United States: Tips On Negotiating Key Legal Agreements In Games

Last Updated: August 14 2018
Article by S. Gregory Boyd, Sean F. Kane and Brian Pyne

The following excerpt, a chapter from "Video Game Law: Everything You Need to Know about Legal and Business Issues in the Game Industry" by S. Gregory Boyd, Brian Pyne, and Sean F. Kane, may provide devs some interesting insight into how to negotiate. The book was published in June, and is available for order on Amazon or directly from publisher CRC Press.

What does it really mean to "negotiate"?

Whenever one person talks to another about a deal, there are a lot of moving parts.

How experienced are both people in buying or selling this item or service? How clever are the parties involved? How well do the parties understand the rules and strategies of negotiation? Last and most important, how much does each party want to do the deal?

The first three questions are fairly self-explanatory. Experienced, bright people who know negotiation strategies are pretty obviously going to perform better than people who do not have those tools.

The fourth element above—"how much does each party want the deal"—is more complicated. To begin to unpack that question, negotiation studies have created a term called BATNA.

BATNA stands for Best Alternative to Negotiated Agreement. Consider buying apples at the local farmers' market. You can walk up and down the lanes, looking at the apples in the different stands. You can judge the quality of the apples and then compare the prices. If you think a stand is too expensive, you do not have to buy from it. If one stand is very cheap, but the apples are rotten, you do not have to buy from it either. You have a lot of choices at the farmers' market. When you are at one apple stand, your BATNA is to walk to the next stand.

"Write down the 'walk-away' point prior to going into the negotiation because it is so easy to get caught up in the discussion and fall in love with the deal."

Contrast that experience with hiring a superstar CEO or landing a big publishing agreement. There are not that many superstar CEOs out there. There are not that many publishers interested in each game (for most developers). You have to be more careful with those negotiations than you are at the farmers market. Your BATNA is worse if the deal falls through.

Put another way, supply and demand alters negotiation power.

Strategy and planning: Walking away

Know your goals going into any negotiation. Do we have to get at least 3 million dollars for the development of this mobile game? Do we prefer to pay the CEO less than $250,000 as a base salary and not give up more than 3 percent of equity in the company? All other things being equal, the party that knows what they want going into a negotiation will do better than one that does not know what they want.

One goal that should always be considered is the "walk-away" point. If the CEO asks for more than a $250,000 base, we will have to move to the next candidate. If we cannot get at least 3 million dollars, we cannot develop the game to our standards. If the film company will not indemnify us for the movie IP, it is too risky to make the game because we may get into litigation.

You should write down the "walk-away" point prior to going into the negotiation because it is so easy to get caught up in the discussion and fall in love with the deal. After the agreement is signed, it is very difficult to back out.

Emotional positioning

Is it best to be compromising or aggressive? Anyone that answers this question with one answer or the other is wrong. Anyone that has just one style is going to fail in negotiation at least half of the time. The different postures are just tools. Sometimes you need a hammer and other times you need a saw.  One cannot be substituted for the other.

Normally, it's best to start out nice and compromising and only move to an aggressive position if forced to do so. Compromisers respond well to other compromisers, as do some aggressive people, as long as they are still perceiving progress toward their goals. Aggression is useful when another aggressive negotiator refuses to respond to a compromising posture, or when you need to force a final position from a compromiser. Aggression can also be useful when the other side is obviously in the wrong and is offering an off-market position: surely, Disney, you are not saying that we have to continue working if you are not paying us.

Remember, you can always go from nice to aggressive, but it is very difficult to go the other way. People remember when someone is aggressive, especially if it includes a personal affront. People take insults personally. But true insults are rare. The more common problem is implying something that people take personally.

The most common example is a party stating or implying they know more about an industry or have more experience in a negotiation subject. Something as simple as saying that a definition/section/price term is standard in the game industry really says that the person speaking knows a basic piece of industry knowledge and the other side does not.

This pushes on the other side's insecurities and may create a personal affront. Normally, it is not even a true statement. Retreating to a "standard" argument is a refuge for the ignorant and weak in this author's experience. Very few things are standard. When they are, every person in the negotiation knows it and it does not need to be said.

Saying something is standard is an aggressive negotiation tactic designed to establish an experiential superiority and shame the other side into accepting the deal. The right answer to that tactic is to say that, "even if it is standard, it will not work in this deal because..." That rejoinder does not admit that the position is standard while simultaneously showing that you will not fall for that tactic.

