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Friday, January 25, 2013

Navigating the Waters of Work for Hire

from Steve Goldstein





There was a time in console and PC game development when developers could enter a publishing agreement and retain the rights to the IP they created. With increasing market pressure, downward sales and pervasive aversion to risk by publishers, those days are long over unless you are one of a very select group of incredibly successful independent developers. As such, almost any type of development deal which involves a publisher financing the lion's share of a game will be a "work made for hire"in which the publisher will own all right, title and interest in the game being developed, regardless of whether the game was the original idea of the developer. Even though the industry standard is for developers to give up the rights on the games they work on, there are many ways that developers can protect themselves so they can get the most out of a work-for-hire agreement. The following is a list of suggestions and tips to keep as much as you can when dealing with a work-for-hire negotiation.

You should keep your tools and technology. A work-for-hire agreement always starts from the standpoint that a publisher gets everything that the developer creates in the course of making a game for the publisher. However, this does not make much sense when a developer is working on re-usable code that can apply to multiple games, such as game engines, physics engines, effects, etc. To use a film analogy, just because a studio pays for the production of a film, it does not necessarily own the cameras that were used to shoot that film. If you are developing your own technology and software tools to create a game and you do not specifically state that those tools and tech are not to be deemed part of the work-made-for-hire, you will unintentionally give away vital assets of your studio. By including a carve-out for tools and tech, you are building value in your company even though you may not own the game you are working on.

If you do negotiate a carve-out for your tools and tech, the publisher is going to ask for a broad-based license to use those tools and technology. It is important to keep this license as narrow as possible. Again, these technologies are valuable assets of your company, and if a publisher has open ended rights to use (or to allow other developers to use) your software to create any type of game that publisher wants, this diminishes the value of those assets. You therefore want to limit the publisher's rights to use your tools and tech strictly (1) to the extent the tools and tech are integrated in the game, to distribute the tools and tech to end users solely as the tools and tech are embodied in the game in object code only, and (2) to use the tools and tech to complete the game solely in the event that the publisher terminates the agreement due to your uncured material breach. This is an extremely narrow license, but it is possible to achieve with the right amount of negotiation.

It's not the IP, it's the revenue streams. Many developers think that they lose value in their company when they create a new IP under a work-for-hire because they are giving up their rights in IP that they would otherwise own. However, a work-for-hire can be tremendously valuable if the agreement between the developer and publisher is structured so that the developer has solid revenue streams from the IP. In other words, a developer may be far better off under a work-for-hire in which the developer has a significant royalty, an aggressive recoupment structure and participation on ancillaries than the developer would if the developer owned the IP but had a low royalty rate. Further, publishers have a stronger incentive to invest marketing and promotional dollars into a game that they own than a game that they have licensed. Going back to the film analogy, most motion picture directors do not own the movies they create on behalf of the studios. Very successful directors, while they don't own the movie they make, do have significant royalty participations, not only on the film itself, but on all ancillary properties and merchandise that the film generates. If a director creates a billion dollar film franchise and has a significant participation, that director is not going to mind that the studio owns the IP he or she made. In short, the aggressive negotiation of the revenue streams that a developer receives from a work-for-hire may be better than actually retaining ownership of the IP.

If you don't own the IP, make sure you are attached to it. Another major risk factor in entering into a work-for-hire agreement is that the developer that creates the IP will not be able to work on future iterations of that IP, such as sequels or ports. It is therefore critical that the developer negotiates long-term rights to work on future projects related to the IP. Typically, these rights are in the form of rights of first negotiation and last refusal. A right of first negotiation ensures that the developer has the opportunity to negotiate working on an ancillary project prior to the publisher negotiating with any other third party for that same project. This right is typically granted by the publisher. The right of last refusal is more favorable to the developer, and thus, rarely granted by publishers. This right states that if the developer and publisher do not come to an agreement under the right of negotiation, if the publisher negotiates a deal with a third party developer for the development of a particular ancillary property, before entering into that deal, the publisher must offer the same terms to the developer of the original property. If the developer passes on the offer, the publisher may enter into an agreement with the third party developer. "First and last rights"can also be intricately tied to royalties as well. As part of negotiating these rights, developers should also ensure that to the extent they "pass"on working on a port, sequel or prequel, the developer should still receive royalties as part of the developer's ancillary rights royalty stream.

While the "work-for-hire"is not ideal for all developers, through proper negotiation, a "work-for-hire"can provide significant and long-term revenue streams to a developer. Although the proposition of losing your IP can be daunting, by approaching "work-for-hire"with a long-term strategic focus on royalties, retention of technology and ongoing rights to work on a franchise, a "work-for-hire"can build tremendous value in your studio.

Steve Goldstein is a Partner at Stubbs, Alderton, and Markiles LLP and Chair of the Interactive Entertainment and Video Games practice group. Steve's practice concentrates on advising clients within the video game industry on legal issues across all aspects of their business, including negotiation of video game publishing agreements, merchandizing agreements, co-marketing agreements and other inbound and outbound licenses regarding the exploitation of video game intellectual property, Internet best practices, drafting of online game privacy policies and terms of use, alternative financing, global corporate structuring, and legal issues related to the use and trade of virtual goods.You can contact steve at sgoldstein@stubbsalderton.com.


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