M&A and Gaming Industry
The gaming industry has witnessed significant growth and diversification in recent years, making it an increasingly attractive sector for mergers and acquisitions. However, conducting M&A transactions in the gaming space involves a distinct set of legal considerations that require industry-specific expertise. Below, we outline some key issues to be aware of when navigating M&A in the gaming sector:
A: Regulatory Compliance and Licensing
The gaming industry is subject to various legal and regulatory frameworks depending on the jurisdiction. In Japan, this includes laws related to intellectual property, online gaming, and consumer protection, as well as more specialized regulations such as the Payment Services Act and the Act on Specified Commercial Transactions. It is critical to assess whether the target company holds the necessary licenses and complies with all applicable regulations, as failure to do so could jeopardize the transaction or expose the acquirer to significant legal risks.
B: Intellectual Property and Content Licensing
Intellectual property is often one of the most valuable assets in a gaming company, including trademarks, copyrights, and software licenses. During due diligence, it is essential to confirm the scope and validity of the target’s IP rights, as well as to identify any third-party licenses or agreements that may impact the use of the IP post-acquisition. Issues such as the licensing of in-game music, character designs, and software code should be carefully examined to avoid post-acquisition disputes or infringement claims.
C: Player Data and Privacy Compliance
With the increasing complexity of gaming ecosystems, player data has become a significant asset and potential liability in M&A transactions. It is crucial to review the target company’s data collection and usage practices to ensure compliance with Japan’s Personal Information Protection Act and any other relevant data privacy regulations.
Our firm has extensive experience advising clients on M&A transactions in the gaming industry, including:
-Conducting legal due diligence for a European game publisher on compliance with Japanese gaming regulations.
-Advising a U.S.-based gaming company on its acquisition of a major game publisher distributing mobile games in Japan:
Our team combines in-depth knowledge of the gaming industry with expertise in corporate and M&A transactions to help our clients navigate the complexities of transactions in this dynamic sector.
Gaming Transactions / Contracts
The gaming sector is a rapidly evolving field, characterized by frequent amendments to relevant laws and ever-changing industry practices. To anticipate potential future issues and mitigate risks, it is crucial to keep contracts updated promptly and accurately. Our firm continuously monitors the latest legal and practical developments in the gaming industry to provide tailored services that meet our clients’ needs.
Some common contracts in the gaming and eSports industry include Management Agreements (Player Contracts) and Licensing Agreements for Game Development.
Management Agreements (Player Contracts)
A Management Agreement, also known as a Player Contract, is an agreement between eSports players who earn income through competitions or promotional activities and game manufacturers, sponsors, or gaming teams.
Management Agreements may include a variety of provisions, such as the scope of the player’s duties, compensation and prize distribution, rights to the player’s image and publicity, restrictions on competition and transfers, ownership of accounts, and more. It is essential to have appropriate provisions in place to address these matters and prepare for unforeseen circumstances that may arise in the future.
Under Japanese law, Management Agreements (Player Contracts) generally fall into one of two categories: Mandate Contracts (or Quasi-Mandate Contracts) or Employment Contracts. This classification is not determined solely by the title of the contract but rather through a comprehensive assessment of the substance of the agreement, the nature of the duties, and the real-world activities involved.
Typically, eSports players operate under contracts where they provide their expertise in gameplay without being subject to direct commands regarding their work, which would categorize the relationship as a Mandate Agreement (or Quasi-Mandate Contract). However, if the contract is found to be an Employment Contract, the player would fall under the protection of the Labor Standards Act, which imposes various regulations on the employer. This distinction requires particular attention.
The eSports industry is still relatively new, and there are not many precedent-setting contracts or court rulings available to serve as references. Therefore, engaging a legal professional at the initial stages of contract drafting or review can help both businesses and players engage in comprehensive risk management that considers their specific circumstances.
Licensing Agreements for Game Development
Games typically contain various creative works, including illustrations, text, music, and software programs. If these works are created by employees of a game company in the course of their duties, they are considered corporate works under the Copyright Act, with the company being recognized as the copyright holder.
On the other hand, when these materials are outsourced to external creators, the copyright remains with the creator. Therefore, in order for the game company to legally use such works, it is essential to formalize an agreement between the company and the creator. The types of agreements generally include:
- Copyright Transfer Agreement – The creator transfers full copyright ownership to the game company.
- Copyright License Agreement – The creator grants the game company permission to use the copyrighted works.
Particularly in the case of the Copyright License Agreement, it is crucial to clearly define the scope of the license, including whether sublicensing is permitted, and ensure that the usage rights encompass scenarios such as eSports tournaments, online streaming, and potential international expansion. This ensures comprehensive legal coverage and minimizes the risk of future disputes.
