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


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.

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