Wednesday, December 19, 2012

Game Business Law 2013

Game Business Law 2013 will be here in just over a month. It will be held January 24-25, 2013, at SMU Law School, as it has been since the conference started.

I will be moderating a panel on crowdfunding and Kickstarter this year, but all of the sessions are looking very strong. The iniital program has been posted, for those interested in attending.

The past four Game Business Law conferences have been truly excellent, and I would recommend that anyone involved in the industry consider attending.

Wednesday, December 12, 2012

Beware the Berner Convention: Terms of Use and Social Media

Nearly everyone uses social media. It is difficult find people who do not. There are many platforms with different concepts and target audiences. But across them all, there are questions about privacy, copyright, and contracts. This arose when a makeshift legal declaration recently trended on Facebook:
In response to the new Facebook guidelines, I hereby declare that my copyright is attached to all of my personal details, illustrations, comics, paintings, crafts, professional photos and videos, etc. (as a result of the Berner Convention).

For commercial use of the above my written consent is needed at all times!

Facebook is now an open capital entity. All members are recommended to publish a notice like this, or if you prefer, you may copy and paste this version.
There are so many things wrong with that. It is a remarkable word to red ink ratio. But, this is an opportunity to think about social media from different angles. So many sites are “free". What’s the real cost of use? We will look at some of the legal issues.

First, there is no Berner Convention. There might be a Bernie Convention where people do this dance and wear cool sunglasses. No Berner Convention. There is a Berne Convention covering copyrighted works, and the United States and many other countries are parties. It is relevant to Facebook, but differently than the statement suggests.

“Declaring" your copyright to the world is meaningless. The Berne Convention directs that copyright exists when an idea takes form. Whenever a creative work becomes fixed, so do rights in the creator, regardless of any “declaration." However, there are things creators can do to improve the protection that copyrights grants. For example, filing for a registered copyright can be a great investment for something that shows a potential to generate revenue (and might be taken by someone else for that purpose): a video game, a book, a movie, a song. Vacation photos might not be worth the fee, since there’s likely no value to third parties.

Second, things like this come far too late, and don’t change the basic proposition of Facebook. Facebook’s easily accessible Statement of Rights and Responsibilities makes clear that, “you own all the content and information you post on Facebook," and:
For content that is covered by intellectual property rights, like photos and videos (IP content), you specifically give us the following permission, subject to your privacy and application settings: you grant us a non-exclusive, transferable, sub-licensable, royalty-free, worldwide license to use any IP content that you post on or in connection with Facebook (IP License). This IP License ends when you delete your IP content or your account unless your content has been shared with others, and they have not deleted it.
As long as your things are up on Facebook, Mark Zuckerberg is free to do what he pleases based on that license, but you still own the rights to the work in question. This is one of the click-wrap licenses we mentioned before. As long as the agreement is not unreasonable or unconscionable a court is unlikely to strike it down. If you are uncomfortable with this, you are not alone. But deciding whether these agreements are fair should happen before you click “I Agree". Moreover, without the clickwrap license, Facebook would be unable to function. They would have no legal ability to share the photo you uploaded with anyone, be that friends, family, random strangers, or that ex you’re trying to make jealous.

When you join Facebook or any other social media site, you enter a contract. A contract needs an offer, acceptance and consideration. Facebook offers to let you use their platform to connect with friends, share photos, and so on: those services are consideration. In return, you offer the consideration of letting them use your intellectual property. It is important to be realistic about how they might use it. Maybe one of your photos ends up in an ad. But what is much more valuable is information about you.

By tracking your behavior, sites get an idea of who you are and what you like. They turn to advertisers with this information and sell the opportunity to reach consumers who are apt for certain products. Some companies have figured out how to turn this into a sustainable business models, but many observers remain skeptical on its long-term viability. Warren Buffet’s investment partner Charlie Munger said pointedly, “I don’t invest in what I don’t understand. And I don’t want to understand Facebook."

The challenge of developing a new kind of business is risk. Facebook became ubiquitous rapidly. It remains to be seen whether that growth means they will be profitable in the future. No matter the era or the business, there is no free lunch. Money does not change hands when you sign up for sites like these, but they would not make the service if there was no cash involved. On balance, most people would probably decide that they are OK with sites using their information, provided it stays within certain bounds.

If you are not OK with it, take your profile and your content down. You cannot alter your agreement with Facebook by just saying so. Contracts can be modified, but both parties need to consent. The Facebook Terms of Use were unacceptable to the federal government, so the Government Services Administration negotiated different parameters with Facebook and many other sites. Like a copyright application for your vacation photos, this would probably not be worth your time and money. Even if it were, it seems unlikely you would be able to compel Facebook to negotiate these points.

This hoax did some good: it created a conversation about where these platforms fit in our lives. We share deeply personal things in ways that were not possible fifteen years ago, accessible around the globe. This convenience has its price. Is it right for you? Maybe, maybe not. Whatever you do, do not expect the Berner Convention to bail you out.

Zack Bastian is an official contributor to Law of the Game. A a recent graduate of George Washington University Law, Zack works at the Woodrow Wilson Center's Science and Technology Innovation Program and is a member of the American Intellectual Property Law Association. The opinions expressed in his columns are his own. Reach him at: zack[dawt]bastian[aat]gmail[dawt]com.

Wednesday, September 26, 2012

International Bar Association: Dublin

For any readers who might be attending the International Bar Association Annual Conference in Dublin, I will be speaking in two sessions, Monday afternoon and Tuesday morning. More information on the sessions is below.

The global ‘gamification’ of online gambling
Joint session with the Leisure Industries Section and the Technology
Law Committee.

Session Co-Chairs
Trevor Nagel White & Case, Washington DC, USA
Gabrielle Patrick iSeed, London, England; Vice-Chair, Electronic
Entertainment and Online Gaming Subcommittee
Gamification, and online gambling, are among the booming global
phenomena of the past decade. Given the highly polarised reactions to
gambling across different jurisdictions, yet the boost it can provide to
governmental coffers in these trying economic times, few are surprised
that online gambling has generated both political controversy and a
plethora of cross-border regulatory and legal issues. This session initially
explores these critical issues through the eyes of major online gambling
companies. The second segment will be interactive and include a
debate between an online gaming hacker and a representative of a
gaming /gambling company. Hot topics to be discussed will include
both the commercial and legal implications of:
• recent trends in online gambling - products, channels and
• laws, enforcement and operators’ duty;
• regulation internationally - the past and the future;
• is harmonisation of online gambling laws feasible in the EU?
• cross-border payments issues;
• compliance issues and cybersecurity;
• management of players’ accounts and fraud;
• privacy expectations and regulation in a digital existence; and
• ‘pathological’ gambling and public policy issues.

Andrew Algeo Paddy Power, Dublin, Ireland
Peter Cercone Playtech, Tel Aviv, Israel
Marcus Clinch Eiger Law, Taipei, Taiwan
Mark Methenitis Metro PCS Wireless, Richardson, Texas, USA
Diane Mullenex Ichay & Mullenex Avocats, Paris, France; Senior
Vice-Chair, Communications Law Committee
Brendan O’Connor Malice Afterthought, Madison, Wisconsin, USA

Cornices, cupolas and copyrights: protection and infringement of architectural copyrights
by remote sensing, media use, virtual worlds and construction changes

Joint session with the Art, Cultural Institutions and Heritage Law
Committee and the Space Law Committee.

Session Chair
Souichirou Kozuka Gakushuin University, Tokyo, Japan; Website
Officer, Space Law Committee

This session will examine the validity of architectural design
copyrights, and the potential infringement by remote sensing
imagery, incidental or deliberate use in media and social media, and
by construction variance, remodelling or demolition. The architect
of a striking new building has copyrighted its design. To the
architect’s distress, the design is now being copied and modified.
Images from space are widely distributed; print and online media
capture and replicate the image in film, virtual worlds, and other
incidental uses. During construction and renovation, the design has
been modified. In this session, our mock architect will prosecute a
copyright infringement case against these industries. Participants
will hear the evidence and arguments and act as jurors to decide
the fate of the architect’s claims.

