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PROTECTING INTELLECTUAL PROPERTY IN VIDEO GAMES

January 4th, 2012 by administrator

by David Kim, Esq.

Once the exclusive domain of basement-dwellers and geeks, video games have become a lucrative, multi-billion dollar industry.  Where gamers once had to make trips to shopping malls and arcade centers to plunk down quarters to play video games on giant cabinets, the mobile technology of today allows people to play games directly on their phones across a variety of social media.   With an estimated player base of 56 million people, social gamers are expected to spend over $6 billion on games by the year 2013.  These types of numbers are highly attractive to businesses, and social gaming is a fast-growing sector of the overall industry.  Naturally, competition is fierce, and developers often mimic the features and feel of popular games in an attempt to grab market share, a practice that dates back to the very beginning of the video game industry.

Historically, game developers haven’t devoted a substantial amount of time and resources to protecting IP, but developments in technology and law suggest the importance of a greater focus on IP rights.  A basic understanding of each type of protection, and how it could apply to a game, will be invaluable to game developers who want to maximize potential revenues from their creations.  Earlier this year, Zynga, a social network game developer that recently went public, sued another game developer, Vostu, alleging that Vostu’s games infringed on Zynga’s copyrights.  Such lawsuits are not uncommon in the social gaming industry, with Zynga itself having been sued a number of times over similar allegations.  In this lawsuit, Zynga asserted that it had obtained Federal copyright protection over various aspects of its games, and relied on these copyrights as its sole cause of action against Vostu.  The two parties settled the lawsuit, resulting in Vostu’s making a monetary payment to Zynga, and changes to some of Vostu’s games.  The settlement can be seen as a successful outcome for Zynga, and one example of why game developers should actively protect the IP in their games.

As with other types of software and technology, protection for IP in games is available in the forms of patents, copyrights, and trademarks.  Businesses tend to be the most familiar with trademarks, which are distinctive signs or marks used by a business for identifying its services or goods.  Trademarks are available at common law, State, and Federal levels, with trademarks registered with the United States Patent and Trademark Office protected across the entirety of the United States.   Because competitors will often try and mimic success, it can be to a game developer’s benefit to find a mark that it will be able to defend strongly.  Fanciful names tend to be more distinctive than descriptive ones, which means that holders of a fanciful mark will usually have greater success in preventing copycats from capitalizing on their fame.

In addition to trademarks, many games contain elements that are suitable for copyright protection.    Copyrights protect works of authorship in a tangible form, but do not protect facts, ideas, systems, or methods of operation.  Applied to software and to games specifically, a developer could copyright the artwork and designs of the game, the source code, and the game’s look and feel, among other aspects.  Once a work has been created in a tangible form, it is protected by common law copyright, even if the game developer doesn’t register it with any official body.  An official filing, however, can be invaluable to a developer, because it creates various presumptions as to the legality and validity of the copyright, and makes statutory damages and attorney fees available to a copyright holder in an infringement suit.  Additionally, the Digital Millenium Copyright Act offers some significant protections to game developers who are in compliance with its requirements.

Finally, despite common belief, games are often patentable.  Although trademark and copyright are more appropriate for protecting game content, developers may obtain patents on various aspects of the game, including technical aspects of a game platform, software processes and other functions, and game methods.  The important thing to remember with a patent is that ideas are not patentable, and in order to obtain a patent, there must be an invention of something that is new, useful, and non-obvious.  Game developers have been taking advantage of patents to protect things like the use of virtual currency in a game, ways of providing directions to characters, methods of rewarding players, and methods of calculating and adjusting game difficulty.  There are a number of hurdles to obtaining a patent, which can include cost, length of time required to obtain a patent, and lack of belief that the developers have created anything patentable.  Given the financial stakes, however, game patents may well be worth the time and resources required.

Protecting IP is an important, but often overlooked aspect of game development.  Developers work long and hard on perfecting games that they are proud to bring to market.  Too often, they neglect to add those crucial elements of protection that can prevent other developers from copying their work and innovations.  A well-developed and comprehensive IP strategy can mean the difference between reaping the financial rewards of developing a game, and seeing hard work lost in a sea of competitors.


NEW CALIFORNIA EMPLOYMENT LAWS FOR 2012

January 4th, 2012 by administrator

by Jennifer Gentin, Esq.

A number of new employment bills making significant changes in California employment law have been signed by California Governor Jerry Brown. The new laws are effective January 1, 2012, unless otherwise indicated. These new bills could affect your business’ day-to-day operations and company Handbooks or policies.  We highlight what we believe to be the most significant new changes below:

Pregnancy Disability Leave (SB 299)

SB 299 prohibits employers from refusing to maintain and pay for group health insurance coverage for the duration of pregnancy disability leave, up to four months in a 12-month period.

