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Bethesda Softworks LLC v. Interplay Entertainment Corporation

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Bethesda vs Interplay

Bethesda Softworks LLC v. Interplay Entertainment Corporation was a legal dispute between Bethesda Softworks, the current owner of the Fallout franchise, and Interplay, the publisher of the original Fallout games, and in settlement confirmed that Bethesda was the sole owner of the Fallout franchise, and ended the hopes of Interplay to create any future Fallout titles, including Project V13 (Fallout Online).

Howard Stahl and Joe LoBue (of Fried, Frank, Harris, Shriver & Jacobson) lead the case for Bethesda; against Jeffrey Gersh and James Sedivy (of Gersh Derby) for Interplay, with Geoffrey Hervey supporting as local (Maryland) counsel for Interplay.

Justice Deborah K. Chasanow of the US District court in Maryland was the judge of record for the case. Witnesses providing evidence included Herve Caen, CEO of Interplay Entertainment, Frederic Chesnais of Interactive Game Group (a financier of video game development), and Thomas Bidaux, a consultant to the MMOG industry.

Leading to the caseEdit

In 2004, faced with growing debts and declining revenues, Interplay offered a number of their Intellectual property rights (including Fallout) to other developers and publishers for sale or license. Amongst the bidders for the Fallout license was Bethesda Softworks, who secured a license to create 3 Fallout titles, in an Exclusive License Agreement (often referred to as the ELA). This deal was completed in June 2004.

Following this, Bethesda began some limited development on Fallout 3, while continuing to focus on the development of The Elder Scrolls IV: Oblivion.

The Fallout deal was not enough to secure Interplays' future, and on 29 November 2006 Interplay were issued an involuntary bankruptcy order. This was not the end for Interplay however, the next day they announced plans for Fallout Online, a game they hoped to fund with an investment from European backers.

Continuing to seek more funding, Interplay sold the entire Fallout franchise to Bethesda through an Asset Purchase Agreement (commonly referred to as the APA) and copyright assignment, replacing the previous 3 game license. Concurrent with this agreement was a second agreement signed at the same time, called a Trademark License Agreement (or TLA) on April 4 which licensed back to Interplay the right to make Fallout online, the terms of the TLA included:

  • Interplay's game would have to be a Massively Multiplayer Online game, which the TLA defined in Section 1 as having the following features:
    • They are "only played and accessed via the Internet and is not playable off-line in any manner whatsoever".
    • The game "is only functional as an MMOG and does not work as a single player game or as a game with 100 or fewer players".
    • MMOs enable "at least 1,000 players to interact simultaneously in the game world online and remains live 24 hours a day/7 days a week".
    • The business model requires "all players to pay a monthly subscription service fee or some similar ongoing method for billing players for participation in the game world online for the express purpose of obtaining and continuing on-line access to the game's core experience (except during any applicable user trial period)"
    • MMOs contain "content that is maintained only on dedicated servers by the offeror of the MMOG"
    • Fallout Online could not be "played on online game services of console manufacturers (such as Xbox Live from Microsoft)".
  • Full scale commencement was required to begin within 24 months of the agreement being signed (so a final date of April 4, 2009).
  • Interplay was also required to secure $US30 Million in funding by the same date.
  • The game must launch (in both North America and Europe) within 4 years of full scale development beginning; In the event of this deadline being missed, there was an option to extend this by an additional year and the possibility of further negotiations if more time was required.
  • After launch, the game was required to have at least 10,000 subscribers, and not be unavailable for more than 3 consecutive months
  • In the event of the TLA ending, Interplay would own the code, but would be required to remove any Fallout elements from the game.
  • The game would also need to meet Bethesda's Quality standards
  • Interplay would pay 12% of "Net Cash Receipts" (sales revenue, less costs involved in selling, such as marketing, packaging, sales/value added taxes, commissions and refunds) to Bethesda as a fee for using the Fallout marks.

In February 2009, President of Masthead Studios contacted Herve Caen via the Interplay Website offering his company's services to help develop the game. The Next month Mr Caen visited Masthead in their home country of Bulgaria and took a 90 second video of Fallout Online in some sort of playable state.[1]

Following this on April 2, 2009, Interplay announced a partnership with Masthead Studios, Developer of Earthrise to work on "Project V13", the Fallout online project.

