Addressing legal issues with the latest technological developments and social media trends.
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On June 21, Canada’s Federal Office of Privacy Commissioner released its 2010 annual report on Canada’s data privacy law, the Personal Information Protection and Electronic Documents Act (known as “PIPEDA”). According to the report, in 2010 the Office of the Privacy Commissioner:

§ Received 4,793 inquiries in 2010 under PIPEDA,
§ Received 108 “early resolution” complaints of violations,
§ Received 99 formal complaints of violations, and
§ Closed a total of 249 investigations into formal PIPEDA complaints.

Among other things, the Report states, “Social media networks, which some research suggests now link together more than half of all Canadian Internet users, were of particularly pressing interest to our Office.” This is consistent with similar statements that have been made by the UK Information Commissioner’s Office, and should indicate to any game or social media company with global ambitions that the days of flying under the radar of data protection authorities are coming to an end.

The Report includes discussion of the Office of Privacy Commissioner’s investigations into the privacy practices of Facebook and issues around the launch of Google Buzz and Google’s well-known street-view wifi data collection practice. The Report also covers a previously unreported investigation of online dating site eHarmony’s privacy practices. The investigation was prompted by a complaint by an eHarmony member. According to the Report, when she requested to delete her online account after her membership ended, eHarmony’s response was to tell her that her account was inaccessible to other members, but that the personal information could not be entirely removed.

The Privacy Commissioner found that the option to “close” an account was not readily accessible on the eHarmony website, and that the website did not provide a clear explanation of what eHarmony meant by the term “close the account.” Based on recommendations from the Office of Privacy Commissioner, eHarmony is establishing a two-year retention period for personal information collected from its users, providing a “clear and efficient process” for users to request removal of their personal information, and providing users with “clear information” on the difference between deactivating and deleting an account and on its personal information retention policy.

It’s important to note that the Report stressed that the office’s interest in the privacy practices of online dating sites is not restricted to eHarmony. The Report noted that other dating sites do not have privacy policies at all and others have policies but do not specify how they handle personal information after a user is no longer active.

The fact that the Privacy Commissioner felt the need to note that some websites do not have privacy policies is somewhat shocking. Since July 1, 2004, it has been a violation of the California Online Privacy Protection Act (OPPA) of 2003 to fail to post a conspicuous privacy policy on any commercial website that collects personal information about California residents.

The 132-page 2010 annual report is available at http://www.priv.gc.ca/information/ar/201011/2010_pipeda_e.pdf.

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The EU “Cookie Rule,” which requires companies with European customers to get informed consent from visitors to their websites in order to use most cookies (other than those “strictly necessary” for the service requested by the consumer), went into effect on May 25. As an example of how they wanted websites to behave, the UK Information Commissioner’s Office put the following banner on their website:

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Thanks to a Freedom of Information request from Vicky Brock, we can see the effect of the opt-in cookie requirement on tracked traffic to the ICO website:

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Vicky has also made the underlying data available in a Google Docs spreadsheet.

While this does seem to pose a challenge for marketers, there are a couple of things about this data to keep in mind:

1)         The UK ICO implemented the opt-in via a banner on the top of the page. People have grown so used to ignoring banners that they might not have even looked at the option being provided. Thus, another method for requesting consent might have a greater opt-in rate.  Guidance from the UK ICO states that consent can be obtained via the following methods:

 

  • Pop-ups. A website operator could ask a user directly if they agree to a website operator putting something on their computer and if they click “yes”, this would constitute consent.
  • Terms and conditions. A website operator could alternatively make users aware of the use of cookies via the terms and conditions, asking a user to tick a box to indicate that they consent to the new terms.
  • Settings-led consent. Consent could also be gained as part of the process by which the user confirms what they want to do or how they want the website to work, e.g., some websites “remember”
    which language version of a website a user prefers. If this feature is enabled by the storage of a cookie, then the website operator could explain this to the user and that it will not ask the user every time they visit the website.

It is worth noting, however, that the guidance does not purport to be exhaustive. The ICO states that they will consider supplementing the advice with further examples of how to gain consent for particular types of cookies in the future. It goes on to say that the examples listed are not intended to be a prescriptive list on how to comply,
rather, that a website operator is best placed to work out how to get information to users and what users will understand.  Each case will be facts-specific.

2)
Even for those who did see the banner, there isn’t really any incentive to opting-in. If a website makes a case for the opt-in by pointing out additional functionality or other benefits to opting-in, that may increase the opt-in rate.

