Dream Games: Illegal Use of Copyrighted Work Does Not Preclude Damages for Infringement

In a case of first impression, the 9th Circuit held that illegal use or operation of a copyrighted work by the copyright owner does not preclude an award of statutory or actual damages for infringement. In Dream Games of Arizona, Inc. v. PC Onsite, 561 F.3d 983 (9th Cir. 2009), the federal appellate court rejected the infringer’s unclean hands defense based on a claim that the plaintiff used its copyright illegally in two states. The Court held that a work that contains legal content but which may be used for illegal purposes is still copyrightable.

BACKGROUND

Dream Games of Arizona, Inc. (“Dream Games”) designs, develops, and sells electronic video bingo games, including a game called “Fast Action Bingo.” Dream Games entered into negotiations with PC Onsite to provide a software upgrade to Fast Action Bingo – the parties signed a nondisclosure agreement indicating that Dream Games retained all intellectual property in the game.

PC Onsite created an upgrade of the game it called “Fast Action Bingo II,” but when it was presented to Dream Games, negotiations between the parties broke down. Immediately thereafter, PC Onsite created its own video bingo game called “Quick Play Bingo I,” that was remarkably similar to “Fast Action Bingo II.” PC Onsite registered the copyright for the source code and installed and operated Quick Play Bingo I in bingo parlors in Wyoming and Utah, where it often competed directly with Dream Games’ bingo machines.

Dream Games filed an action against PC Onsite, alleging copyright infringement, breach of contract, and unjust enrichment. While the case was pending, the Wyoming Supreme Court ruled that Fast Action Bingo was illegal in Wyoming; several Fast Action Bingo machines were also seized in Utah because gambling is illegal in Utah.

At trial before the District Court, PC Onsite defended on the basis that, among other things, Dream Games’ operation of its copyright was illegal in Utah and Wyoming and therefore Dream Games should not be able to win compensatory damages for PC Onsite cutting into its illegal revenue.

The District Court agreed with PC Onsite as to actual damages, but it did not preclude an award of statutory damages. A jury found that PC Onsite did infringe on Dream Games’ copyright and awarded Dream Games statutory damages of $25,000. The Court granted a permanent injunction against PC Onsite’s future use of the competing bingo game. PC Onsite appealed; Dream Games filed a cross-appeal but apparently did not appeal the lower court’s ruling that it was not entitled to actual damages. Dream Games of Arizona, Inc. v. PC Onsite, 561 F.3d 983 (9th Cir. 2009).

Illegal use of a copyright does not preclude actual or statutory damages

In a question of first impression before the 9th Circuit, the Court determined that illegal use of a copyright in two states – illegal use that does not directly harm the defendant – does not preclude damages for infringement. The Court began the analysis by reviewing its previous decision in Belcher v. Tarbox, 486 F.2d 1087 (9th Cir. 1983), as well as the 5th Circuit’s decision in Mitchell Bros. Film Grp. v. Cinema Adult Theater, 604 F.2d 852 (5th Cir. 1979). In those cases, the courts upheld the copyright of works containing illegal content – fraudulent advertising and obscenity, respectively).

The 9th Circuit then analogized that if copyright protection is afforded to works containing illegal content, then works containing legal content, but which may be used in an illegal manner, are “surely copyrightable.” Dream Games, 561 F.3d at 991.

Additionally, because the game was operated illegally in only two of 50 states, but would not be illegal in other locations, the court found that “it would be absurd to deny a work the protection of a federal copyright because it is capable of illegal use in one or more states, but capable of perfectly legal use in other states.” Id. A primary purpose of copyright protection is to deter infringement; precluding any damages based on the claims made by PC Onsite would be contrary to this goal.

The Court did suggest that the outcome might be different if Dream Games’ illegal operation actually harmed the defendant. The court stated, “an award of either type of damages available under the Copyright Act – actual or statutory – is not precluded by evidence of illegal operation of the copyrighted work, at least where the illegality did not injure the infringer.” Id. at 992. PC Onsite was not directly injured by Dream Games’ illegal operation of the game, so the 9th Circuit affirmed the District Court decision.

CONCLUSION

This case exemplified the strength of federal copyright protection. The manner in which a copyright is used has little to no bearing on the nature of the copyright itself and its protection from infringement.

As a practice note, had Dream Games appealed the District Court’s decision to preclude actual damages, it likely would have won a right to a new trial on appeal for a determination of actual damages. Its failure to do so was an expensive mistake.

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Olivier Taillieu

Jeff Zuber

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