Most states and the federal government have specific laws that prohibit unlicensed gambling and lotteries, which are typically defined as “risk[ing] something of value upon the outcome of a contest of chance or a future contingent event not under his control or influence, upon an agreement or understanding that he will receive something of value in the event of a certain outcome” (See NY Penal Law – PEN§225.00 et seq.).  In fact, only state governments, where permitted, are allowed to run lotteries and many states outright prohibit them.  As a general matter, a lottery has three determinative, core elements: consideration (usually the payment of money), chance and prize.  Accordingly, for example, under California law Penal Code Sec. 319 , which is typical of most state anti-lottery laws, a contest or a sweepstakes becomes an illegal lottery when all three of these elements are present.  Therefore, in order to run a legal promotion (such as a sweepstakes or contest) one of the three elements of a lottery must be absent.

Sweepstakes generally enjoy an “exemption” of sorts from the lottery and gambling laws by virtue of the fact that there is no purchase required in order to enter (leading to the “NO PURCHASE NECESSARY” language that accompanies sweepstakes rules), thus eliminating the “risking something of value” element described above.  In contrast, a contest will often retain the consideration element but instead require some demonstration of skill from the participant, thus removing the core element of chance from equation.

Against this backdrop, the first slew of promotion-type apps taking advantage Apple’s revised developer terms have been sweepstakes as opposed to contests.  Specifically, these new applications are allowing entry into games where the winner is selected purely on a randomized basis, without having to demonstrate any skill in participating.  Therefore, laws applicable to the administration of sweepstakes, as opposed to contests, are at issue.

Historically, the largest legal hurdle and source of the most debate regarding the operation of sweepstakes has been over the removal of consideration from the equation.  Merely removing the requirement of an entry fee will not always satisfy the “no consideration” requirement as consideration can come in many forms, including the purchase of a product, an SMS text, subscription fees or otherwise engaging in activities that require substantial time or effort, such as completing an online survey, etc.  And even when some amount of consideration exists, promoters have generally avoided having their sweepstakes classified as unlawful lotteries by providing a universally-available, free alternative method of entry (“AME”) (such as a mail-in postcard, etc.) that provides equal treatment to entrants who use the AME.  Thus far, the sweepstakes applications available on the App Store (whether free or for a fee), such as “Scratch Off Now” from Thought Quarry LLC, which enables marketers to include their branding, messages and products on the app, are coupled with an AME on a corresponding website, allowing entrants the opportunity to participate in the sweepstakes without downloading the particular application.

However, providing an AME may not be enough, under some state laws, to make the promotion legal if the entrants that have paid consideration do not receive something of value for the payment.  An end user may not pay just for a chance to win a prize and state anti-gambling laws may be invoked (as is the case with online poker, sports betting and other forms internet-based gambling) if an end user is required to purchase (a) an app itself or (b) entry in a sweepstakes via such app and does not receive some value in return.  That “return value” needs to only be equivalent to the value paid for the app or the entry.  To take a recent example, paying entrants in a recent sweepstakes promotion tied to the Iron Man 2 movie release received a can of Dr. Pepper.

In addition to providing something of value to entrants, a sweepstakes can avoid classification as an illegal lottery if it clearly promotes the sale of “real” products or services, distinct from the game itself.  Accordingly, it is no surprise that Apple has limited its developers to creating “promotional” sweepstakes and contests. Even Facebook, which similarly allows third parties to run contests and promotions on its platform, continued to refine and post increasingly specific guidelines throughout the past year in an attempt to ensure that these gaming-style promotions are run in accordance with applicable law. In fact, Facebook now prohibits promotional sweepstakes that condition entry upon the purchase of a product, completion of a lengthy task, or other form of consideration.

Needless to say, the risks are real for both social networking sites and device manufacturers housing applications, particularly when both virtual and credit card transactions are occurring on and through the sites and platforms, including where credit card data is maintained (e.g., purchasing raffle tickets via an iPad app where the credit card charged is on file with Apple via iTunes), as the potential exists for liability to extend beyond the app developer.  Ultimately, social networking sites and platform developers need to ensure that their marketing partners, sponsors and developers carefully structure their promotions and apps to comply with anti-gambling laws.

As always, we will keep an eye out for developments in this area of the law, particularly as the lucrative and viral nature of these promotions continue to expand exponentially across new media platforms and devices.

Whether a dance routine or a martial arts demonstration, legal protection for the majority of athletic movements that will be incorporated into the forthcoming wave of motion detection-based games will likely fall under copyright law’s definition of “choreography”–a form of artistic creation which secured copyright protection in 1976 when the Copyright Act (the “Act”) was amended to include “pantomimes and choreographic works” (17 U.S.C. 102(a)). Prior to that time, choreography could only be protected under copyright statutes to the extent embodied within another copyrighted work that was eligible for protection. Although the Act extended protection to “choreographic works”, it failed to define the term and what types of movements qualified as same. Other copyrightable forms, including “architectural, audiovisual, literary, pictorial, graphic and sculptural works, motion pictures, and sound recordings” are defined in the Act, but “choreographic work” is the only copyrightable form whose meaning is left unclear. In fact, the House and Senate Reports surrounding the Act indicate that Congress’ decision not to define “choreographic work” was deliberate, as legislators believed the meaning to be “fairly well settled”. In fact, the only guidance provided by Congress with respect to the category of “choreographic works” was that it does not include “social dance steps and simple routines.”

In the absence of guidance from Congress or the copyright statutes on which activities qualify for protection under copyright law as “choreographic works”, the U.S. Copyright Office (the “Office”) offered a more technical definition of “choreography” in its Compendium of Copyright Office Practices, stating that “[c]horeography is the composition and arrangement of dance movements and patterns usually intended to be accompanied by music.”

While instructive, this interpretation is not binding on the federal judiciary, and there is little case law defining the precise scope of “choreographic works”. Moreover, even if the Office’s interpretation of a “choreographic work” does not capture the essence of certain athletic movements, the fact remains that the Act’s enumeration of copyrightable subject matter is not meant to be exhaustive, and is prefaced with the statement that “[w]orks of authorship include the following categories”; and since the Act defines the term “including” as “illustrative and not limitative,” the fact that Congress did not specifically list all athletic movements that fall within the realm of copyrightable subject matter does not mean that they are not covered (just as, for example, the absence of programming code and computer programs from the Copyright Act has not prevented the courts from finding same to be well within the range of copyrightable subject matter). Further, a separate category of copyrightable subject matter known as “dramatic works” also provides some applicability to the extent the athletic movements portray a story or narrative through action, but the underlying movements, which themselves are devoid of story, would not likely find refuge here if separated from the corresponding story or narrative in the context of an interactive game.

While some athletic movements remain close enough to the Office’s definition of “choreographic works” or “dramatic works” that they should be afforded copyright protection (e.g., figure skating, rhythmic gymnastics, synchronized swimming, etc.), there has been, in recent years, a push for the copyrightability of other athletic movements under the guise of “choreographic works.”  For instance, Open Source Yoga Unity v. Choudhury, specifically addressed the question of the copyrightability of yoga moves (see 2005 WL 756558 (N.D. Cal. Apr. 1, 2005).  While the court did not settle this question, it held that it is at least possible for individual yoga positions to be “arranged in a sufficiently creative manner” to merit copyright protection. In Ahn v. Midway Manufacturing Co., a district court held that dancers who performed martial arts routines for a software developer that later incorporated the routines into the “Mortal Kombat” video game did not become joint owners of the copyright in the game only because they assigned their rights to the copyrights pursuant to a work-for-hire contract (see 965 F. Supp. 1134 (N.D. Ill. 1997)).  The court deemed the martial art performances to be “choreographic works” and stated that these “choreographic works were all original works of authorship [and] choreographic works fall within the subject matter of copyright.”  In fact, in Baltimore Orioles, Inc. v. Major League Baseball Players Ass’n, the Seventh Circuit held that “[baseball] [p]layers’ performances possess the modest creativity required for copyrightability” (see 805 F.2d 663 (7th Cir. 1986)).

Based on the foregoing decisions, there may not be a significant enough distinction between a kung fu sequence, a skateboarding demonstration set to music and a figure skating routine that would warrant extending copyright protection to one and not the others. Ultimately, though, determining which choreography or movements actually fulfill the statutory criteria, and which on the other hand are too commonplace to qualify as copyrightable subject matter, will require a case-by-case, fact-specific analysis. That being said, as the above discussion indicates, it is certain that to qualify for copyright protection, an athletic movement will have to evince a certain degree of complexity and original expression, and routine-oriented athletic performances are more likely to warrant coverage as they generally embody sufficient amounts of artistic expression and each move is specifically choreographed and designed for repetition. As one commentator described, a sport like football, even where each play is diagrammed and practiced to some extent, depends more upon the interaction and improvisation of the participants throughout the natural course of the game. A running back, for example, may go fifty yards for a touchdown, eluding opponents, breaking tackles and navigating through the defense on one play, but the next time that play is called, he may fumble the ball or be tackled for a loss of yards. A figure skating routine, on the other hand, has a repetitive nature to it; the skater will often perform the same routine countless numbers of times with minimal variations.