Another issue for websites is that it is not yet clear whether the Cookie Rule applies to non-cookie tracking technologies like web beacons. Technically, the Cookie Rule applies to “the storing of information, or the gaining of access to information already stored, in the terminal equipment of a subscriber or user.” However, given the assertive position that many European Data Protection Authorities take towards the protection of personal information, it may be prudent to assume that anything that lets a website track users could require consent. In the case of web beacons, as well, since they could disclose a users IP address, which could be personally indentifying information, they might be subject to the general obligation to obtain user consent before collecting personal information,
anyway.

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On April 12, 2011, the Massachusetts Department of Revenue issued Letter Ruling 11-4 holding that a product providing a customer access to information from a Taxpayer’s database is not subject to sales or use tax where the services provided do not involve transfers of prewritten software or a license to use software on a server hosted by the Taxpayer or a third party.

The Massachusetts Department of Revenue (“DOR”) issued Letter Ruling 11-4 addressing the issue of whether Massachusetts customers of a Taxpayer’s product, which provides employment application collection and selection services through proprietary software, are subject to Massachusetts sales and use tax.  The DOR held that sales of the taxpayer’s products to Massachusetts customers are not subject to the Massachusetts sales and use tax.  Massachusetts imposes a 6.25% sales tax on sales of tangible personal property and telecommunication services within the state including sales of prewritten (canned) software regardless of the method of delivery.  Also, the sale of a license or right to use software on a server hosted by a taxpayer or third party is taxable.  However, where there is no charge for the use of the software and the object of the transaction is acquiring the good or service other than the use of the software, sales or use tax on software does not apply.  See 830 CMR 64H.1.3(14)(a); LR 10-1.  In the instant matter, the provision of information services to customers based on data gathered from prospective employees and provided in a report by a taxpayer to its customers is not subject to tax.  The object of the customer’s purchase of the product is to obtain database access including reports prepared by the taxpayer, rather than use of the software itself.  The taxpayer customers do not have the ability to operate, direct, or control the software.  The DOR concluded that the services provided by the taxpayer do not involve transfers of prewritten software or a license to use software on a server hosted by taxpayer or a third party and therefore are not subject to sales and use tax.

The taxation of on-line services is evolving in many jurisdictions.  Jurisdictions without specific statutory or regulatory authority addressing such services look to existing provisions for information, telecommunication, data processing or software services in attempts to include some on-line services within their scope.  As the above ruling indicates, under existing sales and use tax principles such as true object of the transaction or primary purpose tests such efforts may not succeed.  However, every jurisdiction has is own statutory provisions and tests so one needs to review them in the context of the specific facts relating to the online game or other social media services.

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A recent lawsuit by SocialApps LLC (d/b/a take(5) social and playSocial) accuses Zynga of copyright infringement, theft of trade secret and various other acts concerning Farmville. Farmville is one of the most widely played and profitable social games, with around 80 million users and was released in June 2009. SocialApps allegedly developed and released “myFarm” in November 2008.

Did Zynga independently create Farmville or, as SocialApps alleges, did Zynga approach SocialApps using a ruse of due diligence in an attempt to acquire the IP rights and source code to get access to the details of myFarm?
Perhaps we will learn the answer as the suit progresses.

If SocialApps did indeed invent the game earlier, did they do all they could to protect the IP? Many companies in the online social game space do not.
For an overview of some of the ways that social game companies can protect their IP, see our previous post entitled “What You Don’t Know About IP Protection For Social Games Can Hurt You“.

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Copying within the games industry is prevalent. Some people attribute this to the fact that this is just the way it is and has always been within the industry. This is often premised on the notion that the “idea” for a game is not protectable. But as the game market grows, so to do the losses from copying suffered by the game innovators.

One of the biggest factors contributing to this is that many game developers do not develop comprehensive strategies for protecting the valuable intellectual property that they create. This is generally due to several reasons. One is that historically, intellectual property has just not been a big focus for many in the industry. The other is that many people are not aware of the range of options available for protecting IP in the game space and what aspects of games are protectable. This is often due to some common misunderstandings about intellectual property, particularly with respect to the patentability of game features.

While it is true that one can not protect the “idea”
for a game, this does not end the inquiry. Many aspects of games are protectable by patents, copyright and trademarks. Of these, patents are probably the most overlooked and least understood. While this applies to all types of games, there are particularly compelling opportunities to patent many of the innovative aspects of social and online games. This is due in part to the many recent developments in the relevant technology and business models for these games. Prudent developers and publishers will seize these opportunities to develop a comprehensive IP protection strategy.

