Game Developer And Publisher Battle Over Step In Rights

The High Court (in Secret Mode Ltd and another v Victura, Inc) has declined competing applications for interim relief by the developer and publisher to obtain what the Judge described as the "keys to the kingdom" in an ongoing dispute relating to the development of the first-person shooter Six Days in Fallujah. The applications concerned attempts by both parties to gain control of the continuing development and publishing of the game pending trial.

It is an interesting case about an allegedly failed milestone, which is a common area of dispute during the video game development process. However, a court case such as this is fairly unusual, because milestone disputes are typically resolved pre-action (e.g. by resubmitting the relevant deliverable and/or through negotiation between the parties), and are not often litigated. 

The source code in question is clearly valuable. The game has been in development for some time, and over $50 million had already been spent by the developer in developing the source code and releasing the early access version of the game before the parties entered into the publishing agreement currently in dispute. Under this agreement, the publisher would fund up to $8 million in development costs, spend approximately $3 million on marketing and publishing, and share net revenues 50-50 after recoupment. 

As is typical, the agreement contained milestone-based funding, with each tranche of the development advance released only after the publisher approved a milestone build. Less typically (and reflecting the $11 million investment by the Publisher), the agreement also included a "step in" right. This potentially powerful right allowed the publisher to assume control of development if the developer failed to meet milestones after two resubmissions, with the publisher's revenue share increasing to 75% and the developer being obliged to hand over its full source code.

The relationship broke down after the publisher rejected a milestone and two resubmissions, citing AI performance issues and loading times. The publisher claimed its step in right had been triggered. The developer alleged (in a clearly serious counterclaim) that the milestone rejection was pre-determined and part of an unlawful means conspiracy to acquire access to its proprietary source code and intellectual property, and alleged that it was entitled to terminate the agreement. 

Ultimately, the court declined to grant interim relief to either party. The developer's application failed primarily because the court was not satisfied that it had the financial resources to fund both the completion of the game and its marketing and publication. The court described the developer's proposals for covering a $3 million funding shortfall as "based on hope rather than the presence of existing liquid facilities." The developer's financial situation meant that it also could not adequately back its cross-undertaking in damages.

The publisher's application was also refused. The court found the risks of granting it control outweighed the benefits. In particular, handing over source code developed at a cost of over $50 million to a publisher that had invested $2.6 million created a real risk of irremediable harm especially where there was a serious issue to be tried as to whether the publisher had engineered the milestone failure to access that source code. 

As this was an interim hearing, the court did not rule on the substantive issues in dispute which will require a full trial (including cross-examination of the witnesses) to resolve if the dispute does not settle. However, the Judge gave a strong indication that he favours the parties coming to a negotiated settlement (possibly in a formal mediation), noting that a milestone is near completion and negotiations may allow the parties to reflect on their common interest in completing the game. 

As I have explained, both sides are seeking interlocutory injunctions that give them the "keys to the kingdom" pending trial.

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