Helen Conlan Bird & Bird, London, England
Jean-Frédéric Gaultier Olswang, Paris, France; Senior Vice-Chair,
Media Law Committee
Roberto Hernández García COMAD, Mexico City, Mexico; Latin
America Regional Officer, Anti-Corruption Committee
Mark Methenitis MetroPCS Wireless, Richardson, Texas, USA
Peter Polak Fiebinger Polak Leon & Partners, Vienna, Austria
Massimo Sterpi Jacobacci & Associati, Rome, Italy; Chair, Art,
Cultural Institutions and Heritage Law Committee

Tuesday, September 25, 2012

Don’t Forget to Read the Manual: Apple v. Samsung and the Challenge of Jury Instructions

A jury has enormous responsibilities. The judge decides all questions of law, using their legal expertise to interpret the problem presented by the case and determine which law or laws apply. The jury’s job is to resolve all questions of fact. Sometimes it’s simple. Is there enough evidence to show that the accused committed a crime beyond a reasonable doubt? Sometimes it’s difficult. This is particularly true in patent cases. A group of ordinary people is called to reach a shared conclusion on complex technical issues. That’s not a slight to the intelligence of the jurors. These questions are challenging for the attorneys and engineers that work in the field all their lives. Thus, jury instructions become very important. Today, we will consider the jury instructions in the recent Apple v. Samsung case and some post-verdict statements by the foreman that highlight just how hard it can be to follow the directions. The case is far from over, but its eventual resolution could determine the biggest hardware supplier in the mobile gaming market.

Within jury instructions, the court sets specific parameters on what questions the panel must answer and the legal rules they must follow. For common cases, model instructions are available. There has been a lot of debate on how to tailor these rules so that the jury receives the best guidance possible. Even if they are written perfectly, there are numerous variables that are impossible to eliminate. Jurors, just like everyone else, have biases and opinions that frame the way they look at the world. They also come in with different levels of education and expertise. No one is a professional juror. Most people have things they would rather be doing, so there’s a risk that they might gloss over more complex problems to save time.

In Apple v Samsung, there were no model instructions available. This case involved a mountain of issues. Apple commands serious market share and enormous customer loyalty, but Samsung’s recent smartphone offerings have shown they’re unafraid to challenge the house Jobs built. Steve was apparently so infuriated by the November 2007 announcement of Google’s Android (the operating system for the disputed Samsung phones) that he promised "thermonuclear war" over what he considered a “stolen product." There will be many books written about this battle, but we will focus on the jury instructions.

First, they were incredibly long: 109 pages. These had to be read aloud by the judge, which took hours. They listed roughly 700 separate questions the jurors had to answer to reach a verdict. One important detail was underlined. This jury could not include punitive damages. These damages typically come up in tort cases where the defendant did something especially terrible. To deter that type of behavior in the future, punitive damages are awarded. States have discretion on what types of cases can offer them and how high they can go. This is a contentious topic. Perhaps most infamously, it arose in Liebeck v. McDonald’s, where a woman sued the burger chain after suffering third degree burns from their coffee. That touched off a vigorous debate over tort reform: laws designed to limit civil judgments and discourage lawsuits.

But whatever your opinion is about punitive damages, they were not available in Apple v. Samsung. If the jury concluded that a patent was violated, their judgment was to put the holder in the place they would be had the infringer paid an appropriate licensing fee. Sending a message or discouraging future violators wasn’t to come into the equation. The jury instructions made this crystal clear, stating, “You should keep in mind that the damages you award are meant to compensate the patent holder and not to punish an infringer." But recent comments by the foreman, Velvin Hogan, cast serious doubt on whether the jury internalized that rule. In a Reuters interview, Mr. Hogan said, “We wanted to make sure the message we sent was not just a slap on the wrist. We wanted to make sure it was sufficiently high to be painful, but not unreasonable." That could easily be interpreted as intent to punish Samsung.

Mr. Hogan also made some comments on prior art that throw into question whether the jury followed their instructions. Prior art is a bedrock concept in patent law. It is all knowledge available to the public that can impact a patent’s claim of originality. To take an extreme example, let’s say you decided to sue Huffy for violating your patent on a “two wheeled rider propelled vehicle with shifting gears and handlebars." Huffy would easily defeat your claim, because they would point to the fact that bicycles and how they work has been freely available public knowledge for over a century. This principle reins in many patent claims by asking whether the invention in question is truly an original work, or an idea that is already making the rounds.

Prior art was an important piece of the smartphone lawsuit. Which of the features available on the iPhone were wholly original, and which were concepts that others had already explored and published? But on a Bloomberg TV interview with Mr. Hogan, he made a statement that could indicate confusion on the topic. The specific item was the “bounceback" patent, dealing with the way your phone screen “bounces" when you scroll down to the end of the page. According to the foreman, what convinced him that prior art didn’t apply was that, “The software on the Apple side could not be placed into the processor on the prior art and vice versa." But this is a misinterpretation. Prior art does not hinge on whether it can run on the same system, but instead on whether the invention has been used or even explained elsewhere.

This is not meant to suggest that the jurors in Apple v. Samsung did a bad job. Patents are an incredibly difficult subject, and equally qualified scientists can reach opposite opinions on the validity of a case. Even if the jury had followed every instruction perfectly, this case was going to be appealed. Smartphones are big business, and companies with skin in the game would logically spend large sums to settle who would decide the future of the market. Some influential legal scholars have pointed to cases like these as a sign that patent law is overdue for reform. Whatever the result, Apple v. Samsung shows just how hard these cases and their instructions can be. You can read the manual, sure, but 109 pages mean things might slip through the cracks.

Zack Bastian is an official contributor to Law of the Game. A a recent graduate of George Washington University Law, Zack works at the Woodrow Wilson Center's Science and Technology Innovation Program and is a member of the American Intellectual Property Law Association. The opinions expressed in his columns are his own. Reach him at: zack[dawt]bastian[aat]gmail[dawt]com.

Tuesday, June 26, 2012

New Law Review Article

I just had a new article published in Cybaris, the Intellectual Property Law Review at the William Mitchell College of Law.  The piece is titled "Intellectual Property 2.0: Revisiting the Copyright and Trademark System for a Digital Reality."

It's available for download here.  The full listing of articles can be found here.

Many thanks to the staff over there for everything, particularly Brian Bender, the co-Editor-in-Chief.

Wednesday, May 16, 2012

ABOSG and DIGDA - Saturday, May 19

I just wanted to make everyone aware that this Saturday, there are two events at the NTEC in Frisco. I will be speaking in the first, and moderating the panel in the second.  My understanding is both are open to the public at large, but you need to register on Eventbrite.

A Bunch of Short Guys
The Business of Animation
Panel discussion with local experts in entertainment law, freelance and contract employment, taxes, tips and tricks:
  • all professional animators
  • freelancers
  • students
Solid ground information needed after the initial starry eyed dream begins.

Dallas IGDA
Big changes in State and City Incentives Learn about the increase in money for you and decrease in effort on your part!

  • Evan Fitzmaurice, Director Texas Film Commission, Office of the Governor
  • Trish Avery, Executive Director of Screen Actors Guild For Houston and DFW
  • Janis Burkland, Director of the Dallas Film Commission

Both events are at:
6170 Research Road
Frisco, TX 75034
(972) 987-1400

Hope to see some of you there!

Free to Play: It’s Addictive. Should We Regulate It?

As the Zynga empire has shown, free-to-play online games have become an incredibly lucrative part of the industry. Free-to-play allows anyone to take part without paying a dime, but the games become profitable by inserting advertising and by offering features that will cost you. This could be extra levels, special items, or skipping ahead to later stages. Is calling a game “free" but then later charging fees a deceptive practice? Is it legal, and more fundamentally, is it ethical?

Deceptive trade practices are an important branch of business law. Federal and state law control what qualifies as deceptive practice, and many states have been influenced by the Uniform Deceptive Trade Practices Act. A lot of the doctrines deal with trademark law, a topic we recently covered with respect to Joustin’ Beaver. Pretending that a good is made by a company when it is not is a deceptive practice. So is selling something as new if it is used, disparaging the goods of another by misrepresenting facts, advertising things you do not intend to sell, and so on. Deceptive practices set basic standards of honesty between businesses and consumers. These rules, generally, are at the state law level, and accordingly do vary from state to state. What follows is a general discussion without any particular state’s viewpoint guiding.

Most of those concepts come into play when advertising a product, but there are additional deceptive practices that govern how businesses can behave in their ongoing relationships with customers. This would likely be the area of the law relevant to free-to-play games. It prohibits unfair adhesion contracts, which is when a “take it or leave it" agreement exists between parties with unequal bargaining power. For it to be considered unfair, courts look to whether the terms are outside reasonable expectations, whether the less powerful party would know a term was there, or if the contract is unconscionable or oppressive.

