Under Development

Understanding “Without Prejudice” in terms of confidentiality

    The dispute between Edge Games/Tim Langdell and Mobigames has devolved into a bit of a media disaster, but it has brought about several issues worth discussing. In light of Edge Games recent publication of settlement communications, perhaps the most glaring issue at the moment is confidentiality. In several of those communications, Edge Games (ironically) points out that because the communications were submitted under the heading "Without Prejudice", they should not be disclosed to third parties.

    "We reserve all or rights in this matter, and note this communication is sent under banner of 'without prejudice' which means it cannot be used in any legal proceeding and should     not be revealed to any third party, the press, or etc"—July 28, 2009 communication from Edge Corp. to David Papazian

    In one communication Langdell suggests that sharing the communication with the media is in violation of U.S. Law.

    "You quoted on a public forum from a communication that was sent to you under a "without prejudice" header which is not in accord with US law (and it was on a US website). Please     be aware you are not permitted to quote from such correspondence that is written as part of settlement resolution, as all this correspondence between us has been."—June 3, 2009 communication from Tim Langdell to David Papazian.

    The irony in all this being that Dr. Langdell and his company subsequently disclosed ALL communication under the heading "Without Prejudice" to third parties through its "Edge Studio" website. However, this raises the question of whether the phrase "Without Prejudice" offers any kind of protection, what kind of protection it provides, and whether other statements or contractual provisions would better serve the problem of confidentiality in settlement disputes.

    The heading-phrase "Without Prejudice" in a communication between two opposing parties has a relatively specific application, which has its roots in English Common Law. This application is, under current federal and state evidence law, somewhat redundant. "Without Prejudice" implies that anything contained in the communication is intended for settlement purposes only and cannot be used against either party as evidence or precedence in the event of litigation. The purpose of this statement is to facilitate candor between the parties because it is in the interest of public policy to facilitate the settlement of disputes without court action. The words are intended to free parties from the concern that the admissions and statements made by them in the course of settlement will later be used against them in court. See Am. Eagle Outfitters, Inc. v. Lyle & Scott Ltd., 2008 U.S. Dist. LEXIS 96375 (W.D. Pa. Nov. 26, 2008)

    In today's usage the phrase does little more than suggest that the communication is, in fact, intended for settlement. As a legal term of art it provides minimal protection under the predominant weight of US law due to Federal Rules of Evidence 408 and its mirror rule in almost every state's evidence laws. These rules automatically render compromise and settlement communications inadmissible. Under Rule 408, "conduct or statements made in compromise negotiations regarding the claim, except when offered in a criminal case and the negotiations related to a claim by a public office or agency in the exercise of regulatory, investigative, or enforcement authority," are not admissible evidence.

    Furthermore, using the phrase "Without Prejudice" when it is clear that the communications have gone beyond the point of possible settlement makes the use of the phrase ineffective. If a court could imply that the use is an empty one and the communication does not reflect conduct intended for settlement or compromise purposes, the court will ignore it and any admissions or statements contained therein may be used against either party.

    However, use of "Without Prejudice" in a communication doesn't render the communication confidential or imply it as such. Generally speaking, settlement communications are only confidential by law if they relate to a court-ordered settlement conference or mediation conference and local rules render communications during and relating to those conferences confidential. In those cases, using "Without Prejudice for purposes of Settlement" may be useful to show that the communication is made in connection with a mediation conference or a court-ordered settlement conference. However, communications made prior to an official proceeding may not be subject to the same protections.

    In communications such as those between Mobigames and Langdell made prior to mediation or court-settlement, confidentiality hinges on an agreement between the parties to keep that information confidential. This may be accomplished via a confidentiality/non-disclosure statement at the end of each communication prohibiting the distribution, disclosure, and copying of communications relating to possible settlement. Better yet, leave such communications to your attorneys. An attorney isn't allowed to disclose communications arising from representation, nor may they make disclosures to the media or public that may prejudice a case. Furthermore, it would probably reduce the chances of those communications getting as personal and antagonistic as the ones between Mobigames and Langdell.

Trademark Fair Use

    I realize that this has little to do with game development or games law, but as an ode to free speech and the internetz, it's a hard Fail to resist. Since we're on the topic of Trademarks, here's an interesting case concerning trademarks and what I would probably consider an abusive use of a cease & desist letter.

FailBlog

    FailBlog received a cease and desist for the use of GWR's trademark in a screen capture. This brings up some very basic questions as to when someone can legally use a trademark and what constitutes fair use, which is sometimes trickier than it sounds. Traditionally trademark fair use is a far cry from the fair use you may expect under copyright law. Unfortunately these two standards are frequently confused.

    There are a few forms of fair use under trademark, and it's worth becoming familiar with them. In the event that you receive a cease & desist like the one linked above, or want to use a particular mark in a way that may or may not fall under fair use, this will hopefully give you enough information to know when you should start seeking out an attorney to protect your rights.

• Note: This is a point I've made in the past, but it bears repeating—a fair use is an affirmative defense. It is not a right. It is a shield you can raise in the event that your use is legally challenged. If you don't want to go through the trouble of defending your use against rightful trademark registrants/owners, you're better off not using the mark at all. However, I'm not a fan of cease & desist letters that brazenly disregard valid fair uses because exposing people to litigation costs is frequently threat enough. So while it's no one's right to urge you to challenge a cease & desist, it may still be useful to know when you can.

    Classic Fair Use

    A "classic" fair use under trademark law permits a defense where the protected mark is used only to describe the goods or services of an opposing party. Marks that are more descriptive than distinctive are frequently the subject of classic fair use, because they contain terms that may identify something other than the origin of the product or service. For instance, if a company used the trademark "California Car Repair," this would create a problem for every other car repair located in California unless some limits were placed on the scope of protection for the mark. As a result trademark law does not allow a trademark holder or registrant to "appropriate a descriptive term for his exclusive use and so prevent others from accurately describing a characteristic of their goods." Soweco, Inc. v. Shell Oil Co., 617 F.2d 1178, 1185 (5th Cir. 1980). Simply put, if your mark is made up of terms that do little more than describe the product or service you're selling as opposed to something suggestive or distinctive (e.g., something that fancifully suggests the kind of product you're selling, or a made up word or a term or word generally unrelated to the type of product/service you're selling), you do so at your own risk. Others may use those same descriptive words in connection with their own product on a limited basis.

