Conditions, Covenants, Copyrights, and Contracts

More weapons for licensors, my pet!

Whether you are doing battle in a virtual world with mythical beasts or in a real courtroom with rebellious licensees, it’s all about the weapons.

In MDY Industries LLC vs. Blizzard Entertainment, Inc., the federal Ninth Circuit Court of Appeals explained under what circumstances a licensee’s violation of a non-exclusive software license agreement would not only be a breach of contract, but also an infringement of copyright, giving the licensor many more powerful legal weapons with which to do battle.

World of Warcraft (“WoW”) is a popular multiplayer fantasy computer game in which weapons feature prominently. Players must advance through 70 different levels by fighting battles, slaying beasts, and buying or trading for weapons and armor. WoW has an end user desktop software component subject to an end user license agreement, and an Internet server component subject to terms of use. Michael Donnelly invented a software bot called Glider that automatically plays the game and advances players through the lower levels of WoW without their participation. Glider quickly became popular, eventually earning Donnelly $3.5 million.

When Blizzard became aware of Glider, it changed the end-user license agreements and the terms of use to prohibit use of game-playing bots, and implemented an anti-bot component called Warden to intercept Glider. Donnelly added an anti-detection module to Glider, and bragged in the press that Blizzard would never be able to completely shut down Glider.

After Donnelly received a threatening visit from Blizzard’s legal counsel, his company, MDY, filed suit. Blizzard countersued, claiming: 1) end-users’ use of Glider in violation of the license agreement and terms of use was an infringement of Blizzard’s copyright in the WoW software; and 2) although MDY did not directly infringe Blizzard’s copyrights, it either encouraged or permitted Glider users to do so, which made MDY liable under theories of either contributory or vicarious copyright infringement. (Blizzard also raised claims under the Digital Millennium Copyright Act and tortious interference with contract.)

Blizzard claimed copyright infringement in part out of necessity – MDY was not a licensee of WoW, so Blizzard could not sue MDY for breach of contract – and in part out of preference. As we saw in Jacobsen vs. Katzer, copyright infringement actions give the plaintiff powerful legal remedies. Not only the right to seek the licensor’s actual damages as in a breach of contract action, but also to seek the infringer’s profits, statutory damages of up to $150,000 per work, injunctive relief, attorney’s fees, as well as enforcement against downstream infringers.

The trial court found in favor of Blizzard on the copyright claims, assessed a judgment of $6.5 million against MDY, and permanently prohibited MDY from distributing Glider.

The Ninth Circuit started from the premise that a copyright licensor normally waives the right to claim copyright infringement against a non-exclusive licensee, and is therefore limited to its contractual remedies for breach of the license agreement.

The exception to this rule occurs when the licensee breaches a condition of the license, that is, a contractual term on which the licensor conditioned his permission for the licensee to access the copyrighted material. And not just any condition, but one that has a close nexus to the licensor’s exclusive copyright rights.

This was in accord with the Federal Circuit in Jacobsen vs. Katzer and other courts that have ruled that breach of garden variety contractual promises (covenants) in a license agreement condition would not constitute copyright infringement, but that breach of conditions might. According to the WoW court, state law will normally define these terms, but generally speaking, a covenant is a promise to act or not act in a particular way (“Licensee agrees that it will not X”), while a condition is a precondition that must be fulfilled before a party delivers a benefit (“Provided that Licensee does not A, then Licensor will allow Licensee to B”).

Furthermore, the breached condition must have a nexus to the licensor’s exclusive copyright rights such as copying, selling, and creation of derivative works. If not, wrote the court, all licensors would draft every license provision to say that it is an essential condition of the license, to access more powerful copyright remedies against breaches. In a footnote, the court ruled that a licensee’s failure to pay the license fee would always be deemed to have the required nexus to permit the licensor to bring a copyright infringement action.

Turning to the facts of the Glider bot, the court found MDY was not liable for either contributory or vicarious copyright infringement, because: 1) the Blizzard license prohibitions against using bots were phrased as covenants (“You agree that you will not…create or use cheats, bots, ‘mods,’ and/or hacks….”), not as conditions to using WoW; and (2) Glider users’ violations of the license terms did not implicate any exclusive copyright rights, for example copying WoW or creating altered versions of it.

Takeaway: Although Blizzard lost its copyright claim, in a larger sense licenses and licensors won in yet another Ninth Circuit case. Expect licensors to draft software and other copyright licenses in which many of the licensee’s obligations are styled not as covenants, but as conditions to the licensor’s provision of the license, by inserting language such as, “Provided that Licensee…” or “Subject to and conditioned on Licensee’s…” With the increased legal weapons that a copyright infringement action makes available to licensors, there could be an increase in litigation not only against licensees, but also against third parties who may have encouraged or permitted infringement by licensees.

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