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#58:
December, 2005
NOTE: This article is subject to changes and improvements; reader comments are welcome.
When you get into the games biz, either as an employee, a lone wolf, or a freelancer, you will encounter contracts. There are contracts for just about everything. That was the bad news. But the good news is: you can read them, and you can ask for changes to their wording (before you sign them, and only with some of the contracts, not all of them).
There are different kinds of contracts. You probably won't encounter all of them, unless you become a producer.
The first sort of contract you're likely to encounter is the employment contract. The purpose of this contract is to set forth the terms of your employment - what the company expects you to do for the company, and what the company will do for you in return. Employment contracts at game companies are pretty much like employment contracts at any other sort of company. Do an internet search on "employment contracts" and you're bound to learn a lot of specifics about this sort of contract.
The game industry employment contract is likely to include clauses about benefits, confidentiality, about inventions, and about not competing with the company during or shortly after the term of employment.
Benefits - If the company offers health insurance, vacation, and bonuses, those are usually mentioned in the contract. The amount you are to be paid initially is often in the contract. And, in the case of higher-level employees, stock options and (rarely) royalties are also covered.
Confidentiality - The company wants to make sure that you understand that people outside the company, especially the company's competitors, do not learn about the company's secrets due to any leaks from you. The contract usually mentions what will happen to you if you blab their information around.
Inventions - It's common for game companies' employment contracts to include a clause that states that any inventions you create during the term of your employment are automatically the property of the company. Such clauses usually mean that if you create and divulge a game idea during the term of your employment, the game idea belongs to the company (whether or not the company would choose to actually create the game). Invention clauses usually apply to inventions directly related to the company's line of business - in the case of a game company, game ideas would certainly qualify. But if you invented a mousetrap while working for a game company, the company wouldn't necessarily claim automatic ownership of your mousetrap idea.
Non-Compete Clause - Higher-level employees (vice presidents, executive producers, directors) who might learn everything about the company's secrets of success, then quit and go start a competing company, may be prevented from doing so by inclusion of a non-compete clause in the employment contract. Some notable game industry luminaries (such as Nolan Bushnell, founder of Atari) were subject to non-compete clauses for a certain length of time after departure from a company.
Game publishers often hire game developers to create games for them. A development agreement is a contract that spells out the terms of the development deal. If you get a job working for a developer, your boss cares about the development agreement, but if you're an entry-level guy, you'll probably never see this contract. Someday when you're an old man (in your thirties or so), you might have your own company, and will have to negotiate a development agreement.
"The Whereases" - This is just what I call the stuff on the first page of a development agreement (after the first paragraph, in which the names of the contracting companies and their addresses are spelled out). "Whereas [Publishing Company] is in the business of publishing electronic entertainment, and whereas [Developing Company] is in the business of creating electronic entertainment, the parties therefore enter into an agreement whereby [Developing Company] will create an electronic entertainment product (hereinafter referred to as "The Game") to be published by [Publishing Company]." Stuff like that.
Terms - This part of the agreement spells out how much the publisher will pay the developer, what timeframe the developer has to develop the game, and if there will be royalties, what the royalty rate is. The obligations of both parties in the relationship are spelled out.
Ownership - It's important to clarify whether the publisher owns the IP or the developer owns it. Or maybe neither party owns the IP (in the case of a game based on licensed IP, for instance). Maybe the publisher owns the game, a licensor owns the IP, and the developer owns the source code. (Note: if any of these terms are new to you, you can look them up in FAQ 28, The Game Biz Glossary.)
Warranties - The developing company has to swear that it won't use anybody else's source code (so the publisher won't get sued for something the developer did), and the publishing company has to swear that it has the right to ask developer to create this particular game (so the developer won't get sued for something the publisher did). And there's language about what will happen if there is a lawsuit.
Termination - The contract spells out various things that might happen to cause the deal to end before the game is fully developed and published. And the contract specifies what will happen if such early termination does occur.
Legal Details - Contracts often end with lots of nitpicky stuff about contracts, about where disagreements would be adjudicated, and other boring stuff.
Appendices - A lot of the important details about a contract are kind of tacked on at the end. The most important of these (for a development agreement) are:
- The milestones and payment schedule
- The game design document itself is attached as an appendix.
