Business Law Essentials for the Modern Video Game Company.

As a game developer, unless you are working on the new Ace Attorney game, law and lawyers are the last thing on your mind. But no matter how high-tech, innovative, and cutting-edge your product, video games and mobile apps are still a business and there are industry-specific legal areas to consider. Doing it right will protect your investment and ensure that your business grows in the right direction with minimum risk and liability. Artaev at Law specializes in legal issues facing video game and mobile app developers and also has extensive general business experience to help you run your company the right way.

The Fundamentals.

1. Form Your Corporation or LLC.

When starting your business, the first thing to do is to form a business entity. It is important to choose the right type of entity depending on your future goals and needs in mind. For example, if you are planning to solicit investors and venture capital, a Delaware corporation is likely your best option. In other situations, a limited liability company (“LLC”) may be a simpler approach, but at the same time may create unintended tax consequences in the future if you decided to merge, reorganize, or consolidate your company with others. Whatever form you choose, incorporation is critical for all business owners because it creates a separate business entity with its assets and liabilities independent of its owners. A formal business organization also helps address important governance, financial, and succession issues right at the outset.

To officially form your company, you file articles of incorporation (or organization) in the state where you want to be registered. An experienced business attorney can advise you on the right type of entity, as well as the advantages and disadvantages of incorporating in various states (i.e. should you form a Delaware corporation?) Every state requires an initial registration fee, an in-state registered agent to serve as your official point of contact, as well as an annual filing and renewal fee to keep your company current and in good standing.

2. Have an Attorney Draft Your Bylaws or Operating Agreement.

The next step is to have an attorney draft the bylaws or operating agreement. This internal governance document is absolutely critical. It spells out who owns the company, how decisions are made, how money is distributed, how shares are transferred, what happens if an owner dies, and many other important considerations. Even if you are a one-person business, the bylaws or articles of organization are still necessary when you want to open a bank account, obtain a business loan, sell all or part of your business, and otherwise ensure that you are running your business the right way. Having formal documents and procedures, as well as keeping written records of corporate meetings are also critical to maintaining the corporate form for liability protection purposes. Aggressive creditors have successfully argued that a business that does not observe such formalities is a “sham” and that a court should “pierce the corporate veil” to allow them access to an owner’s personal assets.

3. Separate Your Business Money and Assets.

Maintaining a separate bank account and finances for your business is another vital step. Virtually all business problems are linked to money. A separate business finance setup (including a bank account) avoids commingling personal and business funds, which is another circumstance that could expose you to liability. Further, failing to separate business and personal expenses and properly account for distributions creates a very difficult and unpredictable tax situation at the end of the year. For example, if you use personal credit cards for business expenses, make sure to keep records and promptly and accurately reimburse yourself. Also, if you apply for an SBA or other loan, make sure that the loan is disbursed to your business account and not to your own personal account (yes, this actually happened with one of my clients). Otherwise, you are creating an accounting, tax, and legal nightmare – and risking an IRS audit.

Make sure to reserve adequate money for income taxes from any operational income. Also, state and federal taxes must be paid on a quarterly estimated basis, since as a business owner there is no employer automatically withholding taxes from your paycheck. If you have employees, you will need to make sure to pay the appropriate payroll, worker’s compensation, and unemployment taxes. If you do not have employees, self-employment tax is still something that must be calculated and paid periodically.

Finally, on cryptocurrency or “crypto.” If you are planning on using crypto as part of your business, there is a whole separate set of considerations. The IRS considers crypto taxable property, including stablecoins. Taking payment in crypto may be innovative and position your business as “high-tech,” but there are obstacles to using crypto instead of fiat currency in running your business. For example, even if a vendor allows you to pay them for goods or services in crypto, each transaction is a taxable event. The IRS considers you to have sold crypto and incurred capital gains tax liability each and every time. There are also state and federal laws that preclude you from paying wages in crypto, but bonuses and other discretionary pay are another story. Crypto may have promising implications for the future, but there are many practical obstacles for business owners interested in integrating crypto into their day-to-day business.

Intellectual Property.

Intellectual property or IP law is of paramount importance to game developers and designers. On one hand, you want to protect your own creations and inventions against unscrupulous competitors seeking to copy your product. On the other hand, you have to be able to protect yourself from others’ IP claims, including DMCA copyright takedown notices and cease-and-desist letters.

Intellectual property generally consists of three main categories: (1) patent; (2) copyright; and (3) trademarks.

