# Petition for Writ of Certiorari — Nintendo of America, Inc. v. Lewis Galoob Toys, Inc. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386003_1755%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition for Writ of Certiorari - **Published:** January 1, 1994 - **Citation:** 513 U.S. 822 ## Text i Supreme Court, U.S. J No. FILED == 9-9-9-§-3-5-u-6 1994 In The OFFICE OF THE CLERK Supreme Court of the United States October Term, 1993 + NINTENDO OF AMERICA INC., Petitioner, Vv. LEWIS GALOOB TOYS, INC., Respondent. ¢ Petition For A Writ Of Certiorari To The United States Court Of Appeals For The Ninth Circuit + PETITION FOR A WRIT OF CERTIORARI + ROBERT H. BORK 1150 17™ Street, N.W. Washington, D.C. 20036 (202) 862-5852 JOHN J. KIRBY* MUDGE ROSE GUTHRIE ALEXANDER & FERDON 180 Maiden Lane New York, New York 10038 Telephone: (212) 510-7000 Attorneys for Petitioner Nintendo of America Inc. *Counsel of Record QUESTIONS PRESENTED As the price of obtaining a restraining order or preliminary injunction, a litigant must post security from which its opponent may recover costs and damages if the latter is subsequently found to have been “wrongfully” enjoined or restrained. Fed. R. Civ. P. 65(c). The circuit courts of appeals have employed three different standards in deciding when the enjoined party is entitled to recover damages from an injunction bond. The Court of Appeals for the Ninth Circuit has now created a four-way conflict among the federal circuits concerning the meaning of “wrongfully.” The Ninth Circuit held in this case that the enjoined party is always entitled to execution on the security unless it has been guilty of intentional deception or misconduct. In sharp contrast, the Fifth. Seventh, Tenth, Eleventh, District of Columbia, and Federal Circuits hold that a range of equitable factors, such as the enjoined party's failure to mitigate damages, are to be considered. These circuits differ sufficiently on the extent of allowable judicial discretion that they may be characterized as in conflict on that issue. Yet a fourth position, one of strict or automatic liability, has been adopted by the Second and, perhaps, the Third Circuits, so that an enjoined party that later wins the case is conclusively proved to have been wrongfully enjoined. Two questions are presented: 1. Which of the four conflicting rules devised by the courts of appeals should govern exoneration of or —S ii execution on security posted to obtain a preliminary injunction or restraining order? 2. On the undisputed facts of this case, where respondent did not even try to mitigate damages, was petitioner entitled, as a matter of law, to exoneration of its bond? “** TABLE OF CONTENTS Page QUESTIONS PRESENTED .........--+--+:: i TABLE OF AUTHORITIES .......-.2202e00- v Le GR Se ra er ee 2 pg EE ane ee Sr ae cr eee a 2 STATUTORY PROVISION INVOLVED ........ 3 STATEMENT OF THE CASE ...........--:- 3 A. Statement of Facts ......5.2-2 ee eees 4 B. Proceedings Below ..........--+-+:> 5 REASONS FOR GRANTING THE PETITION .... 9 I. CERTIORARI SHOULD BE GRANTED TO RESOLVE THE CONFLICT AMONG THE CIRCUITS REGARDING THE STANDARD FOR EXECUTION ON SECURITY GIVEN TO OBTAIN A PRELIMINARY INJUNCTION OR RESTRAINING ORDER. ..........+-++:-: 11 A. Upon An Application For Execution On Security Pursuant to Rule 65(c), The Court Should Consider All Relevant Factors To Determine Whether There Is A Good Reason To Deny or Reduce The Award of Damages ......... 14 B. The Erroneous Standard Applied By The Ninth Circuit Rejected Any Consideration Of The iV TABLE OF CONTENTS (Continued) Page Equitable Factors Emphasized By The Large Waasormy OF me Cie. ow we tw 17 Il. CERTIORARI SHOULD BE GRANTED BECAUSE THE CONSTRUCTION OF RULE 65(c) Is OF GREAT IMPORTANCE EN PRA EAEISAEEORN et 23 CAIRNS 6 nu oe ewes ob ee ee eee 27 : Vv TABLE OF AUTHORITIES CASES American Bible Society v. Blount, 446 F.2d 588 (3d ie GOIN sien Se ER EE St 13 Apple Computer, Inc. Vv. Formula Int’l Inc., 725 F.2d 521 (9th Cir. 1984) .....---- eee eee eee: 25 Blumenthal v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 910 F.2d 1049 (2d Cir. 1990) .....-----: 13 Canal Authority of State of Florida v. Callaway, 489 F.2d 567 (Sth Cir. 1974) ....--- +e ee ees 24 Coyne-Delaney v. Capital Devel. Bd.. 717 F.2d 385 (7th Cie MOET gc alia a ea ee EL passim Crowley v. Local No. 82, 679 F.2d 978 (1982), rev'd on other grounds, 467 U.S. 526 (1984) .....---- 24 Fogerty v. Fantasy, Inc.. 114 S. Ct. 1023 (1994) ... 13 H&R Block, Inc. v. McCaslin, 541 F.2d 1098 (Sth Cir. 1976), cert. denied, 430 U.S. 946 sf) BPN eae 11 Johnson Controls, Inc. v. Phoenix Control Systems, Inc. , 886 F.2d 1173 (9th Cir. 1989) .......------ 25 Lewis Galoob Toys, Inc. v. Nintendo of America Inc., 780 F. Supp. 1283 (N.D. Cal. 1992), aff'd, 964 F.2d 965 (9th Cir. 1992). cert. denied, 113 S. Ct. 1582 Ue ea Wk ol a PE RD = Ee vi TABLE OF AUTHORITIES (Continued) Page National Kidney Patients Ass'n v. Sullivan, 958 F.2d 1127 (D.C. Cir. 1992), cert. denied, 113 S. Ct. 966 (GONEe 484040 6448868 ee 11, 12, 15, 21 Nintendo of America Inc. v. Lewis Galoob Toys, Inc.., 16: Fide 1652 th Cie. 1996) 550505 BNE occ 2,8 Page Communications Engineers, Inc. v. Froehlke, 475 F.2d 994 (D.C. Cir. 1973) ..... 11, 14-16, 19-20 State of Ala. ex rel. Siegelman v. U.S. E.P.A., 925 F.2d sar the Ca: SOSE) 6 ok ocean aoe 12, 16 State of Kan. ex rel. Stephan v. Adams, 705 F.2d 1267 (To A «| Pp ee Co | Universal City Studios, Inc. v. Sony Corp. of America, 659 F.2d 963 (9th Cir. 1981), rev'd on other grounds, 464 U.S. 417 (1984) ............ 25 Warren v. Stoddart, 105 U.S. 224 (1881)... ..... 21 Wayne Chemical, Inc. v. Columbus Agency Service Corp... 567 F.2d 692 (7th Cir. 1977) ........ 24 Zenith Radio Corp. v. U.S.. 823 F.2d 518 (Fed. Ce. 1967) ak er OA Se 12, 16, 22 STATUTES i? U.S.C. § 097 Gage. 990e ice eens 4-6, 7, 16 vii TABLE OF AUTHORITIES (Continued) Page , Pie La ey. |) ree ee ee 2 Red. R. Civ. BP. G6lG) 0 we ec ccc ec seces passim MISCELLANEOUS Cardozo. The Nature of the Judicial Process SD CUTS cc 2 sas 0 0-6 b 0d tbe oes es 9 Note, Jnterlocutory Injunctions and the Injunction Bond, 73 Harv. L. Rev. 333 (1959) .......-.--- 21, 24 Note, Recovery For Wrongful Interlocutory Injunctions Under Rule 65(c). 99 Harv. L. Rev. 828 (1986) . 9 Williston on Contracts § 1039 (3d ed. 1967) ...... 21 Wright and Miller, Federal Practice and Procedure: Civil 8 2947 (1973) . 0. ce cee ee wees 24 No. * In The Supreme Court of the United States October Term, 1993 * NINTENDO OF AMERICA INC.., Petitioner, LEWIS GALOOB TOYS, INC., Respondent. * Petition For A Writ Of Certiorari To The United States Court Of Appeals For The Ninth Circuit 7 PETITION FOR A WRIT OF CERTIORARI + Petitioner, Nintendo of America Inc.,' petitions for a writ of certiorari to review the judgment of the United States Court of Appeals for the Ninth Circuit. | * ' All parties who appeared below are listed in the above caption. Pursuant to Rule 29.1] of the Rules of this Court, petitioner Nintendo of America Inc. states that it is a wholly- owned subsidiary of Nintendo Co., Ltd., a Japanese corporation. Nintendo of America Inc. has no subsidiaries that are not wholly- owned. OPINIONS BELOW The opinion of the Court of Appeals is reported at 16 F.3d 1032 (9th Cir. 1994). The Court of Appeals denied a petition for rehearing and suggestion for rehearing en banc in an unreported order. The District Court opinion is unreported. * JURISDICTION The judgment of the Court of Appeals was entered on February 17, 1994. A timely petition for rehearing and suggestion for rehearing en banc were denied on March 21, 1994. This Court has jurisdiction to review the judgment of the Court of Appeals by writ of certiorari pursuant to 28 U.S.C. § 1254(1). e ¢ The opinion of the Court of Appeals is reprinted at pages A-| to A-18 of the appendix to this brief. The order denying rehearing and rehearing en banc is reprinted at page A-19 of the appendix. Also contained in the appendix are the substantive decisions on the merits of the Ninth Circuit in Lewis Galoob Tovs, Inc. v. Nintendo of America Inc. , 964 F.2d 965 (9th Cir. 1992), cert. denied, 113 S. Ct. 1582 (1993), reprinted at pages A-20 to A-35 of the appendix. and of the District Court. 780 F. Supp. 1283 (N.D. Cal. 1992), reprinted at pages A-36 to A-67 of the appendix. The Ninth Circuit's unpublished decision affirming the preliminary injunction is reprinted at pages A-68 to A-74 of the appendix. 3 STATUTORY PROVISION INVOLVED This petition involves Federal Ruie of Civil Procedure 65(c): (c) Security. No restraining order or preliminary injunction shall issue except upon the giving of security by the applicant, in such sum as the court deems proper, for the payment of such costs and damages as may be incurred or suffered by any party who is found to have been wrongfully enjoined or restrained. No such security shall be required of the United States or of an officer thereof. The provisions of Rule 65.1 apply to a surety upon a bond or undertaking under this rule. STATEMENT OF THE CASE This case presents a four-way conflict among the circuits on an important and recurring issue. The tssue concerns litigants’ rights to security posted in order to obtain a temporary injunction or restraining order when the party enjoined or restrained ultimately prevails in the lawsuit. The answer given will profoundly influence the course of thousands of litigations. If. as the court below held, the party preliminarily enjoined may automatically execute on the bond unless shown to have acted in bad faith, even litigants fully entitled to relief will be deterred from seeking temporary injunctions or restraining orders, and no party 4 enjoined or restrained will have any incentive to mitigate damages. The same result will follow if, as two courts of appeals have held, the right to execute is absolute. Very different consequences will follow if, as six courts of appeals have held, the right to execute is conditioned by equitable considerations such as the enjoined party’s failure to mitigate damages. A uniform rule of decision is critical. A. Statement of Facts Petitioner, Nintendo of America Inc. (“Nintendo”), manufactures and sells a home video game system and video game cartridges. The audiovisual portions of the cartridges are protected by copyrights owned by Nintendo. Respondent, Lewis Galoob Toys, Inc. (“Galoob”), manufactures and sells a device, “Game Genie,” which has the capacity of altering the games played on the Nintesido system and cartridges, e.g., by making a video game character nin faster or jump higher. Galoob approached a well-known intellectual property law firm for advice as to whether Game Genie violated any of Nintendo’s intellectual property rights. That firm prepared an opinion which suggested that the altered audiovisual works created by the Game Genie fit within the limited exception to a copyright owner's exclusive rights provided by Section 117 of the Copyright Act. 17 U.S.C. § 117 (Supp. 1992). See CR 315, Ex. B at 2-4.° Armed with this * Citations to “CR __~ are to the Clerk’s Records in the district court. 5 opinion, Galoob contacted Nintendo and inquired about obtaining a license for the Game Genie. Nintendo stated its view that Game Genie infringed Nintendo's copyrighted video game audiovisual works, which were not within the purview of Section 117, and advised Galoob that it would not grant a license. B. Proceedings Below On May 17, 1990, Galoob filed a complaint seeking a declaratory judgment that Game Genie did not violate any of Nintendo’s video game copyrights. After commencement of Galoob’s action, Nintendo filed this lawsuit alleging copyright infringement and sought temporary injunctive relief. In opposing such relief, Galoob admitted that the Game Genie created derivative works and relied on Section 117 of the Copyright Act as a basis for non-infringement. 6/8/90 RT at 5:5 - 6:3, 11:21-22, 12:3-17, 13:14-23 and 14:7-23; 6/29'90 RT at 18:4-23.° Following a hearing, the district judge issued the temporary injunction, holding that. on the record presented, Nintendo was likely to prevail on the issue of copynght infringement. He found that Game Genie produces “what can only be termed [infringing] derivative works.” 6/29/90 RT at 34:14 - 35:5. The judge rejected Galoob’s Section 117 * Citations to “RT __~ are to the Reporter's Transcripts of the hearings in the district court. 6 defense, finding that Section 117, “by its plain language, does not apply to this situation.” Jd. at 35:6-11.° Galoob retained new counsel, who filed an appeal based not only on the Section 117 defense but various new defenses including “fair use.” Galoob also asserted for the first time that the Game Genie did not create infringing derivative works because the effects caused by Game Genie were allegedly not fixed in a tangible medium of expression and were not original. See CR 315 Ex. F at 17-19, 25-30. Although neither of these defenses had been raised below, Galoob argued to the Ninth Circuit, in a brief filed on August 10, 1990, that the record was fully developed for a reversal of the preliminary injunction based on these defenses. Galoob opening brief in Appeal No. CA 90-15936 at 16, n.9. In a decision issued on January 24, 1991, the Ninth Circuit refused to consider the new defenses raised by Galoob, applying the established rule that “a_ federal appellate court will not review issues on appeal that were not raised in the Court below.” (A-72) The Court also rejected Galoob’s invitation to apply the “narrow and discretionary exception” permitting “consideration of issues of law that do not require factual determinations beyond those in the record.” (Jd.) The court refused to do so on the grounds, inter alia, that the new defense required findings of fact not made by the district court. * After the preliminary injunction was issued, the case was transferred to another district judge. 7 Despite this rejection, Galoob did not move in the district court to modify or dissolve the preliminary injunction and thereby obtain the findings of fact essential to its new defenses. Instead, while the action was proceeding toward trial, Galoob simply filed a series of motions to increase the preliminary injunction bond which Nintendo had posted pursuant to Fed. R. Civ. P. 65(c). Over Nintendo's opposition, the original bond of $100,000 was raised to $5 million and then to $15 million. | In ruling on Nintendo's copyright infringement claim after trial, the district court acknowledged that the issues presented were “difficult and novel.” 7/3/91 RT at 4. See also A-49. Ultimately, however, the court accepted the contention of Galoob’s new counsel that Game Genie did not create infringing derivative works and was a “fair use.” (A-50 - S51) These were among the new defenses that the Ninth Circuit had refused to consider in its January 24, 1991 decision. Conversely, Galoob’s defense at the preliminary injunction stage, Section 117, was expressly not reached by the court and formed no part of the decision on the merits. 