For Content

[ LiB ]

For Content

An intellectual property is usually not a discrete entity but rather a set of trademarks and copyrightsfor example, the Superman property isn't just the Superman trademark; it's Clark Kent, Lex Luthor, Kryptonite, Smallville, Lois Lane and the other peripheral characters and villains , weapons, story lines, town names and descriptions, etc. that make Superman "Superman." But is the Justice League part of the property? Superman appeared in it, but the holders of the Wonder Woman property would probably be quite irritated if a Superman licensee incorporated her in their work. Of course, this wouldn't happen because any Superman license would be very specific about the characters, and even the manifestations of characters (Dean Cain versus Christopher Reeves versus Hanna-Barbera), weapons, and so forth that a licensee can use. An important negotiating point is who owns the derivative copyrights and other additions to the property made by a licensee (say, a new weapon).

For a new property, the publisher will want to acquire as many rights to as much of the property as possible. Expect language like:

" The Newgame universe created by Devco and owned by Devco, whether now existing or hereafter developed, including without limitation all characters, settings, story lines, designs, weapons, vehicles, costumes, and all trademarks, trade names, copyrights, and any and all other intellectual property rights "

In other words, the publisher will have rights to every new character, weapon, or story that you develop around Newgame .

Subsequent Additions and Developments

A property evolves over timecharacters are added, weapons are added, and so forth. Spin-offs can be a huge profit center for franchise properties. Contemplate with the publisher what will happen if three, five, ten years down the line you create new characters, weapons, or scenarios. What if you retain the entertainment rights, and the film licensee creates a new character? Will the publisher have rights to those additions? In which categories? Games only, or entertainment, too? What if the publisher holds the entertainment rights and its TV licensee develops a new character that you want to use in a sequel game? How will the publisher define the property in its sublicenses?

Figure 6.5. EA has created one of the smartest franchises around with its Madden games.

Rights Being Licensed

A "property," as a chunk of content, generally consists of a set of trademarks and copyrights. If the content is yours, expect the structure of the agreement to be a license , but be prepared for the publisher to demand to own the property outright .

A license means that you retain "ownership" of the property, and that most copyrights and trademarks (TMs) are registered in the development company's name , but the publisher is granted a license to use certain rights (like making and selling games) for a certain period of time. An exclusive license for some rights means that you may not grant those rights to any other parties during the exclusive period of your agreement. As an example, an exclusive license to make games based on your Newgame property means that, absent some other provision in the contract, you may not license Newgame game rights to any other publisher during the term of the agreement, even if the publisher decides to release the game on only one platform.

Nowadays, it's tough to find a publisher that will risk the money developing and promoting a new property without a lock on other revenue streams, such as film, TV, toys, and T-shirts, that may flow from that property. Break out the different categories of licenses granted, because each should have its own rules in the contract for revenue split, term, what happens after termination, reversion, and more. The four main categories of rights are:

• Games

• Merchandise/Ancillary Products

• Non-software entertainment

• Engine/Underlying Technology

Games

There are two core questions regarding game rights: how many (platforms, languages, and sequels) and how long (duration).

Figure 6.6. Blizzard's crowd pleaser.

How Many?

What platforms are being licensed? You will prefer to give a publisher a license for only those platforms the publisher intends to release, or institute an option or reversion (see discussion in Options and Reversions Sidebar). Can you publish a port with another publisher? What about a localization in a territory in which the publisher does not intend to release the game? What about wireless, PDA, and other platforms? What about digital distribution and online revenue?

How long?

Generally, a license is for one game, with the publisher having options for sequels for a certain period or if certain thresholds are met (see the "Sequels, Ports, and Conversions" section later in this chapter).

Merchandise/Ancillary Products

Merchandise and ancillary products include hint books, T-shirts, and other merchandise or derivative products based on Newgame as well as OEM ("original equipment manufacturer" product, where the game is bundled with hardware or other software as an add-on or an arcade game) but not the Newgame movie or Newgame movie merchandise or what is currently being called non-software entertainment.

Non-Software Entertainment

This includes all filmed, animated, and recorded entertainment based on the property and all merchandise/ancillary products based on those products rather than on the property itself.

