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LGJ: Is the NDA still viable?

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Each week Mark Methenitis contributes Law of the Game on Joystiq ("LGJ"), a column on legal issues as they relate to video games:


It was about E3 time last year when I gave an overview of our old friend (or enemy) the non-disclosure agreement. After all, it's those NDAs that are responsible for keeping the surprises as surprises. This year's E3, however, was a solid demonstration of the failure of the surprises mentioned last year, with Sony bearing the brunt of the leaked information. While I don't think this is necessarily an indication of the health of the NDA concept, it is a good opportunity to showcase some of the weaknesses of the NDA.

I'm willing to assume that most people have heard the term "iron-clad contract." In that regard, I have some unfortunate news: there's really no such thing. Even a perfectly drafted contract that addresses every possible contingency still requires that the parties hold up their ends of the bargain. Otherwise, you're going to have to go down an enforcement route like litigation. The idea is to make the penalties for violation of the agreement something people want to avoid to encourage compliance with the agreement, and in the game industry context, as well as much of the tech sector, certain kinds of disclosures are simply difficult to deal with.


Even when sharing information for business purposes, it can be difficult to ascertain damages if a non-disclosure agreement is breached by one party. Let's say a publisher and a developer are having a meeting covered by an NDA. The developer is showing off a new game concept running on a unique engine. The game, in fact, has some gameplay mechanic that's completely new and not patented. The publisher ultimately declines, and the developer goes off to pitch another publisher, who ultimately buys in on the concept. It's about 18 months later when the game is set to release. Let's say the original publisher immediately puts a team to work on creating another game based on the same, innovative mechanic. Because of greater available resources, this publisher is able to fast track the game to release in about 18 months.

The basic remedies available to a developer under a normal NDA would start with an injunction. Of course, with game development being generally under wraps, that injunction may not be filed until the first publisher is almost done with the game. While some courts may grant an injunction regardless and prevent the game's release, others may not. The alternative remedy would be damages. But how does anyone quantify damages based on a similar game being released at a similar time?

It can be nearly impossible to track some leaks.

Given a more recent example of similar games with similar release dates (though no NDA violations that I'm aware of), will Prototype impact inFamous's sales on PS3? Maybe or maybe not; this is about the only practical answer, and finding an accurate number to attach to that impact is nearly impossible.

The solution that's often reached in such as case is that the profits of the first publisher would be given, in part, to the second publisher. After all, if not for the disclosure of the confidential information and the breach of that confidentiality, there wouldn't have been the competing game. That's often a remedy that courts use when there's no simple way to reach actual damages, but it's clear that damages have occurred.

NDAs with the press have obvious ramifications. To the extent a press outlet releases advance information before the date set by an NDA, the press outlet is likely to lose out on future advanced information. Given the serious competitive disadvantage that that would put a press outlet at in the marketplace, the practical implication of a leak of known information is enough to deter action. In an industry like the game industry, a press outlet that violated an NDA with one developer or publisher would likely be known to other companies in the industry, and it may even lead to loss of advanced information with other companies. Similarly, NDAs with employees can almost certainly lead to termination if violated. Most people wouldn't risk their jobs to leak juicy information to the web.

On the other hand, NDAs with the end user have problems. These agreements tend to be for things like beta testing. First is the almost impossible to quantify damages. If a user leaks screenshots or a video of a to-be-released, in-testing game, are there even any damages? Maybe the hype from those shots sells more copies of the title. Maybe a bad point loses some sales, but maybe the issue is fixed before the final release and there's no impact at all. Second, with the anonymity of the internet, it can be nearly impossible to track some leaks. That's just the reality of the internet right now. That may change, or we may be past the point of no return. It's difficult to say.

So, does all this mean the NDA isn't useful anymore? Of course not. The simple truth is that use of an NDA is a calculated risk, and the amount of risk varies depending on the circumstances. In fact, I'd be willing to bet some companies are counting on a leak in some cases, or even engineering leaks to generate hype. I don't think the PSP Go leak hurt Sony in the long run, and it even provided some good comic relief during the press conference. Yes, it's unfortunate, when most of an E3 press conference's biggest surprises are all spoiled well in advance of the show, but that's just how things go sometimes.


[Image credit: cogdogblog]

Mark Methenitis is the Editor in Chief of the Law of the Game blog, which discusses legal issues in video games. Mr. Methenitis is also a licensed attorney in the state of Texas with Munck Carter, LLP, and a member of the Texas Bar Assoc., American Bar Assoc., and the International Game Developers Assoc., where he is a board member of the Dallas chapter. Opinions expressed in this column are his own. Reach him at: lawofthegame [AAT] gmail [DAWT] com.

The content of this blog article is not legal advice. It only constitutes commentary on legal issues, and is for educational and informational purposes only. Reading this blog, replying to its posts, or any other interaction on this site does not create an attorney-client privilege between you and the author. The opinions expressed on this site are not the opinions of AOL LLC., Weblogs, Inc., Joystiq.com, or Munck Carter, LLP. As with any legal issue that may confront you in a particular situation, you should always consult a qualified attorney familiar with the laws in your state.

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