The law also authorizes employers to recover insurance premiums from the employee if the employee fails to return from pregnancy disability leave, provided that the employee’s failure is not due to leave taken under the state Moore-Brown-Roberti Family Rights Act (CFRA), for a health condition that entitles the employee to pregnancy disability leave, or other circumstances beyond the employee’s control.

This bill requires that collective bargaining agreements of state agencies provide for continued insurance coverage for state workers on pregnancy disability leave.

This law will have a significant impact on employers because employees who are not eligible for federal Family and Medical Leave Act leave are eligible for pregnancy disability leave. Further, continued insurance coverage provided for pregnancy disability leave will not count against an employee’s right to continued benefits under the FMLA if she subsequently becomes FMLA eligible. The affect of the federal Health Reform Law on the new law is unclear at this time.

Organ and Bone Marrow Donor Leave (SB 272)

Under existing law, an employer must grant a leave of absence of up to 30 days in a one-year period to an employee who is an organ donor and up to five days in a one-year period to an employee who is a bone marrow donor. SB 272 provides that the days of leave are business days, rather than calendar days, and that the one-year period is measured from the date the employee’s leave begins and consists of 12 consecutive months.

This law clarifies that the leave of absence is not a break in the employee’s continuous service for the purpose of his or her right to paid time off. It provides that employers may condition the initial receipt of leave upon the employee’s use of a specified number of earned but unused days for paid time off, as well as upon a specified number of days of earned but unused sick or vacation leave, as under existing law.

Credit Reports (AB 22)

AB 22 imposes significant restrictions on an employer’s ability to obtain a credit report for employment purposes. It generally permits employers that are seeking to fill only specific, identified exempt positions to obtain and use credit reports to screen applicants or current employees. The use of the credit reports in other occupations generally is prohibited.

Further, employers will be required to provide the employee or applicant with a disclosure statement setting forth the specific basis permitting the employer to obtain a credit report.

Credit reports may be obtained only if the position to be filled falls into one of eight exempt categories:

Credit reports also may be obtained for employees of financial institutions subject to Sections 6801-6809 of the United States Code.

California employers should ensure that their practices for obtaining and using credit reports comply with this new enactment. If use of a credit report is permitted, the employer must provide the applicant or employee with a disclosure form that states the permitted basis for the credit check. Employers also should modify forms to ensure compliance with SB 909 (requiring background screening firms to provide subjects of their reports with a Disclosure and Request for Consent before a subject’s data can be sent outside the United States). Multistate employers should ensure compliance with the requirements of the federal Fair Credit Reporting Act and applicable state laws.

This new bill will limit the ability of employers to do credit checks as a screening tool for applicants. On the positive side, in this economy, this new bill will likely avoid discrimination against job applicants on the basis of a negative credit history.

Willful Misclassification of Independent Contractors (SB 459)

SB 459 imposes a civil penalty of between $5,000 and $15,000 for each violation on a person or employer that willfully misclassifies an individual as an independent contractor. Willful misclassification is defined as avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor. The penalty increases to between $10,000 and $25,000 for each violation if the person or employer has engaged in a “pattern or practice” of willful misclassification.

The law also subjects paid, non-attorney advisors to joint and several liabilities with the employer if they knowingly advise the employer to treat an individual as an independent contractor and the individual is not found to be an independent contractor.

This new bill increases the stakes for employers who willfully misclassify workers.

Wage Payment Details (AB 469)

AB 469 requires employers to provide to nonexempt employees, at the time of hire, a written notice indicating the following:

While most employers already provide the above-referenced information in various places such as pay stubs and workplace posters, employers will now be required to put it all in one notice given to new non-exempt employees.  The California Labor Commissioner will provide a template, but each notice will need to be unique for each employee.

The law also requires employers to notify employees in writing of any changes to the information in the notice, within seven calendar days after the time of the changes, unless the changes are reflected on a timely wage statement or other writing required by law..

The law increases penalties for wage violations, provides for employer restitution of certain wages to employees, and extends from one to three years the statute of limitations on collection actions by the state Division of Labor Standards Enforcement.

Employer Contract Requirements (AB 1396)

AB 1396 requires an employer that enters into an employment contract involving commission payments for services to be rendered within California to put the contract in writing and specify the method by which the commissions are to be computed and paid. The employer must give a signed copy of the contract to every employee who is a party thereto and obtain a signed receipt for the contract from each employee. The law also repeals existing law making an employer that violates this requirement liable in a civil action for triple damages.

