Panopticon Labs: Tell us what it is that you do, Jim.

Jim: I head the social media and games team here at Sheppard Mullin. In that role, I lead a team of about 70 people who focus on all legal aspects of games and social media. Everything from basics of corporate formation, finance, and MA. We do a lot of intellectual property and strategy and help companies with their business models to make sure they are legal, privacy policies, terms of use, EULAs  and the rest of the gamut. It’s very fun, we get to work with a lot of cutting edge companies and cutting edge legal issues.

PL: As a lawyer who works with IP and issues related to virtual currency, what do you think is the main threat that you see the industry experiencing from fraud and risk?

Jim: Mainly from issues related to in-game cheating and collaboration type stuff and gold farming and second markets depending how the game is designed. Cyber security is a huge issue for everybody including the game industry and I think it really hasn’t gotten the attention that it probably should get.

PL: Why do you think that is?

Jim: I think that it’s a lack of focus, There’s so much focus on getting the game out, and monetizing it, that the idea of keeping your money and making sure you’re not vulnerable sometimes doesn’t get top attention until there is an issue.

PL: So that’s a great lead in to my next question, because as you know in December of 2016 the FBI successfully convicted a ring of thieves that were stealing FIFA virtual currency, then reselling it on authorized websites. In that case, the FBI sought and won a conviction for wire fraud against them. Why do you think they chose to pursue that specific charge against them?

Jim: Well I don’t know for sure, but in general when dealing with virtual currency that’s typically a type of contractual issue between the game publisher and the players. There are contractual rights, and generally a terminable license. So if a game company is going to go after a player it is typically going to be under a contract theory, unjust enrichment or some other form of contract or tort law. For the feds it is interesting– a lot of the federal statutes that give the feds enforcement power over different types of crimes– some of them are just very general. You know, like wire fraud, that is pretty encompassing. If you commit a crime you’re using the wires, so I think in general, from my understanding and talking to federal agencies, they’ll usually look at the facts and the available laws that are out there, then figure out which fits best. And you know, in that case, it obviously seemed to work.

PL: So now that a law enforcement agency has actually won a conviction do you think that we will see more of this happen?

Jim: Anytime you have a successful enforcement it always leads to the possibility of more. I think a number of things have to come together. One is that when you see a successful enforcement, it raises the awareness and acts as a deterrent for people who engage in similar behavior. Some people, of course, will always be undeterred and will continue to go and do similar things,  and to the extent that they do, I think it will give the feds the confidence in the right circumstances to use that again or other statutes that might be appropriate.

PL: Over the past year or two we’ve also seen more video game companies going after toolmakers, programmers that build cheat tools. In those cases, though, publishers seem to favor using copyright violation lawsuits to fight back. Is that a civil case? Or is that criminal?

Jim: Well there can be criminal violations for copyright and other forms of IP, but generally those are civil. What’s interesting in those cases is that there is a range of issues. For some, you say copyright, for some of the cases I’ve heard recently for example are ones that, under the DMCA, or Digital Millennium Copyright Act, there are certain provisions that relate to anti-circumvention of protection of copyrighted works. So that’s been one tool that’s been used in that context. In other contexts, there may be situations where there is literally copied content or code and you can have a direct copyright infringement claim. But often you’ll see a range of charges that are levied–civil charges that are brought in these types of cases. Take Blizzard for example: for years they went back and forth with MDY, a company that was creating bots to level up and sell accounts. Through a variety of legal claims, technology measures and well-crafted terms of use, they largely prevailed.

There’s also unjust enrichment and other business tort type claims that say it’s unfair for you to level up when people are actually playing, grinding, and earning their way up. Additionally, it adversely affects our game…because if someone has to grind to get to a certain level and they’re playing against someone who just bought into that account that was botted up to that level; it takes away a bit of the competitiveness. So there’s a whole range of issues that come into play. Those are just some of them but it can cover all that and more.

PL: You mentioned Blizzard Entertainment; they recently stated that the reason they’re going after damages for cheat toolmakers was because their actions were causing ‘tens of millions of dollars in irrevocable damage’ every year that their activities are allowed to continue. Given that publishers are claiming such large damages from these activities, what does a game publisher or operator need to do to prove that in a court of law? What would they have to do to prove that those damages are just?

Jim: So the first step is proving some kind of liability under one or more either contractual or tort claims that we talked about. Then, depending on which claims you win, there’s different measures of damage for those different claims. It’s pretty fact-specific, but if you’re trying to show lost profits or unjust enrichment, you typically get a damage expert and they do an analysis, but I’ve never seen two damage experts come out at the same place – there is a science behind it, but there’s also a lot of subjectivity. So if you go through a court case there’s always the battle of the experts. But you need someone who can lay out a thoughtful analysis based on the facts and the proper legal tests and come up with some number that’s defendable.

