London information technology & internet law firm Crefovi is delighted to bring you this new technology & data privacy blog, to provide you with forward-thinking and insightful information on hot business and legal issues in the digital & high technology sectors.
This new technology & data privacy blog provides regular news and updates, and features summaries of recent news reports, on legal issues facing the global information technology, media and internet community, in particular in the United Kingdom and France. This new technology & data privacy blog also provides timely updates and commentary on legal issues in the hardware, software and e-commerce sectors. It is curated by the IT lawyers of our law firm, who specialise in advising our information technology & internet clients in London, Paris and internationally on all their legal issues.
Crefovi practices in information technology, hardware & software since 2003, in Paris, London and internationally. Crefovi advises a wide range of clients, from start-ups in the tech world requiring legal advice on contractual, tax and intellectual property issues, to large corporations – renowned in the information technology and ‟Consumer discretionary” sectors – which require advice to negotiate and finalise their licencing or distribution deals, or to enforce their intellectual property rights. Crefovi’s ‟Internet & digital media” team participates in high-profile transactions. It assists leading established and emerging companies in mergers and acquisitions; litigation, including intellectual property litigation; financing transactions; securities offerings; structuring cross-border international operations; technology and intellectual property transactions; joint ventures and in matters involving online speech, privacy rights, advertising, e-commerce and consumer protection, and regulatory issues. Crefovi writes and curates this new technology & data privacy blog to guide its clients through the complexities of information technology, and internet & digital media, law.
The founding and managing partner of Crefovi, Annabelle Gauberti, regularly attends, and is a speaker on panels organised during, important events from the calendar of the world of information technology and internet, such as the tradeshows CES, Slush, SXSW, Viva Technology, Wired and Web Summit.
Moreover, Crefovi has industry teams, built by experienced lawyers with a wide range of practice and geographic backgrounds. These industry teams apply their extensive industry expertise to best serve clients’ business needs. Some of these industry teams are the ‟Information technology, hardware & software”, as well as the ‟Internet & digital media” departments, which curate this new technology & data privacy blog below, for you.
Annabelle Gauberti, founding and managing partner of London information technology & internet law firm Crefovi, is also the president of the International association of lawyers for creative industries (ialci). This association is instrumental in providing very high quality seminars, webinars & brainstorming sessions on legal & business issues to which the creative industries are confronted.
Artificial intelligence (‟AI”) technologies, which developed exponentially in the last 5 years, are here to stay and thrive. Most legal frameworks, in particular the French and US ones, are not ready for these technological advances. Indeed, most courts still refuse to grant copyright protection and ownership, to AI-generated works, worldwide. This situation is not sustainable, as AI-generating tools and platforms will replace traditional methods of generating content, in a very short timeframe. Legal frameworks must therefore adapt and yield, in order to ensure that their national creative industries remain competitive and at the top of the class. How can this be achieved?
1. The AI revolution: making AI the new normal
1.1. AI technological advances
AI technologies have exponentially developed, in 2022, making it possible to generate various creative outputs, in the literary field, music sector, art and illustration sectors, the film industry, the graphic novels’ sphere and the video gaming industry.
For example, ChatGPT is a language model developed by OpenAI, a research organisation that specialises in developing cutting-edge AI technologies, founded in 2015. ChatGPT is based on the Generative Pre-trained Transformer (‟GPT”) architecture. Its self-described purpose is to ‟provide conversational assistance and answer a wide range of questions on various topics, from factual information to subjective opinions and advice”. It can be used as a powerful research tool, writing extremely coherent and detailed research reports, which may then be inserted verbatim in any article, research paper or blog.
AI writing tools have become commonplace, and now assist humans in a variety of ways, in order to write better emails, blogs, articles and novels, to curate email newsletter content, to generate ready-to-write SEO outlines, to generate articles that are SEO friendly, etc.
In the graphic design sphere, AI tools can produce outstanding illustrations and drawings just by merely giving written instructions to AI tools such as Dall-E 2 (also created by OpenAI), Midjourney, and Stability.ai. The results are outstanding, as Midjourney’s community showcase demonstrates.
These illustrations and drawings can, in turn, be used to create graphic novels, such as ‟Zarya of the Dawn” by Kristina Kashtanova (generated with Midjourney), video games, magazines’ covers, such as The Economist’s cover and Cosmopolitan’s cover for its AI issue, or films, such as ‟The Crow”, a short film generated with OpenAI’s CLIP, and which won the 2022 Jury Award at the Cannes Short Film Festival!
In the music field, AI-generated music is become more prevalent, with AI music composition tools such as MusicLM, a model generating high-fidelity music from text descriptions from Google Research lab, Riffusion, an AI that composes music by visualizing it, Dance Diffusion, Google’s previous project AudioLM and OpenAI’s Jukebox. Soundful, a human aided AI music platform, aims at fulfilling the demand for music within the creator community and content-creator economy. At the click of a few buttons, you can have the tune you need for your project.
1.2. Who are the main players in the AI field?
As mentioned above, OpenAI, is at the forefront of AI innovation, with multiple AI tools created to be exploited on various creative medium such as:
- the spoken word, via ChatGPT;
- films, with CLIP;
- illustrations, via Dall-E 2, and
- music with Jukebox.
