Tips for Negotiating Mobile-Game Development Agreements

The mobile-game industry can be lucrative. Mobile games ' which can be downloaded to cell phones and other mobile devices ' can be cheaper and easier to develop than games created for platforms like PCs or game consoles, where users expect higher production values. What also makes mobile games attractive to developers and entrepreneurs is the potential market of consumers who already carry and use cell phones ' estimated at 207.9 million nationwide and 2 billion worldwide. Mobile games present huge brand opportunities as well: Celebrities such as hotel heiress Paris Hilton, rapper 50 Cent, skateboarder Tony Hawk and poker champion Phil Hellmuth have each licensed their names and images to mobile games. Tom Cruise, notoriously shy of associating his name with videogames, lent his name exclusively to a Mission Impossible III mobile-phone game.

But to access these potentially large returns, developers must deal with complexities ranging from the need to redevelop or 'port' the same game to various platforms ' such as Brew, Java and J2ME ' and tweak it for display on a wide variety of handsets, to navigating the nettle of contracts and legal issues in a long and complicated value chain from developer to end user.

In negotiating a mobile-game development deal, a rightsholder must understand the significant licensing and rights issues that result from the variety of players involved in the production and distribution chain. This article discusses these players, the legal issues each one presents and how to work through them. The hope is that by highlighting the main issues and legal pitfalls to which these various relationships give rise, a workable set of best contract practices can develop that will foster longer-lasting, more-rewarding business relationships for clients and help promote the growth of the mobile-game business generally.

The Players

Before developing any game, one must gain an understanding of the other players and how they interact. At the beginning of the mobile-game development value chain is the game developer. The developer can be an individual or a small partnership like Sprout Games or Mystery Studio, medium-sized like Large Animal, Gamelab or GameLoft, or even an immense, publicly traded company like Electronic Arts. The developer provides the creative spark behind the game's concept and code. A developer will create the game's back-story, characters, visual appearance and rules. Also, based on market considerations and sponsorship opportunities, the developer chooses which platforms (CDMA, GSM, PCS, etc.) and operating systems (Java 2 Micro Edition known as J2ME, Java, Brew, Nokia N-Gine, etc.) for which to develop the game.

In addition, other developers often share pre-existing developed software or codes that the developer can license and incorporate into the new game to speed the development process. Further, to achieve certain graphic or animation results, a developer might use certain tools or game engines licensed from software companies and application developers such as mFoundry, Adobe, and Macromedia Flash.

Once the game is completed, the developer will often seek to license the game to a publisher like Hands-On Mobile, Electronic Arts, GluMobile or Retro 64, which in turn, will sell the game directly to a distributor like Verizon, Sprint or T-Mobile, or to a mobile-game aggregator, for example, Thumbplay, Cellmania, Playfirst or Zingy. The mobile-game aggregator acts as a combination retailer-distributor in the sense that it provides one commercial outlet for several different publishers. Some aggregators operate websites that only offer games, while others offer general online content including games, ringtones, images and other services. In certain cases, a single company might vertically integrate to act as a developer, publisher and aggregator. At the end of the game-development chain, of course, is the most important player: the mobile-game consumer.

The Playing Field

How all of these players interact will necessarily depend on the different agreements binding them together. For instance, a company that employs or commissions individual developers to create a game will likely use a work-for-hire agreement. In such cases, the company typically owns the game created by the employee or commissioned developer. It is also possible that a developer might choose to negotiate a development agreement in which the ownership of the produced game is shared between the company and the developer, or between the developer and several companies.

Before a company enters into an ownership agreement with a developer, it should be aware that the end product typically incorporates certain pre-existing technologies or materials such as artwork, music, animation graphics and software tools. The intellectual-property rights to these elements, including trademark, copyright and patents, might be held by a variety of different parties with different habits and policies regarding enforcing those rights. Therefore, when entering a game development deal, counsel should discuss the need to obtain appropriate licenses, secure (and pay for) those rights, or at the very least get releases and indemnifications against infringement claims. When negotiating these terms in contracts, keep in mind that the developer may not have exercised the appropriate degree of due diligence in clearing rights and securing licenses, or may not ultimately have enough money to effectively indemnify you or your client against infringement claims. We discuss this in more detail later.

