Archive for Contracts

What Happens When You Don’t Have a Written Agreement: [Part 2, Real Life Application]

January 9, 2012 Contracts, Game Development, Litigation, Negotiations No comments

This article is the second part of a two part series. Please refer to Part 1, Contract Basics, if some terms or examples seem unclear.

Now that the contract basics are explained, it’s time to examine real life application of those principles. Ideally you don’t want disputes to go to litigation. Hopefully you’ll be able to negotiate terms that, if not favorable to all, are at least enough to make sure that everyone lets go of the matter before dumping thousands into legal fees. However, much of that negotiation will depend on your leverage under the law and your ability to determine whether the law is on your side. Below we’ll employ some of the contract principles learned before in some fairly typical contract dispute situations and specifically when no formal agreement exists.

Types of Informal Agreements

In most cases when we’re looking at the independent developer space, the contracts you’ll see most often are work-for-hire agreements or collaboration agreements among individuals. These almost always count as service agreements and don’t necessarily require a signed writing to be enforceable. Note that while service contracts that take longer than a year to perform require a signed writing, service contracts for an indefinite term don’t necessarily require the same. So even if you don’t have anything definitive in writing, a contract may still be enforceable if the circumstances suggest a valid agreement.

The Gentleman’s Agreement (Oral or Handshake Agreement) and Enforceability

                Oral contracts and handshake agreements are fairly common in the entertainment industry. They are particularly common in independent game development. They rely on mutual trust and knowledge among the contributors and are frequently the result of prior relationships. It’s often said that an oral contract is “worth the paper it’s written on,” and in some cases that is definitely true. There are certainly a number of draw backs to having an oral agreement over a written one, not the least being enforceability and the likelihood of a shorter statute of limitations.

However, oral contracts are enforceable under many circumstances and shouldn’t be dismissed so easily. The problem with enforcing an oral contract is evidence—if it’s just an agreement between two people the dispute will inevitably break into to a “he said, she said” finger-pointing match unless you have a witness or some other evidence pointing to an actual agreement. Sometimes that evidence can be performance itself; however, unless there’s definitive proof or witness testimony concerning compensation for that performance, a court of law may only apply the market value of the performance instead of what was actually agreed to in order to make the person “whole”. Let’s look at an example:

Example #6: Among Friends: Anne, Bill, and Charlie worked together at a game studio that fell on financial difficulty. The three decide to go off on their own to create their own game and meet at Bill’s house to go over duties and logistics. They decide that Anne will handle art and music assets, Bill will handle design and act as production manager, and Charlie is in charge of programming/tools. They’re each entitled to a third of the income. However, no written agreement is formed. Bill acts as the unofficial leader of the group and also handles license procurement and applications to the requisite online distribution channels like as Steam and Impulse. Nine months later they complete a simple but engaging game and release it on Steam. The game is a hit and Bill starts receiving payments from Steam, which he fails to distribute to Anne and Charlie. Anne and Charlie sue Bill for breach of contract asserting their entitlement to two-thirds of the proceeds. Bill argues that he treated them as independent contractors and they are only entitled to 10% each. Everyone’s testimony is equally convincing, so the court relies on expert testimony and the market value of the contributions performed by Anne and Charlie. The experts disagree as to market value, but it’s clear that the contributions exceed 10% of the finished product. The court awards Anne and Charlie 20% each for their contributions, with the remaining 60% going to Bill.

The example above demonstrates the difficulty in proving the terms of an oral contract—however, this problem becomes less obvious if more people are involved or if disinterested third parties know about the agreement and can act as witnesses against the person breaching the agreement.

The “Living Contract” (E-mail Exchange)

Another often-seen disputed agreement comes in the form of e-mail exchange, which is probably more common than the handshake agreement these days. While e-mail or letter exchanges provide more evidence of an existing contract, they come with their own host of problems concerning enforceability. First, there’s the question of validity—is there a valid offer and acceptance, is there a counter-offer, and has a counter-offer been rejected or accepted? Then there’s the question of whether any particular e-mail constitutes a “written agreement” or “integrated agreement” for purposes of the parol evidence rule. Additionally, there’s the issue of whether later e-mail exchanges act as modifications or amendments to the earlier contract.

