As we discussed previously, licensing can be a great way for businesses to profit off of their intellectual property without completely transferring or assigning all of their ownership rights to another party. A license authorizes a licensee to use a licensor’s certain intellectual property rights in specified manners in exchange for compensation. This arrangement allows both parties to exploit each other’s strengths (i.e. brand strength or production methods) for commercial gain. While these types of arrangements can be extremely profitable for both parties, licensors and licensees should have some familiarity with the language of the deal in order to ensure that they are not agreeing to unfavorable terms. This post will discuss the terms common to licensing agreements, and also highlight certain issues that can arise during the course of the contractual relationship.
Grant of Rights
The “Grant of Rights” section is the foundation of any licensing agreement. Here, the contract will identify which parties are involved in the transaction and what intellectual property is being licensed.
Correctly identifying the parties to a licensing transaction should not be overlooked. Oftentimes, a parent company may comprise of a number of entities so it’s important that the drafter makes sure the intended party is accurately described. For example, by entering into a deal with Activison Blizzard instead of the Overwatch League entity specifically, the extent of your transaction may exceed your original intention, as all of Activision Blizzard’s affiliated companies may be granted the right to use the licensed intellectual property.
Additionally, this section should also describe what intellectual property is being licensed. Depending on the purpose of the arrangement, the extent of what intellectual property will be made available can be broad (i.e. all intellectual property) or narrow (specific trademark/slogan). Precisely identifying which intellectual property will be the subject of the license is necessary to ensure both parties are on the same page and not exceeding their rights.
Scope of the Grant
The scope of the grant will dictate how the licensee will be able to use the license. Parties should determine whether the license will be exclusive, restrictive to certain geographic locations or sectors, and the term of the agreement when defining the scope of a license.
Generally, there are three types of licensing agreements: exclusive, sole, or non-exclusive. In an exclusive license, the licensee is only the party that can use the licensed intellectual property. This restriction on use also applies the licensor, which tends to cause these types of arrangements to be the most expensive. If a licensor wishes to continuing using the licensed intellectual property, the licensor should look to execute a sole license. This type of license provides the licensee with the right to continue to use its intellectual property, along with the licensor. In a non-exclusive licensing agreement, the licensee will be able to use the intellectual property, but the licensor holds the right to license the property to other businesses. Licensees will often try to push for some kind of exclusivity in a licensing agreement in order to prevent any potential competitors from also obtaining the rights to use the licensed intellectual property in a defined category, but this will also command a higher cost.
Territory rights must also be clearly defined. Parties will want to clarify where the licensee will be able to use the rights granted during the term of the agreement. Many agreements will grant licensees worldwide authorization, but it is not uncommon for licensors to add geographic restrictions if a licensor wants to reserve those areas for other potential partners in the future. These geographic restrictions can be structured in any fashion, but oftentimes will organized by continent, country, or region. For instance, a licensee may be granted a limited right to use the licensed intellectual property within only North America, or more narrowly, the United States, for the duration of the term. These limitations can get tricky as a licensor could also grant to a party exclusive rights for certain territories and nonexclusive rights in others.
As with any agreement, the term must also be defined in the agreement. The term of an agreement establishes the time frame of the deal. When deciding on the term, parties should be realistic and consider how long it may take for a licensed product to hit the market. A six-month license may not be wise if this time frame does not allow for adequate product manufacturing, distribution, and marketing. Parties should thoroughly consider this in order to maximize returns from the partnership. The Term may also provide for a specified run-off period beyond the initial term itself whereby the licensee can continue to sell off any remaining stock of licensed items/merchandise. This potentially reduces the sunk cost of remaining inventory.
The method of compensation used in these types of deals can vary, but will often take the form of: (1) a one time payment; (2) an earned royalty fee with an annual minimum; or (3) a combination of (1) and (2). By opting to use the one time payment method, the licensing party will pay a flat amount, up front, in order to the use the license for the duration of the agreement. While an upfront payment may be beneficial for a licensor who needs additional capital immediately, generally, parties will elect to use the earned royalty fee structure. Under this structure, the licensor will receive a percentage of net sales on products sold that incorporate the licensed intellectual property (approx. 6 to 10 percent). In order to protect against the possibility of poor sales, licensors may require an annual minimum payment to ensure they receive adequate compensation for the license. These payments can get complicated so parties must make sure to include clear payment terms regarding the timing and frequency of payments, as well as the mode of payment. Parties may also want to consider including language that requires a proper accounting report to accompany any royalty payment that is made. Without this, licensors would have a difficult time figuring out whether the appropriate royalty amount has been paid. Additionally, it is not uncommon for licensors that own famous marks to require both an upfront fee and a royalty payment. This allows the mark holder to capitalize on the fact that its marks are famous.