The other side can, of course, try to come up with a different number, and in those cases lot of times it comes down to a jury deciding who they believe more. Do they split the baby?

Then there’s other measures of damages too. In some cases, you can get up to triple damages for certain types of tort claims and/or attorney’s fees so there’s different measures of damage, but you can’t just plug it into a formula and say “here’s our number”; it’s trying to show, you know, when you’ve lost players, or lost revenue from players. What would they have spent? You’re always trying to predict the future and there’s always some subjectivity in that so it makes it a little bit challenging.

PL: On the issue of proving liability: based on your experience, what kinds of data do operators need to collect to do that?

Jim: Well as far as the liability it’s looking at the actual actions and saying “is what this person or company did illegal” under any of the things we’ve talked about: contract law or copyright law, anti-circumvention, unjust enrichment or some tort theory? So you look at the elements of what those different legal claims are and whether the facts of what actually occurred fit within it, and if you can prove one or more claims then you have a finding of liability. At that point the question becomes: under these different types of statutes, or different tests for damages in some cases, in some cases it’s lost profits, what you would have lost, in some cases it’s what the actual infringer actually made. There’s an equitable theory about what’s kind of fair and punitive [actions will] deter this type of action, [leading to] a whole range of tests under the different legal possibilities.

PL: What, exactly, is a ‘Terms of Service violation’? Are there any legal penalties associated with breaking one?

Jim: So the short answer is the terms of service are primarily a contract, and breaking one is breach of contract–that’s the short answer.

The contract is if you’re providing a service, you’re enabling people to access your service subject to certain terms and conditions, which is the terms of service. So there’s permissible uses and there may be things that are specifically called out as being improper, or that you can’t do under the agreement. There may be general categories of things, like anything that may defraud other players or impairs the integrity of the game. Sometimes it will be general, sometimes specific. And so you put those in there to protect both the operator of the service–it’s to protect them but also to protect other players, to make sure people can’t defraud them or adversely impact the game play.

The ramifications for breaching [that contract] can vary depending on what the breach is. For example, with virtual goods and virtual currencies, typically you have a license, and the license is granted in the terms of service. But it’s a revocable license. So if you violate the terms of service in some way they can terminate your license to virtual goods or virtual currency so you have no access to them and no recourse and no compensation due for what you would have had. So that’s kind of one remedy–they can terminate your account, they can ban you from playing or suspend you from playing for a period of time.

Publishers may also choose to seek remedies in court for breach of contract, and seek contractual damages as alluded to earlier. To the extent that there’s copyrighted material involved, generally, there’s a very limited copyright license that goes with terms of service. Primarily to use the service for it’s intended purpose. If you start taking content and using it for other purposes, or re-publishing it, that could be a straight out copyright infringement, in addition to breaching the contract, or a trademark infringement for taking trademark items. So again depending on the facts there can be a range of issues under contract law or other legal theories.  

PL: In December of 2016 the South Korean government actually went a step further with Terms of Service violations – they actually passed a law in South Korea that made violating, specifically terms of service, an actual criminal offense. Do you think it was a good idea for them to escalate TOS violations from a civil to an actual criminal issue?

Jim: I have mixed thoughts about it. I think in general it’s good; now it has teeth. The problem is I’m not as familiar with the regulatory environment in Korea, and whether or not having that law they will actually enforce it, which is always an issue. There are a lot of federal laws [that are] violated, and the feds just won’t enforce them here, so I don’t know if having those types of provisions will be any sort of panacea. We have [similar laws] here with trade secrets, for example: there’s certain types of intellectual property infringement that are actually criminal here, but it can still be kind of hard to get law enforcement agencies interested. If it’s just about a little bit of money with one party – if someone is not actually laundering money, or engaging in some kind of wider pattern of misconduct – you have certain criminal provisions but sometimes it’s hard to get the enforcement. So, I think it’s good to have that as a fall back. In most cases, however, if someone is doing something egregious enough, there’s going to be some kind of general criminal statutes that apply anyhow, like wire fraud so I don’t know how effective it is.

I think it’s a great PR thing, but in reality you just have to see how the data plays out and how many enforcements there really are.

PL: What you say about enforcement kind of plays both ways, though, right? For example, we know that there’s usually a certain amount of unwanted behavior that occurs in-game that, while harmful to good players in the long run, the operator just figures it’s not worth their time fighting back against. Do you feel there’s a limit where they just can’t really turn a blind eye to it anymore? Is there a line in the sand that they all kind of see, or is it very subjective?