Offer, acceptance, revocation, and counter-offer

As mentioned above, mutual agreement requires offer and acceptance. A counter-offer is essentially a rejection of the original offer, so once a counter-offer is made, the original offer is typically treated as invalid unless offered again. An offer can be revoked at any time prior to acceptance. In the case of an e-mail exchange, many offers or counter-offers may be made before there is acceptance—and if the acceptance is based on an earlier offer that has already been revoked or rejected with another counter-offer, there’s an argument that the acceptance isn’t valid. Let’s look at an example.

Example #7: Whose line is it, anyway?: Nick and Alice are in the process of putting together a team for their newest project, “Delilah’s Curse”, a post-apocalyptic RPG where the player is the parent of the harbinger of the apocalypse. The parent is presented with a Hobson’s choice: He or she can either save his or her child or protect the world from complete annihilation. Ultimately the goal is to achieve a balance where both can be saved. Nick, without disclosing the project details, sends an e-mail to his friend Tom, a skilled level designer, and asks if he’d like to get involved with the project. Tom responds with a request for more information. Alice, who is CC’d on all correspondences, replies that the contents of the game concept can’t be disclosed without an NDA, but she strongly believes Tom is an excellent fit for the project. Nick then sends Tom an NDA for negotiation purposes. Tom doesn’t sign the agreement, but responds with the statement “I accept the terms of your NDA. Please tell me more about the project and the compensation you’re offering.” Alice sends Tom a brief synopsis of the game and the work they expect Tom to perform. She offers him $3,000 per milestone deliverable and contingent compensation of 10% of net profit. A few minutes later, Nick sends the same synopsis and offers him $2,500 per milestone deliverable and a contingent compensation of 15%. Confused, Tom accepts Alice’s earlier offer. Nick responds that Nick’s offer was meant to replace Alice’s offer and Alice’s offer is no longer valid. Tom refuses Nick’s offer and insists on Alice’s offer. Alice suggests in her reply that Nick’s offer is more favorable—however, Tom responds that he would still prefer Alice’s offer and rejects Nick’s offer. The next day he sends a follow up e-mail saying he’s thought about it, and he’s willing to consider taking Nick’s offer if the milestone deliverable payments are upped to $2,700. However, unbeknownst to Tom, Alice had sent an e-mail in the middle of the night stating that she’s sorry for his rejection, and they’ll look for someone else. The next day, Nick sees Tom’s counter-offer. He sends Tom a response stating “Let me talk to Alice and get back to you. I think she’ll accept. In the meantime, here is the work order for the first milestone deliverable.” Tom begins work on the first milestone deliverable. Two weeks later, he receives a response from Alice, which states “I’m sorry, but we’ve already found someone else for the position. Please ignore Nick’s prior e-mail.”

Tom, believing that he’s entitled to the contract for $3,000 at 10% contingent compensation, or at the very least $2,700 at 15%, sues Alice and Nick for breach of contract. The case eventually goes to Court, and the Court finds the following: 1) under that jurisdiction’s law, Tom’s acceptance of the NDA in addition to his electronic signature constitutes a valid agreement for purposes of the NDA; 2) Nick’s subsequent offer after Alice’s initial offer constitutes a revocation of Alice’s original offer; 3) Tom’s rejection of Nick’s offer and acceptance of Alice’s original offer was a counter-offer by Tom; 4) Alice’s late night e-mail constituted a valid rejection of the counter-offer by Tom; 5) Tom’s next day e-mail constituted a new offer by Tom; 6) Although Nick’s response to Tom’s offer may have created some expectancy of being hired, nothing in the response constituted an acceptance of Tom’s offer, so no contract was formed; 7) Because nothing in the e-mail sent by Nick actually requested performance on the work order, no request for work was actually made and Tom is not entitled to damages arising from promissory estoppel; and 8) Alice’s final e-mail constituted a rejection of Tom’s offer.

Note that the decisions reached by the Court are only hypothetical—depending on the jurisdiction and the language used in any given e-mail, Nick may have created a reasonable expectation in Tom that Tom’s offer would be accepted. In that case Tom’s performance may have entitled him to promissory estoppel. There is also the question of authority between Nick and Alice—if Alice is the person responsible for the project and Nick is only acting as her agent, a whole other slew of issues concerning agency law arise. The main point here is that the “living agreement” can get convoluted and it isn’t always clear whether a contract has actually been formed or not.