Once the determination is made that the athletic movement likely falls within a class of protectable subject matter under the Act, the next step is licensing the rights for inclusion in the interactive game. The clearance process for music-based interactive games, for example, relies on a well-established framework with the licensing arms of the major labels, publishers, performing rights organizations and other collectives serving as long-standing clearing houses for securing rights from multiple artists and writers. However, there are no analogous industry clearing houses or collectives for licensing choreography rights and each applicable copyright, together with any corresponding moral, publicity or privacy rights, need to be licensed from the individual owner.

In fact, this may well be the first time that movements deemed “choreography” under the Act, whether in the form of modern dance or complex wrestling moves, will be exploited and licensed as individual works on a large scale–separate and apart from the play, the music video, the movie or even the person through which it entered the public consciousness. In other words, in order to develop an interactive title based on choreography on an operational level, each individual movement will need to be reperformed and recast by professionals and technicians who will recreate the movements in a green screen-reminiscent environment using motion sensors that will allow advanced computers to precisely track a new range of activity, in particular depth-based movement, which will then be digitized and incorporated into the video game. This process will ultimately allow for the comparison of the professional recreation against the end users’ movement on a television screen and allow the game to rate and track performance, alter difficulty settings, offer training functionality, etc., all of which have become standard functionality in interactive titles. Having now extracted and recreated the choreography as a stand-alone artistic creation, the publishers and developers of motion detection games will need to begin the process of securing the rights to those popular movements crucial to a successful gaming title.

This is where the legal confusion begins for licensing athletic movements and choreography. As an example, consider the implications of the inclusion of modern or popular dance into a motion capture video game. Dances have never been the subject of lucrative licensing outside the realm of dance companies and on-stage performances because dancers were often placed at a severe disadvantage for demonstrating ownership of copyrights. As a result, attribution and credit for a dance in the dance community is frequently not equated with ownership of the copyright given the lack of economic incentive in establishing and maintaining an accurate chain of title. In these muddy waters, who holds the necessary rights required to license the dance? The music label that owns the music video? The artist who performed the dance? The artist’s choreographer who conceived of the dance? Is it jointly owned by contributing dancers and the artist? Was it created pursuant to a work for hire agreement or within the scope of employment without an agreement? Was the dance based on a pre-existing dance which could invalidate ownership? Was the dance created outside the United States thus leaving the creator with moral rights over the work that cannot be assigned? Was it previously performed and recorded on stage or in dance studio, so that the movie studio or music label is left without ownership outside of their movie or video?

The foregoing dance hypothetical is just one example of the complications associated with one form of athletic movement destined to be incorporated into motion capture games. Once the worldwide popularity of a new line of these games takes hold and creators of all forms of movements claim copyright protection after realizing the new found economic value of their works, legal disputes over the nature of copyright and the bounds of statutory protection will force the courts to take a series of bold moves–ones that can be repeated.

As always, we will keep an eye out for developments in this area of the law, particularly as the technological bounds of interactive gaming continue to expand with the introduction of gesture-based gaming.

  Royalty Rate Analysis

After months of hearings, testimony and deliberations, on October 2, 2008, the United States Copyright Royalty Board (CRB) announced newly established rates for royalties to be paid to writers and composers (as opposed to performers) whose musical compositions are made and distributed as sound recordings (i.e., phonorecords), including via (1) physical recordings (e.g., CDs, tapes, vinyl, etc.), (2) permanent digital downloads, (3) ringtones, (4) limited/tethered digital downloads and (5) interactive streaming.

 These new rate determinations, which will remain in effect until December 31, 2012, break new ground. Following a drawn-out battle between the National Music Publishers’ Association (NMPA) (representing song writers and composers) and the Recording Industry Association of America (RIAA) and the Digital Media Association (DiMA) (representing the record labels and digital music retailers, respectively), the CRB established, for the first time, a rate for the distribution of ringtones (24¢ per delivery), while surprisingly maintaining the same rates for the distribution of physical recordings and permanent downloads of digital recordings that had been in effect since January 1, 2006 (9.1¢ per delivery). The rates for the distribution of sound recordings as limited/tethered downloads (i.e., downloads that only play a fixed number of times or for a fixed period of time) and as interactive streams (i.e., online digital streams of recordings selected by an end user on an on-demand basis), both of which had been slated for resolution by the CRB among the other rates at the outset of the lengthy proceedings, were actually negotiated to a consensus by the parties during the hearings, and their settlement was adopted by CRB, subject to ratification following public comment.

