Intellectual Property Negotiation between Mukashi Games and Pixie

General Information of Pixie and Mukashi Games1

The video game industry is rapidly growing around the world. Leading companies such as
Nintendo, Sony, Entertainment Arts are dominant in technically complex console based games
while independent studios, “indie” studios, are able to nimbly produce lower budget but highly
popular games. Indies with niche skills often provide services to other indies or even major studios
in areas such as rendering of graphics, artwork, physics engines, testing, and technical support.
Indie studios may range in size from 10 to 150 employees, depending on their previous successes
and ability to sustain their business. Some indie development studios in Japan include Q Games,
Ponos, Toy Logic, GemDrop, Kamakura, and others. Some examples in China include Crazy Ant,
Coconut Island Studio, and Rocket Punch to name just a few. The competition is strong, but the
indie world is often also cooperative as companies specialize their abilities and develop their hits.

The industry has always faced fast moving changes in technology, consumer tastes, regulation, and
market demographics. For some companies such changes have led to big success, for example,
Toy Logic of Tokyo was able to benefit from consumer taste for action games but distaste for and
regulation against realistic violence with the cute and non-scary offering Happy Wars. Upcoming
challenges confronting the industry include potential shifts to immersive Virtual Reality games,
spectatorship and augmented reality games and so on. These trends may require new investment to
understand markets, develop human resources, and manage new Software Development Kits
(SDK) for various platforms and publishers.

Pixie of Chengdu, China is a graphics firm that provides services from technical graphics to
animation for clients such as game and animation studios. The clients, mainly in Japan, develop
the main content, ideas, characters, style and stories. Pixie usually provides services such as game
testing, logic reviews, graphics development of backgrounds, visual details around characters, and
the many frames that develop a scene. These business activities have been stable for about 10
years as Pixie has steadily increased its gross revenues, number of contracts, and number of
customers in Japan.

Mukashi Games of Kyoto, Japan became a customer of Pixie about 3 years ago and has enjoyed a
good relationship with Pixie during that time. Mukashi Games specializes in story games and
animated role-playing games based on folktales. The products target middle school through young
adults.

A few months ago, Pixie launched development of its first original game, Capital of the West. It is
a story game for the Chinese market based on ancient tales. A “story game” means a kind of game
which has multiple possible endings based on the choices made by the players. Development is
advanced and a demonstration version last month received acclaim from kids and authorities. Pixie
has developed everything internally, from story to style to characters. During development,
information about the game was accidentally shared with Mukashi Games. Mukashi Games
quickly returned the materials to Pixie with positive comments about the project and best wishes
for it.

But just 4 days ago, Pixie managers were shocked to find that a work order from Mukashi Games
included a description of a game theme and structure very much like the one Pixie had accidently
sent to Mukashi Games. Pixie’s founder, Qixin Zheng was furious – it seemed like a clear theft!

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The companies and the storyline of this case are fictional, yet the setting is real and the issues are not uncommon in this
industry.

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Zheng’s staff quickly and heatedly notified Mukashi Games that they would start legal action for
theft of Intellectual Property in the Chengdu city court system. Zheng himself was quoted in a
front-page news item in the Chengdu Business News complaining strongly that Mukashi Games
had committed theft. They told Mukashi Games in no uncertain terms that work would
immediately stop on the current project, though an initialization payment of 30% of the total fee
($400,000) had been paid by Mukashi Games. So far, only about 10% of the work has been done.
They also insisted that Mukashi Games stop work on their game project called Build the Capital:
Kyoto or face additional legal action in Japan.

Mukashi Games answered, after two days of consideration, that they had not taken any ideas at all
from Pixie and proposed negotiations to avoid court proceedings. Pixie, not quite so sure of the
evidence, agreed at least to listen.

Intellectual Property and Institutional Background between China and Japan

Chinese Governmental Influence in Intellectual Property

The Intellectual Property Rights (IPR) protection system was established at a comparatively late
date in China. Yet, China has always adopted a responsible attitude to actively promoting IPR
protection. Therefore, IPR has developed rapidly in recent years and especially, to protect IP
domestically. In recent years, China has revised the "Copyright Law." It has also announced
various laws and regulations with legal effect, such as "Regulations on the Protection of Computer
Software". Such promulgation and implementation of these legal documents have strengthened a
solid legal foundation for copyright protection in China.

