Lawyers in Canada: Davis LLP - Legal Advisors Since 1892

EBAY BANS (SOME) VIRTUAL PROPERTY

Online auction giant eBay has banned the trading of in-game property (e.g., characters, items, weapons, player accounts, etc.) from on-line games such as "World of Warcraft". eBay says that it has begun enforcing its rules against virtual property trading in order to protect its users and to provide them with a good eBay experience.

Other commentators suggest additional motives for eBay's decision. Some suggest that eBay is trying to avoid a 2-front battle against game companies and government regulators, both of whom have an increasing interest in virtual property trading. Others suggest that because there's a larger risk of fraud in virtual property transactions, eBay is eliminating the time and expense of dealing with fraudulent transactions.

Interestingly, eBay has specifically exempted trading in "Second Life" property. eBay says that it's not clear whether "Second Life" is a game. Further, "Second Life" involves a thriving functioning economy that depends on the trade of virtual property -- both in the game and in external forums like eBay.

Coverage at: http://tinyurl.com/2zmhqr (News.com)

SOUTH KOREA VIRTUAL PROPERTY LOBBY

Some time ago the South Korean government introduced a bill that would prohibit the real-world purchase and sale of MMO currency (although it would not affect transactions involving other in-game items, apparently). Now South Korean gold farmers have created a trade lobby organization (with the catchy title Digital Asset Distribution Promotion Association) to represent their interests. Given that South Korea's in-game item exchange market is estimated to be worth about US $1 billion, the new organization will undoubtedly have some political clout.

Coverage here: http://tinyurl.com/2cknsr and http://tinyurl.com/2tjj47 (GamePolitics)

JACK THOMPSON FINDS HIMSELF A POWERFUL, IF UNEXPECTED, ALLY

From the sounds of it, Jack Thompson has found support in the most unlikely of places: the Vatican. In his annual speech delivered from the Vatican on January 24, 2007, Pope Benedict XVI denounced violent and sexually explicit video games saying that video games “which in the name of entertainment exalt violence and portray anti-social behaviour or the trivialization of human sexuality [are] a perversion, all the more repulsive when these programmes are directed at children and adolescents”. The theme of the papal speech this year - Children and the Media: A Challenge for Education - focussed on the need for the media to be “committed to effective formation and ethical standards”. Uh-huh - good luck with that …

Coverage at: http://tinyurl.com/yvxau8 (CNet News.com)

Papal speech at: http://tinyurl.com/32luyn (Catholic News Agency)

UPDATE ON NY GAME BILLS

We reported recently about two video game-related bills that were introduced in New York's State Assembly (see previous post). Those bills have created concern because some people have misunderstood the bills as preventing the sale of certain games to anyone under 30. This is not the case. Rather, both bills propose an "adults-only" section for certain games, and state that customers will have to show ID to enter those sections unless they reasonably appear to be at least 30. If you don't look 30 but are still over 18, you'll be able to buy the games (so long as you have ID with you that lets you get into the restricted section).

This system is similar to the ones many US states use for regulating tobacco and alcohol sales.

So, all you 20-somethings out there (and those of us who are over 30 yet still look amazingly youthful) don't have to worry about your ability to buy games in NY if these bills pass.

Coverage at: http://tinyurl.com/3x4duu (Joystiq)

Virtual Drug Use Keeps Blitz Out Of Australia

Blitz: The League, Midway’s Xbox 360 American football game, has been denied classification by Australia’s Office of Film and Literature Classification (the “OFLC”), thereby preventing sale of the video game in that country. At issue for the OFLC is the player’s ability to choose to have team members take both legal and illegal performance-enhancing drugs. Though the player can choose for the virtual athletes to reject the illegal drugs, the OFLC argues that the player has an incentive to use such drugs to improve the team’s performance.

Australia’s restrictive game classification system refuses classification to titles that “depict, express or otherwise deal with matters of sex, drug misuse or addiction, crime, cruelty, violence or revolting or abhorrent phenomena in such a way that they offend against the standards of morality, decency and propriety generally accepted by reasonable adults".