Jim: It definitely varies but it’s a great question. The problem with a minor copyright violation, is that when someone takes a character and prints a shirt, they do it for their own personal use, are you really going to try to stop that? Probably not. But if someone starts doing a wide scale production of products with those same video game characters, then you will want to shut that down. The problem is with some of this stuff, typically the copyright infringement, is that sometimes the damages are not enough to offset the legal fees required to do the enforcement, and sometimes that’s okay. But from an individual scenario from trying to make a business decision like- should we go after these guys that are doing this or not? It’s quite hard.

Under copyright law, one of the things that still amazes me, is that companies dont always timely file their copyright registrations. If you register copyrights before you publish your goods, and before there’s infringement, you can often get statutory damages and attorney’s fees. With statutory damages, you don’t do that you have to prove your actual damages. If you can get statutory damages, it’s not your actual loss. Rather, a court can award up to $150k in damages per infringement as a deterrent, and you can get your attorney’s fees. So the money can be much more significant if a IP holder registers their copyrights in a timely manner, but they don’t always do that. So there’s a practical tip you should encourage people to do; it’s pretty cheap (copyrights are like $35 and you can file online), it’s pretty easy, and you don’t really need a lawyer for most of it once you’ve done a few of them.  

PL: So when do you normally see people file their copyrights? Are they doing it sort of when they go to the publisher or are you seeing the developers actually doing that early?

Jim: It varies. Under copyright law you don’t have to file a registration to get protection unlike patents which you have to file and actually get the award. You have copyright protection from the time you create something and fix a tangible medium–and many people realize that and think, okay if I ever have to go sue somebody, I can always file a copyright and then go sue, there’s not really like a time bar to get the copyright. Some people just don’t do it. But if you do it in a timely way there’s an additional upside, it’s amazing the number of companies that just don’t do that. More of the sophisticated companies understand it and do it but some of the smaller developers and publishers just don’t deal with it.

PL: If an operator wanted to file a copyright challenge, what would they typically be looking at in legal fees?

Jim: It really depends, and again that’s kind of a general answer too but you know, what we’ll typically do is we’ll do some investigation and make sure there’s a valid claim and figure out what claim(s) there are.

The typical first step is to write a letter, because sometimes people do something and they’re not aware that it is a problem, and sometimes they’ll stop. For people who are knowingly violating the law, sometimes one well worded letter with legalese from a big law firm will deter them. But some of these people, they know what they’re doing is illegal, and they just don’t care: they’re judgement proof, they’re not here in the US, so they know it can get more expensive to file a lawsuit. In some cases you get a default judgement and they just don’t show up, and you kind of get your liability by default and then you have to convince a court what appropriate damages might be. Then you have to try to enforce that, and whether someone is judgement proof, or whether they’re not here, that can be kind of difficult.

In some cases though like the MDY cases with Blizzard they tried to challenge it, they tried to say no this is not illegal, so there were some mixed results along the way. It was a cat and mouse game and ultimately I would say that Blizzard won and they prevailed. I didn’t handle those cases for them but in the end a lot really depends on what the response is from the party that is doing the wrong, and whether it’s going to be a few thousand dollars or a few million dollars.

PL: If you could go back in time and tell your clients one thing that would really make your life easier in representing them and their interests, what would that be?

Jim: Well, I’d say that it’s really critical to get a detailed legal review of your game before you launch it; that will ensure you get the right terms of service. More preferable, get an initial legal review early on in the design process to flag any big legal issues before you spend the time and money to build it.

People sometimes look at terms of service as just boiler plate and copy some other game company, you know like ’if xyz game company has it, then it must be good enough for us.’ But each game is different, and your terms of service need to be tailored to what you are doing. You want to look at your IP protection strategy right? To the extent you have novel game mechanics? Try to patent it. To the extent you’re using copyright material? File copyrights on either the game as a whole or the individual elements like characters etc. that may have independent value outside the game. Protect all that and your trademarks. If you are using any third party assets in your game, get the rights necessary.

Also, make sure to the extent that you’re doing something, let’s say there’s a kind of gambling mechanic in your game. Make sure that you’ve gotten that vetted and make sure that it’s legal. What we try to do with companies is to sit down and do a legal review. Depending on the nature of the game, we’ll probably spot issues that maybe they’re not aware of, then make sure they’re looked at and, if necessary, take the appropriate legal actions. You know, just do it right from the beginning.