OpenAI was founded in 2015 by a group of prominent tech industry figures, including Elon Musk, Sam Altman, Reid Hoffman, Ilya Sutskever, Peter Thiel, John Schulman, and Wojciech Zaremba. It is an American AI research laboratory consisting of the non-profit OpenAI Incorporated (OpenAI Inc.) and its for-profit subsidiary corporation OpenAI Limited Partnership (OpenAI LP). The goal of OpenAI is to create safe and beneficial AI ‟that can help to address some of the world’s most pressing challenges” (sic). OpenAI is an independent organization, and its research is funded by a mix of philanthropic contributions, corporate partnerships, and government grants. The organization is ‟dedicated to advancing AI technology while also promoting transparency, collaboration, and ethical considerations in the development and deployment of AI”.
In 2023, OpenAI announced a partnership with Microsoft. On 23 January 2023, Microsoft announced a new multi-year, multi-billion dollar (reported to be USD10 billion) investment in OpenAI. Then, on 7 February 2023, Microsoft announced that it is building AI technology based on the same foundation as ChatGPT into its web search engine Bing, its web browser Edge, its productivity software Microsoft 365 and other products.
Google is also prominent in the AI-tools’ manufacturing sector, in particular with its above-mentioned music-generating AI tools, MusicLM and AudioLM. On 6 February 2023, Google announced an AI application similar to ChatGPT (Bard, a conversational AI chatbot powered by Google’s Language Model for Dialogue Applications), after ChatGPT was launched, fearing that ChatGPT could threaten Google’s place as a go-to source for information. Google also launched Imagen, a ‟text-to-image diffusion model with an unprecedented degree of photorealism and a deep level of language understanding” (sic), to compete with Dall-E.
For now, the media’s general impression is that Google fell behind in AI, in particular compared to Microsoft and OpenAI.
2. AI’s legal challenges
2.1. Do AI users have rights to the outputs?
The question of AI authorship is particular important, especially if actors from the content-creator economy embrace it.
The first port of call is to review the terms and conditions of the AI-generating tool, in order to clarify who owns what, as far as the AI-generated output is concerned.
2.2. Who is the author of the AI-generated output?
Was it the person who input the text prompt? Was it the AI? Was it the developer of the AI or the company that owns the AI?
Most jurisdictions require a human to be the author, and a work is only capable of being protected by copyright if it shows intellectual effort, creativity, and reflects the author’s personality.
As AI creative systems become more widespread, can we consider that a text prompt, such as ‟a cat wearing a turban gazing at the city landscape at night, from a window, in the style of Van Gogh”, constitutes enough human input and individuality, and is sufficiently creative and reflective of the human author’s personality to allow the resulting image to be protected by copyright?
For example, UK law permits copyright protection of computer-generated works, with the author being the person who made the ‟necessary arrangements” for the creation of the work pursuant to section 9(3) of the Copyright, designs and patents act 1988. Other rare jurisdictions expressly provide for copyright in computer-generated works, such as Hong Kong, India, Ireland, New Zealand and South Africa.
However, most countries, such as France, refuse to acknowledge copyright protection if the work is generated by anyone other than a human. Indeed, pursuant to article L. 112-1 of the French intellectual property code, ‟any work of the mind, regardless of its kind, form of expression, merit or purpose”, is eligible for copyright protection. French courts acknowledge the originality of a creation as soon as the said creation is endowed by the personality of their author. While the threshold of the originality requirement is low, the author of a work must be a natural person according to a well-established case-law. It cannot be a legal person, an animal or a software. The rationale behind this position is that French law only protects works of the mind and the creations at issue must bear the imprint of the personality of their author(s); legal persons, animals and AIs neither have a conscience nor have a personality that may come out of the works created by them.
Time and time again, the United States Copyright Office (”USCO”) which is in charge of registering works for copyright protection in the USA, refused to grant copyright protection to AI-generated content, such as:
- a picture autonomously created by a computer algorithm entitled ‟A recent entrance to paradise”, which Steven Thaler, the CEO of Imagination Engines, Inc. requested the USCO to register as part of his application dated 3 November 2018, and
- the above-mentioned graphic novel ‟Zarya of the Dawn”, because the images generated by Midjourney, contained within the work, are ‟not original works of authorship protected by copyright” (sic) and since ‟text prompts” are insufficient to qualify as ‟human authorship”.
Since copyright protection is automatically granted in France, unlike in the USA where copyright protection is granted solely upon the USCO’s registration, no such case law exists in France or other European countries. We will have to wait a few more years, before copyright infringement litigation, relating to AI-generated content, lands in the European courts’ dockets (with the notable exception of the claim filed by stock image supplier Getty Images, against Stability.ai, for copyright infringement, with the High Court in London, UK).
Considering the absence of a work of the mind and the lack of originality of an output resulting exclusively from an AI, such creations are thus today in the public domain and not intellectual property right is attached to them (with the notable exception, above-mentioned, of the regime applicable in the UK, Hong Kong, Ireland, India, New Zealand and South Africa, which permits copyright protection of computer-generated works, with the author being the person who made the ‟necessary arrangements” for the creation of the work).
2.3. How can the law adequately address AI, in order to make it beneficial for the creative industries?
In France, the ‟Conseil Supérieur de la Propriété Littéraire et Artistique”, an independent advisory body advising the French ministry of culture and communication in the field of literary and artistic property, provided recommendations in a report dated 27 january 2020. It suggests that a ‟sui generis” right could be created to the benefit of the one bearing the risks of the investment, like the specific regime benefiting to database producers.