Red Ant Enterprises, the local distributor for Blitz: The League has not yet decided whether it will appeal the ruling.

Coverage at: http://tinyurl.com/2ce3tk (Gamespot)

EULA's Under Attack!

(This posting was written by Andreas Lober at Schulte Riesenkampff in Germany).

Leading computer gaming producers are under attack in Germany! The so-called "Verbraucherschutzzentrale" - a Consumer Protection Organisation - claims that the EULAs of Electronic Arts, Blizzard, and Take 2 are illegal because they prohibit gamers from making backup copies of games for private use. The organisation threatens to go to court if the publishers do not change their EULAs.

Many publishers have complied with this request, but the case is debateable: In Germany, backup copies for private use are legal, but software designed to crack copy protection mechanisms is illegal. Therefore, the German Association of game publishers (Bundesverband Interaktive Unterhaltungssoftware) has criticized the Consumer Protection Organisation for its claims.

As Consumer Protection Organisations and Competitors may issue warning letters and seek injunctive relief based on EULA clauses which have never been applied, North American game companies should keep in mind that simply translating EULAs into various languages is dangerous. Within the European Union, many of the relevant competition rules are unified, but not all are. And North American laws often do not match their European counterparts.

Coverage (in German) at: http://tinyurl.com/ywz7e8

BEST GAME PATENTS

Gamasutra recently published an article on the best game patents of all time. It's well-written and it's an interesting read. The "now and then" comparison at the end is priceless.

Article at: http://tinyurl.com/2stq9z

2 GAMES BILLS INTRODUCED IN NY

Two bills dealing with video games were recently introduced in the New York State Assembly. Bill A00547, introduced by Keith Wright, prohibits the sale to minors of certain rated video games containing a rating that reflects content of various degrees of profanity, racist stereotypes or derogatory language, and/or actions toward a specific group of persons. This bill would prohibit the sale to minors of games which depict, advocate or glamorize things such as the commission of violent crimes, suicide, sexual violence, violent racism or religious violence. It would also require retailers to check ID for game buyers who appear to be 30 or younger.

Bill A02024, introduced by Aurelia Greene, prohibits the sale of mature or violent video games to minors, and provides for the display of such videos in a manner to preclude access by minors (in other words, retailers would have to keep mature-themed games in a separate area that minors cannot access).

Both bills have been referred to the NY Assembly's Committee on Consumer Affairs and Protection.

Bill A00547: http://tinyurl.com/yfy66n

Coverage of Bill A00547: http://tinyurl.com/y4ad9f  (GamePolitics)

Bill A02024:  http://tinyurl.com/yc9x6o

Coverage of Bill A02024: http://tinyurl.com/y4ownw (GamePolitics)

Anshe Chung's Husband Drops Lawsuit, Admits It Wasn't Really About Copyright...

...and more about the thousands of digital flying penises.  Guntram Graef, husband of Ailin Graef, better known asSecond Life's real estate mogul Anshe Chung, has withdrawn a complaint filed under theDigital Millenium Copyrightagainst YouTube for copyright infringement, after YouTube allowed clips to be posted of his wife's avatar being attacked by "a barrage of digital flying penises."  The, ahem, "attack" was launched by griefers during an appearance by Anshe Chung in CNET'sSecond Lifebureau for an interview.  Chung is a controversial figure inSecond Lifebecause of her dominance in the real estate market (the Graefs claim over US$1,000,000 in real-life assets arising from the value of their virtual properties, and boast that they currently employ 30 persons full-time in their studio in China to manage Chung's empire) and her omnipresent advertising presence.

Graef told CNET that he withdrew the complaint because "the real issue at hand wasn't at all about copyright," but about the offensive nature of the video and the trauma of seeing his wife's avatar sullied in such a manner.   Graef complained that there was no other way to compel YouTube to take down the video clip, and that theDMCAclaim was a last resort.

YouTube has since taken down the video for violating its terms of service.

An article about the infamous penis attack is available at http://urlsnip.com/347194 .