In certain cases, based on your goals for development or exploitation, you might want to secure the rights to use the same technology in more than one mobile game, or the right to distribute the game on a variety of platforms. If so, you can enter into a wide variety of industry standard value-added reseller agreements, which can allow the same technology, such as the kind that creates an animated golf swing, to be used in different games or allow you to sell the same game through different distribution channels or different carriers. Note these carrier or other distribution agreements are highly sought-after and prized. Their terms and flexibility are, of course, the key to determining the size of the audience that can be attracted to a particular game, and thus the amount of revenue that can be made from it.

Who Owns What?

One of the most crucial negotiation points in mobile-game development is who owns all or part of the work. A game developer unfamiliar with copyright law may not realize that the law does not recognize the creator of a work as its rightful owner if the creation is considered a 'work for hire.' Likewise, in the absence of a 'work for hire' clause, a company utilizing independent contractors to develop a game may find that they do not own the finished product outright, despite the fact that they paid for its development. The 1976 Copyright Act creates two categories of works for hire: when an employee creates the work within the scope of his or her employment; and when certain types of works are specifically commissioned as a 'work for a hire' and both parties expressly agree to the term in writing.

So if the developer happens to be an employee of the company, the company will own the game. If the developer isn't an employee but the company specifically commissioned the developer to create a game for the company, then the company will own the game only if there is a signed, written agreement stipulating the game as a 'work for hire.' If a developer falls within neither 'work for hire' category, the developer will own the mobile game, and a company will need to enter into a developer agreement that clearly sets out the duties and obligations of both parties. This developer agreement should include specific clauses relating to who owns what aspects of the mobile game.

Once negotiating parties have determined 'who' will have ownership rights, the next step is to figure out 'what' exactly is going to be owned. In game developing, there are essentially three sets of creative elements involved: 'look and feel' visual work product such as graphics, music, game play, object code and other related documentation; source code; and developer technology, including templates, processes, techniques, methodology and know-how related to the work product, data and software, as well as any improvements, enhancements or derivatives thereof.

In general terms, the typical compromise is that the company commissioning the work will usually insist on owning the ultimate work product exclusively, while the developer will often maintain exclusive rights in the tools he used to create the game ' namely, the source code and underlying technology. However, such a split is not always so simple. In addition to owning the finished product, a company must also be able to maintain and support the game and upgrade it. Therefore, it is crucial for the company to obtain a limited and non-exclusive, worldwide license to use the developer's source code and technology.

In practice, the developer will usually place a copy of the source code with a third-party escrow agent and agree to allow the company to access the source code when technical problems arise. Additionally, when the developer owns the game's technical tools, a company will need a worldwide perpetual license to use and to sublicense the technology to third parties, who maintain, support, distribute and host the games. The source code and developer technology licenses should be exclusive because the company generally wants to be the only one providing that particular gaming experience. Thus, the developer would refrain from using the licensed technology and source code, or their derivatives, to create the same or similar games.

But as previously explained, there are other players to consider. Recall that a developer typically integrates pre-existing software into his creation. For example, EyeMobile provides technology used by game developers that reduces or eliminates the need to push buttons to play mobile games. The user tilts the phone to produce movement on the screen. If a developer wants to use this technology, the rights must be licensed from EyeMobile or their reseller. If the developer uses the technology without securing these rights, the outside technology provider could have a copyright or patent infringement claim. Such an infringement could end in a costly legal battle. At the very least, it could put the developer or distributor at a disadvantage in negotiating a license after the fact.