The law is effective January 1, 2013, giving employers a full year to assure their commission agreements comply with the new law.

Use of E-Verify System (AB 1236)

AB 1236 provides that state agencies, cities, and counties cannot require private employers to use the federal E-Verify system to confirm the legal immigration status of workers they hire, except when required by federal law or as a condition of receiving federal funds.

E-Verify is a computerized system maintained and operated by the U.S. Department of Homeland Security, in partnership with the Social Security Administration. E-Verify allows employers to use the program, on a voluntary basis, to verify that the employees they hire are authorized to work in the United States.

Genetic Information (SB 559)

SB 559 amends the California Fair Employment and Housing Act (FEHA) to prohibit discrimination on the basis of genetic information. Genetic information is defined by the new law to mean information about any of the following:

The law similarly expands the categories prohibited under other antidiscrimination provisions in the California Unruh Civil Rights Act to include genetic information.

Gender Expression (AB 887)

AB 887 amends California FEHA to clarify that prohibited discrimination in employment and housing on the basis of sex or gender includes discrimination on the basis of a person’s gender identity and gender expression. The law defines gender expression as meaning a person’s gender-related appearance and behavior, whether or not stereotypically associated with the person’s assigned sex at birth.

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If you have any questions regarding any of these new laws and their implications, or wish us to revise your Employee Handbook, please contact Parsus LLP.


Understanding Venture Financing Terms

October 12th, 2011 by administrator

by Ju Park, Esq.

Despite a somewhat uncertain economic outlook, investment by venture capitalists for the year 2011 has remained steady.  Although the stock market may not be performing as well as desired, investors continue to look for good opportunities with start-ups and other private companies.  An infusion of cash can be just what a business needs for success, but term sheets from sophisticated investors often contain terms that can be confusing to entrepreneurs.  This article explains some of the common provisions found on financing term sheets.

Common vs. Preferred Stock

Most corporations are formed with founders and employees receiving common stock.  Venture investors, on the other hand, tend to demand preferred stock, which, as the name suggests, offers various preferences over common stock.  Preferences can include dividend, conversion, voting, liquidation, and redemption rights.  Preferred stock can be thought of as being “senior” to common stock in that preferred holders will generally get things first, or will have higher priority than common stock.  Corporations can have multiple “series” of preferred stock (typically designated by a letter, such as Series A, Series B, and so on), with each series having different rights depending on the terms negotiated by the series investors.  Just because a series of stock comes first in the alphabet doesn’t mean that it has priority over the other series, however.  As companies grow and attract larger investments, subsequent investors may demand preferential treatment for their particular series of stock.

Liquidation Preference

A liquidation preference is a standard way that venture investors will protect their investment in your business.  If the term sheet specifies that preferred stock will have a liquidation preference, it means that on a liquidation event (typically a sale of the company’s stock or substantially all of its assets, bankruptcy, or some other event whereby a company ceases to exist), the venture investor will recoup at least some of the money they’ve invested before the holders of common stock will see any money.   If a series of preferred stock has a “senior” liquidation preference, it means that it will be entitled to receive its liquidation preference before other preferred series.   Although liquidation preferences are commonly set at “1x,” which means that the investor will receive only the amount of their original investment, a “multiple” liquidation preference specifies that investors will receive more than the original investment (for example, a 3x liquidation preference means that the investor will receive three times their original investment).

Participation

A term that goes hand-in-hand with liquidation preference is whether the preferred stock gets to “participate” after receiving the liquidation preference.  Commonly thought of as a “double dipping,” participation rights allow a preferred stock holder to share the proceeds of a company sale with the common stock holders.  Participation works such that on the sale of a company, for example, the preferred stock will receive the full liquidation preference amount specified in the terms of their preferred stock, and will then share the remaining sales price pro rata with the common stock holders.  Participation tends to be an investor-favorable term, especially with a favorable liquidation preference.  These terms in conjunction can often mean that the preferred stock holders will receive a significant portion of the proceeds of any sale of the company.  As with liquidation preferences, participation rights can be “capped,” which is usually expressed as a multiple.