    This sounds deceptively simple, but there are some excellent examples that arise in game development, particularly when it comes to media publications. For instance, Game Developer Magazine is almost purely descriptive—there is little to nothing that is distinctive in the term used in the brand, and therefore another magazine that uses the term "a game developer magazine" to describe its own product may have a valid classic fair use claim.

    It's important to note that to qualify for a classic fair use defense the term itself cannot be used as a trademark—for instance, if another company called itself "Game Developer Magazine," it wouldn't be subject to a classic fair use defense. On the other hand, if someone used trademark "X" and described the product in publications and its website as "a game developer magazine", the classic fair use defense would probably apply. Furthermore, the defense only applies when the trademark in question has both a primary and a secondary meaning, and the classic fair use employs the primary meaning. In this case, a game developer magazine's primary meaning would be a magazine dedicated to game developers and game development. Its secondary meaning would be the existing brand, Game Developer Magazine. Use of the primary meaning to describe your own product is a classic fair use. Use of the secondary meaning is not.

     Meanwhile a publication like Gamasutra experiences considerably more protection because the mark is non-existent in the English language and therefore can't reasonably be used to describe anyone else's product.

    Nominative Fair Use

    So what happens if you want to use Gamasutra's mark, or a competitor's mark, or even the name of a brand, product, or company in a review or publication? Another fair use defense, called "nominative fair use", exists when a defendant uses the plaintiff's mark to describe or identify the plaintiff's own product. In short, if you're using another company's mark to identify that company's product as opposed to your own, your use of that mark is a nominative fair use. This is the case even if your ultimate goal is to describe your own product. An example of a nominative fair use that is ultimately intended to describe your own mark is the use of another mark to encourage consumer comparison: "Like X brand games? Then try my product!"

    This comes down to the simple philosophy that it is impossible to refer to a company's brand or product for purposes of comparison or criticism without using their mark. Trademark and Unfair Competition law therefore permit a defendant to raise a nominative fair use defense when the use of the mark clearly identifies the mark's registrant. It's assumed that this use is unlikely to raise a lot of consumer confusion—if you're accurately attributing the mark to the mark holder, and it's clear that you're not using the mark as your own, there's less of a chance of consumer confusion.

    However, one problem that may arise is "false endorsement", which renders null the nominative fair use defense. This means that your use of the mark suggests that the other company or brand is endorsing or sponsoring your product. This is a tricky area and is the reason why it is almost always dangerous to use popular brands in your game without permission or a license. For instance, if you create a racing game where your cars are "sponsored" by certain brands, or the brand names of the cars themselves are readily identifiable, the trademark owner may argue that those uses suggest sponsorship or endorsement of your game. This would destroy any nominative fair use argument you may want to raise.

    This is, however, exactly where GWR's cease & desist fails and where a nominative fair use is painfully obvious. There is no question that GWR's mark is being improperly used to suggest endorsement, nor does it falsely identify the origin of the work. On the contrary, FailBlog is more or less dedicated to humorously pointing out failures, and they have no intention of misleading their audience in believing that the failure is their own.

    First Amendment Protection

    In the case of creative and artistic works (including video games, for reference see E.S.S. Entm't 2000, Inc. v. Rock Star Videos, Inc., 547 F.3d 1095, 1099 (9th Cir. Cal. 2008)), it is generally accepted that the public interest in avoiding consumer confusion must outweigh the public interest in free expression for a trademark infringement/Lanham Act claim to survive. This is an incredibly steep test, actually; according to the 9^th and 2^nd Circuits, an artistic work's use of a trademark that would otherwise violate the Lanham Act isn't actionable "unless the [use of the mark] has no artistic relevance to the underlying work whatsoever, or, if it has some artistic relevance, unless [it] explicitly misleads as to the source or the content of the work." Mattel, Inc. v. MCA Records, Inc., 296 F.3d 894, 902 (9th Cir. 2002). As most pornographic works survive the Miller obscenity test based on the "artistic relevance" test alone, it's fair to say that anything above zero artistic merit is sufficient. Humor and parody are typically viewed as having at least some artistic relevance, even if the humor is somewhat tasteless. There is also little to suggest that FailBlog's use of the mark improperly misleads consumers—on the contrary, it points directly to the actual source of the Fail.

    I'm using the FailBlog example pretty liberally, because it's an easy example. The First Amendment protection is particularly appropriate, however, when looking at the use of trademarks in games; because video games, no matter how crude or grotesque, are typically protected under first amendment due to their artistic value, they may be subject to greater first amendment protection than a product website that uses another company's mark as a basis of comparison. This is something you may want to consider when weighing the risks of using a trademark or a parody of a mark in your game.

    

    

Marketing and Public Relations

    There is little doubt that advertising, reviews, and recognition in the marketplace are vital to the success of any title. Typically marketing is the responsibility of the publisher. However, more and more games are being produced independently and are in need of at least some of the exposure the major titles enjoy. In many cases it's possible to get recognition on a grassroots level. Word of mouth is a powerful tool and there is a growing development community that reviews and recommends game products. In most cases this is more than enough to get exposure for independent projects by individuals and small collaborative groups.

    However, taking your game to the next level may require you to seek professional help. To that end, if you can't afford to employ a marketing guy outright, you may consider hiring a public relations or marketing firm. This entry will provide a (very) general idea of what these firms do, but more importantly it will discuss what goes into the agreement/contract you will have to sign when you engage one of these firms. It will also cover some of the things that should be in the contract to protect your own interests. Often these terms are only conspicuous in their absence, so unless you know what to look for you may find yourself with an out-of-control bill and little oversight over what this firm is doing for you.

    What do Marketing and PR firms do?

    A good marketing firm will evaluate your product and come up with the most effective strategy to expose your product to the broadest market in the best light. Doing this involves creating a project proposal that explains the demographic(s) targeted, what tools and materials the firm feels will best reach that audience, and the media outlets that the firm has access to that can reach that audience. A PR firm usually focuses on "free" exposure, such as media publications, press releases, and other opportunities to improve you or your product's reputation in the marketplace. In some ways public relations could be viewed as a subset of marketing—marketing is more generally related to creating the brand and influencing how that brand is received by the public. PR involves improving the image and reputation of that brand.

    What's in the Agreement?

    The agreements will differ depending on what you're buying. Generally the Agreement (typically a "Consulting Agreement" but sometimes an engagement letter or "Marketing Agreement") comes in two parts: the contract and the project proposal, which outlines some of what I stated above and usually a great deal more.