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As we previously posted, Viacom is appealing to the Second Circuit its summary judgment loss to YouTube (and its parent Google) of a billion-dollar copyright infringement suit.  Last June, the U.S. District Court for the Southern District of New York ruled that YouTube is entitled to safe harbor protection under the Digital Millennium Copyright Act (“DMCA”) and granted YouTube’s motion for summary judgment on the basis that it did not have sufficient notice of the specific infringements at issue.  

At the crux of the court’s decision was “whether the statutory phrases ‘actual knowledge that the material or an activity using the material on the system or network is infringing,’ and ‘facts or circumstances from which infringing activity is apparent'” in 17 U.S.C. § 512(c)(1)(A)(i) and (ii) mean “a general awareness that there are infringements” as argued by Viacom, or instead mean “actual or constructive knowledge of specific and identifiable infringements of individual items,” as argued by YouTube.  The court agreed with YouTube’s interpretation, ruling it was supported by both the DMCA’s legislative history and recent case law.

Both sides have submitted their appellate briefs, and the Second Circuit has received 28 briefs filed by amici curiae.  Oral argument will likely be scheduled between late August and late September.   

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On of the announcements
coming out of E3 is that GameStop and Virgin Gaming have formed  a partnership to power online video gaming tournaments. According to the announcement, Virgin Gaming will be:

The preferred online tournament provider for featured console game releases sold in U.S.
GameStop locations and through GameStop.com. GameStop will offer publisher partners unique, large-scale online tournaments to help market, sell and create deep player engagement for their games. GameStop customers will have the opportunity to win cash and incredible prize packages through the GameStop/Virgin Gaming tournaments, in addition to Virgin Gaming credits redeemable for games and other merchandise.

As online gaming continues to grow, companies are seeking various ways to create ancillary revenue and drive user engagement. Tournaments can be one way of doing that. Tournaments, if done right, can be legal. However, there are a number of legal considerations of which companies must be aware to avoid running afoul of various laws.

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Recently the controlling interest in Playtika Ltd., the Israeli social and casual game development company behind the Facebook games Slotomania and Farkle Pro, has reportedly been acquired by Caesars Entertainment Corporation for approximately $90 million USD. 

Playtika was founded in late 2010 and since then has garnered around 9 million users. 
Playtika’s games, Slotomania and Farkle Pro, are modeled after a slot machine and ancient dice game, respectively.  However, unlike Caesars Entertainment’s real life casino games, Slotomania and Farkle Pro are free to play with a “virtual currency” transaction option. 
Caesars Entertainment has stated that “[w]e have made a strategic investment in Playtika and look forward to working with their strong,
experienced management team in developing free-to-play social games globally.”

From this, it would seem that Caesars Entertainment wants to build an online brand and obtain expertise in managing an online gaming property, possibly with an eye to creating synergy between its offline properties and its new online brand.  Additionally, this would likely serve Caesars Entertainment well if any of the current Federal or State-specific proposals to legalize online gambling are successful. 

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While the National Endowment for the Arts (“NEA”) is traditionally known for providing grants for various “traditional” artistic endeavors, a recent change in its eligibility requirements expands its coverage to certain categories of digital media as well. Specifically, the NEA has modified its mandate to include providing grants for innovative work in the video game design field.  Grants will be made available for the development, production, and national distribution of innovative video games about
the arts and video game projects that can be considered works of art on their own.

The eligibility changes are due in part to the NEA’s understanding that people can experience art in a number of ways outside traditional arts venues, including through video games. However, video games will need to comply with the same standard of artistic excellence and merit as works in any other medium.  While those are somewhat subjective standards, the NEA has asserted that its panels will have knowledge and experience in the relevant field to judge any applicants.

Grants may range from $10,000 to $200,000 (or more in some extraordinary instances), based on the platform, complexity and scope of the project.  However, applicants must be a 501(c)(3) nonprofit arts organization, or affiliated with one, to qualify for a grant of any size.  The application deadline date is September 1, 2011, for projects that start on or after May 1, 2012.

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star wars images.jpegTime Warner’s recent earnings report shows that a video game helped drive its earnings, according to a recent report by Investor Place.

According to the report, the video game LEGO Star Wars III: The Clone Wars, is based on George Lucas’ long-running science fiction brand, and enables players to control Star Wars characters built out of iconic Lego building blocks. Here is a link to the game site.

This result for Time Warner is another powerful example of how brands are leveraging games for enhanced consumer engagement and to drive revenues.