Readers of GamePolitics will not soon forget the contentious June 14th video game hearing of the House Subcommittee on Commerce, Trade, and Consumer Protection. The ESRB and its president, Patricia Vance, came under heavy fire during the proceedings. Ultimately, several members of Congress would be lampooned by Jon Stewart, host of The Daily Show, for clueless comments made during the videotaped session.

Now, Subcommittee Chairman Rep. Cliff Stearns (R-FL, seen at left) has formalized his issues with the ESRB by introducing HR 5912, the so-called "Truth in Video Game Rating Act."
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Summers haven't been much fun at Take Two Interactive, of late. Last year, of course, the Hot Coffee scandal unwound itself in agonizing daily steps throughout the month of July. This summer, water cooler gossip must be equally tense around Take Two Interactive's Lower Manhattan digs.

Although last month's Federal Trade Commission (FTC) report on the Hot Coffee affair resulted in a mere slap on Take Two's corporate wrist, developments since then have been almost exclusively negative for the controversial game publisher. Let's recap:

June 25th: CNN reports that T2 canceled upcoming PC game Snow, a drug-dealing simulation deep into development.

June 27th: GamePolitics and other sources pick up on a New York Post report that the Manhattan District Attorney's Office has issued "unusually wide-ranging" subpoenas dealing with Hot Coffee as well as the way in which T2 reported "key financial information" related to "acquisitions, partnerships and the recent dismissal of its longtime auditor, PricewaterhouseCoopers."

June 27th: Wedbush Morgan analyst Michael Pachter says, "It is likely that one or more Take Two employees may be subject to a potential criminal indictment." Wow!! Take Two execs be doing the perp walk?
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Capitol Hill is very much interested in video games these days.

Wednesday's hearing before the House Subcommittee on Commerce, Trade, and Consumer Protection was both lengthy and contentious. Subcommittee Chair Rep. Cliff Stearns (R-FL) and colleagues were not kind to game industry witnesses, especially ESRB President Patricia Vance.

GP does not quarrel with the ability of Congress to hold hearings on the video game issue.

We just think they grilled the wrong people.

With 99% of political attention in relation to video games directed at the Grand Theft Auto series in general and the Hot Coffee scandal in particular, Congress should have skipped intermediaries like Doug Lowenstein and Patricia Vance and posed their questions directly to the people who run Take-Two Interactive and Rockstar Games.
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Could video game publishers face the same type of indecency fines to which radio and television broadcasters are already subject?

They will if Rep. Fred Upton (R-MI) has his way. Upton expressed frustration with the Federal Trade Commission's Hot Coffee investigation during yesterday's meeting of the House Subcommittee on Commerce, Trade, and Consumer Protection, saying, "I guess I thought the FTC would have had some more teeth than they apparently have... I'm not at all happy with the consent decree... In essence there are no consequences. None... I would like to have thought that (Take-Two and Rockstar) would have been able to be fined for millions of dollars for the trash they put out across this country."

As Upton learned from a witness, however, the FTC has no such authority.

After the hearing, Upton told Broadcasting & Cable he is preparing legislation which would allow fines to be levied against video game publishers in much the same way that radio stations were made to pay for the on-air antics of shock jock Howard Stern and T.V. stations for the infamous Janet Jackson wardrobe malfunction.

"I am going to be looking to write legislation giving the FTC the authority to impose civil penalties," Upton said. "I didn't know that they didn't have the authority. I have made a lot of phone calls - it's like the show Car 54, Where Are You?: FTC, where are you? - and I haven't heard that excuse until today."

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The issue of video game violence is once again under scrutiny on Capitol Hill.

Today at 2:00 P.M. the Subcommittee on Commerce, Trade, and Consumer Protection will convene a hearing on "Violent and Explicit Video Games: Informing Parents and Protecting Children."

The proceedings will be chaired by Rep. Cliff Stearns (R-FL, seen at left).

"In response to controversy over violent or sexual situations in video games, the industry established a self-regulatory organization to apply ratings and provide advertising guidelines," Stearns said in a statement on his website.

"Yet in one instance, the game 'Grand Theft Auto: San Andreas' had hidden content with scenes of explicit sex. In addition, the Federal Trade Commission found that video games labeled 'Mature' routinely were marketed to children under 17. Our goal is to ensure that parents have information on the content of their children's games and that these children are protected from inappropriate content and marketing."
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KUTV-2 News in Salt Lake City might have won an award for its Hot Coffee coverage - if it ran at this time last year.

The station's consumer reporter, Bill Gephardt, did a story yesterday on the FTC's recent ruling in the Hot Coffee investigation.