    The Contract

    In almost all cases the contract will be for "consulting services" related to public relations and/or marketing. This should tell you two things—one, the firm you're hiring is an independent contractor, and two, you will be on the hook for all or almost all expenses relating to the production of marketing material. Most firms charge a monthly "basic fee" for the consulting services alone. This usually doesn't include any out-of-pocket, vendor, or third party contractor fees or expenses. Some things to look out for (by no means all-inclusive):

• The right to approve expenditures, including anticipated costs, fees, and expenses, including but not limited to out-of-pocket and third party vendor/contractor fees. Approval should be sought in writing and should only be given in writing. The sum approved and precisely for what should be carefully documented and kept for your files.
• The right to approve or change the project proposal.
• Costs resulting from delays caused by the marketing/PR firm are the sole responsibility of the firm—if the project exceeds the projected timeframe for completion because of negligence or inappropriate conduct by the firm, the firm should be on the hook for all late fees and expenses resulting from the delay—this includes overtime for third party vendors, etc. Don't worry. It is very likely that the firm will ask for the same for you, in the event that delays are your fault.
• Retention of all IP rights: generally this will already be in the agreement, but if it isn't, make sure to have it included. You want to make sure you not only retain all of your original trademarks and copyrights, but you want to make it clear that you are the owner of any trademarks and copyrights resulting from the project. You want to also make sure that the firm will warrant that no third party contractors will have a claim or stake in the resulting IP. As it is usually the firm that procures those contractors, it's not unreasonable to ask for a copy of their form IC agreement.
• Limited trademark license: The firm needs the right to use your trademark if they are going to produce anything for you. A trademark license that may be sublicensed to third parties but that is limited to use in connection with/for the benefit of the project should protect you from any unlawful uses or reproductions. The firm may ask for the right to use the mark in connection with its own marketing materials (e.g., the "clients" page of its website).
• NDA/Confidentiality. This should include any information you provide to the firm and any market data, surveys, or results the firm obtains by its own efforts in connection with the project and your product.

    The Project Proposal

    At a minimum, the project proposal should include an itemized projection of anticipated costs and when/how frequently those costs will be incurred. More importantly, you should know why you're incurring those costs. This is why you will want the right to change the project proposal and the right to approve expenses—in some cases they may include something that you can already provide for free or at a lesser cost.

    Choosing the right firm comes down to reputation and actual prior results. Do your homework and make sure the firm or individual you're considering has experience in your industry and with your type of product. As "picking the right marketing firm" is outside the purview of this blog I'll defer to the myriad of advice pages on that question.

Trademark Abandonment

    Recently there has been a lot of talk about Tim Langdell's trademark, "EDGE". Many have a very strong opinion about the matter, particularly considering Langdell's involvement with the IGDA. This post has nothing to do with anyone's personal opinion, and I have none in the matter. Rather the trademark question raises various issues relevant in the games industry—for instance, when is a mark sufficiently distinctive under trademark law? When has a mark obtained a secondary meaning for trademark purposes? Is it readily identifiable to consumers? There are a variety of factors that may be used to determine whether a mark is valid, and like fair use this is frequently determined on a case by case basis. 

Another question is whether licensing the mark in the manner Langdell's company has is an appropriate use of trademark protection. Iit should be noted that the trademark wasn't filed for registration until 2006-- although the claim of first use is 1984, and apparently the mark was "licensed" to various other products prior to the date of filing. Based on the website, and if rumors are to be believed, the company allegedly licenses its name to various unrelated projects and products without engaging in any continuous sale of a product of its own (although the website says the store is "closed during maintenance")—and presumably without having any oversight or involvement with the products licensing the name. If this is a case of trademark squatting (e.g., "owning" a trademark for the sole purpose of licensing the name to others without the mark satisfying any of the requirements of trademark law, such as identifying the source of a product in commerce or being sufficiently distinctive—relatively similar to patent trolling), then several arguments may be raised. One is whether the mark has been so "diluted" by indiscriminatory licensing so as to make the mark invalid. Another is trademark abandonment.

    While games such as Bobby Bearing (originally published in 1986) have been re-released in mobile form, most of the games listed on the company's website were developed in the 80s for platforms that are now nothing short of antique. The company lists various "forthcoming" titles, but there is a considerable platform generation gap between previous publication and what will supposedly become available. This raises a novel argument for trademark abandonment.

    This isn't to say that this is a great argument in light of the facts (few of which are readily available)-- this is mostly my excuse to discuss something I've wanted to talk about for a while.

    The law of trademark abandonment, also referred to as "non-use" and "cancellation", is international in scope. While the time frame and specific definition for non-use and abandonment vary slightly from country to country, countries that acknowledge trademark rights permit opposition to the mark on the basis of abandonment and cancellation by non-use. A mark is considered abandoned under Section 45 of the Lanham Act, for instance, when "its use has been discontinued with intent not to resume such use."

    The period of discontinued use in the U.S. is three years. In many countries the period for non-use is as many as five years. Typically the burden of proof lay on the opponent of the mark. That burden varies drastically from country to country. The law on abandonment seems deceptively simple. At a glance it seems as though a mark is abandoned if the registrant (or the common-law owner of the mark) fails to use the mark in commerce for a set period of time. But what happens if the non-use is involuntary? What constitutes use? When is a use considered a nominal and valueless use that is solely intended to unlawfully preserve a mark? These are all issues that must be considered when determining whether a mark is in fact abandoned.

    The question becomes even trickier when international standards are at issue. The law of cancellation in Egypt, for instance, sets out clear exceptions to non-use cancellation. Other countries may not acknowledge those exceptions or may set forth different standards when evaluating those exceptions. A mark that is used internationally is subject to all of these varying standards.

    This post focuses predominantly on U.S. trademark abandonment law. However, the issues discussed below may also apply to the laws of other countries.

Involuntary Non-Use

    Trademarks are exposed to a variety of risks. Mergers, bankruptcy, or government seizure of a business may result in the unintentional non-use of a mark even if that business has no intention of abandoning the mark. Some courts have found that a mark is abandoned notwithstanding exigent circumstances. Other courts have ruled the opposite. Frequently the determination is based on the actual provable intent of the business and the likelihood of continued future use. Many claims for abandonment have been rejected based on a showing of "intent" not to abandon.