What is the difference to the developer between merchandise based on the game and merchandise based on filmed entertainment? Size and timing. Merchandise from other entertainment comes in the form of a smaller slice (for the publisher and, therefore, for you) of a much larger pie. When filmed entertainment is made from a property that you own, the producers and distributors of that entertainment take a chunk out of the merchandise profits before passing it on to the publisher. Profits from merchandise based on entertainment take longer to get to your pocket because there are more middlemen. Where the contract is between the publisher and a merchandising sublicensee, the sublicensee has an accounting period within which to pay the publisher, who then has an accounting period within which to pay you. Tack on a filmed entertainment producer and that adds at least one more accounting period. Ultimately, however, the profit split for the two kinds of merchandise (that based on the game and that based on entertainment) will be roughly the same between you and the publisher.

If you will be granting the publisher the right to sublicense entertainment rights to the property, the core issues to cover include:

• For which media?

• What are acceptable sublicensing arrangements? See discussion in this section as well as Chapter 7, "Licensing."

• What happens if the publisher does not produce any entertainment?

• Is there any difference in the revenue split if you find and initiate the deal?

Engine/Underlying Technology

If you will be making a game with your own pre-existing underlying technology, or developing underlying technology for the game, or using the publisher's technology, issues arise concerning:

• Ownership (if you will be creating it for the game). Publishers have been known to assert ownership rights in technology created on their development dime. Developers have also been known to pitch a game with the claim that they can use their pre-existing Technology X , which doesn't quite exist and won't until they get the development advance to fund its creation.

• Use in other games based on the property. If you will not be developing a sequel, for example, the publisher may want a royalty-free license to use the technology. While the " royalty-free " part is a concern, the bigger concern is the support that will be required for a new team to try to understand your technology.

• Use in games not based on the property. A publisher may want the right to use your technology royalty-free in other games created by other studios . Many developers find this a patently absurd idea, as a publisher wouldn't ask to use the game's content in another product without paying a royalty.

• Annotation/support requirements. As a hedge against having to complete the game with another developer, some publishers request that you annotate the code and agree to provide support for any third parties using your technology. This is highly unadvisable and extremely expensive for you in terms of the man-hours that it will cost.

• Your ability to license it to third parties. If you create it, you should be able to monetize it. If you are creating the technology with the development fees, your publisher may feel that, as it shares revenue from content licensed to third parties, it should share revenue from technology licensed to third parties.

Term

Where you own the intellectual property, the term is more important because it defines the duration of the publisher's rights to your IP. Without a carefully -written term provision, a developer may technically own the property but be prevented from exploiting it due to rights lingering in the publisher's control.

Options and Reversions

When developing a property, both parties want to ensure that rights stay with the party that values them most.The goal is to allow the publisher to retain rights long enough to reap the rewards of its investment, while giving the developer the ability to take its rights back if the publisher is not exploiting them. Two mechanisms for retaining or obtaining rights are the option and the reversion.

Imagine that you are hungry and have just picked an orange off a tree, but you aren't sure it's edible. Someone comes along and wants to buy some or all of the orange, incorporating uncertainty about the orange's condition into the purchase. If he buys an option on the orange, the orange would stay in your hands, and he would pay a certain fee for the right to have the option, after you have peeled the orange and he has tasted it, to buy the fruit. If he buys it subject to reversion, he takes the orange from your hands, paying you outright for the right to the fruit on the inside, but he must give you any part of the orange he can't finish.

Whether the rights are put into an option or a reversion framework is somewhat value-neutralit is the specific terms of the option or the reversion that make it more or less to the benefit of a given party. Under the option, the rights still belong to the developer, and the publisher has the option to purchase them for a given price and/or subject to certain conditions. Under the reversion, the publisher receives a grant of the rights but can lose those rights if it doesn't meet certain conditions. Giving the publisher a license that reverts back to you if he doesn't use it for one year is a better deal than if you hold on to the rights but the publisher gets an automatic option if sales are greater than $10,000 (a threshold it is almost sure to reach). Low option fees or a lot of successive options can also be counter to a developer's interest: five successive two-year options means that the publisher can pay an option fee every two years to lock up rights for a full ten years.

