(This article was first published in December 2005.)

F. Jason Far-hadian Esq., Principal of Century IP Group (www.centuryip.com) maintains that protecting intellectual property in today`s video game market is necessary to establishing a distinct competitive advantage.

During my recent stay in Seoul Korea, I visited the largest underground entertainment and shopping center in Asia (the COEX Mall), where the Microsoft and Sony corporations have built spacious “game zones,” providing public access to hundreds of game stations and video games for free. Each year the center hosts international competitions where teams of players collectively compete with others online, and before the eyes of large audiences, to win multi-thousand dollar prizes.
Here are a few interesting facts: total sales in the video game industry reached 7.3 billion last year; sales from the online multiplayer games sector by itself is expected to grow to $763 million by 2007; big business in the video game industry is coming from adults, where the average age of a game player is 30; and video games have outsold movie tickets in the United States 10 to 9. Not bad for a business that began as an incidental offspring of the computer software industry.

The video game industry, even though still dependent on advancements in the computer software and hardware sectors, has evolved beyond recognition in relation to its humble origins in games such as Pong and Pacman, developed 50 years ago on refrigerator size computers by timid software engineers. Modern video games have intricate storylines, bold colors and a plethora of characters and backdrops. As such, many video games today are written, designed and choreographed by writers, producers, directors and talent with experience in the arts and movie industry before a single line of code is written.

For the above reasons, the legal issues related to the protection and enforcement of rights in video game products have become more sophisticated and complex. Luckily, however, various legal means are available to help protect different aspects of a video game product, especially the functional and operational aspects, which may be protected by a patent. Alternatively, certain features may be maintained as trade secrets. Additionally, most characters, scenes, music, dialogues, story lines and source code may be protected under copyright laws as long as each contains original works of authorship.

Despite of the availability of the above legal means, there is a surprising and somewhat inexplicable lack of intellectual property protection in the video game industry. This imbalance within the video game industry is cultivating a new and relatively unexploited legal battlefield that is resulting in large judgments against infringers and licensing opportunities for those who have diligently pursued their legal right to obtain and register the respective patents and copyrights.

The 1997 case of Alpex Computer Corp. v. Nintendo Co. is among the first cases involving video game patent infringement. In that case, Nintendo was ordered to pay $253 million to Alpex for infringing its patent for a machine configured to play multiple games, in contrast to the older arcade systems that could only play a single game. More recently, in March 2005, the United States Federal court in the Northern District of California found Sony guilty of patent infringement and entered a judgment ordering Sony to pay $84 million to Immersion Corp., which had a patent covering the vibration feature incorporated in the Play Station`s game controller.

Accordingly, even simple operational features incorporated in a game may be worthy of patent protection. Such innovations, if properly protected, can potentially provide a distinct advantage to a game developer by way of excluding competitors from using the particular feature in their products.

In the realm of copyright protection, certain non-operational but graphical attributes or themes of a video game may be protected by preventing others from altering or modifying such attributes. For example, modding and morphing software are available that allows a player to change the look and feel of a game by adding new levels and characters or otherwise customizing the game based on the player`s preference.

The judicial consensus on whether such acts constitute copyright infringement remains unclear. For example, in Microstar, Inc v. FormGen, Inc., the Court of Appeals for the 9th Circuit held that Micorstar`s act of selling a collection of additional game levels developed for the video game Duke Nukem 3D constituted “derivative work” and infringed the copyrights of the game developer FormGen. Microstar had to enjoin further sales of the product and pay $250,000 in damages. Prior to the Microstar decision, the rights to derivative work had been recognized only in literary works such as novels and films.

More recently, in January 2005, Tecmo, Inc., maker of an X-Box game (Dead or Alive Xtreme Beach Volleyball), sued the operators and users of an online bulletin board service “www.ninja-hacker.net” for posting lines of code that made the characters appear nude. The suit was dismissed in May 2005, due to a settlement between the parties. But it left unanswered the question of whether a rightful owner of a video game can legally modify the game in the same manner that a purchaser of a book can underline the text in the book.