Two days later the expiration of the deadline to begin full scale development passed. By April 15, Bethesda made moves to prevent further development by Interplay on this title.

In September 2009, Bethesda filed suit against Interplay to prevent further development.

The lawsuitEdit

SummaryEdit

The case raised the following questions to be determined through the suit

  • Were the TLA and APA valid?
    • Given Interplay believed Fallout copyrights were included in the TLA, and Bethesda did not, was there a "meeting of the minds" in the APA? this may make the TLA invalid.
    • Is a meeting of the minds an issue in a written contract under Delaware law? Bethesda says no.
    • If the TLA is invalid, does it in turn mean the APA is invalid? Are they a part of the same deal, or separate deals?
  • If the TLA is valid, then has it been rightfully revoked?
    • Did Interplay meet the financial requirements of the TLA by the agreed deadline?
    • Similarly, did Interplay meet the development requirements of the TLA by the agreed deadline?
    • Is the agreement between Interplay and Masthead permitted under the TLA?
    • Did Bethesda act in good faith, or did they attempt to prevent Interplay from achieving the requirements of the deal?
  • If the TLA and APA are invalid, who owns Fallout now?
    • Is the old 3 game licensing agreement back in effect? How much does Bethesda own in back royalties if this is the case?

Pre Trial InjunctionsEdit

After filing its initial suit in 2009, Bethesda filed injunction motions (first Sept 2009, denied Dec 2009; second June 2011, denied August 2011, Appealed) trying to get Interplay to stop work on Fallout Online. These were denied, on the ground that Bethesda failed to show enough evidence to the court that show that it was being harmed by Interplay's actions - the interplay game was not on release, and would have minimal impact on the value of the IP until a release became imminent.

Interplay in turn responded in October 2009, with a counter suit claiming that the TLA was invalid, and through this invalidity the APA was invalid too. Through this reasoning, if both the TLA and APA were invalid, then Interplay were still the rightful owners of the Fallout franchise, with the prior 3 game deal being in effect.

Masthead issuesEdit

Exclusion of EvidenceEdit

you [Interplay] are not calling any Masthead folks because you have not given the names in discovery, you did not do it timely in response to interrogatories that were sufficiently br[oad] to have required the identity of anybody at Masthead who has knowledge of or participated in the full scale development.

— The Court

An important point debated in pre trial motions was the admissibility of evidence from Masthead studios. Court documents and rumours surrounding the case suggest that Masthead had agreed to fund at least part of Fallout Online, and had done significant work on the project - to the point where the game was at least in some state playable - albeit using some elements of Masthead's other title to work.

In American trials, prior to the actual main part of the trial in the courtroom, both sides of the dispute go through a process called discovery. In the discovery phase, each side is required to essentially show the other side the evidence it may use in the trial itself, including physical evidence and names of witnesses to be called. Additionally in this phase, witnesses may have to go through a deposition, where the other sides lawyers can ask them questions while the witness is under oath. This allows both sides to prepare for each other's evidence, and have ready further evidence to call into question the validity or value of evidence called.

On September 23, 2011 the court, in a response to a Bethesda pretrial motion, precluded Interplay from calling any Masthead employees to the stand, as Interplay had not named any Masthead employees as witnesses.[2]

This had the effect of barring Interplay from introducing any evidence from Masthead, the judge noting "...it would be total hearsay for them to tell a jury about what they think Masthead was doing in Bulgaria, if it is based simply on what one of them might have told them from Bulgaria". Evidence that is considered "Hearsay" is not typically admitted in courts.

This had two major implications in the case. Interplay had decided that full scale development had begun following Herve Caen's visit to Bulgaria in March 2009, where he accepted the work that Masthead had completed to date; additionally although Masthead were working for a royalty (of between 25 and 45% depending on sales), Interplay had valued their contribution at $US 20 million, counting this towards the amount of money they were required to secure to maintain their license.[3]

Interplay could not sub-license to MastheadEdit

Bethesda grants to Interplay an exclusive, non-transferable license . . . The conditional license herein does not grant Interplay any right to sub-license any of the licensed rights without Bethesda’s prior written approval

— Trademark License Agreement

Bethesda also argued in their pre trial memorandum[4] that Interplay's engagement of Masthead to work on Fallout Online constituted a breach of the Trademark License Agreement, as the document prevented Interplay from sub-licensing the work on Fallout online without written approval - something which Bethesda says was neither sought nor granted.

