FEATURE: Preparing for litigation in the games industry

Katya Nemova & Philipp Behrendt discuss the increasing risk of product liability, consumer claims and class action suits in the games industry in Europe, and how studios can prevent, prepare and manage such cases.

FEATURE: Preparing for litigation in the games industry

This is the third community feature this year, following the interviews with Leonard von Rummel on trade sanctions and games industry and with Luca Guidobaldi about the risks posed by the new AI tools.

🇱🇹 Katya Nemova, Deputy General Counsel at Wargaming, spoke to 🇩🇪 Philipp Behrendt, Head of Disputes & Investigations at Taylor Wessing Germany, about the upcoming changes in the European legal system, and the increased risk of claims against the companies in the games industry.

They discussed how studios can shift their approach from responding to an active lawsuit to preparing for a possible litigation, and how implementing training and document management internally can have a huge impact on the future disputes.

By now, most of us would already be familiar with the concept of “privacy by design”. In this article, Katya and Philipp discuss how a company can be “prepared for litigation by design” – that is, have the concerns of consumer claims and exposure through discovery become a part of the product design, rathe than an after-thought.

Philipp’s expertise

Philipp is a commercial litigator with a focus on product liability, collective action, and consumer claims. He is a partner at Taylor Wessing for nearly 20 years and serves as the head of the Disputes & Investigations team at the firm’s German office.

Philipp works represents clients with the matters that appear both in German and in American courts, as well as in before national and the international arbitration tribunals. He also assists clients who face litigation in courts in other jurisdictions, in particular in the US, together with local counsel.

Philipp is focused on helping companies:

  • prevent future litigation, to the extent that it is possible;
  • prepare for potential claims, where risks are known to exist;
  • and, once litigation starts – manage the dispute process.

A time traveler (preventing)

Think of Philipp as a time traveler who goes into the future, when the company is already sued, to observe the situation, and then returns with the advice on preventing the worst outcomes, while optimizing for the best.

The core of such approach is that preparation and prevention, where possible, is substantially more efficient than the actual litigation, that can be very disruptive to any company, and even more so – to a creative team that builds and operates video games.

What is the best point to start thinking about it, for a studio?

Ideally, before launching a new product or entering a new market. For example, see the class action lawsuit against CDPR (settled for $1.85M; original estimate of damages: $11M), which got filed after the launch of Cyberpunk 2077 – that’s a classic case of a studio releasing a new product, and facing the risk.

When litigation is unavoidable (preparing)

In a litigation process, we have the plaintiff, and we have the defendant. Depending on which side your company is, your level of control over the matter will differ significantly.

Some companies, including many in the games industry, have little tolerance for litigation as a plaintiff, and would sue only under the exceptional circumstances. Thee can be multiple considerations:

  • the management is risk-averse in general, more so if the company is public;
  • the company desires to avoid coverage in the media, even if the company itself is on the right side – because to a part of the audience, reading that “company X is involved in a lawsuit” already gives a negative vibe; industry peers may see the company as too aggressive; and under the right circumstances, you can actually amplify the problem (IKEA going after a crowdfunded game is one of such examples);
  • finally, the company is conscious of the risks of exposure of confidential information during a lawsuit – which is often the case behind seeing studios not suing cheaters, even when they can, as they may then have to disclose the mechanics that will allow others to circumvent those.

Currently, the games industry is rather non-litigious – to a large degree, we are still “friends and enthusiasts”. However, while you can choose not to sue others, you cannot completely exclude the risks of getting challenged yourself. And once we accept this, we need to consider, to what extent we can preemptively prepare for litigation, to increase our company’s chances of having a beneficial outcome when we are eventually in court.

Understanding the system (managing)

Not every litigation can be prevented. When a company enters a new market and is challenged with a lawsuit, it would certainly hire a local lawyer to represent them in court.

But in many cases, when the litigation unfolds in another region, the company also needs someone at home – like Philipp – who will help it understand the dynamics and the rules of the different legal system – especially, the system of discovery that plays a big role in the US litigation (and in some arbitration tribunals).

Which is why, once litigation commences, Philipp often represents German companies engaged in the European courts, the courts in the US, and under the arbitration.