1. Patents.

Patents are most often associated with scientific discoveries and mechanical devices. In the video game context, a so-called utility patent may be available to protect a game’s unique mechanics or a specific gameplay methodology. The protected design must be unique and non-obvious. But patents do not protect the code itself, the game concept, or idea. For example,, a leader in the real-money skill-game market, has over 50 patents, including a patent for technology that ensures fair and level asynchronous play. Skillz does not have a patent for any specific game played on their platform and in fact, there are a lot of copycat apps on the Apple App Store that are essentially the same games as those available through Skillz. The downside of patents is that patent protection is fairly expensive to obtain and to police, involves publication and public disclosure of the technology, and may even be waived by playtesting certain concepts.

2. Copyright.

Copyright law protects creative works like books, movies, music, and yes, video games. The underlying code for a game is also protected by copyright and pirates who illegally copy the code and sell copies of the game are violating federal copyright law. Most recently, copyright claims have come up in the context of streaming and whether streamers are allowed to use certain music and other creative elements during their broadcasts.The creative concepts – or the “theme” of the game – are also protected. This means the storyline, the characters, art, music, box design, and other distinct creative and thematic elements. But not everything is protected by copyright.

Distinct from the “theme” of the game are the game mechanics, which cannot be copyrighted. “Game mechanics” is the actual gameplay – this can be as simple as moving the joystick to move an avatar around in a virtual environment. The United States Copyright Act codifies this concept and expressly states that copyright protection does not extend to “any idea, procedure, process, system, method of operation, concept, principle, or discovery, regardless of the form in which it is described, explained, illustrated, or embodied in such work.” 17 USC 102(b). The distinction between the copyrightable theme and the non-copyrightable game mechanics is not always clear and there may be some overlap. Additionally, the concept of “fair use” protects certain commentary, criticism, and parody from an infringement claim.

3. Trademarks.

Trademark protection exists chiefly to prevent customer confusion and to protect the integrity of a brand. In the video game context, trademark will primarily protect the name of the game, but can also protect unique “trade dress” elements that constitute unique menu or box designs, or user interface elements. A trademark can also protect a slogan or recognizable phrase associated with a game.

Trademarks are relatively easy to obtain and the USPTO website allows you to search for existing trademarks to ensure that your branding does not infringe on existing products. Trademarks also vary in strength depending on whether they are more generic and descriptive, or unique and arbitrary. For example, the game name “Grand Theft Auto” is also the term for a certain felony associated with vehicular theft. The name literally describes a core game concept (stealing cars), so it would be considered either a “suggestive” or “descriptive” mark. On the other side of the spectrum, an entirely unique “fanciful” or “coined” mark enjoys the strongest protection – for example the terms “Skyrim” or “Warcraft” (at least arguably) do not have any other meaning outside the game context.

4. Other Intellectual Property Issues.

The most two common questions facing game developers are: (1) How can I prevent someone from copying my game? and (2) How do I avoid getting in trouble for copying someone else’s game? While you may have taken steps to protect your intellectual property, the fact is that games are especially vulnerable to knockoffs and plagiarism. International law may even become an issue if an overseas company takes and repurposes your idea. By hiring an attorney as part of your team, you can ensure that you have taken the right steps to obtain copyright protection for your user interface, graphics, art, etc., and that you have properly registered your trademarks. An attorney can also ensure that any contractors – such as artists, coders, or composers – properly assign all rights back to the game developer through “work for hire” agreements. Licensing agreements with any publisher must also delineate the rights and responsibilities of all parties. Royalties and assignments must be fair, clear, and definite. If you have a co-designer or a business partner, you must absolutely have a business agreement before your idea starts making money, so there are no surprises or hard feelings. If there are copyright concerns or knockoffs, a DMCA takedown notice or demand letter is often an effective tool to dissuade would-be thieves. Conversely, if you are receive a takedown notice or demand from another designer, you need to have an effective and prepared attorney ready to respond.

Regulatory Concerns.

Most game developers are not going to encounter regulatory issues or attract the attention of state or local prosecutors. However, if you are considering real-money play (such as skill games) you will need a legal opinion as to where your game may be offered. Payment processors, advertisement platforms, and distributors may all require additional information and assurances as part of their internal review and approval process.

Finally, if you are distributing internationally, you need to be aware of the region-specific laws and regulations. Some regions are more friendly to gaming than others – for example, real-money skill-games are popular and abundant in India, but there is no uniform national-level law. Hong Kong is a haven for real-money gaming, yet at the same time, China does not allow them. Plus, there are international tax treaties and financial regulations to navigate.

Whatever your game and whether you are a veteran or just starting out, an experienced gaming attorney can be a great asset to your business.

Contact Artaev at Law PLLC to set up your initial consultation. We are Michigan’s gaming law firm and we specialize in the unique concerns that you may encounter as a game developer.

Disclaimer: This guide is for general informational and promotional purposes only. Nothing herein constitutes legal advice. Every situation is different and faces its own unique set of challenges. Do not take any action or sign any contract until you have obtained specific guidance from a qualified professional.

© 2021 Artaev at Law PLLC. All rights reserved.

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