Diagnosing a problem

When people do not agree or appear not to agree, your first thought should be to ask "why?" "Why?" is the key to diagnosing a problem and figuring a way through it. The next step is to ask more questions. A good second question is "can you tell me more about that?"

Often people will literally explain the way through a problem just by answering those two questions. Do you really disagree on ownership of the final product or do you really just disagree on control of the distribution of the product? Do you really disagree on price, or is it perhaps just the upfront development pricing, and can the difference be made up in the royalty?

This distinction is key because a perceived disagreement can often be resolved through questioning and subsequent drafting. Compare this with an actual disagreement—which can only be resolved by one company giving ground to the other.

Good business development vs. bad business development

After you ask "why?" and "can you tell me more?", you will learn whether the issue can be addressed in the drafting or whether it is an actual difference of opinion. This is a core distinction when working with attorneys.

Attorneys can make suggestions and help you to ask questions. They can help you sort out something that needs to be discussed more from items where there is real disagreement. They can also draft language when you agree on the details of how you want something to work in practice. They can negotiate on behalf of the company, if they are empowered to do so. All negotiations are easier if everyone agrees about when a deal is ready to go to contract. The majority of deals that do not close were not ready to go to contract. The parties do not really agree on fundamental issues and drafting starts too soon.

"Make certain that the key elements of the deal are worked out prior to moving to contract writing. If you fully negotiate the elements summarized below, you dramatically increase the chances of a successful negotiation."

How do we avoid that outcome? Make certain that the key elements of the deal are worked out prior to moving to contract writing. If you fully negotiate the elements summarized below, you dramatically increase the chances of a successful negotiation.

Conversely, failing to work through the items below prior to documenting the deal is a failure of business development. We want to avoid what would qualify as bad business development. When I see this, I often refer to it as used-car business development, because that is the skill displayed. It looks like this: we have some idea on price and some idea on what we are buying, and then we are told "now go paper this."

That is a hand grenade of molten shit, not a real deal. And yet, this problem is much more common than it should be. We avoid it by working through the seven core items below.

Intellectual property, term, termination, indemnity, price, payment, net revenue

These items are important in almost every deal in the game industry. Licenses, publisher agreements, and even employment agreements can touch these items.

  • Price: What is the price for this deal and how is it paid? Is it spread out, up front, or on the back-end? Does it require invoicing prior to the payment or is the payment just made?
  • Term and termination: How long does the deal run for? Can it be extended? How can it be terminated? Is the termination for breach alone or can it be for convenience as well? In the event of termination, what is paid out and when?
  • Ownership: Who is going to own what is made under the agreement? Does it make a difference how it is developed? Is there a license back? If there is a game, who will make sequels?
  • Indemnity: Indemnity is about who covers any third-party damages related to an agreement. What if there is a privacy or other regulatory violation? Or an infringement of third-party intellectual property? Who pays? Indemnity is like children at a party. If your child breaks something, you pay for it. If someone else's kid breaks something, they pay for it. In deals, the question is: Whose kids are whose? Who covers what in a transaction?

Show me the money

They say that possession is nine-tenths of the law. Whenever possible, on either side of  an agreement, try to be the person that receives the money directly. Historically, in the publisher–developer context, the publisher always received the money from distributors. Modern distribution through platforms like iTunes and Steam has changed this. Now, it is possible for games to be distributed through the developer's account. In those cases, the publisher receives the royalty split from the developer.

In theory, this should not matter, but in practice it matters a great deal. The party that receives the money first controls how deductions are made and has the initial view of critical sales data.

In a dispute between the parties, the first thing that happens is all payments are suspended and are usually held in escrow. Holding the money is key in a dispute. Refunds outside of a litigation are rare, so people tend to hold on to revenue until a settlement is reached. Payments are the lifeblood of both companies, but especially to the developer. The company that is holding game revenue is in a much more powerful negotiating position.

After you have done dozens of agreements of a particular type, there is an inclination to omit initial negotiations and skip to the end. You have a pretty good idea of how it is going to work out and you might want to just draft the agreement to that point and hold it there.