    One notable example comes in the form of the popular cordial Chartreuse. This liqueur was originally developed using a secret process by the Order of Carthusian Monks. It was named after the mother house of the order, the Monastery of the Grande Chartruese (located in France). The liqueur became popular in the late 19th century and was sold both locally and internationally. However, the French Government confiscated and liquidated the monks' business in 1901. The liquidator then sought to reproduce the monk's recipe in order to continue distribution under the old name "Chartreuse". As trustee of the business's estate the liquidator claimed he owned legal title to the international mark.

    Ever perseverant, the monks moved to Spain and continued to make the liquor by importing the required herbs from France. They distributed the old secret recipe under the name "Peres Chartreux" and stated on the bottle that it was the only liqueur that was made in the identical manner as that made in the Monastery of the Grande Chartruese. The monks also pursued legal action in several countries and distributed to the U.S. under the old label to preclude a claim of abandonment.

    SCOTUS found that a) the liquidation did not include rights to the trademark outside of France, as the business and good will associated with the mark arose from the secret process through which the liqueur was made and not the location, and b) the adoption of the new mark did not show the requisite intent to abandon. The Court found that the adoption of the new mark was necessary as the old mark could not be used within France, and it was natural that the monks would want to adopt a mark that could be used in France as well as abroad. The monks demonstrated their desire to avoid abandonment by their prompt assertion of trademark rights in other countries. See Baglin, Superior General of the Order of Carthusian Monks v. Cusenier Co., 221 U.S. 580 (1911).

    It should be noted, however, that U.S. courts (including the Second Circuit) will now typically apply a different intent test; i.e. "no intent to resume use in a reasonably foreseeable future." This is the precedential norm in the U.S. due to the language of the Lanham Act, and particularly relevant in the Edge Games trademark question due to the substantial platform generation gap mentioned previously. By this standard even a good faith intent to not abandon will not preclude abandonment if the intent to resume is vague, unspecific, or impossible within the reasonably foreseeable future, as may be the case in bankruptcy or insolvency.

    Courts seem to be slightly more lenient in the event of merger. The Sixth Circuit found that the mark of one of the merging companies was not abandoned if the name was still invoked or used in the course of business or where some portion of the work continued under the prior name. Stilson & Assocs. V. Stilson Consulting Group, 129 Fed. Appx. 993 (6th Cir. 2005). Similarly, the 9th Circuit recently found that sell off of remaining stock and inventory under the former trademark was sufficient "use" to negate the claim of abandonment. See Grocery Outlet Inc. v. Albertsons, Inc., No. 06-2173 (N.D. Calif. 2008)

This raises another major issue: use.

    The Quality and Quantity of Use

    Even if a trademark is still technically "in use" it may be deemed abandoned. The quality and nature of the use is therefore important when determining whether the use precludes abandonment. Courts will examine the number of goods sold that make use of the mark and whether the mark is being used for commercial purposes or token purposes. Generally the use must be continuous and deliberate. Regardless of this generalize standard, there is no black letter law that sets out whether a use precludes abandonment; typically this is determined on a case by case basis.

    However, U.S. companies may not hoard trademarks. In fact most countries have some regulation that prohibits "token" use of a mark to prevent cancellation. Trademark "maintenance" programs such as limited arranged sales will not protect a mark from abandonment. Exxon Corp. v. Humble Exploration Co., 695 F.2d 96 (5th Cir. 1985). Typically, when a mark is discontinued, any future intent to resume must be an actual good faith commercial use. This raises the question of whether re-releases of old titles like Bobby Bearing are merely "token" exercises to maintain a trademark employed otherwise exclusively as licensing tool.

    Conclusion

    Even in the U.S. it is not always easy to determine whether a trademark is abandoned. Frequently it is determined on a case by case basis. There are also other considerations such as geographical abandonment (when the non-use only occurs in a particular region) that may also play a role in a Court's determination. In the case of international abandonment of a mark there are dozens of other considerations at play, including presentation of evidence and burden of proof. It is imperative that a business takes these considerations into account when deciding to discontinue or suspend use of a mark.

    The Edge mark in particular raises quite a few grey areas as to what constitutes "abandonment". Although it is unlikely that the current licensing model used by Edge Games will be challenged in the near future, it would be interesting to see the outcome and to further interpret the definition of abandonment and dilution.

 

Copyright Registration Problems: Alleviating backlog worries

    An article in the Washington Post raised numerous issues concerning the new electronic copyright registration system. While the system definitely needs work, the belief that this problem is prohibiting people from marketing, publishing, or otherwise exploiting their creative ventures is misguided. Copyright protection is automatic from the time the work is fixed in a tangible medium. This means that once you create your work and put it in a fixed form (including computer files) your work is protected. While registration is necessary to enforce a copyright in court failing to register does not mean that people can openly copy or otherwise pirate your work without your permission. There are benefits to registering early, including statutory damages and attorneys' fees awards. However, because copyright registrations backdates to the time it was registered (i.e., put in the hands of the copyright office) and not at the time of certificate issuance, the fear that the benefit of early registration will be lost because of the backlog is without merit.

    We can hope that the online system will be updated soon. In the mean time it is important to bear in mind the benefits of registration, regardless of when you obtain the actual certificate.

    Copyright attorney John E. Grant wrote extensively on this topic. If you would like to learn more, check his blog.

Richard Garriott Sues NCSoft for $24 Million

    According to Kotaku Richard Garriott filed suit against NCSoft yesterday in the Western District of Texas (U.S. District Court) as a result of his stock option agreement with the company. This presents an interesting opportunity to introduce the concept of stock options in employment contracts. It also presents an ideal case study of why paying attention to your boilerplate (the "miscellaneous" provisions of a contract, like jurisdiction, choice of law and force majeure) is extremely important.

    Stock Options

    A stock option is a contract between an employer and an employee that grants the employee the right, but not the obligation, to purchase a designated number of shares (usually a set number of common shares) of a company at a designated price. This is typically the market price at the time the agreement is made. Simply put, a stock option agreement "freezes" the stock price for employees and allows employees to purchase shares at that same rate when the company's stock increases. The employee can purchase those stocks or any percentage thereof at that price and at any time during the exercise period, provided the stock option in those shares (the right to purchase) has vested. The stock option can vest all at once (for instance, five years after employment begins) or over a period of time (e.g., 25% after the first year, 50% after the second and so on).