These rights define the circumstances in which the agreement may be terminated. While licenses will terminate upon expiry of the original term and after the exhaustion of all renewal periods, this section may also allow for parties to terminate the license either with or without cause.
Both parties should seek to include a list of events (breaches or defaults), which may trigger termination by the licensee or the licensor. For example, licensors will want to include language allows them to terminate a licensee if it: (1) fails to pay royalties; (2) fails to maintain licensor’s level of quality control; or (3) files for bankruptcy. A licensor may also want to include the right to terminate the license if a licensee does not release the targeted product to market within a certain amount of time.
Licensees generally have fewer termination rights, as the crux of the deal often relies on their performance. However, in certain situations, licensors may be obligated to advertise the product and conduct promotions. If they do not perform these obligations in an appropriate or timely manner, the licensor may be in breach, thus allowing the licensee to terminate. It’s important to note that agreements should give non-breaching parties the right to terminate, but not force them to do so.
These are only a few of the terms that will be included within a licensing agreement. However, familiarizing yourself with these provisions will provide you with a solid foundation when finalizing the deal. By clearly defining what intellectual property will be licensed, the scope of the rights granted, compensation, and each party’s rights of termination, you will be able to understand critical points of the deal and reduce the likelihood of major problems arising thorough the course for the partnership. Still, licensing agreements can include a number of complicated clauses, so it’s essential that you understand each section of the agreement being executing it. If you have any questions regarding the terms of your licensing agreements, please feel free to contact us.
As we have discussed previously, intellectual property is a core part of every business. Intellectual property encompasses a variety of works including trademarks, copyrights, patents, trade secrets, and propriety data, amongst other things. Assets like a company’s trademarks (i.e. logo or slogan) can be extremely valuable in commercial affairs because, if properly maintained, these rights provide owners with an exclusive right to use and monetize their creations. This means owners have sole control over who is able to use their intellectual property and how it can be used. Oftentimes, intellectual property owners will use these rights strictly for their own monetary gain, but owners can also sell these rights, or uniquely license them to another party.
What is Licensing?
Licensing is a business arrangement where the owner of certain intellectual property rights (licensor) agrees to authorize another party to use such rights (licensee) in exchange for compensation. This compensation can vary in form, but will typically comprise of a one-time, upfront fee or a percentage of all gross or net revenues received from the use of the licensed intellectual property, otherwise known as royalties. One common example of licensing occurs in the retail market, where a company may enter into a retail licensing deal with an apparel company that allows the apparel company to use its trademark (i.e. the licensor’s name or logo) on all types of clothing sold in exchange for a percent of the profits from apparel sales using the licensed mark.
Businesses frequently use this kind of arrangement because it provides them with another way of profiting off of their intellectual property without completely transferring or assigning all of their ownership rights to another party. Through licensing partnerships, a company is able to use the expertise of another business that operates in a different sector, like manufacturing, to reap commercial benefits from that sector at minimal cost. For example, a company that only creates comics books may license its characters to a toy company without having to use its resources on costs or labor associated with the production of action figures. In most cases, the comic book company would not have to take an active role in any of the production, distribution, or marketing of the action figures, and would still receive a percentage of any sales of this product. Licensees welcome these partnerships because they are able to profit off the popularity of the licensor’s brand.
Licensing arrangements are most effective when they are solidified through a written contract. This provides all parties with necessary control and reduces the risk associated with the agreement. Parties in a licensing deal are able to determine when (duration of term), where (territory of use), and how (scope) the intellectual property can be utilized. By defining these terms effectively, a business has the ability to profit from different sectors (i.e. apparel, entertainment, etc.) in an efficient manner. Additional protections can also be added to ensure that a partnership is operating successfully. A licensor may require that certain benchmarks be met in order for the licensee to keep the using its rights. For instance, a licensor can require that the licensee meet a minimum annual revenue target in order to ensure that the licensee is adequately marketing the product bearing the licensed intellectual property. Licensing agreements that include provisions like this may provide for the return of all intellectual property rights to the owner if these goals are not met. These types of provisions can act as added security in the event one side fails to meet certain quality control or performance standards.