This is a mistake. A colleague once told me that you "have to dance the dance." Rationally, this does not make the most sense. But there is something about going through the process that people find satisfying. There is an educational element for both parties: issues are fully explored, and people get comfortable working together. As a result, pushing for a consensus draft right away usually results in failure and the party that proposes it often loses more ground than they should. The other party still wants to "dance the dance" and press for more concessions.

Deal pace and process

Two commonly discussed terms around the pace of a negotiation are deal fatigue and deal momentum. Depending on corporate needs and the size of a transaction, a deal may take a few days to several months. During that time, be aware of both of these concepts. They are psychological, not legal, but they have huge effects.

Deal fatigue is when one side appears to lose interest in the deal and may actually lose interest in the deal—not because it has suddenly become a bad deal—but because they are tired of negotiating it. Deal fatigue manifests itself in two ways. First, in some cases, people cancel the deal or genuinely lose interest in it. They say the opposing party is "too difficult to work with" as a reason to stop negotiating. This is not helpful to the negotiation. Deal fatigue can also take the form of people giving up points they should not have, or drafting quickly (and sloppily) just to tick an issue off the box.

Deal momentum is the idea that frequent drafts, emails, meetings, and calls keep every- one focused on and interested in the deal. The party that benefits most from keeping up deal momentum is the party that needs to get the deal done. Does the developer need money to make payroll? Does the publisher have to close the deal prior to the end of its fiscal year to get money off the books? But be careful: pushing deal momentum can result in rushing through items that should not be rushed through. You have to balance the benefits of keeping the ball rolling against the risk of a drafting or tactical mistake.

Both deal fatigue and deal momentum are real and substantial factors in a negotiation. They are difficult to control, but the first step in using them to your advantage is to recognize them and recognize the effects they have on the negotiation. Know that very sophisticated negotiators manage deal momentum and deal fatigue to increase leverage and generate other advantages for their side.

Preparing for a meeting or call

When do you have a call or an in-person meeting?

One common business development failing is to ask for a call too early, on the theory that going straight to a phone call (or an in-person meeting) will avoid some negotiating hurdles. Asking for a call or meeting too early is done in the name of keeping up deal momentum, but in practice it can slow things down substantially.

Remember: you have to dance the dance. There are psychological and actual structural/process-oriented reasons for doing the first couple of rounds on paper. Many of the common issues presented in a first draft of a document are not actual misunderstandings, they are just drafting issues that are easily solved by exchanging a draft or two. Simple items like honing representations and warranties or setting up invoicing terms do not require a meeting of any type. Those items are best sorted out by exchanging a draft or two.

While this takes time and is frustrating to people that do not understand the optimal process, doing a couple of initial rounds on paper usually ends up being the fastest way. When people see a mark-up and have a chance to think about something, they do not have to take an immediate position or dig into any particular view. If people start round one in person or on the phone, then they become wedded to ideas that do not deserve that kind of attention, and that removes the attention from larger issues.

After a few drafts are exchanged, the real issues will surface. These are items that need to be discussed, explained, and negotiated. If a call or meeting is called too early, then people spend hours talking about less important things like "What kind of invoicing software do you use, and where is your corporate form registered?" It is a tremendous waste of time and always points toward incompetent business development and process management.

If people really want to hurry, they exchange two drafts over two to three days and then have a focused meeting on the last remaining items.

When to have a call and when not to have a call

The perfect time to have a call is right after the basics have been sorted out in initial drafts. Ninety-five percent of deals for day-to-day operational items are closed without ever having to talk to the other side. Calls or meetings are important when there are larger, more difficult issues that need sorting out. Those issues require the higher bandwidth communication that a meeting provides.

In some cases, you may choose not to have a meeting or a call. This usually arises after drafts have been exchanged and there have been one or more meetings/calls. Then, there are usually just one or two issues left. In some cases, those issues are so black and white that there is no reason to discuss them. Consider the negotiating power of telling the other side that you do not want to have a call on a particular issue. If done deliberately, it conveys a seriousness about the issue that no other technique provides.

To view the full article please click here.

Previously published in Gamasutra

www.fkks.com

This alert provides general coverage of its subject area. We provide it with the understanding that Frankfurt Kurnit Klein & Selz is not engaged herein in rendering legal advice, and shall not be liable for any damages resulting from any error, inaccuracy, or omission. Our attorneys practice law only in jurisdictions in which they are properly authorized to do so. We do not seek to represent clients in other jurisdictions.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
S. Gregory Boyd
Sean F. Kane
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions