subject to the interests of the other authors.

    This can be problematic. For example, if you want to sell your product to a publisher, you will probably be required to sign a contract that assigns all rights to distribution to the publisher. You can't do this if you are a joint author unless you have permission from the other joint authors. There are limitations to this rule. For instance, a joint author can license certain non-exclusive rights independently so long as that joint author shares the profits with the other joint authors.

    Joint authorship is something to keep in mind if anyone could potentially claim a stake in your work. Unfortunately, the law concerning joint authorship is a bit ambiguous and jurisdiction dependant—the only real bright line rule is that the contribution must be more than "de minimus" or more than a minimal amount.

    If you work for a corporation or on behalf of an organization your work may be a work-for-hire. This means that the author (you) do not own the work under Copyright law. Instead, the company employing you automatically owns the rights to anything you create within the scope of your employment. Because the limitations on work-for-hire are also fairly ambiguous (for instance, if you work on a personal project after hours on a company computer, the project may still belong to the corporation) it is important to make the limitations clear in your employment contract.

    Selling your Work

    There are various ways to profit from your work, including exclusive licensing, non-exclusive licensing, and assignment/transfer.

    Exclusive License

    An exclusive license gives the licensee (the purchaser) the sole right to use the work in the limited manner stated in the license. They are typically recognizable by language ("exclusive right") and a limitation in scope, region, and time. For instance if the licensor (you) grants licensee an exclusive right to distribution within the territory of Japan for three years, the licensee is the only entity that can distribute your work within Japan for three years. Keep in mind that when you grant an exclusive license to someone you aren't permitted to use or exploit the work in the manner described in the license during the term of the license; exclusive means just that, and it excludes you too unless you reserve certain rights. Once the license expires (in this case, after 3 years), the licensee retains no right to distribute your work unless the contract states otherwise.

    Non-Exclusive License

    A non-exclusive license gives the licensee the right to use the work in the limited manner stated in the license. Read that carefully. Only the right to use is granted. Keep in mind that no one but you may participate in any of the enumerated rights under copyright law without your permission. An example is a sync license for music. Unless the contract states otherwise the right to use a song in a movie is non-exclusive. The music publisher may re-license that song to any other licensee.

    Note: You cannot grant an exclusive license when non-exclusive licenses are outstanding. If you've granted several people a non-exclusive license to use your work for an indefinite or infinite period of time, you will have to retain some kind of right of revocation or termination if you ever want to license your work exclusively.

    Bear in mind that if you add or change your work in any way you essentially create a new copyright in a new work. If you grant a non-exclusive license in a piece of software and later change that software (by, say, adding new functions), you can sell an exclusive license in spite of the previous software unless the licensee demands otherwise.

    Assignment/Transfer

    If you assign or transfer your work you are no longer the owner of the copyright. If you see the words "assign" or "transfer" in a contract you should bear in mind that you will not be able to get those rights back unless the contract contains an option to repurchase. The purchaser can register the transfer document with the Copyright Office and be listed as the owner. However, copyrights are severable. You can transfer the public display or public performance right while retaining the right to distribute if that is made clear in the contract.

    The key point is that it is important to know what you are selling. If you believe that you are selling an exclusive license but are in fact selling (according to the contract) an assignment/transfer you may wind up violating a copyright in your own work and have that copyright enforced against you.

Virtual Worlds vs. NCSoft Patent Infringement Suit—Legal Theorycrafting

January 2, 2009 Litigation No comments

    On Christmas Eve 2008, Virtual Worlds filed a patent claim against NCSoft for infringing on patent no. 7,181,690. The claims included in the patent pertain to online 3D environments where "[a] plurality of users can interact in the three-dimensional, computer-generated graphical space where each user executes a client process to view a virtual world from the perspective of that user." In other words, the technology arguably applies to every MMO in existence. According to counsel for Virtual Worlds, the patent (granted in 2007 and filed in 2000) was continued from an earlier patent filed in 1996 (patent no. 6,219,045).

