Lilith Games v. uCool – Seeking Preliminary Relief in the US

Attached is the order denying a preliminary injunction in Lilith Games v uCool (N.D. Cal., Sept. 23, 2015).  According to the order of Judge Conti, Lilith is a video game developer that released the game Dao Ta Chuan Qi (translated as “Sword and Tower”)  in China in February 2014. Lilith holds Chinese copyright registrations in Sword and Tower’s source code and alleges that it owns the copyrights to that code pursuant to Chinese copyright law. Sword and Tower has enjoyed great commercial success, and as of August 2014, was the leading game in Asia.   Defendant uCool is a video game marketer who allegedly obtained access to Lilith’s copyrighted software code for Sword and Tower and used it to create its own game, Heroes Charge , which it published in the United States in August 2014.

Lilith filed this case in March 18, 2015, four months after talks with uCool had broken down. Lilith argued that a four month delay was justified because Lilith is a small start-up  and was reluctant to become involved in costly litigation until it was necessary, although the court noted “It is unclear what Lilith means by ‘small start-up,’ particularly given that Lilith owns the most popular game in Asia.”

There are a few interesting points in this case worth comparing to Chinese practice:

  1. Application of Law and Recognition of Evidence: The court determined that Lilith “owned valid Chinese copyright registrations and therefore has provided prima facie evidence of copyright ownership under Chinese law.” In addition, it was “undisputed that Lilith is the entity that filed for and obtained the copyright registrations and that these registrations expressly list Lilith as the copyright owner. Thus, Lilith was the developer of the Sword and Tower source code and the copyright for Sword and Tower consequently belongs to Lilith.” The court also noted that “Lilith brings its copyright infringement claim under the Berne Convention, an international agreement governing copyright.”

The court directly  applied Chinese copyright law and the Berne Convention, which are rather unusual.  To its credit, there was no evidence that the court required notarized and/or consularized documentation, as might be required of a US company submitting similar evidence in China.   

  1. Regarding copying, the court concluded that “a finder of fact is likely to conclude that the source code for Heroes Charge is substantially similar to the source code for Sword and Tower,”and that “the evidence shows that the games are almost identical from the user’s standpoint, with only minor modifications.”

Although the court noted that Lilith sought to apply the Berne Convention, the court’s determination of copyright infringement appears squarely based on US practice.  Screen shot comparisons can be found here.

  1. In its trade secret analysis the court noted that “Lilith’s efforts to maintain the confidentially of its source code, while not as rigorous as they could have been, were sufficiently reasonable to maintain the code as a trade secret. Lilith keeps its source code on a secure server and limits access only to those employees who need it to perform their duties. Lilith also encrypts the Sword and Tower source code so that it cannot be easily deciphered. Although Lilith failed to secure confidentiality agreements from all of the employees that had access to the code, Lilith has presented evidence to show that these employees understood Lilith’s code to be confidential business information. Further, there is no evidence to suggest that any of these employees disclosed the code to a third party.”

Difficulties in demonstrating that a trade secret owner has established appropriate measures to protect the confidentiality of a trade secret are one of the obstacles in trade secret litigation in China.   The court’s approach is not unreasonable given that there appeared to be adequate procedures in place, and any gap in protection was not a cause of the leak of confidential information.

  1. Preliminary Injunction “E-Bay” Factors

Although the court determined that there was a strong likelihood that Lilith would succeed on the merits, it denied the motion for a preliminary injunction.  In the court’s view Lilith could not demonstrate that there was adequate imminent injury, either by reason of reputational injury in a market where it had little presence or by difficulties in developing that market through an exclusive distributorship.  The court took note that eight months had passed from when Lilith discovered the alleged copying to when it filed for a preliminary injunction. The court’s apparently suspicious view of Lilith’s argument that it was a small start-up, which accounted for the delay, may also have been a factor in this determination.

These cases are part of a growing trend of Chinese companies using the US courts to address claims of infringement by Chinese, US or third country actors.  There are also several obvious comparisons in recent Chinese cases to this one.  The case may be compared to the preliminary injunction granted by the Guangdong IP court in Blizzard Entertainment and NetEase versus Chengdu Qiyou Limited, involving a US rightsholder.  In that case, I noted the importance of having an active licensee as a co-plaintiff to succeeding in a preliminary injunction matter; the lack of an active licensee may have been a problem with the US case in demonstrating irreparable harm due to difficulties in obtaining an exclusive licensee. 

This is the second recent case brought by a Chinese company seeking a preliminary injunction in the US courts for copyright infringement.  In the earlier CCTV case, the Chinese plaintiffs were granted a preliminary injunction applying US law.    As I noted in the CCTV cases, had the US court applied Chinese law it might have found that no copyright infringement existed at least with respect to sports broadcasting.