The European Parliament, from the European Union (‟EU”) also suggested that a legal personality be acknowledged to IA, so that copyright protection be granted to AI-generated works.
For the time being, none of the above recommendations have been taken up by the French and/or European legislators.
The European Commission (‟EC”) has proposed a four-step test in order to assess whether AI-generated output can qualify as protected work under the current EU copyright framework, as follows:
- step one: the AI-generated output must be a production in the literary, scientific or artistic domain (article 2(1) of the Berne Convention for the Protection of Literary and Artistic Works);
- step two: the AI-generated output must be the result of human intellectual effort (i.e. some sort of human intervention such as, for example, development of software, editing or gathering or choice of training data);
- step three: the AI-generated output must be original, and
- step four: the work needs to be identifiable with sufficient precision and objectivity (i.e. the generated output will fall within the creator’s general authorial intent).
It is blatant that the current disparities in the various legal systems and frameworks, where one set of national legal frameworks strongly pushes back against granting copyright protection to AI-generated content, while the other set of national legal frameworks fully embraces AI-generated content and grants it full copyright protection, will create substantial inequalities of treatment for content creators worldwide.
Indeed, content creators based in the UK or Ireland or India are incentivised to speed up their work flow, by fully embracing time-saving AI-generator tools and programmes, the output of which these creators will be able to claim copyright ownership and protection on. Meanwhile, creatives based in France or the USA will seriously struggle to enforce any type of copyright protection and rights over AI-generated content. Therefore, French and US content creators will prefer to stick to the ‟old methods” of work creation, refusing to use AI platforms which output will automatically fall into the public domain.
This situation cannot perdure, and since AI is here to stay – big time – stubborn law makers and enforcers, such as the USCO which recently issued some narrow-minded guidance on copyright registrations involving AI, will inevitably have to yield and reform, in order to grant copyright protection to AI-generated works.
Of course, lobbies and organisations representing music and other creative disciplines will try to delay the inevitable, by setting up mindless campaigns and lobbying plots, such as the ‟Human Artistry Campaign”, to prevent copyright offices and courts from finding that AI-generated works are protected by copyright.
But the floodgates are now open. And there is no way back: the technological advances and jumps that AI-generating tools and platforms provide are so important and ground-breaking, that the creative content economy and stakeholders at large will fully embrace them in the next few months, never looking back.
Lawmakers must adapt fast, in order to keep their creative economies and actors at the forefront of competition.
The Competition and Markets Authority (‟CMA”)did a stellar job, with the information and data it was provided with, during the phase 1 and phase 2 investigations of Sony’s acquisition of Kobalt’s assets, AWAL and Kobalt Neighbouring Rights. Why is this merger inquiry important, for the music industry? How did it come about? Was the merger inquiry’s outcome fair and appropriate, to preserve healthy competition in the music distribution and rights management sectors?
While cancel culture and culture wars are attacks on freedom of speech and freedom of expression which come from the bottom, the virulence of the latest onslaught on freedom of the press and creative expression now comes from the top. States, government structures, public and private companies, oligarchs as well as other plutocrats are using all the legal tools in the box, and more, to silence, intimidate and neuter anyone who may as much as mouth a criticism about them, their behaviours, their actions and their track records. The creative industries are particularly targeted by these authoritarian top-down approaches and legal tactics to bland their creative outputs and works, despite the legal protections offered by copyright.
Even in a downturn, private equity money picks Hollywood as a smart bet. Investment firms now view star-driven production banners (and major soundstages) as a long-term play in a crowded content marketplace. How did this happen? Why the sudden change of heart, since finance people had previously always viewed investing in media content production a very risky bet, at best? Is this ‟all in” investment strategy in media content production, implemented by private equity funds, financially sound?
On the back of the Star Wars Battlefront 2 debacle in 2017, many European regulators, including the UK and French ones, have started to take an increasingly scrutinising and judging stance, on loot boxes offered for purchase to children and young persons who play video games. Why are loot boxes potentially dangerous? What are the UK and French regulators – and other governments in the world – doing, to protect vulnerable players from these random reward mechanisms?
1. What are loot boxes?
Loot boxes are a relatively recent phenomenon, entering discourse around 2006. There is evidence that the use of the term ‟loot box” developed from the more general phenomenon of ‟Random Reward Mechanisms” (‟RRMs”) that have been used in games since the early 1990s. RRMs operate similarly to other forms of chance, such as collectible cards and Kinder eggs, and can be traced back to 19th-century cigarette cards.
RRMs are based on the principle of desirable ‟free” products contained within another product which is sold and the nature of ‟the game” relies on blind purchases of random items. Using collectible cards as an example, buyers continue to pay for cards in the hope of finding the particular cards they want. The market for these goods operates with information asymmetry: sellers control availability, do not publish probability statistics and capitalise on buyers’ desires.
While these antecedents of loot boxes are established and accept randomness as an element of play in physical and virtual games of chance, research indicates that ‟video games have been putting random items in treasure chests for decades”.
Therefore, the randomness of reward is the key distinguishing feature of loot boxes around which all definitions agree.
In terms of distinguishing and classifying loot boxes, the division centres on the mechanism of reward. Key distinguishing factors in definitions are:
- type: cosmetic (customisation, eg. looks of the player’s character or avatar) versus integral/game improvement (eg. tools, weapons, maps, ‟super powers”);
- currencies used: virtual versus real-world money (with the cost of loot boxes varying from a few Euros (1 to 2 Euros) to up to 100 Euros or more);
- ubiquity: popular versus niche;
- access: reward for playing the game well or a reward for sustained gameplaying (with the cost of loot boxes ranging from some gameplay – such as finishing a level, for example – to heavy – several hours – and often repetitive gameplay – so-called grinding), and
- exclusiveness: the player has no other way of acquiring items other than spending money.
RRMs have been conceptualised in four types, depending on the Resources players tender versus the potential Reward. These may be either (I) Isolated from, or (E) Embedded in the real-world economy. This leads to four types of loot boxes:
- I-I non-purchasable and non-sellable, RRMs in single-player games (eg. Diablo I);
- I-E non-purchasable but sellable, RRMs that can be traded (e.g. Diablo III);
- E-I purchasable but non-sellable, RRMs that can be bought but not traded (eg. Overwatch);
- E-E purchasable and tradable, RRMs that can be bought and traded in multi-player games (eg. Team Fortress 2, CS:GO and PlayerUnknown’s Battlegrounds).
While some researchers consider that only E-E type loot boxes can be considered gambling, others, like Leon Xiao, have argued against that position, pointing towards the FutGalaxy.com case. In this case, a third-party website meant that game currencies and rewards that were Isolated by design, could in fact be traded (making them effectively Embedded in this case).
So loot boxes are a form of microtransactions where they are available as an in-game purchase. However, loot boxes are only one part of the in-game purchase market. Their unique element is the change mechanism. For other forms of in-game purchases, players will know what item they will receive in advance of purchase.
1.2. Scale and scope of the market for loot boxes and microtransactions
In 2021, there were 2.96 billion gamers globally, generating 2020 revenues of USD189.3 billion from the top five companies (Tencent, Sony, Microsoft, Apple and Activision Blizzard), accounting for 43 percent of global games revenues. Video games is one of the fastest-growing entertainment sectors, with predictions of a compound annual growth rate of around 10 percent, over 2022-2030.
In this context, loot boxes and microtransactions are highly lucrative. Revenues generated from loot boxes used in video games will exceed USD20 billion in 2025, up from an estimated USD15 billion in 2020.
As explained in our article on Microsoft’s acquisition of Activision Blizzard, gamers access video games three ways:
- they can purchase the game for a set price (that premium purchase price model is the most traditional business model, still used for the Grand Theft Auto V and Assassin’s Creed franchises);
- they can subscribe, on a monthly (sometimes yearly) basis for access to a game (Blizzard Entertainment’s World of Warcraft is perhaps the most successful game that utilises this subscription model); or
- they download games which are free to play, but may have to execute microtransactions in order to obtain discrete pieces of content (for example, a player may spend a dollar on a new sword for a character, or on a vanity item such as changing the color of their character’s hair, like in the most popular PC game in the world – Riot Games’ League of Legends – which sells a variety of items that can customise the base game, which, itself, is given away for free).
It is in the third and last scenario, the freemium model of distribution, built round microtransactions as a revenue stream, that loot boxes thrive. The game is downloaded from digital platforms such as the App Store, Google Play or Steam, with most players spending no money at all to play the game. Loot boxes are inserted into freemium games as a mechanism for in-app purchases. Even if players do not wish to access loot boxes, they cannot avoid exposure to these features of the game: they will constantly be reminded of the opportunity to avail themselves of the random rewards contained in loot boxes.
1.3. Are loot boxes included in the definition of ‟gambling‟ under the UK gambling act 2015 and French law dated 12 May 2010?
No, loot boxes are not legally considered gambling in the United Kingdom (‟UK”) and France.
Concerns have been raised about whether the purchase of loot boxes is like a ‟game of chance” and therefore a form of gambling. Particular concerns have been raised about loot boxes within video games targeted at children or young people.
In 2016, the UK Gambling Commission identified loot boxes as a potential risk to children, as part of a wider review of gaming and gambling. The Gambling Commission subsequently stated that whether it has powers to intervene in the loot box market is based on a judgment of whether a particular activity is considered a game of chance played for ‟money or money’s worth” under relevant provisions of the UK gambling act 2005. The commission said that ‟where in-game items obtained via loot boxes are confined for use within the game, and cannot be cashed out, it is unlikely to be caught as a licensable gambling activity. In those cases, our legal powers would not allow us to step in”.
The same conclusion was reached by French ‟Autorité de régulation des jeux en ligne” (‟ARJEL”), in its 2017-2018 activity report, concluding that loot boxes (except E-E type loot boxes, such as in games PlayerUnknown’s Battlegrounds, Team Fortress 2 and Counter-Strike: Global Offensive, which had been investigated already, and largely resolved by ARJEL, other regulators and the game industry) were outside the scope of French law of 12 May 2010 relating to the opening of competition and regulation in the sector of online money and chance games.
So, for French and UK gambling regulators, the games that are most commonly mentioned in the debate on loot boxes (Overwatch, Star Wars Battlefront 2 and FIFA Ultimate Team) belong to the E-I type (purchasable but non-sellable RRMs) and thus do not meet the legal definition of gambling.