7/3/91 RT at 13:13-16. The district court vacated the preliminary injunction on July 12, 1991. Nintendo appealed the district court's determination of the copyright issues. The Ninth Circuit affirmed the district court’s judgment. 964 F.2d 965 (9th Cir. 1992), cert. denied, 113 S. Ct. 1382 (1993). On September 11, 1991, Nintendo filed a motion to exonerate the preliminary injunction bond on the grounds ~ mare or tee 8 that it was inappropriate and inequitable to impose liability on the bond in this case. Galoob cross-moved for execution on the bond. Without requiring Galoob to reply or allowing Nintendo to reply, the district court summarily denied Nintendo’s motion and, after an expedited damages hearing, awarded the entire amount of the $15 million preliminary injunction bond to Galoob. CR 317. The Ninth Circuit affirmed the award, 16 F.3d 1032 (9th Cir. 1994). The court held that a party is “wrongfully enjoined” under Rule 65(c) “when it turns out the party enjoined had the right all aiong to do what it was enjoined from doing.” (A-11) The court then noted that “there appears to be some variance in how other circuits” determine when to allow a wrongfully enjoined party to execute a bond. (/d.) It decided to “join what appears to be the majority” and to find a “rebuttable presumption” in favor of execution. (A-12) The court then concluded that Nintendo had not rebutted this presumption because it had not shown that Galoob had engaged in deception or misconduct in opposing the request for injunctive relief. (A-14 - 15) On March 21, 1994, the Ninth Circuit denied Nintendo's petition for rehearing and suggestion for rehearing en banc. (A-19) 9 REASONS FOR GRANTING THE PETITION This case merits review because the Ninth Circuit has brought additional confusion to issues — in the application of Rule 65(c) — that have long been the subject of widely divergent analyses by courts and commentators. In all of the stages of the existing process of recovering on injunction bonds, courts have departed from or given conflicting interpretations of rule 65(c). They have thereby greatly decreased the value of the rule as a means of providing consistent guidelines: they have transformed the federal law of injunction bonds into “a field within which judicial judgment moves untrammeled by fixed principles.” [Citing B. Cardozo, The Nature of the Judicial Process 128 (1921).] This state of the law has allowed, and continues to allow, unjust results. Note, Recovery For Wrongful Interlocutory Injunctions Under Rule 65(c). 99 Harv. L. Rev 828, 846 (1986). The writ should issue for two reasons. First, although nominally adopting what it characterized as the “majority view” of the circuit courts, the Ninth Circuit’s approach is, in fact, at odds with both versions of that view, as well as with the minority view. and creates yet a fourth standard that has not been recognized or applied by any other circuit. Confusion reigns and unjust results necessarily follow. A uniform interpretation of Rule 65(c). which only this Court can provide, is needed. 10 Second, the Ninth Circuit's error is a matter of great significance in the conduct of federal litigation. Interlocutory injunctions are an essential form of relief in many cases. It is important that parties not be deterred from seeking such relief by the prospect of losing substantial sums of money (here $15 million) should the injunction later be dissolved even though the enjoined party utterly failed to mitigate damages, as Galoob did here. It is equally important that the enjoined party who later prevails recover damages only where those damages are not traceable to its own conduct. Here, Galoob chose to present its new defenses for the first time on an appeal from the issuance of the temporary injunction rather than presenting them to the district court in a motion to modify or dissolve the injunction. That appeal stripped the district court of jurisdiction for seven months, during which damages accumulated. But even after its appeal had been denied, Galoob did not seek relief from the district court on the basis of its new defenses but kept obtaining increases in the amount of Nintendo's bond. Awarding execution on the bond despite Galoob’s failure even to attempt to mitigate its damages produced not merely a palpably unjust result but a mile that seriously damages the utility of interlocutory injunctions. 11 Kk. CERTIORARI SHOULD BE GRANTED TO RESOLVE THE CONFLICT AMONG THE CIRCUITS REGARDING THE STANDARD FOR EXECUTION ON SECURITY GIVEN TO OBTAIN A PRELIMINARY INJUNCTION OR RESTRAINING ORDER. Rule 65(c) requires the provision of security as a condition of obtaining a preliminary injunction but addresses execution upon the security only by allowing recovery of damages and costs by a litigant who was “wrongfully” enjoined. A clear majority of federal circuits require courts to exercise equitable discretion in allowing execution upon a bond. But there is a conflict between the circuits upon the extent of that discretion. Two circuits have taken the view that Rule 65(c) does not limit the broad discretion of the trial court, in the exercise of its equity powers, to avoid any injustice between the parties. H&R Block, Inc. v. McCaslin, 541 F.2d 1098 (Sth Cir. 1976). cert. denied, 430 U.S. 946 (1977): State of Kan. ex rel. Stephan v. Adams, 705 F.2d 1267 (10th Cir. 1983).° In denying damage awards, these * The District of Columbia Circuit appeared to take a similar view in Page Communications Engineers, Inc. v. Froehlke, 475 F.2d 994 (D.C. Cir. 1973), but later made clear in National Kidney Patients Ass'n v. Sullivan, 985 F.2d 1127 (D.C. Cir. 1992). cert. denied, 113 5. Ct. 966 (1993), that it approved of Coyne-Delaney v. Capital Devel. Bd., 7\7 F.2d 385 (7th Cir. 1983), and that Page would have come out the same way under a re 12 courts emphasized that the plaintiff had acted in good faith in seeking an injunction. Other courts allowing equitable discretion disagreed with the broad exercise of discretion approved by the Fifth and Tenth Circuits and required more rigorous analysis. Coyne-Delaney v. Capital Devel. Bd., 717 F.2d 385 (7th Cir. 1983), perhaps the most influential of the decisions in this group, affirmed the responsibility of courts to consider a range of equitable factors but cautioned that, if an award of damages is to be denied, the analysis of equitable factors must yield an objective “good reason” to do so. See also State of Ala. ex rel. Siegelman v. U.S. E.P.A., 925 F.2d 385 (1ith Cir. 1991); Zenith Radio Corp. v. U.S., 823 F.2d 518 (Fed. Cir. 1987). The District of Columbia Circuit expressed agreement with Coyne-Delaney and stated that a successful defendant enjoys a “rebuttable presumption” of entitlement to damages. National Kidney Patients Ass'n v. Sullivan, 958 F.2d 1127 (D.C. Cir. 1992), cert. denied, 113 S. Ct. 966 (1993). These courts discounted the importance of good faith on the part of a plaintiff as a justification for denying the award of damages. Good faith, they reasoned, was to be expected and only its absence would be of particular significance. Finally, at the other end of the spectrum, the Second Circuit, and perhaps the Third. adopted a position that left no discretion to the trial court. /.¢.. assuming the only issue to be “whether, in hindsight in light of the ultimate decision that method of analysis. 13 on the merits after a full hearing, the injunction should not have issued in the first instance.” Blumenthal v. Merrill Lynch, Pierce, Fenner & Smith, Inc. 910 F.2d 1049, 1054 (2d Cir. 1990); American Bible Society v. Blount, 446 F.2d 588, 595 n.12 (3d Cir. 1971). In this case, the Ninth Circuit declined to impose absolute liability, as Galoob requested, and indicated that it would follow the majority view. In fact, however, the Ninth Circuit ignored the key element of the majority view that mandates consideration of the full range of relevant factors. On the contrary, it focused on a single issue: whether respondent Galoob had been guilty of intentional deception or misconduct in opposing, appealing from, and failing to seek the lifting of the preliminary injunction. Finding that Galoob was not guilty of such misconduct, the court of appeals upheld the district court's award of damages. (A-14) The standard applied by the Ninth Circuit is so narrow and restrictive as to be of little practical value; indeed, it will usually produce the results of the minority strict-liability rule. Ironically, as a majority of the circuits decided that a plaintiff's good faith was not sufficient reason to deny an award of damages, the Ninth Circuit decided that a defendant's good faith was sufficient reason to award damages. By doing so, the Ninth Circuit effectively created a dual standard for plaintiffs and defendants, one comparable to the dual standard recently rejected by this Court in another copyright action. Fogerty v. Fantasy, Inc.. 114 S. Ct. 1023 (1994). Moreover. any approach that turns entirely on the absence of bad faith, whether on the part of the 14 plaintiff or the defendant, is sure to produce unjust results by foreclosing examination of other obviously relevant factors. One of those factors is certainly the defendant's failure to mitigate damages when that could easily have been done. An examination of the relevant factors in the present case will demonstrate that there was indeed “good reason” to eliminate or, at a minimum, greatly reduce, the award of damages to Galoob. Apart from demonstrating the gross inequity of the result here, such an examination will point up the grave risk to future plaintiffs if the unique standard created by the Ninth Circuit is not rejected along with the automatic damages standard of the Second and Third Circuits. A. Upon An Application For Execution On Security Pursuant to Rule 65(c), The Court Should Consider All Relevant Factors To Determine Whether There Is A Good Reason To Deny or Reduce The Award of Damages In Page v. Froehlke, supra, the court faced a Situation identical in its equities to the present case. The court held that it was “bound to effect justice between the parties, avoiding any result that would be inequitable or oppressive for either party.” 475 F.2d at.997. The court then exonerated the plaintiff from liability on a preliminary injunction bond on the ground that the defendant had in its possession, but did not produce at the preliminary injunction hearing, a pertinent document. The court observed that “the injunction might not have issued if the [defendant] had 15 timely filed the comparative cost study, an important and relevant document.” Jd. at 997. In National Kidney Patients Ass'n v. Sullivan, supra, the District of Columbia Circuit, in discussing its earlier decision in Page v. Froehlke, pointed out that the failure of the defendant to have producéd the comparative cost study at the preliminary injunction hearing was comparable to a failure to mitigate damages which Coyne-Delaney had said was a “good reason” for not allowing the enjoined party to recover damages under the bond. 958 F.2d at 1134. In Coyne-Delaney v. Capital Devel. Bd., supra, the Seventh Circuit held that damages should be awarded pursuant to Rule 65(c) unless there appeared to be a “good reason” not to do so. Nevertheless, the Court was at pains to emphasize the duty of the trial court “to consider the full range of factors relevant under that standard.” 717 F.2d at 392. In particular, the court emphasized that: A good reason for not awarding such damages would be that the defendant has failed to mitigate damages. Id. The court also pointed out that a change in the applicable law, subsequent to the preliminary injunction hearing, was a “legitimate consideration” in the determination of whether to award damages. /d. The Seventh Circuit was careful to point out that the test to be applied was not the judge's unguided, subjective sense of fairness. Instead, “the ingredients of a proper 16 decision are objective factors . . . accessible to the judgment of a reviewing court.” Jd. The court reversed the denial of damages by the district court and remanded the case for a reevaluation of the equities. This case is strikingly similar to the facts and rationale of Page and to Coyne-Delaney’s reasoning. Here, much as in Page, Galoob withheld its real defenses from the district court until trial on the merits. The district court had no occasion to consider the legal defenses that ultimately prevailed at trial. Galoob’s decision not to present those arguments was also a plain failure even to attempt to mitigate damages within the meaning of Coyne-Delaney. Subsequent cases were similarly explicit in their insistence upon a careful examination by the trial court of all relevant factors. For example, in Zenith Radio Corp. , supra, the Federal Circuit upheld a decision of the Court of International Trade to deny damages on the basis of five “equitable factors” including a change in the law that had deprived the trial court of jurisdiction over the plaintiff's Claim. In State of Ala. ex rel. Siegelman v. U.S. E.P.A., supra, the Eleventh Circuit held that the equitable factors considered by the district court did not justify a refusal to award any damages but should be considered in determining the amount of an award. In short, the “majority view” identified by the Ninth Circuit carries with it not only a presumption favoring the award of damages but a clear mandate for a thorough examination of all relevant factors to determine whether 17 equity requires that the award be denied or reduced. As will be shown below, it is precisely such an examination that the district court and the Ninth Circuit failed to make. B. The Erroneous Standard Applied By The Ninth Circuit Rejected Any Consideration Of The Equitable Factors Emphasized By The Large Majority Of The Circuits. Nintendo’s appeal to the Ninth Circuit stressed that the procedural history of the case made the award of damages to Galoob grossly inequitable. Indeed, the record demonstrated that any damages sustained by Galoob were the product of its own reappraisal of the substantive law, procedural misjudgment. and tactical decision. Most important, Galoob steadfastly refused to take any step to mitigate its damages by bringing its new defenses to the attention of the trial court. Galoob had and took a full opportunity. after Nintendo rejected its request for a license, to study the legality of its Game Genie device before it initiated its action. See CR 315. Ex. B at 2-4. With the full benefit of controlling the timing and place of the litigation, Galoob admitted at the preliminary injunction hearing that the Game Genie created derivative works and relied solely on Section 117 of the Copyright Act as a purported basis for non- infringement. 