Discovering the risks of discovery

Many European companies are surprised by the discovery system, and how it may significantly affect their business – whether they win their case, or not. Consider, for a moment, what would be the potential exposure at your own studio, if you must go through this process right now – without taking any additional steps to manage the records, or prepare the team?

Generally, German companies tend to meticulously record everything, keeping very detailed meeting notes of their management meetings. This is a useful business practice. What they may not be ready for, however, is having to make such information public – when these notes are revealed as a part of the discovery process.

The scope can be quite broad, and the disclosure may involve information that is not directly relevant to the claim yet becomes a collateral damage on the case. Because of this, it’s not uncommon that the risk of discovery pushes companies to settle, as it can be a huge leverage (see, for example, the Twitter deal that may have gone through in a large part because of the uncomfortable exposure in pretrial discovery).

A matter of records

The discovery process can be harmful when you don’t want to expose certain things; and it can be beneficial, when you can produce the documents that support your side. This is the heart of the matter, really: you want to have the right records available, but not more than that.

For the smaller studios, locating the required documents can be an easy task. In a stable team with a clear, structured communication flow (such as emails), internal investigations are quick and painless.

However, in a larger organization – with hundreds, or even thousands of employees, who use multiple communication tools across different teams, – it may become a tremendous challenge both to locate what you need, and to understand the scope of what exists otherwise.

Simply put, you want to:

find the right stuff:

  •   have it documented
  •   have it accessible when needed

not find the wrong stuff:

  • because it doesn’t exist
  • because sensitive material doesn't’ become collateral damage

So, how do you produce the internal records that are beneficial?

You start months (or years!) in advance, by setting up a document management system that allows you to find what you need; and you introduce the rule of keeping the records from very early on in the process – right at the product development phase, when you can document your team following the compliance requirements throughout the whole of the R&D stage.

As we noted in the interview with Leonard, such an approach helps a lot even for the compliance and trade sanction matters – when you can show that, at the company level, you’ve made a conscious effort to follow the regulation.

What you want to achieve, ultimately, is the integration of compliance into the product design and development.

Building a system

Studios are made of teams, and teams consist of individuals that sometimes may have a bad day, or a difference of opinions on whether they should follow the company rules. As much as you’d like to remain compliant as a business, the reality is that we cannot avoid situations where people make mistakes.

It is a given: once you have a company that’s large enough, you’re bound to have someone taking an unwarranted risk.

What you can do, though, is protect your studio by building a system, and establishing a proper process. Companies are significantly less likely to be held responsible for the individual actions of their employees if there’s a compliance system in place, and if a particular action is clearly seen as a personal mistake rather than a business decision. If during the discovery it is objectively evident that your company has built the system that prevents the abuse, you can defend yourself against some of the damages that would otherwise be brought up.

Now, once you’ve started to build a system, how do you scale it across your organization?

It’s all about the people

The best tool that we have for making this system work, is the training. Though training is difficult, especially for non-lawyers who may see the risk of litigation as too remote, and rather irrelevant for them personally.

Additionally, you may need to deal with the bias of the creative and the business teams: when people are unused to having discovery in their own country, they tend to be rather skeptical about the risks of discovery from another region. And we still have a lot of talent for whom the legal requirements are an after-thought, a technicality that exists outside of the creative and business process.

The crucial thing is completing the shift in the mindset, getting the team to accept as a fact that every record can be seen in court – in a way, taking them along with yourself on a time travel.

Still, if your studio has a thousand people or more, you cannot train everyone. The management may be fine, but going through a few more layers of reporting, things can change to the degree where the compliance aspect evaporates. What you can do, though, is approach it through scoping: focus on the specific roles that are more exposed to risk, such as sales, admins, and the public-facing roles, and expand from there.

It’s not that complicated

Once your  team acknowledges that the internal records can become public, it’s not that difficult to get people to comply, as it’s rather intuitive. Most people will develop a natural precaution – “would I want this to be shown in court at some point?”. And even if your company is not litigating yet, it’s helpful to look back at the older projects and review the records, to see if any potentially harmful data may exist there.