Not every European country has taken this route, though, with Belgium and the Netherlands ruling that the sale of loot boxes in certain circumstances is a form of gambling under their national gambling legislation. Slovakia also considers loot boxes to be gambling under its national legal definition but has yet to take regulatory action. More recently, Spain has committed to introduce new legislation to restrict the sale of loot boxes.
Interestingly, the European Union (‟EU”) institutions, and, in particular, the European Commission, declined to take any significant targeted action to address the topic of loot boxes because the EU has little competence in the area of gambling, as this competence mainly lies with EU member-states.
So, in France, the UK, but also Denmark, Finland, Sweden, and the other EU member-states (except Belgium, The Netherlands, Slovakia and Spain) loot boxes are regulated by general national legislation on contracts and consumer protection.
2. Why are loot boxes an issue, as it stands?
A scandal erupted in November 2017, when game studio EA suspended microtransactions in Star Wars Battlefront 2 following a furore over loot boxes, hours before the game’s launch. While other game developers and publishers had been embroiled in the controversy over loot boxes, EA took the brunt due to the imbalance potentially caused by randomised loot, in this competitive multiplayer shooter game.
This is when more and more national gambling authorities and governments started to take the issues potentially caused by loot boxes really seriously, and launched investigations.
Moreover, a study published in 2020 surveyed the 100 top-grossing games on the Google Play store and App Store. It found that 58 percent of the Google games, and 59 percent of the iPhone games, contained loot boxes. Of those that contained loot boxes, 93 percent of the Google games, and 95 percent of the iPhone games were available to children aged 12 and over. So, loot boxes are an extremely common occurrence, in freemium games.
Also, loot boxes are becoming even more appealing to players because premium fashion brands and luxury labels, such as Gucci, Burberry and Nike – are partnering up with video games publishers to provide even more attractive and hype cosmetic and avatar-customisation options to players. So this makes it even more difficult to resist, for fashion conscious youth, opportunities to purchase loot boxes containing fashion designers’ items, on their favourite game.
In September 2019, the UK House of Commons Digital, Culture, Media and Sport Committee (‟DCMS”) published its report ‟Immersive and addictive technologies”. The report detailed financial harms associated with online gaming, including gambling-like behaviours which can affect some users, especially those in vulnerable age groups like children and young people. DCMS heard evidence that there were ‟structural and psychological similarities between loot boxes and gambling”. The report recommended that loot boxes that contain the element of chance should not be sold to children playing games, and instead in-game credits should be earned through rewards won through playing the games.
3. What are the UK and France doing to limit the damage caused by loot boxes?
This prompted the UK government to launch a call for evidence in September 2020, and the wider review of the gambling act 2005 in December 2020. The consultation outcome of the call for evidence was released in July 2022 with the main message conveyed by the UK government to the games industry being that it must self-regulate and take action on loot boxes, or risk future legislation. In a typical Tories’ move, the conclusion of the consultation was that improved industry-led protections were the best approach, over regulation under an amended version of the gambling act 2005 (which would classify loot boxes as gambling) and other statutory consumer protections. Under these improved industry-led protections, industry trade body Ukie and its members must go further, and more should be done across game platforms and publishers to mitigate the risk of harm from loot boxes, while purchases of loot boxes should be unavailable to all children and young people unless and until they are enabled by a parent or guardian.
So the view of the DCMS, set out in its July 2022 conclusion to the call for evidence, is that it would be premature to pursue legislation with regards to loot boxes without first pursuing enhanced industry-led protections. And convene a technical working group to pursue these enhanced industry-led measures to mitigate the risk of harms from loot boxes in video games. The technical working group would include representatives of games companies and platforms, government departments and regulatory bodies.
Among the members of this technical working group is above-mentioned Leon Xiao, a PhD fellow focusing on loot boxes and video game law.
In a seminal piece, L. Xiao criticises Belgium’s loot box ban as ineffective, because, even though Belgium technically ‟banned‟ loot boxes using its gambling law in 2018, 82 percent of the highest-grossing iPhone games on the Belgian App Store continued to monetise using loot boxes in 2022. This is because the Belgium regulator has not actively enforced the law due to a lack of resources and enforcement power. Therefore, any self-regulatory framework should be supported by effective enforcement mechanisms, with an independent body set up to review compliance actions by game publishers and hand down penalties (such as fines and financial penalties) in case of non-compliance. Funding for this enforcement task could be obtained through a mandatory levy on the gaming industry.
L. Xiao also suggests that the UK loot box self-regulation involve the creation of a ”code of conduct” within the meaning of Regulation 2(1) of the Consumer Protection from Unfair Trading Regulations 2008. This would imply that any failure to comply with verifiable self-regulatory commitments, explicitly set out in such code of conduct, by a signatory company, may be subject to legal proceedings. This combination of flexibility, industry commitment to self-regulation, and enforcement powers thanks to UK statutory regulations, would be ideal, according to L. Xiao.
Another tool to enhance self-regulation would be to require mandatory loot box probability disclosures, such as the ones required in China. Indeed, China has required video games platforms to disclose the probabilities of obtaining randomised items from loot boxes since 2017. Only 64 percent of games containing loot boxes disclose probabilities on the UK App Store, compared to 95.6 percent on the Chinese store. While Apple has some App Store Review Guidelines which set out that loot box probability disclosures must be made, it has not actively enforced this self-regulatory probability disclosure requirement. This should change according to L. Xiao and failing to disclose probabilities should cause the games to be removed from the store. Also, these probability disclosures should be sufficiently prominent and easily accessible to players, and the UK self-regulation measures should encompass industry-wide minimal standards that all companies must meet in this respect.