6/8/90 RT at 5:5 - 6:3, 11:21-22, 12:3-17, 13:14-23 and 14:7-23; 6/29/90 RT at 18:4-23. After the hearing, the district court granted Nintendo's motion, finding that the Game Genie produces a : : 18 “what can only be termed derivative works,” rejecting Galoob’s Section 117 defense, and finding a likelihood of Nintendo’s succeeding on the merits. 6/29/90 RT at 34:14 - 35:11. In July 1990, the case was transferred to another judge, and Galoob retained new counsel. Galoob did not institute any action in the district court to seek relief from the injunction; instead, in August 1990, Galoob chose to file an appeal that raised a host of new defenses including the contentions that the Game Genie did not create derivative works and that it represented a “fair use” under the Copyright Act as a matter of law. Galoob’s decision to appeal the granting of the preliminary injunction, and not present its new defenses to the district court, was pivotai: because it deprived the district court of jurisdiction, the appeal would leave the injunction in effect for the next seven months. Galoob’s counsel was not unaware of the rule against federal appellate review of issues not raised below but gambied that they could persuade the Ninth Circuit to make an exception to that rule. The Ninth Circuit declined and Galoob’s gamble failed, to the injury, perversely enough, of Nintendo. Even after the decision by the Ninth Circuit on January 24, 1991, Galoob declined to present its new defenses to the district court and to seek a dissolution of the preliminary injunction. On the contrary, Galoob elected to Stand mute on the underlying issues while filing a series of successful motions over many months to increase Nintendo’s bond from $100,000 to $15,000,000. See CR 48-52, CR 89- 100. 19 The Ninth Circuit opinion on the award of damages under the injunction bond is devoid of any equitable analysis of this history. Rather, the court embarked on a search for evidence of bad faith or deceit on Galoob’s part (A-14): Nintendo’s argument that Galoob failed to assert all of its defenses at the time Nintendo sought the preliminary injunction raises the scepter [sic] of bad faith on the part of Galoob. The essence of this argument is that Galoob took advantage of Nintendo by initially making its case appear to be worse than it really was, thus lulling Nintendo into obtaining the preliminary injunction. The implication of the argument is that Galoob cunningly got the court to raise the amount of the bond on two successive occasions, finaily pushing it up to $15 million. while concealing the hole cards it intended to play at the time of trial. Nintendo argues it would be inequitable to permit Galoob to recover damages when it pursued such wily litigation tactics. In support of the argument, Nintendo relies on Page Communications Eng’rs, Inc. v. Froehlke, 475 F.2d 994 (D.C. Cir. 1973). The Ninth Circuit's analysis misread both Page v. Froehlke and Nintendo's argument. As previously indicated, Page did tum on the failure of the defendant to have produced an important document at the preliminary injunction hearing. And Nintendo did contend that Page presented a strong analogy to the present case. But Page did not involve — and Nintendo never claimed that it involved — any intentional misconduct on the part of the defendant. 20 On the contrary, in Page it was the fact that the document in question was not provided, not the bad faith of the enjoined party in failing to provide it, that required exoneration of the bond. The court recognized the importance of the fact that the district court did not have before it the complete picture of the case at the preliminary injunction stage because of the omission on the part of the enjoined party. Irrespective of whether that omission was accidental or intentional, Page held, consistent with the majority rule, that it would be “inequitable and a perversion of justice” to allow the enjoined party to execute on the bond. 475 F.2d at 997. For its part, Nintendo specifically disclaimed that Galoob’s subjective intent in withholding defenses was dispositive. See Nintendo's Reply Brief at 9-10. If the court had concluded that Galoob acted in bad faith, that should, of course, have been conclusive and required exoneration, just as bad faith on the part of Nintendo would have been conclusive in requiring execution.’ Absent bad faith on the part of either party, however, the court was required to examine all of the equitable factors. "As the Ninth Circuit observed (A-13): {I]f a party obtains a preliminary injunction in bad faith, that party “flunks [the good faith test and] the presumption in favor of enforcement [of the bond] congeals virtually into a rock.” National Kidney, 958 F.2d at 1135. Contrary to the implication by the Ninth Circuit, Nintendo never argued that its good faith was an independent ground for exoneration. It merely pointed out that it has met that essential prerequisite. 21 The Ninth Circuit's preoccupation with bad faith led it to overlook or ignore the more obvious teachings of Page and other decisions reflecting the majority view. For example, as previously indicated, it is well recognized that a defendant's failure to mitigate its damages is grounds to deny or reduce an award. Coyne-Delaney v. Capital Devel. Bd., 717 F.2d at 392; National Kidney Patients Ass’n v. Sullivan, 958 F.2d at 1134; Note, Interlocutory Injunctions and the Injunction Bond, 73 Harv. L. Rev. 333, 346 (1959) (the duty of mitigation means that the defendant “must move to dissolve the order as soon as possible”).* The present case presents a failure to mitigate that could hardly be clearer. Assuming that Galoob had not become aware of its defenses at the time of the preliminary injunction hearing — despite ample opportunity to have done so — it was demonstrably aware of them by August when they vere raised in Galoob’s brief to the Ninth Circuit. And even if one could somehow justify Galoob’s decision to attempt to raise those defenses for the first time before the Ninth Circuit, the rejection of the defenses by the Ninth Circuit, because those defenses had not been urged below, ‘ As this Court long ago held in the breach of contract context, if a party “can save himself from a loss arising from a breach of [contract] at a trifling expense or with reasonable exertions, it is his duty to do it, and he can charge the delinquent with such damages only as with reasonable endeavors and expense he cculd not prevent.” Warren v. Stoddart. 105 U.S. 224 (1881). See also Williston on Contracts § 1039 (3d ed. 1967), regarding mitigation of damages. 22 made unmistakable Galoob’s duty to present them to the district court. Similarly, the Ninth Circuit failed to consider the importance given, under the majority view, to a change in the applicable law subsequent to the preliminary injunction hearing. See Zenith Radio Corp.. supra; Coyne-Delaney v. Capital Devel. Bd., supra. In this case, Galoob effected a dramatic metamorphosis in the theories of its defense. That transformation in Galoob’s view of what law controlled the case is Closely analogous to a court decision or statute which altered the law after the issuance of a temporary injunction. Both types of changes must be brought to the attention of the district court. The “change in the law” applicable to Nintendo's claims led directly to Galoob’s ultimate success. Such a change, effected by the defendant itself, merits even greater weight than a change imposed by a neutral third party, i.e., a court or legislature.” ¥ Compare the comment of Judge Posner in Covne-Delaney, 717 F.2d at 392-93: We do not believe that a change in the law is always a good ground for denying costs and injunction damage to a prevailing party. but it is a legitimate consideration, perhaps especially where the prevailing party is a state agency that benefitted from a change in the law of its state. In a sense, this is a case where one state agency (the Board) is seeking to benefit from the confusing signal sent out by another state agency (the court system) — though we do not mean to suggest that the Illinois Supreme Court was rushing fraternally to the aid of another state agency when it reversed Polyvend. In Zenith Radio Corp.. supra, the Federal Circuit upheld the denial of injunction bond damages where the “change in the law™ 23 The standard for execution on an injunction bond badly requires clarification. Under the proper standard, failure to mitigate damages requires exoneration rather than execution. Il. CERTIORARI SHOULD BE GRANTED BECAUSE THE CONSTRUCTION OF RULE 65(c) Is OF GREAT IMPORTANCE IN FEDERAL LITIGATION If the unique approach of the Ninth Circuit is permitted to go uncorrected, or if the automatic liability rules of the Second and Third Circuits are allowed to stand, there will likely be adverse consequences far beyond those jurisdictions. Given the divergent views of the various circuits with respect to Rule 65(c), it clearly has the potential to influence, and distort, the law. The decision here, that all equitable factors other than the defendant's good faith are irrelevant, will, at a minimum, reinforce the minority view of strict liability espoused by the Second Circuit and, it appears, by the Third as well. The importance of injunctive relief to the litigation process is beyond argument: was a ruling in another case. on an issue of first impression, that there was no jurisdiction to entertain Zenith’s lawsuit. 823 F.2d at 520-21. 24 Although the fundamental faimess of preventing irremediable harm to a party is an important factor on a preliminary injunction application, the most compelling reason in favor of [granting a preliminary injunction] is the need to prevent the judicial process from being rendered futile by defendant's action or refusal to act. Canal Authority of State of Florida v. Callaway, 489 F.2d 567, 573 (Sth Cir. 1974) (quoting Wright and Miller, Federal Practice and Procedure: Civil § 2947 (1973)) (alteration in original). It follows that imposition of undue or unwarranted burdens on the obtaining of an injunction threatens the very integrity of the process. Indeed, the avoidance of undue burdens made many courts at common iaw reluctant to require a bond in the first instance. See Note, Jnterlocutory Injunctions and the Injunction Bond, supra p. 20, at 336.'° The requirement of a bond under the Federal Rule is now well settled.'' Nevertheless, the “The injunction bond appears to be the result of the inter- action of two major competing considerations[:]. . . the tradition- al reluctance to penalize a plaintiff for resorting to the judicial process or to make him pay a price for his remedy [and] . . . the extreme caution which often permeates judicial proceedings and is reflected in their elaborate safeguards. . . .~ /d. '' Under appropriate circumstances, the Federal requirement may be relaxed. Wavne Chemical, Inc. v. Columbus Agency Service Corp., 567 F.2d 692, 701 (7th Cir. 1977) (in suit to enforce rights under a group medical poiicy, indigence of party excuses bond requirement): Crowley v. Local No. 82, 679 F.2d 978, 1000-01 (1982), rev'd on other grounds, 467 U.S. 526 (1984) (district court did not err in refusing to require union 25 avoidance of undue burdens must remain a matter of serious and legitimate concer. The unfortunate consequence of imposing such a burden by adoption of either the Ninth Circuit’s approach or the automatic liability view, may be felt in any of the myriad circumstances under which injunctive relief is sought. But nowhere is the potential harm more serious than in actions under the Copyright Law. Injunctive relief is vital to the protection of intellectual property. And the availability of preliminary relief is especially important. As Nintendo pointed out in its brief to the Ninth Circuit, the Copyright Law recognizes that importance by providing a presumption of irreparable injury to copyright owners who, in seeking preliminary relief, establish a likelihood of success on the merits. See, e.g., Johnson Controls, Inc. v. Phoenix Control Systems, Inc., 886 F.2d 173, 1174 (9th Cir. 1989): Apple Computer, Inc. v. Formula Int’l Inc., 725 F.2d 521 (9th Cir. 1984).'° members to post bond where absence of security would not impose significant burden on defendants, plaintiffs were less able to afford security, and bond requirement would affect enforcement of statutory labor rights). '2 Nintendo also noted that a copyright owner is generally entitled to an injunction to halt any infringement, citing Universal City Studios, Inc. v. Sony Corp. of America, 659 F.2d 963, 976 (9th Cir. 1981), rev'd on other grounds, 464 U.S. 417 (1984). The Ninth Circuit observed that Universal Ciry had involved a permanent injunction and concluded that “public policy does not advocate the liberal issuance of preliminary injunctions in copyright infringement actions.” 16 F.3d at 1038. The Court, however, was mistaken. As reflected by the authorities cited in the 26 In a field such as copyright law, where the governing legal principles are extraordinarily complex and frequently changing, the implications of the standard adopted by the Ninth Circuit are particularly disturbing. As interpreted by the Ninth Circuit, Rule 65(c) will go far beyond the rationale, adopted by the Ninth Circuit, of discouraging “flimsy claims.” A copyright owner who furnishes security to obtain injunctive relief will know that he is at risk not only from defenses presented at the preliminary injunction stage but from any defense that later occurs to the alleged infringer at any time prior to, or perhaps even during, the trial. Such a standard, we submit, can only have a chilling effect upon bona fide efforts of copyright owners to protect the fruits of their creative labors. text, an application for preliminary relief, like an application for permanent relief, will be granted upon a showing of infringement, i.e., because of public policy considerations. the element of irreparable injury need not be demonstrated. 