A separate suit was filed against Masthead and later dismissed by agreement of both parties as part of the conclusion of this case.

TLAs and CopyrightsEdit

In December 2010, Bethesda muddied the waters with a new claim. Even if Interplay did have a valid license to make Fallout Online, the Trademark License Agreement only included the Fallout Trademark itself. Other elements, such as Supermutants, Power Armor, the Brotherhood, and the characters in game are not covered by trademarks; rather these elements are covered by copyright. This claim became a key plank in the arguments for both sides.

Bethesda - Trademark v CopyrightEdit

As Bethesda and Interplay did not have a Copyright license agreement, Interplay was restricted to a Fallout MMO without signature Fallout elements - in short, Fallout in name only.

Interplay - the vague TLA also makes the APA invalidEdit

Where terms in an agreement are so vague that a court cannot determine the existence of a breach, Delaware law provides that the parties have not reached a meeting of the minds... In that instance, the court should deny the existence of the alleged agreement

— DEFENDANT/COUNTERCLAIMANT INTERPLAY ENTERTAINMENT CORPORATION’S MEMORANDUM RE DELAWARE LAW OF CONTRACT FORMATION

The main strut of Interplay's case is based on the validity of the Trademark License Agreement. If the TLA is invalid, or so Interplay's argument goes, as this was "consideration" (basically part of the trade)on the Asset Purchase Agreement deal, then the APA is also invalid, putting the Fallout franchise back into Interplay's hands, with Bethesda allowed to release no more than 3 Fallout games, under the terms of the previous 2004 Exclusive License Agreement.

That both Interplay and Bethesda had such different interpretations on what the TLA allowed Interplay to do suggested that there may not have been a "meeting of the minds" (basically a common understanding of what was being agreed) between the two parties. It was Interplay's position that under Delaware law a court can strike out a contract where this is not present.

For its part, Bethesda argued that this line had no merit:

The issue of “mutual assent” or “meeting of the minds” arises where there is no formal, written, or fully executed agreement. The reason why is clear: Signing a contract conclusively establishes the parties’ objective manifestation of assent to the written terms of the contract. In Osborn v. Kemp, the Delaware Supreme Court dismissed out of hand an argument that there was no mutual assent to a fully-executed contract: “The face of this contract manifests the parties’ intent to bind one another contractually. Both parties signed the contract and . . . also exchanged consideration . . . .” Osborn v. Kemp, 991 A.2d 1153, 1158-59 (Del. 2010).[5]

Development and Funding guidelinesEdit

Whether or not Interplay had secured enough funding, and had started "full scale" development of Fallout Online were potentially key questions in the case had the full trial gone ahead.

Under the terms of the Trademark License Agreement, Interplay was required to secure $US30 in funding and start full scale development within 2 years of the TLA being signed (4 April 2007).

In pre-trial motions, who had the "burden of proof" to show the conditions in the TLA had or had not been met, what evidence would be available to prove this, and whether Interplay would be permitted to make any arguments at all were the subject of various motions.

The court ruled on who had the burden to prove on December 5, 2011 [6]

The first request is that I hold Interplay Entertainment to have the burden of proof on three separate or three potentially separate issues. One, that Interplay has a trademark and copyright license; that Interplay commenced full scale development by April 4, [2009] and third, that Interplay had secured financing also by April of 2009. ... The question arises as to how to approach the problem as of April 4th 2009. My conclusion is that the license was granted for an initial period of two years. And while Bethesda is calling this a "condition precedent" using contract terms, I think more appropriately it is a condition to the continued existence of the grant of the license. This is a condition that automatically reverted the right to Bethesda unless the condition was satisfied.
And, thus, I think it does come down to Interplay's burden, at least of production, with regard to the satisfaction of the condition in the grant. That is, that it will be the burden on Interplay Entertainment to come forward with evidence that it satisfied the conditions in the TLA for a license as of April 4th 2009. This is an express condition in the documents. It is one the treatise writers, at least, talk about as one that results in an automatic rescission or reclamation of rights if a grantee fails to perform the conditions and, thus, it would, if they can't produce evidence of the satisfaction of the condition, meaning they have not satisfied their burden of production with regard to having a license.