Licensing in Esports
Licensing partnerships are especially apparent within the esports industry. Game developers, like Riot, Activision Blizzard, and Epic Games, license their games to tournament organizers through various types of licenses so that these organizers can use games like League of Legends, Overwatch, or Fortnite in their tournaments. Additionally, esports teams will often enter into licensing deals with apparel companies to produce products like performance wear, fanwear, and other accessories. Influencers can also enter into their own licensing deals for branded products. Most recently, Ninja, through his partnership with Red Bull, entered into an exclusive licensing deal with Walmart for the sale of his unique headband. Sponsorship agreements will also oftentimes include language that defines terms of licensing, if any, between the parties as both parties will use of each other’s intellectual property (logo, slogan, etc.) in sponsorship activation. The amount of licensing opportunities within esports is endless and these types of partnerships will continue to make up a significant portion of all business transactions within the industry as it grows.
Any time intellectual property is involved, which is almost always certainly the case, companies will have the opportunity to license it for commercial gain. Through a licensing arrangement, both parties to the transaction can reap certain benefits. Licensors may be able to use a licensee’s production, distribution, and marketing network, while licensees can profit off of the licensor’s brand appeal. Still, while these types of deals seem easy to complete, there are a number of concerns that must be considered before executing a deal. Be on the lookout for a future post where we will address these concerns.
As the esports landscape continues to grow and companies further invest within the space, there is no doubt that the shift towards the professionalization of business practices at all levels of the industry is well underway. This progression is already apparent in that most businesses, teams, and players have started to adopt a more mature outlook on written contracts within the space. For the most part, some type of written contract is now the rule rather than the exception in business transactions, even at the small business and semipro levels. While this approach is positive for the future of the industry since contracts should provide both parties in a transaction with necessary protections, the value of a contract can be in jeopardy if proper business practices are not instituted.
Disputes in business transactions can arise at any level of the deal so it’s important for all businesses (yes, streamers are businesses too) to take steps to ensure that they will be able to protect themselves if a problem were to arise in the future. No one likes to think that when entering a contract, there may be disputes in time, but implementing some simple business practices at the outset of any deal can help make the resolution of any potential dispute easier. Here are some tips that will help prevent problems from occurring, and may assist you down the line if there is ever a contractual dispute:
1. Do Your Due Diligence
While this may seem like an unnecessarily obvious step, research the other party to the deal prior to entering into an agreement with them. Our trusting human nature can sometimes be harmful in newer industries where bad actors look to prey on inexperienced business owners. Unfortunately, esports is no different. There are a number of very public examples (see here) where people have falsely represented who they are or who they work for in order to reap their own gain. For example, someone may represent that they work for a company does not actually exist, have high valued accounts which don’t exist, or represent that they work for a company, when they actually do not, in order to trick a person into entering into an agreement for whatever reason. Doing a quick search of the company or person you are dealing on websites like Google, LinkedIn, and even Twitter, can help you better determine whether the other party is reliable and prevent you from entering into a partnership with people who may be acting fraudulently.
2. Retain All Communications
Keeping a record of all communications (emails, texts, discord messages, etc.) with the sponsor throughout the span of your relationship can also be beneficial if done so in a responsible manner. Maintaining communications from initial outreach, to negotiation, and through the actual term of the agreement, will help provide you with concrete evidence to validate your claim if there is ever a dispute regarding the terms or intention of an agreement. This is especially necessary when communicating orally over the phone or through online voice chats, where details can easily get lost or “forgotten” between the parties. It is always a good practice to send a follow-up email to the other party after discussing anything significant in the manner. Doing so provides both parties with clarity as to what was discussed, which can eliminate any immediate confusion.