    This is an interesting case and it could create problems for MMO developers and publishers. The duration of a patent is 20 years from the date of filing, so provided that this is a "typical" case and no extensions apply, the patent is valid until 2020. If Virtual Worlds sees any success against NCSoft, there is little doubt that they will pursue other infringers, including Blizzard Activision's World of Warcraft, Linden Lab's Second Life, and others. Nothing in the current press suggests anyone has yet purchased a license from Virtual Worlds for this technology, and it seems as though this litigation may set the benchmark for price– provided the case survives preliminary motions.

    Virtual Worlds may try to avoid non-merit based arguments such as the doctrine of laches by relying on the fact that the patent wasn't granted until 2007. This is where things may get a bit tricky, because the 1996 patent upon which the 2000 patent is based was issued in 2001. This suggests that Virtual Worlds has had a valid patent in the relevant technology for almost eight years. The time is important here, because Virtual Worlds would have to rely at least in part on the '045 patent when arguing the validity of its patent. If the '045 patent is ignored, then the earliest Virtual Worlds can claim this technology is 2000. Under U.S. Patent Law, an invention cannot be patented if: "(a) the invention was known or used by others in this country, or patented or described in a printed publication in this or a foreign country, before the invention thereof by the applicant for patent," or "(b) the invention was patented or described in a printed publication in this or a foreign country or in public use or on sale in this country more than one year prior to the application for patent in the United States . . ." If the case goes to the merits, NCSoft may defend by asserting that the '690 patent is invalid because the patent failed to meet the novelty standard under the Patent law. NCSoft has been in business and making MMOs since 1997 and Everquest came into existence in 1999, which means that prior arts using the technology were already in existence and likely generally known and described at the time the Virtual Worlds '690 patent was filed. This isn't a simple issue and the Court could rule to validate the '690 patent, but relying solely on the '690 patent certainly makes it harder for Virtual Worlds to meet the novelty and non-obvious standards.

    If Virtual Worlds relies on the 2001 patent by introducing it as evidence in support of a valid patent claim, however, a new set of problems arise. While the statute of limitations argument can be avoided because, as is the case with most infringement cases, the infringement is ongoing, plaintiffs still have an obligation to file within a reasonable time period. The doctrine of laches states, in relevant part:

    "laches may be imputed to a plaintiff who, with knowledge of infringement, stands by for many years and permits the alleged infringer to build up, at great expense, a large business, which will be worthless if plaintiff's complaint shall succeed, and who by inaction permits many thousands of other persons to become liable as constructive infringers from the fact of the use of an infringing device. Of course, laches does not depend on mere lapse of time. It is probably true that mere failure to sue for any but the latest act of infringement, which took place, perhaps, only the day before the suit was filed, would not of itself bar an action, on the ground either of laches or because of any statute of limitations, provided the action be brought during the life of the patent."
Temco Mfg. Co. v. National Electric Ticket Register Co., 33 F.2d 777 (D. Mo. 1928)

     Virtual Worlds has had ample time to bring a lawsuit, provided they felt that they could safely rely on the '045 patent. If you're using a prior patent to argue that your new patent is valid and is only a continuation of the old patent, there is much to suggest that you have a lot of faith in that old patent. Why wait, except to allow companies like NCSoft and Blizzard to "build up, at great expense, a large business, which will be worthless if plaintiff's complaint shall succeed…"?

    From an academic standpoint it would be interesting to see where this could go if it proceeds through discovery and litigation. The expert testimony and legal breakdown of the Virtual Worlds patent would be fascinating, but it could also prove damaging to developers of future technology in light of the complexity of the issue. Practically speaking, if it survives preliminary motions there is little chance that it will escape settlement, thus setting Virtual Worlds up for a substantial payday from not only NCSoft, but from dozens of other major publishers in the MMO market. For another perspective, check out the Massively analysis. And for a quick laugh, head over to Penny Arcade.

Publisher Developer Deals and the Buyout Provision

November 13, 2008 Negotiations No comments

 Tom Buscaglia's recent article on Gamasutra discussed some very important points that game developers should take to the table when negotiating a deal. He also pointed out a new contract model that caught my interest.

