Can a Publisher Refuse to Pay Development Royalties Because Their Downstream Didn't Pay? What Is the Correct Collection Process? Can a Subsidiary Be Used to Dodge Debt?

After a game publishing license agreement is signed, developers often breathe a sigh of relief, thinking they can focus on continued development.

But in practice, operators frequently fail to pay on time, with an endless variety of excuses.

In recent years, the most common excuse has been “the downstream didn’t pay.”

It almost sounds reasonable:

If the downstream doesn’t pay, “I” (the operator) have no money — so how can “I” pay “you” (the developer)?

Today, let’s look at a case and see how the Supreme People’s Court ruled on the “downstream didn’t pay” defense.

* This article represents only the author’s personal views and does not constitute legal advice or a legal opinion.

** Case number: (2022) SPC IP Civil Final No. 105

I. Brief Case Background

The copyright owner of the mobile game ”** World” (formerly ”** Three Kingdoms”), a Guangzhou-based company (“Guangzhou Company”), entered into a five-year exclusive agency and operation cooperation agreement with a Beijing-based global exclusive agent operator (“Beijing Company”) starting in 2014, specifying tens of millions in licensing fees and detailed revenue sharing arrangements.

However, the collaboration began to crack in early 2018: Beijing Company started defaulting on game revenue share payments owed to Guangzhou Company.

After multiple unfruitful demands, Guangzhou Company sent a lawyer’s letter in July of the same year formally demanding payment. Although Beijing Company paid part of the amount, it failed to settle the full outstanding balance.

Given that Beijing Company’s continued breach had seriously damaged its legitimate rights and interests, Guangzhou Company issued a written notice on September 30, 2018, deciding to terminate all cooperation agreements effective the next day (October 1), requiring settlement of all amounts and return of game operation rights.

Since Beijing Company did not acknowledge the termination and refused to perform its related obligations, Guangzhou Company sued Beijing Company and its affiliate.

After the Beijing Intellectual Property Court’s first-instance judgment supported Guangzhou Company’s main claims, Beijing Company appealed to the Supreme People’s Court, which ultimately dismissed the appeal and affirmed the original judgment.

Final judgment results:

1. Confirmed that the contract between the parties was lawfully terminated on October 1, 2018 (the date of the plaintiff’s termination notice).

2. Defendant Beijing Company was ordered to pay plaintiff Guangzhou Company a total of RMB 18,227,100.10, comprising: overdue game revenue share of RMB 14,521,800.10, late payment penalty of RMB 2,000,000, legal fees of RMB 1,700,000, and evidence collection and travel expenses of RMB 5,300 (including timestamp service fee of RMB 3,300 and travel expenses of RMB 2,000).

3. Defendant Technology Company (Beijing Company’s sole shareholder) was ordered to bear joint and several liability for the entire RMB 18,227,100.10.

II. “Downstream Didn’t Pay” Is Not a Get-Out-of-Jail-Free Card

The core defense of defendant Beijing Company was that their downstream Japanese operator was disputing Japan’s consumption tax, and precisely because the downstream hadn’t paid them, they delayed payment to plaintiff Guangzhou Company. Beijing Company even argued that, based on the previous payment process, both parties had developed an understanding that “payment is triggered by downstream payment.”

This is a very common industry argument.

Operators often believe that as intermediaries, if downstream channels don’t settle, their own cash flow tightens, making delayed payment understandable.

But the Supreme People’s Court’s answer was straightforward and simple: everything hinges on the black-and-white contract terms.

The court pointed out that the cooperation agreement clearly stipulated: “If the publisher fails to pay revenue share on time, and the delay exceeds thirty working days without payment, the product party has the right to terminate this agreement.” Upon investigation, out of 33 payments made by Beijing Company, 32 exceeded 30 working days, with the longest delay reaching 149 working days — facts that already satisfied the contractual termination conditions.

The court also rejected all of Beijing Company’s defenses:

First, regarding the Japanese consumption tax dispute, the contract clearly provided that all taxes and fees arising from operations were to be borne by the publisher, and could not serve as a reason for refusing payment;

Second, Beijing Company’s claim that the payment method had been “factually modified” was not accepted due to a complete lack of written evidence;

Finally, the court held that paying revenue share was the publisher’s core contractual obligation, and large-scale, prolonged late payments constituted a serious breach — therefore, Guangzhou Company’s exercise of its contractual termination right was entirely reasonable and lawful.

What Can We Learn?

Contract Terms >>> Oral Promises/Mutual Understanding

For game developers and publishers, a contract with clear rights, responsibilities, and detailed provisions is very helpful in avoiding future disputes.

The key points in the final judgment — such as “termination upon 30 working days overdue” and “all taxes and fees arising from operations shall be borne by the publisher” — all came from precise contractual language.

Therefore, whether you are a developer or a publisher, when signing a license agreement, you must carefully design the core terms, including but not limited to: specifying the settlement cycle and reconciliation process, setting clear payment deadlines, quantifying the specific circumstances constituting fundamental breach (e.g., overdue days, total amount/percentage of arrears); for cross-border cooperation contracts, clearly define who bears the various taxes, channel fees, and marketing expenses that may arise in global distribution, and anticipate the possibility of policy changes affecting these fees.

Any changes to the contract should be documented in a specific written agreement to avoid the problem of “private conversations between bosses” being inadmissible in court.

Can operators still insist on “no downstream payment, no payment”?

Actually, they could — provided it is explicitly stated in the contract and accepted (signed and sealed) by both parties.

Of course, my personal advice is that developers should avoid agreeing to this if possible.

