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Case Summary: MDY Industries, LLC. v. Blizzard, Inc., 2011 U.S. App. LEXIS 3428 (9th Cir. Ariz. Feb. 17, 2011)

Category : Case Summaries, Infringement v. Breach

KEY HOLDINGS: In the absence of direct infringement, one cannot be found liable for contributory or vicarious infringement. Generally, a copyright owner who grants a nonexclusive, limited license waives his right to sue a licensee for infringement, and may sue only for breach of contract. Nevertheless, a licensee may be liable for copyright infringement where the licensee’s action exceeds the scope of the license in a manner that implicates one of the licensor’s exclusive statutory rights (i.e., copying, distributing, making derivative works, etc.).  A contractual term that limits a license’s scope is a “condition,” the violation of which constitutes copyright infringement. All other license terms are considered “covenants,” the violation of which give rise to suit for breach of contract. Conditions and covenants are distinguished by state contract law, and to the extent consistent with federal copyright law and policy.  Section 1201(a)(2) of the DMCA provides for an anti-circumvention right, distinct from infringement.

BACKGROUND: Blizzard Inc. is the creator of the popular online videogame, World of Warcraft (“WoW”) which came on the market in 2004. Each WoW player was required to accept Blizzard’s End User License Agreement (“EULA”) and Terms of Use (“ToU”) at various stages throughout the gaming process.

MDY Industries, and its sole member, Michael Donnelly (collectively “MDY”), developed and sold Glider, a “bot” that automatically played the first few levels of the 70-level-WoW game for players. Glider did not copy or alter the game client’s software, did not prohibit a player from paying its monthly subscription to WoW, and had no independent use separate from WoW.

Blizzard became aware of WoW players’ use of Glider and claimed the bot disrupted the WoW gaming experience for other non-Glider users. In September 2005, in an effort to eliminate Glider use, Blizzard launched a program named Warden to locate players using bots, including Glider users, and ban them from connecting to the WoW server.

MDY learned of Blizzard’s detection of bots and thereafter modified Glider so that its use could not be detected. Further, MDY continued to market Glider through its website, highlighting Glider’s new anti-detection features and charging a $5/month service fee for use of the new Glider. At the end of 2005 Blizzard amended its ToU to reflect that the use of Glider was prohibited by WoW gamers. MDY was aware of this prohibition and modified its website to state that using Glider violated Blizzard’s ToU. However, MDY continued to sell Glider.

Blizzard contended that from December 2004 to March 2008 it received thousands of complaints about Glider. Blizzard further claimed that it spent $940,000 annually responding to bot complaints. The parties stipulated that Glider was the primary bot used by WoW players.

MDY filed suit, seeking a declaratory judgment that its sales of Glider did not infringe Blizzard’s copyright or other rights related to WoW. Blizzard counterclaimed under the Digital Millennium Copyright Act (“DMCA”) and for tortious interference with contract under Arizona law.

The district court found MDY and Donnelly liable for secondary copyright infringement, violations of DMCA §§ 1201(a)(2) and (b)(1), and tortious interference with contract. MDY appealed.

ISSUES: Whether MDY’s marketing and sale of Glider constituted secondary copyright infringement as to Blizzard’s WoW gaming software. Whether MDY’s sale of Glider violated Blizzard’s rights under the DMCA. Whether MDY tortiously interfered with contracts between Blizzard and its gaming users by selling Glider to WoW gamers.

STANDARD OF REVIEW: The Ninth Circuit reviews de novo the district court’s (1) orders granting or denying summary judgment; (2) conclusions of law after a bench trial; and (3) interpretations of state law. The district court’s findings of fact are reviewed for clear error.

ANALYSIS:

I. BLIZZARD’S CLAIM OF COPYRIGHT INFRINGEMENT

In its analysis of whether MDY committed copyright infringement, the Ninth Circuit considered whether MDY committed contributory or vicarious infringement of Blizzard’s copyright when it sold Glider to WoW players. In order to establish secondary copyright infringement (i.e., contributory or vicarious), Blizzard had to first show that WoW players directly infringed its rights. In other words, Blizzard had to establish that is owned a valid copyright for the WoW software and that a player’s use of the Glider software to play the WoW game violated of one of Blizzard’s monopoly rights.

