(This is an archived case summary)
This case involved two gorillas, King Kong and Donkey Kong, and the rights of their respective owners, plaintiff Universal City Studios, Inc. (“Universal”), and defendants Nintendo Co. Ltd. and Nintendo of America, Inc. (collectively, “Nintendo”). Universal initially claimed certain rights in the name and image “King Kong” and brought an action against Nintendo for its “Donkey Kong” video arcade game. In an earlier decision on cross motions for summary judgment, the Court dismissed Universal's claims of copyright infringement. The summary judgment was upheld on appeal (See Universal City Studios, Inc. v. Nintendo Co., Ltd., 746 F.2d 112 (2d Cir.1984).
With the copyright issue resolved in favour of Nintendo, the parties continued on with Nintendo's unresolved counterclaims for unjust enrichment, contributory copyright infringement, and tortious interference with contract. The District Court held that (1) Nintendo had no cause of action for unjust enrichment under state law; (2) Universal was liable for vicarious copyright infringement in licensing games substantially similar to Nintendo's games; (3) Universal tortiously interfered with license agreements between Nintendo and its licensees; (4) Universal was liable for punitive damages; and (5) Nintendo was entitled to attorney fees.
In 1981, Nintendo started selling its “Donkey Kong” electronic arcade game. In November 1981, Nintendo licensed American toy company Coleco Industries, Inc. (“Coleco”) to produce a “Donkey Kong” videogame cartridge for its home video system, Coleco-Vision. The formal licence from Nintendo was signed on February 1, 1982. In the fall of 1981, Tiger Electronic Toys, Inc. (“Tiger”), another American toy company sought and received a licence from Universal to use the name “King Kong” in connection with its own electronic game.
By April of 1982 Universal was considering a relationship with Coleco, either by way of an investment or a joint venture. Aware of Coleco's intent to produce a home video cartridge version of “Donkey Kong” under license from Nintendo, Universal asserted its rights against Coleco. Coleco, on the threshold of entering the market place with its fully developed “Donkey Kong” game, capitulated to Universal's demands and entered into an agreement to pay to Universal 3% of its gross revenues from the sale of “Donkey Kong” cartridges in exchange for Universal's covenant not to sue.
Nintendo declined to make any concessions to Universal in various meetings between the two companies. Universal commenced the action on June 6, 1982, and, after doing so, convinced two other Nintendo licensees to enter into Coleco-like agreements.
Universal also sent “cease and desist” letters to Nintendo's licensees stating that Universal was “the owner of the trademark and trade name rights in the name “King Kong”, the gorilla character “King Kong” and certain pictorial and graphic depictions of the character “King Kong” made famous by several motion pictures.” Universal demanded that the licensees either desist from marketing “Donkey Kong” products or obtain a licence from Universal authorizing the use of the name “King Kong” and variations of the name, including “Donkey Kong”. As a consequence of these letters, Nintendo lost $94,219.41 in guaranteed royalties under various license agreements.
Despite Universal's repeated allegations of “irreparable injury” resulting from alleged trademark violations by Nintendo's licensees, Universal began to secure agreements from Nintendo's licensees whereby Universal became a partner in the distribution of millions of “Donkey Kong” products identified as originating with Nintendo and under Nintendo's exclusive control. Universal received royalties of $4,765,371.48 from these agreements. Universal did not take action against licensees who refused to comply.
Nintendo's counterclaim against Universal stated that Universal's agreements with Nintendo licensees constituted the misappropriation of Nintendo's trademark and resulted in Universal's unjust enrichment. The court found that unjust enrichment claim was precluded either because Universal licensed King Kong, a property not controlled by Nintendo, or because Universal's improper licensing of “Donkey Kong” provided for a claim under federal copyright laws only.
Nintendo further alleged that Tiger's various games infringed on Nintendo's and Coleco's “Donkey Kong” games. The Tiger home video game revolved around the same three characters as “Donkey Kong”: a large gorilla, a female captive, and a male rescuer. After hours of determined game play, the court found that the “concept, feel, and play of the Tiger “King Kong” game are substantially similar to the coin-operated “Donkey Kong” game.”
Nintendo claimed that because Universal licensed Tiger's use of King Kong in these games, Universal was guilty of “vicarious infringement.” To establish vicarious infringement under U.S. law, a party must show that the other party, with knowledge of infringing activity, induces, causes, or materially contributes to the infringing conduct of another. The court held that the electronic games licensed by Universal were substantially similar to Nintendo's copyrighted “Donkey Kong” video arcade game, such that Universal's licensing of infringing games constituted vicarious copyright infringement.
Interference with Contracts
Nintendo's claim of tortious interference by Universal focused on two categories of licensee: (1) Coleco, Atari and Ruby-Spears, who breached material terms of their licensing agreements but continued to perform their other obligations; and (2) Nintendo's existing licensees who breached their licenses and refused to perform as a result of Universal's actions. The elements that had to be proven to establish tortious interference with contractual relations were (1) a valid contract between Nintendo and a licensee; (2) Universal's knowledge of the contract and inducement of a breach; and (3) a resulting damage to Nintendo.
Nintendo's cause of action for tortious interference failed with respect to its contracts with Coleco, Atari, and Ruby-Spears, because Nintendo did not prove a material breach of those contracts. The agreements between those companies and Universal did not impair payment of royalties to Nintendo, nor did they alter any other licensee obligations to Nintendo.
However, as a result of Universal's threatened litigation, a number of licensees failed to pay $94,219.41 in guaranteed royalties due under their licence agreements with Nintendo. The facts also established that Universal knew of these contracts when it took the actions that induced the breach. Universal argued, however, that liability can only attach for tortious interference with contractual relations where the interference is knowing and improper, and that a threat of litigation is improper interference only if the litigation is instituted without probable cause and for a purpose other than securing a judgment through the courts. The Court held that liability for tortious interference with respect to the licensees “hinges on whether or not Universal's threats of litigation were based on good faith and probable cause” and probable cause exists “when a party acts in reliance upon the advice of counsel, sought in good faith after full disclosure of all relevant facts within his knowledge and information.”
In the end, the Court found that Universal instigated the lawsuit and threatened others with litigation without meeting the good faith standard and without probable cause. Though a party's bad faith can rarely be established by direct evidence, and must often be proved circumstantially and by inference. In this case, there was direct evidence that Universal knew it did not have the rights it asserted in its complaint.
As a result, Universal was found liable for vicarious copyright infringement and tortious interference with contractual relations.
Universal City Studios, Inc. v. Nintendo Company Ltd. and Nintendo of America, Inc.
July 29, 1985
US Dist. Ct., SD NY
615 F. Supp 838
KEYWORDS: unjust enrichment – contributory copyright infringement – contractual interference – Nintendo – King Kong – counterclaim
SUMMARY BY: Arsen Krekovic