Cumulative Dividends

Dividends are a distribution of a company’s earnings, typically from the company’s profits.  Dividends are usually issued in the form of cash or stock, with most venture investment term sheets requesting “cumulative” dividends on the amount invested.  Most venture term sheets specify a five to eight percent cumulative dividend on the purchase price of the preferred stock.  Although it is rare for venture investors to require a company to make annual dividend payments of cash, they will often receive the cumulative dividends on a later sale of the company.   If, for example, the venture investor provided a $1 million dollar investment with a 5% cumulative dividend and a 1x liquidation preference, and the company was sold 5 years later, that investor would receive $1 million dollars (1x liquidation preference) + $250,000 (5% dividend of $50,000 for 5 years) before the common stock holders received any money from the sale.  Cumulative dividends tend to be uncommon in venture financings, and are often tied into liquidation preferences as a way for investors to require a minimum return on investment.

Antidilution Provisions

Antidilution provisions protect investors’ ownership stake in a company and are frequently designed to protect investors in the event that subsequent company financings occur at a valuation lower than their own.  Preferred stock holders will usually have the right to convert their shares of preferred stock into common stock at a certain ratio (typically 1:1 to start).  Antidilution mechanisms increase the conversion rate of preferred stock, so that the preferred stock holders will receive additional shares of common stock in order to protect their percentage ownership of the company.  The two most common antidilution provisions are “weighted average” and “ratchet” antidilution.

A “weighted average” antidilution term is more favorable to company founders and increases the conversion rate of preferred stock based on a formula that takes into account the overall effect of the proposed issuance of new stock in the company.  The formula factors in new price per share, old price per share, shares already outstanding, and shares to be issued.   “Ratchet” antidilution, on the other hand, increases the conversion rate of preferred stock based on the new price per share regardless of the number of shares being sold.  When the new price per share is lower than the old price per share, this method essentially reduces the price per share of preferred stock retroactively.  “Ratchet” antidilution favors investors heavily, and has fallen out of favor as a typical method of antidilution protection.

Conclusion

When faced with investment opportunities, entrepreneurs will often want to go by the industry “standard,” particularly when they are presented with a term sheet containing unfamiliar provisions.  There are a number of model documents that are promulgated by various groups that can help entrepreneurs assess a proposed investment.  Entrepreneurs should be aware, however, that “standard” transactions may not the appropriate fit for their company, and that despite what venture investors might suggest, there can be a significant amount of room for negotiation.  Entrepreneurs who are able to decipher the key provisions of a term sheet will be able to get a much better sense of the deal being offered, and will be able to negotiate on those provisions that are most important to them.

The Ninth Circuit Examines Domain Name Re-Registration Under the ACPA

October 12th, 2011 by administrator

by David Kim, Esq.

It is increasingly common for business to be conducted entirely on the Internet, making a domain name a valuable asset that is critical to the success of a business.  The Anticybersquatting Consumer Protection Act (“ACPA”) protects trademark owners from bad faith registrations of domain names.  Designed to prevent the “cybersquatting” of the early days of the Internet, where people would rush to register domain names of well-known service and trademarks in an attempt to sell them to the registered mark owners for an oftentimes astronomical profit, the ACPA prohibits the registration of domain names that are “identical” or “confusingly-similar” to marks that are distinctive “at the time of registration of the domain name.”  The ACPA, which grants statutory damages to damaged mark owners, does not apply, however, to domain name registrations that occur before a mark becomes distinctive.  Recently, the Ninth Circuit considered the question of whether a “re-registration” of a domain name registered prior to the granting of a trademark constituted a violation of the ACPA.  In a decision that split with a Third Circuit ruling on the same issue, the Ninth Circuit determined that the ACPA applied only to the initial registration of the domain name, and that subsequent registrants of the domain would not violate the ACPA.  This ruling could have a significant impact on business owners who are trying to make branding determinations.

In GoPets Ltd. v. Hise, the Ninth Circuit assessed a case brought by GoPets Ltd. against a domain owner who had registered the domain “www.gopets.com” five years prior to the company’s use of the trademark “GoPets.”  The domain owner had made little use of the domain name in the intervening years, but indicated that he might be willing to sell it to the company.  The parties were unable to reach an agreement regarding the price of the domain name, and the company eventually filed a dispute with the World Intellectual Property Organization (“WIPO”).  The WIPO arbitrator decided in favor of the domain name owner, ruling that because the initial registration was not done in bad faith, the WIPO would not compel transfer of the domain name.  Subsequently, the domain name owner transferred ownership of the domain name to a corporation (resulting in the “re-registration” of the domain name to the corporation), and also registered a number of domain names that were similar to “www.gopets.com.”   GoPets Ltd. eventually brought suit against the domain name owner.  A lower court found in favor of GoPets Ltd. and awarded the company damages for the “re-registration” of the domain name, and the subsequent registration of the similar domain names.