3. Retain All Contracts and Corresponding Information
Although written contracts have become more of a standard practice within the esports industry over the past few years, there is still an element of unpredictability that transpires in many of these transactions. Oftentimes, parties will agree to modify conditions of an existing agreement during its term, which can result in multiple separate independent agreements. It is good practice to keep track of ALL of these agreements on file in an organized manner in case of a dispute. This way, if a party tries to argue that it only agreed to certain terms from the original agreement, you will be able to provide supporting evidence proving otherwise. Without having these documents available, it would be much more difficult to substantiate your claims. Importantly, this sentiment also applies to any amendments to a contract. Additionally, it is also helpful to preserve any audit trail from websites where you have electronically signed an agreement. This audit trail can prove to be useful if the opposing party ever tries to contest the authenticity of a signature, which, unfortunately, happens far too often. An audit trail will verify the name of the user that executed the agreement, the date it was signed, and sometimes, the IP address of the signatories.
While these steps may seem basic, it is surprising how often little steps like these are not taken. With so many deals being completed, and frankly, being busy operating the business itself, it is easy for businesses to become unorganized and lose track of every detail of its dealings. Instituting simple business practices like saving all contracts from your email into your hard drive, scanning each physical agreement onto your computer, and sorting/maintaining all communications with contracted parties can save you time and money if a problem were to arise. And as always, do your due diligence before entering into an agreement!
With the recent reports that Call of Duty franchises will be sold for $25 million, now is as good a time as any to take stock of the issues that have plagued the CoD community for years. The franchise system that Activision-Blizzard has created for the Overwatch League is surely portable, at least in part, to their other games. However, the foundation created for OWL benefitted from the fact that Overwatch was a relatively new game, creating a new community unto its own, with little time and means for roots to take hold prior to the league and its academy system forming. That’s far from the case with Call of Duty, with years of a largely unstructured esports ecosystem that has become a Frankenstein of excitement, public contract disputes, sneaker flexes, entire rosters being dropped after qualification, third party tournament systems, and rampant player poaching. The CoD community is truly a unique space in esports, though one that has never risen to the popularity of League of Legends or Counterstrike. At $25 million per franchise, Activision-Blizzard will have the money, and opportunity, to stabilize what has otherwise been an unstable ecosystem in its corner of the esports industry. Having worked with dozens of teams, players and influencers in Call of Duty, here are some of the things I’d like to see implemented to create a more legally sustainable industry:
On November 5th, current and former employees of Riot Games filed a class action lawsuit against the publisher, alleging that Riot denied them equal pay and stifled their careers solely because they were women. Additionally, the two women allege that they encountered constant harassment in a work environment that punished them for speaking up. The complaint contains multiple allegations against Riot including: (1) a violation of California’s Equal Pay Act; (2) a discrimination and retaliation claim in violation of that same Act; (3) discrimination, harassment, and retaliation claims in violation of the Fair Employment & Housing Act; and (4) a claim for failure to prevent discrimination.
This lawsuit comes on the heels of an investigative report published by Kotaku in August that discussed Riot’s toxic working environment and the sexist culture of the company. In that report, Jessica Negron, a former employee and current plaintiff, shed light on her experiences within the company, including multiple incidents of harassment, discrimination based on her gender, and a pattern of pay inequity. In one instance, Negron recounted an experience where she did not receive adequate compensation or a change in her job title after assuming the role of her recently departed manager. After fulfilling the manager’s job duties for a lengthy period of time, management denied her request for increased pay and eventually filled the role with three consecutive male employees.
The complaint reiterates many of the incidents that were written in the Kotaku article and includes additional experiences in detail. In another instance of the alleged toxic work environment at Riot, Negron alleges that a former supervisor expressed his appreciation for the lack of diversity within the company, “because gaming culture is the last remaining safe haven for white teen boys.”
The second plaintiff, current Riot employee Melanie McCracken, described numerous occasions where her coworkers allegedly subjected her to sexism. In one specific encounter with her former supervisor, the supervisor allegedly communicated an outright opposition to hiring women for senior employment roles. The complaint states that the supervisor told McCracken that he would “feel weird having a male” as an assistant. Later, when McCracken filed an anonymous complaint with Riot Human Resources department, the HR employee relayed the encounter to management, which allegedly led to McCracken’s former supervisor advising her that she had five months to find a new position or be fired.