Registration and Reporting Services for Prepaid Payment Instruments
If in-game currencies or items used in online games qualify as “Prepaid Payment Instruments” under the Payment Services Act, it is necessary to comply with the regulations stipulated by the Act.
What is a Prepaid Payment Instrument?
The Payment Services Act defines Prepaid Payment Instruments as those that meet the following three requirements:
- Stored Value
The monetary value is recorded or stored in a tangible or electronic form. - Issued in Exchange for Consideration
The instrument is issued in exchange for a corresponding value (consideration). - Utilized for Payment
The instrument can be used to pay for goods and services.
In the context of online games, virtual currencies (commonly known as in-game currencies) are often used to play games or purchase items. Since the value of these in-game currencies is stored on the game provider’s server, it meets the first criterion, Stored Value.
Additionally, if users acquire in-game currencies by paying a corresponding amount, the second criterion, Issued in Exchange for Consideration, is also satisfied.
Finally, if these in-game currencies are used to play the game or purchase in-game items, they satisfy the third criterion, Utilized for Payment. Therefore, general in-game currencies typically meet the above three criteria and are subject to the regulations under the Payment Services Act.
Types of Prepaid Payment Instruments
The Payment Services Act categorizes Prepaid Payment Instruments into two types:
- Self-Issued Type
These instruments can only be used for services provided by the issuer. - Third-Party Issued Type
These instruments can also be used for services provided by third parties.
In the case of in-game currencies, they generally fall under the Self-Issued Type since they are primarily used for services offered by the game provider.
Payment Services Act
For self-issued Prepaid Payment Instruments, a post-issuance reporting system is applied. If the unused balance of in-game currencies exceeds the threshold amount (JPY 10,000,000) as of the reference dates (March 31st and September 30th), the issuer must deposit the issuance security deposit (equivalent to half of the unused balance) at the Legal Affairs Bureau and submit an issuance report to the competent Local Finance Bureau.
However, the Payment Services Act excludes Prepaid Payment Instruments with a validity period of six months or less from this regulation. Some game applications set the expiration date of in-game currencies within six months to be exempt from the regulations under the Payment Services Act.
Required Information for Prepaid Payment Instruments
Issuers of Prepaid Payment Instruments must display or provide the following information in accordance with the Cabinet Office Ordinance on Prepaid Payment Instruments:
- Name or trade name of the issuer
- Usable balance or quantity of goods/services available
- If a period or expiration date is specified, the relevant period or expiration date
- Contact information for handling complaints or inquiries from users
- Facilities or locations where the instrument can be used
- Necessary precautions for usage
- Unused balance or methods to check such balance (for instruments where value is stored electronically)
Additionally, if the issuer intends to refund the unused balance of in-game currencies, certain items must be announced and the information must be provided accordingly.
Note: The sale of in-game currencies also falls under the Act on Specified Commercial Transactions as mail order sales, which means that information required by this Act must also be displayed.
Our Services
At our firm, we not only act as a legal representative for the above-mentioned deposit procedures at the Legal Affairs Bureau and for the submission of issuance reports to the Financial Services Agency (Local Finance Bureau), but we also provide advisory services regarding the appropriate methods for displaying and providing the required information.
Legal Advice on the Premiums and Representations Act: Legality of Prize Money in Tournaments
In eSports tournaments, where top-ranking players may be awarded substantial prize money, it is essential to be aware that such prize money might be considered a “premium” under Article 2(3) of the Act against Unjustifiable Premiums and Misleading Representations (“Premiums and Representations Act”). If this is the case, the maximum and total amount of the prize money could be subject to restrictions under the Act.
Definition of “Premium” under the Premiums and Representations Act
The term “premium” under the Act is defined as follows:
- Means to Attract Consumers: Provided as an incentive to induce consumer participation;
- Offered in Connection with a Transaction: Attached to a transaction of goods or services provided by the business;
- Economic Benefits: Representing monetary or other economic benefits, such as goods, services, or cash.
For instance, if players in an eSports tournament can gain an advantage over other players by purchasing game software sold by the tournament organizer or by spending money on in-game items, the financial incentive (criteria 1 and 2) and the prize money awarded to top-ranking players (criteria 3) might be considered as a “premium” under the Act.
Restrictions under the Premiums and Representations Act
The Japan Fair Trade Commission (JFTC) defines “sweepstakes” as “methods in which the recipient of a premium or the value of a premium is determined based on the superiority or accuracy of a particular action” in its official notice. The related notice, “Restrictions on the Provision of Premiums through Sweepstakes,” stipulates that the maximum value of premiums offered through sweepstakes “must not exceed 20 times the transaction value (or JPY 100,000, if 20 times the value exceeds JPY 100,000).”
As a result, concerns have been raised that if a cash prize is awarded to top-ranking players in an eSports tournament, it may fall under the definition of “sweepstakes” and be limited to a maximum prize amount of JPY 100,000 under the Act.