Due partially to the ambiguities in copyright law, some video game manufacturers have relied on provisions of the Digital Millennium Copyright Act (DMCA) to target companies that distribute modding technologies. In the past, Sony, Microsoft and other companies have successfully gone after distributors of modding chips for violating the provisions of the DMCA that make it unlawful to distribute circumventing technologies such as modding software.

It is noteworthy, however, that according to a recent decision of the United States Court of Appeals for the Federal Circuit, the DMCA cannot create new copyright rights, but can only be used to enforce existing rights. So it is no longer clear whether the DMCA will continue to empower video game manufacturers as it did prior to this decision.

Regardless of the above uncertainties, the noted progeny of cases confirm that courts recognize the value of intellectual property in video games and will reward the game developers that protect their rights by taking the legal steps to properly register and enforce those rights. In response to the pressing need for legal representation and specialization in the video game industry, certain intellectual property law firms such as the Century IP Group and Morrison & Foerster are further developing their resources to help their clients deal with the legal ramifications of changes in intellectual property law.

In today`s competitive video game market, protection of intellectual property is not a luxury, but a necessity for success. A properly registered innovation provides a competitive advantage and further protects the owner from attack by competitors. Therefore, it would be wise for game developers and video game distributors to consult competent legal counsel about how to protect their rights and ideas so that they will have opportunities to both offensively and defensively limit competitor options.

F. Jason Far-hadian Esq. concentrates his practice on client counseling, opinions, due diligence and the procurement of patents, copyrights and trademark rights in several technology areas, including electronics, computer software and hardware, telecommunications and wireless devices. He can be reached at jfarhadian@i-p-law.us or visiting www.i-p-law.us. Ms. Jennifer Burcio also contributed to drafting this article.

This article is not intended as legal advice and should not be exclusively relied upon to form a legal opinion or to make a business decision. Particularly, certain legal standards disclosed here may have been modified since the date of publication of this article. This article may not be reproduced or distributed in whole or in part without the authorization of the author, or without the complete notice of this paragraph. (c) 2006

(This article was first published in March 2006.)

A technology company`s strength and viability cannot be fully assessed without a close look at its intellectual property assets. F. Jason Far-hadian of Century IP Group (www.centuryip.com) explains why a well-balanced IP portfolio is so important in today`s competitive environment.

In the dot-com era, while a portfolio with several patents was a positive sign of technological prowess, private equity investors and venture capitalists did not rigorously scrutinize the value of a start-up`s portfolio. Instead, they were primarily interested in finding the right opportunity, funding it and making a quick profit with an exit strategy spanning three to five years.

Back then, investors did not bother with extensive valuation procedures, since the market fury was conducive to realization of profits before a start-up`s intellectual property assets were put to the test in a competition-driven market. In the current economy, however, start-ups are taking much longer to reach the IPO stage. This slowdown has reduced investor interest in traditional valuation factors such as market timing, experience, management and financing strategies. Now, more than ever, the value and strength of a company`s intellectual property portfolio defines the actual worth of a company in the eyes of investors.

There are several methods for attempting to attach a dollar value to an intellectual property portfolio. An upper limit value can be determined by estimating the cost of designing around the patent (i.e., designing a non-infringing product). In certain cases, however, revenues generated from licensing a patent may be worth far more than it would cost to design around it. Ultimately, the true value of any intellectual property can be calculated based on the present value of the future profits that it will provide.

A patent portfolio`s value and strength is largely a function of the breadth of the patented claims in relation to what is already in the public domain and how long it will take before a competitive product can enter the market. In the pharmaceutical industry, for example, obtaining a patent is exceedingly valuable as it is relatively difficult to design around a well-drafted set of claims, further governmental regulations typically stifle competition by drastically limiting a pharmaceutical product`s entry to the market.

In contrast, patents in the semiconductor, communications and software industries can generally be invented around with greater ease, creating the risk that a start-up will find new and unexpected competition as soon as it attempts to commercialize its technology. That said, unexpected competition is much less of a threat if a company has strategically carved out a sacred space for its technology by obtaining a critical number of patents that cover its most commercially viable products.