If all the incidents described in the complaint are proven to be true, including class action certification (which is difficult to achieve), it would seem likely that the plaintiffs would prevail on their claims should this case reach verdict. However, many of these kind of cases never reach verdict due to a settlement being reached. Settlement is oftentimes seen as a means of helping prevent negative PR stemming from the lawsuit and its allegations. Nonetheless, the alleged incidents described in the complaint and Kotaku’s article should be deemed a cautionary tale to other companies within the video game industry, which has an unfortunately long history of alleged discriminatory practices.
On September 27, 2018, Nintendo’s blue-shell finally reached the Japanese go-karting company MariCar. The Tokyo District Court ruled in favor of the video game giant and awarded it damages for Maricar’s copyright infringement. MariCar, a popular service in Tokyo since 2011, must now pay ¥10 million (nearly $89,000 USD) in compensation and cease its use of Nintendo-related cosplay to promote its business.
MariCar is a well-known tourist attraction in Tokyo that offers street-legal go-kart rentals to users who wish to tour the streets of the city. The company also gave customers the option of renting out costumes to wear during their go-kart adventure. These options included costumes that mirrored characters like Mario, Luigi, Princess Peach, Bowser, and other characters from the classic Nintendo title Mario Kart, undoubtedly in an effort to make the virtual game a reality for fans.
The game developer filed the lawsuit in February 2017 alleging copyright infringement and a violation of Japan’s Unfair Competition Prevention Act. In its filing, Nintendo stated that MariCar provided users of the service with copyrighted Nintendo character costumes and often posted photos and videos of the customers in said outfits in an effort to promote its business. Nintendo believed the go-kart company’s actions were a violation of Nintendo’s intellectual property rights, since MariCar had been using the characters’ likeness without a license. The Tokyo District Court agreed with Nintendo and ordered MariCar to stop using Nintendo-related outfits in connection with its services and awarded Nintendo the requested amount of 10 million yen. Interestingly enough, the company still offers its customers the option of wearing other character cosplay like Superman and Spiderman – for now.
This lawsuit was not the first time Nintendo legally opposed MariCar. Prior to filing its lawsuit against the go-kart company, Nintendo filed an objection with the Japan Patent Office over MariCar’s registered trademark. In its objection, Nintendo argued that the MariCar trademark beared a striking resemblance to Nintendo’s Mario Kart franchise, and that MariCar directly intended its trademark to confuse the public. Nintendo went on to assert that the public widely interpreted MariCar to be nickname for Mario Kart, much like other abbreviated Japanese nicknames for game titles, such as “Pokemon” for “Pocket Monsters,” “Pazudora” for “Puzzle & Dragons” and “Sumabura” for “Super Smash Bros.” This colorful argument did not appeal to the authoritative body, as the Japan Patent Office maintained that there was no connection between the two trademarks, handing Nintendo a rare legal loss.
Nintendo has a long history of aggressively defending its trademarks and copyrights. The publisher recently opposed a United States couple's “Poké Go” trademark that was intended for use in connection with clothing. Predictably, Nintendo stated that the trademark would be confusingly similar with its Poké trademarks. More recently, the game developer sued a website operator over two websites that allowed anyone to play and download a number of Nintendo games for free. Over the years, Nintendo has shaped the gaming industry through its zealous fights to protect its intellectual property against copyright infringement.
At first it may be hard for passionate Nintendo fans to understand why the publisher has taken such an aggressive approach in defending against copyright and trademark infringement. From their perspective, the Japanese company is simply preventing supporters from living out their fantasies of a real life video game like Mario Kart and stopping others from making its older games more available to the masses. However, Nintendo is only doing what is necessary to protect its property and brands that have taken years, and substantial sums of money, to build. Without opposing similarly confusing trademark registrations, Nintendo, in time, could potentially lose a trademark that it previously held. Additionally, by allowing others to use its copyrights for their own businesses, the publisher would be losing out on creative control over similar opportunities it may have planned to provide at a later date and any profits that would be associated. Still, companies that wish to use Nintendo’s copyrights may do so legally by obtaining a license from the game developer, though the price for a license may be steep. In the mean time, fans will have to wait for Nintendo to make their dreams come true with a theme park containing all their favorite characters.
