Litigation stormclouds over the games industry

Disputes are inevitable in any industry.  Sometimes disputes are generated by genuine differences between businesses –  from time to time deals fall through and contracts are broken, which can lead to one party feeling aggrieved and deserving justice.   Sometimes, dispute resolution is deployed as a useful business strategy against a competitor.  And there is also a third way in which some individuals or businesses can use dispute resolution  – to secure cash settlements.



Over the last few years, disputes both within the games industry (a recent example being the ongoing lawsuit between Interplay and Bethesda) and against the industry have been gaining a progressively higher profile.  Most recently, this year seems to have become the year in which the class action lawsuit made its presence felt in the games industry.
What is a class action lawsuit?
A class action lawsuit is a legal action brought in a court against a defendant entity by a group of claimants who represent the whole ‘class’ of persons who are in the same position as them – if the representative group wins, then all persons in that class can benefit from that ruling even if they were not in any way part of the legal proceedings  (unless they express opted out.  A famous example is a group of American smokers who sued tobacco companies on behalf of all (or most) American smokers.
The value of class action lawsuits is primarily that they make it relatively straightforward for a large group of persons to commence a single lawsuit, often seeking substantial damages from a large corporation, rather than each person having to bring individual lawsuits at his/her individual cost and risk.
There are of course different models of class action lawsuit in different counties, but by far the most well-known is the US class action lawsuit.  Class actions are particularly popular in the US due to a range of factors, including a relatively robust consumer protection regime, advantageous procedural rules (there is no ‘loser pays legal costs’ rule in the USA) and the propensity for US juries to award substantial damages to claimants.  Previous targets of class action lawsuits have included the tobacco, oil/gas and fast food industries to name a few.

Class action lawsuits and the games industry
 
In 2008, a class action lawsuit was commenced against Rockstar Games and Take-Two Interactive over the “Hot Coffee” matter, although the matter settled earlier this year with a $30m payout to the claimants. [need other previous examples].

This year, several well-publicised class action lawsuits have been commenced or threatened against the  games industry.  A first example is the lawsuit commenced against Sony over alleged hardware failures in the PS3 caused by firmware updates.  A second example is the lawsuit (commenced earlier [this/last] week against Facebook and social gaming company Zynga over allegations that players were made to pay unauthorised charges (e.g. recurring SMS subscriptions) in order to play games such as Mafia Wars and Farmville – this appears to be the first class action lawsuit commenced against the social games industry.  A third example is the very recent threatened lawsuit by Xbox 360 players against Microsoft over its recent banning of certain Xbox Live accounts whose holders were said to have modded their consoles (we assume for current purposes that this lawsuit will be commenced in the future).

The fundamental question for the defendant to a class action lawsuit (Sony, Facebook/Zynga and Microsoft in the above examples) is whether they afford to let these lawsuits get to trial.  Standard litigation practice in these circumstances would be for their lawyers to investigate the allegations and then advise on the legal merits of the claim, its prospects of success and the potential costs if it was fought to trial and won (or lost). 
However, ultimately it will be for the board of directors to make a business decision as to whether it is in the best inerests of the company to fight the litigation or to settle it (and sometimes that decision has to be revisited several times as the litigation progresses).  In making that decision, the directors have to look at the legal advice as critical (and non-legal) issues including the impact of the litigation on their customerbase and business partners;  negative PR; and (importantly) the potential negative reaction of banks and other funders such as venture capitalists.  Sometimes (and anecdotal evidence would suggest more often in the US), a defendant may decide therefore that the cost/benefit analysis is in favour of settling a class action lawsuit (even a speculative one) rather than ride it out and risk massive damages awards against it from a sympathetic judge/jury.
What choice the defendants in the above lawsuits take will, of course, remain to be seen.
Closing thoughts
Our standard advice is to involve your lawyers as closely as needed regarding any development which may become cause problems in the future  – whether with business partners, competitors, consumers or regulators.  In other words, some legal advice early on may well help to avoid real problems later on.  That said, looking at the games industry as a whole, it seems clear that the future will bring more legal claims against games companies, some of which will certainly be class action lawsuits.  

Jas Purewal is an associate at Olswang LLP (email: jas.purewal@olswang.com).

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