In partially reversing the lower court’s decision, the Ninth Circuit examined traditional notions of property law and determined that the ACPA should apply only to the initial registration of a domain name.  Had the domain name owner not transferred ownership to the corporation, he could have held the rights to the domain indefinitely.  Following this reasoning, the Ninth Circuit concluded that a general rule of property is that a property owner may sell all the rights he or she holds in that property, and that the ACPA was not designed to prohibit subsequent “re-registration” of lawfully obtained domain names.  The Ninth Circuit did find, however, that the domain name owner had violated the ACPA in registering similar domain names after the WIPO ruling, and affirmed damages awards based on that violation.

Extending the Ninth Circuit’s holding, it seems that if the initial registration of a domain name is valid, any future transfer of that domain name should also be valid, no matter the circumstances of the transfer.  Use of the domain name would have to comply with trademark law (domain name owners couldn’t attempt to capitalize on the confusion of Internet users, for example), but the Ninth Circuit’s ruling does mean that service and trademark holders should be aware that they may never be able to prevent an existing domain name owner from capitalizing on the holder’s development of that particular service or trademark.  This being the case, business owners may find it worthwhile to consider existing domain names before undergoing substantial branding efforts.  Given the split between the Third and Ninth Circuits, the Supreme Court may make a definitive ruling on this issue, but until that time, domain name “re-registration” is not prohibited under the ACPA in the Ninth Circuit.

When is a Chicken a Chicken? How Attorneys Can Help You Avoid Fowl Situations in Drafting Contracts

June 10th, 2011 by administrator

by David Kim, Esq.

Why do you need an attorney to draft a contract?  It seems simple enough: you and some potential business partners have been throwing around ideas and want to formalize your arrangements.  You have explored various scenarios, and have a pretty good grasp of what you intend to accomplish and the goals of the parties involved.  If you have survived to adulthood and are able to negotiate a business relationship, chances are good that you have a decent grasp of the English language and are confident in your ability to express yourself on paper.  As a result, many business owners will draft their own contracts in an attempt to save money, or edit an existing contract that they have found online.  Unfortunately, these enterprising people often find that despite their best efforts, they end up drafting imperfect contracts that lead to unexpected results.

Attorneys spend a great deal of time learning about the nuances of contract interpretation, which helps them understand the importance of a well-drafted document.  Business relationships often break down and parties may resort to litigation to resolve their differences.  If the obligations of the parties are unclear or not contained in the contract, a court may have to rely on various rules of contract interpretation which were unfamiliar to the person drafting the contract.  Such interpretation may hinge on something that is a non-issue to a layperson.  One famous case taught to many first year law students, Frigaliment Importing Co. v. B.N.S. International Sales, exposes the difference between “legal” and “regular” English.  As difficult as it may seem to believe, the central question in Frigaliment that the court had to resolve was, “what is a chicken?”  Those readers who are familiar with the chicken industry can probably see the pitfalls related to that seemingly innocuous question.  But for those of us not in the know, the answer is not as clear-cut as it may seem.  In the Frigaliment case, the parties contracted for a bulk sale of chickens, to be shipped internationally.  Young chickens are used for broiling and frying, whereas older chickens that have seen better days are used for stewing due to their toughness (and are often referred to in industry parlance as “fowl”).  The contract did not specify the desired age of the chickens, and when B.N.S. sent the older birds, Frigaliment rejected them as being unsuitable for its purposes.  When the parties resorted to litigation to resolve their dispute, the court consulted the dictionary and considered a variety of conflicting expert testimonies before determining that Frigaliment had failed to establish that the word “chicken” in the contract meant a broiler or fryer.  Frigaliment was forced to accept and pay for the shipment of older birds, since B.N.S. had satisfied all of the other requirements of the contract.

In addition to imbuing a craving for chicken in a host of first year law students, the Frigaliment case illustrates that in the often strange world of contract law, a word doesn’t always mean what you think it means.   Modern courts are adept at applying “plain English” interpretations to contracts and figuring out what the parties intended, but commercial relationships are often complex enough that this task can be impossible.  In a world where a chicken isn’t always a chicken, attorneys can’t always guarantee a perfect contract, but they will be able to explain potential danger areas, and help you understand what aspects of the contract will need particular attention.  A well-drafted contract can help protect your business from liability, and can prevent financial harm from unforeseen and unintended consequences.  You have a great idea, a solid business plan, and the drive to make your business succeed.  By consulting an attorney to ensure that your contract is suitable for your purposes, you can eliminate potential challenges to your continuing success.

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