27 CONCLUSION For the foregoing reasons, the petition for a writ of certiorari should be granted. Dated: June 17, 1994 Respectfully submitted, Robert H. Bork 1150 Seventeenth Street, N.W. Washington, D.C. 20036 (202) 862-5851 John J. Kirby Counsel of Record Mudge Rose Guthrie Alexander & Ferdon 180 Maiden Lane New York, New York 10038 (212) 510-7000 Attorneys for Petitioner a 2 = eT an A-1 UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT NINTENDO OF AMERICA, INC., Plaintiff-Appellant, No. 92-16364 D.C. No. ™ CV-90-01440-FMS Lewis GALOoos Toys, INC., OPINION Defendant-Appellee. Appeal from the United States District Court for the Northern District of California Fern M. Smith, District Judge, Presiding Argued and Submitted December 14, 1993—San Francisco, California Filed February 17, 1994 Before: Donald P. Lay", Cynthia Holcomb Hall and David R. Thompson, Circuit Judges. “ Hon. Donald P. Lay, Senior Circuit Judge for the Eighth Circuit, sitting by designation. A-2 Opinion by Judge Thompson SUMMARY Civil Litigation and Procedure/Interim Relief — Preliminary Injunctions/Interim Relief The court of appeals affirmed a district court judgment. The court held that a defendant who was wrongfully enjoined was entitled to have the full amount of the injunction bond executed in its favor. Several years after appellant Nintendo of America, Inc. began selling a home video game system called the Nintendo Entertainment System (NES), appellee Lewis Galoobd Toys, Inc. announced its intention to begin selling the Game Genie, an electronic device allowing NES owners to change aspects of NES video games. A month later, Nintendo brought a copyright infringement action against Galoob. Nintendo obtained a preliminary injunction against the sale of the Game Genie. The district court required Nintendo to post a $15 million bond as security for the injunction. At trial, Galoob asserted additional legal theories that it liad not asserted at the preliminary injunction hearing. Galoob prevailed at trial, and the district court vacated the injunction. The district court held a “lost sales” hearing to determine the number of Game Genie sales Galoob lost because of the injunction. Galoob’s evidence included a comparison of the Game Genie to another NES accessory, the Nintendo Advantage, for A-3 which sales figures were available. The court, assuming that the Game Genie was at least as attractive to NES owners as was the Nintendo Advantage, determined that Galoob lost 1.6 million Game Genie sales due to the injunction. The district court also held a “profits hearing” to determine Galoob’s net profit margin. Galoob called an economist who testified regarding its profit margin. The district court awarded Galoob the entire amount of the bond after finding that the injunction caused Galoob at least $15 million in damages. Nintendo appealed. [1] A party has been wrongfully enjoined when it turns out that the party enjoined had the right all along to do what it was enjoined from doing. [2] In this case, Galoob was wrongfully enjoined. [3] There is a rebuttable presumption that a wrongfully enjoined party is entitled to have the bond executed and recover provable damages up to the amount of the bond. [4] Galoob’s litigation conduct did not preclude it from recovering on the bond. There was no indication in the record that Galoob sandbagged Nintendo into prevailing on its application for the preliminary injunction, knowing all the while that it could have defeated that application. [5] Galoob established with reasonable certainty that it was damaged by the issuance of the injunction. [6] The district court’s method of calculating the number of lost sales was not erroneous; the court repeatedly used the most conservative ends of available ranges in calculating the number. [7] Thus, Galoob was entitled to have the full amount of the bond executed in its favor. A-4 COUNSEL John J. Kirby, Jr., Mudge Rose Guthrie Alexander & Ferdon, New York, New York; and William E. Trautman, Brobeck, Phleger & Harrison, San Francisco, California, for the plaintiff- appellant. Jerome B. Falk, Jr., Howard, Rice, Nemerovski, Canady, Robertson & Falk, San Francisco, California, for the defendant- appellee. OPINION THOMPSON, Circuit Judge: Nintendo of America, Inc. appeals the execution of a $15 million bond in favor of Lewis Galoob Toys, Inc. Nintendo posted the bond as security for a preliminary injunction against Galoob in a copyright infringement action Nintendo later lost. The district court awarded Galoob the entire amount of the bond after finding the injunction caused Galoob at least $15 million in damages. Nintendo argues the district court erred in three ways: First, by not weighing equitable considerations before deciding to execute the bond; second, by improperly findirg the injunction harmed Galoob; and third, by improperly calculating the amount of Galoob’s damages. We have jurisdiction under 28 U.S.C. § 1291, and we affirm. A-5 FACTS The Nintendo Entertainment System (“NES”) was the most popular home video game system in the United States from the late 1980s until the early 1990s. Its manufacturer, Nintendo of America, Inc., began selling the NES in 1986. By 1991 Nintendo had sold over thirty million units in the United States. Several years after Nintendo introduced the NES, Lewis Galoob Toys, Inc. announced its intention to begin selling the Game Genie, an electronic device allowing NES owners to change aspects of NES video games. For example, the Game Genie would permit a video game character to run faster, jump higher, or become immortal. At the time of Galoob’s announcement of the Game Genie, in May 1990, NES product sales were at or near their peak. Nintendo sold nearly fifteen million NES video games that year, exceeding any other year’s sales. Consumer interest in the Game Genie was similarly intense. Immediately after the product announcement, Galoob received orders for over 550,000 Game Genies, and expected to sell well over a million units in 1990. Expert witnesses later testified Galoob could have sold as many as 6.5 million units over the product’s lifetime. Only one month after Galoob’s announcement, however, Nintendo obtained a preliminary injunction against the sale of the Game Genie. Nintendo’s lawsuit and request for a preliminary injunction responded to an earlier lawsuit filed by Galoob in which Galoob sought a declaratory judgment that its Game Genie did not violate any of Nintendo’s intellectual property rights. At the hearing for the preliminary injunction, Galoob asserted that the Game Genie fell under an exception to rights provided to A-6 a copyright owner by the Copyright Act. Specifically, Galoob contended that the Game Genie allowed an “adaptation . . . created as an essential step in the utilization of [a] computer program,” which 17 U.S.C. § 117 states is a permissible use of a copyrighted work. The district court granted the injunction, believing at the time it was likely “Nintendo will prevail on its claims that Galoob [has infringed] Nintendo’s copyright rights; [and] that Nintendo will suffer immediate and irreparable harm as well as the loss of profits.”’ The district court required Nintendo to post a $100,000 bond as security for the injunction. This amount was later raised to $5 million and then to $15 million. Nintendo resisted these increases, but nevertheless posted bond in the increased amounts. At the copyright infringement trial, Gaioob asserted additional legal theories it had not asserted at the preliminary injunction hearing. It contended that the Game Genie was a fair use of Nintendo’s copyrights under 17 U.S.C. § 107 and that the game did not create infringing derivative works. Galoob prevailed at trial and in July 1991 the district court vacated the injunction.’ The injunction had been in effect approximately one year. In August 1991, Galoob began selling the Game Genie. It sold about one million units in the United States that year and expected to sell as many as 800,000 in 1992. In September 1991, ' We affirmed the district court’s order granting the preliminary injunction in an unpublished memorandum disposition filed January 24, 1991. See Nintendo of Am., Inc. v. Lewis Galoob Toys, Inc. , 923 F.2d 862 (9th Cir. 1991)(unpublished disposition). ? We affirmed the judgment in May 1992. Lewis Galoob Toys, Inc. v. Nintendo of Am., Inc., 964 F.2d 965 (9th Cir. 1992), cert. denied, 113 S. Ct. 1582 (1993). A-7 the district court ordered the execution of the bond in favor of Galoob “in an amount to be determined by the Court.” In December 1991, the court held a “lost sales” hearing to determine the number of Game Genie sales Galoob lost because of the injunction. To establish the number of lost sales, Galoob presented evidence comparing the Game Genie to another NES accessory called the “Nintendo Advantage.” The Advantage is a joystick, manufactured and sold by Nintendo. The Advantage permits NES owners to more easily control the characters in video games. The Advantage reached a “market penetration” of ten percent, meaning one Advantage was sold in the United States for every ten NESs. Galoob also presented studies explaining the “Canadian multiplier method,” which showed that, in general, a product will seil ten to twelve times as well in the United States as in Canada. Galoob estimated it would sell 190,000 Game Genies in Canada by the end of 1991. In response to Galoob’s assertion of lost sales, Nintendo argued that annual NES sales did not provide a reliable indicator of Game Genie demand. Although annual sales of the NES declined in 1991, the “installed base” or number of NES systems owned in the United States, increased. By the end of 1990, there were 26 million NES systems in the United States, and by the end of 1991, there would probably have been more than 30 million. One of Galoob’s marketing documents showed that 93 percent of all NES consoles ever sold were still in use at the end of 1991. On the basis of this evidence, Nintendo contended there was actually an increase in the number of potential Game Genie customers since the district court imposed the injunction. The district court determined Galoob lost at least 1.6 million Game Genie sales. In arriving at this number, the district court assumed the Game Genie was at least as attractive to NES owners A-8 as was the Nintendo Advantage. Because the NES’s installed base was 30 million at the end of 1991, and the Advantage’s market penetration was ten percent, Galoob should have sold at least three million Game Genies, or ten percent of 30 million, over the product’s lifetime had the court not issued the injunction. To check the accuracy of this estimate, the court applied the Canadian multiplier method, using the estimated total Canadian Game Genie sales of 190,000 and a multiplier of eleven. The resulting 2,090,000 was, in the court’s view, “very close to 3 million,” and satisfied the court its estimating method was reasonable. Noting testimony that four million more NES units would be sold in 1992, the district court then added another ten percent, or 400,000 units. to the figure of three miliion and concluded Galoob would have sold 3.4 million Game Genies over the product’s lifetime. The court subtracted the one million Game Genies Galoob actually sold in 1991 and the estimated 800,000 it would sell in 1992. The court concluded Galoob lost 1.6 million Game Genie sales due to the injunction. This conclusion was based on estimates the court determined were reasonable. The court stated: “I think that these calculations are conservative. I have tried in estimating to take basically the bottom end of everybody’s range, and if you want to tell me why that isn’t fair, I’m certainly willing to listen.” The district court also held a “profits hearing.” At this hearing Galoob established that the average net wholesale price for the Game Genie was $34.28. Nintendo does not contest this figure, but does contest the district court’s finding that Galoob’s net profit margin was 27.6 percent. The district court applied this percentage to the average net wholesale price to determine Galoob’s net profit on each Game Genie (27.6 x $34.28 — $9.46). A-9 To establish its net profit margin percentage, Galoob called an economist. He testified that Galoob’s profit margin was 42.74 percent. In arriving at this figure, the economist deducted variable costs allocable to Game Genie sales, but not fixed costs which he described as costs that would have been incurred regardless of Game Genie sales. Nintendo contested the economist’s determination of Galoob’s profit margin percentage by challenging his categorization of variable and fixed costs. Nintendo presented an accountant who examined financial data for the Galoob company as a whole and concluded an extra 18.77 percent should be deducted from Galoob’s economist’s figure of 42.74 percent. In determining that Galoob’s profit margin was 27.6 percent, the court began with the testimony of Galoob’s economist that Galoob’s profit margin was 42.74 percent. The court stated the economist’s method in calculating this figure was a “rational and reliable one.” The court agreed with Nintendo’s contention, however, that four categories of Galoob’s costs, namely, salaries and benefits, travel and entertainment, promotion, and interest, had to be taken into consideration in arriving at the profit margin. It disagreed with Nintendo’s contention that as much as 18.77 percent should be deducted from the economist’s profit margin figure, but nevertheless lowered the profit margin to 32.74 percent. Nintendo also disputed the proper allocation of other costs, such as “reworking the Game Genie, tooling, packaging, TV origination, and contract R & D.” The court included these factors in its calculations, “[a]ssuming, without deciding, that Nintendo is correct in each of these contentions,” and further reduced the profit margin from 32.74 percent to the final figure of 27.6 percent. A-10 By multiplying the 1.6 million unit sales lost by the net wholesale price of $34.28, times the 27.6 percent profit margin, the district court found Galoob suffered at least $15,138,048 in lost profits due to the injunction. The court also calculated Galoob lost $315,569 in interest it would have earned on its loss profits and $480,000 in costs it incurred “when [Galoob] ceased production and distribution and thereafter recommenced those activities upon dissolution of the injunction.” Because the total of these amounts exceeded the $15 million bond Nintendo posted, the district court awarded Galoob the entire amount of the bond, plus costs, under Federal Rule of Civil Procedure 65.1. This appeal followed. STANDARD OF REVIEW We review de novo a district court’s decision to execute a bond. Matek v. Murat, 862 F.2d 720, 733 (9th Cir. 1988)(noting the conflict between “abuse of discretion” and “de novo” standards of review among circuits but choosing the latter). An allegation that a district court ignored legal procedure raises a question of law we also review de novo. Anderson v. United States, 966 F.2d 487, 489 (9th Cir. 1992). A district court’s computation of damages is a finding we review under the clearly erroneous standard. Stephens v. City of Vista, 994 F.2d 650, 655 (9th Cir. 1993); Lum v. Honolulv 963 F.2d 1167, 1170 (9th Cir.), cert. denied, _ U.S. ____, 113 S. Ct. 659 (1992); Galindo v. Stoody Co., 793 F.2d 1502, 1516 (9th Cir. 1986). A-11 DISCUSSION The first issue we consider is whether Galoob was wrongfully enjoined. We conclude it was. We then consider what standard we should apply to ascertain whether the district court erred in determining that Galoob was entitled to damages. Finally, we consider whether the district court erred in computing the amount of damages. Rule 65(c) of the Federal Rules of Civil Procedure provides: No restraining order or preliminary injunction shall issue except upon the giving of security by the applicant, in such sum as the court deems proper, for the payment of such costs and damages as may be incurred or suffered by any party who is found to have been wrongfully enjoined or restrained. Fed. R. Civ. P. 65(c). [1] Under this rule, before a court may execute a bond, it raust find the enjoined or restrained party was “wrongfully enjoined or restrained.”