    Stock options can be incentive based (ISO) or non-qualified (NSO). The ISO offers more favorable tax treatment—there is no income tax on the stocks; if the stocks are held after the exercise for a period of one year or more any profit made from a future sale is treated as a long term capital gain. The only tax that the employee may have to pay on the stocks is an Alternative Minimum Tax. In an NSO the difference in price between the market value at the time of exercise and the stock option price are treated as taxable income. In most cases you want your stock options to be treated as ISO—otherwise you're liable for a potentially exorbitant income tax every time you exercise your option.     

Note: There are a variety of compensation packages involving stocks and stock options that you may believe are stock option agreements but do not require to pay for the stock in order to exercise your rights under the agreement. This isn't the case, and for tax purposes it's good to know what kind of compensation you're getting. If you would like to know what you actually have, look through the list here.

    Garriott's Stock Option Agreement

    Garriott was entitled to receive 120,000 shares of NCSoft common stock at 126,200 Korean won (approximately $99 U.S.). Under the terms of the Agreement the stock options could be cancelled under a few different circumstances:

     1) termination of employment during the vesting period (which ended in 2003);

    2) voluntary departure after the vesting period if the options aren't exercised with 90 days after departure;

     3) gross negligence caused by Garriott that damages the company, 4) breach of the stock option agreement by Garriott; or

     5) the company's bankruptcy or dissolution.

    Garriott's stock option agreement satisfied all of the requirements to be treated as an ISO. He was an employee at NCSoft, the exercise period was within 10 years after the grant date, and the exercise price was the market price at the time the agreement was made. However, there are other requirements for ISO tax treatment— the employee must retain the stock for one year after exercising or two years after the grant date, and the options must be exercised during employment or within three months after employment terminates.

    Garriott's Complaint

    Garriott's complaint raises four causes of action: Breach of Contract, Fraud, and alternative cause of action for Fraud (that the firing itself was fraudulent) and Negligent Misrepresentation. There are a few problems with Garriott's complaint. I'll start with the substantive issues first.

        Substantive Problems

    The facts asserted in the complaint allege that Garriott was fired by NCSoft and his termination was involuntary. He also claims that NCSoft produced "false documentation" to support the claim that the termination was voluntary. The complaint alleges that NCSoft wrote the Open Letter from General British that appears on the Tabula Rasa website. It also concedes that at the time Garriott found nothing wrong with the letter. This is a bit a departure from the rest of the complaint, because the open letter certainly makes it sound like he made the choice to leave:

    "Many of you probably wonder what my plans are, now that I have achieved the lifelong dream of going to space. Well, that unforgettable experience has sparked some new interests that I would like to devote my time and resources to. As such, I am leaving NCsoft to pursue those interests."

    The language of the open letter places the impetus of the departure on Garriott. The fact that the complaint openly admits that he had no problem with it may hurt his case. Perhaps acting like it was voluntary and letting people believe it was voluntary, in his mind, didn't actually make it voluntary. However, it certainly won't help him if the case reaches discovery.

    Garriott's complaint alleges that because his termination was treated as "voluntary" by the company he was forced to exercise his stock option at a time when the market price was suffering due to the economic downturn. He contends that as a result of his termination he lost the benefit of the bargain of his agreement, and that if his termination had been treated as "involuntary" he would have retained his stock options until 2011. He also alleges that the forced exercise of the stock options, "worth tens of millions of dollars" (pro tip: you don't need to capitalize and bold the same statement multiple times in your complaint. Ever), caused him to lose millions of dollars in value (see?) and forced him to sell tens of millions of dollars of NCSoft shares in the current economic climate. 

    The complaint also raises an interesting tax problem—it alleges that apart from the direct financial loss sustained as a result of the involuntary termination, Garriott was forced to suffer hundreds of thousands of dollars in costs (see how annoying it gets?) How is not addressed and the claim itself is a bit misleading. The taxable income for an NSO is the difference between the stock option price and the market price. If the market price was trading at less than the stock option price, there is presumably no income tax liability. If the options were treated as an ISO, the options wouldn't be subject to an income tax at all. Furthermore, under the US Tax Code Garriott would have been forced to exercise those options within three months after termination whether the dismissal was voluntary or involuntary. Failing to do that and holding onto the stock options for two more years while the stock increased would expose Garriott to some serious tax liability at the time of exercise, because the options would be treated as NSOs. If he exercised via cashless exercise the tax liability is even more confounding-- the amount earned (and the taxable income) from a cashless exercise is the difference between the fair market value at the time of sale and the exercise price -- in this case, the cashless exercise would have sold the stock at a loss, which should typically have a positive effect on your taxes.

    Procedural Problems

    This is why reading your boilerplate is incredibly important. There are a few relevant procedural issues in this case. Choice of law, jurisdiction, and attorneys' fees are the most obvious.

    The contract is governed by Korean law. None the less, the complaint relies on a Texas statute to support a claim for attorneys' fees. This doesn't really work because choice of law provisions govern the entire contract, and the statute in question only allows attorneys' fees for contract disputes—the fraud and misrepresentation claims aren't within the purview of that particular statute. Jurisdiction is also an issue—the provision in this case is a bit more ambiguous because the Seoul District Court has "non-exclusive" jurisdiction. The lack of exclusivity may have been negotiated, and it could create a problem by allowing the case to be heard anywhere with personal jurisdiction over the defendant. However, forum non conveniens allows a court to refuse to hear a case that would be better handled in the hands of another court. The fact that an appropriate court is stated in the contract and the contract is governed by Korean Law may tempt a Texas jurist to refuse to hear a matter that should be brought in a Korean court.

    It should prove to be an interesting (albeit short lived) case, if it goes anywhere.

    

Update: NCSoft's corporate site provides Stock Information. If you're curious. Apparently NCSoft's stock began to fall a while back and is only now beginning to steadily ramp up-- their stock is on the rise for the first time since 2002. It's been steadily increasing since February and is currently trading at about $112 a share. At the date around when Garriott's stock options would have been cancelled were they not exercised, it was trading at about 66,000 won, or around $52. Another interesting factoid-- when Garriott's stock options were 50% vested the stock price was near its highest. 