Another comparison is with the   Eli Lilly v. Huang Mengwei (黄孟炜) case, where a preliminary injunction was granted in China for a trade secret matter.  However, that case was publicly discussed but never published.  The Lilith case is published, according to US practice, with confidential information removed.   

Perhaps the most interesting comparative aspect of the Lilith case was the delay in initiating litigation by the plaintiff.  Had this case been tried in China, the delays in seeking preliminary injunctions might have been more problematic in light of the expectations of tight time frames, where litigation and IP matters change in “a New York minute.”    After all, in eight months, most IP litigation has been finally adjudicated.

 

Video Game Equipment Ban to Be Lifted Nationwide

In a development that speaks to both recent developments that seek to drive more value for the content industries in China, as well the vitality of the Shanghai Free Trade Zone as an experimental pilot, the Ministry of Culture has lifted the ban of video game consoles in China.

The ban had previously been lifted in the Shanghai Free Trade Zone in early 2014. The Ministry of Culture on Tuesday lifted the ban on video games and consoles effective retroactively as of June 30, 2015.

In its announcement, (文化部关于允许内外资企业从事游戏游艺设备生产和销售的通知) (Notice of Ministry of Culture Permitting Domestic and Foreign Enterprises Participating in Video Game Entertainment Equipment Production and Sales) as well as the related notice accompanying the announcement (游戏游艺设备内容审核管理办法)(dated June 24, 2015) (Rule for Managing Approval of Content for Video Game Entertainment Equipment), the Ministry noted that it will encourage “healthy” video games, with national characteristics, including “use of indigenous intellectual property.” (具有自主知识产权).   Self-censorship and reporting mechanisms are to be established by game developers and manufacturers.

Requests to lift the video game console ban had long been a staple of requests made to USTR by console manufacturers and game developers, as well as the International Intellectual Property Alliance.

How much will the removal of the ban stimulate the legitimate industry? This appears to be one of several efforts to bring more value and protection to copyrighted content in China. Among those recent developments are the market opening efforts announced in the recent Strategic and Economic Dialogue on marketing of flat-fee (non-revenue sharing) films in China, the availability of copyright protection for sports broadcasts, the grant of a preliminary injunction involving a US video game product, and recent licensing deals for music and sports broadcasts.

The World of Injunctions: Guangzhou Makes Its Mark

According to various press reports, on March 9, 2105, the Guangzhou Specialized IP court issued a preliminary injunction in a copyright matter, Blizzard Entertainment and NetEase versus Chengdu Qiyou Limited (“Seven Games”),Beijing Fenbo Times Internet Technology Co., Ltd (“Rekoo”) and Guangzhou Dongjing Computer Technology Co., Ltd (“UCWeb”), regarding developing, operating, distributing and disseminating over the internet the game titled Everyone WarCraft: War of Draenor (formerly known as Chieftain Thrall: The expedition of WarCraft). The injunction calls for the above named defendants to cease reproduction, distribution and/or online dissemination of this game.

Eric Roeder, General Counsel of Blizzard is quoted in the media as saying “We welcome the efficient and timely injunction of the Guangzhou IP Court based on Chinese…It provides a fast and effective remedy and fully demonstrates the determination and power of the Chinese courts to protect intellectual property…”

The case is notable for three factors

A) Its rarity. According to the Supreme Peoples Court, in 2013, there were 88,583 first instance civil IP cases, yet there were only 11 cases in which a preliminary injunction was accepted, and, according to the Court, “77.78%” were “granted approvals.” (Note: I can’t quite figure out how many of these 11 were granted approvals based on this percentage).

B) The importance of having an active licensee. From press reports, it appears that Blizzard and Netease have had a multi-year licensing relationship. As Chinese licensees become more interested in US content and establish collaborative relationships, I expect we will also see more strategic and path breaking judicial decisions.   As Eric Priest has discussed in his work, one approach to dealing with high piracy may be finding business models that work for licensor and licensee.

C) Political timing. The desire of the newly established Guangzhou IP Court to show its authority may  have been a positive factor in this case being acepted and the relief granted.  Although preliminary injunctions remain rare, there appears to be an interest in clarifying procedures and, one hopes, in increasing their availability.  In another important development, on February 26, 2015, the SPC issued a draft Judicial Interpretation for public comment on Act Preservation [Preliminary Relief] Measures in IP and competition civil cases. The measure seems to be directed to preliminary injunctions, but may also have an important impact on asset and perhaps evidence preservation matters. Comments are due March 30. Attached is an unofficial translation.