More coverage at http://urlsnip.com/723898 .

ACTIVISION DEVELOPMENT AGREEMENT WITH SPARK

In an earlier posting , we reported that Activision and new developer Spark Unlimited were involved in a lawsuit regardingCall of Duty Finest Hour. 

Today Gamasutra published a feature on the contract and the dispute. The feature includes some comments from us, and (perhaps more interesting for you) also includes a copy of the actual development agreement between the parties. 
The feature is available here  http://tinyurl.com/wpx8j  (Gamasutra)

DOWNSCALED LEGISLATION PASSES IN DC

Washington D.C. has significantly scaled-back its new video game legislation, called the Consumer Education on Video and Computer Games for Minors Act. Originally the legislation would have prohibited selling M-rated games to minors. This has been dropped due to constitutionality concerns. Now the legislation only requires that a consumer education program be created to help parents understand game ratings. 
Coverage at  http://tinyurl.com/ync9w7  ( GamePolitics.com )

Microsoft, Nintendo And Sony All Named In Patent Infringement Lawsuit

Fenner Investments, a Texas company, has sued all three console makers for violating its patent for a 'Low-Voltage Joystick Port Interface"?. The patent in question was originally developed by Lucent Technologies in 1998 and it is unclear how the patent was ultimately acquired by Fenner.

The law suit does not specify which consoles or controllers are alleged to violate the patent, nor does it set out the quantum of damages sought by Ferrier.

Nintendo and Microsoft have not responded to inquiries about the lawsuit, while a Sony rep has declined to comment on the pending litigation.

Coverage at http://tinyurl.com/yhxj96  (Gamespot)

PRODUCT PLACEMENT RISKS IN GERMANY

(This posting was written by Andreas Lober at Schulte Riesenkampff in Germany.)

Publishers' hopes for additional revenues created through product placement in games get a slash back with some recent decisions coming from Germany.

In Europe, many forms of product placement are currently illegal. While the European Parliament favors a liberalization, the German parliament wants to maintain the strict rules currently applicable in Europe's largest economy. 

A Munich court has decided recently that publishers may have to pay back product placement revenues to the advertisers even if the product placement was provided as agreed. Europeans assume that the customer may be mislead by product placement, which is considered as a form of camouflaged advertising.

Publsihers targeting an international audience are therefore well-advised to consider European legislation when designing the product placement, and when drafting the relevant advertising agreements.

The Munich case number is BayObLG München 29 U 4412/05.

JACK'S BACK!

Florida lawyer and anti-video game crusader Jack Thomson has drafted legislation for Massachusetts to block the sale of violent games to minors. This follows a string of similar legislation that has been declared unconstitutional in other states, including (most recently) Louisiana. 

Coverage here http://tinyurl.com/yao7ph  ( GamePolitics.com )

SECOND LIFE GOES OPEN SOURCE

Second Life publisher Linden Lab has released virtual world's viewer as open source software, and intends to do the same with the server software that runs the virtual world itself. Linden Lab released the viewer software under the open source General Public Licence (GPL), which allows anyone to view, change and distribute source code, but requires anyone who distributes modified software to make the changes available as well. Linden Lab will require programmers to sign a contributor agreement which gives Linden Lab joint ownership of the software; Linden Lab will also maintain control of an official version of the viewer software.

This is a big step in the games industry, as most large game companies prefer to keep their code proprietary. However, Linden Lab believes that Second Life lends itself to an open source approach, and also believes that it still has significant income potential even if software is open source.

Coverage from News.com here .

Linden Lab press release here .

Class Action Lawsuit Over Backdating

The directors and executive officers of THQ Inc (NASDAQ THQI) are facing a class action lawsuit from its shareholders as a New York law firm is looking for plaintiffs in its anticipated class action lawsuit based on their wrongdoing in connection with backdating of stock options.

The firm, Stull, Stull& Brody is one of many law firms whose business is to generate business by starting class action lawsuits on behalf of a defined class of plaintiff. The law firm involved must first identify a class of people who has been the subject to a wrong, obtain a sufficient number of plaintiffs, get the class action lawsuit certified and finally settle the dispute.

