MDY Industries v. Blizzard Entertainment

Citation
MDY Indus., LLC v. Blizzard Entertainment, Inc., 2010 WL 5141269, 97 U.S.P.Q.2d (BNA) 1001 (9th Cir. Dec. 14, 2010).

Factual Background
Blizzard Entertainment, Inc. (“Blizzard”) is the creator and publisher of the massively multiplayer online game (MMO) World of Warcraft (“WoW”), which enables players to interact in a virtual role-playing environment and advance through 85 levels of game play.

MDY Industries, LLC and its sole member Michael Donnelly (“MDY”) developed and sold Glider, a software program that automated game play in early levels of WoW. Glider is a type of program classified as a “bot” or “robot,” which mimics the actions of players and allows them to advance through the game without actually playing. Glider accomplishes this by performing relatively safe, repetitive actions that are rewarded over a long period (also known as “grinding”).

Trial Court Proceedings
Following numerous attempts by Blizzard to block the Glider program, and to ban its users, MDY brought an action for a declaratory judgment to establish that the sales of Glider did not infringe Blizzard’s copyright or other rights. Blizzard filed a counterclaim 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. The court of appeals reversed the district court except as to MDY’s liability for violations of DMCA § 1201(a)(2) and remanded for trial on Blizzard’s claim for tortious interference with contract.

WoW players are required to accept Blizzard’s End User License Agreement (“EULA”) and Terms of Use (“ToU”) on multiple occasions; before installing the software, before loading the game for the first time, and after every patch, update, or expansion (sometimes as often as once a week for a regular player). The EULA relates to the game client, which loads a portion of the game software onto the player’s computer, which allows the player to access the online service; the ToU relates to the online service. No portion of the game can be played “offline” without accessing the online service, and a purchasr is allowed to return the game if he or she does not agree to the EULA and ToU after purchase.

While Blizzard and MDY disagree over the impact of Glider on the use and enjoyment of the WoW community, MDY contends that Glider was originally designed in compliance with Blizzard’s EULA and ToU (according to Donnelly). As the use of Glider increased following its release in 2005, Blizzard launched Warden, a technology that was developed in order to prevent access to the online service by players running bots and ultimately ban them from game play. MDY responded by modifying Glider to load only after Warden had completed its scan of the user’s computer. After this modification to the program, MDY also modified its website to indicate that the use of Glider was a violation of the Blizzard ToU.

While MDY was reporting gross revenues of $3.5 million in 2008 based on 120,000 license sales, Blizzard was claiming that from December 2004 to March 2008, it had received 465,000 complaints about WoW bots, thousands of which named Glider. According to Blizzard, $940,000 was spent annually to respond to complaints regarding the use of bots, and the parties have stipulated that Glider is the principal bot used by WoW players.

In 2006, Blizzard began sending cease and desist letters alleging that MDY’s website hosted WoW screenshots and a Glider install file, all of which infringed Blizzard’s copyrights. On December 1, 2006, MDY filed an amended complaint seeking a declaration that Glider does not infringe Blizzard’s copyright or other rights, and in February 2007, Blizzard filed counterclaims and third-party claims against MDY and Donnelly for contributory and vicarious copyright infringement, violation of DMCA §§ 1201(a)(2) and (b)(1), and tortious interference with contract. In 2008, the district court granted Blizzard’s partial summary judgment, finding that MDY’s Glider sales contributorily and vicariously infringed Blizzard copyrights and tortuously interfered with Blizzard’s contracts. The district court also granted MDY partial summary judgment, finding that MDY did not violate DMCA § 1201(a)(2) with respect to accessing the game software’s source code.

In September 2008, the parties stipulated to entry of a $6 million judgment against MDY for the copyright infringement and tortious interference claims and further stipulated that Donnelly would be personally liable for the same amount of found personally liable at trial. After a January 2009 bench trial, the district court held MDY liable under DMCA §§ 1201(a)(2) and (b)(1) and also held Donnelly personally liable for MDY’s conduct. The district court also permanently enjoined MDY from distributing Glider and MDY filed this appeal.

