Distributing Games in Subscription Models in Europe

Written on 28 Aug 2018

Numerous game publishers recently announced expansions of their current subscription services. One such upgrade will allow subscribers to play the most recent games, on top of older titles already available under this distribution model. Will this business model, a sort of "Netflix for Video Games", be the future of digital distribution? We take a closer look at some of the legal implications of games subscription services in Europe.

Information obligations and purchase flow

Under European law, traders (in this case the subscription service provider) must provide a long list of mandatory information to consumers before a contract is formed. These obligations are to a great extent codified in Article 6 of Directive 2011/83/EU, which has been implemented into the national laws of all EU member states in similar form: The trader must in particular provide information about their identity, the specifics about the provided services (including any system requirements or limits on compatibility), the total price of the service, term and termination – especially with regard to indefinite contracts or mechanisms automatically prolonging terms – and warranty rights, and the right of withdrawal (which is discussed in greater detail below).

European law also imposes formal requirements on online contracting. If the contract obliges the consumer to make any payment, it is valid only if the final purchase button is labelled accordingly – the EU directive suggests the words "order with obligation to pay", but "buy" is also deemed sufficient in all but very specific circumstances.

German law (partially based on EU law) provides strict rules on the validity of clauses used in terms and conditions, especially with regard to long term contracts and continuing obligations.

For example, terms of subscription contracts may not extent a period of two years. The contract term can be automatically renewed if customer does not terminate in due time – but just for a maximum period of one year with each renewal. With regard to advance payment clauses, the use is restricted due to the fact that the legal nature of a continuing obligation (such as a subscription contract) is usually characterised by instalment payment, e.g. on a monthly basis. Courts held that a clause stipulating advance payment of the full outstanding amount if customer was in default by at least two months was invalid, if used within a contract with a term of one year or longer. For a contract term of six months, such a clause was held valid but risk remains that higher courts might disagree. In case of a termination of contract due to payment default, clauses providing that the full outstanding amount must be paid by customer were held invalid due to the fact that they are considered illegitimate contractual penalties.

Transition from free trial to paid subscription

An issue frequently arises with subscription services providers that want to offer the customer a free trial: They hesitate to say "buy" or anything to that effect because the consumer can initially use the service for free. However, German courts have ruled that in case the free trial month turns into an obligation-to-pay-contract automatically, this does not relieve the service provider from said obligation, because in this case the entire contract is deemed to be performed in exchange for a fee. The purchase button must be labelled accordingly – even wording to the effect of "register for free (but costs money later)" was deemed insufficient.

Right of Withdrawal

Contracts about subscription services will usually be formed online, so European laws for distance selling rules apply. In particular, consumers have the right to withdraw from any paid contract within 14 days (Art. 8 Directive 2011/83/EU). This right generally cannot be limited in terms and conditions, but with the notable exception of contracts for the provision of digital content not stored on tangible media (i.e. download or streaming). The European Commission listed several examples for digital content in their proposal for the directive, including video games (COM(2015) 634). Whether a subscription service itself also qualifies as digital content is not clear from the wording of the directive, but in Germany, the Higher Regional Court of Munich has applied the withdrawal right exception to a video streaming service subscription.

Therefore, an exemption from the right of withdrawal is generally possible for game subscription services, but it must satisfy a number of formal requirements: A consumer only loses their withdrawal right if "performance has begun with the consumer’s prior express consent and his acknowledgment that he thereby loses his right of withdrawal" (Art. 16 (m) Directive 2011/83/EU). This means it is not sufficient to include withdrawal waiver language in terms and conditions – providers must actually ask consumers for consent. Whether or not this consent requires a separate check box in the signup process is still subject to judicial clarification.

Consequences of breach – cease and desist letters and injunctions

When addressing consumers in Germany, providers should take particular care to comply with formal and substantial consumer protection requirements. Private consumer watchdog groups can enforce consumer protection law by way of cease and desist letters and, if those are not complied with, court injunctions. These groups have substantial public funding and political backing, and in the past have gone after video games companies with a vengeance.

Typically, consumer groups' interpretations of statutory law border on the extreme – especially when it comes to what is a sufficiently clear and conspicuous disclosure of mandatory information, for example about the contents as well as the term, termination and auto-renewal provisions of a particular subscription package. Since it is easy to identify missing information or formalities on websites and in signup flows, these issues are often targeted by cease and desist letters. For websites or providers whose target audience includes children and adolescents, it is particularly advisable to double-check compliance.

Warranty regime

Distributing games under a subscription rather than a one-off download means that statutory warranty obligations change. Where customers have a time-limited warranty of 2 years for downloadable games, subscriptions come with statutory warranty rights throughout their duration. If games do not work or the games library cannot be accessed, customers might withhold subscriptions payments or terminate prematurely for cause, and claim a refund of their subscription fees for any time period in which the service was not compliant to the contractual agreement.

Necessary IP rights

In order to offer subscription services, providers may need to obtain certain additional intellectual property rights. If the service is structured to permit unlimited downloads while the subscription is active, this may be covered by the same existing rights needed for any digital distribution, in particular the right to make content publicly accessible. However, if the games run "in the cloud" and the user only receives a stream (as with Sony's Playstation Now), providers need to consider public performance and broadcasting rights as well.

Geo blocking

In April 2018 Regulation (EU) 2017/1128 – the “Portability Regulation” – entered into force, banning geo blocking for online content services. The Commission has called geo-blocking an "unjustified online sales discrimination based on customers' nationality, place of residence or place of establishment within the internal market". In this vein, the regulation aims to ensure that subscribers to an online content service in their own EU country, such as films, sports events, eBooks, video games and music, can access it when they are temporarily staying in other EU countries. In order to ensure cross-border portability also for copyrights with a limited territorial scope, the provision of an online content service to a subscriber who is temporarily present in a member state, as well as the access to and the use of that service by the subscriber, are deemed to occur solely in the subscriber’s member state of residence. Thus, even territorial copyright restrictions do not relieve the service provider from the obligation of providing cross-border portability.

These portability obligations are tremendously relevant for all online subscription services and their business models. Another set of geo-blocking rules (for the sale of physical goods) will apply from 3 December 2018 – while this “Geo-Blocking Regulation” currently would not apply to game subscription services, it will be closely evaluated by the EU Commission within the next two years and its scope of application possibly extended.

Digital Content Directive

Additional requirements and changes are on the horizon already: The Directive of the European Parliament and of the Council on certain aspects concerning contracts for the supply of digital content (Digital Content Directive) is still being discussed in the EU legislature, but a proposal by the Commission (COM(2015) 634) gives a preview of the broad nature of the new rules.

These include new mandatory warranty rights for digital content, including damage claims "for any economic damage to the digital environment of the consumer caused by a lack of conformity with the contract or a failure to supply the digital content" (proposed Art. 14 of the Digital Content Directive).

Furthermore, it will bring more services under the purview of the Consumer Rights Directive, because it will introduce the concept of "payment with data". While this does not directly affect paid subscriptions, many free-to-play games may have to be considered "paid" if users authorize the provider to process their information for purposes beyond what is strictly necessary to operate the game. In that case, a withdrawal would also mean that the provider would have to delete or at least stop using that customer's information.

Offering subscription services requires careful planning and structuring since the legal aspects vastly differ from current services. If the legal prerequisites are met, subscription services indeed seem like the inevitable future of digital distribution, particularly in the light of the success stories written by online video streaming services.

Many thanks to our trainee Leonie Schneider for her invaluable contributions to this article.