Tag Archives: Startup lawyer canada

Intellectual Property Rights for Video Game Studios

For our video game clients, protecting intellectual property is an important part of their business.   Intellectual property protection for a video game commonly comes in the form of trademark and copyright but may also involve patents and trade secrets

Trademarks can protect the titles and logos associated with a game.  Without a registered trademark, another studio could register a trademark that is confusingly similar to your existing game, thereby creating confusion, negatively impacting your ability to enforce trademark rights and potentially the complete loss of all trademark rights.

Copyright can protect game code, artwork, music and characters.  A copyright registration could be obtained on a particular character used in a game to prevent third parties from creating and selling plush toys based on the character.  

Patents can protect new and innovative hardware, systems, technical solutions, innovative game play or design elements and technical innovations such as networking or database design.  

Trade secrets can protect customer mailing lists, pricing information, publisher contracts, developer contracts, in-house development tools, and terms and conditions of any agreement the studio enters into.  Note that the enforcement of a trade secrets requires that a confidentiality agreement be put in place.

The following chart provides a helpful overview of intellectual property protection options:

Copyright  ProtectsTrademark ProtectsPatent ProtectsTrade Secret Protects
MusicStudio nameHardware systemsCustomer mailing lists
CodeStudio logoInventive game playPricing information
StoryGame titleTechnical innovations such as new software, networking or database designsPublishing contacts
Characters  Middleware contacts
Art  Developer contacts
Box design  In-house development tools
Website design  Deal terms

We recommend that studios become familiar with the range of intellectual property protections available and to prepare an intellectual property strategy for both the studio and its games.  

California Consumer Privacy Act comes into Force Jan. 1, 2020

The California Consumer Privacy Act (the “CCPA”) is a new law intended to enhance privacy rights and consumer protections for California residents, which comes into force on January 1, 2020. 

In the lead-up to the CCPA coming into force, this blog post covers three common questions we receive: (1) do I need to comply? (2) when do I need to comply? and (3) what happens if I do not comply?

1.         Do I need to comply? Probably, but not directly.  Most companies that operate from Canada or in states other than California, will not directly have to comply with the CCPA as the territorial scope of the law is fairly limited, especially when compared with the EU’s General Data Protection Regulations (the “GDPR”).  To fall under the territorial scope of the CCPA, you have to be a for-profit business doing business in the State of Californiaand have one of three factors apply: 

(a) gross revenue of over $25,000,000 USD

(b) handle the personal information of more than 50,000 consumers, households or devices (it is unclear in the Act, at this stage, whether this is a California or world-wide number); or 

(c) derive more than 50% of annual revenue from the selling of consumers’ personal information.  

While the CCPA may not apply directly to many companies, as we saw with the GDPR rollout in 2018, the CCPA will likely indirectly apply as major tech companies like Google and Apple will have to comply with this law and as such, they will likely require, as part of their own compliance requirements, that companies they do business with that collect personal information also comply.  The extent of this indirect compliance is currently unclear and may only apply to certain provisions of the CCPA.

2.         When do I need to comply?  The effective date of the CCPA (the date at which the CCPA becomes law), is January 1, 2020, and while enforcement by the California Attorney General’s office may not begin until supporting regulations are finalized (deadline for regulations is June 1, 2020), we recommend that companies that need to comply directly begin compliance work immediately and aim to be fully compliant by January 1.  Companies that only need to comply indirectly may have some time to wait and see how the CCPA will affect contracts and terms with CCPA compliant companies but it won’t hurt to be compliant by early 2020. 

3.         What happens if I do not comply?  Beware of the cost!  There are several penalty clauses in the CCPA, including $2,500 for each non-intentional violation and $7,500 for each intentional violation.  If you have over 50,000 users, these penalties can easily amount to over $125,000,000.  For companies that will have to comply indirectly through contracts or user agreements, beware of indemnification clauses and other liability amendments that may push these penalties onto your company.

For many companies, the CCPA may not directly apply. However, it’s important to monitor CCPA factors, relative to your company’s business, to ensure that you do not miss compliance should a factor be met in the future – this is especially important in rapidly growing startups where it’s easy for a compliance obligation to be missed. Even if the CCPA factors are not met, there may be an obligation to comply as large tech companies will likely be complying and force compliance on everyone else they do business with.

Video Game Profit Sharing Structures

Our video game studio clients often come to us with plans to split game profits among the team members but require advice on the form this split should take.  Three main approaches exist for structuring your video game profit share:

1.  Profit Sharing Agreement

The most common approach is the Profit Sharing Agreement.  This agreement is between the company and each person participating in the profit share and sets out the profit sharing terms and contains key terms such as:

  • How profit is calculated.  For example, revenue received by the company from sales of the game minus publisher royalties, platform fees, certain operating costs etc.
  • What constitutes the “game”.  Does the game include DLC, HD/upscaled/remastered versions, sequels etc.?
  • Adjustment of each person’s percentage if future participants added. 
  • What is the profit sharing duration?
  • Is there a cap on payouts?
  • Termination upon acquisition of the company or the game, perhaps with a lump payout.
  • What happens if the company receives investment?

The benefit to this approach is that the participants are not shareholders in the company and, as a result, do not have a say in how the company is operated or a right to receive payouts from future games developed by the company.  However, the parties need to ensure that the agreement is thorough in its scope as any ambiguity or overlooked scenario could create major headaches in the future.

2.   Create a Separate Company for each Game

Under this approach, a separate company is created for each game you develop, with the commonality being that the main company you incorporated (the studio) is a majority shareholder (51% and up) in each of these separate companies.  For example: Studio Company owns 66 2/3% of Game 1 Company.  The separate company would receive profits from the game and distribute them to the shareholders based simply upon their shareholding (although more complex special rights and restrictions could also be put in place).  Intellectual property for each game may rest with the separate company or the main company.  Profits from the game would be distributed as a dividend to the shareholders.

This approach works well if each person is expecting an interest in the company developing the game with the benefit that these persons cannot participate in future games developed by the main company (which may be unrelated to the current game).  However, when pursuing this approach, it is important to obtain tax advice to ensure that distribution of the profits between the companies is structured efficiently.

3.  Issue Shares in your Company to Profit Share Participants

Under this approach, a special class of non-voting share (the profit share class)  is issued to the profit share participants and contains a dividend right to receive a portion of game profits, which would contain similar terms as described in approach 1 above.  This approach is similar to approach 2 above except that no separate company is created.  However, additional terms are also required, such as:

  • Share retractability:  this allows the company to repurchase the profit sharing shares in the future.
  • Voting trust:  this takes control of some or all of the voting rights of the non-voting shareholders  (see non-voting shareholder’s limited voting rights).

The problem with this approach stems from the fact that the profit share participants may only be involved in one game but the studio may continue on to make other games, which the profit share participant should not receive a financial benefit from.  Further, by being a shareholder (without detailed share rights and restrictions), the shareholder may be able to participate in profits from future, unrelated titles, benefit from sale of the company and/or exert their rights as a shareholder to participate in the company’s direction.  To alleviate these problems, complex terms and agreements are likely needed (see retractability and the voting trust) to ensure that the profit share shareholders only benefit from the game they worked on and have a limited right, if any, to participate in the company’s direction.

As a first step, it’s critical to recognize that your profit sharing agreement needs to be documented in writing.  Second, you must reflect on the relationship you desire with the profit sharing participants (duration, scope of their involvement etc.) and analyze that relationship relative to the features of each of the above approaches.

Avoid Absolute Anti-Dilution Protection

Anti-dilution protections are frequently granted to investors and forgotten by founders until their friendly lawyer brings it up.  In many cases, anti-dilution protections are reasonable but in other cases can impose a substantial burden on the company, even impacting the appeal of the company to future investors.

Generally, anti-dilution protections protect an investor from the dilution of the investor’s interest.  When VC’s speak about anti-dilution they are usually referring to price-based anti-dilution protections, which protect from a decrease in share price in a future financing (known as a “down-round”) by, ultimately, increasing the number of shares issued to previous round investors.  This down-round protection is seen in Series A financings and Brad Feld has a great post covering the details.

What is FAR less common, and almost universally viewed as inappropriate, is an absolute anti-dilution clause.  This type of dilution protection guarantees the investor a certain percentage of the company, usually for a fixed time.  For example:

Startup hereby agrees to issue additional shares of Common Stock (for no additional consideration) to maintain Investor’s ownership interest at 10% of the total capital stock (calculated on a fully-diluted basis, including all options, warrants, convertible securities and other rights to acquire capital stock).

In the above case, the investor maintains a 10% interest in the company without a need to make additional payments.  What if the company sells shares to a new investor?  New shares are issued to the previous investor.  What if the company issues options to employees?  New shares are issued to the previous investor.  The absolute anti-dilution clause is viewed as inappropriate as it protects the investor against ALL dilutive events, including those every investor expects to occur, rather than a limited set of dilutive events, such as a down-round.

The absolute anti-dilution clause also runs the risk of rendering your company less appealing to investors.  An investor may reconsider an investment knowing that they will be immediately diluted by the previous investor’s absolute anti-dilution clause.  This is especially the case if the new investor is increasing the company share price and, in turn, the value of the previous investor’s shares.

I usually encounter these absolute anti-dilution clauses in connection with an accelerator program investment.  In this scenario, clients tend to accept the terms as acceptance to the program is viewed as worth the cost (which is a reasonable position to take).  Nonetheless, it’s important for companies to understand the impact of absolute anti-dilution clauses and to weigh the pros and cons of any investment in light of an absolute anti-dilution clause before proceeding further.