All things being equal, however, while possession isn't quite 9/10s of the law with intellectual property, there are all sorts of formalities to getting a property back, and the process sometimes gives rise to conflict. Developers will want the publisher to specify some release window in their contract, after which the developer can regain the rights.

Rights commonly subject to reversion/option:

• Platforms

• Languages

• Territories

• Sequels

• Entertainment rights

As a general rule, the more successful a release is, the more rights the publisher receives gratis; frequently, all reversions can be overridden if total royalties from all projects are greater than a pre-specified amount.

Games

The term will likely be either a long grant with reversion, for example, 10 years from the date of signature, reverting to you if property is not exploited or royalties fall below $ X for three years in a row, or a short grant with an automatic renewal, for example, five years from the date of signature, automatically renewing for successive three-year terms if earned royalties exceed $ Y .

Ancillary Products

This usually runs and ends with the game term, since it is based on products relating to the games.

Entertainment

It is helpful to think of these rights in two chunks : the right to make new entertainment and the right to continue receiving money from entertainment already made. While the term will often be stated as "for the life of copyrights and trademarks in the entertainment," there is usually a reversion clause that will send the rights to make new entertainment back to the developer, on a medium-by-medium basis, should the publisher not exploit those rights within a given time period. So a situation may arise under which, 20 years in the future, the publisher and developer still have a relationship surrounding a film made during the term, but the developer is doing a comic book with a separate entity and the publisher has nothing to do with that comic book deal.

Territory

The publisher will want a worldwide exclusive license. You may want territory-by-territory reversion if the publisher is not distributing or adequately localizing your product in the given territory.

Sequels

Sequels are closely related to any discussion of the term because they act as extensions. Sequel rights can prolong a relationship, so it is wise to build in assurances that the extension will benefit both parties. Decide what will trigger the publisher's right to make the sequel. Meeting a certain sales level for the original game? Paying the developer a certain amount of royalties? How many sequels will publisher have rights to? Who will develop the sequel? Odds are, you will want the development contract. What will the royalty structure be?

Reversion

Take care to ensure that your sequel rights come back to you if the publisher decides it isn't interested in publishing a follow-up title. This can be done by giving the publisher an option to pick up sequel rights or granting the publisher so-called exploding sequel rights that revert to you after a certain period of time (two to four years after release of the game for which a sequel is being considered ). The option may be free (that is., there is no specific option fee) if it is a short window after initial commercial release or is contingent on hitting an earned royalties threshold within a certain number of months following release, or the publisher may buy an option for a set amount of time, say two years after initial release.

Notice

If you want to do the sequel, it is important that the publisher have a quick deadline for deciding whether it wants to exercise its sequel rights; otherwise , by the time the publisher decides it wants to do the sequel, you may be committed to another project.

Third-Party-Developed Sequels

What if you can't or don't want to develop the sequel to your property? If the publisher hires a third party, a few issues may arise:

Royalties

If the original game is based on your intellectual property, you will receive a license royalty for all sequels and all ancillary products/entertainment based on the sequels. This royalty should be negotiated up front and included in the contract. Be sure that the royalty is based on the same "net" definition as your original royalty.

Control/ Approvals

A developer probably won't get much in the way of control over sequels done by third parties unless he has a very strong negotiating position. Meaningful consultation is a reasonable request, however, and may be agreed to by the publisher.

Developer Obligations

The publisher may want you to provide follow-up support for any third-party developers. You will want to create a cap on the amount and kind of support you will provide.

Additional Compensation

A developer contributing its own IP to the game usually receives additional compensation in the form of a higher royalty rate and a larger share of derivative products like merchandise and entertainment. Because there are additional parties involved in the production and distribution of these derivative products, getting from "gross" to "net" looks a bit different (see discussion in the "Work for Hire" section).

Usually, the publisher and developer will share what are called "net receipts." Net receipts are all revenue from the licensed products, including barter, less certain expenses. You will want net receipts to be for expenses actually paid to avoid paying for internal expenses such as the inhouse attorneys ' time spent negotiating a TV deal.

Standard deductions "off the top" of gross receipts are:

• Agent's commissions. An entertainment agent usually takes about 10 percent. A merchandise agent will take anywhere from 25 percent to 50 percent.