Parol Evidence Rule and the Hybrid Oral Contract/Living Agreement

A “Living Agreement” can be even more convoluted if you throw in oral correspondences in addition to e-mail exchanges. For example, if Tom had accepted Nick’s second offer of $2,500 and contingent compensation of 15%, and then later sent his e-mail accepting Alice’s first offer, the question of acceptance versus counter-offer would become even more complicated. For this situation most jurisdictions have imposed the “Parol Evidence Rule”, but even that rule may not be applicable in all circumstances. Simply stated, the Parol Evidence Rule prohibits things outside of an existing contract, such as oral or written communications (this extrinsic evidence is called “parol evidence”), from being admitted as evidence when a final or “integrated” contract exists if that evidence contradicts or adds to the written terms. This is limited to prior or contemporaneous evidence, like oral communications or e-mail exchanges made prior to or at the same time as the execution of the final written agreement.

The most obvious question for our purposes is whether an “integrated” agreement actually exists. A contract is integrated if it is a final written agreement between the parties. In other words, all of the necessary terms are set out in the agreement, and as an additional security the parties may include a merger clause that asserts that the agreement is the final agreement between the parties. The more common problem when no formal contract exists is that an agreement may only be partially integrated—in that case, only some terms are clearly agreed to between the parties while others are left in dispute or not discussed at all. In that case, some parol evidence may be admissible if it expounds on those undefined terms.

When we’re looking at an e-mail exchange, it’s possible that a partially or fully integrated agreement could come into existence through one or more of the correspondences. Let’s return to our earlier example concerning Delilah’s Curse:

Example #8: Let’s assume that Tom has decided to accept Nick’s offer of $2,500 per milestone deliverable with 15% contingent compensation. Prior to responding to Nick’s offer via e-mail, Tom calls Alice and Nick to further discuss his role in the project, when payments will be made, and when milestones are due. However, in his next correspondence he states nothing more than “As per our conversation, I’d like to accept the level design position for $2,500 p/MSD and 15% contingent compensation on release.” During the phone discussion, Nick and Alice agreed that milestone delivery payments would be paid within 10 days of delivery regardless of whether or not the milestone was approved. However, the work order forms (none of which are signed by the parties) states that payment will only be made if the deliverable is approved by Nick and Alice. A few months down the road, Tom submits a milestone deliverable. Nick and Alice fail to make payment within 10 days. Tom contacts Nick and Alice about the payment and they respond that they had some problems with the milestone that need to be fixed before they’re willing to make an agreement. Tom argues that they’d agreed to make the payment regardless of approval. However, Nick and Alice point to the provision in the work order requiring approval before payment. Angered, Tom refuses to do any more work on the project and sues Nick and Alice for breach. Nick and Alice file a counter-complaint asserting breach of contract against Tom.

The suit goes to trial and the Court decides the following: 1) A partially integrated agreement existed with regard to Tom’s position and compensation; 2) the work orders are integrated into the agreement based on Tom’s past performance of those work orders and failure to dispute the terms of the work orders; 3) the oral agreement made prior to Tom’s formal acceptance is barred by the parol evidence rule since it was made prior to the partially integrated agreement and directly conflicts with the term of the work order; 4) Tom is in breach for refusing to perform; 5) neither Nick or Alice are in breach, but are expected to exercise good faith when determining whether a milestone is “approved”.

The parol evidence rule could go many different ways depending on the circumstances; for instance, if the work order didn’t say anything about payment depending on approval, Tom’s testimony regarding their prior conversation may be admissible as clarifying a key point to the agreement. Also, the work order itself may be treated as parol evidence instead of being treated as an integrated part of the agreement if Tom disputed the payment terms prior to delivering the first milestone (in the contract world, “performance” is frequently treated as “acceptance”). All sorts of contingencies can change the game in a contract dispute—a formal written agreement that clearly defines the agreed upon terms is the easiest way to minimize those contingencies.

