Intellectual Property Due Diligence Considerations in the Gaming Industry
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Video games are big business. In 2023, we have seen antitrust activity relating to Microsoft’s proposed acquisition of Activision Blizzard,1 NVIDIA reach a market capitalization of a trillion dollars2 and Arm boost the IPO market by listing on the Nasdaq at a valuation of nearly $55 billion.3 This follows the metaverse’s recent assent into the public consciousness. As such, the importance of the gaming sector is becoming increasingly obvious. This follows years of consistent growth, such that the gaming sector is larger than the music and movie sectors combined and has been for a number of years.4
Companies and investors will continue to look at the gaming sector as presenting interesting investment opportunities. An important aspect of the value proposition of an asset in the gaming sector is the applicable intellectual property (“IP”). Below, we discuss some of the most important IP issues to consider when evaluating an investment into the gaming sector.
1. IP for all elements of the game
It is clear that it is important to ensure that, as an investor, you are buying or investing in a company that owns all the IP applicable to the relevant game(s). Indeed, this is a key consideration for any IP-rich transaction.
In gaming, the most important IP right is likely copyright, which protects the expression of an idea. This would include the images within the game as well as the game’s computer code. Importantly, copyright does not protect the idea itself or the functions of the implementation of that idea. This is why there are multiple apps that do similar things and various versions of first-person shooter games. It aims to protect authors of original works, such as writers, artists, music composers and also programmers. The list of covered works is long and includes books, movies, music, software and graphic designs. Video games can comprise several works operating in unison to provide the intended entertainment experience, such as software, animation, characters, voices and musical compositions. There are many elements to analyze, as well as a variety of layers to those elements, depending on the features in the game and the distribution model.
Depending on the jurisdiction, copyright can attach to different kinds of works in video games. There is not a homogeneous approach across all countries. Some jurisdictions take the approach that video games are a complex structure of layered works that each need copyright protection. In other jurisdictions, video games are predominantly seen to be computer programs, due to the importance of software for implementation, and the focus for copyright protection will lie in such programs. Furthermore, there is a third (albeit smaller) group of jurisdictions in which video games are classed as essentially “audiovisual” works, meaning that copyright protection for elements such as pictures, video recordings and sounds is seen as more important than that for the software.5
As a result, an investor must ensure that the target company owns (or validly licenses) IP for all applicable elements of any relevant game (and this may differ depending on the jurisdiction in question). For games that have scaled or which are delivered via a cloud-based delivery model, an investor should, at a minimum, consider clearing the IP concerns in all the major financial markets where the target company’s games are offered.
2. IP from all contributing parties
As implied by the long list of possible works within a video game, there are many contributors. The list includes:
1) producers (who supervise and oversee the development of a video game);
2) game designers (who create its content, such as its plot, characters and layout);
3) artists (who create its visual art, both 2D and 3D);
4) programmers (who develop the software);
5) audio designers (who collect, edit and create sound effects, music and other related sound elements);
6) performers and actors (including for voice and motion capture); and
7) non-creative positions (including quality assurance testers).
It is therefore important that an investor is confident that the target company owns the IP attached to the various works and materials generated and developed by these contributors (a license is unlikely to be preferred in this context). In some jurisdictions, such IP generated by employees and / or independent contractors is automatically owned by the employer / hirer of the contractor. However, in other jurisdictions, this default may not apply to independent contractors or may be more narrowly applied to employees. In both cases, a careful review of the employment and contractor agreements is necessary to determine whether the default applies (if satisfactory) or not (if unsatisfactory). This analysis is further complicated by the geographically distributed nature of teams developing video games. As a result, the laws of multiple jurisdictions may apply.
Regardless of the jurisdiction and applicable law, best practices require checking the agreements that assign the applicable IP rights from each contributor to the target company. While it might seem like a tedious exercise to collect and review all of these types of assignment agreements, it is critical, because it only takes missing one contractor agreement to cause issues for a gaming company if a game is very successful.
3. Games based on pre-existing IP
While most games are created from original concepts, some are based on existing IP. For example, many sports-related games are developed and marketed with sports leagues, such as the National Football League and the National Hockey League. Such sports games get more complex to analyze, given developments in the law that protect the athletes depicted in such games as well as their names and likenesses, meaning such rights also need to be cleared to bring a game to market.6 These athletes, or the groups negotiating the collective rights of a group of athletes, often need to be compensated for the use of their names and likenesses. There are also situations in which a game is based on a movie (e.g. there are multiple games under the Star Wars brand) and sometimes there are spin-offs or sequels of a prior successful game (e.g. multiple versions of Pac-Man and a number of successful series of games, such as Grand Theft Auto).
In each case, attention should be paid to the in-bound license agreements for such IP to the gaming company. A review of these agreements should focus on: (i) the scope of the license grant (i.e., what uses are permitted); (ii) the allocation of risk, including by means of an indemnification or the use of representations and warranties; (iii) the ownership of newly-developed IP using the originally licensed IP; (iv) the economic terms; and (v) the term and termination provisions. Each of these areas of an IP license will impact the commercial potential for the new game and will be important in valuing the game’s importance to the overall value of the gaming company.
4. Artificial intelligence and IP
It is difficult to write about technology in 2023 without mentioning artificial intelligence (“AI”) and gaming is no different. AI has long been deployed to enhance the gamer’s experience by providing an adaptive gaming experience that is generated in-game rather than by game designers. A famous example is the use of “Radiant AI” in The Elder Scrolls V: Skyrim, a popular roleplaying video game, which tailors quests to the gamer, their progress in the game and their relationships with other characters.7
Thankfully, we have already touched on some of the developing IP concerns relating to AI in a previous blog: New due diligence challenges facing investors in AI.8 Our team will have additional thoughts on AI in gaming in a future Tech Talk blog post.
It is an exciting time for investors to evaluate investment opportunities in the gaming sector. However, as with any IP-rich sector, it remains important to carefully analyze the IP position of any such opportunity.