Ninth Circuit Highlights the Importance of Well-Drafted Software Licenses and Terms of Use

While World of Warcraft (“Wow”) is a massive virtual role-playing game, where over 12 million players around the globe ply the hills, dales and alleys of the WoW virtual landscape, back in the real world Bizzard Entertainment, Inc., the makers of WoW, have been involved in numerous lawsuits over the years dealing with various aspects of WoW. The latest saga is the Ninth Circuit weighing in last week in its opinion, MDY Industries v. Blizzard Entertainment, (2:06-CV-02555-DGC) available here, addressing at root whether independent “bot” software by MDY Industries, LLC (“MDY”), called Glider, infringed WoW’s copyrights by virtue of its interaction with WoW to automatically play several early levels out of a total of the game’s 70 levels. Why the hullabaloo? Good question.  Answer: there's big money in gaming.  The case itself, however, provides a nice nutshell encapsulation for your light holiday reading of the types of issues and claims that arise in software licensing and infringement situations, though the facts are rather unique.

The saga all started when MDY launched a declaratory action in late 2006 seeking a ruling that its Glider software did not infringe Blizzard’s WoW copyrights and other rights. That straightforward strategy blew up in MDY’s face when Blizzard counter-claimed under the Digital Millennium Copyright Act (“DMCA”), 17 U.S.C. 1201 et seq., as well as for contributory and vicarious copyright liability and tortious interference. The Arizona district court held, opinion here, after a bench trial that MDY was liable for “secondary” copyright infringement, DMCA violations and tortious interference with contract, but granted MDY partial summary judgment in its favor that MDY had not violated DMCA 1201(a)(2) by accessing the WoW software source code. As an aside, this case highlights the real strategic dangers inherent in launching even a seemingly benign declaratory effort that can open the door to a hail storm of unanticipated counter-claims.

However, MDY’s fortunes recently took somewhat of an upturn for the better, because on appeal the Ninth Circuit vacated the district court on all but two claims: that MDY violated the DMCA sections 1201(a)(2) and (b)(1) and Blizzard’s claim of tortious interference with contract. The Court then remanded for reconsidering of the issue of personal liability.

Unfortunately, for MDY the victory may be empty, as the lower district court opinion notes the parties had entered a stipulation agreeing to MDY’s payment of $6,000,000 dollars in damages on the tortious interference, contributory copyright infringement and vicarious infringement copyright claims “if any of those claims is affirmed on appeal.” As a result, at least facially, it appears while the Ninth Circuit opinion heralds a broad win for MDY on the bulk of disputed claims, MDY may still be on the hook for the $6MM stipulation damages due to affirmance of the tortious interference claim – even as the Ninth Circuit stated that “summary judgment is inappropriate as to Blizzard’s claim for tortious interference with contract under Arizona law.”  I predict someone somewhere was banging their head against the wall after this opinion came out.

This said, the meat of this case’s matter, however, orbits around the WoW End User License Agreement (“EULA”), copyright infringement, the DMCA and the extent of Copyright Act preemption of state-based contract claims. The facts are somewhat muddled by the fact that WoW consists of a binary coupling of software: the end user client software and the server-based backend running on WoW’s servers, but in laying the foundation of facts the Court noted that Glider “does not alter or copy WoW’s game client software, does not allow a player to avoid paying monthly subscription dues to Blizzard, and has no commercial use independent of WoW.” Based on this description Blizzard’s angst appears ado about potentially nothing, but the Court further stated “Blizzard contends that Glider disrupts WoW’s environment for non-Glider players by enabling Glider users to advance quickly and unfairly through the game and to amass additional game assets.”  If you advance more quickly, you finish earlier and potentially pay fewer installments of the monthly subscription fees.  With 12 million users even a few months sliced from each adds up, hence there are in fact significant dollars at issue.

The plot thickened even further because after Glider’s launch Blizzard counter-attacked by changing it Terms of Use (“ToU”) to ban bots and added software to detect bots and prevents users running such bots from connecting to the WoW servers. MDY in its digital arms race response modified the Glider software to avoid such detection and the subsequent user banning that would befall Glider users, but informed users that those who elected to use Glider would be violating WoW’s ToU.

The Court’s Analysis

The Court’s analysis examined, in order, the contributory/vicarious (“secondary infringement”) copyright issues, the “essential step” defense, the important and often highly disputed contractual covenant versus copyright license issue (in which ToU’s and EULA’s frequently play key roles), and last, but certainly not least, the DMCA’s role in this case. I do recommend you read the full opinion, again available here, to gain the full picture. For this post, however, I’ll only be focusing on the copyright covenant vs. copyright license issues and touching on the DMCA’s role.