The Pirate Bay Ruling

    A Swedish court handed down The Pirate Bay ruling today, convicting four administrators of The Pirate Bay website (namely Fredrik Neij, Gottfrid Svartholm Warg and Peter Sunde). The reason for the judgment is probably in no small part due to the ideology espoused by The Pirate Bay operators and the notoriety the site enjoys. The Pirate Bay website provides both a search engine for torrent files and runs BitTorrent trackers for the files listed. The conviction included somewhere in the vicinity of $3.5 million in fees, to be awarded to various studios and record companies, and a one year prison sentence. Currently the site is still up and the men are still walking free pending further proceedings. It may be years before a final determination is made on appeal. The ruling raises a whole mess of legal issues, not the least of which is the effect this will have on BitTorrent technology and the repercussions of linking to infringing material.

    BitTorrent

    BitTorrent is a file sharing protocol that enables rapid downloads without putting a great burden on any one particular host. It starts with the creation of a torrent file that contains metadata about the torrent tracker (the only central point in the process and the server that connects peers and coordinates distribution of data) and information about the file a client wants to access. Note that the torrent file doesn't contain copyrighted material—it only contains parameters that can identify pieces of data from that file on the tracker's network. To access the file a user must download the torrent and connect to the specified tracker that then designates how the bits of data are downloaded from various peers on the network. Once a piece of data is taken from the seed that piece of data can be shared from peer to peer and each piece can be downloaded from a variety of peers.

    The advantage of this file-sharing technique is that it puts less strain on the content provider and it reduces strain on individual peers—instead of downloading one large file from one host or peer, small data requests are sent out on the network and are downloaded from multiple sources. The protocol does more than bypass the original content provider/copyright owner (although it can and has been used for that purpose). It reduces the cost to content providers and, in the case of secure trackers like the one used by the World of Warcraft downloader, it can provide a faster downloading mechanism to rapidly distribute patches and updates.

    This raises a major point. The BitTorrent protocol wasn't on trial here.

BitTorrent, Inc. (the developer of the protocol) is a San Francisco, CA company that has licenses from various media providers to share hundreds of shows, songs and films through its website and search engine. Trackers can be private and secure—their primary function is to list and sort the IP addresses of peers and coordinate what downloads from where, and they're necessary for the BitTorrent protocol to function.

    The Pirate Bay

    The Pirate Bay was created in 2003 by the Swedish anti Copyright group Piratbyrån and later separated as its own organization. It utilizes OpenTracker software to coordinate communication between peers. While anyone can download torrents from the site, only registered users can upload torrents and post comments and messages. The Pirate Bay is a bit antagonistic when it comes to legal threats—in one memorable reply to a take-down notice from DreamWorks SKG, "It is the opinion of us and our lawyers that you are ....... morons, and that you should please go sodomize yourself with retractable batons."

    The Pirate Bay strongly held to its belief that it was immune from suit because, up until 2005, Sweden had some fairly lenient copyright laws. Previously it was legal in Sweden to copy and distribute unauthorized copyrighted works through the Internet. However, the EC Directive on aspects of copyright and related rights in the information society forced Sweden to adopt laws criminalizing this conduct. This put Sweden more in line with EU and US law. However, Swedish law doesn't really distinguish between criminal and civil litigation, and the Swedish Copyright Legislation lacks the safe harbors for ISPs and website operators provided for in 17 U.S.C. § 512. Because The Pirate Bay made it a point to be as visible as possible they were the first to fall under the proverbial Axe.

    The Charges

     Investigation into The Pirate Bay began in 2006. The prosecution of The Pirate Bay began with two charges under Chapter 7 of the Swedish Copyright Legislation. The two charges included "assisting copyright infringement," and "assisting making available copyrighted material." The first charge for assisting copyright infringement was later dropped and The Pirate Bay administrators were only charged with assisting making available copyrighted materials.

    The Trial

    The Trial took place in February 2009 and lasted for nine days. During the trial, if the Internet is to be believed, The Pirate Bay received ample support and held fast to its defense: no copyrighted material at any time existed on The Pirate Bay's servers and neither the site nor its operators committed copyright infringement. They also contended that search engines such as Google can perform the same function as The Pirate Bay. 

    The Outcome

    None the less, as of today the Court found that The Pirate Bay did assist in making available copyrighted material by  creating a "sophisticated" search function and acting as a torrent tracker for what was predominantly unauthorized copyrighted material. From an outside perspective this seems more a matter of politicking than actual justice--Swedish prosecutors and Courts were under pressure to enforce new copyright laws. The Pirate Bay is a highly visible and vocal website with a massive community that contained links to torrents that lead to a lot of unauthorized copyrighted works. They made a good target.

      It's a sticky, quicksand kind of issue because the technology can be extraordinarily decentralized and a website could do nothing more than act as an internet search engine (i.e. Google) and provide similar functionality as The Pirate Bay. In that argument The Pirate Bay is certainly correct. Many torrents operate on a "trackerless" system that makes each peer a tracker, so all you need to do is find a torrent on Google, download it and open it in a BitTorrent client. No one is going to shut down BitTorrent or try to prohibit BitTorrent protocol because the clients are functional beyond circumventing content owners and many content providers use BitTorrent protocol. Certainly no one's going to shut down Google.

    The frightening but somewhat expected outcome of this ruling is the suggestion that merely providing a hyperlink to a file or site that will probably lead to unauthorized copyrighted works is contributory infringement if you express a particular ideology. One could argue that The Pirate Bay was prosecuted because of its political affiliation.

    This could raise a freedom of speech issue.

    The Pirate Bay prided itself in its piracy. It promotes a particular ideology in copyright reform: that the current state of copyright law is a grossly exaggerated shield to protect major content providers as opposed to promoting individual contribution to the intellectual marketplace. There is a very active and very real political party in Sweden that expresses this ideology. The Pirate Bay operated under the protection of Sweden's liberal copyright laws for over two years before what they viewed as their right to freely distribute content on the Internet was removed.

    The outcome for now looks dim and strange, but it is by no means certain.

Privacy Policies and Consumer Protection

    With more and more games being provided online and through websites as opposed to the old brick and mortar model, consumer privacy protection is an ever evolving issue. When you develop a game or product that derives data from the user it is important to take that user's privacy into consideration. To that end, you may ask yourself whether you need a privacy policy and what you need to do to comply with consumer protection laws or industry standards. In this entry I'll cover some of the legal issues that are relevant to user privacy and your obligations as a developer or website designer.