* This circuit has yet to define wrongful enjoinment. We hold today that a party has been wrongfully enjoined within the meaning of Rule 65(c) when it turns out the party enjoined had the right all along to do what it was enjoined from doing.‘ See Blumenthal v. Merrill Lynch Pierce, Fenner & 3 Because this case involves a preliminary injunction rather than a temporary restraining order, we use the term “wrongfully enjoined” rather than “wrongfully restrained.” * We prefer the wording of Rule 65(c), which speaks in terms of a party who has been “wrongfully enjoined,” rather than the wording in some cases in other circuits which refers to an injunction as having been A-12 Smith, Inc., 910 F.2d 1049, 1954 (2d Cir. 1990)(“A party has been ’wrongfully enjoined‘ under Fed. R. Civ. P. 65(c) if it is ultimately found that the enjoined party had at all times the right to do the enjoined act.”). [2] Here, Nintendc obtained a preliminary injunction enjoining Galoob from selling the Game Genie. As it turned out, Galoob prevailed in the underlying litigation. The district court held Galoob could sell the Game Genie and vacated the preliminary injunction. We affirmed on appeal. Galoob Toys, 964 F.2d 965. Thus, Galoob was wrongfully enjoined. [3] This brings us to the next question: Is Galoob entitled to have the bond executed in its favor? Although there seems to be some variance in how other circuits respond to this question, we join what appears to be the majority and hold there is a rebuttable presumption that a wrongfully enjoined party is entitled to have the bond executed and recover provable damages up to the amount of the bond. See, e.g., National Kidney Patients Ass’n v. Sullivan, 958 F.2d 1127, 1134 (D.C. Cir. 1992)(a “defendant injured by a wrongfully issued preliminary injunction is presumptively entitled to recovery on the injunction bond”), cert. denied, 113 S. Ct. 966 (1993) We believe this rule is sound. By adhering to this standard, the party enjoined will usually recover damages, thus discouraging parties from requesting injunctions based on tenuous legal grounds. See Coyne-Delaney Co. v. Capital Dev. Bd., 717 F.2d “wrongfully issued.” Fed. R. Civ. P. 65(c). A court that complies with the applicable law in issuing a preliminary injunction does not “wrongfully” issue it. Indeed, in an earlier appeal in this case we upheld the district court’s issuance of the preliminary injunction. See Nintendo, 923 F.2d 862 (unpublished disposition). A-13 385, 392 (7th Cir. 1983)(“... [this test] discourages the seeking of preliminary injunctions on flimsy (though not necessarily frivolous) grounds.”). Furthermore, a presumption that damages will be awarded from the bond assures district court judges that defendants will receive compensation for their damages in cases where it is later determined a party was wrongfully enjoined. See Note, Recovery for Wrongful Interlocutory Injunctions Under Rule 65(c), 99 Harv. L. Rev. 828, 838 n.36 (1986). Moreover, demands on judicial resources may be relieved to some extent, because a defendant who can recover damages against a preliminary injunction bond will be less likely to file a separate malicious prosecution action. See generally Note Interlocutory Injunctions and the Injunction Bond, 73 Harv. L. Rev. 333 (1959). Finally, this standard provides an equitable means by which courts can decline to impose damages on the rare party who has lost a case on the merits but nevertheless should not suffer the execution of the preliminary injunction bond. Nintendo argues it rebutted this presumption. Nintendo points out it acted in good faith in bringing its copyright infringement lawsuit, Galoob failed to assert defenses to the preliminary injunction it could have asserted at the preliminary injunction hearing, public policy favors the issuance of injunctions in intellectual property infringement suits, and to award Galoob $15 million imposes a punitive sanction against Nintendo. We consider each of these arguments in turn. We reject Nintendo’s good faith argument. Good faith in the maintenance of litigation is the standard expected of all litigants. That a party lives up to this standard simply means the party did what it ought to have done. On the other hand, if a party obtains a preliminary injunction in bad faith, that party “flunks [the good faith test and] the presumption in favor of enforcement [of the A-14 -ond] congeals virtually into a rock.” National Kidney, 958 F.2d at 1135. Nintendo’s argument that Galoob failed to assert all of its defenses at the time Nintendo sought the preliminary injunction raises the scepter of bad faith on the part of Galoob. The essence of this argument is that Galoob took advantage of Nintendo by initially making its case appear to be worse than it really was, thus lulling Nintendo into obtaining the preliminary injunction. The implication of the argument is that Galoob cunningly got the court to raise the amount of the bond on two successive occasions, finally pushing it up to $15 million, while concealing the hole cards it intended to play at the time of trial. Nintendo argues it would be inequitable to permit Galoob to recover damages when it pursued such wily litigation tactics. In support of this argument, Nintendo relies on Page Communications Eng’rs, Inc. v. Froehlke, 475 F.2d 994 (D.C. Cir. 1973). Page Communications is inapposite. There, the court declined to award damages to an enjoined defendant in a contract action. The defendant earlier agreed to produce “all ‘records relating to the evaluation of proposals submitted’ by the various offerors, and all ‘documents setting forth the basis for award.’” Page Communications, 475 F.2d at 996. Although this language described a particular report the defendant possessed, the defendant intentionally declined to produce the report. In granting the injunction for the plaintiff, the district court believed erroneously it had examined all the relevant evidence. Because the defendant was responsible for the missing evidence, and because the district court would probably not have granted the injunction had it seen the report, the court concluded that in light of these circumstances, it would be inequitable to assess damages against the plaintiff. Jd. at 997. A-15 [4] Here, Galoob did not fail to produce evidence. It did not deceive the court. There is no indication in the record that Galoob sandbagged Nintendo into prevailing on its application for the preliminary injunction, knowing all the while that it could have defeated that application. Those facts simply are not in this case. All that appears is that Galoob had additional defenses it asserted at the time of trial, defenses it had not asserted at the preliminary injunction hearing. And while it is true Galoob persuaded the court on two successive occasions to increase the amount of the bond, thus raising the stakes of the game, it is also true that Nintendo called these raises by putting up additional amounts of the bond. We conclude Galoob’s litigation conduct does not preclude it from recovering on the bond. Nintendo’s public policy argument is premised on its assertion that public policy favors the issuance of injunctions in intellectual property infringement lawsuits. This assertion is correct only when a permanent injunction is sought once infringement has been established. See, e.g., Universal City Studios, Inc. v. Sony Corp. of Am., 659 F.2d 963, 976 (9th Cir. 1981) (“We note that, as a general rule, a copyright plaintiff is entitled to a permanent injunction when liability has been established and there is a threat of continuing violations.”) (emphasis added), rev’d on other grounds, 464 U.S. 417 (1984). Public policy does not advocate the liberal issuance of preliminary injunctions in copyright infringement actions. We reject Nintendo’s argument that the district court awarded punitive damages by executing the bond in favor of Galoob. The damage award was not punitive, but compensatory. Every dollar the court awarded to Galoob compensated it for the injury it had suffered because of the injunction. Cf Coyne-Delaney, 717 F.2d at 392. ee oes A-16 We next consider whether the district court erred in determining that Galoob suffered at least $15 million in damages by reason of the issuance of the injunction. Nintendo argues the court failed to require Galoob to meet any burden of proof in establishing its damages. The record belies this contention. In its order directing entry of partial judgment, the district court stated, “Galoob has proved by a preponderance of the evidence that it sustained actual injury as a result of the wrongful issuance of the preliminary injunction.” The court explicitly named the standard it applied to Galoob and ernlicitly stated Galoob met that burden. Nintendo challenges this finding. It argues Galoob failed to prove with reasonable certainty that it suffered any damage. See Palmer v. Connecticut Ry. & Lighting Co., 311 U.S. 544, 561 (1941) (“Certainty in the fact of damage is essential.”). According to Nintendo, Galoob was not damaged by the injunction because the injunction only delayed Game Genie sales, it did not prevent them permanently. That is, although NES owners who wanted to purchase the Game Genie in 1990 could not do so because of the injunction, they most likely waited a year until the injunction was lifted, and then bought the product anyway. [5] We reject this argument. It is premised largely on speculation, and as the district court stated, it “defies common sense.” Galoob established with reasonabie certainty that it was damaged by the issuance of the injunction. The next question is: Did the district court err in computing the amount of damages Galoob suffered? “The district court’s computation of damages . .. is . . . insulated from review unless clearly erroneous.” Laborers Clean-Up Contract Admin. Trust Fund v. Uriarte Clean-Up Serv., Inc., 736 F.2d 516, 520 n.2 (1984); see also Lum, 963 F.2d at 1170 (upholding damage award where the award was “not extreme or outrageous”). A-17 Throughout its calculation of damages, the district court chose figures favoring Nintendo. The court assumed the Game Genie would sell only as well as the Nintendo Advantage, even though the Advantage was, in its opinion, “not as versatile or long-lasting a peripheral” as the Game Genie. When the court checked the accuracy of its estimate of lost sales, using the Canadian multiplier method, it chose a figure of 190,000 Canadian sales, which was “at the conservative end of the level,” and used a multiplier of eleven, which was far below the multiplier of thirty-eight that the Advantage enjoyed. The court also adopted Galoob’s highest estimate of its anticipated 1992 sales. It then deducted this high- end estimate, together with Galoob’s actual 1991 sales, from the total sales it determined Galoob would have made “but for” the issuance of the injunction. [6] In sum, in determining the number of lost sales, the district court repeatedly used the most conservative ends of available ranges. While it is true that Galoob did not likely lose exactly 1.6 million sales of the Game Genie, it is reasonably certain it lost at least that amount. The district court’s method of calculating the number of lost sales was not erroneous. With regard to the court’s finding that Galoob’s profit margin for the Game Genie was 27.6 percent, the court began with the “rational and reliable” estimate of Galoob’s economist that the profit margin was 42.74 percent, considered the evidence and contentions of the parties and A-18 reduced that figure to 27.6 percent. It did not clearly err in making this funding. CONCLUSION [7] Galoob was wrongfully enjoyed from selling the Game Genie. As a result, it was presumptively entitled to recover damages. Nintendo did not rebut this presumption. Galoob proved with reasonable certainty it was damaged by the injunction. The district court did not err in finding Galoob’s damages exceeded the $15 million amount of the bond. Galoob was entitled to have the full amount of the bond executed in its favor. AFFIRMED. A-19 UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT NINTENDO OF AMERICA, INC., Plaintiff-Appellant, No. 92-16364 D.C. No. « CV-90-01440-FMS Lewis GALoos Toys, INC., ORDER Defendant-Appellee. Before: LAY*, HALL and THOMPSON, Circuit Judges. The panel, as constituted above, has unanimously voted to deny the petition for rehearing. Judges Hall and Thompson voted to reject the suggestion for rehearing en banc, and Judge Lay so recommended. The suggestion for en banc rehearing has been circulated to the full court, and no judge of the court has requested a vote on the suggestion for rehearing en banc. Fed. R. App. P. 35(b). The petition for rehearing is DENIED, and the suggestion for a rehearing en banc is REJECTED. “ Hon. Donald P. Lay, Senior Circuit Judge for the Eighth Circuit, sitting by designation. he spe et i et ‘ Ny oy a 4 c Neots c ee eed Code, kg Ine ae he ee ee ae eer ME. Sas eA be Be? oe “ae Ses) A-20 UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT Lewis GALoosB Toys, INC., No. 921-16205 Plaintiff-Appellee, D.C. No. CV-90-1586 FMS ¥; NINTENDO OF AMERICAN, INC., AMENDED OPINION Defendant-Appellant. NINTENDO OF AMERICA, INC., Plaintiff-Appellee, D.C. No. v. CV-90-1586 FMS Lewis GALoos Toys, INC., OPINION Defendant-Appellant. Appeal from the United States District Court for the Northern District of California Fern M. Smith, District Judge, Presiding Argued and Submitted March 12, 1992 - San Francisco, California Filed May 21, 1992 Amended August 5, 1992 A-21 Before: Jerome Farris and Pamela Ann Rymer, Circuit Judges, and David V. Kenyon,” District Judge. Opinion by Judge Farris COUNSEL Thomas G. Gallatin, Jr., Mudge, Rose, Guthrie, Alexander & Ferdon, New York, New York, for the defendant-appellant. Jerome B. Falk, Jr., Howard, Rice, Nemerovski, Canady, Robertson & Falk, San Francisco, California, for the plaintiff- appellees. OPINION FARRIS, Circuit Judge: Nintendo of America appeals the district court’s judgment following a bench trial (1) declaring that Lewis Galoob Toys’ Game Genie does not violate any Nintendo copyrights and dissolving a temporary injunction and (2) denying Nintendo’s request for a permanent injunction enjoining Galoob from marketing the Game Genie. Lewis Galoob Toys, Inc. v. Nintendo of America, Inc., 780 F. Supp. 1283 (N.D. Cal. 1991). We have appellate jurisdiction pursuant to 15 U.S.C. § 1121 and 28 U.S.C. §§1291 and 1292(a)(1). We affirm. ~ Honorable David V. Kenyon, United States District Judge for the Central District of California, sitting by designation. A-22 FACTS The Nintendo Entertainment System is a home video game system marketed by Nintendo. To use the system, the player inserts a cartridge containing a video game that Nintendo p:oduces or licenses others to produce. By pressing buttons and manipulating a control pad, the player controls one of the game’s characters and progresses through the game. The games are protected as audiovisual works under 17 U.S.C. § 102(a)(6). The Game Genie is a device manufactured by Galoob that allows the player to alter up to three features of a Nintendo game. For example, the Game Genie can increase the number of lives of the player’s character, increase the speed at which the character moves, and allow the character to float above obstacles. The player controls the changes made by the Game Genie by entering codes provided by the Game Genie Programming Manual and Code Book. The player also can experiment with variations of these codes. The Game Genie functions by blocking the value for a single data byte sent by the game cartridge to the central processing unit in the Nintendo Entertainment System and replacing it with a new value. If that value controls the character’s strength, for example, then the character can be made invincible by increasing the value sufficiently. The Game Genie is inserted between a game cartridge and the Nintendo Entertainment System. The Game Genie does not alter the data that is stored in the game cartridge. Its effects are temporary. A-23 DISCUSSION 1. Derivative work The Copyright Act of 1976 confers upon copyright holders the exclusive right to prepare and authorize others to prepare derivative works based on their copyrighted works. See 17 U.S.C. § 106(2). Nintendo argues that the district court erred in concluding that the audiovisual displays created by the Game Genie are not derivative works. The court’s conclusions of law are reviewed de novo. See Rozay’s Transfer v. Local Freight Drivers, Local 208, 850 F.2d 1321, 1326 (9th Cir. 1988), cert. denied, 490 U.S. 1030 (1989). Its findings of fact are reviewed for clear error. See id. A derivative work must incorporate a protected work in some concrete or permanent “form.” The Copyright Act defines a derivative work as follows: A “derivative work” is a work based upon one or more preexisting works, such as a translation, musical arrangement, dramatization, fictionalization, motion picture version, sound recording, art reproduction, abridgment, condensation, or any other form in which a work may be recast, transformed, or adapted. A work consisting of editorial revisions, annotations, elaborations, or other modifications which, as a whole, represent an original work of authorship, is a “derivative work.” 17 U.S.C. § 101 (emphasis added). The examples of derivative works provided by the Act all physically incorporate the underlying work or works. The Act’s legislative history similarly A-24 indicates that “the infringing work must incorporate a portion of the copyrighted work in some form.” 1976 U.S. Code Cong. & Admin. News 5659, 5675. See also Mirage Editions, Inc. v. Albuquerque A.R.T. Co., 856 F.2d 1341, 1343-44 (9th Cir. 1988) (discussing same), cert. denied, 489 U.S. 1018 (1989). Our analysis is not controlled by the Copyright Act’s definition of “fixed.” The Act defines copies as “material objects, other than phonorecords, in which a work is fixed by any method.” 17 U.S.C. § 101 (emphasis added). The Act’s definition of “derivative work,” in contrast, lacks any such reference to fixation. See id. Further, we have held in a copyright infringement action that “[iJt makes no difference that the derivation may not satisfy certain requirements for statutory copyright registration itself.” Lone Ranger Television v. Program Radio Corp. , 740 F.2d 718, 722 (9th Cir. 1984). See also Paul Goldstein, Derivative Rights and Derivative Works in Copyright, 30 J. Copyright Soc’y U.S.A. 209, 231 n.75 (1983) (“the Act does not require that the derivative work be protectable for its preparation to infringe”). Cf. Kalem Co. v. Harper Bros., 222 U.S. 55, 61(1911) (finding the movie “Ben Hur” infringed copyright in the book Ben Hur even though Copyright Act did not yet include movies as protectable works). A derivative work must be fixed to be protected under the Act, see 17 U.S.C. § 102(a), but not to infringe. The argument that a derivative work must be fixed because “la] ‘derivative work’ is a work,” 17 U.S.C. § 101, and “[a] work is ‘created’ when it is fixed in a copy or phonorecord for the first time,” id., relies on a misapplication of the Copyright Act’s definition of “created”: A work is created’ when it is fixed in a copy or phonorecord for the first time; where a work is prepared over a period of time, the portion of it that has been A-25 fixed at any particular time constitutes the work as of that time, and where the work has been prepared in different versions, each version constitutes a separate work. Id. The definition clarifies the time at which a work is created. If the provision were a definition of “work,” it would not use that term in such a casual manner. The Act does not contain a definition of “work.” Rather, it contains specific definitions: “audiovisual works,” “literary works,” and “pictorial, graphic and sculptural works,” for example. The definition of “derivative work” does not require fixation. The district court’s finding that no independent work is created, see Galoob, 780 F. Supp. at 1291, is supported by the record. The Game Genie merely enhances the audiovisual displays (or underlying data bytes) that originate in Nintendo game cartridges. The altered displays do not incorporate a portion of a copyrighted work in some concrete or permanent form. Nintendo argues that the Game Genie’s displays are as fixed in the hardware and software used to create them as Nintendo’s original displays. Nintendo’s argument ignores the fact that the Game Genie cannot produce an audiovisual display; the underlving display must be produced by a Nintendo Entertainment System and game cartridge. Even if we were to rely on the Copyright Act’s definition of “fixed,” we would similarly conclude that the resulting display is not “embodied,” see 17 U.S.C § 101, in the Game Genie. It cannot be a derivative work. Mirage Editions is illustrative. Albuquerque A.R.T. transferred artworks from a commemorative book to individual ceramic tiles. See Mirage Editions, 856 F.2d at 1342. We held that “[b]y borrowing and mounting the preexisting, copyrighted individual art images without the consent of the copyright A-26 proprietors... [Albuquerque A.R.T.] has prepared a derivative work and infringed the subject copyrights.” Jd. at 1343. The ceramic tiles physically incorporated the copyrighted works in a form that could be sold. Perhaps more importantly, sales of the tiles supplanted purchasers’ demand for the underlying works. Our holding in Mirage Editions would have been much different if Albuquerque A.R.T. had distributed lenses that merely enabled users to view several artworks simultaneously. Nintendo asserted at oral argument that the existence of a $150 million market for the Game Genie indicates that its audiovisual display must be fixed. We understand Nintendo’s argument; consumers clearly would not purchase the Game Genie if its display was not “sufficiently permanent or stable to permit it to be perceived. . . for a period of more than transitory duration.” 17 U.S.C. § 101. But, Nintendo’s reliance on the Copyright Act’s definition of “fixed” is misplaced. Nintendo’s argument also proves too much; the existence of a market does not, and cannot, determine conclusively whether a work is an infringing derivative work. For example, although there is a market for kaleidoscopes, it does not necessarily follow that kaleidoscopes create unlawful derivative works when pointed at protected artwork. The same can be said of countless other products that enhance, but do not replace, copyrighted works. Nintendo also argues that our analysis should focus exclusively on the audiovisual displays created by the Game Genie, i.e., that we should compare the altered displays to Nintendo’s original displays. Nintendo emphasizes that “*[aJudiovisual works’ are works that consist of a series of related images . . . regardless of the nature of the material objects . . . in which the works are embodied.” 17 U.S.C. § 101 (emphasis added). The Copyright Act’s definition of “audiovisual works” is inapposite; the only question before us is whether the audiovisual A-27 displays created by the Game Genie are “derivative works.” The Act does not similarly provide that a work can be a derivative work regardless of the nature of the material objects in which the work is embodied. A derivative work must incorporate a protected work in some concrete or permanent form. We cannot ignore the actual source of the Game Genie’s display. Nintendo relies heavily on Midway Mfg. Co. v. Artic Int'l, Inc. , 704 F.2d 1009 (7th Cir.), cert. denied, 464 U.S. 823 (1983). Midway can be distinguished. The defendant in Midway, Artic International, marketed a computer chip that could be inserted in Galaxian video games to speed up the rate of play. The Seventh Circuit held that the speeded-up version of Galaxian was a derivative work. Jd. at 1013-14. Artic’s chip substantially copied and replaced the chip that was originally distributed by Midway. Purchasers of Artic’s chip also benefited economically by offering the altered game for use by the general public. The Game Genie does not physicaliy incorporate a portion of a copyrighted work, nor does it supplant demand for a component of that work. The court in Midway acknowledged that the Copyright Act’s definition of “derivative work” “must be stretched to accommodate speeded- up video games.” /d. at 1014. Stretching that definition further would chill innovation and fail to protect “society’s competing interest in the free flow of ideas, information, and commerce.” Sony Corp. of America v. Universal Studios, Inc., 464 U.S. 417, 429 (1984). In holding that the audiovisual displays created by the Game Genie are not derivative works, we recognize that technology often advances by improvement rather than replacement. See Christian H. Nadan, Note, A Proposal to Recognize Component Works: How a Teddy Bears on the Competing Ends of Copyright Law, 78 Cal. L. Rev. 1633, 1635 (1990). Some time ago, for example, computer companies began marketing spell-checkers that operate A-28 within existing word processors by signalling the writer when a word is misspelled. These applications, as well as countless others, could not be produced and marketed if courts were to conclude that the word processor and spell-checker combination is a derivative work based on the word processor alone. The Game Genie is useless by itself. It can only enhance, and cannot duplicate or recast, a Nintendo game’s output. It does not contain or produce a Nintendo game’s output in some concrete or permanent form, nor does it supplant demand for Nintendo game cartridges. Such innovations rarely will constitute infringing derivative works under the Copyright Act. See generally Nadan, supra, at 1667-72. 2. Fair use “The doctrine of fair use allows a holder of the privilege to use copyrighted material in a reasonable manner without the consent of the copyright owner.” Narell v. Freeman, 872 F.2d 907, 913 (9th Cir. 1989) (citations omitted). The district court concluded that, even if the audiovisual displays created by the Game Genie are derivative works, Galoob is not liable under 17 U.S.C. § 107 because the displays are a fair use of Nintendo’s copyrighted displays. “whether a use of copyrighted material is a ‘fair use’ is a mixed question of law and fact. If the district court found sufficient facts to evaluate each of the statutory factors, the appellate court may decide whether defendants may claim the fair use defense as a matter of law.” Abend v. MCA, Inc., 863 F.2d 1465, 1468 (9th Cir. 1988), aff'd sub nom. Stewart v. Abend, 495 U.S. 207 (1990). Section 107 codifies the fair use defense: A-29 In determining whether the use made of a work in any particular case is a fair use the factors to be considered shall include - (1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes; (2) the nature of the copyrightec. work; (3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; (4) the effect of the use upon the potential market for or value of the copyrighted work. The factors are nonexclusive, see Fisher v. Dees, 794 F.2d 432, 435 (9th Cir. 1986), and section 107 does not indicate how much weight should be ascribed to each. Much of the parties’ dispute regarding the fair use defense concerns the proper focus of the court’s inquiry: (1) Galoob or (2) consumers who purchase and use the Game Genie. Nintendo’s compiaint does not allege direct infringement, nor did it try the case on that theory. The complaint, for example, alleges only that “Galoob’s marketing advertising [sic], promoting and selling of Game Genie has and will contribute to the creation of infringing derivatives of Nintendo’s copyrighted . . . games.” (emphasis added). Contributory infringement is a form of third party liability. See Melville B. Nimmer & David Nimmer, 3 Nimmer on Copyright § 12.04[A][2], at 12-68 (1991). The district court properly focused on whether consumers who purchase and use the Game Genie would be infringing Nintendo’s copyrights by creating (what are now assumed to be) derivative works. Nintendo emphasizes that the district court ultimately addressed its direct infringement by authorization argument. The A-30 court concluded that, “(bjecause the Game Genie Joes not create a derivative work when used in conjunction with a copyrighted video game, Galoob does not ’authorize the use of a copyrighted work without the actual authority from the copyright owner.’” Galoob, 780 F. Supp. at 1298 (quoting Sony, 464 U.S. at 435 n.17). Although infringement by authorization is a form of direct infringement, this does not change the proper focus of our inquiry; a party cannot authorize «nother party to infringe a copyright unless the authorized conduct would itself be unlawful. Nintendo disputes this conclusion. According to Nintendo, a party can unlawfully authorize another party to use a copyrighted work even if that party’s use of the work would not violate the Copyright Act. Nintendo’s argument is unpersuasive. In Sony, 464 U.S. at 449, for example, the Court considered whether consumers were using the Betamax for a commercial or noncommercial purpose even though Sony itself obviously was acting in its own commercial self-interest. Professor Nimmer similarly concludes that, “to the extent that an activity does not violate one of those five enumerated rights [see 17 U.S.C. § 106], authorizing such activity does not constitute copyright infringement.” 