    "I recently ran into a really clever ploy by publishers. In order to overcome the objection to IP assignment for original IP games, instead of demanding the IP ownership in the deal, publishers are     now allowing the developers to retain IP ownership until after the game is released. However, the publisher retains an option to buy out the IP (and in the process the developer's rights to a back-    end royalty in the process) if the game performs above a certain level. What level, you ask? Well, it is inevitably some time before the advance recoup point when back-end royalties would normally     kick in if the game is a hit! You really have to admire their guile. If the game sucks, the developer can keep the IP. But if the game is a hit, the publisher owns it and the developer gets screwed out     of any back-end royalties in the process!"

     Tom pointed this out as an example of the ways in which publishers attempt to exploit game developers, and there is no question that this particular model can be seriously abused by publishers. However, Tom's primary point was the developer's need to carefully negotiate and think through the process of deal making. With that being said, this raises the question of whether, by way of negotiation and valuation, the buyout model could ever potentially benefit the game developer.

    The Potential Benefits of a Buyout Provision

    Obviously, there are times when a buyout provision is a very bad idea. If a developer agrees to a $1,000,000 buyout once the game reaches a sales threshold that indicates a blockbuster, the deal isn't benefiting the developer at all. However, if the buyout provision takes into consideration the actual and future value of the product if that product reaches a certain sales milestone, the deal could be a very good one for the developer if the developer otherwise wouldn't see a royalty off of Net revenue (which is very often the case). It is possible for the game to be successful while the developer only barely breaks even. With ever escalating development costs and the tricky structure of Net revenue, not to mention a short publishing cycle (in most cases only 3 years), it's rare for developers to ever see anything after the advance.

    I covered royalties previously, so by now it should be clear that royalties aren't ever a guarantee. If a game costs $10,000,000 to make, the game is selling for $40, and the developer is taking 15% of Net after recoupment (which discounts cost of production, third party distributions, reserves, etc.), the game will have to sell almost two million copies before the developer would see a dime ($40 * 2,000,000 = $80,000,000 * .10 [approximate and probably highly underestimated deductions from gross] = $8,000,000. $80,000,000 – $8,000,000 = $72,000,000 * .15 = $10,800,000). Two million copies is a very respectable number as far as games sales, and most games never do that well. If you get a buyout provision that is triggered at 1 million sales, and the game never sells more than 1.5 million, under the above formula a buyout provision for $10,000,000 to the game developer would be a substantial windfall.

    These are hypothetical numbers, but it demonstrates the point—it isn't necessarily the deal model that is bad, but (as Tom pointed out) how the deal is negotiated that determines the deal's worth. The difference between a royalty rate and a buyout provision is the difference between purchasing shares in a mutual fund and betting at the race track. With a royalty rate, there's a fixed rate of return for as long as the game is published that is based on the game's success in the market. With a buyout provision, you are playing the odds and betting that your game will be a winner. Investing in a mutual fund is responsible, but it doesn't always guarantee a return (look at the current market). A buyout provision doesn't guarantee a return either, unless your game is a success—however, if the game's a success yo may stand to earn substantially more than you would earn under a traditional net royalty formula if your valuation is higher than actual sales. You are betting on those odds, you want to bet high, and you want to negotiate the highest number you can get.

    Valuation under the Buyout Clause

    The key to a fair buyout provision comes down to valuation. It also comes down to the questions you need to ask yourself when contemplating a deal:

  • How do you determine the game's value once it's achieved a certain level of success? How high can you push past the sales milestone to determine the game's worth?
  • What is being sold?
  • How do you come up with a number?
  • Should you rely on the amount the developer would have earned by the end of the publishing cycle?
  • Should you rely on the game's net worth to the publisher?
Ideally you want to anticipate the best possible outcome—so your projections should include all sales on any current and future consoles, any possible derivative uses that could lead to future income for the IP owner (i.e., film rights), and the inevitable likelihood of sequels. Other things to keep in mind as the developer are ancillary rights (merchandising), right of first refusal for sequels, OEM and bundling rights, and buy back provisions should the publisher choose to not exploit the work.

Any deal can hurt the developer if the developer devalues their own
work. The key is having faith in what you create and allowing that
confidence, good sense, and perseverance (as well as a good lawyer)
guide you through the negotiation process.†

 

†Once again, thanks to Patrick Sweeney for his valuable input.    

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