As Interplay were relying upon Mastheads contribution to show full scale development beginning in March 2009, this left them in a difficult position.

Interplay says funding is securedEdit

Bethesda's pre-trial memorandum summarizes Interplay's claim to secure funding:

Interplay satisfied its obligations under Section 2.3 of the TLA through a funding agreement with Interactive Game Group that provided up to $15 million and through a binding letter of intent for development services and subsequent agreement with Masthead Studios that provided approximately $20 million in development services and technology licenses.[7]

However, the value of $US20 million for development services was based upon Interplay's valuation of Mastheads contribution continuing through to completion. Masthead had not offered any funding for them and did the agreement signed with them did not offer a valuation for this contribution (Masthead were to instead receive a royalty from sales for their work).

Bethesda's counter-argument on fundingEdit

Bethesda's pre trial memorandum refuted Interplays claim that Interplay secured $US15 million in funding from Interactive Game Group (I2G). Bethesda's deposed (interviewed) the founder and sole employee of I2G Frederic Chesnais and in their counter argument included the following facts discovered during this deposition [8]:

  • The Game Production Agreement between Interplay Entertainment Corp. and I2G was not a binding agreement to provide financing to Interplay for the Fallout MMOG
  • There was no binding agreement between Interplay and I2G to provide financing to Interplay for the Fallout MMOG
  • As of April 4, 2009, (the deadline for securing “Minimum Financing”) there was no financing available from I2G for the Fallout MMOG.
  • As of June 11, 2010 I2G had financed only one game for Interplay: “Rat Race.”
  • I2G did not guarantee that it would provide funding to Interplay under the Game Production Agreement for any particular game.
  • I2G considered providing no more than five or six million dollars of financing to Interplay for the Fallout MMOG.

As for the agreement from Masthead, it was Bethesda position that any documentary evidence from Masthead, including an agreement to provide funding would be inadmissible in court under the rules against hearsay evidence.

Full Scale DevelopmentEdit

Like the requirement for Interplay to secure funding, Interplay was required to begin "Full Scale Development" no later than 2 years after the TLA was signed. In their Pre Trial memorandum (page 22) Bethesda noted:

Bethesda will present lay and expert testimony at trial that development of an MMOG costs tens of millions of dollars and requires a team of 40-80 individuals consisting of multiple members of at least twenty-two different professional disciplines: 3D engine programmers; network programmers; back end programmers; content tools programmers;service tools programmers; database programmers / database specialists; audio programmers; 3D model artists; 3D texture artists; technical artists; 3D animators; concept artists; system game designers; world designers; quests designers; writers; music composers; voice actors; producer (project manager); website designers; account system programmers; quality assurance manager;[and] localization manager. Development of an MMOG also involves production of final game content and final game infrastructure which is comprised of computer source code.

Earlier in the case, Interplay had stated in 2008 that Development costs would be at least $US26.8 million and 53 Employees. However, their 10-K release at the end of 2009 confirmed Interplay had a total of 5 employees, and $279,000 in development costs.

Bethesda noted in the same pre trial memorandum that Interplay had offered no code during discovery to prove development, and that a statement in March 2009 by Interplay CEO Hearve Caen confirmed the game was not in full scale development at that time. Further to this, Interplay's development costs decreased in the following quarter, Bethesda claimed that these both prove that full scale development did not begin by the April 4, 2009. In court however Herve Caen asserted that Fallout Online was in Full Scale development as of March 2009 following his observation and acceptance of early work by Masthead on the game.[9] Masthead's related evidence would be ruled as hearsay subsequent to this testimony for the purposes of the trial, and thus be inadmissible.