An outgrowth of this concept is the shrink wrap-contract, which directly applies to buyers and sellers of software, like games. The terminology comes from the fact that you cannot see the terms without opening the product. In the case of downloads or websites, web-wrap, click-wrap, and browse-wrap terms only appear when you use the program. There is no nationally controlling decision on the subject. Some major cases like ProCD v. Zeidenberg suggest that these types of contracts are perfectly legal, while others such as Specht v. Netscape found them invalid. Of course, any decision is specific to the facts of the case, so a court would consider an agreement by analyzing it for reasonableness and unconscionability, just like adhesion contracts. Unless a company misled players into believing nothing in the game was ever going to cost money, it seems like free-to-play games with monetized aspects are fine under these principles.

Some countries are extremely concerned about the addictive nature of gaming and have regulated it accordingly. Ars Technica noted that Japan is set to restrict certain practices that prey on compulsive behavior. The new regulations would deal with games that offer random items for a price. Japan’s Consumer Affairs Agency has received complaints after some customers burned through enormous amounts of money while attempting to complete rare sets of digital items. Even though some social gaming companies already voluntarily capped the amount children could spend, authorities have argued the practice violates Japan’s lottery laws.

But as we noted previously, the US is a different story. Japan may be tightening the screws on social games with aspects that resemble gambling, but the Justice Department’s new interpretation of the Wire Act points in the opposite direction. As long as the wager is on the game itself and not some outside activity, the American government seems willing to tolerate it. If a game company does not make promises it cannot keep or step outside of reasonable behavior, they are legally safe building costs into a free-to-play game.

Of course, legal and ethical principles do not always overlap. As free-to-play has boomed, many have wondered whether it is right. When people go overboard and dedicate too much money and time to any game, it makes us uncomfortable. People can become addicted to anything, and games are not an exception. Free-to-play is ripe for criticism because the costs are not immediately apparent.

With other games, the sticker price is immediately obvious. (Some companies have also been criticized by making additional features available only after spending more money, but that is only getting more popular.) With free-to-play, a gamer could end up spending as much or more than they would on your average console title. Some developers are opposed to this because they consider it misleading, while others have it built into their business model. There is no widespread agreement on how to handle this, and gamers will set the industry standard by voting with their wallets.

A challenge with resolving this question is that it raises a larger point about the ethics of sales. Producers of anything from food to video games face a very competitive market. There are a myriad of options and it is a battle to get noticed. One of the most effective ways to court customers and establish an audience is to give them a complimentary taste. That is the logic behind the free samples in the grocery store, or the coupons offering deep discounts for new items. It also underpins the tried and true technique of the game demo that is offered shortly before the full release. You let someone give your product a try, decide if they like it, and hopefully they choose to pay for it.

Free-to-play operates the same way. The developer provides a base version that introduces you to the engine, allows you to have some fun, and then they make their money once you are hooked.  Some believe that because games are ripe for compulsive behavior, they must be regulated. But that is a slippery slope. People can have an unhealthy relationship with food: does that make dropping the price on a new kind of chip unethical? If we started down this road, we might never stop. But it is also possible that the way we perceive games will evolve, and we will shift closer to Japan’s approach. As free-to-play’s market share expands, so does the chance for regulatory scrutiny.

As a gamer, you have influence on how this plays out. If you dislike free-to-play, then do not download the games. Governments might choose to respond, but the market will always be more nimble. As long as free-to-play is a cash cow, it is going nowhere.

Zack Bastian is an official contributor to Law of the Game. A third year student at George Washington University Law, Zack works at the Woodrow Wilson Center's Science and Technology Innovation Program and is a member of the American Intellectual Property Law Association. The opinions expressed in his columns are his own. Reach him at: zack[dawt]bastian[aat]gmail[dawt]com.

Thursday, April 12, 2012

Good News for Small Developers: Crowdfunding in the JOBS Act

As we discussed recently, today’s gaming market has ample opportunities for independent developers. There is distribution across multiple consoles, personal computers, and smartphones. Development costs for a top-tier title on the Xbox360 may prevent a start-up company from competing, but you do not have to push the graphics to the limit to find an audience. While indie game development might be cheaper, it is not free. If you do not have money to finance your project, what are your options?

Many people have been looking to the crowd. “Crowdfunding" is a variation on crowdsourcing. The idea is elegant, simple, and well suited for the internet. Rather than taking inputs from just a few sources, crowdsourcing casts a wide net. By receiving feedback from many individuals, you are more likely to arrive at a better solution. As internet connectivity has proliferated, people have taken this basic concept and applied it to many different situations.

It has been used in public safety. In the aftermath of the devastating Haiti earthquake, geographic information systems experts and programmers pooled their efforts to build working maps of ground level conditions. During the recent civil unrest in the Middle East, journalists looked to the crowd on sources like Twitter to place their coverage in context. Tracking the crowd is also being applied to global development, as experts hope it can forecast shifts in commodity prices and economic conditions.

Crowdfunding works by gathering funds by receiving smaller amounts of cash from many people rather than big contributions from just a few. President Barack Obama famously looked to the crowd for a significant portion of his 2008 campaign financing. Comedian Louis C.K. made $1.1 million from a stand up special financed by the crowd, and other creatives are following his lead. For those without an established audience, there are sites like Kickstarter where people with ideas can propose a project and receive crowdfunding. Recent successful proposals have included REM dreaming sleep masks, an encyclopedia of Golden Age Superheroes, and a side-scrolling adventure game. There have been some very famous projects in both the game and tech space.

While Kickstarter and similar sites offer incentives for funders, such as a personalized copy of the project, post cards, or exclusive content, they do not offer ownership. By opening your e-wallet to an idea that looks good to you, you receive no share or stake in their success, other than a name in the credits (which brings no financial benefits). With the recent passage of the JOBS (Jumpstart Our Business Strength) Act, that could change. The new law has numerous regulatory adjustments meant to help small businesses get access to capital. It works to make private capital formation simpler, and reduce the administrative burden for a fledgling business looking to go public.

A particularly exciting portion of the law shows that Congress has been watching crowdfunding, and believes it could provide the economy a shot in the arm. The JOBS Act amends the Securities Act, allowing a company that does not register with the SEC to raise up to $1 million in a year. There are a few requirements to qualify. First, if the interest sold exceeds $1 million, the company no longer qualifies. Second, there are limits to the amount a company can receive from individual investors. If a funding party has a net worth or annual income less than $100,000, they cannot provide more than $2,000 or 5% of their annual income or net worth. If an investor earns more than $100,000 a year or has a net worth above that number, they cannot invest more than 10% of their income or net worth.

The JOBS Act also requires that a company seeking investment through this exemption to use a broker or funding portal, similar to Kickstarter, and has a series of basic guidelines for the broker or funding portal. They have to register with the SEC, provide necessary disclosures to investors, and perform due diligence on companies seeking investment. They may only provide funds once the target is reached. They must protect investor privacy, avoid conflicts of interest, and make sure any individual investments do not exceed the limits described above. The Act also requires that companies seeking investment limit their advertising, file a disclosure document with the SEC, avoid undisclosed compensation for promoting the offering, and provide the SEC with an annual report. (This is a brief digest, but the law firm Akin Gump has released a much more detailed explanation.)

Why does this matter? Looking over these regulatory adjustments, the law recognizes the potential of crowdfunding and shifts the burden away from the company seeking investment and towards the processor of investments, be it a broker or a funding portal. For a small company looking to get the ball rolling, this is a big deal. Companies will still have to make sure they are keeping their financial statements in line and being very careful with investor funds: that does not change. But by relaxing these registration regulations, a growing company can let a broker or funding portal do the heavy administrative lifting. This makes sense. As a company that handles investments for a lot of different companies, a broker or portal will already be familiar with how to navigate the SEC and can remove a lot of anxiety, stress, and time for someone who needs crowdfunding. It also gives creators an alternative to bootstrapping or asking friends and family for investments. It may be an intermediate step before seeking angel funds, or a viable alternative to traditional angel investors. It is a much needed step for early entrepreneurship to have access to this kind of capital.

