Level Up: A guide to the video games industry
Level five IP Licensing Arrangements
Video games are often a complex patchwork of several IP rights which are often held by multiple rights holders. To develop AAA games with ground-breaking content, it is often necessary for developers to enter into various licensing arrangements with different rights holders. Such licensing arrangements should be viewed as an opportunity for both parties to develop and monetise their respective IP, however, the terms of each such licence will vary considerably on and will often come down to the commercial positions and bargaining powers of the parties.
For instance, Electronic Arts is well-known for its popular football game series which is branded as "FIFA", the brand being under license from Fédération Internationale de Football Association. However, the company recently announced that it will cease developing FIFA-branded football games by the end of this year and instead continue under a new brand "EA Sports FC". The split reportedly follows disagreements between the parties relating to licensing fees and other commercial terms. With the licence coming to an end, it will be interesting to see the content of any future releases and how fans react to the removal of the FIFA name and brand.
With the above in mind, we wanted to create an all-in-one guide for those that currently operate in or are considering entering the video games industry with the purpose of providing an overview of the life cycle of a video game – from the early stages of development, past the grind of regulatory compliance, through to the final stages of monetising the product. The result is "Level Up: A Guide to the Video Games Industry".
In Level 5 of the Guide, below, we examine the use of licensing arrangements in the video games industry and take a deep-dive into the key considerations and risks to bear in mind when negotiating a licence.
Video games are often a complex patchwork comprising IP rights from many different rights holders, and are a perfect illustration of how the product as a whole can be more valuable than the sum of its parts. However, in order to lawfully use a party’s IP rights, a valid and legally binding IP licence will need to be in place. This could be a stand-alone licence or it could form part of a wider collaboration, partnership, sponsorship or endorsement arrangement, depending on the context.
Some examples of licensing in for developers include:
- IP assignments contained within employment / contractor contracts for the development of the games
- Third-party licences, including: Music; Personal image, likeness or names, e.g., from actors or sports stars; Adaption rights for films or books
- Game Engines
Some examples of licensing out for developers include:
- Publishing agreements – whilst many companies develop and publish the games within the same structure (e.g., Nintendo), it may be necessary for a developer to work with an external publisher to release the game in international markets
- End-user licence agreement – this governs the relationship between the player and the developer / publisher
- Merchandising agreements.
Regardless of whether key stakeholders are licensing in or licensing out IP, they will need to consider carefully a number of factors before entering into any IP licensing arrangement. We set out below key considerations and pitfalls to be aware of:
Consider what IP is being licensed, how it will be used and whether the scope of the licence grants the licensee the necessary rights. For instance,
- Is there any core IP that will need to be licensed (e.g., publishing rights, film rights and footage)?
- Will the IP only be used in-game (e.g., character design, level design) or will it be used out-game too (e.g., merchandise, packaging, trade dress, marketing and advertising)?
- Will the scope of the licence be limited by any other factors (e.g., geographic territory, term, field, exclusivity etc.)?
Consider if the licensor’s IP will be combined with the licensee’s IP or any other third-party IP.
- If so, does the licence contain appropriate provisions to ring-fence ownership of each party’s Background IP?
- Who will own and/control the rights in any Foreground IP?
Consider how the licensor intends to monetise the licensed IP.
- Will the licensor generate revenue from a one-off licence fee or will there be an on-going commitment for the payment of royalties?
- If a royalty arrangement will be in place, what milestones will the royalty be marked against (e.g., commercial sales) and how long will the royalty be in place?
- If the licensor is not the rights holder but a licensee that is sub-licensing the IP rights, will there be any royalty stacking provisions?
Consider if the licensee will need the right to sub-license the licensed IP to other parties (e.g., sub-contractors; affiliate companies) in order to develop and/or commercialise the video game.
- Should the licensor have the right to consent to any sub-licence before granted?
- What obligations will be placed on the licensee to ensure proper performance by the sub-licensee?
- Who will be liable for acts of the sub-licensee?
Consider what termination rights should be available to each party.
- The licensor will want to have stringent mechanisms in place to enable it to terminate the licence if it believes the licensee is in breach of the licence or is otherwise causing, or is likely to cause, damage to its IP and/or reputation.
- In contrast, the licensee will want to push back on any ‘hairpin’ trigger termination rights that could lead to termination for any minor breach and result in a substantial financial loss.
Consider the extent of each party’s liability to the other under the licence. For instance:
- The licensor will want to have comfort that it will be compensated if it suffers any damage due to the improper use of its IP by the licensee (or any sublicensee).
- Likewise, the licensee will want to be protected against any third-party IP infringement claims arising in connection with its use of the licensor’s IP in accordance with the terms of the licence.
- Will the parties provide each other with any warranties or indemnities?
- What will the parties’ respective liability caps be?
Key stakeholders should also bear in mind that certain commercial arrangements may require the parties to cross-license their respective IP to one another (e.g., collaborations, marketing and promotions). The terms of such commercial arrangements will need to be carefully negotiated to ensure that the scope of any such licence is appropriate for the purpose at hand and that the licensor has adequate remedies available in the event of any breach of the licence.
To access the full guide, please email the Talking Tech team.