|
 Features
On
the Edge: How Current Legal Issues Affect Game Development And Marketing
This paper
covers how the following issues affect game developers and publishers:
- Online
Law: (1) strategies for game owners to preserve the power to license
Online multiplayer services; (2) the danger posed by the patent infringement
case Interactive Gift Exchange v. Compuserve, et. al., which involves
a patent that is claimed to apply to Online pay-for-download and CD-ROM
pay-for-unencryption schemes.
- Computer
Game Editors: the question of whether the new versions of games created
by "editors" can be sold without the permission of the publisher of
the original game is no longer theoretical. The subject increasingly
appears in disputes, including the ongoing case of Microstar, vs. Formgen,
Inc. (involving "levels" created for 3D Realms' "Duke Nukem 3d").
- Trademark
Law: (1) a description of recent changes in Trademark Office system
for classifying computer games, and related services (such as Online
games, and game arcades); (2) the importance of trademark registration
to protection of Internet domain names and developments in Internic
domain name dispute policy; and (3) the use of game characters as trademarks
To accommodate
anticipated changes in these issues, materials relating to them will be
provided at the session. The materials below relate to the fourth subject
of the session: the laws applicable to "virtual corporations".
THE VIRTUAL COMPANY MEETS NON-VIRTUAL LAW
Game development is collaborative work, and much of it still occurs in
the windowless rooms where programmers, artists and occasionally the "biz
guy" nest amidst computers, copies of Computer Game Monthly, Frisbees
and an empty pizza box. But perhaps more than any other industry, all
of the members of game companies -- programmers, the president, and the
hired fulfillment company that boxes and mails finished CD-ROMs -- are
physically diverse, often working out of their homes located in several
states. The companies are real, often even incorporated, but have no receptionist,
no parking lot, and no headquarters with views of the Golden Gate bridge.
The Companies are, in a word, "virtual".
While the trend of detaching business enterprise from physical space dates
back at least to 19th century correspondence courses, virtual companies
are new. The law, evolved for centuries on the assumption that every company
has a centralized physical office, is just adapting to them. The legal
implications of virtuality is complicated the term "virtual company" describes
three really separate phenomena:
* Telecommuting Corporations which are typically mainstream corporations
whose employees "telecommute" from home by using email, telephone conferences
and fax modems. This trend is driven by the possibility of saving on office
costs, and by federal laws which encourage large corporations reduce the
car commuting of their employees.
* Temporary Alliances (such as one among IBM, Motorola, and Apple Computer
that produced the PowerPC microprocessor) are a sort of virtual corporation.
Business Week defines them as "a temporary network of independent companies...
linked by information technologies to share skills, costs and access to
one another's markets".
* Email Corporations, which are real corporations at which the place the
President works, the place orders are accepted, and the place software
is written can all be in different states. These corporations survive
mostly by email and other virtual communication. While they typically
start with a handful of people, they increasingly keep their virtual form.
Veri-Fone, for instance (a credit card-verification company) stayed mostly
virtual even after growing to more than 2,500 employees by 1995.
The three
sorts of virtual corporations raise only partly overlapping problems.
All three involve the interesting management problem that for all the
speed and informality of email, people need to see each other now and
again to really feel part of the same enterprise, and to avoid misunderstandings.
Alone among the three, the Temporary Alliance sort of virtual corporation
raises issues of how trade secrets can be preserved among participating
companies that, at least outside of their temporary collaboration, may
be fierce competitors. Telecommuting Corporations raise workplace safety
and privacy issues resulting from the fact that their employees work at
home.
But the biggest legal uncertainties are raised by the type of virtual
corporation that is the most common amongst game development companies:
the Email Corporation. Unlike the other types, they combine the legal
issues raised by employees who work at home with other issues raised by
their typical lack of a real physical headquarters. The metaphysical question
of "where does an Email Corporation really do business?" becomes very
down to earth when the spooky issue of taxes is raised.
THE PROBLEM OF "DOING BUSINESS" IN A STATE
A corporation "resides" in the place where it is incorporated. Most traditional
corporations incorporate where all their operations are located. When
corporations instead incorporate in Delaware or other management friendly
state for legal and liability reasons, they must separately obtain a "Certificate
of Authority" (or equivalent document) in the one or more other states
in which they "do business". Several problems arise from this:
* once a corporation is "doing business" in a state, the state can tax
it on its income derived from the state, as well as impose a "franchise"
tax; and
* failure to obtain a Certificate of Authority can result in substantial
penalties.
1.
What is doing business?
What "doing business" means varies from state-to-state. Historically,
the important indicia were mostly tangible: factories, showrooms, or a
warehouse at which orders were received, accepted and shipped. But revenue
hungry states are increasingly finding that intangible connections are
sufficient. Generally, these activities alone are NOT enough:
* Maintaining, defending, or settling an action, suit, claim, dispute,
or administrative or arbitration proceeding;
* Holding meetings of its directors or stockholders or carrying on other
activities which concern its internal affairs;
* Maintaining bank accounts;
* Maintaining offices or agencies for the transfer, exchange, and registration
of its securities;
* Appointing and maintaining trustees or depositories with respect to
its securities;
* Transacting business exclusively in interstate or foreign commerce;
* Conducting an isolated transaction not in the course of a number of
similar transactions; and
* Corporate officers residing (but not principally also working) in a
state.