The Chinese government also adheres to international rules on IPR protection. Particularly, the IP
war in technology has extended to associated products in software development for computers,
mobiles and educational interactive communication systems. The seemingly endless IP issues have
drawn the Chinese government’s attention. China has decided on a level of IPR protection to suit
its own national situation. Further, the IP bureau has made great efforts to balance the interests
among intellectual property creators, users and the public. The intent is to create a benign circle for
the creation and use of intellectual property realized in China.2

China's legal system for copyright protection was gradually established and strengthened in the
1990s. The Chinese government has the full authority to evaluate all materials and requests for
content revision before products are released to the market. This is to prevent content deemed
politically or morally inappropriate reaching the domestic market. Chinese government exercises
its legal power and it actively functions to safeguard law and order. Current regulatory policies
encourage IP creators to participate in fair competition and mediate disputes or settle cases should
there be any IP violations.

Chinese Governmental Network in IP Right Protection Issues

China's Copyright Administrative Management Departments at all levels are interlinked and they
cooperate in the administrative enforcement of the copyright law. They have increased cooperation

2
In Intellectual Property Protection in China: http://www.china-un.ch/eng/zmjg/jgzfbps/t176937.htm
The law provides that in addition to protecting the copyright of written works, oral works, music, operas, quyi (folk art forms including
ballad singing, storytelling, comic dialogues, clapper talks, cross talk, etc), choreography, works of fine arts, photographs, films, TV
programmes, video tapes, engineering designs, product designs and their descriptions, maps, sketch maps and other graphic works,
China also protects computer software. China is among a select group of countries that have explicitly listed computer software as the
object of protection by copyright laws. The State Council has, moreover, promulgated the Regulations on the Protection of Computer
Software, providing the specifics whereby the laws protecting computer software will be implemented.

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with other government departments, such as the departments of public security, industry and
commerce, customs, press and publications, and cultural departments.3 The copyright departmental
units operate within a strong governmental network. China has established a network system for
copyright public management and related services. The governmental network system consists of
copyright collective management organs, copyright agencies, copyright protection associations,
professional associations and organizations of copyright holders. The network allows government
to manage works of the written language, books, audio-video and software products over 20
provinces (autonomous regions, municipalities directly under the central government) and major
cities.

The Chinese court system has shown its authority on the patent IP ruling on high-profile brands. In
2016, for example, a local court ordered Apple to stop selling the iPhone 6 and 6 plus in Beijing.
This is because a patent design dispute with a Chinese company – Baili, who claimed the Apple
phone copied the look of their “100C” smartphone. To deal with this copyright dispute, the
Chinese court issued a “no-sell” order to process the infringement.

Major Chinese v. foreign IP disputes in recent years4:

Parties Disputed item Outcome Decision date

Apple v. Xintong “IPHONE” Xintong Tiandi won5, and may May 2016
Tiandi continue using “IPHONE” on
Technology leather goods.
Apple has requested a retrial.

Facebook v. “face book” (脸 Facebook won6. April 2016

Zhujiang 书 in Chinese)
Beverage

Michael Jordan 78 name and Qiaodan won7, after a retrial. July 2015
v. Qiaodan logo trademarks Michael Jordan’s appeal is
Sports related to pending.
Michael Jordan

Zhan Baosheng “Tesla” Settled8. Zhan settled with August 2014

v. Tesla Tesla, deregistering the
trademark in exchange for an
undisclosed sum.