Other ElementsEdit

Fallout 1/2/Tactics SalesEdit

A second issue drawn into the greater case was Interplay's limited right to continue to sell Fallout, Fallout 2, and Fallout Tactics: Brotherhood of Steel. Under the original terms of the APA Interplay could continue to sell these games through to the end of 2013, after which all rights would revert to Bethesda.

Controversy erupted when Interplay began packaging these games together as the "Fallout Trilogy". Bethesda argued that this was both deceptive marketing (as trilogy would typically imply 1, 2 and 3; rather than Fallout 3 being included purchasers would receive Tactics) and was a breach of the parts of the APA which gave Bethesda control over how the games were to be marketed.

In response, Interplay stated that the Trilogy marketing was not new, and that Bethesda had been interfering with deals interplay was negotiating with digital distribution channels by threatening these retailers not to stock the earlier Fallout titles.

This Element of the case was mostly dropped pre trial.

Fallout D20Edit

In June 2006, prior to the sale of the Fallout franchise to Bethesda, Interplay had authorized Glutton Creeper Games to create a fallout tabletop role playing game to be marketed as Fallout Pen and Paper d20.

Following its purchase of the Fallout franchise, Bethesda terminated this agreement. Although the game was eventually released with Fallout elements removed, Interplay asserted in the case that Bethesda's attempt to do so was illegal. In response, Bethesda claimed that under the original 3 game deal it was the exclusive licensor of the Fallout title, and as such Interplay had no rights to enter the agreement in the first place.

The title was eventually released as Exodus

Thomas BidauxEdit

Mr. Bidaux is really here for Your Honor's benefit to explain to you and, I have to be candid, to me what an MMOG is in terms of what it takes to develop one and what skills are required; what kind of people are involved; the complexity of doing it; the cost of doing it. This is what he does. He is a recognized expert in the field of massive online gaming which, interestingly, Your Honor, is different from regular gaming. Like, Fallout 3 is a game that you could play at home, but you couldn't play with me and Mr. Gersh online. An MMOG, I understand, is much more complicated and much more difficult to create, and the development of it is a very, very complex enterprise.

— Howard Stahl, Attorney for Bethesda, 159

Another pre trial point of contention was the possible testimony of Thomas Bidaux. Bethesda sought to include him as an expert witness on MMO development, and said he would testify as to what sort of resources would be required to develop a MMO.

Interplay objected to his availability as a witness as they had limited opportunity to depose (a sort of pre-trial interview under oath) him before the trial. They argued that Bethesda had been uncooperative in trying to arrange for his deposition. Bethesda for their part said they had made him available between the 26–28 October 2011, but he did otherwise have a very busy schedule. Interplay argued that Bethesda's insistence that this must be performed in person, and not via he be excluded as a witness as with no information on Interplay's actions he had no information of value to offer the court.

The court ruled in Bethesda's favor, permitting his evidence, but limiting him to speaking in general about MMO development. He would not have been permitted to speak in specifics as to Project V13, the APA, TLA or any work Interplay had done on the project (which Bethesda contended they had no intention of doing).

Trial and SettlementEdit

Trial NotesEdit

See also Bethesda v Interplay trial court transcript.
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So there's thousands of pages of information, of designs, of characters, of effects, how these effects are going to work, what's going to happen. This isn't something that's created overnight, and I think Mr Caen has indicated that he's gathered this information, had the company gather this information for everything prior to April 4, 2009.

— Jeffery Gersh


Summary of terms of SettlementEdit

  • Both parties agree to dismiss the case, with prejudice (meaning the case cannot be refiled)
  • Bethesda paid Interplay $US 2 million
  • Interplay delivered the Gold Masters of the prior games to Bethesda
  • Interplay asserted the source code for the older games no longer exists, but in the event of it locating these, they would also be turned over.
  • The TLA would be terminated, and Interplay thus surrendered any claim to the Fallout franchise.
  • As per prior agreements, Interplay could continue to sell the older fallout titles until the end of 2013.
    • Interplay are prohibited from porting the games to any non PC platform.
    • Interplay are prohibited from modifying the games, except for patches to allow it to work on PC
    • Streaming Deals, beyond a completed deal with OnLive are prohibited.
  • All work on Fallout online was to cease, and the domain name turned over to Bethesda.