But these
sorts activities -- among others -- generally ARE enough to invoke the
requirement of a getting authority to do business:
* consignment operations (where the seller owns the goods for sale in
a store pending their actual sale);
* accepting and shipping orders (which is different than passively passing
along an order to a corporate location in a different state at which the
order may be accepted or rejected); and
* permanent, regular, and systematic solicitation of business, especially
if it involves regular in person sales calls, or a local business address.
2.
Penalties for not doing business
The consequences of failing to be certified to transact business vary
with the state, but in a worst case, they include:
* substantial fines;
* personal liability of the directors and officers involved; and
* disqualification of the corporation's right to sue using state courts.
These
problems can even follow a corporation, so that after it is sold the successor
corporation will bear them. Some states allow the disqualification of
the right to sue to be cured as long as the corporation obtains a Certificate
of Authority, and pays back taxes and any related fines and late fees.
3. Name Clearance
Unlike trademarks, which can be federally registered, corporate names
are registered on a state-by-state basis: there is no central clearing
house for them. If the inspiration to incorporate as BLUE HAZOO, INC.
should strike someone in every state, then there can be 50 independent
unrelated corporations with that name. All fifty can co-exist unless:
* they sell similar products to similar customers, in which case a trademark
or trade name dispute could result based on customer confusion as to which
company is the source of their respective products; or
* either company "does business" in a state other than the one in which
it is incorporated, and needs a Certificate of Authority to do business
there.
Before
granting a Certificate of Authority to a foreign corporation, a state
checks its name against a list containing the names of corporations incorporated
there, and the names of those doing business there. If there is a conflict,
the Certificate of Authority will not be granted until the foreign corporation
either changes its name, or adopts an "assumed" name ("BLUE HAZOO (OF
NEW YORK) INC.").
4. Sales tax
Since the mid-1980s, many states have broadened their sales tax laws to
include computer software. Software vendors are generally required to
collect sales taxes when the sale occurs in a state that charges sales
tax, and the vendor has sufficient contacts with that state. Whether a
vendor is obligated to collect taxes accordingly turns on two questions:
in what state does the sale take place? and does the vendor have sufficient
contacts in that state to be required to collect sales taxes from there?
For virtual companies, both questions can have surprising answers.
The question of where the sale takes place has become complicated by new
Internet systems for downloading software after ordering it and paying
for it Online. In Texas, for instance, when software is ordered by phone
and sent to the out-of-state buyer on a disk, the point of sale is where
the disk is sent. But the Texas State Comptroller's Office recently ruled
that software sold and downloaded from an Internet server located in Texas
is sold in Texas.[*]
The separate question of whether a vendor has sufficient contacts in a
state to be required to collect taxes there has different answers in different
states. The Supreme Court has held that a State may not tax the economic
activity of a foreign (out of state) corporation interstate commerce unless,
"the tax is applied to an activity with a substantial nexus with the taxing
State, is fairly apportioned, does not discriminate against interstate
commerce, and is fairly related to the services provided by the state".[**]
Certainly,
if a state is required to get authority to do business in a state, sufficient
contacts exist. But something less may be sufficient. Some states have
found a "substantial nexus" merely from regular mail and phone contacts,
or from regular technician calls to install and maintain software.[***]
5. The Problem Of Limited Liability Companies
Some game development companies organize as Limited Liability Companies
("LLC"). LLCs have many of the characteristics of "S" corporations. Like
an S (and other sorts) of corporations, the liability for company activity
for investors in an LLC activities is limited to the amount of the investment.
Also like S corporations, the income and losses of LLCs for federal income
tax purposes generally receive more desirable treatment than that in ordinary
corporations.[*]
Whether a game company should organize as a corporation or an LLC depends
on many factors, including preferences about management, and whether the
company has any non-resident alien investors. But a factor often overlooked
is whether the LLC will be "doing business" in a state other than the
one in which it is organized. Any corporation can do business (in the
sense that term is used in this article) in another state, at least as
long as it obtains the applicable authorization from the state. But for
LLCs getting authorized is not always possible because a number of states
don't have a procedure for LLCs to be created, and don't recognized the
existence of LLCs from other states. When an LLC does business in a state
that doesn't recognize LLCs, it risks exposing its owners to personal
liability for the LLC's debts, contracts and tortious actions.[**]
6. Local City Or County Rules
City and country rules sometimes subject work-at-home workers special
regulations, or require them to register their business. Malibu, California'
Zoning Ordinance regulations,[***] for instance, provide that (absent
a special permit) at home based businesses:
c. No signage shall be permitted;
d. No one other than residents of the dwelling shall be employed on-site
or report to work at the site in the conduct of a home occupation.
f. ... no permanent work area, work bench, or structures shall be built
within the required garage parking area.
h. The delivery of materials, goods, or products to and from the location
of a home occupation shall be limited to the hours of 7:00 a.m. to 7:00
p.m., with the exception of newspaper deliveries.
PRACTICAL
TIPS
Some of the practical consequences of this are that Email Companies should
consider:
* Arranging for orders to be "accepted" only in the state where "virtual
corporation" is incorporated
Providing for arbitration in contracts. In this way, if a conflict arises
with another company with which the corporation has contracted, the corporation
may be able to avoid the defense that it cannot go to a state court because
it has not obtain Authority to Do Business in that state.
* Reserving or registering a company’s corporate name in states in
which it may want to do business in the future to preclude other corporations
from incorporating under the same name.
* Limit contacts (such as the places management decisions take place,
and official business addresses) to those in which the corporation is
incorporated.
|
|
|
|
|