Conclusion

The most obvious lesson to take away from this is to always, always get something in writing; but more importantly you need to make sure you understand what’s written down. As stated in Part 1, you don’t need a massive legal document with a bunch of legalese and recitals to formalize your agreement. A document written in plain English with your agreement spelled out in plain and simple terms while taking into consideration as many contingencies as possible is vastly more valuable, legally speaking, than a form agreement that neither party understands. Knowing what to put in that agreement is equally important—for example, if the agreement doesn’t address intellectual property issues, confidentiality, or indemnification matters properly, you’re not covering your bases and you may end up in a conflict down the road. Although living contracts and handshake agreements are enforceable in many cases, they will rarely if ever provide you with the kind of protection you’ll want or need regardless of the outcome of your project.

 

What Happens When You Don’t Have a Written Agreement: [Part 1, Contract Basics]

January 9, 2012 Contracts, Litigation, Negotiations No comments

It’s a common event—people decide to collaborate on a project without putting anything in writing. Ideally, the fact that there’s no written agreement won’t cause a problem; after all, you’ve decided to work together and hopefully the hiccups you come across won’t be deal-breaking.

But people put things in writing for a reason. Negotiations break down, trust crumbles, or outside influences such as money or the threat of litigation destroy the cohesion that once existed. In other words, things go pear-shaped and all you can do is look at the agreement to determine how you’ll handle the situation when those circumstances arise. Hopefully those circumstances aren’t inevitable. Hopefully they can be avoided. But you can’t hang your hat on hope, so it’s important to prepare for the possible eventuality of things going horribly awry.

This isn’t about being defeatist if that’s what you’re thinking right now. Three times out of ten nothing seriously horrible will happen and you’ll either break even or go bust. Two times out of a hundred you might see something great. But the reality of this industry is that things won’t always work out the way you anticipate, and more importantly (and as I’ve said in previous articles) what people anticipate or want may not always be the same thing as what you’d expect. Having something in writing can clear up any possible delusions or misinterpretations among the people you’re working with. Unfortunately, the truth is that people tend to only realize this AFTER things go wrong. So how does the law handle these situations?

Legal Theory behind Contracts

Formation

Contract law is heavy stuff, but it breaks down into two factors: a) whether a contract exists; and b) what remedies are available to the non-breaching party. Even if contract law in and of itself is complicated, forming a contract is as easy making a promise. In most cases you don’t need a bunch of legalese or a massive document signed on a specific type of paper. The basics for a contract, in writing or not, are the following:

Mutual Agreement. Just as it sounds—the parties are agreeing to something. This can be broken into two parts; offer and acceptance.

Example #1 (mutual promise): Mary and James decide to make a game together. Mary promises to handle the programming, while James promises to handle the art assets. Even though no money has changed hands at this point, a mutual agreement has been made and the “consideration” required for the agreement are the promises themselves.

Example #2 (consideration [e.g., future profit] +performance): Mary wants to make a game. She approaches James, an artist, and asks him to create the graphic content for the game in exchange for a cut of the profits. James accepts. In this case, the future promise of a profit is Mary’s consideration, and James’ promise to create art assets constitutes his consideration.

Example #3 (consideration [e.g., money] + performance): Mary wants to make a game. She approaches James, an artist, and offers to pay him $500 for James’ production of art assets for her game. James counter-offers with $1,000 for both art assets and animations. Mary rejects the counter-offer. Even though counter-offers are valid, Mary’s rejection of James’ asking price terminates the “mutual agreement” requirement of the contract, so no contract is formed.

It should be noted that a promise counts as consideration as well, provided it’s made in good faith. In all of the cases noted above, adequate consideration has been provided to form a mutual agreement for contractual purposes.

Consideration. As you’d probably noticed from the examples above, consideration is one of the most important parts of a contract. A mutual agreement generally relies on the fact that both parties have an expectation for the other—that expectation is called consideration. This could be payment for an invoice, production of content for a game, or the payment of a royalty based on that content. In any contract, both parties need to give something to make an agreement valid. Otherwise an agreement may be treated as illusory (where one party is getting something while giving nothing of value in return) or as a gift (where one party is giving something voluntarily without the expectation of receiving anything in return). In either case, the contract is unenforceable. The keyword for consideration is “bargained-for”— even if an agreement seems unbalanced or unfair on its face, it will still be treated as valid provided there’s evidence that the parties bargained or negotiated those terms.

As for examples of consideration, you can look to the “mutual agreement” section above.