The Project V13 title was since reused for a completely different game.

TimelineEdit

  • June 2004 - Exclusive Licensing Agreement (ELA) signed giving Bethesda the rights to make 3 Fallout games. Interplay Entertainment retains ownership of the IP.
  • 10 June 2006 - Interplay signs licensing deal with Glutton Creeper Games for Fallout Pen and Paper d20
  • 29 Nov 2006 - Interplay receives Involuntary bankruptcy order
  • 30 Nov 2006 - Interplay announces it is seeking funding for a Fallout MMO
  • 4 April 2007 - Bethesda and Interplay sign Asset Purchase Agreement (APA) and Copyright Assignment (CA); these transfer all Fallout IP to Bethesda, less a right to continue to sell the old games through to Dec 2013 and supersede the ELA. Additionally both parties sign a Trademark License Agreement (TLA) to allow for Interplay to work on, and potentially release Fallout Online, if certain preconditions are met.
  • 8 May 2007 - Cease and desist sent to Glutton Creeper Games by Bethesda to cease work on Fallout Pen and Paper D20.
  • February 2009 - Masthead Studios president Atanas Atanasov approaches Interplay, offering their services in developing Fallout Online.
  • March 2009 - Bethesda claims that Herve Caen had confirmed that Fallout Online had not entered Full Scale Development during this month.
  • March 2009 - Herve Caen visits Masthead Studios in Bulgaria. After taking a 90 second video of early gameplay footage, he begins to consider the project in full scale development
  • 2 April 2009 - Interplay announces deal with Masthead studios for development for Project V13 in exchange for a royalty from sales of between 25 and 45%.
  • 3 April 2009 - Last day for Interplay to start full scale development and secure $US30 Million
  • 4 April 2009 - Interplay's internal Fallout Online wiki has 2400 pages detailing the game mechanics, classes, etc.
  • 15 April 2009 - Bethesda confirmed to have been making moves to prevent further Fallout Online Development
  • September 2009 - Bethesda files suit against Interplay, seeking to prevent further Fallout Online development.
  • October 2009 - Interplay files counter suit, claiming APA is invalid due to Bethesda breaching contract
  • December 2009 - Bethesda's motion for a preliminary injunction denied. During hearing extend and valuation of Masthead's involvement revealed.
  • 9 June 2011 - Bethesda files second injunction request against Interplay
  • August 2011 - Injunction request denied and appealed to the US Court of Appeals.
  • Oct-Dec 2011 - Final pre trial motions (Biddeaux, Masthead, etc.)
  • Dec 2011 - Trial begins, and is suspended same day, Sealed motion to dismiss with prejudice. Transcript here.
  • 9 Jan 2012 - Bethesda announces court case is over, MMO rights restored to Bethesda, and other settlement terms. Dispute ends
  • 3 April 2013 - Last day, had Interplay started full scale development on 3 April 2009, Fallout Online could have been released without a per-negotiation extension.
  • 31 Dec 2013 - Last day Interplay can sell Fallout, Fallout 2 and Fallout Tactics.
  • 3 April 2014 - Last day, had Interplay started full scale development on 3 April 2009, Fallout Online could be released without further negotiations on license.

Notable QuotesEdit

Just because the parties disagree as to what a contract means didn't mean it's ambiguous.

— Justice Chasanow, Court Transcript, p24

Court documentsEdit

Some of the court documents were marked as Confidential at the start of the case; this was in order to prevent the rival companies acting on information they should not have until the trial had concluded. Following the settlement all court documents are considered public domain; originals are available through the PACER system.

ReferencesEdit

  1. Partial Transcript 10-12-2009 court hearings in Bethesda v Interplay
  2. pre trial memorandum p19
  3. Partial Transcript 10-12-2009 court hearings in Bethesda v Interplay
  4. pre trial memorandum page 28
  5. Bethesda Pre Trial memorandum page 30.
  6. Motion in Limie hearing transcript
  7. Bethesda pre trial memorandum P17.
  8. Bethesda pre trial memorandum P17-18.
  9. Partial Transcript 10-12-2009 court hearings in Bethesda v Interplay

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