As a result, in negotiating the development agreement, you must be sure to address what pre-existing technologies or licensable materials the developer used in making the final product. In this negotiation, be sure that the developer agreement contains warranty clauses that the developer's services, work product and source code won't infringe upon or violate any patent, trademark, copyright, trade secret or any other right of third parties. Along with the warranty, the developer should agree to indemnify and hold the company from and against damages, liabilities and costs resulting from third-party claims of infringement. The underlying theme of the contract discussions should be: Can the company be sure the developer owns the total creation?

As noted earlier, in answering this question you should take into account the solvency of the party making these representations and indemnifying you. If they don't have enough money or insurance to defend an infringement claim or sustain a judgment against them, then the indemnification won't be particularly useful in protecting you against such a claim. As a final negotiating tip, if you determine that the indemnifying party would, in fact, be unlikely to be able to defend such a claim, but you still want to use their work product, then factor this risk into the purchase or license price and give them a lower offer.

Um, Excuse Me, Am I in the Credits?

For a developer, being recognized as the brains behind a particularly successful game could be the key to getting the next lucrative development job and can even be career making. As a result, giving the developer prominent attribution can be an excellent negotiating point for a company to get good prices on license fees. The placement of credits ' whether bold and bright on a title screen or listed in small, plain text in the game's final credits ' are important to game developers because names, trademarks, service marks and logos all help build the brand of the developer's products and services.

When negotiating credits, companies should be sensitive to the developer's style and placement requirements. In return, the developer must be prepared to agree to adjusting credits in order to accommodate technical limitations such as screen size, format and the gaming device's memory constraints. Depending upon the brand identity of the developer, in addition to credits within the game itself, a company might offer to include the developer's logo on the company's website or in other promotional materials. Of course, the language in the agreement should address such uses of the developer's identity.

Steven Masur is the managing director of the New York-based MasurLaw, a media and entertainment law firm known for its work with new technologies. E-mail: [email protected]. He would like to thank Ursa Chitrakar, Fulbright Scholar 2006, and Jennifer Williams, Brooklyn Law School 2006, for their significant contributions to this article.

The mobile-game industry can be lucrative. Mobile games ' which can be downloaded to cell phones and other mobile devices ' can be cheaper and easier to develop than games created for platforms like PCs or game consoles, where users expect higher production values. What also makes mobile games attractive to developers and entrepreneurs is the potential market of consumers who already carry and use cell phones ' estimated at 207.9 million nationwide and 2 billion worldwide. Mobile games present huge brand opportunities as well: Celebrities such as hotel heiress Paris Hilton, rapper 50 Cent, skateboarder Tony Hawk and poker champion Phil Hellmuth have each licensed their names and images to mobile games. Tom Cruise, notoriously shy of associating his name with videogames, lent his name exclusively to a Mission Impossible III mobile-phone game.

But to access these potentially large returns, developers must deal with complexities ranging from the need to redevelop or 'port' the same game to various platforms ' such as Brew, Java and J2ME ' and tweak it for display on a wide variety of handsets, to navigating the nettle of contracts and legal issues in a long and complicated value chain from developer to end user.

In negotiating a mobile-game development deal, a rightsholder must understand the significant licensing and rights issues that result from the variety of players involved in the production and distribution chain. This article discusses these players, the legal issues each one presents and how to work through them. The hope is that by highlighting the main issues and legal pitfalls to which these various relationships give rise, a workable set of best contract practices can develop that will foster longer-lasting, more-rewarding business relationships for clients and help promote the growth of the mobile-game business generally.

The Players

Before developing any game, one must gain an understanding of the other players and how they interact. At the beginning of the mobile-game development value chain is the game developer. The developer can be an individual or a small partnership like Sprout Games or Mystery Studio, medium-sized like Large Animal, Gamelab or GameLoft, or even an immense, publicly traded company like Electronic Arts. The developer provides the creative spark behind the game's concept and code. A developer will create the game's back-story, characters, visual appearance and rules. Also, based on market considerations and sponsorship opportunities, the developer chooses which platforms (CDMA, GSM, PCS, etc.) and operating systems (Java 2 Micro Edition known as J2ME, Java, Brew, Nokia N-Gine, etc.) for which to develop the game.