On September 11, 2018, New Mexico’s Attorney General Hector Balderas filed a federal lawsuit against an app developer and its contracted advertisers for violating the Children’s Online Privacy Protection Act (“COPPA”), New Mexico’s Unfair Business Practices Act, and the Federal Trade Commission Act. The 85-page complaint contains allegations that Tiny Lab Productions, an app developer, operated 91 apps designed for children that failed to adequately comply with COPPA. The complaint states that the developer collected and sold children’s data to advertisers, who then used the data to track and profile the children for targeted advertising without parental consent. Under COPPA, companies must comply with a certain privacy rules before they are able to collect a child’s data, including obtaining explicit consent from the child’s parents. New Mexico also alleges that some of the apps’ advertisers, namely Google (and its advertising company, AdMob) and Twitter (and its advertising company, MoPub,), marketed these apps through their platforms, which gave the public a false impression that the apps were in compliance with COPPA.
The Attorney General is seeking a permanent injunction to prevent any further tracking practices and destruction of any improperly obtained personal data, along with civil penalties for the COPPA violations, and nominal and punitive damages for violating New Mexico’s Unfair Business Practices Act.
App developers and online businesses need to recognize that privacy and data collection practices have become a principal concern for the Federal Trade Commission and Attorneys General throughout the country, especially when it pertains to the collection of children’s data. Website and online service operators should be aware of COPPA and must understand that compliance with it is necessary in order to avoid facing punishment.
What is COPPA?
COPPA is a series of federal laws that was enacted by Congress in 1998 to protect the privacy of children under 13 years old. Congress created the regulations to protect children from unknowingly sharing their data with companies, after noticing an increase of marketing techniques that targeted children. The data that was being collected often included personal information ranging from the child’s first and last name, home address, telephone number, and more recently, files that contained the child’s image or voice, and geolocation information that made it easy to identify the child’s street name and home city or town. Congress recognized that children giving away this information posed obvious dangers, and enacted a list of practices for website and online service operators to implement. Effectively, these practices allow parents to control what types of data operators are able to collect from their children. The Act was revised in 2012 to apply to social networks and smartphone apps as well.
Who does COPPA apply to?
Many people believe that COPPA only applies to commercial websites and online services that are directed to children under 13 years old, but the Act also extends to other operators who collect data from children. Under the Act, all general audience website or online service operators with actual knowledge that they are collecting, using, or disclosing personal information from children under 13 must also comply with COPPA. Additionally, all website or online service operators that have actual knowledge that they are collecting personal information directly from users of another website or online service directed to children will be subject to penalties for not complying with the Act.
The Act defines “online services” in a broad manner that includes any service available over the Internet or that connects to the Internet or a wide-area network. This includes all mobile apps that connect to the Internet, Internet-enabled gaming platforms, and services that allow users to play network-connected games, engage in social networking activities, purchase goods or services online. It also includes Internet-enabled location-based services also are online services covered by COPPA.
How to comply
Operators must make sure they follow these requirements in order to comply with COPPA:
What are the consequences of not complying?
For each violation of COPPA, courts may impose a civil penalty of up to $41,484. Courts look at a variety of factors when determining how severe of fine it should levy. If the operator was not collecting a great deal of personal information and had it never violated the Act previously, a court would be less likely to impose the maximum fine. However, if the operator repeatedly violated COPPA, collected a multitude of personal information, and it was sharing the data with third parties, a court would be more inclined to impose the maximum penalty. The fine amount can quickly add up since each violation is penalized. Last January, VTech Electronics agreed to pay the Federal Trade Commission $650,000 over charges that it violated COPPA by collecting personal information from children without providing direct notice and obtaining their parent’s consent, and failing to take reasonable steps to secure the data it collected.
As data collection and tracking continue to be valuable marketing tools for companies, it is important for these companies to understand that they must comply with certain regulations if they wish to perform these practices and collect data from children under the age of 13. By failing to do so, companies will be exposed to steep fines considering the volume of data that is continuously being collected. Without proper compliance and protections in place, a company may end up being subject to fines that can cause permanent damage to the company. If you have any questions on how to correctly with COPPA, please feel free to contact us.
Due diligence is a critical part of any acquisition. A company looking to buy an asset (any property a business owns) will typically conduct due diligence prior to acquiring the asset in order to determine whether the asset it wishes to buy has been characterized correctly by the Seller. This process consists of a thorough review of all aspects related to the target asset. While it may seem like a tedious task to complete, due diligence is an important part of the acquisition process because it essentially provides the buyer with a complete evaluation of information relating to the asset so as to protect against any misrepresentations made by the Seller. By engaging in sufficient due diligence, companies can further protect themselves from entering into bad deals.