Interpretation by the Consumer Affairs Agency
The Consumer Affairs Agency has clarified its interpretation as follows:
“Even if a benefit is provided to a party in a transaction, if such a benefit is considered a form of compensation for labor or similar remuneration, it does not constitute a premium” (Consumer Affairs Agency Commissioner Decision, December 1, 2014). Furthermore, if the participants are expected to demonstrate advanced gameplay skills or perform in a manner that is attractive to a large audience, thereby contributing to the competitiveness and entertainment value of the event, the prize money may be considered as compensation for labor and thus fall outside the scope of the restrictions under Article 4 of the Premiums and Representations Act (Preliminary Confirmation Notice on Legal Application, September 3, 2019, by the Head of the Display Regulation Division, Consumer Affairs Agency).
However, this interpretation does not automatically qualify all prize money in eSports tournaments as compensation for labor. The Consumer Affairs Agency’s opinion is that this applies only if there are no additional facts that could suggest an attempt to evade the purpose of the restrictions under the Act (Preliminary Confirmation Notice). Moreover, the agency’s interpretation does not legally bind judicial authorities, which retain the power to make their own decisions, including the application of penalties by investigative authorities.
Given the above, it is advisable to seek prior consultation with a legal expert to minimize risk when organizing eSports tournaments. Our attorneys have been providing legal advice on these issues since the early stages of the eSports industry in Japan, helping clients navigate the complexities of the Premiums and Representations Act in relation to tournament prize money.
Intellectual Property Strategy
Copyrights
Regarding the games used in eSports, the images displayed on the screen during gameplay are considered a “cinematographic work” under the Japanese Copyright Act, as they are “works expressed in a manner similar to the effects of a film or other audiovisual effect, and are fixed in a medium” set forth in the same Act.
Additionally, the programs used in game software are classified as “program works” under Article 10, Paragraph 1, Item 9 of the Act (as established by the Supreme Court ruling in the Tokimeki Memorial case on February 13, 2001, Minshu Vol. 55, No. 1, p. 87).
As games are recognized as copyrighted works under the Copyright Act, using gameplay footage for offline eSports tournaments or online streaming may raise copyright infringement issues. Thus, the general rule is that permission from the IP holders (mainly game publishers) is required. However, there are cases where such permission is not necessary if the use complies with the IP holder’s published terms and guidelines.
If a game is used without proper authorization, the copyright holder may seek an injunction, claim damages, or request restitution of unjust enrichment. Additionally, criminal penalties could apply, including up to 10 years’ imprisonment or a fine of up to 10 million yen. Therefore, when hosting an eSports tournament or operating an eSports facility, it is often necessary to obtain a license from the copyright holder. To prevent potential disputes, it is advisable to reach an agreement on the following conditions as part of the licensing process:
- Game usage and broadcasting methods
- Game usage fees
- Secondary usage of game content
- Usage of promotional materials for advertising the eSports tournament
- Distribution and streaming methods for eSports tournaments
- Conditions for using recorded gameplay footage
At our firm, we provide legal advice from the perspective of the Copyright Act to help avoid copyright infringement risks when organizing eSports tournaments. We also support clients by drafting and reviewing license agreements related to such permissions and by negotiating with relevant parties.
Trademarks
A trademark refers to a mark used to distinguish goods or services from others. When a trademark is registered, the trademark holder has the right to pursue legal action, such as claims for damages or injunctive relief, in cases of trademark infringement.
Game titles, game developer names, and logos are typically registered trademarks, and in most cases, the trademark rights are held by the game publishers.
When organizing an eSports tournament, it is common for the tournament name to include the game title, and there may also be a need to use these trademarks in advertising, promotional activities, or for announcing the event.
Therefore, when organizing an eSports tournament, it is often necessary to use game titles, developer names, or their logos. Utilizing these trademarks requires proper rights management and compliance with trademark laws.
Our firm assists clients in drafting and negotiating trademark license agreements necessary for the use of such trademarks in eSports tournaments, and provides comprehensive legal advice on trademark-related issues.
Privacy, Cybersecurity, and Data Protection
The gaming industry operates in a digital ecosystem where user data and cybersecurity considerations play a critical role. With the rise of online gaming, live-streaming platforms, and social interactions within virtual spaces, gaming companies are increasingly responsible for safeguarding large volumes of personal data and ensuring compliance with stringent data protection regulations.
One of the fundamental aspects of operating in the gaming industry is the collection and use of personal data, such as player names, contact information, in-game purchases, and behavior analytics. In Japan, the handling of personal data is governed by the Personal Information Protection Act, which sets out obligations on data controllers regarding the collection, use, storage, and transfer of personal information.