These regulations could support a huge variety of crowd-funded projects, including games. As long as a company was looking for under $1 million within 12 months and obeyed the individual investor limits, they could receive support from many different everyday investors instead of a few big ones. This also creates an incentive for investors. Kickstarter is great, but what if the rewards such as a copy of a game are not interesting to you? The JOBS Act means you could end up with a stake in the success of a particular project, or the company as a whole. There will likely be a lot of flexibility in what is crowdfunded and how these opportunities are structured and offered by the crowd portals. See a proposal for a game you think is the next big thing, and believe that the developers can make it a reality? By getting in on the ground floor, you could see a financial return if the project succeeds.

There are caveats. Although this law has passed, it still needs to be interpreted by the SEC in light of its current regulations. There is strong bipartisan support for the law, so it is unlikely the SEC will throw any curveballs. Still, always better to wait for the agency to make a statement before plowing ahead. Also, anyone who chooses to invest in a project should do their homework and make sure they are not over committing themselves. Investments of all kinds have risks, and crowdfunding does not change this fact. Funding portals will need to decide whether they are comfortable crossing into the area of providing a real public offering. Some companies might think it is too much trouble and stick with the Kickstarter “reward" model.

Still, it is exciting to see legislative acknowledgement of a technological tool that has been applied in fascinating ways around the world. The crowd has come to the rescue many times over the last few years, and now it could be used to finance the next great indie game.

Zack Bastian is an official contributor to Law of the Game. A third year student at George Washington University Law, Zack works at the Woodrow Wilson Center's Science and Technology Innovation Program and is a member of the American Intellectual Property Law Association. The opinions expressed in his columns are his own. Reach him at: zack[dawt]bastian[aat]gmail[dawt]com.

Tuesday, April 10, 2012

Dallas IGDA - Crowdfunding and Kickstarter

For anyone in the Dallas area, the Dallas IGDA is hosting an event on crowdfunding and Kickstarter on April 11, at the Fox and Hound in Richardson. More details can be found here. Please feel free to come out and join us if you can!

Wednesday, April 4, 2012

Your Nostalgia, While Charming, Is Illegal: the Problem with Fan Remakes

Some experiences are hard to reproduce. Things come along at a unique moment in your life and make an indelible mark on your brain. They become a standard by which you measure every other piece of art in that genre. There are albums that will always remind you of a wonderful summer, books that evoke the magic of new ideas, or paintings that give you life changing beauty. Revisiting art of this caliber can fuel you. It can inspire new creations, or place others in context. Truly special work is flexible, durable, and available for appreciation across generations.

Great video games are no different. Among RPG fans, there is a contingent that pines for the mid-to-late 90s, a golden era of console gaming. The genre was moving away from card tables in basements and into living rooms. The development art was incredible. Storytelling shifted from standard fantasy templates, to nuanced epics. Plots touched on mature themes like religion, corruption, and death. This reverence inspires animated adaptations, sequels, and re-releases.

Some take their fandom further. When it comes to fan-fiction, (writers using the original games’ plots to create sequels, alternate realities, and etc.,) rights-holders generally look the other way. (The Wikipedia article on the topic is not authoritative, but gives a good broad look at the issues.) First, fan-fiction is traditionally free. The writers do not make money. They just want to share their appreciation for the source material with others. The other problem with legal action against fan fiction is public relations. Someone who takes the time to write because of your work will be one of your biggest supporters, until you sue them.

Attempting to port, update, or create your own version of an existing game is not similarly tolerated. 1UP posted last week about an HD remake of Chrono Trigger. (Mark previously covered the related issue of fan sequels on Joystiq.) A group of programmers previously attempted to publish Chrono Resurrection in 2004. Everything was going fine, until they received a cease and desist letter from Square Enix. 1UP reached out to Mark and asked about Chrono Trigger HD. They wanted to know, what type of legal difference does it make if the programmers do not attach their names to the project or make a website? As he said, none, it is illegal. We will discuss this type of creation, a derivative work, and the options available for fans to keep things on the up and up.

Derivative works are an important branch of copyrightable material. They are based upon one or more already existing copyrightable works, and can include “translation, musical arrangement, dramatization, fictionalization, motion picture version, sound recording, art reproduction, abridgement, condensation, or any other form in which a work may be recast, transformed, or adapted." That was a mouthful, so why not check out an example? If Halo is the copyrighted work, then the (late, lamented) film version is derivative, as is Red vs. Blue.

Protecting this class of copyrighted works provides a powerful incentive for people to create, because the rewards from creating are not limited to the work itself. If you find an audience, you have the option of expanding your creation into different genres, or continuing your story or universe in sequels. On the other hand, you can choose to not expand. Some people want to make a game and brand it on everything from paper plates to mobile apps. Some people do not. If you own a copyrighted work, it is your choice, and no one else’s. The absence of a lunchbox displaying your creation does give people the right to fill that hole in the market.

Since Chrono Trigger HD would be a derivative work, we will look at a case where the concept was applied to the gamespace, Lewis Galoob v Nintendo. Nintendo was unhappy with Galoob’s very popular Game Genie. For our younger readers, the Game Genie was a cartridge made for the Nintendo and other systems with a slot to insert another game. Once you turned on your console, the game would be ‘unlocked,’ allowing you to skip levels, gain invincibility, and so on. Previous cases had established that video games were copyrightable, so Nintendo hoped they could nip this type of modification in the bud, and maintain tight control over their products.

The Ninth Circuit disagreed, and concluded the Game Genie did not violate Nintendo’s copyrights. The court compared it to someone buying a book and then reading ahead to the end, or skipping to the credits of a movie. Just because your work is copyrightable does not give you unlimited control over how your customers use it. As Judge Fern M. Smith put it, “Having paid Nintendo a fair return, the customer may experiment with the product and create new variations of play, for personal enjoyment, without creating a derivative work." Since Nintendo had received a preliminary injunction banning sales of the Game Genie during the lawsuit, Galoob received $15 million along with legal fees.

While this gave some breathing room for the Game Genie, it is not a green light for Chrono Trigger HD. Galoob’s product allowed end-users to tweak their console titles without permanently altering the game. That is fundamentally different than releasing an upgraded version of an old title with better graphics. Nor does it help that the would-be programmers will not be selling their work at retail. Allowing that to be determinative of liability would be unfair to the creators. If they ever decided to release an HD port, their market would be harmed by the existence of a free version.

Keeping things anonymous and not building a website does not change the situation. It would certainly slow down the process of enforcement. But as Mark pointed out, Square Enix has other options available to protect their work. Cease and desist letters could be served on hosting companies, catching innocent users in the crossfire. That brings up a larger point about the direction of gaming culture and the internet at large. Torrents are a clever, 21st century solution to the challenge of mass file distribution. They, like the cloud, have many incredible legal uses.

They can be abused, and everybody gets hurt when that happens. Yes, it is frustrating to feel a company has let a title you love lie fallow. Many gamers have daydreamed about how they would make their favorites better. But trying to sidestep the law by torrenting an illegal derivative version shows why many rights holders are queasy about new file sharing techniques. The internet went crazy over the Stop Online Privacy Act. You could not go anywhere without being told, in all caps, that the law would turn the web into a police state or break the Internet completely.

If you think those types of laws are heavy handed, then please do not use torrents to share an illegal game. Every time we see BitTorrent and unlawful activity associated in the same sentence, it is a step backward for the technology. If you miss the golden era of 16-bit gaming, why not get together with some friends and make a title of your own? The market is there, as Xbox Live Arcade and the Playstation Store have shown. Legitimate distribution options are reasonably open; from Steam, to iOS and Android, to the Xbox Live Arcade Indie Marketplace, there is no shortage of ways to get a creation out there. To be blunt, if you are talented enough to make Chrono Trigger HD, you are talented enough to make an original game.

Many share your frustration that developers have not taken full advantage of their old games or localized every game overdue for translation. Using means that highlight the unsavory uses of useful technology is not a solution. In fact, recent examples like The Last Story show that developers and publishers may be listening now more than they ever have been in the past. Move forward, not backward.

Zack Bastian is an official contributor to Law of the Game. A third year student at George Washington University Law, Zack works at the Woodrow Wilson Center's Science and Technology Innovation Program and is a member of the American Intellectual Property Law Association. The opinions expressed in his columns are his own. Reach him at: zack[dawt]bastian[aat]gmail[dawt]com.

Tuesday, March 27, 2012

Won’t Someone Please Think of the Children? Oklahoma Lawmakers Offer Sane Response to Silly Law

Video games have come a long way. Within decades, they have gone from a fringe hobby to a major industry. But as sales increased and the market expanded, small and significant debates took place. As a child, your parents are gatekeepers between you and the world at large. If you had your preference, you might wear a motorcycle helmet and a clown suit to school, eat candy for lunch, and train the dog to do your chores.