Contributory/Vicarious “Secondary” Copyright Infringement

Of course for secondary infringement to successfully lie there must be associated direct infringement. In textbook recitation and citation to the recent Supreme Court Grokster case the Court observed “MDY is liable for contributory infringement if it has ‘intentionally induc[ed] or encourag[ed] direct infringement’ by Glider users.” Infringement of what and how? Infringement of Blizzard’s WoW software by Glider users.

Clearly Blizzard has copyrights in its software. However legitimate WoW users are valid licensees, which is where the language of the WoW ToU entered the picture - to determine whether users violated the scope of the copyright license granted or merely breached a covenant of the otherwise contractual ToU.  This highlights an extremely important issues for anyone issuing software licenses: it’s best to ensure that language used in the license granting agreement is expressly drafted such that any otherwise mere “covenants” are in fact phrased as conditions whereby breach serves to withdraw the license. Since many state’s disfavor condition precedents that result in forfeiture, it’s important to examine the agreement's controlling state law and draft accordingly. However, without such express language a violation of an obligation in the license may serve merely to provide a contractual breach claim, and not divest the licensee - without more – of the granted copyright license. The end result is to preclude any claim of copyright infringement.

This convenant/condition conundrum occurs regularly in software licenses and is frequently a source of trouble in resulting litigation. It’s best to take extra steps to dismiss the issue up front, when drafting rather than in the uncertain atmosphere of a courtroom. For a comprehensive look at the issue within the software contract license context, see Copyrights, Contracts, and Confusions: “Open Source” Software Licenses and Jacobsen v. Katzer, NYSBA, Bright Ideas Journal, 9-13, (Vol. 17, No. 3, Winter 2008), which discusses the district court opinion in MDY v. Blizzard Entertainment in the article's analysis of software license convenants/conditions.

In this case, the Court devoted an entire subsection of its opinion to discussion of “contractual covenants vs. license conditions”. As the Ninth Circuit has a rather robust number of decisions in this area, the Court stepped through its previous opinions on the issue, and concluded that whether a clause provided a condition to the copyright license’s continuation or was merely a covenant depended on application of state contractual law – Delaware’s in this case given the ToU’s provision that Delaware law controlled.

Here the court found Blizzard’s ToU did not provide a condition, because “nothing in that section conditions Blizzard’s grant of a limited license on players’ compliance with ToU § 4’s restrictions.” As a result the Court found that the specific “wrong” here – potential interference with others playing experience – “violates the covenants with Blizzard, but does not thereby commit copyright infringement because Glider does not infringe any of Blizzard’s exclusive rights.” End of story as far as Blizzard’s copyright claims were concerned. I think it’s safe to bet that Blizzard has carefully revisited its ToU since this case began.

The Digital Millennium Copyright Act

As we’ve noted in other posts, the DMCA has become a favorite offensive tool for copyright owners because of 17 U.S.C. § 1201(a)(1)(A)’s provision against “circumventing a technological measure that effectively controls access to a work protected under [the Copyright Act].”

The district court below reviewed whether MDY’s actions violated sections 1201(a)(1)(A) and 1201(b)(1) of the DMCA, which prohibits trafficking in technology in technology that circumvents a technological measure that protects a copyright owner’s rights. While the minutae of the analysis is certainly interesting, the broad take away is that the scope of the DMCA’s reach in its 1201 provisions remains unsettled. Worth reading is the Court’s detailed examining of the DMCA and in particular its observations “that section [1201](a) creates a new anticircumvention right distinct from copyright infringement, while section (b) strengthens the traditional prohibition against copyright infringement,” and its statement that “[s]ection 1201(b)(1)’s prohibition is thus aimed at circumventions of measures that protect the copyright itself: it entitles copyright owners to protect their existing exclusive rights under the Copyright Act.”

Interestingly, the Ninth Circuit, after a step-by-step analysis of the seminal DMCA decision of Chamberlain Group, Inc. v. Skylink Techs., Inc., 381 F.3d 1178, 1203 (Fed. Cir. 2004), declined to follow Chamberlain’s holding here, and siding with the Second Circuit’s holding in Universal City Studios, Inc. v. Corley, 273 F.3d 429, 440 (2d Cir. 2001), to state “[w]hile we appreciate the policy considerations expressed by the Federal Circuit in Chamberlain, we are unable to follow its approach because it is contrary to the plain language of the statute.” The Court further noted in Footnote 16 that “a circuit split exists with respect to the meaning of the phrase [in 1201(a)(3)(A)] ‘without the authority of the copyright owner.'”  Did I mention that caselaw on the DMCA’s scope and application remains unsettled?

While I’ve barely scratched the surface of the range, depth and scope of issues raised by the opinion in this post, if anything I hope I’ve highlighted that software licensing is a complicated and complex area that demands extremely careful understanding of the issues and drafting language used.  As always, if you have any further questions or would like to discuss the opinion or the issues raised further, please feel free to contact me or any of the attorneys at the InfolawGroup.