The VERSUS.legal law firm has prepared a second article on the pitfalls of concluding deals with publishers. This time we will talk about the calculation of royalties, the obligation of the parties and the terms of withdrawal from the contract. As always, with cases.
Alina Davletshina, Senior Lawyer of VERSUS.legal
In the first part, we analyzed the main points of the publishing agreement concerning the subject and scope of the license.
In this article we will discuss:
- remuneration provisions;
- the procedure for the formation of remuneration;
- responsibility of the parties;
- grounds for withdrawal from the contract.
Financial conditions
It is they who pay attention in the first place. We note right away: it is worth paying attention not only to the amount of remuneration.
What are the types of developer rewards?
Royalties
The term royalty usually appears when it comes to the distribution of revenue from the game between the publisher and the developer as a percentage.
The developer’s share of income in such a transaction is usually referred to as “royalties” or “developer’s fee”. In the contract, this amount is often described as a counter-remuneration for the provision of a license.
The percentage is influenced by a large number of factors: the readiness of the game, the number of commitments, established prices, and, of course, the positions of the parties.
Royalties are usually calculated as % of the total amount of income reduced by the amount of expenses. And the definition of “expenses” is critical here.
It is a common practice to reduce the amount of income by the amount of commission platforms, banks, VAT on sales and expenses incurred by the publisher for marketing and buying users. But it is important to make sure that the expenses do not include unpredictable expenses or expenses that are not directly related to the promotion and development of the game.
A case from our practice: in one of the contracts that we checked for legal risks, the amount of income tax that the publisher paid from his share of income according to the law of his country of incorporation was included in the expenses deducted from the publisher’s income. It is unfair to shift this burden to the developer.
It is also important to understand whether the publisher’s expenses are reimbursed, for example, for marketing from the total income (recoupment), since it is possible that until the initial expenses of the publisher are paid off, the developer will not begin to receive his share.
Development financing
If the game is still in the process of being created, some publishers agree to co-finance its completion. They are willing to pay fixed amounts for completed milestones, agreed by the parties, and the delivery of finished builds (usually this amount is designated as a “development fee”).
These payments can be assumed to be “refundable” (recoupable). That is, the publisher expects that he will return his development costs from the first profit from the game (and until they are reimbursed, the developer will not begin to receive his share of income) or not. If the publisher does not expect a return on investment, then often co-financing of the development becomes the basis for a negotiating position on the publisher obtaining the full scope of intellectual property rights instead of a limited license for the game.
A case from our practice: the developer received a one-time payment from the publisher to finance the development of the game and completed it on time. But a number of strategic mistakes were made during the launch, and the publisher lost interest in the project, was actively involved in marketing and buying users. Because of this, the game brings very little income, which is fully used to reimburse the initial investment. The developer has not been able to start earning income for several years since the launch, and because of this he is not motivated to support and improve the game, which only aggravates the situation. At the same time, the developer does not have the right to unilaterally withdraw from the contract, and the exclusivity of the license prevents negotiations with other publishers. In such a situation, unfortunately, we, the lawyers, can only help in conducting negotiations in order to achieve a “comfortable” withdrawal of the developer from the contract.
Also, in order to avoid the situation described above, some publishers offer more preferential terms: they pay the developer a share of the profit, but a smaller percentage than the one he will receive after all investments are reimbursed. So the developer begins to receive money immediately, can develop this project and start a new one. Similarly, the same logic applies to the reimbursement of the publisher’s marketing costs.
In any case, if investments are provided for by the contract, it is worth carefully reading the terms of termination and withdrawal from the contract, as well as the fate of these payments.
A case from our practice: the publisher co-financed the development of the game, but before its release decided that he was not interested in the project and used his right to an unmotivated unilateral withdrawal from the contract with the requirement to return the investment. The contract did not provide for any provisions on the refund account. As a result of negotiations, it was agreed that these investments will not be returned, since they have already been spent by the developer, and it is not his fault that the contract was terminated.
However, in our opinion, if the contract is terminated due to the fault of the developer (for example, the development deadlines are significantly violated, the team does not get in touch), then the publisher has the right to demand a refund of the invested amounts, and this should also be reflected in the contract.
How can the developer check the correctness of the calculation of the share?
Since the calculation of all costs and the total amount due to the developer lies with the publisher, it makes sense to provide for the developer’s right of access to financial information and/ or the right to audit.
A common situation is the obligation to provide P&L reports with a full calculation, on the basis of which the developer issues monthly invoices (or providing access to dashboards with such information). It is only important to think about how to make it convenient for all parties.