3 Nimmer on Copyright § 12.04{A][3}[a], at 12-80 n.82. The district court concluded that “a family’s use of a Game Genie for private home enjoyment must be characterized as a non- commercial, nonprofit activity.” Galoob, 780 F. Supp. at 1293. Nintendo argues that Game Genie users are supplanting its commercially valuable right to make and sell derivative works. Nintendo’s reliance on Harper & Row Publishers, Inc. v. Nation Enters., 471 U.S. 539, 562 (1985), is misplaced. The commercially valuable right at issue in Harper & Row was the right of first publication; Nation Enterprises intended to publish the copyrighted materials for profit. See id. at 562-63. See also Sony, 464 U.S. at 449 (“If the Betamax were used to make copies A-31 for a commercial or profit-making purpose, such use would presumptively be unfair.”). Game Genie users are engaged in a non-profit activity. Their use of the Game Genie to create derivative works therefore is presumptively fair. See Sony, 464 U.S. at 449. The district court also concluded that “[tJhe [Nintendo] works’ published nature supports the fairness of the use.” Galoob, 780 F. Supp. at 1293. Nintendo argues that it has not published the derivative works created by the Game Genie. This argument ignores the plain language of section 107: “the factors to be considered shall include . . . the nature of the copyrighted work.” The argument also would make the fair use defense unavailable in all cases of derivative works, including “criticism, comment, news reporting, teaching . . . , scholarship, or research.” 17 U.S.C. § 107. A commentary that incorporated large portions of For Whom the Bell Tolls for example, would be undeserving of fair use protection because the incorporated portions would constitute an unpublished derivative work. This cannot be the law. The district court further concluded that the amount of the portion used in relation to the copyrighted work as a whole “cannot assist Nintendo in overcoming the presumption of fair use.” Galoob, 780 E Supp. at 1293. The video tape recorders at issue in Sony allowed consumers to tape copyrighted works in their entirety. The Supreme Court nevertheless held that, “when one considers . . . that [video tape recording] merely enables a viewer to see such a work which he had been invited to witness in its entirety free of charge, the fact that the emire work is reproduced does not have its ordinary effect of militating against a finding of fair use.” 464 U.S. at 449-50 (citations omitted). Consumezs are not invited to witness Nintendo’s audiovisual displays free of charge, but, once they have paid to do so, the fact that the derivative works created by the Game Genie are i A-32 comprised almost entirely of Nintendo’s copyrighted displays does not militate against a finding of fair use. Nintundo would distinguish Sony because it involved copying copyrighted works rather than creating derivative works based on those works. In other words, the consumers in Sony could lawfully copy the copyrighted works because they were invited to view those works free of charge. Game Genie users, in contrast, are not invited to view derivative works based on Nintendo’s copyrighted works without first paying for that privilege. Sony cannot be read so narrowly. It is difficult to imagine that the Court would have reached a different conclusion if Betamax purchasers were skipping portions of copyrighted works or viewing denouements before climaxes. Sony recognizes that a party who distributes a copyrighted work cannot dictate how that work is to be enjoyed. Consumers may use a Betamax to view copyrighted works at a more convenient time. They similarly may use a Game Genie to enhance a Nintendo Game cartridge’s audiovisual display in such a way as to make the experience more enjoyable. “The fourth factor is the "most important, and indeed, central fair use factor.’” Stewart, 495 U.S. at 238 (quoting 3 Nimmer on Copyright § 13.0S[A], at 13-81). The district court concluded that “Nintendo has failed to show any harm to the present market for its copyrighted games and has failed to establish the reasonable likelihood of a potential market for slightly altered versions of the games at suit.” Galoob, 780 F. Supp. at 1295. Nintendo’s main argument on appeal is that the test for market harm encompasses the potential market for derivative works. Because the Game Genw is used for a noncommercial purpose, the likelihood of future harm may not be presumed. See Sony, 464 U.S. at 451. Nintendo must show “by a preponderance of the evidence that some meaningful likelihood of future harm exists.” Id. (emphasis supplied). A-33 Nintendo’s argument is supported by case law. Although the Copyright Act requires a court to consider “the effect of the use upon the potential market for or value of the copyrighted work,” 17 U.S.C. § 107(4) (emphasis added), we held in Abend that “[a]lthough the motion picture will have no adverse effect on bookstore sales of the [underlying] novel - and may in fact have a beneficial effect - it is ’clear that [the film’s producer] may not invoke the defense of fair use.’” 863 F.2d at 1482 (quoting 3 Nimmer on Copyright § 13.05[B], at 13-84). We explained: “’If the defendant’s work adversely affects the value of any of the rights in the copyrighted work... the use is not fair even if the rights thus affected have not as yet been exercised by the plaintiff.’” Jd. (quoting 3 Nimmer on Copyright § 13.05[B], at 13- 84 to 13-85 (footnotes omitted)). The Supreme Court specifically affirmed our finding that the motion picture adaptation “impinged on the ability to market new versions of the story.” Stewart, 495 U.S. at 238. Still, Nintendo’s argument is undermined by the facts. The district court considered the potential market for derivative works based on Nintendo game cartridges and found that: (1) “Nintendo has not, to date, issued or considered issuing altered versions of existing games,” Galoob, 780 F. Supp. at 1295, and (2) Nintendo “has failed to show the reasonable likelihood of such a market.” Jd. The record supports the court’s findings. According to Stephen Beck, Galoob’s expert witness, junior or expert versions of existing Nintendo games would enjoy very little market interest because the original version of each game already has been designed to appeal to the largest number of consumers Mr. Beck also testified that a new game must include new material or “the game player is going to feel very cheated and robbed, and [the] product will have a bad reputation and word of mouth will probably kill its sales.” Howard Lincoln, Senior Vice President of A-34 Nintendo of America, acknowledged that Nintendo has no present plans to market such games. The district court also noted that Nintendo’s assertion that it may wish to re-release altered versions of its game cartridges is contradicted by its position in various other lawsuits: In those actions, Nintendo opposes antitrust claims by using the vagaries of the video game industry to rebut the impact and permanence of its market control, if any. Having indoctrinated this Court as to the fast pace and instability of the video game industry, Nintendo may not now, without any data, redefine that market in its request for the extraordinary remedy sought herein. . . While board games may never die, good video games are mortal. Galoob, 780 F. Supp. at 1295. The existence of this potential market cannot be presumed. See Sony, 464 U.S. at 451. See also Wright v. Warner Books, Inc., 953 F.2d 731, 739 (2d Cir. 1991) (affirming district court’s finding of no reasonable likelihood of injury to alleged market because “[p]laintiff has offered no evidence that the project wil! go forward”). The fourth and most important fair use factor also favors Galoob. Nintendo’s most persuasive argument is that the creative nature of its audiovisual displays weighs against a finding of fair use. The Supreme Court has acknowledged that “fair use is more likely to be found in factual works than fictional works. Stewart, 495 U.S. at 237. This consideration weighs against a finding of fair use, but it is not dispositive. See Sony, 464 U.S. at 448 (fair use defense is an “equitable rule of reason”). The district court could properly conclude that Game Genie users are making a fair use of Nintendo’s displays. A-35 3. Temporary and permanent injunction Galoob has not violated the Copyright Act. Nintendo therefore is not entitled to a temporary or permanent injunction. AFFIRMED. RYMER, Circuit Judge, concurring in the judgment: I concur in the judgment for reasons stated by the district court, Lewis Galoob Toys, Inc. v. Nintendo of America, Inc. , 780 F. Supp. 1283 (N.D.Cal.1991). A-36 IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA No. LEwis GALOoB Toys, INC., C-90-1440 FMS No. Plaintiff (s), | | C-90-1586 FMS VS. NINTENDO OF AMERICA, INC., Defendant (s)."|_ MEMORANDUM OF DECISION AND RELATED AND CONSOLIDATED ACTIONS (Filed JULY 12 1991) PEGS FRY IG TESTE AED IG BH RINNE LEN OM OE OS INTRODUCTION These two consolidated suits test the scope of copyright protection for audio-visual games (video games). Nintendo of America, Inc. (“Nintendo”) markets and sells home video games harawa-e systems and compatible video game cartridges. The audio-visual portions of the game cartridges in suit are protected by registered copyrights held by Nintendo. Lewis Galoob Toys, Inc. (“Galoob”) markets and sells toy products. Galoob has a license to market a video game accessory known as the Game Genie Video Game Enhancer (“Game Genie”), which attaches to a video game cartridge and allows the player to temporarily alter certain attributes of the video game. It is sold for personal consumer use only, not for video game arcades. The Game Genie does not create a separate copy of the A-37 original video game, does not make permanent changes to the original game work, and can only be used when attached to the original game. Nintendo contends that the Game Genie creates a derivative work as defined in 17 U.S.C. § 101, and that Galoob is therefore either a direct c. contributory infringer of Nintendo’s copyrights in the original video games in suit. For the reasons set forth below, the Court finds to the contrary and vacates the pending preliminary injunction forthwith. SUMMARY OF RULINGS This case has included one and one-half years of litigation, a two-week trial, and extensive briefing of all issues, both pre- and post-trial. After careful consideration of the evidence and briefing submitted by both sides, and for the reasons set forth below, this Court rules as follows: 1) Use of the Game Genie by consumers to temporarily alter copyrighted video games for their own enjoyment does not create a derivative work under 17 U.S.C. § 101. Because the consumers are not direct infringers, Galoob is not a contributory infringer. 2) In the alternative, even if the Game Genie did create a derivative product, the doctrine of “fair use” enables consumers to use the Game Genie for their personal enjoyment, 17 U.S.C. § 107, and therefore allows Galoob to sell it. 3) Galoob’s use of copyrighted video games for purposes of testing or marketing the Game Genie does not violate any of Nintendo’s rights under the Copyright Act. AP GORDO LISE LY SINS DIMEN SDS IPE ELST IES ORNS PE ELL A EIEN D INGEN Sern an ae AML eT A HASEENO NTL 5 EIA REE NAN LINE AUG BIOS RY RMB IDI ae A-38 4) On this record, injunctive relief is not appropriate for either side. PROCEDURAL BACKGROUND On May 17, 1990, Galoob filed « complaint for declaratory relief against Nintendo, seeking a declaratory judgment that the Game Genie does not violate or contribute to the violation of any of Nintendo’s video game copyrights. Galoob also sought an injunction prohibiting Nintendo from interfering with the marketing of the Game Genie, and permanently enjoining Nintendo from modifying the Nintendo Entertainment System (“NES”) in order to make it incompatible with the Game Genie. Nintendo responded by filing its own complaint for an injunction prohibiting Galoob from all facets of marketing the Game Genie, on the grounds that it contributorily infringed Nintendo’s registered copyrights in various video games. Nintendo also claimed violation of the trademark laws. On July 2, 1990, this Court (per Schnacke, J.) issued a preliminary injunction in favor of Nintendo; the injunction was affirmed by the United States Court of Appeals for the Ninth Circuit on February 27, 1991. Both actions were transferred on July 6, 1990 to the undersigned, who consolidated them and held a bench trial on the sole issue of whether or not the Game Genie infringes any of Nintendo’s copyrights. Nintendo claims that Galoob has wilfully and deliberately infringed, both directly and contributorily, Nintendo’s copyrights in its audio-visual game cartridges. Galoob seeks a declaration that use of the Game Genie by individuals in their own homes does not constitute infringement of Nintendo’s copyrights, and that Galoob’s marketing, distribution, and sale of a A-39 the Game Genie is therefore not contributory infringement of those copyrights. In addition, Galoob seeks a declaration that its own use of the Game Genie for testing and marketing purposes does not constitute direct infringement. PARTIES Galoob is a corporation organized and existing under the laws of Delaware, with its principal place of business in South San Francisco, California. Nintendo is a Washington state corporation, with its principal place of business at Redmond, Washington, and is a wholly owned subsidiary of Nintendo Company, Ltd., of Japan. Galoob and Nintendo are the only two parties to these consolidated actions. No individual consumers of the Game Genie have been named as defendants, although it is their use of the Game Genie that allegedly constitutes the primary infringing activity. JURISDICTION AND VENUE This civil action arises under the Copyright Act, as amended 17 U.S.C. § 101 et seq.; the Lanham Act, 15 U.S.C. § 1051 et seq.; and California law. This Court has subject matter jurisdiction pursuant to 17 U.S.C. § 501; 15 U.S.C. § 112i; and 28 U.S.C. § 1331, 1332, and 1338. Venue is proper in this district pursuant to 28 U.S.C. § 1391 and 1400(a). A-40 FINDINGS OF FACT AND CONCLUSIONS OF LAW I. PRODUCTS This suit involves the interplay of three products, the Nintendo Entertainment System, Nintendo copyrighted video games and the Game Genie. A. The Nintendo Entertainment System Nintendo markets and sells video game hardware systems. The system is known as the Nintendo Entertainment System (“NES”) and is designed for playing video games in the home. Nintendo has sold in excess of 25,000,000 of these systems in the United States. Nintendo also markets and sells video game cartridges, and licenses third parties to market and sell video games which are compatible with Nintendo’s hardware. The video games are displayed on a home television. The NES includes a microprocessor-based console, the “control deck,” which houses two processing units: the central processing unit (“CPU”), which controls the overall operation of the system, and the picture processing unit (“PPU”), which generates the pictures for display on the television. The control deck is connected to the television. B. Video Games The video games which may be played on the NES control deck are both audio-visual works and computer programs. The audio-visual works and game programs are permanently stored on ROMs (i.e., Read Only Memory chips) contained in game cartridges. A-41 Nintendo owns valid and subsisting registered copyrights in the audio-visual programs contained in many of its video games, including those in suit. Each game typically has a theme and a goal. For example, a game might consist of the main character’s attempt to obtain a certain level of points before he is defeated by hostile forces.’ In an attempt to reach that point goal, he has a certain number of chances (“lives”) in which to [sic] must overcome obstacles, battle adversaries, and travel through various levels (“worlds”). Each time he overcomes an obstacle or reaches a new world, additional points are added to the score. On the other hand, each time he is defeated by a villain and/or obstacle, he loses a chance or life. If he loses all of his lives before obtaining a certain number of points, the game ends, and he must start again. More than 500 different video games have been produced and offered for sale for use with the NES Control Deck. In addition to those owned and copyrighted directly by Nintendo, hundreds of games have been produced by some 71 other companies. Sixty- three of the non-Nintendo producers of video games have licenses from Nintendo, and an additional eight do not. Players can buy various devices (“interactive devices”) which connect to the NES control deck and allow the player to influence various aspects of the game being played. Changes include speeding up certain aspects of the game, skipping one or more levels of play, etc. Interactive devices which may be used with the NES control deck include devices marketed as the “Control Pad,” “NES Advantage,” “Power Glove,” “NES Max,” and “Turbo Blaster.” Light guns may also be used by players for playing male. For reasons that remain obscure, the protagonists are generally A-42 certain games. Nintendo markets and sells, or licenses others to sell, such interactive devices for use with the NES control deck. The NES video game cartridges contain two separate memories: one memory (the “program memory”) is connected to the CPU when the game cartridge is physically inserted into the control deck; the other memory (the “character memory”) is connected to the PPU when the game cartridge is physically inserted into the control deck. In order to play an NES video game, the player inserts a game cartridge into the control deck. The player begins game play and interacts with the video game by manipulating buttons on the standard controller, which is sold with the NES and which attaches to the control deck. The game’s action is performed on the television screen. Players use the controller (which contains a four-way control pad, for directional control, and four other buttons labeled “start,” “select,” “A” and “B”) to guide the actions of “their” character in an attempt to reach the game’s goal, as described earlier. The copyrights allegedly infringed in this suit are for the audio-visual portion of the video game cartridges manufactured by Nintendo. The games are only compatible for play on the NES; they have a retail list price of approximately $40 to $50 each. C. The Game Genie Galoob is in the business of marketing and selling toy products in the United States. Galoob obtained a license to market the Game Genie from Codemasters Software Co., Ltd., a United Kingdom corporation, and Camerica, Ltd., a Canadian corporation. The Game Genie, the accused product, allows players A-43 to alter certain attributes of video games, in ways similar to the interactive devices and published codes described supra at 7-8 and infra at 35. The Game Genie can function in combination with any NES- compatible game cartridge. Six licensed producers of copyrighted Nintendo-compatible games, as well as Nintendo itself, are known to object to the use of the Game Genie with their copyrighted games. It is not known whether the nontestifying Nintendo- licensees or the eight nonlicensed producers of NES-compatible games object or consent to the use of the Game Genie with their copyrighted games, nor is it known how many of the games of Nintendo licensees or nonlicensee producers have registered copyrights. At this time, the Game Genie is configured both electronically and physically to plug into NES control decks and NES-compatible video game cartridges only; it has no other use. The Game Genie is designed to fit between the NES control deck and NES-compatible video game cartridges. When a Game Genie is used (i.e., when a game cartridge has been attached to a Game Genie and the Game Genie is then inserted into a control deck), it has two modes of operation: a programming or “set-up” mode, and a game play mode. If une game cartridge is detached from the Game Genie during operation, all audio-visual displays of the game cease. Likewise, if a game cartridge inserted into a control deck without the Game Genie is removed from the control deck, all game audio-visual displays cease. The Game Genie cannot be used unless it is physically attached to a video game cartridge and then inserted into an NES control deck. A-44 During the Game Genie’s set-up mode, a display appears on the television screen and the player is presented With the choice of entering from one to three codes into the Game Genie. Each code can be six to eight letters in length, and each letter may be chosen from among sixteen available letters of the alphabet. Although there are billions of possible codes, a maximum of three codes can be entered for any single play of a game. When code selection is complete, the player presses the “select” button on the controller, the set-up mode screens display disappears, and the Game Genie shifts into its “game play mode.” In this mode, the game begins, and the player plays the game with the alterations allowed by the Game Genie codes the player has entered. If no code has been entered, the Game Genie has no influence on game play, and the game plays exactly as it would if no Game Genie were attached.” If the game player inputs one, two, or three codes into the Game Genie, each entered code causes the CPU to receive different data than it would if the Game Genie were not attached and activated by the game player. * The Game Genie interprets each of the codes a player selects to refer to a particular "address" in the game cartridge program ROM and the data that are stored there. As the game proceeds, the CPU inquiries that are directed to the game cartridge’s program ROM pass through the Game Genie. If an inquiry is directed to an address that matches one of the codes the player has selected, the Game Genie substitutes the data it has stored for the data that the game cartridge would otherwise transmit to the CPU. (For example, assume the CPU asks for the initial number of lives and the game cartridge has the number "three" at the address corresponding to initial "lives." If the player has selected a code for six lives, the Game Genie would substitute data signifying six lives and send that data to the CPU.) Each Game Genie code can substitute only a single byte of data at a single address. Thus, of the million or so inquiries per second that the CPU directs to the game cartridge, the Game Genie can interrupt and change relatively few. A-45 Galoob has prepared a booklet intended to be distributed with the Game Genie entitled “Programming Manual and Code Book” (“Code Book”). The Game Genie Code Book instructions expressly encourage players to alter listed codes and to create various effects by programming their own codes. The effects of all codes, whether devised by Galoob or by the players themselves, are temporary in nature, and will last only until the player unplugs the game or resets in order to start a new game. There are approximately 1,660 listed codes in the Game Genie code book, allowing various categories of temporary changes to be created with the use of the Game Genie. Some permit the player to choose where to begin the game, i.e. at a higher level of the game rather than at the beginning. Other codes allow the player to increase or decrease the number of chances the player has to complete the game or the amount of time in which those chances can be exercised. Others allow a player to advance more quickly through the game by skipping certain obstacles.’ The Game Genie cannot be used to play or do anything unless a separate game cartridge is also used. It can neither substitute for an NES game cartridge, nor can it reproduce or copy an independent version of the game. The effects of the Game Genie last only for the temporal period in which a particular sequence of play continues. Its effects vanish as the player ends a sequence of play by disconnecting the power to the game or by resetting and starting over. The Game Genie codes cannot change the plot, theme, or characters of any game. The vast majority of the Game Genie codes alter the rules of the game or method of play. See infra at 18-19. > Such effects are paralleled by Nintendo's hardware, pass-words, and "secrets," discussed infra at 35. A-46 The Game Genie is marketed for use by consumers as an accessory to their home video system. It is not intended to be used in connection with any public performance of a video game, e.g. in an arcade setting. Cf Midway Mfg. Co. v. Artic Int’l. Inc. , 704 F.2d 1009 (7th Cir. 1983), cert. denied, 464 U.S. 823 (1983). No evidence was presented of any such actual or potential public performance. Il. SCOPE OF COPYRIGHT PROTECTION Article I, Section 8, of the Constitution provides: “The Congress shall have Power . . . To promote the Progress of Science and useful Arts by securing for limited Times to Authors and Investors the exclusive Right to their respective Writings and Discoveries.” As new technological developments have occurred, Congress has responded by fashioning new rules of copyright. Copyright protection is statutory, and the judiciary has shown a general reluctance to expand those protections, absent explicit legislative guidance. See, e.g., Teleprompter Corp. v. Columbia Broadcasting System, Inc., 415 U.S. 394, 414 (1974). While there are sound historical and policy reasons for this consistent deference to Congress, Congress cannot immediately respond to each invention that hits the market. The courts must therefore use their best judgment to construe the meaning of certain words consistent with Congressional intent. Sony Corp. v. Universal City Studios, Inc., 464 U.S. 417, 456 (1984). Copyright protection does not accord a copyright owner complete control over all possible uses of the protected work. As stated in Sony, 464 U.S. at 429: The monopoly privileges that Congress may authorize are neither unlimited nor primarily designed to provide A-47 a special private benefit. Rather, the limited grant is a means by which an important public purpose may be achieved. It is intended to motivate the creative activity of authors and inventors by the provision of a special reward, and to allow the public access to the products of their genius after the limited period of exclusive control has expired. Congress appears to have made reward to Nintendo a consideration of the copyright law, but not the only one. A. Derivative works The Copyright Act gives the holder exclusive rights to use and authorize the use of the work in five qualified ways, including the preparation of derivative works based upon the copyrighted work. 17 U.S.C. § 106(2). Nintendo alleges that the Game Genie is a derivative work. This Court does not agree. Section 101 of the 1976 Copyright Act defines a derivative work as “a work based upon one or more preexisting works such as a translation, musical arrangement, dramatization, fictionalization, motion picture version, sound recording, art reproduction, abridgement, condensation, or amy other form in which a work may be recast, transformed, or adapted” (emphasis added). Nintendo relies heavily on Midway Mfg. Co. v. Artic Int’l., Inc., 704 F.2d 1009 (7th Cir. 1983), cert. denied, 464 U.S. 823 (1983) in claiming that the Game Genie is a derivative work. That reliance is misplaced. As Midway noted, “It is not obvious from [the language of section 101] whether a speeded up video game is a derivative work.” Jd. at 1014. If it was doubtful as to whether or not the product in that case was a derivative work, the uncertainty is far greater regarding the Game Genie. In Midway, ee oe ee aon ee a re A-48 the allegedly infringing product was a printed circuit board which could be used to speed up the rate of play - how fast the sounds and images changed - of one of plaintiff's video games (“Galaxian”), licensed for use in a play-for-pay arcade setting. Under those circumstances, the Seventh Circuit found that speeding up that specific game increased the licensee’s revenue by making the game more challenging and decreasing the time it took to complete a game, i.e., more games could be played in a given time period, generating more income for the licensee. Acknowledging that the copyright owners of that video game would be anxious to obtain that extra revenue, the court found that commercial licensees were not implicitly authorized to use the speeded up circuit boards; therefore, the suppliers of those circuit boards contributorily infringed because the speeded version of the game was a derivative work. 704 F.2d at 1014. Based on those facts, Midway held that the “amount by which the language of section 101 must be stretched to accommodate speeded up video games is . . . within the limits with which Congress wanted the new act to operate.” /d., (emphasis added). The result appeared to be based on the equities of that situation. Under those facts, the court was willing to “stretch” the acceptable definition of a derivaiive work. Midway’s result, if not its analysis, appears to have turned on the fact that the licensee arcade owner, not the copyright holder, was making money from the public performance of the altered game, a violation of section 106(4) (copyright holder has exclusive right “to perform the copyrighted work publicly”).* The alleged infri [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386003_1755%3A1. Public record. Not legal advice.