One self-regulatory measure that has been uniformly applied is PEGI’s ‟Includes paid random items” label. European video game content rating system provider PEGI would attach this to any games containing loot boxes to ‟provide additional information” to players and parents. But PEGI label seems ineffective because it does not inform players and parents as to exactly how the loot box mechanic can be identified so as to allow players and parents to avoid engaging with it. Therefore, an improvement would be to specifically describe the loot box mechanic in the game, and provide a choice in the options’ menu to turn the ability to purchase loot boxes on or off (potentially even with the default option set to off).
While the UK is attempting to find the best way to force the video games’ industry to self-regulate on loot boxes and microtransactions, and France has lost the plot on the subject entirely, Australia has filed a loot box bill on 28 November 2022, with its proposed legislation requiring games with loot boxes to be rated R18+ and carry warnings for parents, in order to keep children from purchasing and playing games with loot boxes.
This is a stark warning to video game companies that they must change their ways, quickly, in order to work with governments and, in particular, the UK government, to implement effective and strictly enforced self-regulating measures to avoid any further children’s and young persons’ psychological and financial exploitation via loot boxes. I am hopeful that game publishers have got the message since many large studios, such as Activision Blizzard, Electronic Arts, Ubisoft and First Touch Games, as well as trade association representing the UK’s game industry TIGA, submitted evidence to the above-mentioned 2020 call for evidence. Let’s watch the space and see whether video game companies are up to the challenge, and can come up with decisive self-regulatory measures, which will be enforced industry-wide, in the UK and beyond.
Film distribution remains inefficient and not user-friendly enough, despite the many disruptions caused by online piracy and the advent of film streaming. Is the outcome of the streaming wars going to bring more consolidation in film distribution? What about aggregating film streaming services together, to make them more affordable to end-users? Let’s explore.
Since Microsoft announced its acquisition of Activision Blizzard, the largest independent video games’ developer and publisher worldwide, competitors and national competition authorities alike have been busy, around the world, in assessing the potential substantial lessening of competition that such a large deal may entail. Let’s dive in, and assess where this acquisition is at, in each country in which the competition authority is investigating its impact on competition in the respective national market.
While at the Podcast show on 25 May 2022, I struck a conversation with Kevin Fairburn, senior account manager for the Japanese musical products brand Zoom at Sound Service MSL Distribution Ltd, who mentioned that online retailing of musical instruments (‟MI”) and products was more strictly regulated, in the United Kingdom (‟UK”), since its Competition and Markets Authority (‟CMA”) had handed down several decisions against top MI suppliers and retailers, such as Roland and Fender. Intrigued, I decided to dive in, and get to the bottom of these CMA cases which, according to Kevin, did a lot to make MI online retailing a better place for fairer competition. Here is what I found.
Gaming, and the competitive games sector, in particular esports and virtual sports, are growing exponentially. The magnitude of such growth can be measured by global financial, economic and social metrics. While this development is no doubt advantageous for the sports, gaming and esports sectors, it raises issues in relation to the most adequate ways to resolve contractual, tort based, disciplinary and doping and digital doping disputes and cases arising out in this new ecosystem. Let’s explore what is at stake, here, and analyse the possible avenues to structure, and process in the most confidential, efficient and diligent way any dispute arising in the gaming, esports and virtual sports spheres.
Four Tet v Domino: why pacific renegotiation of royalties’ rates on music streams is the best strategy for all involvedCrefovi : 31/07/2022 12:32 pm : Articles, Copyright litigation, Entertainment & media, Information technology - hardware, software & services, Intellectual property & IP litigation, Internet & digital media, Litigation & dispute resolution, Music law, Webcasts & Podcasts
The case Four Tet v Domino is the UK’s most recent example of music labels and recording artists battling it out, during the renegotiation of their respective share, on music streams’ royalties, away from sales, and as licenses. Why did Four Tet have to file his claims in court? What was the outcome? Was such strategy to escalate this royalties negotiation into full-blown litigation the smartest thing to do, for Domino, and for Four Tet?
In two of my previous articles, I posited that the next war, in the music streaming space, would be between performers and record labels, battling it out in court over whether a music stream is a sale, a license or a rental.
Indeed, in ‟Modern methods of monetisation for independent and major record labels: 360 and beyond”, published in February 2016, I set out that ‟as digital income is the fastest and exponentially growing area in music revenues, it is likely that more and more acts will be drawn to the net profit deal option, which ensures a 50-50 split on streaming and download revenues, rather than the traditional record deal option”. ‟Recording artists, such as Eminem and ‟Weird Al” Yankovic, as well as managers, such as 19 Entertainment founded by music mogul Simon Fuller, have swiftly brought this issue relating to the split of earnings on digital revenues to the attention of the general public, by filing high-profile lawsuits against the three music majors. The defendants later settled these lawsuits out-of-court, consenting – under confidential terms – to hike up artists’ share of earnings on digital revenues, but their reputation got tarnished in the process”.