• Third-party distribution fees and costs (which can be as high as 45 percent in territories like Japan); (see discussion of these costs in Chapter 7, "Licensing").

• Intellectual property registration and enforcement. The cost of intellectual property enforcement and registration is a surprise for most. The major cost centers are local and international copyright and trademark registration; anti-piracy measures; and suits against infringers. The enforcement/registration costs for the game are often borne by the publisher and recouped off the top of revenue.

Intellectual Property Ownership and Control

There are a lot of property rights to keep track of in a game development deal, particularly if you created the original IP. Most people are accustomed to understanding property rights as a binary: either you own something or you don't. Law students learn to think of ownership as a "bundle of sticks," with each stick representing a certain right in and to the property. Particularly with IP, the sticks can get split down to splinters.

Take the example of television rights. Even that stick gets broken down further into series, mini-series, and movie of the week, and those are subdivided further into live action and animated rights. Aside from the granular definition of a category of use of the property, the terms of its use and duration of that use create even more complexity. If the publisher is granted the use of your engine, will it still have that stick if the contract terminates?

Another way to understand duration rights is to think back to the reversion/option structure. A reversion takes the stick out of the bundle and gives it to the publisher, but it creates another stick for the developer's bundlethe right to reclaim the property should certain events occur or not occur. An option leaves the stick in your bundle but creates one for the publisher's pilethe right to make certain uses of the property should certain events occur or not occur.

How these sticks get dividedfor instance, who owns the property and who has a license or exclusive license or reversionis the subject of intense negotiation. The main goal is to ensure that, no matter what happens between the parties and whether the contract terminates or not, everyone involved will end up with all of the rights they need to receive the benefit of work performed under the contract and to maximize the exploitations of the property.

The four main properties to analyze are

1. Underlying technology

2. Content/the property trademarks and copyrights

3. Game/Product (source and object code and audiovisual assets)

4. Property licensed from third parties (such as engines or vocal talent)

Related Issues

Sublicensing Rights

If the IP belongs to you, the publisher will need to be able to sublicense property rights to other parties, such as the right to license the game (since software is generally licensed to the end- user , not soldsee discussion in Chapter 5), manufacture and sell merchandise based on the game, or the right to produce and distribute a direct-to-video film based on the game. The publisher can only sublicense those rights you have granted. For more on this topic, see Chapter 7.

This is really an issue of third-party contracting. Let's say a film based on the game is produced. Most likely, it will be the publisher and not you who negotiates and contracts with the producer, distributor, and merchandise agents . If you want to influence decisions made by those parties, you will have to lever the publishing contract. When a publisher has certain restrictions on its use of the propertyin other words obligations to you, the developer, under the publishing contractit will carve space for those obligations in its contracts with third parties. An example of this would be getting creative approval over the plots for a book series based on the game. When the publisher contracts with the book publisher, it will insert a clause giving itself creative approval over the books' plots so that it can solicit your approval and thereby fulfill its contract with you, the developer.

Understandably, the publisher will want to limit or eliminate all such provisions in the publishing contract to ensure it maximum flexibility when contracting with third parties and to save the administrative hassles of coordinating with you for decisions. See the "Approvals" section for a discussion of the forms that approvals take. Areas impacted by sublicenses include the following: Credits

You will want to receive credit of the same size and prominence as the publisher on all games, merchandise, and entertainment and a credit "Based on the game "Newgame" created by Devco" in all entertainment in addition to any other credits appropriate to your involvement in the production. This latter is particularly important in filmed entertainment because producers are obligated to pay certain amounts for certain credits. The publisher will want to insert language to the effect of "wherever possible."

Creative Rights

Publishers are extremely reluctant to grant the developer any kind of creative approval over entertainment or merchandise, but two areas of compromise exist. The first: For you to have some approval right for all creative areas for which the publisher has a creative approval. For instance, if the publisher has a right of mutual approval over the film script, you would have some approval over the film script as well, whether mutual or consultation (discussed below in Section: Business Approvals). The second: To include language requiring the publisher to use its "best efforts" to have the key originator of the idea attached as a creative consultant, paid by the producer at industry-standard rates, to any entertainment project.