SECONDARY INFRINGEMENT To establish secondary infringement, a plaintiff must first demonstrate direct infringement. See A&M Records, Inc. v. Napster, Inc., 239 F.3d 1004, 1019, 1022 (9th Cir. 2001). To establish direct infringement, a plaintiff must demonstrate copyright ownership and violation of one of its exclusive rights. Id. at 1013. Subsequently, MDY is liable for contributory infringement if it has “intentionally induc[ed] or ecourag[ed] direct infringement” by Glider users. MGM Studios Inc. v. Grokster, Ltd., 545 U.S. 913, 930 (2005), and is liable for vicarious infringement if it (1) has the right and ability to control Glider users’ putatively infringing activity and (2) derives a direct financial benefit from their activity. Id. Copyright owners have the exclusive right to reproduce their works. 17 U.S.C. § 106(1). When playing WoW, a player’s computer creates a temporary copy of the game’s software in the computer’s RAM in order to run the program. This copy potentially infringes unless the player (1) is a licensee whose use of the software is within the scope of the license or (2) owns the copy of the software. See Sun Microsystems, Inc. v. Microsoft Corp., 188 F.3d 1115, 1121 (9th Cir. 1999). WoW’s ToU clearly prohibits the use of bots in conjunctive with the online service, therefore, the issue of infringement hinges on a determination of whether a player is a licensee or owner. WoW’s ToU and EULA indicate that a player is a licensee, however, a determination that a player is an owner would enable a player, who is also a Glider user, to avail itself of the “essential step” defense. OWNER VS. LICENSEE The determination of a software user as an “owner” or “licensee” was recently visited in Vernor v. Autodesk. Inc., 621 F.3d 1102 (9th Cir. 2010). At the time of the proceedings, Vernor had two copies of AutoCAD that he wanted to sell on eBay. Following cross motions for summary judgment, the district court granted Vernor’s declaratory action based on his two affirmative defenses of the first sale doctrine and the essential step defense. The first sale doctrine allows owners of copies of copyrighted works to resell those copies. Under the essential step defense, a software user who is the “owner of a copy” of a copyrighted software program does not infringe by making a copy of the program if the new copy is “created as an essential step in the utilization of the computer program in conjunction with a machine and. . . is used in no other manner.” 17 U.S.C. §117(a)(1). Accordingly, under both defenses, the determinative issue is whether Vernor was the “owner” of his copies as he alleges, or whether he improperly purchased them from licensees in violation of Autodesk’s software license. In United States v. Wise, a criminal copyright infringement case, the court determined whether a first sale of copies of a motion picture had occurred pursuant to written distribution agreements based on whether the agreement (a) was labeled a license, (b) provided that the copyright owner retained title to the prints, 	(c) required the return or destructions of the prints, (d) forbade duplication of prints, or 	(e) required the transferee to maintain possession of the prints for the agreement’s 	duration. 550 F.2d 1180, 1190-92 (9th Cir. 1977). The court against visited the issue of “owner” vs. “licensee” in the “MAI trio” of cases (See. MAI Sys. Corp. v. Peak Computer, Inc., 991 F.2d 511 (9th Cir. 1993); Triad Sys. Corp. v. Se. Express Co., 64 F.3d 1330 (9th Cir. 1995); Wall Data, Inc. v. Los Angeles County Sheriff’s Dep’t, 447 F.3d 769 (9th Cir. 2006)). In MAI and Triad, the defendants maintained computers that ran the plaintiff’s operating system software. When the defendants ran the computers the computers automatically loaded plaintiffs’ software into RAM. Because the software sold by both plaintiffs had been sold subject to restrictive license agreements, the court held that the customers were licensees who were not entitled to the essential step defense and that the defendants had therefore infringed on the plaintiffs’ copyrights by loading the software into RAM. In Wall Data, plaintiff sold 3,663 licenses to the defendant subject to a non-exclusive license that permitted use of the software on a single computer, and that restricted transfers of the software to once per month, and then only if the software were also removed from the original computer. The defendant subsequently installed the software on 6,007 computers and the plaintiff sued for copyright infringement. Citing MAI, the court held that the essential step defense was unavailable where the copyright owner merely granted the user a license that significantly restricted the user’s ability to transfer the software. Considering Wise and the MAI trio, three considerations emerge to determine whether a software user is a licensee or an owner: (1) whether the copyright owner specifies that a user is granted a license, (2) whether the copyright owner significantly restricts the user’s ability to transfer the software, and (3) whether the copyright owner imposes notable use restrictions. The district court, however, concluded that Wise and the MAI trio were irreconcilable and followed Wise as the first-decided case. While admitting that under the MAI trio Autodesk’s transfer was a license, under Wise, the district court held that because Autodesk did not require its customers to return copies of old software, that the transfer was more correctly classified as a sale. \	The Court of Appeals ultimately ruled 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 user’s ability to transfer the software; and (3) imposes notable restrictions. Applying these factors it was clear to the Court that Autodesk’s transfers to the original purchasers were mere licenses and that Vernor’s subsequent purchases were improper. Therefore, Vernor was unable to raise his affirmative defenses and was not privileged to sell his copies. Applying Vernor, the court held that WoW players are licensees of Blizzard’s game client software and as such, Blizzard retains title in the software and grants players a non-exclusive, limited license. Blizzard imposes a number of transfer and use restrictions on players, such as a requirement to transfer all original documentation and packaging when