One of the most asked questions by developers, is what the red flags are in video game publishing agreements. This question is a hard one to answer in general, because red flags depend a lot on the context of the video game and the deal.
In our experience, the biggest risks don’t usually come from a single clause, but from how multiple clauses interact. Together, they can create harmful loopholes that put developers in a vulnerable position.
Reading an article about red flags which only says ‘it depends’ is boring and not insightful. Therefore, we will still share a few of the situations we have come across in our careers.
Please note that these examples are quite extreme situations and are not representative of how we have experienced most video game publishers. Most publishers are as hardworking and passionate as many developers and are not ‘evil’.
The termination for convenience, combined with an obligation to repay development funding
There have been video game publishing agreements that include a termination for convenience. This means that a publisher can terminate the agreement for any reason and at any time. In most publishing agreements, the developer is compensated for this termination by the publisher. For example, in case the publisher terminates the agreement for convenience, they pay one or more of the upcoming milestones. This allows the developer to have some funding to survive and find a new publisher.
This is nothing out of the ordinary, but we have seen publishing agreements which combine a termination for convenience with an obligation for the developer to repay all funding which the publisher has provided to the developer when the contract is terminated. This actually creates a financial crisis for a developer.
Not only does a developer lose their right to funding, they also need to repay everything they have already received (and most probably have already spent). At the same time, they need to find a new publisher or investor to actually complete the game.
The result is that the developer loses future funding, faces sudden debt, and must scramble to find new financing just to keep the development of the game alive.
The termination for convenience, combined with a transfer of intellectual property rights
While we have not seen this combination of clauses in a single publishing agreement, there have been instances where this has happened over the course of the development of a game.
We have advised a developer which has entered into a publishing agreement with a publisher. This agreement contained a termination for convenience.
During the collaboration, the developer has not met a few milestones and the publisher has expressed concerns about the progress that has been made by the developer. To solve this scenario, the publisher has provided additional funding to the developer. In return, the publisher wanted to obtain the intellectual property rights to the game.
Both a termination for convenience and a publisher buying the intellectual property rights of a developer are not that uncommon. However, in this case they were combined and led to a very exploitative situation.
Shortly after the transfer of intellectual property rights, the publisher lost faith in the developer and terminated the publishing agreement for convenience. The consequence of this is that the publisher could continue without the developer (as they owned the intellectual property rights), essentially leaving the developer behind empty handed.
The perpetual exclusive license, combined with a publisher who does not commit
Personally, we do not really like perpetual exclusive licenses as this means that a publisher essentially has an everlasting license to publish your game on an exclusive basis.
However, whether a developer is locked in heaven or locked in hell largely depends on whether the publisher has a lot of obligations in the publishing agreement.
Potentially the worst situation is when a perpetual license is combined with a clause which states that a publisher does not have the obligation to (keep) publish(ing) the game.
This creates a deadlock: the developer cannot publish the game themselves (due to exclusivity) and the publisher has no duty to publish. As the exclusivity license is everlasting, the game can effectively disappear in a contractual black hole.
How to navigate red flags
The examples above show that red flags don’t always come from obvious “bad clauses.” Instead, they often arise when several provisions interact in harmful ways.
Practical tips for developers:
- Look at combinations, not just single clauses. Even a “standard” clause can become problematic when paired with another;
- Ask “what if?” questions. Imagine worst-case scenarios and check whether the contract protects you. Examples of worst cases are termination, poor sales and publisher inaction
- Pay special attention to repayment obligations, IP transfers and the license. These are common risk areas.
- Engage a video game lawyer
Before you sign: summary and next steps
Red flags largely depends on the video game and the interests of the developer. Most of the times, the problem is not a single clause, but a combination of clauses. Especially perpetual licenses and termination for conveniences can form a red flag when they are combined with other clauses in the contract.