Timegate Studios, Inc. v. Southpeak Interactive, L.L.C

713 F.3d 797 United States Court of Appeals, Fifth Circuit

Filed April 9, 2013.

Although not an intellectual property matter, Timegate provides some valuable insights and lessons for game developers and publishers regarding the drafting of development agreements.  In June 2007, Timegate Studios, Inc. ("Timegate") entered into a video game publishing agreement with Gamecock Media Group ("Gamecock") who was later acquired by Southpeak Interactive ("Southpeak").  The terms of the agreement stated that Timegate would develop a "high quality" military-style shoot entitled "Section 8" which would then be published by Gamecock.  The agreement specified that in return for designing the game, Gamecock would, "provide most of the investment funding for the game's development. . . . [as well as] manufacturing, marketing, distributing and selling the game after its development." While Timegate remain the exclusive owner of the game's intellectual property, Gamecock was granted exclusive, world-wide rights to produce and sell the game.  These exclusive rights were to last for a period of eight years from the initial release or for five years after any sequel or downloadable content, whichever was later. 

In September 2009, the game was released and Southpeak had acquired Gamecock and its rights and duties as publisher under the 2007 agreement.  The relationship between the parties began to deteriorate, shortly thereafter, due to sales not reaching expectations.  Timegate filed suit against Gamecock in December 2009 alleging violations of the publishing agreement; Timegate also alleged that Southpeak misreported sales figures in order to withhold Timegate's shares of the revenue.  Southpeak, on the other hand, maintains that Timegate terminated the agreement in order to be released from the contract due to the game being unprofitable.  Southpeak further alleges that Timegate published a Playstation 3 version of the game as well as a sequel without providing Southpeak with any revenue derived from those games even though the agreement called for sharing of revenue.  Gamecock moved the court to stay the trial due to an arbitration clause in the 2007 agreement.  At arbitration, the arbitrator found in favor of Gamecock and awarded $7.5 million, the loss sustained by Gamecock to date, plus attorney's fees, and a perpetual license in the "Section 8" property.  Specifically, the arbitrator found that Timegate had made fraudulent misrepresentations and breached the contract due to Timegate not spending the $7.5 million in development that was stated in the agreement.  What Timegate did spend was only $6.76 million, pocketing the remaining money for itself, and Timegate also failed to invest $2.5 million of its own money into the game which was specified in the agreement.  The arbitration award was later vacated by the district court causing Gamecock to appeal to the Fifth Circuit. 

The Fifth Circuit reversed the district court's decision and ordered the arbitration award to be reinstated.  While noting that the arbitration clause was "quite broad", there were no limitations on the award that could be granted.  Furthermore, the granting of the license "furthered the general aims of the Development Agreement;" because "Timegate committed an extraordinary breach of the Agreement, and an equally extraordinary realignment of the parties' original rights is necessary to preserve the essence of the Agreement.

This case should be noted for game developers, as well as publishers, because it shows the drastic consequences that can result from an overly broad arbitration clause.  The overly broad arbitration clause may have been convenient during the drafting phase, but had it not been present, it is possible that Southpeak would not have received such a large award in damages or the perpetual license in the "Section 8" property.  This further emphasizes the importance of hiring an attorney with a strong background in drafting complex development agreements; otherwise, a developer or publisher is potentially opening itself up to significant consequences when acting as their own contract counsel.