The shareholders are only suing the directors and officers as it would not make any sense to sue the issuer as any award taking from the issuer and given to the shareholders would be like taking money from the right-hand pocket and giving it to the left-hand pocket.

If successful each shareholder stand to gain a minor amount but the only party who will really benefit from this action is the law firms involved.

Coverage         www.gamespot.com/news/6162185.html
THQ               http://thq.com/

Another Publisher Suffers From Backdating

THQ Inc. (NASDAQ THQI) has received a warning from NASDAQ that it will be delisted unless it files its quarterly earning statement. As reported, THQ is currently conducting an investigation of its stock option grant practice and THQ will most likely have to restate its financials.

Coverage         www.gamesindustry.biz/content_page.php?aid=21250 and

                        www.gamespot.com/news/6162289.html

THQ               http://thq.com/

Atari's Shareholders Approves Stock Split

As reported in March of last year, Atari received a delisting warning from NASDAQ pursuant to which Atari's stock would be delisted from NASDAQ unless its traded above $1 for more than 30 days.

In November Atari decided to do a ten for one reverse stock split of its stock, which means that each shareholder will receive one Atari share for every ten Atari shares it held prior to the reverse stock split. This does not change the value of the company but increases the value of each share tenfold. On January 4, 2007, Atari's shareholders approved the reverse stock split. 

It will be interesting to see how the Atari stock will fare in the future. Shortly before the reverse stock split, Atari's stock traded at $0.50 per share and theoretically after the stock split the stock should trade at $5 per share. Historically, this has not been the case and typically a reverse stock split has only provided a struggling issuer with temporarily relief as the stock price often will spiral towards below $1 per share shortly after a reverse stock split. However, if nothing else, the stock split will provide Atari's management with time to solve its financial and business problems before the stock dips below $1 again.

We will await the situation in suspense.

Coverage         www.gamasutra.com/php-bin/news_index.php?story=12275

Atari                www.atari.com

Too Many Options?

Activision, Inc. (NASDAQ ATVI) failed to file its quarterly earning statement due to its ongoing investigation of its stock option grant practice and has accordingly been issued a delisting warning.

Activision is one of more than 180 companies which is the subject of a SEC run investigation of backdating of stock options.

Coverage         www.gamespot.com/news/6161835.html

Activision         www.activision.com

Atari Splits Its Stock To Avoid Delisting

As antici[ated, Atari is going to do a reverse stock split in order to bring its stock price above $1 as it is doing a ten for one reverse stock split, meaning that every shareholder will get one new Atari share for every ten old Atari share he, she or it held prior to the reverse stock split.

This will at least for a little while give its management the opportunity to work out its business and financial issues until the stock dips below $1 again.

Such a consolidation requires simple majority at a special meeting of the shareholders, which should not be an issue as Atari's parent hold more than 50% of the issued and outstanding shares of Atari.

Coverage         www.gamesindustry.biz/content_page.php?aid=20891

Atari                www.atari.com

TAKE TWO Completes Preliminary Option Investigation

Take-Two Interactive Software, Inc. (NASDAQ TTWO) ('Take Two"?) has completed its preliminary independent investigation of its stock option grant practice which we reported on last summer and it has found a number of irregularities in its stock option grant practice. Accordingly, Take Two will have to restate its financials all the way back to 1997. The investigation cleared its current CEO and CFO of any wrongdoing.

Moreover, Take Two is the subject of a SEC investigation of its stock option grant practice, which will publish its findings later this year.

Options are granted as a form of future compensation to motivate employees. The idea is to grant an option to an employee, typical a senior officer, to purchase a share of the issuer at a future date at the current trading price of the issuer. This will provide the optionee with an incentive to increase the value of the issuer.