If you’re directly publishing on major distribution platforms (App Store, Google Play, hardcore channels, etc.), it might be manageable. But if the operator you signed with is sub-licensing, this effectively elevates the risk of “bad debt” infinitely.

III. Properly Exercising the “Right of Termination” Is Crucial

When a partner commits a serious breach, many bosses’ first reaction is “this partnership can’t work — terminate it!” But how to legitimately terminate is a technical skill.

If the contract termination procedure is improper, not only might the termination fail, you could also turn from “victim” into “breaching party,” facing counterclaims and damages.

In this case, plaintiff Guangzhou Company’s procedure was exemplary and worth studying.

Upon discovering the defendant’s prolonged default, they did not directly send a “breakup” letter, but took two critical steps:

First, on July 20, 2018, Guangzhou Company sent a lawyer’s letter to Beijing Company, clearly informing them of the arrears, demanding payment within a specified period, and warning of the consequences of non-payment. This step is legally called “demand” — giving the breaching party a reasonable opportunity to correct the error.

After the demand, Beijing Company still did not fully settle the arrears, and its breach continued. Therefore, on September 30, 2018, Guangzhou Company formally issued a “Notice,” explicitly declaring the contract terminated.

The court ultimately found that based on the contractual “termination upon breach” condition and the plaintiff’s notice, the contract was formally terminated upon delivery of this notice to the defendant (October 1, 2018).

The entire process was well-reasoned and procedurally proper, making the termination’s validity indisputable.

What Can We Learn?

Adhere to Procedural Justice — Do Not Impulsively Terminate

For partners in the gaming industry, when the other party commits a fundamental breach (e.g., long-term default on revenue share) and you wish to terminate, be sure to follow the basic principle of “demand first, terminate second.”

First, send a formal demand notice to the other party via written means (such as a lawyer’s letter, registered mail with proof of delivery — EMS or SF Express preferred), clearly specifying their breach, requiring performance within a reasonable period, and explaining the serious consequences of non-performance (such as termination).

Second, preserve all evidence of the demand, especially proof of the other party’s receipt.

Finally, only after the other party fails to perform within the demand period (the content of their reply does not necessarily constitute a reasonable justification for non-performance) should you issue a formal written termination notice.

Many bosses might think “Why does it take so long?”

Long?

That’s exactly the point.

This process demonstrates our attitude: “We gave sufficient opportunity and time, but the other party persisted in refusing to correct,” and “We tried our best to maintain the partnership.”

Never — and I mean never — unilaterally stop cooperation or take down a game based solely on informal communication between bosses via WeChat or phone, as this can become an attack point for the other side.

IV. The Corporate “Veil” Is Not Absolute

In the gaming industry, whether for project incubation, risk isolation, or tax planning, it is very common to set up a group structure with parent companies, subsidiaries, and even sub-subsidiaries.

Many bosses believe that as long as a company is an independent legal entity, “limited liability” acts like an absolute “golden bell shield” — the subsidiary’s debts can never touch the parent company.

This is especially tempting when a subsidiary needs to engage in borderline activities — setting up a subsidiary seems to offer peace of mind.

The other defendant in this case, a technology company, thought the same way.

As the sole shareholder of defendant Beijing Company, it argued that it was not a party to the contract and should not be liable for Beijing Company’s debts.

The first-instance court, based on a disputed contract clause, ordered it to bear joint liability, but the Supreme People’s Court corrected this view and directly invoked the “big killer” of the Company Law — the doctrine of piercing the corporate veil.

The Supreme Court noted that under the Company Law (the Company Law applied in this case, though the Civil Code also retains this provision), a shareholder of a one-person limited liability company, if unable to prove that the company’s property is independent from the shareholder’s own property, shall bear joint and several liability for the company’s debts.

Here, the burden of proof falls on the shareholder — the technology company had to prove its own innocence. So the technology company stepped up and submitted a financial report.

And indeed, it was explosive — a “self-detonation.”

The report showed that since 2015, the parent company had long-term, continuous, and year-over-year increasing “intercompany receivables” owed by the subsidiary, with no reasonable explanation.

The court reasonably inferred that the parent company had engaged in uncompensated, long-term occupation of the subsidiary’s funds — the two companies’ finances were “personally confused.”

Therefore, the parent company had to bear joint and several liability for the subsidiary’s debts.

That is, the plaintiff could demand payment of the over ten million yuan loss from Beijing Company, and could also collect from this technology company.

What Can We Learn?

(On-paper) financial independence is crucial — setting up a subsidiary is not enough

The “limited liability” of a company has a precondition: the company’s personality and assets must be independent.

This is typically reflected in different personnel (employees), different businesses, but most critically, separate books.

Especially between parent and subsidiary companies, never mix accounts (for receiving and making payments) for convenience, or arbitrarily transfer funds between parent and subsidiary. Every financial transaction must have a legitimate, genuine commercial reason and written basis (such as loan agreements, service agreements, etc.).

Even if there is an ostensible commercial reason and written evidence, transactions between parent and subsidiary must be at arm’s length, avoiding obviously unreasonable benefit transfers. The long-term unexplained “intercompany receivables” in this case are a classic sign of financial irregularity and the reason the parent company had to bear joint liability.

Additionally, maintain complete and clear financial records — the core evidence for proving corporate asset independence.

Given the current norm in the domestic gaming industry, suing the parent company together with the subsidiary might well be a winning strategy.

V. Final Thoughts

Simply put, in other words, to make a long story short:

Never think that lawyers and legal departments adding so much content to contracts and going back and forth is dragging down the business.

Often, putting everything in writing in the contract, completing the collection process, and documenting the entire procedure as evidence can significantly help achieve the desired litigation outcome.