Consent/Capacity. The parties have to be willing to participate in the agreement and be sane enough to do so; in other words, if you’ve got a gun pressed to your temple while making the agreement (whether literal or figurative), the agreement won’t be valid.

Example #1: (Blackmail) John knows that Mary is having an affair with Michael. John promises not to tell Mary’s secret provided she pays him to keep the secret. Apart from this being illegal (another requirement, as you’ll see below), it’s also “duress”, which can be used to render an agreement void.

Example #2: (Delusion) Mary asks her great aunt Dalia, who suffers from dementia, to fund her project while asserting that her project will save the universe from the horrible aliens Dalia has feared for the past five years. Because Dalia is not of sound mind, there is a strong argument that she lacks capacity to enter into this agreement.

Example #3 (Children) Mary wants to hire Tim, a 13 year old genius programmer, to assist her in her game’s development. Tim’s all for the project—his parents, however, are against it. Because he’s not of legal age in his jurisdiction to enter into an agreement without parental consent (the standard age is 18), any contract will likely be voidable based on his lack of capacity due to his age. Note the difference between voided and voidable—for capacity issues, the incapacitated party has the right to void the agreement, but the contract is not automatically void unless that right is exercised.

Legal Purpose. This should speak for itself, but considering the rampant copyright infringement in the games space these days, it may not be as obvious; the scope of any contract must conform to a legal purpose. In other words, if any party’s obligation results in an illegal activity, that obligation (and perhaps the entire contract, unless a severance clause is enforceable) will be void.

Example #4 (The Fan Game) Mary wants to make an unlicensed fan game based on the Star Trek franchise. She asks James to create the character models based on the original actors in the series for her game, and agrees to pay him $5,000 for this project. James accepts. Three months later, and after some research on James’ part, James turns over character models that look nothing like those in the Star Trek series. He contends that absent a license he can’t create the models Mary desires. Legally speaking, the James’ obligation to create content based on unlicensed IP is void because it constitutes an illegal purpose, so James is in the right—however, depending on the terms of the contract the entire agreement may be void, so James’ remedies may be limited to quasi-contract remedies.

In Writing. In some cases a signed writing is mandatory. Signed writings are typically necessary due to state law and the Statute of Frauds (under the Uniform Commercial Code), which has been adopted by most states. Examples of agreements that require a signed writing include: 1) a promise to pay someone else’s debt; 2) a promise in consideration of marriage (prenuptial agreements); 3) a service contract (e.g, independent contractor agreement) that can’t be completed within a year; 4) contracts for the sale of land or interest in land; 5) contracts for the sale of goods with a purchase price of more than $500; and 6) when an executor of a will promises to pay off the debt of an estate with his or her own money (not really something you’ll see in games law, but you never know).

Once it’s determined that a valid contract exists, the parties are bound to the terms of that contract. If a party breaches, depending on the seriousness of the breach, the non-breaching party can seek out remedies based on the harm suffered.

Breach versus Material Breach

If a valid contract exists the next issue comes down to performance and non-performance. If a party fails to perform their duties under an agreement, they’re in breach—however, that may not excuse the other party from performing. A non-material breach exists if the duty breached isn’t material to the entire agreement; for example, if a partial payment is made late and late payments aren’t expressly identified as a material breach, the rest of the agreement is still enforceable even though the non-breaching party may be entitled to damages arising from late payment. Both parties are still bound by the terms of the agreement and are not excused from performing.

On the other hand, if the breach is substantial—for instance, if a contractor fails to deliver the assets they’re contracted to deliver without justification, but has already accepted partial payment—that constitutes a material breach and the non-breaching party has the right to invalidate the agreement and seek contractual damages against the breaching party. The difference in the type of breach is important, and there are several circumstances where non-performance is excusable. None the less, any breach is grounds for seeking remedies.

Remedies

The oversimplified explanation behind contract remedies is to put the non-breaching party in the same position she/he would have been in had the contract been performed. These remedies include specific performance, injunctive relief, and money damages. There are also “quasi-contract” damages, which include unjust enrichment and promissory estoppel; in simple terms, unjust enrichment exists when one party gets something for nothing, while promissory estoppel exists when one party acts in reliance of a promise that isn’t performed and suffers some inequity as a result. The goal of quasi-contract damages isn’t to put the non-breaching party in the same position he/she would’ve been in had the contract been performed, but to put them in the position they would’ve been in had no contract existed in the first place.