But, you do not have your preference. The adults in your life make decisions on the clothes you wear, the food you eat, and your behavior. For as long as video games have been around, those same adults have decided, either actively or passively, whether video games are right for their kids. If they are, they then determine what types of games are acceptable. This might have resulted in some slammed doors and harsh words over your copy of Mortal Kombat, but it was a matter to be worked out within your family, and not something left to the government.

The latest instance of legislators attempting to change that balance of power was a proposed Oklahoma tax on “violent" video games. It is “proposed," because, at present, it has been defeated in committee. The law, the ideas behind it, and the recent decisions are an opportunity to consider the status of video games as protected free speech. Brown v EMA was a huge step forward for gaming, and will be powerful precedent demanding consideration when regulation is proposed. But this debate is far from over.

For background, we should first look at what happened in Brown v EMA. (Mark did a great recap of the case on Joystiq.) California Assembly Bill 1179, passed in 2005, banned the sale of violent videogames to minors, ordering application of labels to offending titles, and fining retail employees up to $1,000 per violation. The law was struck down, first in the District Court for the Northern District of California, and then in the Ninth Circuit Court of Appeals. The Supreme Court agreed to take the case, heard arguments in November of 2010, and released their decision in June of 2011.

In upholding the lower courts, the majority (7-2) refused to consider video games the protections of the First Amendment merely because of their unique appeal to minors. It was a sweeping acknowledgement of games as expression worth protection. Decisions about what to say and how to say it “are for the individual to make, not for the Government to decree, even with the mandate or approval of a majority." This type of legislation receives strict scrutiny, and could not survive. The State has a legitimate purpose in protecting children, but “that does not include a free-floating power to restrict the speech to which children may be exposed." The interactive nature of games did not change that. Fees and penalties added up to $2 million for California.

Oklahoma House Bill 2649 proposed a 1% surtax on any video game rated Teen or higher. Proposed by Representative Will Fourkiller, the money was to support outdoor and counseling programs. On one hand, 1% would end up being about sixty cents for your average $60 game. That is not an amount of money likely to influence any buying decisions. This law was not as broad as California’s in Brown. But as people pointed out, for a law that claimed to target obesity, it would tax Get Up and Dance and Zumba Fitness 2. Both involve moving around, not sitting. Very few children buy their own video games, and for most that do they buy them with money given by their parents. The tax falls on adults, not children.

The common sense response to the proposal in the notes from the subcommittee showed skepticism on whether games deserved singling out. “Why not French fries or rap music or movies?" (At the same time especially!) It narrowly failed, 5 to 6. It may be the dissenters knew that if they ended up defending the legislation in court, it could get very expensive. But the reopening of the issue of whether there is correlation between playing video games and health problems is one worth considering.

Many things, in excess, are bad. Too much junk food is bad. So is television, and video games. But legislation designed to influence the decisions people make about these issues of child rearing have historically failed. The question of when it is appropriate for a child to consume “violent" entertainment is an important one. But ample entertainment already accessible to children is violent, as the majority noted in Brown. Involved parents make those decisions. Lawmakers have since backed out of similar proposals. It remains to be seen how other states will react.

Zack Bastian is an official contributor to Law of the Game. A third year student at George Washington University Law, Zack works at the Woodrow Wilson Center's Science and Technology Innovation Program and is a member of the American Intellectual Property Law Association. The opinions expressed in his columns are his own. Reach him at: zack[dawt]bastian[aat]gmail[dawt]com.

Tuesday, March 13, 2012

Tween Pop Stars, Cartoon Animals, Parody, and the Right of Publicity

At Law of the Game, we pride ourselves on being fans of popular culture, games, and terrible puns. Imagine our glee when the following story emerged. Justin Bieber’s legal team is embroiled in a lawsuit with app developer RC3 over their game Joustin’ Beaver. The app features JB, a cartoon beaver with a stylish shag haircut and purple hooded sweatshirt. Players fight off greedy “Phot-Hogs" with a lance as they travel downstream signing “Otter-graphs." Bieber’s lawyers sent RC3 a cease and desist, claiming they had violated the pop star’s right of publicity by using his name and likeness in the game. In response, RC3 has filed suit in the US District Court for the Middle District of Florida. They are seeking declaratory judgment that their game does not infringe on Bieber’s rights, and that the app is protected as parody. To get a better idea of what is going on we will discuss the right of publicity, the Lanham Act, parody, and then examine the facts of the case.

The right of publicity will typically arise in cases involving advertising or merchandising. It is “the right of every individual to control any commercial use of his or her name, image, likeness, or some other identifying aspect of identity," limited by the bounds of the First Amendment. The image of a celebrity can be enormously valuable. Many companies will pay top dollar for a celebrity to associate themselves with their product. The right of publicity exists to stop people from getting a free ride on a celebrity’s name. It is important to remember there is no federal right of publicity. Nineteen states currently recognize it, although the level of protection varies. One of the strongest states is California: their Celebrities Rights Act extends it to seventy years after the death of the individual in question.

A great deal of the jurisprudence on the issue can be traced back to Elvis. After his death, mountains of “commemorative" merchandise appeared, but none of it had his estate’s endorsement. So, some courts began to acknowledge that letting places like the Franklin Mint pay bills using Elvis’s face was not fair. This has come up in the gamespace before, in cases involving Kurt Cobain in Guitar Hero 5 and the flash games involving politicians. As usual, there is no hard and fast rule for how these suits play out, they are fact specific. Mark had a good summary of the right of publicity. Think of it like a trademark for a famous person’s likeness.

Related to this is the Lanham Act, which codifies our national standards for trademark. Trademarks can be infringed when someone creates a mark that is the same or confusingly similar. This hinges on the “likelihood of confusion," or whether a consumer could see the allegedly infringing mark and assume the products or services are from the trademark owner. These cases will typically involve similar goods. For example, if you put an Apple logo on your laptops hoping they will sell faster, that is infringing.

Trademarks can also be diluted. Dilution happens when someone uses a mark “in a way that would lessen its uniqueness." Trademark dilution cases often involve unrelated goods. Considering our Apple example, this could happen if someone placed an Apple logo on a placemat. Not a related product, but still a case of someone attempting to gain commercial benefit from associating with a famous mark. The Lanham Act arose in the gamespace during 2009’s James “Jim" Brown v. Electronic Arts, Inc.. Jim Brown sued EA in the Central District of California for creating a player using his likeness in the Madden series. The court held that EA’s rights under the First Amendment “immunized" them to liability.

What about parody? Parody in trademark is fundamentally different from it in copyright. The elements are an original work, famous and known to the target audience, being used to create a new original work, but only taking so much of the source as to bring to mind the original. (You can read more about it here.) A useful way to think about it is that trademark infringement and parody are branches from the same tree. Both bring to mind a separate work and draw on the fame of that famous mark to be identifiable. What makes parody different than infringement is it takes an extra step to distinguish itself from the original. A successful attempt at trademark parody will go so far as to leave no doubt that it is a humorous take on a famous trademark. This standard gives people room to create humorous takes on trademarks, but the law also works to keep in mind the integrity of a mark and not let the parody go too far. When a parody starts inserting elements that could be considered scandalous, anyone trying to protect their trademark has a much stronger case.

Applying this web of rights and limitations to the case of Joustin’ Beaver is tricky. Taking Bieber’s perspective into account, he certainly has rights of publicity and an interest in maintaining some kind of control over his image. He is an international celebrity, and his career demonstrates that his name has value. Florida (where RC3 filed suit) does indeed have a right of publicity statute. You might remember that Lindsay Lohan sued E*TRADE for violating her right of privacy (New York’s right of publicity) and got the company to settle.

This segues into the Lanham Act issues of trademark. The offending beaver certainly uses elements of Bieber’s signature outfit (although he appears to have given up the bangs) so the outcome could depend on whether a court looks at the game and believes consumers could be misled into purchasing the game thinking that Bieber signed off on it. Considering dilution, it does not appear Bieber is attempting to market games using his likeness, so if infringement fails, his legal team could argue the game lessens the unique quality of his brand. We are still not far from filing, so it is tough to say where this will head. Maybe the suit could have been avoided entirely by placing a disclaimer on the game. (This is how Elvis impersonators can imitate the King without paying his estate.) That option could still be there, but considering how famous this case has become, it may be beyond an amicable solution.