Business Approvals

You will want some form of input into business arrangements, though publishers will be reluctant to grant it. Non-specific language like "meaningful consultation" rights on all business and creative decisions may be thin, but it communicates intentions between the parties that you wish to be involved in business dealings, and it is far better than having no rights language at all.

If you are licensing your own IP to a publisher, the business issues on which you will want input are

• Marketing and distribution strategy (how much will be spent and howTV, print, retail)

• The licensing program, which includes merchandising and lateral media production, like a TV show or comic book series

Licensing covers a broad range of products and decisions that are discussed in Chapter 7. The scale of approval rights for a developer goes from lowest to highest:

• Consultation rights, which means the publisher will keep you informed of and solicit your opinion on certain topics.

• Mutual approval, which means both you and the publisher must agree before any action can be taken.

• Unilateral approval, which means you must approve the decision.

NOTE

TIP

With very few exceptions, I tend to counsel creative people that, while they will always have more brilliant ideas, they need to publish titles and hopefully entertainment to gain the control that comes with stature. Pick your management at the publisher, ask questions, and get as much written documentation as possible of the pub lisher's plans for the property.

Because the publisher has so much money at stake and your business is to make gamesnot to manufacture, distribute, and manage a licensing programthe publisher is understandably reluctant to allow you any approval rights. Take some time to think about your priorities: how emotionally attached are you to the property? Is it more important to you that the property is done your way or that it is done at all, because that is often the decision until you reach the highest echelons.

Costs

The publisher will want you to pay for some or all of the cost of doing the licensing deals, often pro rata based on the way net receipts are shared (example: if you share the revenue 50/50, you will pay for half of the deal costs). You will want to avoid this for a few reasons. First, the attorney will be hired by the publisher and quite likely more inclined to represent its interests, even if you are paying a portion of the fees. Second, you will argue that you should not be responsible for paying the publisher's overhead, and attorneysespecially in-house counselare considered overhead. Particularly with large conglomerates, all costs deducted should be costs actually paid, not just accounted for.

Credits and Notices

If the IP originated with and belongs to you, you will want correct copyright and trademark notices prominently displayed on all manifestations of the property, including your company's trademark and logo.

Termination

The termination provision should be thought of as a prenuptial agreement, but with a bonus for blame. Termination scenarios fall into a few categories, generally: for developer's material breach, for publisher's material breach, "at will" or "for convenience," and bankruptcy. The fairest rule of thumb is that, in case of termination, parties are still fairly compensated for whatever they accomplished during the term of the contract. Damages caused by the breach should be the subject of a separate legal proceeding, but not built into the termination facts.

It is, however, standard that the party retaining the rights will pay the other party a diminishing royalty over time, whether that is marked strictly chronologically or by the renewal terms of said contracts:

• Example One (time-based): the parties terminate the agreement after a successful television show has been made based on the property. The party who holds the television licensing rights after termination must still pay the other party its share of revenue from the show, but four years after termination, the rightsholder only needs to pay the other party 50 percent of its original participation. The logic is that the rightsholder has done the bulk of the work to create the value in the last four years and should receive more of the revenue.

• Example Two (contract-based): Same TV show scenario: instead of reducing the participation to 50 percent after four years, the reduction happens whenever the TV contract or associated merchandise agreements are renewed.

For Material Breach

The terms should be the same for you and the publisher for breach. Essentially , the offended party will give notice (in accord with the notice rules of the contract, see the "Notice" section in this chapter) to the breaching party, who will then have a period of time to "cure," or correct the breach. If the party doesn't cure, then the contract terminates, but with the following consequences:

Publisher's Material Breach

If it is for the publisher's material breach, the publisher will still owe you for any milestones submitted and approved. You will want to receive a termination fee, generally the current milestone plus one or two more with a set minimum dollar value, to reflect the fact that you have committed resources to the project and will need to find another project.

