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Pirate raids and Troll attacks – how to manage Intellectual Property risk

By on October 30, 2012

Euan McKenzie (@wonthappentome) is an insurance broker for Central Insurance Services, with over a decade’s experience of advising Games Developers on general insurance issues, including the liability and IP implications of Development contracts. 

It is a sad fact of doing business in the digital age that developers regularly get embroiled in costly and time-consuming IP disputes, even where they have done absolutely nothing wrong.

Despite thorough due diligence, some problems simply don’t arise until a game is under the full glare of public scrutiny, and even then, it’s not only the game’s content that can cause problems.

The recent Lodsys/Apple dispute is a useful case study that raises a number of issues for developers.

The Dispute:

In brief, Lodsys initiated a dispute with Apple over a licence that had been granted, allowing Apple to use Lodsys software in relation to in-App purchases. Lodsys alleged that the licence permitted use by Apple, but not any of Apple’s iOS developers.

Apple disagreed and after reaching an impasse, Lodsys wrote directly to some of the iOS developers involved, alleging patent infringement and threatening legal action in the US unless separate licence agreements were signed.

Incidentally, Lodsys deliberately set the royalty at an attractively low rate, which was both variable and payable beyond the term of the patents (cunning, eh?)

The Reaction:

The natural reaction of the developers was to approach Apple, after all the issue concerned Apple’s licence with Lodsys and not anything inherent to the developers’ work.

At this point, Apple highlighted that nothing within its standard “iOS Developer Agreement” obliged it to intervene and declined to get involved – Ouch!
Cutting a long story short, Apple did eventually volunteer to get involved, although a cynic might say this was more to do with protecting their reputation and being seen to look after their Developers, than any altruistic leanings.

Unfortunately, it took time for the US courts to permit this intervention, by which time some of the developers had incurred legal costs or had signed the agreement with Lodsys.

The case continues and has taken a number of dramatic turns, including a group of developers banding together to form a defensive alliance and “bounties” being offered by various parties both to fund research into, and successfully challenge, the validity of Lodsys’ patents.

It’s all very “Wild West” and judging by the general opinions posted about Lodsys and their ilk online, they may well have been subjected to mob justice before now, but for the strictures of civilised society.

What can you do about it?

FlickrCC image by Jon McGovern

Whatever the ethical arguments, what Patent Trolls do is permitted by the existing system and developers are in the firing line, and the threat is not only from Trolls.

The first line of defence, while it may be stating the obvious, is for developers to engage a suitably experienced solicitor to deal with both IP due diligence and the negotiation of the terms of any development contract.

In terms of the contractual exposure, some basic risk management measures can include areas such as: –

1. Restriction of any clauses that allocate responsibility for IP to the developer to events where the developer has actively done something wrong.
2. Inclusion of some kind of limitation on the extent of that responsibility.
3. Inclusion of an Alternative Dispute Resolution clause, which requires prior agreement by both parties to submit to arbitration or expert determination, rather than defaulting to litigation.

The reality is that it can be difficult, if not impossible, for developers to negotiate any change to the terms of a development contract, particularly when dealing with large corporations like Apple.

As well as “curve balls” like Lodsys/Apple and the complications of any contractual IP responsibilities, developers also face the usual range of infringement risks associated with their Games. Even unsuccessful claims cost money to defend and, to make matters worse, if developers do successfully defend a claim, they will rarely recover more than 60-70% of the legal costs.

So in the face of this IP “landscape” what other options are available to developers to minimise their exposure to the costs of litigation?
Well, transferring the risk, or part of the risk, to an insurance policy is often the most effective method available.

It took the insurance market a while to come to terms with the risks faced by creators of “intangibles” but there are now a number of specialist insurers who provide policies that are aimed at addressing some of the IP risks faced by games developers.

Just a little knowledge of what these policies are, what they cover and how they work, can help developers use their limited budgets to maximise their protection and minimise their risk exposure. This knowledge can also feed directly into contractual IP negotiations.

In the next instalment, I will go into more detail on the IP cover available and how games developers can extract the best value from their insurance protection.

About Euan McKenzie

Euan McKenzie is an insurance broker, with over 10 years experience of advising games developers on general insurance issues, including contractual liabilities and IP.