Remedies concerning agreements that aren’t in writing depend both on jurisdiction and circumstance. It almost always comes down to a case by case basis, but generally this kind of thing operates on a sliding scale. To simplify it in equation terms (and for the sake of simplification, let’s assume written agreements are necessary under the statute of frauds):

Promise + promise X no performance = no contract Promise + payment X no performance by either party = no contract
Promise + promise X substantial/complete performance by either party = contract exists, contractual remedies enforceable Promise + payment X partial payment made, no performance = unjust enrichment, restitution the likeliest remedy
Promise + promise X partial performance by both parties = contract may exists—court will examine relationship between parties, industry standards, and other factors to determine contractual terms Promise + payment X partial performance, no payment made= promissory estoppel/unjust enrichment damages depending on the nature of the performance

The chart doesn’t account for all available remedies or circumstances, but it should give you a bit of an idea as to how things will fall out on a case by case basis. Depending on your circumstances it may be better for you to pursue quasi-contractual remedies over contractual remedies or vice versa. To understand how these remedies break down in actual situations, let’s look at an example:

Example #5: The Illegal Contract (Fan Game): Mary wants to make an unlicensed fan game based on the Star Trek franchise. She asks James to create character models and art assets based on the series’ original IP, and agrees to pay him $5,000 for this project and his work is due a little over a year later. James accepts. Thirteen months later, and after some research on James’ part, James turns over character models and art assets that look nothing like those in the Star Trek series. He contends that absent a valid license he can’t create the models Mary desires. On the one hand, James has breached the agreement because he didn’t perform within the specified scope of his contract. On the other hand, the contract lacked a legal purpose, so the provisions requiring illegal conduct would probably be rendered void. Assuming Mary uses the new character models but doesn’t pay James, James could take two approaches—he could treat the contract as void due to illegality, or he could treat the remainder of the contract as valid and Mary’s acceptance of the new models as a waiver of the illegal provision. If he treats the contract as void, he would be entitled to restitution; this may amount to the market value of the work he performed, or injunctive relief to keep Mary from using the character models. If he treats the contract as valid with the illegal provision “severed”, he would be entitled to the $5,000 he’s owed under the contract.

Hopefully you now have a better understanding of basic contract law principles. With that said, the next part of this article will look at how this breaks down in independent game development.

Licensing Third Party IP for your Game Part I

June 22, 2010 Contracts, Entertainment Law, Game Development, Intellectual Property, Negotiations No comments

This is the beginning of a series. Stay tuned for more.

Game developers don’t always rely on their own intellectual property when making a game. They don’t always develop their own game engines or tools software, or compose original soundtracks for their games, or even use characters and stories they’ve created.  Sometimes developers rely on third party intellectual property, or IP developed by someone else. To obtain third party IP, you need a license. Knowing what you can and cannot do with those licenses is mandatory. Understanding what you can and should negotiate is equally important. I will cover a few of the basics, but by no means all, in this series.

Music

Music licensing usually happens in one of two ways. You either only need the music and lyrics of a song and will re-record your own version or you need the original recording as performed on an album. In every case, there are three primary concerns you need to consider when dealing with music licenses: the fee, the scope of the license (how you can use the music) and the duration.

Let’s take a fictional example. Mercedes is the President of Bottom Line studios and is in the process of developing an MMO for teens and young adults called “Rebel Garden”*. She wants to incorporate some “Guitar Hero”-like mechanics in her game that allows kids to jam out online. She’s also incorporating listening parties and listening stations all over Rebel Garden that allow both indie and signed acts to promote their latest releases. Before she can do any of this she’ll need a licensing system in place to get all of the music she wants to include in Rebel Garden.

Music Licensing Basics

Copyright law treats music in a confusing way by providing two types of protection in a recorded work. First, there’s the musical composition. This is the melody, arrangement, and lyrics of a song. Next, there’s the sound recording. This is the specific recording of a song. So any recording in any format, whether physical or digital, will have at least two layers of copyright protection. What kind of license you need depends heavily on these two forms of protection.

