Don’t Play with the Law

1. Don’t Play With the Law Legal Aspects of Serious Games Presented by: James Gatto Co-Leader of Games and Digital Media Team Sheppard Mullin jgatto@sheppardmullin.com 226875966.1 © Sheppard Mullin Richter & Hampton LLP 2016

2. A bit about me • • Partner in the firm’s Intellectual Property Practice Group – DC Co-Lead the firm's Digital Media Team and its Social Media and Games Team Over 30 years experience – developing and implementing IP and other legal strategies, assessing legality of innovative business models; negotiating business agreements and handling litigation; patent licensing, litigation and sales Represent Major Game companies as well as start-ups I advise clients on key legal and business issues relating to the use of social media, video games, social games and online gambling (gamblification), virtual goods and currency, blockchain, social networks, virtual worlds, augmented reality, virtual reality, user- generated content, and gamification VSGI Executive Advisory Board • • • •

3. And my firm Sheppard Mullin is a full service Global 100 firm handling corporate and technology matters, high stakes litigation and complex financial transactions. From our 15 offices in North America, Europe and Asia, we offer global solutions to our clients around the world, providing seamless representation in multiple jurisdictions. 750 attorneys Strong practices in entertainment and technology; about 100 IP attorneys

4. Serious Games Games and Gamification

5. Gamification The use of game mechanics for non-game purposes to encourage and reward/incent desired user actions - motivate participation, engagement, and loyalty  free stuff (coupons. discounts, etc)  exclusive content  loyalty programs  UGC  Contests/Sweepstakes  Much more  leader boards  points  Levels  Status (experts)  badges

6. Gamification leverages people’s desire for: competition – leaderboards status – levels, badges, expert status achievement – progress bars Free stuff – give aways, redeemable points Being right – voting, predicting winning – gamblification! 6 | Gamblification!

7. Gamblification Use of gambling mechanics for non- gambling purposes – provide chance to win to incent user actions 7 | Gamblification!

8. Striking a balance User Experience & Business Opportunities Protect Assets/Users & Avoid Liability

9. Some Legal Issues with Games and Gamification

10. IP Protection for Games Own It! Patents -Absent an agreement or other legal obligation, patents are owned by the inventor Copyrights -Generally owned by the author

11. IP Protection for Games OWN IT! Ensure you own the rights you think you do - Get assignments in writing Founders? Work for Hire? Developers? Consultants? Publishers?

12. IP Protection for Games Own It! Be careful with the rights you grant to developers/publishers – exclusives – right of first refusal – geographical rights – adaptations, sequels, etc.

13. IP Protection for Games Identify it! Games combine - Interactive, functional aspects - creative, artistic aspects Both types are protectable To protect IP you must identify it first

14. IP Protection for Games Identify Your IP! Patents – Interactive, functional aspects (Game mechanics, game play methods, hardware, Processes, graphics generation techniques, UI features Much more); and design patents Copyright – creative, artistic aspects (UI and code) Trademark – name/characters Trade Secrets - algorithms, data, etc

15. IP Protection for Games Protect it! To maximize protection… Develop Comprehensive IP Strategy - That protects all types of IP You Generate!

16. Patents Strongest form of protection for game mechanics  But you must file for protection!!!  You have One Year (or less)!

17. Patents In general terms:  a “utility patent” protects the way an article is used and works (35 U.S.C. 101) a "design patent" protects the way an article looks (35 U.S.C. 171).

18. Design Patents Apple – Slide to Unlock

19. Copyrights You have protection from the time you create the work…. but get benefits if you promptly file  Attorneys fees  Statutory damages

20. Trademarks You have protection from the time you use the work in commerce…. but get benefits if you file for a federal registration Can file intent to use

21. Trade Secrets Must take reasonable steps to protect the confidentiality

22. IP Protection for Games Repeat! IP Protection is an ongoing process…not a one time event!

23. I’ve heard you cant patent software/games. Is that true?

24. Game Patent Eligibility McRO, Inc. v. Bandai Namco Games America Inc. (Fed. Cir. 2016) • Patentee McRO sued video game developers and publishers for alleged infringement of U.S. Patents 6,307,576 and 6,611,278 • Patents related to generating automated lip-synchronization and associated facial expression for 3D animated characters

25. Game Patent Eligibility The defendants sought to invalidate the claims as allegedly being directed to ineligible subject matter under 35 U.S.C. § 101 (abstract idea) District Court agreed and said not patent eligible Federal Circuit Court of Appeals overturned the district court – found the invention to be patent eligible!

26. Game Patent Eligibility • The claimed improvement is allowing computers to produce accurate and realistic lip synchronization and facial expressions in animated characters that previously could only be produced by human animators • The computer automation and the prior human-performed methods are different • The computer automation is realized by improving the prior art through the use of rules, rather than artists, to set the morph weights and transitions between phonemes • Processes that automate tasks that humans are capable of performing are patent eligible if properly claimed

27. Patents - Strategy If claims are not properly drafted, this can adversely impact whether you can prevail in the enforcement of your patent Many patent attorneys that prepare and file patent applications do not get involved in enforcing patents Patent examiners not trained on infringement Not all patent attorneys understand the nuances of game technology and business methods These facts can create problems

28. Patents - Strategy Need to assess patentability at multiple levels and from multiple perspectives (methods, processing, systems, components, tools, features, functions, etc.) It is critical to develop a comprehensive patent strategy consistent with your business model Need to understand various ways in which you can claim an invention and the ramifications of different ways in which patent claims are drafted