3
New Progress in China's Protection of Intellectual Property Rights in http://www.china-un.ch/eng/bjzl/t193102.htm
In 2004, cultural market inspecting and management authorities throughout the country inspected audio-video businesses on
555,368 occasions, confiscating 154 million copies of audio-video works. On January 12, 2005, the Ministry of Culture and the Office
of the National Working Group on Intellectual Property Rights Protection launched a nationwide campaign to destroy illegal audio-
video products, during which over 63.35 million copies of such products were destroyed.
4 After losing “iPhone” and “iPad,” Apple’s losing its grip on the iPhone 6 design in China:

https://qz.com/1082786/our-analysis-of-five-decades-of-sex-research-shows-an-evolving-spectrum-of-sexual-norms/
5
Apple loses 'iPhone' wallets lawsuit in China:
http://money.cnn.com/2016/05/04/technology/apple-trademark-lawsuit-china/
6 Facebook Wins a Trademark Battle in China:

https://blogs.wsj.com/chinarealtime/2016/05/09/facebook-wins-a-trademark-battle-in-china/
7 In China, Michael Jordan does not hold the rights to his own name:

https://qz.com/467625/in-china-michael-jordan-does-not-hold-the-rights-to-his-own-name/
8 Tesla Reaches Settlement to End China Trademark Dispute:

https://www.bloomberg.com/news/articles/2014-08-06/tesla-reaches-settlement-to-end-china-trademark-dispute

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 Parties Disputed item Outcome Decision date

Adidas v. “Adivon” (阿迪 Adidas won9. Adivon was May 2013

Adivon, Huazhu 王 in Chinese) ordered to stop using its
Shoes Co. and its logo Chinese name and logos, and to
transfer its trademarks to
Adidas for free.

Shenzhen “IPAD” Settled10. Apple paid Proview July 2012

Proview $60 million to transfer its
Technology v. trademark.
Apple

Patriotic education in China

In the past two decades, Chinese Communist Party has promoted nationalism subtly through their
education system as well as holiday names. In 2014, the Chairman Xi Jinping announced the
creation of three new holidays, of which, two holidays refer to Japan in negative ways11. The first
new holiday is on September 3rd, “Victory Day of the Chinese People’s War of Resistance Against
Japanese Aggression”. The second, on December 13, is a national memorial day for the victims of
the Nanjing Massacre12. This state-led nationalism activity also has the purpose of uniting the
Chinese after seismic shaking of the Tiananmen movement13.

This patriotic education lately has brandished its power over business operations in China; for
example, China's South Korea boycott of Lotte Supermarket due to a national defense concern14.
South Korea let the U.S. build an anti-missile (Thaad) defense system on a piece of land owned by
the South Korean Lotte chain. The decision to deploy the missile defense system drew the
concerns of Chinese government on national security. Meanwhile, local Chinese protested Lotte
and South Korea’s decision by boycotting their chain stores and Korean products. Chinese
authorities also rejected visas to South Korean performers and removed their TV shows and tourist
support from South Korea.

“No one wants to shop here when our government is having some sort of
dispute with South Korea.”
An interviewee by Forbes.com15

9
The sunset of Adivon:
http://ipr.chinadaily.com.cn/2013-09/04/content_16944108.htm
10 Apple Pays Proview $60m to Resolve IPad Trademark Dispute:

https://www.bloomberg.com/news/articles/2012-07-02/apple-pays-60-million-to-end-china-ipad-dispute-with-proview
11
China Introduces Two Anti-Japanese Holidays:
https://www.bloomberg.com/news/articles/2014-02-25/china-introduces-two-anti-japanese-holidays
12 Nanjing Massacre - Facts & Summary - HISTORY.com

http://www.history.com/topics/nanjing-massacre
13 A state-led nationalism: The patriotic education campaign in post-Tiananmen China

https://doi.org/10.1016/S0967-067X(98)00009-9
14 How China's South Korea Boycott Will Play Out, Politically And Economically

https://www.forbes.com/sites/ywang/2017/03/20/how-chinas-south-korea-boycott-will-play-out-politically-and-
economically/#2d8107ea2c23
15 https://www.forbes.com/sites/ywang/2017/03/20/how-chinas-south-korea-boycott-will-play-out-politically-and-

economically/#c228b742c23a

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 Before the Thaad missile defense system16 After the Thaad missile defense system17

The emphasis on patriotism in China has made an impact on foreign economies. The Chinese
authorities have undertaken formal investigation of Lotte business and closed four Lotte Mart
locations and stopped project construction due to fire safety violations or fire inspections in
various Chinese cities. The online Chinese e-commerce site of Lotte also has been removed (e.g.,
JD.com) due to technical issues18.