So what about Joustin’ Beaver as trademark parody? The game certainly creates an immediate association with Bieber, evoking his famous persona. However, and this may depend on your appetite for puns, there is a solid argument to say the game goes far enough to be a humorous riff on Justin’s worldwide fame. The mop-topped beaver does bring to mind his Canadian counterpart, but it is arguable that it goes just far enough, and does not create confusion. It does not use any of his songs or other intellectual property. The game also does itself a favor by being non-controversial. There are no lascivious or scandalous elements…it is just a simple app where a beaver rides a raft down the river. This could turn on whether the court believes consumers are likely to be confused, but it seems that RC3 has a fairly strong argument here for trademark parody.

This type of celebrity-based game is not a big genre. The outcome of this case could give developers an estimate of the leeway allowed when incorporating a celebrity into their work. If RC3 can get judgment in their favor, we might see an uptick in these apps. Regardless of how this turns out, it is hard to believe this will ever be a substantial part of the industry. What makes a game truly valuable is its ability to build its own brand, not piggy back off of someone else’s. You might gain immediate recognition by association with someone or something famous, but whatever you create will always be tied to them. One of the most exciting things about the Xbox Live, PlayStation Network, and mobile game markets has been the explosion of titles made by independent developers. One of the all time successes, Angry Birds, took game mechanics we have seen before but created a unique world so popular it became a Halloween costume. For a lasting presence in this industry, that will always be the way to go.

Zack Bastian is an official contributor to Law of the Game. A third year student at George Washington University Law, Zack works at the Woodrow Wilson Center's Science and Technology Innovation Program and is a member of the American Intellectual Property Law Association. The opinions expressed in his columns are his own. Reach him at: zack[dawt]bastian[aat]gmail[dawt]com.

Wednesday, March 7, 2012

Zynga vs Everybody: The Battle Over Online Game Intellectual Property

As we have pointed out before, it is always useful to examine any game industry lawsuits by considering what they say about the business of buying and selling games. The longer you have been playing, the more you know how much things have changed. As the pixel count climbs upwards, so have the costs of development. It used to be possible for a few friends in a basement to build a console-quality title from scratch. Now, if you want to take full advantage of the power of the PS3 or the Xbox360, this is not realistic. Big games are now big business, with million dollar budgets and advertising campaigns to match.

That does not mean that there is no more room for the little guy. One of the biggest cost barriers to market entry is distribution, and the explosion in broadband has whittled down that block, bit by bit. Also, people have gradually figured out that a game does not need to knock your socks off with incredible graphics and effects to be popular. If people enjoy playing it, the design can be a throwback and still do quite well. The smaller development costs make such games ideal for slim, streamlined teams of programmers. And if it becomes a hit, the lower overhead means you could see a profit much quicker. The growing popularity of social media games gives you another venue to reach potential customers.

But where there is opportunity, there is bound to be competition. With competition comes conflict. At the center of many of these conflicts has been Zynga. The company has published popular games for social media and mobile phones, including Mafia Wars, FarmVille, and Words with Friends. Along the way, they have also amassed their fair share of critics, particularly smaller studios who argue that Zynga has ripped off their work. For example, see this graphic depicting similarities between NimbleBit’s Tiny Tower and Zynga’s Dream Heights. Or, this one from Buffalo making similar complaints about Zynga Bingo. But is what Zynga does illegal? Probably not. In this post, we will discuss why that is the case, and examine a pending cases with a stronger potential for success.

To understand the nature of copyright infringement, you first must grasp the difference between an idea and an expression. For example, an idea would be a “game about farming." The expression of that idea would be the game itself, complete with source code and unique graphics. Ideas are not available for copyright protection, but expressions are. (Ideas are protected by patents, which have been used to protect game designs in the past.)To summarize, you could not sue someone simply because they made a “game about farming" after you did, but if their game substantially copied your source code you would have a strong case. Our fearless leader Mark outlined a lot of these issues in interviews with Opposable Thumbs and Industry Gamers, along with a previous post on similarities between Dante’s Inferno and God of War. To put it bluntly, So many of the new social games have created their own “sub-genres" that are narrowly defined such that similarity is inevitable.

It is worth noting that copyright protects traditional board games as well as video games. Board game aficionados have created some legal resources on the issue, but the basic concept is the same. The copyright protects the expression (for example, the design of the board), not the game’s mechanics. Some of you may remember this issue in the Scrabble and Scrabulous dispute from 2008. The issue there was not only the trademark similarity, but the direct copying of the game board itself. Words with Friends avoided this design mistake, and therefore avoided an infringement suit.

Copyright law is far from perfect, but there are reasons to believe this level of protection is appropriate. Copyright is intended to serve twin goals that sometimes are in opposition. Ideally, it will reward creativity by protecting the right for creators to be compensated for their work. At the same time, it will encourage innovation, leaving room for people to experiment using work that has come before as inspiration. A great example of this dichotomy is the mechanical license. Over the history of music, one of best ways for a new artist to reach a large audience is by playing a popular song the listening public already knows, called a “cover". Some of the best covers are not direct reproductions of a classic, but instead add their own quirks and sounds to the mix. For instance, compare Pavement’s original Spit on a Stranger with Nickel Creek’s more folky take.

Where does the mechanical license come into play? Imagine you are a young, developing artist with only a little money in the bank, and the song you want to cover is by an established band. If you tried to negotiate with them directly, the bigger band would be at a huge advantage. They could either refuse to let you use their work, or make the license prohibitively expensive. The mechanical license solves this problem by allowing you to cover a copyrighted song provided you pay a set statutory rate per copy, distributed by the Harry Fox Agency. While there is not a parallel concept in the gamespace, the theme of encouraging innovation crosses into both formats. As Mark pointed out in his interview, if a game company had received intellectual property protection (patent) for the concept of a “platform game" in general, games today would be much less rich and diverse. That basic concept has been repeated (or “covered") millions of times, and the successful titles that borrowed that concept added their own innovations bit by bit.

So where could Zynga be in trouble? First, there is the case of Personalized Media Communications suing for patent infringement. A patent is very different animal, as noted above, protecting an actual idea. The subject of a patent must be the invention of a “new, useful, and non-obvious process, machine, article of manufacture, or composition of matter, or any new and useful improvement thereof, and claims that right in a formal patent application." So, for Personalized Media Communications to succeed, they would need to show that Zynga treaded on their inventions that use “control and information signals embedded in electronic media content to generate output for display that is personalized and relevant to a user." We here at Law of the Game love engineers, but we are not engineers. So all we can do at the moment for this particular case is pledge to monitor it and pass along information once it has been translated for our liberal arts educations. Another case was filed by GameTek, LLC, and Mark offered some commentary on this case on Ars Technica, which you may want to take a look at. Generally speaking, as he notes, there will be a question of fact as to whether this patent was filed before the invention was used in the real world, and there is some question about the patent’s validity for this reason. More importantly, as the claims in the patent go beyond the games space, there is a potentially big impact for a victory by GameTek. It presents an interesting situation where the idea of FRAND licensing may be applied outside of the standards setting process based on the potential impact for the whole mobile app ecosystem, not to mention the potential antitrust issues, either of which may lead to compulsory licensing.

Another case that could spell trouble for Zynga is the lawsuit by SocialApps LLC. This involves the enormously popular Farmville game. SocialApps alleges that after releasing their title myFarm on Facebook in November 2008, they were approached the following spring by Zynga, apparently interested in acquiring the intellectual rights and code to their work. As part of the negotiations, SocialApps shared their source code, at which point they claim Zynga became non responsive. Zynga then released Farmville in June of 2009. In early February, the suit survived an attempt by Zynga at dismissal. If it progresses further, Zynga may be faced with the choice of either settling out of court to cut their losses, or letting it go to trial with the risk of extended bad publicity and potentially greater damages. Obviously, taking source code would likely be an infringement, and the facts of this case present that as a real possible finding.

For the indie developers without such complex claims, their best option may be exactly what they have done so far – call attention to the issue through publicity. Zynga has an enormous infrastructure and large audience in their corner, but the internet has had a long history of championing the little guy. You may draw customers your way by pointing out that you believe your work has been borrowed. As long as Zynga does well it would be unrealistic to expect their business model to change. Even in new markets with easy opportunities for entry, it is inevitable to see one party become the 800 lb gorilla. Whether Zynga has actually done anything that could hurt their status remains to be seen.