In addition, other developers often share pre-existing developed software or codes that the developer can license and incorporate into the new game to speed the development process. Further, to achieve certain graphic or animation results, a developer might use certain tools or game engines licensed from software companies and application developers such as mFoundry, Adobe, and Macromedia Flash.

Once the game is completed, the developer will often seek to license the game to a publisher like Hands-On Mobile, Electronic Arts, GluMobile or Retro 64, which in turn, will sell the game directly to a distributor like Verizon, Sprint or T-Mobile, or to a mobile-game aggregator, for example, Thumbplay, Cellmania, Playfirst or Zingy. The mobile-game aggregator acts as a combination retailer-distributor in the sense that it provides one commercial outlet for several different publishers. Some aggregators operate websites that only offer games, while others offer general online content including games, ringtones, images and other services. In certain cases, a single company might vertically integrate to act as a developer, publisher and aggregator. At the end of the game-development chain, of course, is the most important player: the mobile-game consumer.

The Playing Field

How all of these players interact will necessarily depend on the different agreements binding them together. For instance, a company that employs or commissions individual developers to create a game will likely use a work-for-hire agreement. In such cases, the company typically owns the game created by the employee or commissioned developer. It is also possible that a developer might choose to negotiate a development agreement in which the ownership of the produced game is shared between the company and the developer, or between the developer and several companies.

Before a company enters into an ownership agreement with a developer, it should be aware that the end product typically incorporates certain pre-existing technologies or materials such as artwork, music, animation graphics and software tools. The intellectual-property rights to these elements, including trademark, copyright and patents, might be held by a variety of different parties with different habits and policies regarding enforcing those rights. Therefore, when entering a game development deal, counsel should discuss the need to obtain appropriate licenses, secure (and pay for) those rights, or at the very least get releases and indemnifications against infringement claims. When negotiating these terms in contracts, keep in mind that the developer may not have exercised the appropriate degree of due diligence in clearing rights and securing licenses, or may not ultimately have enough money to effectively indemnify you or your client against infringement claims. We discuss this in more detail later.

In certain cases, based on your goals for development or exploitation, you might want to secure the rights to use the same technology in more than one mobile game, or the right to distribute the game on a variety of platforms. If so, you can enter into a wide variety of industry standard value-added reseller agreements, which can allow the same technology, such as the kind that creates an animated golf swing, to be used in different games or allow you to sell the same game through different distribution channels or different carriers. Note these carrier or other distribution agreements are highly sought-after and prized. Their terms and flexibility are, of course, the key to determining the size of the audience that can be attracted to a particular game, and thus the amount of revenue that can be made from it.

Who Owns What?

One of the most crucial negotiation points in mobile-game development is who owns all or part of the work. A game developer unfamiliar with copyright law may not realize that the law does not recognize the creator of a work as its rightful owner if the creation is considered a 'work for hire.' Likewise, in the absence of a 'work for hire' clause, a company utilizing independent contractors to develop a game may find that they do not own the finished product outright, despite the fact that they paid for its development. The 1976 Copyright Act creates two categories of works for hire: when an employee creates the work within the scope of his or her employment; and when certain types of works are specifically commissioned as a 'work for a hire' and both parties expressly agree to the term in writing.

So if the developer happens to be an employee of the company, the company will own the game. If the developer isn't an employee but the company specifically commissioned the developer to create a game for the company, then the company will own the game only if there is a signed, written agreement stipulating the game as a 'work for hire.' If a developer falls within neither 'work for hire' category, the developer will own the mobile game, and a company will need to enter into a developer agreement that clearly sets out the duties and obligations of both parties. This developer agreement should include specific clauses relating to who owns what aspects of the mobile game.