“Showing Lotte the door will be an effective warning to all the other
foreign forces that jeopardize China’s national interests,”
An editorial comment in the Global Times19

Relationships between China and Japan

China is Japan’s largest trading partner with a US$340 billion trade relationship in 2014. Also,
Japan is China’s second largest trading partners. These two Asian giants share different levels of
industrial and technological capability that generate business and investment. Geo-economical
potential brings China and Japan closer, yet, political tension and security have been fuelled
rivalries that threaten to compromise their trading relationships.

Chinese government has displayed anti-Japanese attitudes using various movements and
demonstrations to escalate conflict issues. The China-Japan relationship has been strained due to
territorial dispute on Senkaku islands20, hostile encounters in the East China Sea, Japanese-
American security affairs in Taiwan21 and historical war reparations stemming from WWII (1937
Nanking Massacre22).

16 https://specials-images.forbesimg.com/imageserve/34138525/960x0.jpg?fit=scale
17 https://blogs-images.forbes.com/ywang/files/2017/03/IMG_0681-1200x900.jpg?width=960
18
Korea’s Lotte Runs Into Trouble in China After Angering Beijing Over Missile Deal:
http://variety.com/2017/film/asia/china-to-punish-korea-lotte-missile-1202000505/
19 Lotte's development in China should come to an end:

http://www.globaltimes.cn/content/1035171.shtml
20 Jash, Amrita (22 February 2017). "Diaoyu/Senkaku islands dispute: identity versus territory". Policy Forum.
21
Treaty of Mutual Cooperation and Security between the United States and Japan.
22 Chang, Iris, The Rape of Nanking: The forgotten holocaust of World War ll, Basic Books, A Subsidiary of Perseus Books, L.L.C., 1997

pp. 105-139, the chapter on the Safety Zone

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 Location of Senkaku Islands.23

China and Japan are both among the top five largest economies by nominal GDP and they are the
top bilateral merchandise trade partners. Due to the constant territorial disputes and an
undercurrent of tension from patriotic education in China, there has been increasingly mutual
dislike and hostility between Japanese and Chinese people. In 2014, BBC World Service Poll
showed that only 3% of Japanese people see a positive influence from China while 73% express
the most negative perception of China in the world. Conversely, only 5% of Chinese people see a
positive influence from Japan while 90% express a negative view as the most negative perception
of Japan in the world24. The negative sentiment can be easily enhanced by domestic quarrels and
international matters.

China and Japan have jointly focussed on determining whether their economic relationship can
alleviate the tensions and the rivalry between them. But will the political and security tensions
between them inevitably lead to conflict in Asia? What will it take for China and Japan to
negotiate a mutually acceptable regional order? China is undergoing a strategic shift from basic
manufacturing towards higher value-added manufacturing and services. The Chinese relationship
with Japan has been important for China to ‘catch up’ to the frontier of industrial technology.
Their inter-dependent trading relationship suggests China can transit from a low to a higher
income country through access to Japanese industrial technology and investment. The Chinese
modernization process has pushed Japan, like South Korea, to rethink their strategies to learn how
to become players in China’s technological transformation at a higher level. Because of China and
Japan’s shared extensive production networks, business between the countries can potentially
broaden their global economic involvement and bring reform to the second and third largest
economies in the world.

23 The area of Senkaku (in Japanese) is also known as Diaoyu (Chinese title used in China) and Tiaoyutai (Chinese title used in Taiwan).
https://upload.wikimedia.org/wikipedia/commons/0/07/Senkaku_Diaoyu_Tiaoyu_Islands.png
24 2014 World Service Poll BBC

http://www.globescan.com/images/images/pressreleases/bbc2014_country_ratings/2014_country_rating_poll_bbc_globescan.pdf