In-Game Advertising: The Perfect Score or Legal Minefield?

By Jeffrey D. Knowles and Kerri Griffin

"What goes up must come down." "For every action, there is an equal and opposite reaction."

These words of wisdom may reflect fundamental truths of nature, but they also hold true in the world of electronic advertising. Changes in the marketplace that might make one advertising medium less attractive may open the door to another medium. There has been a great deal of discussion about the effect that TiVo and other digital recorders have had on the value of television advertising.

However, the rise of PC and online gaming is also having an impact on competition for the attention of young men in their late teens to early 30s, along with other demographics. While gaming may be one factor in the diminishing utility of TV advertising for electronic retailers, it also presents an exciting new opportunity: advertising within video games, known as "in-game advertising" or "advergaming."

In-game advertising has two obvious advantages. First, the marketer can hone in on a particular demographic by being selective about the games in which it makes an appearance. Second, the brand's message is exposed to a captive audience that is actively engaged in and focused on the medium; an individual playing a video game is more likely to focus on an advertisement in an interactive environment (and less likely to turn away from it) than when engaged in a more passive activity, such as watching television or flipping through a magazine.

THE RISK TO MARKETERS
Of course, another law common to nature and advertising is that exploring any new environment can be dangerous, and it is important that you have the right guide to help you navigate the landscape. There are several companies that specialize in advergaming, such as IGA Worldwide Inc. and Massive Incorporated. Unfortunately, even companies that are experienced in this medium can get caught in various legal traps.

One particularly complicated area is infringement of copyright and other intellectual property rights. Obtaining the appropriate authorization from a video game publisher to insert advertising is crucial. However, the process can be more complicated than it would seem, especially with games that operate entirely online through a vast network of servers that may be hosted by different entities at different locations.

As the popularity of in-game advertising increases, video game publishers are likely to be more vigilant about the unauthorized insertion of advertising in their games and will no doubt be willing to pursue any means necessary to protect their intellectual property. While companies like IGA and Massive Incorporated that specialize in advergaming are likely to be the initial targets of territorial intellectual property owners, the marketers that are hiring such specialists will also be in the zone of liability. Therefore, it is imperative that marketers considering in-game advertising be aware of the legal landscape and the potential pitfalls associated with pursuing this growing medium.

Intellectual property issues are only one category of risk in advergaming, and marketers should be cautious in their relationships not only with ad agencies but also with the video game publishers themselves, especially as the gaming industry as a whole has become the subject of increased regulatory scrutiny. The Federal Trade Commission (FTC) recently announced a settlement with Take-Two Interactive Software Inc. and Rockstar Games Inc., the creators of Grand Theft Auto: San AndreasTM, a popular video game.

EXAMINING TAKE-TWO, ROCKSTAR CASES
The FTC's case against Take-Two and Rockstar was based on allegations that the companies engaged in deceptive practices by failing to disclose important information about the game's content that was not reflected in its rating that had been established by the Entertainment Software Rating Board (ESRB). The advertising and packaging for the game did not disclose that the game discs contained a sexually themed mini-game and images of nudity that could be viewed with modifications to the game's software and users' gaming consoles. These modifications, dubbed "Hot Coffee," became available when players discovered them and posted them on the Internet.

The ESRB had originally rated the game as "M" for "mature," but it had not been informed of the potential for these materials to be viewed by users. Once the ESRB became aware of the game's "glitch," it changed the game's rating to "AO" for "adult only." Take-Two and Rockstar agreed to release a software patch to disable "Hot Coffee" and re-label or recall existing inventory. Take-Two estimated its costs from returns connected to the re-rating at $24.5 million. The FTC consent order prohibits the companies from making representations about the rating and content of their games and requires disclosure of content related to the rating of its games.

The FTC's investigation was just one element of the fallout from the discovery of the programming glitch in Grand Theft Auto. The incident prompted Congressional hearings and fierce public debate over the video game rating system and the role of the government in regulating the industry. In addition, advergaming is among the topics on which the FTC has requested comment for its preparation of a report to Congress on food marketing and childhood obesity that was due July 1, 2006.

It is clear that we can expect law enforcement agencies and politicians to keep the gaming industry in their sights for the foreseeable future. As a result, marketers should consider the risk that such increased scrutiny could pose to the promotion of their brands. The other side of the coin is that video game publishers may be more wary of the products and brands that they allow to be promoted through their games. With these issues and the specter of intellectual property infringement also present, marketers should approach advergaming with cautious enthusiasm and, as always, seek legal counsel before devoting significant resources to this new media.

Jeffrey D. Knowles is a partner and chair of the Advertising, Marketing and New Media Practice Group at Venable LLP, a law firm based in Washington, D.C. Knowles is the chairman of ERA's board of directors. He can be reached at (202) 344-4860. Kerri Griffin is an associate in the Government and Regulatory Affairs Division at Venable. She can be reached at (202) 344-8272.