The cure period , the amount of time after receiving a breach letter that the publisher has to correct the breach, is very important to getting paid on time and should be as short as possible15 days if you can negotiate it. If your publisher has 30 days to cure, it is quite possible that it will take 30 days to pay after receiving a breach letter from you. The publisher will want to continue receiving royalties for any games it published or entertainment/merchandise contracts that it originated. This is fair, but you will want all monies redirected to you f/b/o the publisher ("for the benefit of," which means that the money legally belongs to the publisher, even though it is delivered to you). If there is a lawsuit over damages caused by the publisher's breach, you will also want the right to hold onto any royalties you may owe the publisher to offset any damages the court may find that the publisher owes you.

Publishers fear remedies in equity which are non- monetary remedies like temporary or permanent injunctions that prohibit the publisher from doing something (like releasing a game), or specific performance, in which a court compels a company to do something, and will want to limit your remedies to money damages.

Developer's Material Breach

You may want to define material breach, for clarity, as failure to get approval for a milestone, failure to deliver the gold master, your going out of business, or excessive delay in delivering the game.

If you are in material breach before the game is completed, the publisher will have a period of time to decide whether to complete and publish the game or to abandon development (30 to 60 days).

If the publisher elects to complete and publish and if the publisher owns the IP, it will want to terminate the contract with no further payment to you. You will want to receive a proportional royalty. The calculation for this is found by multiplying the original royalty rate by a fraction, the numerator of which is the number of milestones you completed and the denominator of which is the total number of milestones.

If you own the IP and the publisher elects to complete the game, the publisher will want to retain the license and sublicensing rights. The publisher will continue essentially as planned, but it should pay you a rights fee for the license to use your IP as well as a royalty (reduced as per the above formula) on the game reduced to reflect the fact that another party will need to be hired to complete the game.

The publisher will also want to reduce the entertainment royalty, but the validity of this will be determined by a few factors, such as how far into development the game is at the time of termination and the relative positions of the parties. You will need to furnish some form of assistance to the third-party developer, but will want a firm ceiling on that obligation, such as "commercially reasonable" or "not to exceed xx hours total."

If the publisher elects not to complete and publish the game, you will want all rights back. The publisher will want to receive the equivalent of a turnaround fee, that is, repayment of money it has paid you for milestones submitted. While the publisher may want to be repaid from first monies (the first money you receive to finish the game), this may not be practical if the money is needed to actually develop the game. A good compromise would be to repay the publisher from first monies to the extent they exceed your documented development costs.

If the game is complete, some may argue that the breaching party should forfeit royalties as a penalty for breach, but as noted above, penalties are a matter for a separate proceeding. Whatever contracts are in place, both parties should continue to receive the benefits for work contributed .

At Will

This privilege will likely only be afforded the publisher. If the publisher terminates the agreement, the consequences are similar to those occurring if it breaches the contract.

Bankruptcy

If either party enters bankruptcy, the counterparty will want to be able to continue with the project without intervention from the creditors and bankruptcy court. Both parties will want to be able to terminate for the bankruptcy of the other, with the provision that the agreement and the rights created thereby shall not be deemed assets and that the bankrupt party will not have the right to sell or assign any of the rights created under the contract. These provisions may or may not be effective in bankruptcy court.

Rights After Termination

Parties often still have involvement with each other even after a contract is terminated , particularly if any of the fruit of the agreement is still making money.

Sell-Off Period

This is a window, usually six months, for the publisher to sell off all games and merchandise in its pipeline, after which it will no longer have the rights to do so.

Rights Reversion

The publisher may request a residual percentage of royalties on new entertainment even after reversion, based on the argument that the game launched the property. The parties may negotiate this point.

Clauses Added to Most Long Form Contracts

Most of these provisions, while important, won't find their way into the short form. Instead, a "future agreement/residual clause" in the short form will note that the parties intend to fill out the short form into a long form agreement, but if they don't, the short form agreement is binding. The "residual clause" states that the long form agreement will include provisions relating to force majeure , assignment, severability, and lots of other dense little paragraphs like the ones explained in this section.

Representations, Warranties, and Indemnifications

Representations and warranties is the section where the parties promise that certain facts upon which the counterparty is relying are true. Indemnifications (see the "Indemnifications" section that follows ) is where the parties promise that, if the representations are not true, the offending party will protect the innocent party from the consequences of the misrepresentation. Most representations concern ownership and use of intellectual property. Ideally, representations, warranties, and indemnifications should mirror each other from publisher to developer and back again.

