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5th Circuit Reinstates Arbitration Award In Video Game IP Suit

By Jess Davis | April 10, 2013

  Dallas (April 10, 2013, 9:54 PM ET) — The Fifth Circuit on Tuesday reinstated an arbitration award giving videogame publisher Southpeak Interactive Corp. a perpetual license to intellectual property for a game developed by its former partner, saying the license is proper because it furthers the essence of their publishing agreement.

Reversing a Texas federal court’s decision to vacate the arbitration award, the appeals panel said Southpeak can retain the rights to the game, “Section 8,” which was developed by TimeGateStudios Inc. under a publishing agreement between the companies. The Fifth Circuit said the perpetual license is an adequate remedy, given the arbitrator’s factual findings that TimeGate had deliberately deceived and defrauded Southpeak’s predecessor, Gamecock Media Group, when it signed the agreement and developed the game.

“TimeGate had breached the agreement in so many ways and its relationship with Gamecock had become so contentious that the collaborative relationship presupposed by the agreement was no longer possible,” the court held. “The perpetual license granted to Gamecock represents an attempt by the arbitrator to restore to TimeGate and Gamecock the fundamental goal of the agreement: mutual access to financial benefits derived from their joint creation and distribution of ‘Section 8.’”

After their working relationship soured and the companies filed competing breach-of-contract claims, an arbitrator determined TimeGate materially breached the contract, including releasing the game for another platform and developing a sequel without authorization, and owed Southpeak not only $8.1 million in damages but the right to create and release its own sequels and competing products, without paying royalties.

“My client is very pleased,” said Southpeak attorney West Short of West Short & Associates PC.

“It’s been a long, hard road to justice and I’m glad to see the circuit uphold arbitration as a viable justice solution.”

Under the terms of the 2007 publishing agreement, TimeGate was to develop the “futuristic, military-style” game, while Gamecock, acquired a year later by Southpeak, was to fund, manufacture, market, distribute and sell the game.

The agreement provides TimeGate would own the intellectual property of the game, but gave Gamecock the exclusive right and license to the game and any sequels for eight years following the initial release or five years after the sequel, whichever was later, according to the court.

A district court in 2012 said the perpetual licenseto the “Section 8” trademarks was unenforceable because the remedy was not rationallyrooted in the contract, and had wrongly shifted an agreement for collaborative development to give Southpeak full control over the game and compete with TimeGate. TimeGate supported the vacatur, saying the license award directly contradicts the terms of the contract, and had argued the arbitrator exceeded his contractual mandate by giving such a free-ranging remedy to Southpeak.

But the court said because of TimeGate’s breaches, the working relationship between the companies could not be healed, and the arbitrator could reasonably have found severing their ties and allowing Southpeak to sell the game and develop sequels without TimeGate was the only wayto fulfill the essential objective of the publishing contract and make a profit. Giving deference to the arbitrator’s findings, the panel said once he determined the contract was fraudulently induced, the arbitrator had the leeway to fashion a remedy that conflicted with the contract’s initiallicensing terms.

“We are understandably disappointed with the court’s decision and we are exploring our options,” said Lynne Liberato of Haynes & Boone LLP, an attorney for TimeGate, on Wednesday. Judges Carl E. Stewart, W. Eugene Davis and Edith Brown Clement sat on the panel for the Fifth Circuit. TimeGate was represented by Mark R. Trachtenberg, Lynne Liberato and Christina F. Crozier of Haynes & Boone LLP and in-house counsel Scott Weiss.

Southpeak was represented by N. West Short of West Short & Associates PC.

The case is TimeGate Studios Inc. v. Southpeak Interactive LLC et al., case No. 12-20256, in the U.S. Court of Appeals for the Fifth Circuit.

–Editing by Chris Yates.

All Content © 2003-2013, Portfolio Media, Inc.