So far, so good, except Gephardt's report makes it sound like Hot Coffee is happening now, instead of last summer. Check out these lines from Gephardt's story, and note the continual use of the present and future (but never past) tenses.

News anchor Mark Koelbel starts the story on its downhill slide when he intros Gephardt with, "Bill Gephardt is here and he says there is a loophole in a kid's game that could actually allow players to see... porn?"
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When a company happily accepts a public thrashing from the Federal Trade Commission along with the threat of crippling fines for future violations, you know they must have been really worried about the alternatives.

According to Next Generation, Take-Two CEO Paul Eibeler said yesterday, "We are pleased that the FTC has concluded its very thorough investigation, and that the matter has been resolved. We recognize the importance of the FTC investigation, and the necessity of maintaining public confidence in the ESRB rating system, and helping the ESRB educate parents and consumers about the rating system. We look forward to putting this behind us."

The embattled CEO was reacting to Thursday's FTC Hot Coffee report which said that Take-Two and its Rockstar subsidiary had engaged in deceptive marketing practices and circumvented the industry's rating system. The FTC threatened fines up of to $11,000 per unit sold for future servings of Hot Coffee.

Eibeler made the remarks during a quarterly conference call with investment analysts in which the firm disclosed a $50 million loss for the second quarter of 2006.

Take-Two stock (NASDAQ: TTWO) dropped nearly 14% in overnight trading to 14.45. TTWO has lost roughly half of its equity value since its pre-Hot Coffee high point.

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In a long-awaited ruling, the Federal Trade Commission has found that the companies behind Grand Theft Auto San Andreas engaged in deceptive marketing practices.

The FTC issued a press release this morning, wrapping up a 10-month investigation into the so-called "Hot Coffee" scandal.

Although the FTC concluded that Take-Two and Rockstar used deceptive marketing practices by not revealing that hidden sex animations were on the GTA San Andreas disc, the proposed penalty was quite moderate, at least in economic terms. The ruling is a blow, however, to the public image of both companies as well as the video game industry.

Under terms of a proposed consent decree, the FTC will require Take-Two and Rockstar going forward to clearly disclose all content relevant to a game's rating on its packaging. The companies must also set up a content review system to spare the gaming public additional servings of Hot Coffee. Finally, the companies agreed that they would be subject to fines of up to $11,000 per game sold if they commit such violations in the future.

Essentially, the FTC is saying, "Don't do it again."
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Yesteday's secret shopper study results released by the Federal Trade Commission delivered encouraging news about retail compliance with ESRB's video game rating guidelines.

Retailers were quick to react. Hal Halpin, president of the Interactive Entertainment Merchants Association (IEMA), the trade association which represents 75% of the retail sector, issued a press release in response to the FTC study results. The IEMA release reads, in part:

"(The FTC study) shows dramatic improvement in retail enforcement of computer and video game ratings over the past five years, a result applauded by the IEMA... The rate at which minors were able to purchase Mature-rated games dropped from 85% in 2000 to today's level of 35% for IEMA member companies."

"I am exceedingly proud of our member companies and their commitment to self-regulation in stemming the sale of Mature-rated games to minors," said IEMA president Hal Halpin (seen at left).

"The FTC's results very clearly indicate that the nation's leading retailers of games have steadily improved and are quickly approaching the compliance rates of the Gold Standard, movie theatre owners. In the two years since our carding policy, we have made significant and tangible progress... And with the industry responding in such a visible and proactive fashion, it is clear that legislative efforts are simply not required."

Halpin also noted a significant improvement in retailer I.D. checks, or "carding" of underage secret shoppers, which jumped from 15% in 2000 to 50% in 2005. The number of retailers providing ratings information to customers also rose dramatically, from 12% to 44% between the 2000 and 2005 surveys. IEMA member stores did even better, carding kids 55% of the time, and posting ESRB info 51% of the time.
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The video game industry, desperate for good news of late, got some today.

The Federal Trade Commission this morning released results of its "2005 Nationwide Undercover Shop," a broad investigation into the issue of how well video game retailers follow the industry's voluntary ratings guidelines.

The key question, of course, is how readily children were able to purchase M-rated games. As reported by the FTC:

"The undercover shop saw a decrease in the number of M-Rated video games sold to unaccompanied children. Video games rated "M" by the ESRB contain content appropriate for those 17 and older. Forty-two percent of the secret shoppers - children between the ages of 13 and 16 - who attempted to buy an M-rated video game without a parent were able to purchase one. In the 2003 shop, 69 percent of the shoppers were able to buy one."

The report concluded that national chains were "much more likely" to block underage sales of M-rated games. Only 35 percent of secret shoppers were able to buy from national retailers. Local and regional stores fared much worse, selling the game to too-young buyers 63% of the time.