     Consumer Protection and Privacy

    In the U.S. consumer privacy is protected and enforced by the Federal Trade Commission (FTC). To protect consumer privacy the FTC relies on specific legislation such as COPPA and the Gramm-Leach-Blilely Act as well as legislation governing false advertising and deceptive trade practices under Section 5 of the FTC Act. Most businesses are not legally obligated to protect user privacy unless they promise to do so (via a Privacy Policy). There are exceptions: Financial institutions, websites and businesses that collect medical data subject to HIPAA regulations, and websites, games or businesses that collect personal information from individuals under the age of 13 must comply with federal regulations by providing notice and complying with specific requirements under the law. In those cases notice in the form of a privacy policy is required. For the purpose of game development, perhaps the most relevant regulation falls under COPPA, which concerns data collection from children under the age of 13.

    The U.S. is more lax about consumer privacy and data collection than the EU. Under the EU Data Privacy Directive of 1995 EU signatories were required to implement laws and regulations in compliance with the directive. The Directive contains strict guidelines for consumer data collection. It also requires the registration of consumer databases with government agencies. If you live in the EU it is very likely that as a business you are required to handle user data in accordance with the Directive. You can find the full text here. The EU Directive can apply to American companies that operate in the EU or exchange user information with EU companies—to that end, use of a privacy policy is required to be protected under the Directive's Safe Harbor for US companies.

    Do I Need a Privacy Policy?

    A privacy policy is a form of notice. It lets users know how their information will be used, exchanged, and stored and protected. While legally you may not be required to have a privacy policy, many businesses choose to use a privacy policy for ethical or business reasons. Certification programs like eTrust are widely recognized and many consumers won't share their personal or financial information without some kind of assurance that their privacy will be protected. This is especially true if you collect credit card or other financial information. From a business standpoint, a privacy policy may be conspicuous in its absence. While consumers may not read every line and verse of a privacy policy, they still expect to see one.

    What Does my Privacy Policy Need to Include?

    The most dangerous thing you can do when creating a privacy policy? Make a promise you don't intend or aren't able to keep. While you may not be required to protect user privacy by law, you are absolutely required to comply with your own privacy policy. Failing to do so will expose you to liability under the FTC's deceptive practices regulation. This is incidentally how most companies get into trouble—they promise to protect user data but then engage in data management that doesn't fulfill the promise made in the policy. For this same reason, it's important to keep your policy up to date.

    Bearing that in mind, below is what a functional privacy policy will include:

    1. Introduction—this includes the company name, the business you're engaged in, and special instructions (e.g. parental verification)

    2. Description of what information is being collected—having a user fill out a form and stating the information collected from that form should be obvious. However, this also includes the personal information that is passively collected such as information logged by your server or collected by a third party program that is integrated in your site or game.

    3. Method of Collection—Explain how you're getting the information from the user, whether it be automated, passive, or via form.

    4. Description of the use of the information—how do you plan on using the information? Who has access to the information? Do you need to share this information with third parties, and if so, who? Are you going to sell this information to marketing or advertising firms? Honesty is the only policy here. If you need or want to share user information with third parties for any reason, you need to say so.

    5. Storage/Protection—this is another area where honesty is the only policy. If you decide to describe the technology by which you plan to store and protect user privacy, make sure you a) accurately describe that technology and b) update your policy whenever you change that method.

    6. Contact information—Give several options and make sure users are able to contact you to discuss their privacy. This includes e-mail, a phone number, etc.

    7. Compliance with regulations—you may be required to comply with federal or international regulations. If that's the case, you have to include everything those regulations require.

    Regulations and Regulation Compliance

    The Children Online Privacy Protection Act

    COPPA pertains to websites and businesses directed to children that collect data from children under the age of 13. If your audience includes minors 13 or younger and you're collecting their e-mail, address, or other personal info, here's what you need to know:

    1. You must have a privacy policy. The policy must state a) what information is being collected, b) how that information will be used, and c) who will have access to that information (disclosure policy).

    2. You need a way to obtain verifiable parental consent. You have some options here:

        a) Provide a form that the parent can fill out and send;

        b) Require the parent to use a credit card in connection with a transaction;

        c) Provide a phone number where parents can call in their consent;

        d) Get consent via e-mail from the parent, provided the e-mail contains a digital signature.

    3. You need to provide a method by which parents can make requests concerning the child's personal information—this includes destroying that information or refraining from selling or sharing that information.

    You should carefully review the COPPA FAQ. Not only can it provide specific guidelines for compliance, but you may also be eligible for certain exceptions.

    State Laws That Require Privacy Policies    

    California law requires that any website or operator who collects private information from California residents must provide a privacy policy if the user data is being sold or shared with third parties. The policy must also provide a method for opting out or full disclosure—i.e., something the consumer can send in to request that the information not be shared or, in the alternative, receive a list of the third parties who have purchased or received that consumer's personal info.

    The FTC provides a comprehensive guide for managing user data. This information will help you organize your own policies and best practices for consumer and employee data management.

    

Legal Issues Surrounding iPhone Application Development

    The iPhone App store has been open for almost a year now, and while many of the apps provide substantial utility, most are just plain and simple fun. Game development for the iPhone is a rapidly growing industry. Below I'll cover some of the general problems that may and have come up in iPhone App development. If you are unfamiliar with iPhone App development, follow the jump for some quick pointers on getting started. If you're already a Mac user and want to develop for the iPhone, you should head over to the Apple Developer Connection to learn about the technical and procedural requirements for iPhone app development. Bear in mind that all apps are subject to Apple certification before they can be tested on an iPhone or uploaded to the iPhone App store.

    Intellectual Property and Related Issues

     1)App games based on PC/Console games. Many developers may want to create iPhone versions of their favorite PC, Console, or handheld games. However the creation of an iPhone app based on someone else's work may be considered a derivative work or reproduction of the original game under copyright law. Therefore recreation of the original game or even an app loosely based off an original game, no matter how novel in execution, would almost certainly expose the developer to infringement liability. Even ignoring the copyright issue there are legal claims under trademark and unfair competition that would create major problems for our would-be developer. Absent a license from the original game developer/publisher no iPhone App developer should attempt to create an app based on prior games.