Specifically on the external communication, we now observe the introduction of “speaking committees” in many larger games companies – structures that greenlight the talks that employees plan to make at industry conferences, because these are the opportunities that may create risks (even though we do need them, to broaden our reach and to recruit new talent).

Often, such committees won’t include lawyers – just senior people in the relevant departments. But this is still fine, as such practice is already a net benefit for the company. The very existence of such a review process makes people understand that they can be seen as representing their company, and not merely themselves, in a speaking role. Especially if this goes on record.

Discovery-like process already exists in Europe

We are currently witnessing a policy push to strengthen the consumer rights in Europe. The European Union is working on a comprehensive framework for the regulation of artificial intelligence, including the AI Liability Directive. In addition, the planned revision of the Product Safety Directive and the Product Liability Directive will broaden the scope of product liability laws in Europe to include software, and to introduce liability for loss of data. Part of this policy push is the inclusion of disclosure requirements in Europe, where only the producer is in the possession of the relevant information to establish a potential liability.

And even before we get discovery in the regular courts in Europe, we must consider that we already have exposure to a discovery-like rules for providing evidence, as a part of the arbitration proceedings. Right now, under the IBA rules of evidence,  parties in an arbitration may be obliged to produce documents. With the upcoming changes in product liability laws in a few years’ time, the same may take place in courts in Europe.

In general, we’re looking at the americanization of the European litigation. And soon enough, the risks of discovery will also start to play an important role in forcing companies in Europe to settle, regardless of their chances to win the cases in court.

Privileged to have a privilege

One issue that often comes up when discussing discovery and litigation, is whether certain information is protected by the privilege. This is relevant for both the documents, and the witness statements.

Generally, in the US, a conversation with an outside counsel would enjoy a broader protection than a conversation with the in-house lawyer. And even then, to be protected by the privilege, the matter must be the legal advice, rather than the general conversation on business.

As to Europe, privilege is not established in such a broad sense, which is a big issue. In Germany, for civil cases, there is currently no use of the concept of privilege, it only is needed in the criminal cases.

The reason for this lack is that we did not have the system of discovery in Europe, hence we had no need to have the system of a privilege. But now that the discovery is coming, we also need a clearly defined system of privilege in Europe!

Will this change? It will, eventually. Though politically, it’s not yet on the political radar.

Games get more open to consumer claims, including class actions

The risk of consumer and liability claims increases with the increase in revenue and becomes something to consider from, let’s say, €60-70M and upwards, maybe even €100M and more. Companies that generate less revenue, don’t face as much of a risk – as even if they lose, there’s little to recover from them.

What are some of the specific areas of claims that games industry is looking at?

First, there’s something that we can frame as “overpromising and underdelivering”, where a product is presented pre-launch with the functionality that it doesn’t have at its release (imagine if the complaints about No Man's Sky lead to a lawsuit).

While it’s normal for our industry to iterate, some consumers may be too inflexible to accept it. And as we continue to move from premium products to the SaaS model, there’s less barrier to releasing a buggy code if the tech team can fix it with the upcoming updates – however, some consumers may disagree with such approach on a commercial product.

Secondly, there’s the Digital Content Directive that covers the practice of nerfing and buffing in the MMO games, though the specific language is unclear, which creates a high risk of non-compliance (and, as a result, consumer claims). Now, when you make a design decision, you need to keep in mind the ways in which this may affect the experience of players who own the in-game items that are being re-balanced.

If the changes that you introduce will open your studio to refunds, you have three issues to deal with:

  • financial impact – the sales of in-game items subject to refund can be in the tens of millions of euros;
  • processing – even when the refund value is relatively not very high, dealing with thousands of user requests can be taxing for the studio;
  • publicity – assuming that you’re fine with the cost and effort involved in a mass refund, the very fact that it had to happen, decimates the trust in the community, and it’s the trust that ultimately drives your studio’s future sales.

And then there’s the EU Directive 2020/1828 that increases the right of the consumer protection organizations to use class action.

While you may try to limit the liability by introducing a waiver under ToS, such clauses are routinely found illegal when the claims are considered by the courts. And once you lose an individual case, the risk of becoming open to similar claims at scale increases substantially – including the collective claims.