transferring a license, and prohibiting the use of the game for commercial purposes. Because WoW players, who are also Glider users, do not own their copies of the software, they are unable to claim the essential step defense. COVENANTS VS. CONDITIONS “A copyright owner who grants a nonexclusive, limited license ordinarily waives the right to use licensees for copyright infringement, and it may sue only for breach of contract.” If, however, the licensee acts outside the scope of the license, then the licensor may sue for copyright infringement. Sun Microsystems, Inc. v. Microsoft Corp., 188 F.3d 1115, 1121 (9th Cir. 1999). Therefore, a contractual provision that limits a license’s scope is considered a “condition,” and all other license terms are considered “covenants.” When the terms of a license are ambiguous, courts will construe a term as a covenant rather than a condition. See Wilmington Tr. Co. v. Clark, 325 A. 2d 383, 386 (Del. Ch. 1974). In order for Blizzard to show that a Glider user commits copyright infringement it must demonstrate that the violated term is a condition rather than a covenant. The WoW ToU prohibits bots and the use of unauthorized third-party software, however, nothing in those sections condition Blizzard’s grant of a limited license on players’ compliance with the ToU restrictions. As such, these prohibitions are considered covenants rather than “copyright-enforceable conditions.” In addition, the potential for infringement exists only where the licensee’s action (1) exceeds the license’s scope (2) in a manner that implicates one of the licensor’s exclusive statutory rights. The court noted that were it to hold otherwise, any software publisher could designate any disfavored conduct during use as copyright infringement by conditioning the license on a user’s abstention from such action. Ultimately, the court concluded 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.” As such, the court reversed the district court’s grant of summary judgment to Blizzard on its secondary copyright infringement claims, and also vacated the portion of the district court’s permanent injunction that barred MDY and Donnelly from “infringing, or contributing to the infringement, of Blizzard’s copyrights in WoW software.” THE DIGITAL MILLENNIUM COPYRIGHT ACT The first provision of the DMCA, 17 U.S.C. § 1201(a)(1)(A), is a general prohibition against “circumventing a technological measure that effectively controls access to a work protected under [the Copyright Act].” Section 1201(a)(2) prohibits trafficking in technology that circumvents a technological measure that “effectively controls access” to a copyrighted work, and Section 1201(b)(1) prohibits trafficking in technology that circumvents a technological measure that “effectively protects” a copyright owner’s right. In considering Blizzard’s DMCA claims, the district court assessed whether MDY violated §§ 1201(a)(1) and (b)(1) with respect to the literal elements of the game client software, the individual non-literal elements, and the dynamic non-literal elements. In addition, one of the elements on appeal is whether certain provisions of § 1201 “prohibit circumvention of access controls when access does not constitute copyright infringement.” The Federal Circuit had previously adopted a rule that required a nexus between potential DMCA violations and copyright infringement. This court declined to follow that rule based on its interpretation of Congress’ intent “to create a new anti-circumvention right in § 1201(a) distinct from infringement. In addressing WoW’s literal elements, this court agreed with the district court that Warden did not effectively control access because the code was available on the player’s hard drive as soon as it had been installed (Warden only guarded access to the online service after installation). With respect to WoW’s non-literal and dynamic elements, the court held that Warden did effectively control access as a player could only connect to the online service once Warden had scanned the player’s RAM and determined that no prohibited programs were running. Accordingly, the district court’s entry of a permanent injunction against MDY to prevent future § 1201(a)(2) violations was affirmed. In considering Blizzard’s § 1201(b)(1) claims, the court determined that Blizzard could prevail only if Warden “effectively protect[s] a right” of Blizzard under the Copyright Act. To meet this standard, Blizzard contends that Warden protects its reproduction right against unauthorized copyright, however, the court disagreed. In addressing this point, the court noted that a user is already entitled to copy portions of the game client into their computer’s RAM in order to play the game. The interruption by Warden if an unauthorized program is also found to be running in a player’s RAM does not interfere with the loading of the game client, only with access to the online service. Furthermore, Warden does nothing to prevent a player from taking screen shots during game play, and as such does not protect WoW’s dynamic non-literal elements. TORTIOUS INTERFERENCE To recover for tortious interference under Arizona law, Blizzard must prove: (1) the existence of a valid contractual relationship, (2) MDY’s knowledge of the relationship; (3) MDY’s intentional interference in including or causing the breach; (4) the impropriety of MDY’s interference; and (5) resulting damages. See Safeway Ins. Co. v. Guerrero, 106 P.3d 102, 1025 (Ariz. 2005). Blizzard satisfied four of the five elements above based on undisputed facts: (1) a valid contractual relationship exists between Blizzard and its customers based on the EULA and ToU; (2) MDY was aware of the relationship and stated on its own website that it was aware that Glider violated these agreements; (3) MDY intentionally interfered with Blizzard’s contracts even after attempts by Blizzard to restrict or ban the use of Glider; and (4) Blizzard was damaged at least so far as the money spent in responding to complaints about the use of Glider. While the court rejected MDY’s argument that Blizzard’s tortious interference claims were preempted by the Copyright Act, the court did vacate the grant of summary judgment on this issue and remand for a determination of the outstanding issues of material fact.