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In the News

The Escapist Magazine
Andy Chalk | 18 April 2013
Section 8 Studio Loses $7.35 Million Lawsuit
A court has declared that TimeGate Studios of Section 8 and Colonial Marines fame owes a lot of money to SouthPeak Interactive. More

Gamespot
Eddie Makuch | April 17, 2013
TimeGate loses Section 8 court appeal
Texas developer faces $7.35 million in damages and loss of Section 8 license following failed appeal.  More

Shacknews
John Keefer |  Apr 17, 2013
Section 8 developer loses appeal and IP, must pay $7.35 million
Section 8 developer TimeGate Studios thought it was off the hook for a $7.35 million arbitration ruling when it won its appeal last year over a dispute with Southpeak Interactive surrounding the game. Unfortunately for TimeGate, that ruling has been overturned.  More

VentureBeat
Jeffrey Grubb | April 17, 2013
TimeGate loses appeal: Court orders Section 8 developer to pay $7.3M in damages
Publishers and developers are like soap-opera characters. One day they’re working together, then the next they’re plotting how to take each other down.  That’s how developer TimeGate, which produced the Xbox Live Arcade first-person shooter Section 8, ended up owing publisher SouthPeak Interactive $7.3 million in damages, as originally reported by Polygon. This comes after the latest court appeal in the long-running case went in favor of SouthPeak.  More

Edge Online
David Valjalo | April 18 2013
Timegate hit with over $7 million damages, loses Section 8 brand
There’s been a disappointing conclusion to a lengthy legal battle for Texas-based developer Timegate Studios and the studio now faces heavy financial damages as a consequence.  More

Polygon
Griffin McElroy | Apr 17, 2013
TimeGate loses court appeal, faces $7.3M in damages in Section 8 suit
TimeGate Studios, developer of Section 8 and co-creator of Aliens: Colonial Marines, faces $7.35 million in damages and the loss of the Section 8 license following an appeal of a fraud suit between themselves and publisher SouthPeak Interactive, Polygon has learned.  More

Game Politics
April 17, 2013
TimeGate loses Section 8 Appeal
TimeGate Studios faces $7.35 million in damages and has lost control of the Section 8 license following a successful appeal by SouthPeak Interactive.  More

Houston Chronicle
Willie Jefferson | April 17, 2013
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TimeGate Studio was sued by SouthPeak Interactive in federal court in 2009 for $7.4M for damages arising over the game, “Section 8.”  More

PC Games N
Julian Benson | April 17 2013
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TimeGate, the developer behind Section 8, portions of Aliens: Colonial Marines, and the recently announced Minimum, have just lost a court appeal against a lawsuit mounted against the studio by publisher SouthPeak Interactive.  More

Joystiq
Alexander Sliwinski | Apr 18th 2013
TimeGate loses SouthPeak appeal, faces $7.3M in damages
TimeGate Studios lost the latest round in court of its battle against publisher SouthPeak Interactive, which could result in the studio paying $7.35 million in damages and losing the Section 8 intellectual property. Polygon obtained the court documents that SouthPeak recently won its appeal of arbitration handled early last year.  More

Develop
Seth Tipps | April 18, 2113
Timegate on hook for $8m in legal battle
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VG 24/7
Brenna Hillier | Apr 18, 2013
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SouthPeak Interactive has been successful in an appeal on its long-running lawsuit with TimeGate Studios, leaving the Section 8 developer facing heavy damages.  More

Gamasutra
Will Lewis | Apr 17, 2013
Lessons from Timegate’s Section 8 Appeal and Suit
On April 9, 2013, the Fifth Circuit United States Court of Appeals reversed the Federal District Court and granted publisher Southpeak Interactive a perpetual license in the Timegate Studios developed video game, Section 8. This post aims to explain the background behind the suit, why the court likely arrived at the decision it arrived at, and how developers can try to avoid the same situation.  More

Some Background

Read the Fifth Circuit Opinion here
Read more about the Case here
Read the Final Award, Findings of Fact and Conclusion of Law here

Hear About It

Hear the Oral Arguments given at the 5th Circuit Board of Appeals WMA, MOV