The FTC investigation was conducted between October 2005 and January 2006 and saw secret shoppers visit game retailers in 43 states. 306 stores targeted belonged to national chains, while 100 were local or regional.

The FTC also announced today that it is studying the idea of conducting consumer and parent surveys regarding the use and effectiveness of the ESRB rating.

GP: The FTC results are a mixed blessing for the industry. Ratings compliance continues to improve dramatically among the large retailers. Even so, a 35% failure rate leaves room for improvement - and provides some ammunition for critics as well. The 63% failure rate for local/regional stores is a greater concern, of course.

By way of Kotaku comes word that state attorney generals in North Carolina and Connecticut have requested records and information from Take Two relating to the Hot Coffee scandal.

The information is contained in the company's annual report, which was filed yesterday with the Securities and Exchange Commission (SEC) and is available online.

While no suits have been filed by North Carolina or Connecticut, such action seems possible, perhaps even likely, given the request for records.

State-level video game legislation sponsored by Sen. Julia Boseman came close to passage in North Carolina last year. Connecticut, of course, is the home state of U.S. Senator Joseph Lieberman, a longtime watchdog of the video game industry. In addition, a Federal Trade Commission investigation of Hot Coffee has been ongoing since last July.

But the revelations concerning North Carolina and Connecticut aren't the only juicy bits in the annual report. Under the heading "Legal Proceedings," are listed the following:

- four class-action suits over Hot Coffee: two in New York state, one in Illinois, and one in Pennsylvania. As described by Take Two's annual report, "The complaints seek unspecified damages, declarations of various violations of law and litigation costs. We believe that these complaints are without merit and we intend to vigorously defend and seek dismissals of these actions."
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The surprising Hot Coffee lawsuit filed yesterday by the office of Los Angeles City Attorney Rocky Delgadillo (left), a Democrat, could have broad implications for the video game industry, not just Rockstar and Take Two Interactive.

Moments ago, GamePolitics talked with Jonathan Diamond, a spokesman for Delgadillo's office. Of the lengthy investigation, Diamond said, "It's been going on for quite a while. I don't know the exact start date, but it's been a few months. It was prompted by the revelation about what was going on with Take Two and Rockstar, the San Andreas Hot Coffee scenes."

But what about the implication that other games and companies may be under investigation?

"We can't talk about the pending investigation," Diamond told GP. The spokesman did reveal that the case has not been presented to a grand jury.

"The city attorney is the driving force behind it and he's directing the chief of our Criminal and Special Litigation branch, who is a former U.S. Attorney," Diamond said. As to whether the video game industry has been cooperating with the probe, Diamond said cryptically, "We have been communicating with them and sharing information."
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The fallout from Hot Coffee is still going on, and likely will be for a long time.

According to a report on The Street.com, Barbara A. Kaczynski, a key member of Take-Two's board of directors, has resigned, citing last summer's scandal surrounding GTA San Andreas as a factor.

A filing with the Securities and Exchange Commission indicates that Kaczynski resigned Jan. 19 from the board as well as from related positions as chairwoman of the board's audit committee and member of the corporate governance committee.

Kaczynski's letter of resignation was brief, but a second letter, written on her behalf by her attorney, cites concern caused by ""several matters requiring the board's attention."

These included, the "discovery of illicit images depicted in its Grand Theft Auto video game, the Federal Trade Commission's investigation of Take-Two following that discovery, and various SEC inquiries directed at Take-Two and its employees."

The letter from Kaczynski's attorney says also that more recent in-house issues have increased Kaczynski's belief of an "increasingly unhealthy relationship between senior management and the board of directors ... characterized by a lack of cooperation and respect."

Kaczynski, the daughter of an NYPD detective, was appointed to Take-Two's board in July, 2004. According to her bio, which as of this writing is still available on Take-Two's website, Ms. Kaczynski is a CPA who previously served as the CFO of the NFL, and has also worked for Time, Inc. and Price-Waterhouse.

GP: Sounds like there could be another shoe yet to drop on this one... Reuters has more on this.

As reported on GamePolitics yesterday, Rep. Fred Upton (R-Mich) today introduced a resolution (H.R. 376) directing the Federal Trade Commission (FTC) to investigate whether the publisher intentionally deceived the Entertainment Software Ratings Board to avoid an 'Adults-Only' rating.

The resolution, which was approved by a vote of 355 to 21, urges a fine if the FTC finds that there was deception. One member abstained and 56 did not vote.

UPDATE: Here is the roll call vote tally on Rep. Upton's resolution.