Due diligence can be completed on the acquisition of any asset, including social media accounts. Unfortunately, it can be difficult to determine the ownership rights of digital assets if a company has not instituted the proper protections for this property. Before acquiring these types of digital assets, purchasers should consider a number points in order to make sure they are not getting swindled.
Here are several aspects to consider when evaluating whether to acquire a target’s social media accounts:
Generally, if you believe there are no issues with the target asset after completing this checklist, it is likely that the seller made accurate representations regarding the asset, and you may be more comfortable in proceeding with the deal. However, if any red flags appear along the way, you may want to take a more cautious approach and ask follow-up questions in order to understand the situation. Nonetheless, businesses should keep in mind that each acquisition is different and there are a number of additional factors that should be considered when entering into this type of agreement. If you need any assistance in performing due diligence and completing your acquisition, please feel free to contact us.
As social media and other digital platforms continue to function as successful ways to connect esports brands to consumers, the value of these digital assets continues to increase. Yet, many esports businesses fail to adequately protect these assets by clearly defining the ownership rights of its social media accounts and digital assets. This ambiguity can lead to problems if a hired party who has created the account or digital assets, decides to leave the company, since there is a strong presumption in favor of granting the original creator ownership rights, absent controlling language.
Ownership of digital assets has become an increasingly trendy issue to litigate in recent years, as businesses and their workers have increasingly filed lawsuits to determine who rightfully owns these assets. Most recently, last week, a Virginia newspaper filed a lawsuit against its former Virginia Tech football reporter to determine ownership over a Twitter account used by the employee while working for the media site. While determining ownership rights to digital assets may seem complex, esports businesses can take preventative measures in a variety of contexts to minimize the likelihood of these situations arising.
This type of dispute often occurs in the context of an employer/employee relationship. When hiring an employee, businesses will first enter into an employment agreement with the new employee. This is the first opportunity businesses have to establish protection for digital assets. These employment contracts should include a provision that clearly states that the business shall own any work product (and its associated intellectual property), or anything created by the employee, resulting from the services provided by the new employee. This language would extend company protection to any property created by an employee in furtherance of their employee duties, including the creation of a social media account by an employee tasked to do so.
Businesses can also limit digital asset ownership issues by providing additional clarity in the business’ employee handbook. In the handbook, a company can (re)state its social media and digital asset policy, thereby eliminating any ownership confusion. For example, a business’ employee handbook can state that any account used by employees who participate in social media activities as employees of the company is property of the company. This would likely include social media accounts dedicated to assisting the business’ customers. An effective social media policy will also specify in its employee handbook that employees cannot keep the account if they leave the company, perhaps even further specifying that the account’s password will not be changed, nor will the employee create a confusingly similar account. Employee handbooks may also include protections relating to associated contacts, follower lists, and connections the employee has gained through the account.
Independent contractor relationships are ripe for social media/digital asset ownership issues to arise. Generally in contractor agreements, companies will not own the work product created by independent contractors unless the agreement specifically includes language effectuating that. Companies often mistakenly believe that they own the rights to all work product created by the contractor simply because the companies are paying for the contractor’s services. This misconception can prove to be costly if the ownership rights are not clearly and correctly defined. Nonetheless, these potential ownership issues can be avoided by including a provision in the contractor agreement that affirms that the contractor agrees to assign all rights to the work product created during the course of his services to the company. This written assignment of ownership will effectively transfer any rights the contractor may have had in his work over to the employer. The specific language used in these provisions is integral to properly determining ownership rights.
Ownership issues relating to digital assets as intellectual property may also arise in the context of partnerships. If two partners in a business decide to create a social media account to help grow their business, and one partner creates the account, regardless of who operates the account, it may be difficult to determine ownership rights unless the partnership agreement explicitly lays out who owns this asset. Partners will want to make sure their agreement explains that any work done, or assets, created for or utilized in furtherance of the company’s business shall be property of the company. By incorporating language that makes this clear, these types of assets will belong to the company and will be subject to distribution, as typical of any other assets, upon dissolution of the partnership.
