by Greenberg Glusker Fields Claman & Machtinger LLP

Free-to-play games are all the rage these days.  Many people while away their days playing Angry Birds, or Words with Friends before going home to watch Monday Night Football.  Nerds — and, increasingly, “normal people” — do the exact same thing, except instead of watching football, we play games like Super Monday Night Combat.  This summer, the remarkable viability of the free-to-play business model gained extra attention when Forbes reported that the most-played PC game in the world is now a free-to-play game called League of Legends.  For those of you struggling to understand the profitability part, just take a look at League of Legends character Teemo (pictured left).  I mean, seriously, who can resist purchasing all the adorable “skins” for him?!  (Clearly, not me.)

Nevertheless, the business world of free-to-play gaming is not without its dark, seedy underbelly, where even the cute and cuddly characters are forced to work in digital sweatshops and sell virtual drugs on simulated street corners just to make ends meet.  Well, ok, maybe it’s not that extreme.  But as a recent (and bitter) dispute between game makers Zynga and Kixeye demonstrates, the gaming business can be just as ugly (and fascinating) as some of the game battles themselves.

You Know the Games, But Who Are the Players?

Zynga and Kixeye are both companies based in San Francisco that publish online social games for Facebook.

Most people know Zynga for their popular Facebook games like Words with Friends or Zynga Poker.  Others know them for games like FarmVille where players can engage in make-believe farming with their friends.  (Others know them for their reputation for aggressive firings and generally employee-unfriendly conduct…more on that soon.)  And before you laugh about who in their right mind would want to engage in virtual agriculture, you should know that Zynga currently has more than 280 million monthly active users and that FarmVille 2 currently boasts more than 8.5 million users per day.  That’s one heck of a lot of digital manure.

Kixeye, by comparison, is a much smaller company, with just under a million daily average users. According to Kixeye’s CEO, Will Harbin:

“Our games have little in common with the ones that Zynga is known for.  We make synchronous, combat strategy games.  They make asynchronous cow clicking games.  We have 2 of the top 7 highest grossing games on Facebook.  Why on earth would we want to emulate a business that has seen a 75% decline in share price since their debut?  According to their S1 their games average $.06 ARPDAU.  Our games generate up to 20x that.  You do the math.”

In terms of their markets, Zynga targets “casual gamers” whereas Kixeye targets “mid-core gamers” (i.e., gamer mini-geeks who are not quite geeky enough to be considered “hard-core”).

Or at least that used to be the case.  Zynga now appears to be making inroads into the “mid-core” market space, as evidenced by a recent acquisition.  At the same time, Kixeye recently poached one of Zynga’s employees, Alan Patmore, who ran one of Zynga’s more lucrative games, called Cityville.  (As a huge SimCity fan, I really can’t make any jokes about the joys of being a virtual mayor.  When my virtual citizens are happy, I am happy too.)

The (Inevitable) Lawsuit

About a month after Patmore left Zynga for Kixeye, Zynga sued him, claiming that Patmore misappropriated company trade secrets and breached his company confidentiality agreement by transferring over 700 documents from his work computer and backing them up online.  Zynga then obtained a protective order preventing Patmore from accessing or using the files in any way, and subsequently amended its complaint to include Kixeye as a defendant in the lawsuit.  Kixeye then turned around and counterattacked Zynga with a scathing cross-complaint.

In the cross-complaint, Kixeye alleges that while Zynga is struggling mightily in the marketplace and that “important talent [is] leaving the company in a mass exodus,” Kixeye, by comparison, is doing quite well for itself.  Kixeye further alleges that Mr. Patmore “responded to the lawsuit by cooperating fully with Zynga” and that “despite [his] cooperation and the fact that none of the forensic computer analysis done by Zynga show that he disclosed any documents containing trade secrets to Kixeye,” Zynga nevertheless added Kixeye as a defendant in the lawsuit.

According to Kixeye, “Zynga’s lawsuit has two aims…(1) to send a message to its employees about the consequences of leaving Zynga to work at Kixeye…and (2) to use the litigation as a Trojan Horse to gain access to Kixeye’s own confidential, valuable information and trade secrets and bog Kixeye down in the wasted time and expense of litigation while Zynga tries to enter the midcore market.”  (Yup, there’s that reputation for employee-unfriendly conduct.)

If that wasn’t enough, Kixeye goes on, in excruciating detail, to explain its theory that Zynga is engaging in unfair competition, including a recitation of how Zynga employees allegedly described how Zynga’s leadership openly admitted to copying its competitors internally.  According to the cross-complaint, “One former Zynga senior employee recalled a meeting with Zynga CEO Mark Pincus, in which Pincus stated:  ‘I don’t f***ing want innovation….  You’re not smarter than your competitor.  Just copy what they do and do it until you get their numbers.”  The cross-complaint goes on to discuss other interviews “where ‘several former Zynga workers indicated that the practice of stealing other companies’ game ideas — and then using Zynga’s market clout to crowd out the games’ originators — was business as usual.”

To paraphrase a famous gaming meme, Kixeye essentially alleges that Zynga’s business strategy is to go around to its competitors saying:  “All your trade secrets are belong to us.

Can Zynga Do that?

Because the bar for obtaining discovery with respect to trade secrets is high, a company pursuing a strategy of “find the other guy’s trade secrets by suing over your own” has a tough legal path to tread.  In California, a party alleging the misappropriation of a trade secret has to “identify the trade secret with reasonable particularitybefore it can obtain discovery from the other side.  Even after identification of the trade secrets, there are a number of obstacles that can get in the way based on the circumstances of the case.

But in most of these cases between big fish and little fish, the real issue is the cost of litigation for the little fish.  For smaller companies, it can be hard to compete with competitors (or soon-to-be competitors) that have Scrooge McDuck sized coffers, which are presumably used  to host daily money swims.  Even in this case, where Kixeye is going on the offensive and looks ready to fight tooth-and-nail, finances (or the lack thereof) will probably dictate exactly how long the fight will last.

This case is a good example of why it is particularly important to be careful when poaching valuable employees from competitors.  As one might suspect, if there is even a hint of smoke, we lawyers are very, very good at making it look like there might be a fire.  Even if Zynga’s claim is ultimately bogus, as Kixeye contends, Kixeye may find itself feeling a bit like Leonard Hofstadter chasing fellow physicist Sheldon Cooper around in the ball-pit, trying to be the mature party, while Sheldon keeps frustratingly dodging Leonard, all the while shouting: “BaZynga!


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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