More recently, in ‟Reforming UK music law: making the music streaming market economically viable for all stakeholders”, I highlighted that the debate, raised by the United Kingdom (‟UK”) House of Commons Digital, Culture, Media and Sport Committee (the ‟Committee”), during its 2020 investigation, as to whether a music stream was a sale, a license or a rental, is considered by American commentators, such as Susan Butler of ‟Music Confidential”, as a means of manipulating record labels to split 50 percent of streaming royalties under existing recording deals, made with recording artists long ago. These old recording contracts stipulate that artists’ royalties are calculated as a percentage of sales but, for licensing, a 50 percent share of licensing fees is collected by music performers. If a stream is classified not as a sale, but as a license, records labels would have to share 50 percent of their streaming revenue with artists, even under old agreements.
Labels and recording artists were, and still are, therefore fighting hard to establish whether music streaming is replacing radio or sales (i.e. sales of CDs, cassettes, vinyls). In the early days of the streaming era, and before that, labels typically paid artists on the basis of a stream (or digital download) being a sale. Why are labels most commonly treating streaming as sales (which is rather counterintuitive since streaming is all about ‟access”, rather than ‟ownership”)? Because the percentage that labels would have to pay artists on music streams is much lower, often in the 10 to 15 percent range if the artists is signed on a traditional or 360 record deal (and therefore classifies streams as sales), rather than around 50 percent for a license.
Well, my attendance to Justice Richard Arnold’s Westminster Law School annual lecture 2022, in February 2022, brought to my attention a new court case, managed and judged by the Intellectual Property Enterprise Court (‟IPEC”), which relates exactly to this ongoing, and raging, debate between music labels and recording artists.
Except that, unlike the above-mentioned legal cases which were all settled out-of-court and in a confidential manner, this new UK court case, entitled Kieran Hebden v Domino Recording Co Limited  EWHC 74 (IPEC), took place very much in the public eye.
1. What are the facts?
Kieran Hebden is a British musical performing and recording artist who performs and records under the name ‟Four Tet” (the ‟Claimant”).
On 28 February 2001, the Claimant and Domino Recording Company Limited, a UK independent record label (the ‟Defendant”), entered into an exclusive recording agreement (the ‟Agreement”).
Under the Agreement, the Claimant:
- undertook to provide certain sound recordings, exclusively to the Defendant, within a specified period, under the name ‟Four Tet” (the ‟Masters”), and
- assigned the copyright in the Masters to the Defendant.
Under the Agreement, the Defendant undertook to:
- release the Masters, and
- account for, and pay the Claimant, royalties in respect of the Masters.
The exclusive recording provisions of the Agreement terminated in November 2005.
Between February 2001 and November 2005, I understand that the Masters provided by the Claimant to the Defendant, and released in the public domain by the Defendant, were: Pause (2001), Rounds (2003) and Everything Ecstatic (2005).
2. What are the case’s procedural proceedings?
Probably after some failed out-of-court attempts to settle with the Defendant, the Claimant issued some particulars of claim against the Defendant, in IPEC, on 16 December 2020 (the ‟Particulars of claim”).
In the Particulars of claim, the Claimant contended that the Defendant had breached their contractual obligations under the Agreement, in particular by failing to account properly for royalties in respect of streaming and digital downloads. The Claimant sought a declaration as to the true construction of the Agreement and monetary relief capped at GBP70,000.
In other words, the Claimant was asking, in the Particulars of claim, that the Defendant pay him 50 percent on the royalties in respect of the Masters, deriving from streaming and digital downloads, thereby categorising such music streams and downloads as licenses under the Agreement (despite the fact that the Agreement is no doubt a traditional record deal contract).
The Defendant filed and served their defence on 21 February 2021, resisting the claim in its entirety (the ‟Defence”). They argued – as they probably did argue, before the Claimant filed the Particulars of claim with IPEC – that digital downloads, including streams, were considered a new technology format, and that the Claimant was only entitled to the 13.5 percent royalty rate on such streams and downloads, like any other sales under the Agreement.
Also, in the Defence, the Defendant filed an application for strike out and/or summary judgment because the Defendant’s solicitors sent an open letter to the Claimant, on 16 November 2021 (the ‟Letter”), setting out that:
- the Defendant made an open offer to pay sums corresponding to the damages sought under the Particulars of claim, and costs;
- the Defendant informed the Claimant that they had instructed all digital service providers (‟DSPs”), such as Spotify, to withdraw the Masters, and undertook not to exploit the Masters digitally in future without first agreeing terms in writing with the Claimant (which, in any case, would not be the 50 percent rate claimed by the Claimant for exploitation), and
- in light of the Defendant’s above-mentioned offer, and their unilateral conduct/undertakings, the court proceedings should be stayed or, should the Claimant disagree to a stay, apply for dismissal of these proceedings.
The receipt of the Letter, and the serving of the Defence, prompted the Claimant to make an application for permission to amend the Particulars of claim, since he considered the Defendant’s conduct in withdrawing the Masters from the DSPs, and in stating that they would not exploit such Masters digitally in future, to be a breach of the Agreement.
The Defendant denied breach and issued an application for summary judgment on 25 November 2021.
The Claimant applied for permission to amend the Particulars of claim to include claims relating to the Defendant’s recent conduct, on 6 December 2021.
The Defendant wrote to the Claimant, on 14 December 2021, explaining that they did not consent to the proposed amendments to the Particulars of claim.