Qualcomm Inc., the pioneer of code division multiple access (CDMA), has over 4,000 pending patents/patent applications and, as of 2005, had licensed the various technologies covered by these patents to more than 130 wireless equipment manufacturers worldwide. Before Qualcomm managed to obtain these core patents, Qualcomm was nothing but a fledgling telecom company. In the 2005 fiscal year, licensing and ongoing royalty fees received by Qualcomm accounted for 32 percent of its total consolidated revenues of $5.67 billion.

Another well-known success story in the realm of licensing is IBM. Earning about 3000 patents each year, IBM has been consistently on the top of the list, as the number one prosecutor of technology patents. In the 2004 fiscal year alone, IBM made $393 million in licensing and royalty-based fees, up 16 from the year before. Thus, for both young and old technology companies, an early start and continued maintenance of an internal program to mine for valuable intellectual property (e.g., by way of inventor incentive programs and progressive filings) are critical to reaching a commanding IP position in the market.

In high-tech industries, where the patent landscape is very densely populated, a cluster of patents covering a niche market is a sign of strength. Such a cluster increases the difficulty of designing around a product, and also provides for design flexibility in the future as the related technology evolves. Most patent savvy companies, instead of only patenting specific features of a product, launch aggressive campaigns to obtain rights to ideas that broadly cover the design landscape to which their specific products belong. This approach allows a company to build an overall stronger portfolio in the related space, sometimes completely barring their competitors from entering the corresponding market.

A strategically maintained patent portfolio should define the outer boundaries of the intellectual property a company has already developed, so that the company can protect itself from encroachment by competitors. More importantly, however, a patent portfolio should be also implemented to propel a company in a direction that would best position it to take advantage of future advancements in the technology.

For example, companies such as Nokia, Sony-Ericson and Samsung routinely file patents that cover present or future telecommunication standards. These companies know very well that obtaining a patent that covers the essential technology behind a telecom standard will firmly secure their market positions and will further deal heavy blows to competitors, who will eventually have to either license the right to use the respective technology or leave the market.

Consequently, for a young company, the strategic positioning of patents reduces risk and makes its technology more attractive to investors. Besides providing strength through fortification, portfolios with multiple patents can provide value in a variety of other ways. For example, with multiple patents in its portfolio, a company may be able to avoid costly litigation by offering to license or cross-license certain intellectual property rights.

Enforcing or defending a patent infringement suit can become very expensive, very quickly, due to the costs associated with hiring legal counsel and the related court fees. For example, the legal costs for asserting a few patents in the United States Federal Court system can easily exceed $3 million. This predicament is further compounded for younger companies that often operate on very thin budgets. Advantageously, a company with a reasonably well-maintained patent portfolio will have a bargaining advantage and also greater leverage to avoid litigation by way entering into cross-licensing agreements.

Hence, a well-balanced portfolio can open the door for cross-licensing opportunities and stimulate cooperation from other companies. The true value of a cross-license is not apparent from finances alone, because income from cross-licensing is only recorded when cash is exchanged. Depending on the structure of a licensing agreement, a patent may be even used as a form of corporate currency, in the same way that corporate stocks can be used to purchase other assets.

Companies with foreign market presence should develop their portfolio with an international objective to limit the commercial exploitation of their products worldwide. Many companies concentrate on the US market alone. While the US is a large market for any product, it only defines a fraction of the global market. As such, emphasis on both domestic and international patents creates a more valuable portfolio. Not seeking protection in foreign markets may help a company save money in the short term. In the long run, however, this strategy will decrease leverage in future marketing endeavors and may prove to be a costly mistake.

A comprehensive intellectual property portfolio at the minimum should broadly cover the patent landscape to which the most important company products belong. It must also target the manufacturing regions and consumer markets that might open up in the next 10 years with an eye towards the foreseeable advancements in related technology. Thus, while extraneous and unnecessary filings should be avoided, building a worldwide patent portfolio in strategic markets is highly recommended to help increase a company`s earnings prospects and potential worth.

This article is not intended as legal advice and should not be exclusively relied upon to form a legal opinion or to make a business decision. This article may not be reproduced or distributed in whole or in part without the authorization of the author, or without the complete notice of this Paragraph. (c) 2008