Forty-two percent of Internet users played a social media game in the last three months; 26 percent of social game players purchased virtual currency with real money; and in 2011, Facebook earned $470 million in revenue from the sale of Facebook Credits, the platform’s exclusive virtual currency. Indeed, the latest statistics evince the continued growth of social networks and social gaming, particularly as smart phone adoption among U.S. consumers continues to rise. Aside from the expressive aspects, social media has become an important source of casual entertainment, with users playing games on social network platforms ranging from poker and board games to virtual farming and zombie eradication. Within this emerging field, many intellectual property holders and other entities have sought to create their own social games.

This article will discuss social gaming generally and the important considerations and issues of the video game software development process.

Social Gaming Generally

A social network game is an online video game played on a social media platform via a Web browser or mobile device and often allows for multiplayer interactions and asynchronous play (different users playing the game at different times). Games genres include casino and card games, sports and action games, board games, virtual activities, and fantasy quests. Unlike some elaborate console games, social media games are generally geared toward the casual gamer who enjoys the social nature of competing with friends and advancing to higher levels of game play. This relative simplicity translates into a lower cost of development for the game publisher (i.e., creator and distributor of the game) and a quicker process for the game developer (i.e., the entity hired to design the game and write the underlying software).

Social games are free for users and produce revenue for the publisher through advertising or small in-game purchases of virtual currency by players. Monetary success for the publisher is typically measured in revenue per the number of active players, or daily active users—the largest social game publisher, Zynga, boasts 60 million daily active users, while other successful game publishers claim a more modest number. While the largest cost of producing a game is software development, other expenses include rights clearance in any existing intellectual property (IP), ongoing advertising to attract and retain users, and live operation costs (maintenance and support, game updates, and hosting fees).

The Parties to the Agreement

There are several possible video game licensing models involving the publisher and developer:

(1) the publisher could license its existing IP in a brand, game, or movie to a game developer and in return, receive a share of the revenue;

(2) the publisher and developer could enter into a joint relationship and agree on a breakdown regarding development costs and future revenue; or

(3) the developer could be paid under a work for hire agreement and receive a negotiated percentage of royalties from future revenues.

Under the work for hire model, the software and related documentation for the game is transferred to the publisher under the development agreement, with the exception of the developer’s pre-existing tools and technology. Developer’s tools are proven, bug-tested libraries of code that a developer uses across multiple game projects. This accumulated knowledge is one of a developer’s most valuable assets and allows the developer to work more efficiently. For example, each game has a “game engine,” which is a software framework that performs basic functions of a single game, but can be reused in the development of other games. Parties should define “Developer’s Tools” in the agreement and delineate the publisher’s ownership rights in both pre-existing tools and enhancements produced during the game development process. The agreement should also clarify what rights in the tools will be licensed to the publisher, namely, future use in sequels or unrelated games, and confidentiality and third-party access.

During the negotiations, the parties will invariably conduct due diligence. A publisher should look to engage developers with experience in social games, not just traditional console games, and look at a developer’s portfolio, which given the capriciousness of the video game industry, will likely contain both successes and failures. A developer will typically examine whether the publisher is financially secure and has expertise in marketing social games, and whether the publisher has a history of non-payment of invoices or royalties.

Moreover, the publisher should take extra precautions before entering into transactions with the potential for conflicts of interest. See, e.g., First Games Publisher Network v. Afonin, 32 Misc.3d 1245(A) (N.Y. Sup. Ct. N.Y. Cty. Aug. 12, 2011) (plaintiff hired game developer partially owned by one of plaintiff’s officers and which allegedly breached a confidentiality agreement by developing a competing video game using the source code created for plaintiff’s game; court refused to dismiss breach of contract claims against its former officer based upon his conflict of interest and breach of fiduciary duty).

Third-Party Rights

To the extent the game concept is based on a pre-existing brand or media product, the publisher is generally responsible for obtaining necessary licenses, including clearance for intellectual property, sounds and music, and the use of celebrity images. During the initial design process, publishers should avoid selecting or using game titles, trade dress or related domain names that infringe existing products. See, e.g., Interplay Entertainment v. Topware Interactive, 751 F. Supp. 2d 1132 (C.D. Cal. 2010) (preliminary injunction issued against video game developer prohibiting distribution and online advertising of video game with confusingly similar name to plaintiff’s mark). Publishers should also avoid copying the unique story lines or exact aspects of competing games, even if the basic concept of the game might contain unprotectable elements. For example, in Tetris Holding v. Xio Interactive, 2012 WL 1949851 (D. N.J. May 30, 2012), a game developer claimed that the defendant infringed the copyright and trade dress of its video game Tetris by releasing a copycat version for the iPhone platform. The court found that the particular style, design, shape, and movement of the pieces in Tetris were protectable expression and that there were many other options for anyone seeking to create a Tetris-like game: “[T]he Court cannot accept that [defendant] was unable to find any other method of expressing the Tetris rules other than a wholesale copy of its expression.”

Moreover, depending on the terms of the agreement, the developer may seek to lower its costs or expedite performance by subcontracting some aspects of the game development and design to third parties, who might employ open source software. Open source licenses contain varying obligations and restrictions on how users may use, modify, integrate or distribute open source software and, depending on the terms of the license, can “infect” the developer’s work requiring users of the code to make the product’s corresponding source code publically available. Thus, it is important for the publisher to ensure that all open source code is identified and any important licensing restrictions known before development is complete.

Deliverables and Milestones

Every development contract must clearly identify what are commonly known as the “deliverables,” the materials to be produced and delivered by either party during the term of the contract. Each deliverable should be defined and described, and the timing of its delivery should be stated as part of the project’s implementation plan. The game development process typically includes common milestones covering initial design specifications, as well as the standard stages of video game development from demo versions to bug-tested finished software (i.e., first playable prototype, alpha build, beta build, quality testing, and gold master). Payments to the developer are often tied directly to the accomplishment of certain milestones set out in the schedule, so it is important for both parties to keep careful records of milestones completed and past payments under the contract in the event the relationship breaks down. See e.g., Mandarin Entertainment v. Twelve SRL, 2011 WL 4729791 (N.D. Ill. Oct. 6, 2011) (plaintiff alleged that video game developer failed to produce the required deliverables and defendants counterclaimed that plaintiff failed to make all duly earned milestone payments; court refused to grant summary judgment because the plaintiff failed to offer sufficient evidence regarding if, when, or why it terminated the agreement, and what payments the developer might have been due under the agreement).

Delays in game development may be caused by many circumstances, particularly when progress is contingent on performance by third parties, including outside software developers, musicians, or other rights holders. To handle delays caused by changes to the game requested by the publisher, development agreements typically include change control procedures to accommodate work outside the original scope of the game specifications. Change control procedures can be used to incorporate the additional work and adjust the fees due to the developer.

If a project’s timely release into the marketplace is critical to its success, the contract should include a “time is of the essence” clause and expressly state that a missed milestone constitutes a material breach of the agreement, perhaps granting the publisher certain rights to complete the game itself. For example in Scratch DJ Game v. California 7 Studios, 2010 WL 550791 (Cal App. Feb. 18, 2010) (unpublished), the parties entered into a development agreement to produce a disk jockey video game. Since the plaintiff wanted the new game to be first to the market, the development milestones were deemed critical and any missed deadline would be considered a material breach. In addition, the agreement provided that in the event of the developer’s material breach, the publisher could elect to take over development of the game and receive all game materials, including source code.

The agreement also stated that the publisher could provide the developer’s tools and technology to a third party developer for completion of the game, subject to “reasonable and appropriate written confidentiality restrictions.” The developer missed several milestones and the plaintiff terminated the agreement and filed suit for breach of contract and an injunction to compel the defendant to hand over all of the game materials so that the plaintiff could hire a third-party to complete the game.

In affirming the plaintiff’s request for preliminary injunction, the appellate court found it was likely the plaintiff would prevail on its contract claim, finding no evidence that the plaintiff’s alleged delays in clearing music and obtaining other approvals caused defendant’s unexcused non-performance. The court also found that the plaintiff was entitled to receive the game engine source code under the agreement—the defendant had previously turned over the game engine in object code format, but refused to turn over the source code because it claimed such code was part of its pre-existing tools and technology. The court ruled that the hardship to plaintiff absent an injunction (i.e., losing its multimillion dollar investment in a video game that needed a timely release) would outweigh any harm to the developer (i.e., permitting an outside developer restricted access to defendant’s tools and technology).

Privacy Issues

Social gaming player data is collected by multiple entities, including, but not limited to, the social media and mobile phone platform, the game publisher, payment processors, and online advertising providers. Each game’s privacy policy should outline the extent of data collection, including data collected for behavioral advertising purposes. Recent court decisions have highlighted additional privacy concerns related to social media games and mobile apps. For example, in In re Zynga Privacy Litigation, No. 10-04680 (N.D. Cal. Nov. 22, 2011), the plaintiffs alleged that a social media gaming company unlawfully transmitted users’ personally identifiable information to third-party advertisers in violation of federal privacy laws and other state claims. The court dismissed the plaintiff’s amended breach of contract claim, among other causes of action, concluding that the plaintiffs failed to show “appreciable and actual damage” to substantiate the claim. See also United States v. W3 Innovations, No. 11-03958 (N.D. Cal. Consent Decree Aug. 12, 2011) (iPhone app developer settled charges that it improperly collected and disclosed personal information from tens of thousands of children under the age of 13 without their parents’ prior consent).

Richard Raysman is a partner at Holland & Knight and Peter Brown is a partner at Baker & Hostetler. They are co-authors of “Computer Law: Drafting and Negotiating Forms and Agreements” (Law Journal Press).