Sync License

Let’s go back to Mercedes and Bottom Line. For Rebel Garden’s rhythm and music mini-games she’s going to re-record the songs she wants to include. This will give her greater flexibility in how the songs can be performed on-line. If she includes some Tool and Puscifer songs she wants the ability to simplify the songs to make them more accessible to her younger audience. Because she’s not using the original recordings from albums like Ænima and “V” is for Vagina, she only needs a license for the musical composition. This is known as a sync license.

The sync license is obtained through the song’s publisher. Co-publishing deals (where the songwriter retains 50% or more of her publishing/musical composition rights) are common, but even in those cases the publisher will handle the licensing (also called “exploitation”) of a songwriter’s catalog and distribute royalties to the songwriter.

Master Use License (Master License)

What licenses will Mercedes need for Rebel Garden’s listening rooms and listening stations? These areas permit players to listen to the latest releases by their favorite artists. However, before Mercedes can include these recordings in her game she must be permitted to use both the underlying song and the recording itself. You can have a sync license without a master license, but you will always need a sync license for the underlying composition if you get a master license.

Unless an artist self-releases record labels hold the rights to reproduce recordings. You will need to contact the record label that released the specific recording you want to use to obtain a license.

Music License Deal Points

Fee: Sync licenses for video games are still relatively new to the publishing industry. Industry standards for fees are therefore still being established. Those fees currently vary depending on the publisher/record label and the developer’s leverage. The rate can be flat fee or royalty-based. A royalty-based sync license could include an advance on the royalty, a minimum guarantee, and any number of ways of defining “net receipts” on which the royalty is based. In short there are as many ways to negotiate the fee for a sync license as there are songs in the vast catalog Mercedes needs. If Bottom Line has the leverage and the budget a flat fee may be ideal. However, if Bottom Line is relying on a big payout at the end and doesn’t have much capital in the beginning a royalty rate can still net Mercedes the song, provided she can negotiate out of an advance. Minimum guarantees can be treacherous, as they will require Bottom Line to pay a set amount at a specific time after the release of the game regardless of whether the game has made any money.

Scope: Scope describes how you’re allowed to use the music. The “Scope” statement will include the title and a brief description of your game and limit use of the song to that game. Mercedes should keep the scope of use as broad as possible to allow for current and future distribution channels within Rebel Garden. The scope should include current and future technologies both known and not yet contrived, and the region covered should be universal.

Term: The perfect deal allows you to use the work for as long as the rights holder retains copyrights in the work. Similarly ideal licenses include words like “perpetual”. However, publishers and record labels may attempt to hedge you in by limiting you to a specific release cycle. For example, a license may say that it will endure for the three years that your game is in print. This isn’t always a bad thing as it may reduce the fee. However, in today’s digital distribution environment games are able to see sales long after the initial release cycle.

Additional Considerations: Sync licenses and Master Use licenses should match up as much as possible. This will avoid confusion in the future. If, for example, Mercedes is using a recording and her sync license is narrower in scope than her master use license, the narrower license trumps. Additional rights granted in the master use license become moot. Another point worth noting: Unless a developer commissions a song for their game, all licenses are non-exclusive; this means Mercedes isn’t the only one who can use it and her rights are limited to the scope of the license.

Movies

Film licensing has taken on a life of its own in the video game industry. Almost every notable film franchise has a game or series of games based on that franchise. These licenses are generally negotiated through the game publisher and are usually so fraught with restrictions and time constraints that the game becomes little more than a mediocre marketing tool for the film. This should be a major consideration when you’re developing for big screen properties; you generally will not enjoy the same freedoms and sense of accomplishment you probably enjoy when developing original IP.

And while a film IP license is often infinitely more complex than a sync or master use license, you still have a handful of major considerations: development time,  approvals and creative freedom/control, and of course the budget.

Let’s assume that Bottom Line Studios is approached via their publisher to produce a game for on an upcoming blockbuster based on a wildly successful book. What deal points should Bottom Line’s publisher fight for prior to accepting this project, and can Mercedes produce a game that’s more than your typical Marketing Department Debacle?

