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.

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!

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.

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.

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.

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.

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