- How the royalties are to be calculated
- Confidentiality agreements signed by every member of the development company
- Ownership of the IP is signed over to the publisher (depending on the deal terms)
When a publisher wants to make a game about a movie or something, the publisher and the movie IP owner execute a contract spelling out the terms of the license. Unless you're a producer or a biz dev guy, you probably won't see many license agreements. But when you're working on a licensed game, your work will be guided by the terms of the license.
What's Being Licensed - The contract spells out exactly what the publisher is getting the rights to use. If, for example, the license is for a movie called "Monster vs. Creampuff III," and the movie studio expressly wants the publisher not to use specific monsters and creampuffs from the 2nd movie in the series (due to ownership issues with the special effects company who worked on that movie, let's say), this is spelled out in the contract.
What The License Can Be Used For - The contract probably specifies that the publisher only has the right to make a game that works on the Xbox 360 and the Playstation 3. This means that if the publisher also wants to make a PSP version and a DS version, the publisher will probably have to pay more for that right.
Territory - The contract specifies what parts of the world the publisher's game will be published in. Publishers always want worldwide rights, of course - but licensors often charge more for that. Many times a publisher will only buy the rights to publish the game in their usual publishing territories, and to sublicense the game to publishers that cover other territories. The biggest territories are: North America, Japan, Europe, Australia/Southeast Asia, South America.
Term - The contract probably doesn't run forever. Most publishers will lose interest in a game product after 3 or 5 years, so most license agreements run no more than 5 years.
Finances - The license agreement spells out how much the publisher will pay for the license. There is usually an up-front payment (called a "guarantee") and royalties based on sales. This is sometimes a per-unit amount and sometimes a percent-of-sales amount.
And there may be other terms to a license agreement, as well. Like what happens if the publisher doesn't finish the game, or if the licensed property fails at the box office. And there are other types of license agreements besides the agreement between a publisher and an IP owner. For instance, an E.U.L.A. (End User License Agreement) is the legal "contract" that an end user of a computer software program ostensibly agrees to (by clicking "Yes" or "Agree") and that governs what rights in the program are reserved by its publisher, and what limited rights the end user is buying.
Non-Disclosure Agreements, Disclosure Agreements, and Confidentiality Agreements are pretty much the same thing. One party, in order to do business with the other party, has to divulge (disclose) a secret of some kind (a plan to make a particular game, or a new technology or process for making games, or a business deal that hasn't yet been publicly announced), and has to tell this secret to the other party. The other party agrees not to disclose the information - to keep it confidential - else damage will be the result to the first party. In such an event, dire things will happen in a court of law to the second party. Stuff like that. NDAs are pretty standard stuff. Some of them go into more detail than others in specifying that the breaching party must pay all legal fees in addition to damages (in the event that the disclosee lets the cat out of the bag) - so some NDAs are scarier to sign than others. But as long as you're going to keep the secret confidential, those clauses aren't going to kick in anyway. I haven't heard of any NDA breaches occurring - so I haven't heard of any NDAs resulting in lawsuits.
In article 21 and article 35 I talked a little about the sort of contracts that go along with submitting a game to a publisher. And there are other kinds of contracts associated with games too. Like agreements with actors who provide voice for games, like agreements to use technology, and agreements between game publishers and platform holders, and distribution agreements.
Contracts are a necessity of business. It's important, when starting a business venture between two entities, to have a clearly defined set of expectations for what the two entities will do for one another. Companies who do business without contracts, or with poorly-written contracts that don't cover enough of the necessities, quickly learn the importance of having contracts that are well written. The more a company learns (by having had bad experiences, unfortunately), the longer the contracts get. (^_^) That's the way the world works, so just deal with it.
This article has described the most ubiquitous types of contracts - the types of contracts you hear about the most and are most likely to be affected by, as you progress through your game industry career. You can learn lots more about contracts on the IGDA website, and on the website of game attorney Thomas Buscaglia (www.gameattorney.com). And of course you can always email me your specific and narrowly-focused questions about contracts, and I'll post my responses on the Game Design Q&A bulletin board.
Got a question or comment about this FAQ? Email your comments to - you'll get a response on the Sloperama Game Design bulletin board.
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