The announcement of the rates for limited downloads and interactive streaming of recorded music are of the utmost importance to both the publishers and the record labels alike because, prior to the announcement of the proposed rates, any service seeking to offer limited downloads and/or interactive streaming of recorded music was required to negotiate a royalty rate with individual writers, publishers or mechanical royalty collections agencies such as Harry Fox. In other words, copyright ownership in a sound recording alone (or obtaining a license from the owner, typically a record label) does not allow for the distribution of that recording without first obtaining a license from the song writer or publisher owning and/or controlling the copyright in the musical composition contained therein. Section 115 of the Copyright Act, also known as the “mechanical compulsory license”, however, provides a mechanism whereby a licensee (typically retailers or record labels) may be automatically granted a license to distribute sound recordings containing songs that they neither own nor control simply by adhering to the terms of the compulsory license and paying the rates set by the CRB. In other words, the express permission of song writers and publishers is not required to make and distribute sound recordings incorporating their musical compositions, provided that the licensee pays the applicable rates and complies with the terms of the statute.

As evidenced over the last two years, the trend among social networking websites (e.g., MySpace, etc.) and other digital entertainment websites (e.g., imeem, last.fm, etc.) has been the inclusion of digital music in forms other than traditional webcasting or internet radio (i.e., non-interactive streaming, where the end user does not select each individual sound recording) in favor of a more personalized user experience. Obtaining a license to provide interactive streaming, however, has thus far been both a lengthy and expensive process, but now website publishers will only be required to negotiate licenses with the sound recording owners or providers and pay the required mechanical license fees and the applicable public performance fees without the need to negotiate a separate licensing arrangement with the publishers.

The new mechanical royalty rates for limited downloads and interactive streaming are unlike the statutory rate structure for physical recordings, permanent digital downloads, and ringtones, all of which are all based on per unit calculations (i.e., “penny rates” or a fixed amount per distribution). Instead, these new rates are based on a percentage of revenue formula, with varying rates based on the business model of the service offering the musical recordings, including subscription-based and ad-supported models. In other words, the amount due to each publisher whose work is incorporated in a sound recording selected by an end user for streaming or downloading is a certain pro-rata percentage of revenue earned by the service or digital platform.

   The calculations are relatively complex, requiring multiple steps that vary according to the type of service. For all service models described in the proposed rate settlement, however, the calculation begins with a determination of monthly “service revenue” for the applicable accounting period, or all revenue recognized by the service from end users from the provision of the licensed activity, including subscription fees, sponsorships, commissions and third party advertising in connection with the interactive streaming and limited downloads offered on the service. The service revenue is then multiplied by the applicable percentage, which is identical across the all service models (10.5%). This amount is then subject to increase based on the applicable minimum payment amounts if the percentage of service revenue fails to exceed the minimums according to the type of service (i.e., whether music subscription fees are charged or whether the service is free or ad-supported).

For example, in the case of music subscriptions services (4 of the 5 service models), the applicable minimum payment is the greater of (a) a fixed amount for each paying subscriber ($.15-$.80) or (b) a fixed percentage of the amount paid by the service to the owners of the sound recordings (i.e., licensing fees paid to the recording labels and content aggregators) for the rights to steam and offer downloads of the recordings (17-22%). In the case of free or ad-supported models, the only applicable minimum is the fixed percentage of the amount paid to the owners of the sound recordings (18%-22%). Ultimately, the total amount due to the publishers is the percentage of service revenue or the applicable minimum payment amount (which ever is greater), less all public performance fees paid by the service provider to the applicable performing rights organizations for the rights to stream the applicable recordings.

These first time mechanical rates for music on ad-supported and free services represent a significant shift in the digital music space. First, it effectively removes any fixed payment obligation on such services (i.e., no penny rates based on the amount of subscribers, downloads, or streams) other than 10.5% of service revenue or the fixed percentage paid to the owners of the sound recordings. Second, the absence of fixed dollar minimums provides much-needed flexibility for new business models to emerge and should allow them to continue to exist, as many would cease to be profitable if required to remit fixed dollar amount minimums when all revenue generated is dependent on alternate sources, including the receipt of advertising dollars.

Once the proposed rates are ratified, expect to see increased streaming activity in the digital music space among purveyors of online content, especially social networking websites. In fact, within a few days of MySpace’s recent launch of its streaming music functionality, MySpace Music, the service had already well surpassed one billion streams, providing further evidence that a per stream or subscriber/member minimum would be cost prohibitive.

    Winning the Digital Race