Zack Bastian is an official contributor to Law of the Game. A third year student at George Washington University Law, Zack works at the Woodrow Wilson Center's Science and Technology Innovation Program and is a member of the American Intellectual Property Law Association. The opinions expressed in his columns are his own. Reach him at: zack[dawt]bastian[aat]gmail[dawt]com.

Wednesday, February 29, 2012

Bitcoins and Prepaid Access Rules: Headed for a Collision

One of the challenges of the Web is making a business plan while wondering if it will stay legal. Technical adaptations outpace the glacial process of legal evolution. A program can be written and distributed in hours, but legal updates require either legislation or a precedential decision. This can be particularly befuddling when a new technical tool comes along. The options can be to make an investment now and risk spending money on something that may not be legal, or wait and miss an opportunity to get in on the ground floor.

The Financial Crimes Enforcement Network (FinCEN) within the Treasury Department took a large step towards closing a legal gap in issuing their new prepaid access rules, handily summarized in this excellent guide prepared by Pillsbury Winthrop Shaw Pittman LLP. All of the requirements detailed therein came into effect in late September of 2011, and the registration requirement goes into effect at the end of this March. To boil it down, the Treasury Department doesn’t like people using prepaid access (gift cards, e-wallets, virtual currency, etc.) to launder money or facilitate other crimes. Without this regulation, FinCEN is concerned people supporting illegal activities could continue to use these systems to ”clean” thousands of dollars a month. To slow down the flow, the new regulations require anyone who is providing prepaid access to register with the Federal government, maintain records of all transactions (including indentifying information of anybody participating), and put procedures in place to verify customers. There are exemptions to these requirements, primarily in limiting transaction values and/or keeping systems entirely “closed loop,” which would generally be more like a store-based gift card system.

The downside of this is easy to see: nobody in business is a huge fan of extra government involvement or additional administrative burden. This will require anyone in the business of prepaid access to register with the government, and keep robust records on their customers, including name, date of birth, address, and any identification numbers. Possibly even more onerous is the requirement to verify the identity of anyone participating in the prepaid access; that’s not necessarily an easy thing to do. Some businesses might argue that their very appeal to customers is the fact that their use is anonymous and outside the more typical, public financial systems.

Despite this burden, these regulations are, to some degree, a healthy measure for anyone providing prepaid access. Keeping records transactions and who is participating is generally not a bad idea, even if it does involve more work. For example, if a dispute arose, that information could be quite handy. However, not every potential customer may view these regulations in the same light. You might be annoying a customer who started using your prepaid debit card because he wanted a financial tool a bit more off the grid or for more limited places that he thought were less secure, like an ewallet. But (hopefully) nobody is choosing to offer that kind of tool specifically because it appeals to terrorists, drug cartels, and other bad people. There is always a fine line between prudent regulation to prevent bad things and Person of Interest/1984 surveillance.

Any regulatory scheme is not going to work all of the time. Criminals will use fake identities to make prepaid access work for them, but a five year transaction record creates the paper trail that will help law enforcement track illicit behavior. It makes sense to explicitly obligate people marketing prepaid access to build up infrastructure and policies preventing too-easy international transfers, or high volume swaps in a short period of time. Without a ramp up, there would never be usable data to track. The regulations also contain practical exceptions for health care flex-spending accounts, and “closed loop” programs like campus dining dollar accounts, defined-store gift cards, and transportation cards. These regulations have been, in many ways, sensibly written to limit the more obvious problems, while trimming the burden on things that are not inherently problematic.

One key detail is a pathway within the regulations left open to some of the potential regulatory burden is that you can make it impossible to be used before verification of customer identification information. So, if you created procedures and policies making it impossible for anyone to use your system without you first verifying their identity, you would be in compliance (though compliance is more complex than just this factor). The verification of that identity means that you would be, in a practical sense, cooperating with a lot of the regulation anyway: you would agree that you could verify who was participating. So if anything seemed fishy, law enforcement would again, be coming to you.

An interesting undercurrent to these issues is the odd case of Bitcoins. While frequently volatile, they made a solid push to some more stability at the end of the year. Of course, it shouldn’t be too surprising that Bitcoins are in legal limbo as Senator Charles Schumer discussed them along with online drug hub Silk Road last June. It is up for debate whether or not Silk Road actually does what it claims. But, it is unfortunate to see a cleverly engineered development like Bitcoins be publicly associated with something that exists to be shut down by government regulators. Many have speculated since the beginning that it was a matter of time before authorities dropped the hammer on the online currency. Any technical development that grew out of a distrust of regulation and central control ironically places itself in line for regulation and central control.

The argument ready for any Bitcoin advocate against applying the new regulations to the currency is that it’s not prepaid access at all: it’s a currency unto itself. The fluctuations in value could be interpreted to mean it is wholly unlike a system that depends on cash infusions and goes back to being cash, eventually. Bitcoins could stay Bitcoins forever. But it would be foolish to think that any government would consider Bitcoins a valid currency, especially since the anonymity built into Bitcoin makes it ripe for the money laundering concerns that prompted the Treasury to get serious on these issues. These are similar to the concerns we have seen with Linden Dollars in Second Life over the years. The challenge is first, that Bitcoins are de-centralized, unlike any other virtual currency presently in circulation. There is no one business entity propping this system up, meaning the way for regulators to try to wipe them out of existence won’t be as obvious. Most entities that accept Bitcoins as a valid form of payment are tiny web-only retailers that often use them to monetize web-services. Bitcoin users seem not the type to ever accept the reporting and registration requirements, so it would be reasonable to assume that any interaction of the government with the system would be try to wipe them out. But of equal concern is whom to apply the regulations to, since it is arguable there is no provider of prepaid access or seller or prepaid access under the Bitcoin system.

The group that should be most wary of Bitcoins is any retailer considering accepting them. A restaurant in Manhattan famously experimented with the idea last summer. (We called, and they do not take Bitcoins anymore.) While it could be a great way to get some geeks in your store and drum up some press about your business, it is frankly more trouble than it is worth. Bitcoins may be more stable than they have been in the past, but, as the article points out, you take a big risk on taking a hit if the value drops.

But Bitcoins are unlikely to be a majority of anyone’s balance sheet. The bigger problem is being associated with a currency that seems bound not to last much longer, at least in its current state. This issue is yet unsettled, but the government has made clear they’re in no mood to tolerate electronic tools that can be exploited for money laundering. Outside of these regulatory challenges, recent events indicate even more instability in the market. Bitcoin supporters suffered a heavy setback when exchange site Tradehill suspended trading after e-wallet service Paxum departed the Bitcoin market. For Paxum, the final straw was that their banking partners were deeply uneasy about who was pouring money into the currency and why. Paxum’s exit hurt Tradehill, and being defrauded for $100,000 by a payment processor did not help either. Who would be eager to dive into a market so fraught with instability?

Regulation takes time, but Bitcoins seem bound for the chopping block. Bitcoins aside, the progress in money transmission and prepaid access is not likely to stop, especially since it appears Facebook may be laying some groundwork in the payments space. Law of the Game will continue to follow these issues and keep you updated.

Zack Bastian is an official contributor to Law of the Game. A third year student at George Washington University Law, Zack works at the Woodrow Wilson Center's Science and Technology Innovation Program and is a member of the American Intellectual Property Law Association. The opinions expressed in his columns are his own. Reach him at: zack[dawt]bastian[aat]gmail[dawt]com.

Edited 3/3/2012 - Fixed Broken Links

Monday, February 27, 2012

Mass Effect 3 Kotaku Piece

I was interviewed for a piece on Kotaku today, which you should check out. It's amazing how many regulations are out there related to raffles and sweepstakes that most people don't consider when planning a contest. I'm glad that it seems that everyone involved with this were able to roll things back before anyone got into real trouble.

Wednesday, February 22, 2012

More on Kim Dotcom and the Fight Over Cyberlockers

In late January, Law of the Game took a look at Kim Dotcom and Megaupload. Bloomberg Businessweek released a superb profile of the file-sharing baron. It is worth checking out. The authors fill in Dotcom’s back story, and what a story! For example, the piracy bug bit him young: he was selling copies of computer games to friends before he reached junior high school. This was also not his first encounter with the wrong side of the law: he was convicted in 2002 of insider trading.