Pick your fights

When your studio is large enough to become routinely challenged, there would be cases where the risk of harm to your company through discovery would be too high, and you will try to settle these; and then there would be cases that you will embrace and try to win in court – because if you settle them, this will motivate bad actors to follow suit.

Essentially, you want to pick your fights, based on the risks and benefits.

The choice of whether to engage in litigation is a part of the company’s strategy. Take, for example, a lawsuit against cheaters. Sometimes this is good for public messaging (no tolerance of cheating) and prevents others from attempting the same; the less cheating, the better the overall player experience, and the higher the company’s revenue. On the other hand, sometimes there’s a risk that such a case will push you to reveal the algorithms that you don’t want to make public or create more negative publicity that your studio can tolerate.

Different countries, different rules

You can discuss the venue of where you litigate in a B2B contract, but not in a B2C relationship. There are litigious countries, such as Brazil, or China, where we see hundreds if not thousands of cases brought against the well-established studios (see, for example, China’s online courts).

According to 🇧🇷 Vanessa Pareja Lerner, a partner at Dias Carneiro Advogados, in Brazil these days there’s an increase not only in consumer litigation, but also in complaints and inquiries brought up by consumer authorities and associations, which is related to both the growth of the player base, and the increased importance of the games market, that attracts more attention in general.

And as 🇨🇳 Chao Yu, a partner at Pillar Legal confirms, the same is true for China: there’s a growing number of consumer litigation against games companies both due to the increase in the number of players (since 2016, there are 174 million more players in the country), and due to the ease of initiating a lawsuit against the studios that can be filed online. Additionally, not all such disputes in China go to the court, as many cases resolved privately. For example, a player may report a matter to the government authority, such as local police and/or local administration of industry and commerce (AIC), which will then mediate the dispute between the player and the games company.

Thus, even when you have a local partner who can take care of these, entering such markets requires a pre-launch estimate of your potential liability there.

Arbitration clauses

In a typical B2B contract, you get to choose both the law and the venue.

Many software companies tend to choose arbitration over the regular courts:

  • easier to enforce –especially in countries like China and India, where enforcing an arbitration decision would be far easier than a foreign court’s decision (which may be even impossible, in some instances);
  • faster – as a rule, arbitration takes less time;
  • having a choice of to keep the matter confidential – if the parties want, they can agree to keep the proceedings private.

Moreover, you can select your own rules, including whether you allow or exclude discovery – which is possible even after the case has started, if both parties agree.

The future of litigation in Europe

Up to now, we had very few consumer cases in Germany outside of pharmaceuticals and the automotive industry. Once we will see the introduction of discovery in the European courts, this will cause a major change on how we litigate – and we will see much more consumer litigation:

  • we will see the expansion of the plaintiff bar – after handling a myriad of cases in the diesel emission context, and for flight delays, these lawyers now have the appetite for much more.
  • we will see more American plaintiff law firms expanding to Europe.
  • we will see the increased availability of litigation funding in Europe. As we have already seen in the consumer class action for diesel cases, these have often been backed by funders, who enabled cases to be brought without any risk for the consumer.
  • we will see more claims brought against software companies once liability for software is established in the product liability flied, including for the loss of data.

We believe that over time, the considerations of product liability are bound to become a part of software development, including video games – especially given the additional risks introduced by the adoption of the AI in our industry.

Like our industry’s relationship with privacy, the issue of liability is bound to move from a rare externality to becoming a part of the creative process – something that you think about at the R&D stage; and the system of producing and retaining records will become more normalized.

Whether you operate in-house or help a local studio manage their risks in the role of their advisor, preventing litigation that you can avoid; preparing for litigation that is unavoidable; and managing the on-going litigation cases is going to become more common, and more important, in our industry.

[ Philipp Behrendt | Katya Nemova ]

Special thanks to Palina Yaromenka and Tobias Schelinski for their input.

Philipp Behrendt (Taylor Wessing) and Theresa Bowman (MSK) will explore this topic further at the upcoming Summit on Tour in Warsaw, with a talk on May 11. And from another angle, we will look at the litigation & enforcement in the games industry with a separate panel by Marc Mayer (MSK), Andreas Lober (ADVANT Beiten) and Chao Yu (Pillar Legal) during the same event on May 10.

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