Ineffectively defining the ownership rights to social media accounts and other digital assets may seem inconsequential in the grand scheme of a multi-million dollar business, but overlooking the inclusion of adequate protections relating to this subject can be extremely costly. Both employers and hired parties have initiated lawsuits containing claims ranging from trade secret protection of accounts/contacts to common law theories of misappropriation and conversion against employees who have taken accounts/contacts or passwords upon leaving the company. While it may be difficult to definitively prevent all potential litigation involving digital assets, a clear definition of ownership rights will help all parties understand who owns what and hopefully preclude any problems from arising. No business wants to lose their successful social media account due to its own inability to secure said assets through its contracts and handbooks.
On June 22, ten well-known Twitch streamers had their Twitch accounts suspended after they received DMCA violations for playing copyrighted music during their streams. This is not the first time streamers have had their accounts suspended or terminated for this type of violation, and unfortunately, it likely won’t be the last. Streamers often play music during their stream without a license to so do. While the streamer may be unaware that this amounts to copyright infringement, service providers must take action against the perpetrator once they are alerted of this unlawful activity. Accordingly, streamers should be aware that incorporating music into their streams needs to be done so appropriately, in order to avoid potential account suspensions or legal repercussions. .
What is the DMCA?
The Digital Millennium Copyright Act (“DMCA”) is a United States copyright law enacted in 1998 to protect the interests of both copyright holders and online services providers, like Twitch and YouTube. The Act aims to provide copyright holders with an easier way to protect their work from being used in an unauthorized way online, while also affording service providers with protection from liability that may arise as a result of their users’ unlawful actions. Under the DMCA’s “Safe Harbor” provision, service providers are protected from copyright infringement liability as long as they comply with certain requirements. As long as these requirements are met, the Safe Harbor protection shields service providers from being held directly liable for any copyright infringement committed by their users.
How does it work?
The DMCA’s Safe Harbor provision states that a service provider cannot be held liable for copyright infringement if it:
This means that service providers will not be liable for copyright claims on content that users upload unless they know about the infringing activity and fail to take action by either disabling or removing the content. Since it would be difficult for service providers to constantly monitor potentially infringing content uploaded by their millions of users, service providers usually state the procedure for DMCA Takedown claim on their sites. Copyright holders must include the following information in their DMCA Takedown claim to service providers in order to correctly file a claim in accordance with the law:
Once this claim is received, the service provider must immediately disable or takedown the content with the infringing activity. If the service provider does not immediately disable or remove the content after receiving the DMCA Takedown Notice, it may lose its Safe Harbor protection and be liable for ALL infringing content on the site.
Why is the DMCA important to streamers?
DMCA takedowns are important to streamers because streams usually incorporate a number of elements that are subject to copyright law (ex. gameplay, music, commentary, etc.). Fortunately, most developers allow their games to be streamed by providing a license to do so. However, playing music during a stream is a particularly sticky issue. If a streamer were to play music on their stream without a license to use that music, the streamer is infringing on the artist’s copyright. Streamers must be aware that playing most music without the proper license can have lasting consequences.
What are the consequences of DMCA Takedown Notices?
Most of the time, service providers are responsible for doling out punishments to users who receive DMCA Takedown Notices. Each service provider has a set of terms that apply to their users when dealing with these notices, but oftentimes, services providers will provide users with warnings or strikes against their account for each notice they receive. If a user receives multiple DMCA notices, a service provider will typically suspended, or even terminate, the user’s account. This is a steep consequence for users who have worked long and hard to obtain their following. DMCA violators can also be subject to severe civil and criminal penalties.
How can I prevent this from happening to me?
In order to avoid any DMCA Takedown Notices, content creators should be aware of any copyrighted material that they may be incorporating into their stream. Streamers that want to play music during their stream should utilize a royalty free music service or otherwise obtain a license for any song they’d like to play. There are a number of inexpensive services available that provide users with licenses for a library of songs.
Streamers need to be aware that DMCA violations are serious and can have a lasting effect on their business and brand. In order to avoid any problems, streamers should be conscious of their potential exposure to copyright infringement in their stream, especially in relation to the music they choose to play during their stream. Without the proper license to play the music, streamers are subject to DMCA Takedown Notices, which can result in the termination of their account, and potentially subject them to more serious penalties. If you are streamer or influencer and you have any questions regarding this topic, please feel free to contact us.
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