29. Game Patent Eligibility Key Takeaways 1. Software/Game Patents – still very viable…if done right! 2. Key to Patentability – how you claim an invention matters 3. Experience with Game Patents - is critical to maximize likelihood of getting a patent You have to know what is and is not patentable You must do it right or don’t do it at all Otherwise your are just wasting money

30. Video Game Patents

31. Class 463 – Video Game Patents

32. Game Patents Growth in many aspects of game patents Game mechanics Gamification Monetization mechanics Esports Hybrid – skill/chance based games AR/Location-based games VR games/VR Arcades Much more

33. Patents Have Real Value Swtich2 Health patent sale to Fitbit

34. Isnt it cheaper just to rely on copyright protection?

35. Copyright Infringement • Nintendo v. Elcon, 564 F. Supp. 937 (ED Mich 1982)

36. Copyright Infringement? Golden Tee lost! • Functional aspects not protectable by copyright • For functional aspects, consider patents

37. Patent Strategy It is highly advisable to consult with a patent attorney who: Understands the scope of patentability for games Who handles patent licensing, litigation and sales Can provide proactive advice on the patentable aspects of your games/technology/business model Work together with you to develop and implement a comprehensive IP protection strategy Help you monetize your patents

38. Virtual Currency Federal & State Regulations Other Legal Issues Virtual Currency Business Models

39. Points/Virtual Currency Points can function as:  Virtual currency  Stored value  Gift cards 39 | Gamblification!

40. Points/Virtual Currency What other issues can arise with points/virtual currency? When do they have “value” Do users own them? 40 | Gamblification!

41. Points/Virtual Currency Incent users to take action by awarding points for recommending product/service Can this trigger a need for compliance with the FTC Endorsement Guidelines? The Guides say if there’s a connection between an endorser and the marketer that consumers would not expect and it would affect how consumers evaluate the endorsement, that connection should be disclosed. 41 | Gamblification!

42. Example 1 A college student who has earned a reputation as a video game expert maintains a personal blog where he posts entries about his gaming experiences. Readers of his blog frequently seek his opinions about video game hardware and software. As it has done in the past, the manufacturer of a newly released video game system sends the student a free copy of the system and asks him to write about it on his blog. He tests the new gaming system and writes a favorable review. Does this require disclosure?

43. Example 2 A young man signs up to be part of a “street team” program in which points are awarded each time a team member talks to his or her friends about a particular advertiser’s products. Team members can then exchange their points for prizes, such as concert tickets or electronics. Does this require disclosure?

44. Example 1 – video game blogger From FTC Guidelines: Because his review is disseminated via a form of consumer-generated media in which his relationship to the advertiser is not inherently obvious, readers are unlikely to know that he has received the video game system free of charge in exchange for his review of the product, and given the value of the video game system, this fact likely would materially affect the credibility they attach to his endorsement. Accordingly, the blogger should clearly and conspicuously disclose that he received the gaming system free of charge. The manufacturer should advise him at the time it provides the gaming system that this connection should be disclosed, and it should have procedures in place to try to monitor his postings for compliance.

45. Example 2 – points for endorsing From FTC Guidelines: These incentives would materially affect the weight or credibility of the team member’s endorsements. They should be clearly and conspicuously disclosed, and the advertiser should take steps to ensure that these disclosures are being provided.

46. FTC Endorsement Guidelines Comprehensive - Covers consumer testimonials, such as reviews or recommendations endorsing a product or service on any social media site, not just blogs Disclosure - Need to disclose material connection between endorser and advertiser – anything of value, including payments, free stuff, points! Burden - Need to advise the consumer giving the testimonial that this connection should be disclosed, and have procedures in place to try to monitor the consumer's postings for compliance 46 | Gamblification!

47. FTC Endorsement Guidelines - "expert" endorsements  Another aspect relates to "expert" endorsements  Whenever an advertisement represents, directly or by implication, that the endorser is an expert with respect to the endorsement message, then the endorser's qualifications must in fact give the endorser the expertise that he or she is represented as possessing with respect to the endorsement.  May be relevant to status/levels

48. Does this stuff really matter?

49. FTC Endorsement Guidelines - Enforcement Employee Posting Reviews A public relations agency hired by video game developers agreed to pay $250,000 to settle Federal Trade Commission charges that it engaged in deceptive advertising by having employees pose as ordinary consumers posting game reviews at the online iTunes store, and not disclosing that the reviews came from paid employees working on behalf of the developers. The company also agreed to set up a monitoring program to ensure compliance going forward. 49 | Gamblification!

50. FTC Endorsement Guidelines - Enforcement Paid Marketer Needs to Disclose A company selling a popular series of guitar-lesson DVDs agreed to $250,000 to settle Federal Trade Commission charges that it deceptively advertised its products through online affiliate marketers who falsely posed as ordinary consumers or independent reviewers. According to the FTC release:  The Learn and Master Guitar program promoted by Legacy Learning and Smith is sold as a way to learn the guitar at home using DVDs and written materials. According to the FTC's complaint, Legacy Learning advertised using an online affiliate program, through which it recruited "Review Ad" affiliates to promote its courses through endorsements in articles, blog posts, and other online editorial material, with the endorsements appearing close to hyperlinks to Legacy's website. Affiliates received in exchange for substantial commissions on the sale of each product resulting from referrals. According to the FTC, such endorsements generated more than $5 million in sales of Legacy's courses.  "Whether they advertise directly or through affiliates, companies have an obligation to ensure that the advertising for their products is not deceptive," said David Vladeck, Director of the FTC's Bureau of Consumer Protection. "Advertisers using affiliate marketers to promote their products would be wise to put in place a reasonable monitoring program to verify that those affiliates follow the principles of truth in advertising."