A case from our practice: the contract with a publisher from China provided for providing the developer with access to financial information. At the request of the developer, the publisher sent reports, but in Chinese, and even with the help of an online translator, they could not be disassembled. Formally, the publisher fulfilled his duty and did not agree to reports in English, although the contract was in English, and all correspondence was conducted in English.
Responsibility
The list of types of liability, of course, should vary depending on what obligations the parties have provided for themselves. The standard is:
- for the developer — responsibility for violations of the deadlines for the provision of builds and updates, if they are agreed;
- for publishers — for delays in payment of remuneration or provision of financial information.
The provisions on liability for violation of confidentiality or obligations to refrain from competition (non-compete) will be common to both parties. Lawyers often prescribe a fixed amount of penalty for each violation, so as not to argue about the amount of compensation out of court. You can read more about the attitude of Russian courts to disputes on NDA and non-compete provisions here.
General advice on analyzing the section of the contract about responsibility — always ask yourself the question: “How clearly are the grounds for liability spelled out here?”. I understand that it is not always possible to think through all the negative scenarios that may arise during cooperation, but it is better to use the most specific formulations and objective indicators.
A case from our practice: in the contract, the publisher’s obligation was formulated as “to promote the game”, and responsibility was provided for “violation of the obligation to promote”. In fact, during the 3 years of the contract, the publisher was really little involved in the processes, but at the beginning of interaction with the developer, he once organized a showcase of the game at an international exhibition. In the absence of specifics (it was not spelled out anywhere what is meant by “promotion”), the publisher considered all his obligations fulfilled, and the contract was undisturbed.
Another case from our practice: the contract provided for the responsibility of the developer for “timely provision of technical support” in the form of a large fine. However, the contract did not specify the % availability of the service and did not specify the duration of possible downtime. In our practice, this figure varies from 99.0% to 99.999% of uptime, but this was not spelled out in the contract. It was the uncertainty of the wording of the contract that allowed the developer to evade responsibility – the publisher could not justify what was meant by “timely support”.
Withdrawal from the contract
Often, by the end of the contract, the reader’s attention is scattered, and there may be such insidious sections as “Grounds for termination of the contract” or “Grounds for unilateral withdrawal from the contract”.
Most often, contracts are terminated either as a result of expiration or termination: unilaterally unmotivated, unilaterally motivated (through the fault of the other party) or by agreement of the parties.
Unilateral unmotivated withdrawal from the agreement is, of course, a privilege and a strong lever of pressure of the party that provides it for itself. On the other hand, the publishing house of the game assumes a multi-month, or even multi-year partnership, and it is assumed that both sides are significantly invested in it.
A sudden withdrawal from the project can cause great damage to the interests of the second party.
This issue is resolved only by negotiations, but in practice developers are often deprived of the right to unilaterally withdraw from the contract, while publishers retain it.
But compromise options are also possible. As the opinion was expressed at the webinar on publishing, it is possible to provide conditions when the right to unilateral withdrawal can be used.
If the right to unilateral unmotivated withdrawal from the contract is not provided for by the terms, then it cannot be used. The laws of almost all countries restrict this right.
Withdrawal from the contract due to the fault of the other party should also be spelled out very clearly, as well as the grounds for liability (although this is universal advice for all sections of the contract). Sometimes the right to unilateral unmotivated exit is veiled (intentionally made unclear, as if covered with a veil. — Ed.) under the right to terminate the contract for a reason that is formulated in a subjective way, for example, under “the right to terminate the contract if the continuation of cooperation turns out to be economically unprofitable.”
It is equally important to make sure that the parties have provided:
- the procedure for unmotivated or motivated withdrawal from the contract (for how long the party is notified, how, etc.);
- rules of interaction for the transitional period, while the contract has not yet been terminated (for example, do periodic payments continue to be paid?);
- consequences of termination of the contract (how long should I transfer the game to another account? At what time should the reconciliation of costs and mutual settlement be made?).
A case from our practice: the publisher used the right to unilaterally withdraw from the contract and warned about it 1 month before the actual date of termination. Under the contract, the publisher is obliged to pay the developer monthly fixed amounts aimed at financing the development. The publisher believed that he was not obliged to pay for the last month, but in the absence of a provision about this in the contract, the developer managed to convince him otherwise.
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We have analyzed the main provisions of the publishing agreement. If there are any questions or there is a desire to share his experience with the approval of publishing contracts, you can address them to me at davletshina@versus.legal .
We wish you all legally clean transactions!