In determining whether MDY’s actions amounted to vicarious or contributory copyright infringement, the Court analyzed the terms of the agreement between WoW and its players to ascertain whether the players were owners or licensees of their copies of WoW. Specifically, the Court considered “whether WoW players, including Glider users, are owners or licensees of copies for purposes of the essential step defense,” which “provides that the player does not infringe by making a copy of the computer program where the copy is created and used ‘solely as an essential step in the utilization of the computer program in conjunction with a machine.’” 17 USC Sect. 117(a)(1).

A. Licensee or Owner: Both parties agreed that when playing WoW, a copy of the game’s software is created and loaded in the random access memory (RAM) of the player’s computer. This copy would infringe Blizzard’s copyright unless the player was (1) a licensee, using the software within the scope of the license or (2) owned his copy of the software.

In determining whether WoW users are licensees or owners, the Court looked to the case of Vernor v. Autodesk, Inc., 621 F.3d 1102 (9th Cir. 2010). In Vernor, the Ninth Circuit held “that a software user is a licensee rather than an owner of a copy where the copyright owner (1) specifies that the user is granted a license; (2) significantly restricts the usder’s ability to transfer the software; and (3) imposes notable use” restrictions . Vernor, 621 F.3d at 1108-09 (9th Cir. 2010). Applying the Vernor factors, the Court first noted that the license agreement reserved title in the software to Blizzard and granted players only a non-exclusive limited license. Second, the Court found that the license imposed significant transfer restrictions in that it required a transferring player to: (i) transfer all original packaging; (ii) permanently delete all of the copies and installation of the game client; and (iii) transfer only to a recipient who accepts the EULA. A player could not transfer his account.

Finally, the Court noted that the license agreement imposed a variety of use restrictions such as limiting its use to non-commercial entertainment purposes, prohibiting its use in cyber cafes and computer gaming centers, and prohibiting the concurrent use of bots and unauthorized third party programs. Blizzard also reserved the right to alter the game client remotely without a player’s knowledge or consent, and to terminate the license if the player violates its terms. Upon termination, the player was required to uninstall the game and destroy all copies.

Based upon the Vernor factors, the Ninth Circuit found that WoW players were licensees rather than owners of the copies they possessed. Thus, the next issue to address was whether a player’s use of Glider to play WoW in violation of the license agreement’s terms exceeded the scope of the license or was merely a breach of the agreement.

B. Covenant or Limitation of Scope: The Ninth Circuit posited that whether the appropriate cause of action sounded in contract or copyright infringement hinged upon whether the bot and third party software restrictions in Section 4(B)(ii) and (iii) were license conditions or contractual covenants.

C. Contractual Covenant or License Condition: The Court referenced its decision in Sun Microsystems, Inc. v. Microsoft Corporation for the proposition that where a copyright owner grants a nonexclusive, limited license, he generally waives the right to sue the licensee for copyright infringement but instead may sue only for breach of contract. 188 F.3rd 1115, 1121 (9th Cir. 1999). However, when the licensee acts outside the scope of the license, the copyright owner may sue for infringement. The Court further cited Sun Microsystems in summarily stating:

[w]e refer to contractual terms that limit a license’s scope as ‘conditions,’ the breach of which constitute copyright infringement… We refer to all other license terms as ‘covenants,’ the breach of which is actionable only under contract law.” The Ninth Circuit then nodded in the direction of Delaware state law by stating that it distinguishes “between conditions and covenants according to state contract law, to the extent consistent with federal copyright law and policy.

Food Contulting Group v. Musil Govan Azzalino, 270 F.3d 821, 827 (9th Cir. 2001).

Looking to Delaware contract law, the Court stated that “a covenant is a contractual promise, … such that the promisee is justified in understanding that the promisor has made a commitment,” whereas “[a] condition precedent is an act or event that must occur before a duty to perform a promise arises.” Applying the Delaware definitions, the Court found that nothing in Sections 4(B)(ii) or (iii) conditioned the grant of the license on the player’s compliance with their terms.