The article does not limit the narrative to Kim Dotcom’s, brazen, bizarre antics, although there are enough for a novel. They also include a discussion of whether or not the shutdown was overboard. The parties take the positions you would expect. Cary Sherman, Chairman & CEO of the RIAA calls the story a “powerful message” to infringers. Julie Samuels of the EFF says that creators are seeking to “stem the growth of new business models instead of using their time and energy to compete. They’re working to harm innovation and consumers and artists who are trying to find new ways to connect with those fans.” The authors also point out that there has never been a case of inducing copyright infringement reaching the level of criminal liability. To dig deeper, we will begin by examining one of the most famous inducement liability cases, consider how the available facts compare, and then comment on whether this case really is an attack on cyberlockers.

In 2005, the Supreme Court considered inducement liability for copyright infringement in MGM v Grokster. Grokster was a file-sharing utility, but unlike its predecessor Napster, it was built on a decentralized architecture where no central list of the files was kept. The software acted as a link between you and the user with the songs you wanted. Grokster, playing this passive role, did not have actual or constructive knowledge that infringement was taking place, nor did they materially contribute as users searched for the files. Grokster attempted to claim the Betamax defense, arguing that if the product was capable of substantial non-infringing uses, it could not give rise to contributory liability. Grokster is capable of non-infringing uses, and so the developers claimed they were not liable.

In rejecting that argument, the Court discussed inducement liability. If you distribute a product promoting that it can be used to infringe copyrights, it can be enough to show liability. Promotion of infringement has to be by either clear expression or other steps showing you meant to encourage it. Considering Megaupload, the indictment provides plenty of emails and more that scream inducement, like the incentive program. People have pointed out, that there is a big difference between civil and criminal cases. Jennifer Granick notes that secondary liability has never been enough to create criminal liability. [The pending Rojadirecta case has the Second Circuit considering that very issue. Can linking to an infringing stream be enough for a criminal offense?] The counterpoint to Ms. Granick, Derek Bambauer, says the principals look very guilty, but agrees an expansion of criminal liability is troubling. Ms. Granick also admits that there may be enough proof that Dotcom and his compatriots directly infringed enough to make secondary liability less of a problem.

We also must remember, a money laundering count was included in the indictment, but not fleshed out. The federal government has repeatedly (online poker shutdown, new pre-paid access rules, etc.) made clear they are concerned about technology supporting criminal enterprise. There may be evidence not yet public showing Megaupload “washing” dirty cash, providing heavy ammunition for the prosecution. Beyond that, there is no indication that the government has the intention or appetite for a broad offensive on cyberlockers. It is safe to assume that most companies offering cloud storage are not an insane, self-aware scam run by a James Bond villain. It is good that people are concerned and talking. Emphasizing the civil liberties at play is very important. The issue of what happens to the non-infringing files still on the Megaupload servers raises legitimate questions about the rights of people who were not using the service improperly.

It is possible that this is part of a large push against cloud services. But there is still a great deal we do not know about the Megaupload case. Until things become clear, we will be following closely.

Zack Bastian is an official contributor to Law of the Game. A third year student at George Washington University Law, Zack works at the Woodrow Wilson Center's Science and Technology Innovation Program and is a member of the American Intellectual Property Law Association. The opinions expressed in his columns are his own. Reach him at: zack[dawt]bastian[aat]gmail[dawt]com.

Tuesday, February 14, 2012

The Department of Justice’s New Interpretation of the Wire Act: A Green Light for Video Game Betting?

Last year was tough for online poker. A lot of people were swept away in poker’s surge in popularity in the early 2000s. A big part of the spike in was a new generation of players who cut their teeth playing online. You might remember Chris Moneymaker, the first World Series of Poker Champion to qualify from online tournaments. Some used the skills they picked up on the web to transition to the tables of Atlantic City, Vegas, and Reno. Others chose to focus on online play and made a healthy income doing so. The New York Times Magazine profiled one such prodigy, Daniel Cates in late March of last year. But the legality of online poker was suspect since the passage of the Unlawful Internet Gambling Enforcement Act (UIGEA) in 2006.

The Department of Justice put a stop to the boom when shut down the biggest and most lucrative poker sites just weeks after the article on Cates was released, including the UIGEA in the indictment. Full Tilt Poker, Poker Stars, and Absolute Poker, played a “game of cat and mouse” with the US Government, and did business here while operating offshore. They argued online poker was not gambling, but a “game of skill”. The Department of Justice was not persuaded: they quickly shut down domains, filed a civil lawsuit for money laundering, and froze company assets. With such a dramatic blow to the biggest outlets in the market, it was easy to assume online poker in the United States might not recover at all.

Maybe not. In a decision reached in September but made public in late December, the Department of Justice has made a dramatic reinterpretation of the Wire Act. According to the ruling, the law’s ban on betting crossing state or international borders now only applies to a “sporting event or contest,” not to online lottery tickets. Professor I. Nelson Rose made a great post summarizing why this matters for online poker. The Wire Act can be used against people who attempt to make cross-border bets on events. But a lottery is not a bet on a separate event: when you buy a ticket, you are wagering whatever you pay on winning the pot based on the numbers drawn, not something external. Instead, it’s a bet in the event. As Professor Rose points out, a bet placed during a poker game follows the same logic. When you wager money on your hand, you’re not betting on anything other than that round itself.

This likely will not mean that the lawsuit against the big poker sites is over with. The Federal Government has made clear they are concerned about technology facilitating illegality, like money laundering. It would be hard to believe that the Department of Justice would make such a sweeping show of force against those poker sites, then abandon the effort. It could mean that online poker could see a rebirth, provided players are in states where that sort of gaming is legal. Due to its checkered past, anybody considering getting into the business would “wait and see”, making sure they are on solid legal footing before putting down any serious investment.

What is particularly interesting to us at Law of the Game is that this could open the door for gamers to make legal bets on their own performance in online gaming tournaments. Players of games like Call of Duty: Black Ops can already wager points used to purchase new items and skills based on their performance in a given round. If it is legal, a player could place cash bets on how they might perform on a given round, or the entire tournament. Remember, it would be a bet in the event, not on. There are some important caveats to consider. It will be up to game companies whether or not this kind of infrastructure is set up. Some might not find it appropriate for a title, either because of the intended audience or the mechanics of the game. Companies would also need to consider whether they want to assume the burden of regulating betting on their game. The Department of Justice would want to make sure that online games were not being used to launder money, so they would expect gaming companies to take appropriate precautions: tracking bettors, making sure games are not fixed, and so on. Game companies have a vested interest in making sure that their product promotes fair competition, and no one wants to get caught up in illegality. That regulatory burden could provide a benefit.

Game companies would want a fee for their troubles. It could take the form of a temporally charged amount above and beyond the amount it costs for a subscription service like Xbox Live, or a per-bet percentage on every wager, win or lose. If the gambling systems on games became popular, this income stream could convince a company wary to dive in the market. A wagering system could extend the shelf-life of a game for quite some time. World of Warcraft just turned seven years old, but it is still generating income for Blizzard today. This is due in no small part to the subscriptions every player must buy. Subscription or transactional fees could be a powerful enticement to bring companies into the business.

This could also signal the return of integrated gambling models like we saw with Kwari, and an increase in 3rd party tournament sites, as we have previously discussed. It will be interesting to see if a proliferation of tournament sites puts their operators in conflict with the game developers/publishers, and what creative lawsuits may result. Online poker’s future is still an open question, and any type of betting on video games would probably be preceded by a more concrete development clarifying poker’s legality. But, as Professor Rose points out, there are not many federal regulations left prohibiting the interstate transactions involved in gambling. In fact, there have already been proposals, including one from Representative Barney Frank, to overturn the UIGEA, and move the industry to regulation and taxation on a nationwide level.

As budgets get tighter, there is always the lingering question of whether the previous moral objections to online gambling might give way to the very present opportunity to increase government revenue and create jobs. If companies can put in the time and effort to keep the competition fair and above board, we might be able to put cash down on our performance on Mario Kart. Which, reminds me: do not bet on a game of Mario Kart with Mark, it is a bad idea.

Zack Bastian is an official contributor to Law of the Game. A third year student at George Washington University Law, Zack works at the Woodrow Wilson Center's Science and Technology Innovation Program and is a member of the American Intellectual Property Law Association. The opinions expressed in his columns are his own. Reach him at: zack[dawt]bastian[aat]gmail[dawt]com.