Common Representations and Warranties

Both parties will agree that they are legally authorized to enter into the agreement and perform all of their obligations.

Developer Warranties

You will warrant and represent that:

• All IP you attach to the game is wholly owned by you, is reasonably free of bugs , and to the best of your knowledge (important because otherwise you are liable for infringements of which you were not aware) does not infringe upon the copyrights, trademarks, or other rights of any person, firm, or corporation.

• If the IP is yours, you can license the property and its trademarks and copyrights to the publisher without violating any third party's rights or interfering with a contract. An example of where a license could interfere with another contract would be if you were under option to another publisher to offer it your next original IP for a period of 60 days. If you did not offer the IP to the option holder, you could not safely make this representation.

• You are a licensed developer for the applicable platform(s).

• You have obtained any and all permissions and clearances to any third-party IP for its authorized use in the game (or entertainment, if necessary). In other words, if you are using a third-party engine, you have gotten the legally correct licenses. If you use voices, you have clearances from the actors.

• You have no knowledge of any claim that would be contrary to your warranties, representations, and agreements contained in the contract. For instance, if you knew that an angry ex-founder was going to sue the company for ownership of the engine, you could not safely make this representation.

• You will reasonably correct programming defects in the work product or released Game. (Be very careful with this clause, as it could indenture you to bug-fixing for the term of the contract. Be sure that you and the publisher understand each other vis-a-vis what is an acceptable bug and what is not).

Publisher Warranties

The publisher will warrant and represent that:

• The publisher has acquired all necessary third-party platform rights and licenses. This means that the publisher has permission from the console manufacturer to make the game, or will acquire it. Furthermore, the publisher has all of the necessary licenses to the content of the game if you are working on a licensed IP. An example would be the right to make a game based on a particular Dungeons and Dragons edition.

• The publisher will make no changes or alterations to any submission by the developer that will infringe any third party's rights. In other words, the publisher will not take your game and insert copyrighted text on the box without obtaining the necessary rights.

• All games, content, entertainment, and merchandise produced by the publisher, the publisher's sublicensees, subsidiaries, affiliates , agents, partners , or joint venturers will be free from any material that would violate any laws or infringe any third-party rights. This means that you will not be responsible for intellectual property or other infringements made by third parties chosen by the publisher (example: if the publisher sublicenses the film rights to a producer who uses a plagiarized script).

• You will want the publisher to warrant that any merchandise created and sold by the publisher or its sublicensees will conform to all safety standards, and a corresponding indemnification should be put in place. For example, if the publisher's merchandising licensee manufactures a toy that violates safety laws, you will not be liable for any damages this causes.

Indemnifications

Both parties indemnify each other against any losses arising from breach of representation, warranty, or obligation under the contract. You will want to analyze the language to be sure you won't have to pay for defense against false claims and that the publisher cannot withhold all funds during the defense of third-party claims.

Both parties agree to give the other prompt notice of any claim arising due to breach of warranty or representation, and you agree to give the publisher the right to participate in the defense at the publisher's expense.

From Developer

You will maintain a general liability policy of at least $ X , and the policy will name the publisher as an additional insured.

You will defend, indemnify, and hold the publisher and its affiliates harmless from any claim by any of your employees , subcontractors , or independent contractors for work-related injury or disability.

From Publisher

The publisher will indemnify you from any action or inaction by the publisher or its sublicensees, agents, subsidiaries, joint venturers, partners, and so forth deemed to infringe or harm a third party's rights or cause any damage to any third party.

Accounting

Game royalties are usually accounted for quarterly. The publisher will deliver a statement and any royalties due within 45 days of the end of the calendar period.

For entertainment/third-party receipts, the publisher should remit payment to you within 45 days of its receipt of such monies.

NOTE

TIP

Try to institute a penalty for late delivery of royalty statements or late payment of royalties.

Audits

Audit rights give you the ability to hire someone to examine the financial records of the publisher to be sure you are receiving accurate royalties. Giving your audit provisions teeth is a good way to encourage careful bookkeeping. Standard provisions are

• You have the right to audit the publisher's books during normal business hours at the publisher's place of business with reasonable notice once every two years. Statements are deemed closed (can no longer be audited ) after two years.