A hearing was held at IPEC on 16 December 2021, to deal with the competing applications.
Justice Pat Treacy issued her judgment on 19 January 2022 (the ‟Judgment”).
3. Four Tet v Domino: so what’s the lowdown?
3.1. Four Tet & Domino settled via a Part 36 offer & Domino will pay 50 percent on music stream royalties to Four Tet going forward
The most important takeaway, from this case, is that the Claimant announced, via a tweet sent on 20 June 2022, that him and the Defendant were in the process of settling the court proceedings via a part 36 offer to settle.
In this part 36 offer, which the Claimant made available to public view via yet another tweet dated 20 June 2022, it is set out that the Defendant made this offer to settle the whole claim, if accepted by the Claimant within 21 days of service of the part 36 offer, as follows:
- in respect of all historical streaming and download income from the accounting period starting on 1 July 2017 (i.e. the accounting period which includes the date 3 years prior to the date on which the claim was issued), the Defendant will pay the Claimant the sum of GBP56,921.08, calculated to be the difference between royalties which would have been payable to the Claimant at the 50 percent rate the Claimant claims, and what has been paid at the 18 percent rate to date;
- the Defendant will pay simple interest on the historical sum calculated to be due at a rate of 5 percent per annum;
- going forward, the Defendant will pay a royalty rate of 50 percent for all streaming and download income in respect of which the Defendant has not yet accounted to the Claimant, and
- this part 36 offer is made in full and final settlement of all claims in the proceedings (including, for the avoidance of doubt, all of the claims pleaded in the amended version of the Particulars of claim).
Another tweet from the Claimant shows the notice of acceptance of the part 36 offer to settle, signed by him as of 5 May 2022.
3.2. The label’s ongoing obligation to exploit the Masters in the public domain may survive the termination of any exclusive recording provisions of the Agreement
In the Judgment, Justice Treacy agreed that the Defendant may have an ongoing express or implied duty to exploit, as well as duty of good faith, with respect to the release and exploitation of the Masters, even after the exclusive recording provisions of the Agreement terminated in 2005.
Therefore, if this issue became relevant at trial (for example in the context of a dispute as to whether the Defendant’s actions in requiring the DSPs to cease digital delivery of the Masters were made in good faith), then the Claimant’s request to amend the Particulars of claim with respect to the Defendant’s express or implied duty to exploit, as well as duty of good faith, was reasonable.
The message is clear.
Record labels beware: don’t try to put pressure on your acts, by threatening, or even worse acting on such threats, to withdraw all your artist’s sound recordings from DSPs, to shut them up when they are asking you to account for music streams and downloads as licenses, and to pay them a 50 percent royalties’ rate on them.
Removing songs from DSPs may breach music labels’ express or implied duty to exploit, as well as to act in good faith, as the Judgment confirms.
This view, set out in the Judgment, goes in the direction expressed by the Committee in their Committee’s report and Bill, and before that by the European commission and parliament, in their European Union directive on copyright in the Digital Single Market 2019/790 (the ‟DSM directive”), that:
- the so-called appropriate and proportionate remuneration principle should apply, based on fair remuneration principles, within the contractual relationships between music labels and their acts;
- a contract adjustment mechanism should be put in place, so that music recording and performing artists may seek additional, appropriate and fair remuneration where the original remuneration is disproportionately low compared to the relevant revenues derived from the subsequent exploitation, and
- a revocation right should exist, and could be used when a copyright work licensed exclusively is not being exploited by the licensee (i.e. record labels).
Indeed, while the Claimant asked for permission to amend the Particulars of claim, in order to submit that the copyright in the Masters should revert to the Claimant, since the Defendant had failed to exploit such Masters on an ongoing basis by withdrawing them from the DSPs, the Judgment confirms that the Particulars of claim may be amended in such respect.
Why Domino refused to negotiate with Four Tet, pre-litigation, quietly and away from the public eye, in view of the above-mentioned recent legal evolutions triggered by the DSM directive, the Committee’s report and the Bill, is beyond my understanding: not only did they tarnish their reputation, by coming across as an out-of-touch, greedy and monolithic independent music label, but they failed to contain such PR public disaster, by letting Four Tet make the details of their settlement offer public via social media.
This is really a perfect example of what not to do, as a music label, when your talent asks for the renegotiation of their royalties’ share on music streams and downloads.
As far as Four Tet is concerned, he played his cards with considerable skill, business acumen and chuztpah, while managing his own legal case very closely and frugally (conducting litigation on his own behalf). While he would have liked to obtain from Domino that they return the Masters to him, as part of the settlement offer finally reached by the parties in May-June 2022, Four Tet was smart enough to accept the part 36 offer to settle, which granted him most of his demands and wishes anyway, while erasing the risk to be held liable in court to pay for all of Domino’s costs (in the scenario in which he would have rejected such part 36 offer, and in case the judgment obtained thereafter would have been no more advantageous than Domino’s part 36 offer).
As a music performer and recording artist, you need to be extremely well-prepared, poised and ready for battle, if and when you want to renegotiate the split on streams’ royalties with your music label, and Four Tet’s strategy is a great example to follow.
Since, Four Tet has moved on, by signing an exclusive and global publishing deal with Universal Music Publishing, and by setting up his own label, Text Records, via his own company Four Tet Limited.