The TSX rules provides that stock options must be granted at an exercise price at no less than the trading price at the date of the grant. The TSX Venture Exchange rules provides that the exercise must not be less than the trading at the date of the grant less a discount of 15%-25% depending on the trading price of the issuer. Otherwise, investors expect that the exercise price is equal to the trading price of the issuer at the time of grant.

The major issues that the SEC has been looking at is backdating of options. Backdating can occur in a number of ways; one way is where the board declares a stock option without setting an exercise price. At a subsequent board meeting, the board sets the exercise price which will be equal to the lowest level in the period. Another way of backdating occurs when the board substitutes the actual grant date with a grant date where the stock price is lower.

Another issue of concern is springloading which means that the issuer grants options prior to the issuer releasing positive information. After the release of the positive information, the stock price will go up and the option will be in the money.

The investigations of stock option practices have mostly been aimed at issuer listed in the US. This does not mean that there are no problems with backdated options for Canadian listed issuers. Canadian listed issuers may be the subject of similar investigations in the future as Canadian listed issuers also have similar or better opportunities to backdate than US listed issuers. The Canadian rules with respect to disclosure of stock option grants are similar to those in the US prior to the implementation of the Sarbanes-Oxley Act which went into force in 2002. Under the Sarbanes-Oxley Act, stock option grants must be disclosed within two days of the grant. It is interesting that most of the irregularities in the US have occurred prior to Sarbanes-Oxley Act came into force.

A TSX listed issuer must report any grant of options to the TSX no later than 10 days after the end of the month in which the grant was made. Moreover, any grant of options to insiders must be filed by the insider no later than 10 days after the grant. This gives a TSX listed company certain room to backdate options.

A TSX Venture Exchange listed issuer has less room to backdate options as it must issue a press release each time it grants options to its directors and officers.

It will be interesting to see how widespread the problem of backdating is in Canada. Research In Motion Limited (TSX RIM) is subject to such an investigation at the moment but it is spearheaded from the SEC as the RIM stock is dually listed at NASDAQ.

Coverage         www.gamasutra.com/php-bin/news_index.php?story=12275
Take Two        www.take2games.com

GERMAN CRACKDOWN

Germany's ratings board has refused to rate the upcoming 360 shooter 'Crackdown"?. As a result, the game cannot be sold to minors, can only be sold in person, and cannot be displayed or advertised in stores. As you can imagine, this decision will seriously impair Microsoft's ability to market Crackdown in Germany.  Crackdown has been rated M by the ESRB.

The German rating board has taken a similar approach to 'Dead Rising"? and 'Gears of War"?, as the country seems to be taking a hard line against violent video games.

Coverage at http://www.gamespot.com/news/6163793.html (GameSpot)

Out Of Court Settlement In Guitar Hero Controllers Suit

Guitar Heropublisher Red Octane has reached an out of court settlement with peripheral maker The Ant Commandos (TAC).  Red Octane was suing TAC over controller packaging, alleging that TAC had engaged in unfair competition, trademark infringement, copyight infringement, false advertising and was out there getting justly enriched all over the place for copying Red Octane's controllers.  Red Octane alleged that TAC's controllers weren't even compatible with the game.  TAC turned right around and sued Red Octane and its parent, Activision, alleging THEY had copied the controller from TAC's controllers for theFreaksseries of games.

So who copied who? We may never know.  TAC has reported to Gamasutra that they've reached an out of court settlement, but the details are remaining private at this point.

Coverage at http://urlsnip.com/773436  (Gamasutra)

Hello Moto? No Halo For You!

In-Fusio is suing Microsoft for wrongful termination of contract amidst accusations that Microsoft is stonewalling In-Fusio's designs for a mobile phone version of superselling videogame title Halo. 

Microsoft terminated its US $2 million deal with French company In-Fusio after In-Fusio failed to pay the second of four $500,000 installments to Microsoft.  In-Fusio has fired back that it HAD to withhold payment after Microsoft refused to approve In-Fusio's game designs with "little or no explanation." 

In-Fusio is seeking damages and an injunction on Microsoft.

More on this story at Games Industry http://www.gamesindustry.biz/content_page.php?aid=21961