• You pay the cost of the auditor (though not for any time spent by the publisher's personnel) unless a discrepancy of 5 percent or greater is discovered , in which case the publisher should pay for the audit. Any monies found owing will be paid with interest at prime plus 2 percent from the date originally due.

Marketing/Advertising Expenditure

It is helpful to negotiate a minimum, whether a fixed dollar amount, a percentage of net sales not to fall below a certain number, or the marketing for comparable releases that year. If you do negotiate a minimum expenditure, the only way to verify it is to require the publisher to provide you with receipts for marketing and advertising related to your game. Some discussion of the kinds of marketing (television, online, end-caps ) and the anticipated demographic should happen between the publisher and developer, whether or not it is reduced to writing in the contract.

Relationship among the Parties

There will be a clause noting that there is no partnership or joint venture among the parties. This avoids some of the legal ambiguities of partnership law.

Force Majeure

Force majeure stops time in a contract for a period (usually around 90 days) where acts of god, terrorism, and so forth, prevent any party from fulfilling its obligations.

Governing Law and Dispute Resolution

This is one of the most important clauses in any contract. This is where the parties decide which state or country's law will govern the contract, and whether disputes will be resolved in litigation or arbitration.

Laws vary significantly from sovereignty to sovereignty. California's refusal to honor most non- compete clauses in employment agreements and France's granting of droit moral or "moral rights" in intellectual property are two examples. California and New York law are best for entertainment and intellectual property contracts because both have an established body of law, thereby removing much uncertainty as to how a court will interpret certain situations. Expect the governing law to be that of the publisher.

Arbitration is like a mini-trial before a qualified arbitrator (often an ex-judge or attorney), usually a member of one of the major arbitration associations. Many prefer it over litigation for dispute resolution because it can be drastically less expensive and leaves less room for the deep-pocketed party to intimidate with the specter of excessive attorney's fees. However, there may be no appeal from an arbitration and no rules of evidence protecting you. The arbitrator should be neutral and a member of the American Arbitration Association or another reputable association. The arbitration clause usually states where the arbitration will occur. In case the parties are far-flung, insert a clause stating that parties and witnesses may appear electronically , whether by telephone or video conference. The findings of the arbitrator must be final and binding, and the judgment may be entered in any court having proper jurisdiction.

Assignment

Assignment is the ability to transfer the contract and your obligations to another party. For instance, if your company got bought in the middle of development, you would "assign" the contract to the purchaser in the sale. Understandably, a publisher will be leery of your assigning the rights to a third party, though it will usually consent if it is simply a matter of being purchased. Since most publishers have no problem allowing a developer to assign its rights to receive royalty streams, this can be a solution if your publisher does not want to allow any kind of obligation assignment.

Confidentiality

Expect your publisher to attach a form confidentiality agreement and ask you to have every member of your team sign it.

Severability

This is a legal detail that allows a judge to throw out one clause of the contract if it is found to be unenforceable without having to throw out the entire contract.

Proprietary Platform Owner/Manufacturer's Consent

This reserves the proprietary platform owner's (e.g. Sony) right to approve or disapprove of the software.

Notices

Both parties give their official contact information and state acceptable methods (certified mail, fax, and so forth) of communicating important information. This information is important for delivering communications that may need to be proved in court, like a notice of termination. If sent to the address in the notice provision, in a permitted manner, the recipient will have a hard time arguing that it did not receive the communication.

Modification

This states the only manners in which the agreement may be changed (usually in writing signed by both parties).

Survival

This sets out certain sections of the agreement that remain in force even if the term of the agreement expires or is otherwise terminated. It is customary for the confidentiality, warranty, and indemnification clauses to survive termination.

No Waiver

This clause usually says that even if a party does not immediately exercise its rights against a counterparty, it reserves the right to do so in the future. Example: if a developer is late enough to allow the publisher to claim breach under the contract, the publisher can keep working with you to try to finish the game without waiving its right to sue for breach down the road if the game ends up incomplete.

Entire Agreement

This clause prevents either party from insisting that there were verbal promises made that are not reflected in the written document. Essentially, it says that every piece of the intent of the parties is captured in the agreement.

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