    2) App games based on or resembling existing iPhone apps or other games. Due to the simplicity of various iPhone Apps, it may often be the case that some apps closely resemble other apps. This can be a tricky problem—while under copyright law two authors may create identical or similar works provided one did not take or borrow from the other, the same is not necessarily true under trademark law. Furthermore, proving that you did not have "access" to someone's pre-existing app usually requires a lawsuit. While Apple reviews each application and provides certification, the reviewers are not omnipotent and may not be aware that pre-existing apps exist. Under the SDK agreement is the developer's obligation to ensure that no copyright or IP laws are being violated. The only real option is to tread carefully and check out the competition or, if you can afford it, obtain Errors & Omissions Insurance for your company/application.

    3) App games that use the name and likeness of celebrities. This has actually happened on more than one occasion. Using the name and likeness of a public figure/celebrity may expose you to liability under state name and likeness laws or trademark/unfair competition law. What you consider parody may be considered defamation by the individual in question or worse, a judge. Unless you want to argue your case for parody and fair use in court, your best bet is to avoid potential exposure by using your own fictional characters.

    ** Addendum: Trademark matters. As pointed out by Dan Rosenthal over at GamesLaw, one issue that deserves mentioning is the trademark problem-- frequently iPhone apps will contain deceptive names that closely resemble the trademarks of other products or similar services.  Absent a license or permission from the trademark holder, developing an app using someone else's service or trademark can and in all likelihood will expose you to some legal liability. This is particularly true if your game also uses other IP elements. See the iBorat app for a good example of the kind of use I mean.

    Contract and Related Issues

    1) User privacy. Under the SDK Agreement developers are required to comply with "all applicable privacy and data collection laws". This includes state, federal, and international laws. Privacy laws prevent the dissemination of user data and information to third parties. If your program uses user location, identity, or other data, it is necessary to review the laws that may apply to your application. In some cases it will be necessary to inform users prior to purchase of the use of their information in connection with the app.

    2) Use of Music. It should go without saying that any music used in your game needs to be licensed to you or owned by you. Normally I would have stuck this in the IP section, but the SDK agreement makes a specific provision for this.

    3) Use of Open Source Software. Any use of open source software requires compliance with open source licenses. The SDK Agreement takes an additional step by requiring that the use does not in any way contaminate the SDK code. There is an argument that this additional language is superfluous, but to be safe you should review the license for any open source code to ensure that it is covered by an approved open source licenses (GPL, BDL, etc).

    4) Rejection of your App. Apple reserves the right to reject your application for the app store. The reason may be based on non-compliance with the SDK or other developer agreements, or because the application does not otherwise comply with marketplace demand. It may even be based on your app competing with other Apple products.

    For more strange contract policies that upset some users, follow the jump.

Marketing to Women Gamers

            "There is no definition of a female gamer, and trying to tack a label to them does a disservice. The female gamer is simply a female who plays games. She's just as diverse as any other market out there."—Sheri Graner Ray

    Recently a GameStop training video made it to YouTube. It apparently isn't a joke or hoax, although after the first minute one couldn't help but hope. It seems strange that the demographic responsible for making 85% of all consumer buying decisions should be considered a "new breed of consumer" that remains a mystery to "over 50% of the population". According to U.S. censuses women outnumber men, so I can only guess that those statements are meant to be hyperbolic.

    What is truly bizarre is that most of the marketing and handling points made in the video are not gender specific. Up-selling applies to both sexes. Consumer buying behavior such as the "hunter" versus "grazer" oversimplification applies to every purchaser for every kind of product. There are marketing and selling techniques that work more effectively on women than men, but GameStop didn't really nail any of them. In fact they missed two of the major points by assuming that most women aren't really interested in game products and generally insulting the intelligence of most female purchasers (not to mention their employees).

    Most industries, particularly media industries, are familiar with marketing towards women. The games industry is certainly getting better at it. According to the ESA, women represent approximately 40% of the gaming population. Most of those women are over 18. Other studies suggest that the numbers are even higher. Women also account for almost 45% of all consumer electronic purchases in the U.S. So how are games being marketed to women? What techniques are proving most effective? A December 2006 study conducted in Madrid in sheds substantial light on the topic and is worth reading if you plan on appealing to the female market. 1,788 surveys were used in that study.

• Keep it casual. There is some evidence that most female gamers are attracted to casual games. According to a September 2006 study by Parks Associates, 59% of American consumers who play on mobile phones are women. Simple, casual puzzle games are frequently cited by studies and analysts as being less threatening and/or more attractive to women. Independent developers are already well-positioned for exploiting this market. It's also worth noting here that according to the Madrid study, 72% of female gamers play on PCs. Other studies, including national statistical leisure studies for the UK, contend that women have less leisure time than men. Games that offer greater rewards for less commitment may therefore be more attractive to women.
• Co-op is a good idea. When women aren't playing against the machine, they prefer to play with friends or family both online and off. 38% of the respondents to the Madrid study play with friends and family. Furthermore, studies show that women prefer to engage in social activities during their free time. Co-op games allows for players to use games as a fun and social event.
• Get a female opinion (preferably several). Every marketing plan requires analysis. That means evaluating your product's strengths, weaknesses, competition, and audience. Test and market pools are therefore a necessary evil when selling a product. One of the key factors to marketing to women is determining what women look for in game titles. If you want to make a shooter but you still want it to appeal to women, determine what other game elements women consider. Preferences cited by the Madrid study include problem-solving, strategy and puzzles, cooperative and interactive games, female lead characters and elaborate plots.
• Emphasize the preferred elements in marketing materials and in the course of sale. If you are designing marketing materials for women or if you are a retailer selling to a woman, do not over-emphasize features that lack any kind of appeal to women. The purchaser needs to know why the game is valuable to her. Listing the standard game features without highlighting the features attractive to her won't help you make the sale.
• Don't assume that women won't like your game. Never assume that girls will not play your game. Women play Gears of War, Resident Evil, Street Fighter, Call of Duty, GTA, and every other shooter and sandbox game out there. Women belong to clans, guilds, and other online teams. Women compete in Professional Gaming events. There is a very good chance that if your game achieves any level of success, some girl out there will play it. There is always the potential for a female audience and it is folly to completely ignore that audience. Knowing your female audience is more important than merely acknowledging that a general female audience exists.
• Employ women to sell your product. Women are generally less threatening to other women and are better able to communicate with other women. Purchasers, in turn, are more likely to buy from someone who speaks their language and understands their needs.

    I've included the video for a laugh but it's ineffective, embarrassing, and unprofessional. Calling women a "new breed of consumer" is patently ironic. Women aren't new to the game market and they certainly aren't new to consumerism.