Representative Fred Upton (R-Mich) introduced a resolution on Friday for consideration by Congress. If approved, the measure would direct the Federal Trade Commission (FTC) to "investigate the publication of the video game 'Grand Theft Auto: San Andreas' to determine if the publisher intentionally deceived the Entertainment Software Ratings Board to avoid an 'Adults-Only' rating. "

That publisher, of course, would be none other than Take-Two Interactive.

The resolution, co-sponsored by Rep. Edward Markey (D-Mass) has been referred to the House Committee on Energy and Commerce.

At least not any time soon.

Here is the full text of ESA President Doug Lowenstein's response to Senator Clinton's call for legislation and an FTC investigation of the percolating Hot Coffee scandal:

"The legislation proposed by Senator Clinton is unconstitutional on its face as it amounts to government enacted restrictions on creative and artistic expression protected by the First Amendment. This is not just our view, but the view of every Federal Court which has rendered final judgment on similar laws enacted by states in recent years, including appellate courts in the Seventh and Eighth Circuits, and the Western District United States District Court. So while we understand Senator Clinton's motivation, in the end her solution will never pass constitutional muster and thus will do nothing to help parents raise their kids

"That said, we agree with Senator Clinton and Dr. Walsh far more than we disagree with them: retailers should not sell Mature games to minors, parents should watch what their kids watch, and parents should and can rely on the ESRB ratings to make the right choices for their families. And we hope that after further reflection and dialogue, Senator Clinton will abandon the bill and work cooperatively with industry and others to ensure that parents take advantage of the effective tools on the market to regulate the games their kids play.

"We reject any suggestion that parents cannot trust ESRB ratings. In fact, a scientific national survey by the highly regarded Peter D. Hart Research shows parents themselves agree with the ESRB ratings 83% of the time. Further, even the National Institute on Media and the Family (NIMF) usually agrees with the ESRB. In fact, for the 10 games recently highlighted and rated on its web site, the NIMF ratings almost always agree with the ESRB rating. In a pluralistic society, any rating system which gets it right 83% of the time is doing a pretty good job.

"We also disagree with those who suggest that violent video games are harmful. The most objective science in the world from the U.S. Surgeon General, the State of Washington Health Department, and the Government of Australia, among many others, has not found that games cause actual aggression or real-life violence. Indeed, one federal court after another has dismissed as unpersuasive and flawed much of the very research Sen. Clinton cites in support of her bill.

"Finally, as Dr. Walsh and Sen. Joseph Lieberman (D-CT) have repeatedly said, and the FTC itself has reported, the video game industry has been a proactive leader in self-regulation and we have a long standing track record in encouraging retailers not to sell Mature-rated games to children, and we will continue to do so. The last word on enforcement is this: according to the Federal Trade Commission (FTC), parents are involved in the purchase and rental of games more than 80% of time, which means that in the vast majority of cases when kids get games that may not be appropriate, they get them from Mom and Dad. You can introduce all the bills in the world but none of them will ensure that parents exercise the necessary control over the games they buy for their kids."

Sen. Hillary Clinton this morning announced that she will introduce legislation to help keep adult-oriented video games out of the hands of children. She also called upon the Federal Trade Commission (FTC) to take "immediate action" to determine the source of the recently revealed Hot Coffee mod. Although Sen. Clinton did not mention Hot Coffee by name, she did specify Grand Theft Auto: San Andreas, noting that graphic content within the game can be unlocked by following instructions "widely available on the Internet."

"The disturbing material in Grand Theft Auto and other games like it is stealing the innocence of our children and it's making the difficult job of being a parent even harder," said Senator Clinton. "I am announcing these measures today because I believe that the ability of our children to access pornographic and outrageously violent material on video games rated for adults is spiraling out of control."

The proposed legislation will help enforce video game ratings by creating financial penalties for retailers who fail to follow rating guidelines. Minors would be barred from purchasing violent and sexually explicit video games. Retailers who violate the law would be subject to fines of up to $5,000.

The Hot Coffee/ESRB ratings story was first reported exclusively here on GamePolitics on June 17th, and this site has been reporting in-depth on Hot Coffee develpoments ever since.

Sen. Clinton's letter to FTC Chairwoman Deborah Platt Majoras reads in part:

"Recent reports have revealed that...Grand Theft Auto: San Andreas has graphic pornographic content which may be unlocked...In all likelihood, this revelation means the game deserves an Adults Only (AO) rating. Alarmingly...no one yet knows the source of this content...the public has a strong interest in learning the answer quickly...I therefore urge you to take immediate action to determine the source of this content and the appropriateness of the M rating...and to make your findings public. Parents who rely on the ratings...should be informed right away if the system is broken. Parents face an uphill battle just understanding the ratings system. They cannot and should not be expected to second guess it. "