Once negotiating parties have determined 'who' will have ownership rights, the next step is to figure out 'what' exactly is going to be owned. In game developing, there are essentially three sets of creative elements involved: 'look and feel' visual work product such as graphics, music, game play, object code and other related documentation; source code; and developer technology, including templates, processes, techniques, methodology and know-how related to the work product, data and software, as well as any improvements, enhancements or derivatives thereof.

In general terms, the typical compromise is that the company commissioning the work will usually insist on owning the ultimate work product exclusively, while the developer will often maintain exclusive rights in the tools he used to create the game ' namely, the source code and underlying technology. However, such a split is not always so simple. In addition to owning the finished product, a company must also be able to maintain and support the game and upgrade it. Therefore, it is crucial for the company to obtain a limited and non-exclusive, worldwide license to use the developer's source code and technology.

In practice, the developer will usually place a copy of the source code with a third-party escrow agent and agree to allow the company to access the source code when technical problems arise. Additionally, when the developer owns the game's technical tools, a company will need a worldwide perpetual license to use and to sublicense the technology to third parties, who maintain, support, distribute and host the games. The source code and developer technology licenses should be exclusive because the company generally wants to be the only one providing that particular gaming experience. Thus, the developer would refrain from using the licensed technology and source code, or their derivatives, to create the same or similar games.

But as previously explained, there are other players to consider. Recall that a developer typically integrates pre-existing software into his creation. For example, EyeMobile provides technology used by game developers that reduces or eliminates the need to push buttons to play mobile games. The user tilts the phone to produce movement on the screen. If a developer wants to use this technology, the rights must be licensed from EyeMobile or their reseller. If the developer uses the technology without securing these rights, the outside technology provider could have a copyright or patent infringement claim. Such an infringement could end in a costly legal battle. At the very least, it could put the developer or distributor at a disadvantage in negotiating a license after the fact.

As a result, in negotiating the development agreement, you must be sure to address what pre-existing technologies or licensable materials the developer used in making the final product. In this negotiation, be sure that the developer agreement contains warranty clauses that the developer's services, work product and source code won't infringe upon or violate any patent, trademark, copyright, trade secret or any other right of third parties. Along with the warranty, the developer should agree to indemnify and hold the company from and against damages, liabilities and costs resulting from third-party claims of infringement. The underlying theme of the contract discussions should be: Can the company be sure the developer owns the total creation?

As noted earlier, in answering this question you should take into account the solvency of the party making these representations and indemnifying you. If they don't have enough money or insurance to defend an infringement claim or sustain a judgment against them, then the indemnification won't be particularly useful in protecting you against such a claim. As a final negotiating tip, if you determine that the indemnifying party would, in fact, be unlikely to be able to defend such a claim, but you still want to use their work product, then factor this risk into the purchase or license price and give them a lower offer.

Um, Excuse Me, Am I in the Credits?

For a developer, being recognized as the brains behind a particularly successful game could be the key to getting the next lucrative development job and can even be career making. As a result, giving the developer prominent attribution can be an excellent negotiating point for a company to get good prices on license fees. The placement of credits ' whether bold and bright on a title screen or listed in small, plain text in the game's final credits ' are important to game developers because names, trademarks, service marks and logos all help build the brand of the developer's products and services.

When negotiating credits, companies should be sensitive to the developer's style and placement requirements. In return, the developer must be prepared to agree to adjusting credits in order to accommodate technical limitations such as screen size, format and the gaming device's memory constraints. Depending upon the brand identity of the developer, in addition to credits within the game itself, a company might offer to include the developer's logo on the company's website or in other promotional materials. Of course, the language in the agreement should address such uses of the developer's identity.

Steven Masur is the managing director of the New York-based MasurLaw, a media and entertainment law firm known for its work with new technologies. E-mail: [email protected]. He would like to thank Ursa Chitrakar, Fulbright Scholar 2006, and Jennifer Williams, Brooklyn Law School 2006, for their significant contributions to this article.