Further, cybersecurity is paramount in the gaming industry, given the sector’s exposure to hacking, data breaches, and DDoS attacks. Under the Act, gaming companies must implement appropriate technical and organizational measures to prevent data breaches and ensure the security of personal data. Furthermore, in the event of a data breach, companies are required to promptly report the incident to the Personal Information Protection Commission (PPC) and notify the affected individuals. Internationally, regulations such as the GDPR also impose strict obligations on companies to report data breaches promptly.
In many online games, players can communicate and interact with each other through chat functions, voice calls, and social networking features. This raises unique privacy issues, as these interactions may involve the collection of additional personal information, including user-generated content and voice data. Companies need to implement robust policies to monitor and moderate such interactions while ensuring compliance with applicable privacy laws. In Japan, providing such communication services may also trigger registration requirements under the Telecommunications Business Act, adding another layer of regulatory complexity.
Our firm regularly advises clients in the gaming and tech sectors on navigating complex privacy and data protection issues. By combining our knowledge of privacy laws with industry-specific insights, we provide tailored legal solutions that help gaming companies protect player data, and ensure compliance with complex data protection requirements.
Gaming Laws & Regulations
Gambling Offenses
There is a potential risk that paying prize money to the winning players using participation fees collected from eSports tournament participants could be deemed “gambling” under the Penal Code.
If an eSports tournament is classified as “gambling,” players who participate in the tournament may be subject to criminal penalties, including “a fine of up to 500,000 yen or a petty fine” (or up to three years’ imprisonment for habitual gambling). In more severe cases, the tournament organizer could be found guilty of “operating a gambling den for profit” and face imprisonment of not less than three months but not more than five years.
Under Article 185 of the Penal Code, “gambling” is defined as “placing a bet on the outcome of an event that is determined by chance, with the intention of winning or losing property.” “Outcome determined by chance” refers to situations where the outcome is influenced by chance and is not fully under the control of the participants. Even in cases where a participant’s skill has an influence on the result, such as in gambling-style mahjong, the presence of even a slight element of chance can render the competition subject to this definition. Since the outcome of eSports tournaments is not determined solely by player skill and may be impacted by elements of chance, there is a high probability that eSports competitions could be considered as involving “outcomes determined by chance.”
Next, the concept of “placing a bet on property and competing for gain or loss” refers to a scenario where a certain property is wagered, and the winning party is promised to receive that property, thereby creating a situation where the winner gains property and the loser loses property. The “property” referred to here includes any item of economic value, encompassing not only money but also any benefits with economic value.
If, for instance, only one party bears the cost or provides property regardless of the outcome, this would not constitute “competing for the gain or loss of property,” and thus would not fall under the definition of gambling.
However, if the prize money for an eSports tournament is sourced from the participation fees collected from the players, it would mean that the players are “competing for the gain or loss of property” in the form of these participation fees, potentially making it subject to charges under the gambling laws. On the other hand, if the prize money is sourced from audience’s admission fees instead of the players’ participation fees, the players are not competing for the gain or loss of those admission fees, as there is no direct wager between the players and the spectators. In such a scenario, it could be argued that this does not constitute “competing for the gain or loss of property.”
Furthermore, if the prize money is provided by a third-party sponsor that is independent from the tournament organizer, it becomes even clearer that the players are not “competing for the gain or loss of property,” which could make it easier to conclude that such a structure does not fall under the definition of gambling.
To safely and legally host or operate an eSports tournament without risk, it is crucial to consult with legal professionals who have specialized knowledge and extensive experience in this field. Addressing the aforementioned issues in advance and ensuring compliance with the relevant regulations is essential before proceeding with the planning and operation of such tournaments.
Our firm offers services such as drafting and reviewing tournament rules and regulations from the perspective of avoiding risks associated with potential violations of gambling laws, as well as providing legal advice on tournament operations.
The Act on Control and Improvement of Amusement Business
Operators of commercial facilities where a large number of visitors play eSports may fall under the category of “Amusement Arcade Operators” as defined by the Act on Control and Improvement of Amusement Business.
Under this Act, amusement arcade operators are prohibited from providing prizes based on the results of games. Consequently, in commercial facilities where the general public can freely participate in eSports, offering prizes based on tournament outcomes or other game results is considered illegal under the Act.
If an operator of a commercial facility were to host a free-entry eSports event to promote the venue and provide prizes or rewards to the winners, such actions would likely constitute a violation of the Act.
Although this restriction is not directly imposed on game companies, any violation of the Act at an eSports event featuring a game title owned by the company could negatively impact its reputation. Therefore, when approached by game centers or similar commercial facilities seeking permission to host eSports events under their brand, it is crucial to ensure that the proposed event does not contravene these regulations.
It is also important to note that the Act typically does not apply to events where participation fees or gameplay fees are not charged, or to purely online events.
Our firm provides legal advice on regulations under the Act, particularly for the establishment and operation of eSports practice facilities and eSports cafes.