The Court then outlined a separate test for distinguishing between copyright infringement and breach of contract, holding that “[t]o recover for copyright infringement based on breach of a license agreement, (1) the copying must exceed the scope of the defendant’s license and (2) the copyright owner’s complaint must be grounded in an exclusive right of copyright.” Reviewing the license agreement through the lens of the newly stated test, the Court noted that Section 4 of the TOU contained restrictions which were grounded in Blizzard’s copyrights, and yet simultaneously other restrictions which were not. As an example the Court pointed to Section 4(D) of the TOU, which forbade

creation of derivative works based on WoW without Blizzard’s consent, A [sic] player who violates this prohibition would exceed the scope of her license and violate one of Blizzard’s exclusive rights under the Copyright Act. In contrast, TOU Section 4(C)(ii) prohibits a player’s disruption of another player’s game experience… Although this conduct may violate the contractual covenants with Blizzard, it would not violate any of Blizzard’s exclusive rights of copyright. The anti-bot provisions at issue in this case… are similarly covenants rather than conditions. A Glider user violates the covenants with Blizzard but does not thereby commit copyright infringement because Glider does not infringe any of Blizzard’s exclusive rights. For instance, the use does not alter or copy WoW software.

The Court concluded its analysis by holding that “for a licensee’s violation of a contract to constitute copyright infringement, there must be a nexus between the condition and the licensor’s exclusive rights of copyright.” Given that the bot restriction was merely a covenant according to the Court, WoW players did not commit direct copyright infringement by using Glider in violation of the ToU. Therefore, MDY could not liable for secondary copyright infringement, which requires the existence of direct copyright infringement.

II. CLAIMS UNDER DIGITAL MILLENNIUM COPYRIGHT ACT:

The purpose of the Digital Millennium Copyright Act (DMCA) is to mitigate issues of copyright enforcement in the digital age. There are three provisions within the DMCA which speak to the “circumvention of copyright owners’ technological measures.” The Court noted that the U.S. Supreme Court has yet to address these provisions and that they were issues of first impression in the Ninth Circuit.

The Court addressed whether Glider violated DMCA Sections 1201(a)(2) and (b)(1) – namely, “by allowing users to circumvent Warden to access WoW’s various elements.” The Court provided a detailed analysis of these sections of the DMCA and ultimately concluded that MDY violated DCMA Section 1201(a)(2).

Specifically, the Court looked to the legislative history of the DMCA, finding (in a departure from the Federal Circuit) that:

there is significant textual evidence showing Congress’s intent to create a new anti-circumvention right in Section 1201(a) distinct from infringement…. Legislative history supports the conclusion that Congress intended to prohibit even non-infringing circumvention and trafficking in circumventing devices.” Glider was not authorized to circumvent Warden, thus MDY violated Section 1201(a)(2). Specifically, the Court found a violation of Section 1201(a)(2) because MDY (1) traffics in (2) a technology or part thereof (3) that is primarily designed, produced, or marketed for, or has limited commercially significant use other than (4) circumventing a technological measure (5) that effectively controls access (6) to a copyrighted work. See 17 USC Section 1201(a)(2).

The Court found that MDY did not violate DCMA Section 1201(b)(1) because (1) Blizzard’s EULA and ToU authorize all licensed WoW players to copy the software code into their RAM when playing the game and (2) while theoretically a WoW player can record a game by taking screen shots, there was no evidence that Warden was designed to detect or prevent infringing copying. In short, MDY did not violate Section 1201(b)(1), because Warden did not effectively protect any of Blizzard’s rights under the Copyright Act.

III. TORTIOUS INTERFERENCE WITH CONTRACT: Applying Arizona law, the Court concluded that there were triable issues of material fact with regard to this count, and that Blizzard satisfied only four of five of the elements of this cause of action based upon undisputed facts. The Court noted Blizzard was entitled to summary judgment in relation to this count only if it showed that MDY’s actions were improper. However, analyzing the facts under the test for determining whether MDY’s actions were improper, the Ninth Circuit concluded that a number of the factors did not clearly weigh in favor of either side. Thus, summary judgment was inappropriate and the issue should have been tried.

IV. COPYRIGHT MISUSE DEFENSE: The Court noted the copyright misuse
defense originates from the unclean hands doctrine. Though the Ninth Circuit did not apply the doctrine in this case (as MDY was not guilty of copyright infringement), it briefly discussed the defense, stating that while its contours are still being defined, the remedy for copyright misuse is to decline enforcement of the copyright for the period of misuse. In the course of its DMCA analysis, the Court discussed the doctrine of copyright misuse in the context of antitrust violations, noting, however there was no clear showing of anticompetitive behavior in this case. The Court did point out concerns related to Section 1201(a), which might permit “companies to leverage their sales into aftermarket monopolies, in tension with antitrust law and the doctrine of copyright misuse.”

HOLDING: The Ninth Circuit reversed the district court except as to MDY’s liability for violation of DMCA § 1201(a)(2) and remanded for trial Blizzard’s claim for tortious interference with contract.

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