Development Time and Release Date: The single most important consideration for Bottom Line in creating a game based on film IP is lack of development time. The time Mercedes gets to develop a game based on film IP is constricted. A movie studio usually won’t consider licensing its IP for a game based on the film unless that film is 100% greenlit. This means all financing is secured, all necessary parties are committed to the deal, and principal photography is ready to begin. From beginning of principal photography to completion of post-production can take anywhere from 8 months to 2 years depending on the film’s budget, special effects, etc. However, by the time a studio gets around to finding a publisher, principal photography may be well under way unless a relationship with the publisher is already established.

Assuming a relationship isn’t established, principal photography has likely already begun by the time Mercedes is given the dubious honor of developing the game. Bottom Line must deliver the game by the end of post-production. Because film studios often do treat games like marketing tools, the game’s ideal street date is two weeks before the film’s release.

Any developer can tell you that it is impossible to produce a Triple A title in 6-8 months. Even a marginally polished, professional product is difficult to pull off with that much of a time crunch; and it will be crunch, hours and hours of it. And unfortunately, even if a relationship already exists between the publisher and the film studio development time usually isn’t negotiable, with some exceptions. Games based on already released film franchises, television shows, and long term film franchises (e.g., Harry Potter) are under less pressure to produce games quickly.

Creative Control: Another major drawback in developing games for film IP is getting necessary approvals throughout development. Milestone deliverables for a movie-based game are subject to an additional layer of approvals by the film studio in addition to the publisher’s approvals. In the studio’s mind this is necessary; studios need to preserve the integrity of their IP, and this includes monitoring the quality and content of any product licensing their IP. Unfortunately, this also means that the developer has fewer opportunities and less time to make the game fun. The additional approval process takes time away from development. If the publisher has considerable leverage and a working relationship with the studio, or if the film studio is actually interested in making a worthwhile game as opposed to making a merchandising opportunity, some of these approvals may be loosened. However, Mercedes should expect that every aspect of her game will be hedged in by licensing parameters, restrictions, and approvals over all content.

Budget: Unless the publisher is under the same roof as the film studio, studios don’t assist in the budget for the game. In fact budget for a third party IP game is generally less than average because of licensing fees to the studio and the shorter development time. The studio may require an advance or minimum guarantee that the publisher must pay in addition to the licensor’s royalty; this money frequently comes out of the game’s budget and the game’s bottom line. Mercedes will have to keep this in mind when preparing her milestone and payment schedule as the publisher will invariably try to make the budget as lean as possible.

All of this means that Mercedes will have less money, less creative control, and considerably less time to create the game she wants; in exchange, she gets free marketing for her game in the form of the film itself and the crossover customer benefit of the franchise. This paints a somewhat bleak picture for Bottom Line. But this should be familiar if you’ve examined the status quo of games based on movie franchises. Until and unless the movie industry treats games as valuable IP in and of itself, the intersection between games and film will continue to disappoint. However, in the uncharacteristic and unlikely situation that you get a film studio willing to grant you some modicum of creative control and all the stars are aligned granting you the time and budget to do so, you may be able to produce a game that can succeed independently from the licensed IP.

Clearance

One additional concern in all third-party licensing is the matter of clearance and chain of title. Is it Mercedes’ job to ensure that Bottom Line can use certain properties and assets from the film in the game? For example, whether Bottom Line can use likenesses of the actors in the movie depends on whether publisher, studio, and developer have permission from the actor to use his likeness in derivative products other than the film. Whether Mercedes can use the film score depends on if the studio owns those rights. Locations, trademarks, product placement; all of these individual components of IP must be separately licensed or included in the third-party license prior to moving forward.

Missing even one seemingly unimportant license can get the publisher and developer into a world of legal trouble. Ideally Bottom Line has negotiated a publishing deal that lay this responsibility wholly on the publisher. The publisher, in turn, will likely demand some assurances and warranties concerning these assets from the film studio. At no point should clearance be Bottom Line’s problem when creating games for licensed IP. The cost of clearance should also be in addition to the budget and at the Publisher’s expense, not Bottom Line’s.

Conclusion

Third party licensing is a part of the games industry. It is neither simple nor, in many cases, fair. Every game studio will be confronted with it at some point; how you fare depends on what you’re licensing, why, and your bargaining position.

  • Special thanks to David Nonaka at Lionsgate and Patrick Sweeney at Reed Smith for their assistance and expertise.

* All characters, events, companies, and game concepts are fictional.

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