With small game publishers sometimes it’s hard. It doesn’t take that much to identify the issue; sometimes clients will come back and say, “we understand that, we understand that there’s some risk there but we are willing to take that risk.” If it’s an informed business decision, that’s fine, but if you just don’t even think about the issue and you kind of get tagged with gambling or something else, it’s very preventable.

PL: Gambling issues are actually really interesting to me. For example, I’ve been following the Valve Steam Stealer saga, and in that case, Valve had created a random number generation systems to create in-game loot boxes as player rewards, which then ended up fostering a massive secondary market supported by, essentially, online wagering. That gray market was not an official part of their games, but people participating in it were selling and exchanging Valve’s virtual assets, thereby creating massive revenues for these bad actors. Eventually, the State of Washington actually demanded that Valve do something to stop these activities, even though online wagering was clearly not an authorized use of their IP. Do you agree with the assertion made by the State of Washington that Valve bears some responsibility for actions taken outside their games?

Jim: Well, it’s a complicated question. So one is, you know, there’s been a number of gambling cases brought against game companies in the past couple of years. We’ve represented two companies in those areas and all those cases were eventually dismissed. There, the common fact pattern was there was some gambling like mechanic in the game – there was, for example,  a casino-like mechanism where you could take some in-game items like currency or gold or something, then spin a wheel for a chance to win more in-game currency that was only usable in game. The company’s that brought these lawsuits said, “yeah but there’s a secondary market for this stuff because people can sell their accounts or their goods.” The court’s in almost all those cases said that as long as the issuer of the goods is also the redeemer of the goods, and they’re not participating in the secondary market, then it’s not gambling.

In the Valve case it’s a little more complicated, I don’t want to say too much publicly on it since it’s pending, but the facts are a bit different there. Sometimes when the facts are different you sometimes see different results. So there’s a question in these types of cases as to who participates in the secondary market and who benefits from it. If the issuer and the redeemer are not the same entity that might be a relevant fact. So if some of the facts are different that could lead to a different result. There were some original filings that had been dismissed more on procedural grounds, there hasn’t been to my knowledge any substantive rulings in those cases yet.

PL: Video game monetization is always changing, and in the last couple of years game companies have figured out new and innovative ways to charge people for the games that they really enjoy playing. From a legal perspective, is there anything in the monetization phase that gives you pause, or that you think may cause a problem down the road? Or to put it another way: say I’m a developer or publisher and I have an idea for the next next hot game, and I come to you to do the legal review you talked about earlier, are there any types of monetization that you would caution me against?

Jim: Well, in general, I’d say is there’s a difference between ‘legal’ issues and ‘doing right by your players’ issues.

From a legal perspective, generally with few exceptions as long as you’re not crossing the line into gambling or something that’s clearly illegal, by and large as long as you’re disclosing what you’re doing, and it’s clear, then there’s a lot you can do. When you look at the mechanics that have been shut down, kompu gacha in Japan comes to mind. Kompu gacha means “complete collection” so basically you’d buy mystery boxes of virtual goods, you would pay the Japanese equivalent of $3, and you would definitely get virtual goods worth at least $3. But there were also rare items you could get and if you got a collection of certain rare items you’d get a super rare item. They got shut down by the Japanese equivalent of the FTC.

The issues there were: one, that allegedly there were kids spending a lot of money.  this goes to the player issue that if players complain you may have a legal issue from fraud or another perspective. The second was, there were allegedly no fixed odds. One guy apparently spent up to $50k and he couldn’t get the piece that he needed. Allegedly they were adjusting the odds on the fly  and as long as people were spending the money they weren’t giving out the super rare goods.

So is that illegal per se? I didnt see any legal ruling. But the Japanese equivalent of the FTC thought it was an unfair practice. I think the two kind of go hand and hand and you need to be clear about what you’re doing and make sure it’s a fair mechanic. So there were some public game companies that temporarily lost 20% of their market value because they had to pull out that game mechanic and because that was such an incredible monetization mechanic.

So yeah, gambling is a potential issue, most companies get legal advice and are doing it right. We see stuff out there that probably doesn’t pass muster but they’re not big enough and they haven’t been shut down yet. So it goes back to enforcement, just because it’s illegal, someone has to take the laboring order to bring the action. But yeah in general I’d tell companies be sure you’ve had it vetted and if there’s any red flags go up, look at it, and talk through it. There’s times we’ve dealt with clients and while the monetization folks had some really clever ideas, legal would back out a little bit just to avoid issues.

PL: Last question: what are you playing right now?

Jim: (Laughs) Well, I try not to get sucked into any one game, because I try to try a lot of different things. I kind of dart around.