Opinion
04 Civ. 3723 (JSR).
March 11, 2005
MEMORANDUM ORDER
By Order dated February 22, 2005, the Court granted plaintiffs' motion to dismiss certain of defendants' counterclaims and also granted plaintiffs' motion for summary judgment in their favor on their breach of contract claims (necessarily dismissing the remaining counterclaims in the process). See Order, 2/22/05. An earlier Memorandum Order set forth the reasons granting the motion to dismiss. See Memorandum Order, 2/23/05. This Memorandum Opinion will set forth the reasons for granting the motion for summary judgment. It will also address, and deny, the remaining motion before the Court, viz., plaintiffs' motion for sanctions against defendants.
The pertinent facts, either undisputed or, where disputed, taken most favorably to defendants, are as follows:
Atari, Inc. ("Atari"), owns the website "Games.com." Pursuant to a licensing arrangement with Hasbro, Inc. ("Hasbro"), Atari publishes on Games.com certain intellectual property owned by Hasbro and by Atari's affiliate Atari Interactive, Inc. ("Atari Interactive"), including board games such as Monopoly and video games such as Asteroids. See License Agreement, attached as Exhibit 7 to Declaration of Paul G. Gardephe, 11/29/04 ("Gardephe Decl."); Purchase Agreement, attached as Exhibit 5 to Gardephe Decl., at 19. Players of these games compete against, and chat with, each other over the Internet. They cannot play a game that requires more than one player, such as Monopoly, unless other players sign on to play against them. Deposition of Glenn Magala, 11/4/04 ("Magala Dep."), at 103-04. A player must remain connected to the Internet with an open browser to play. Deposition of Tristan C. Smith, 11/18/04 ("Smith Dep."), at 36. The complete game is never loaded onto any user's computer; rather, the central server controls the game and continually interacts with each user's computer. Magala Dep. at 130-31.
Atari also distributes other versions of Atari and Hasbro games. For example, it publishes versions of such games on CD-ROMs that can be purchased at stores and installed on PC hard drives. See Smith Dep. at 72-74. Of particular relevance to this case, it uses technology from Exent Technology Ltd. to distribute the functional content of these CD-ROM titles over the Internet for downloading onto a PC, and it licenses to others the ability to do the same. See Declaration of Itay Nave, 11/29/04, ¶ 3. Atari began allowing Yahoo to distribute its games this way in 2002, see 2002 Distribution Agreement, attached as Exhibit 8 to Gardephe Decl.; granted similar rights to Exent in February, 2004, see 2004 Distribution Agreement, attached as Exhibit 13 to Gardephe Decl.; and began distributing the games on its own website on March 30, 2004. See Declaration of Glenn Magala, 11/29/04, ¶ 2.
Because these downloaded versions are sold as part of time-limited subscription services, their files are encrypted such that the user cannot start a game without running a launcher program, which authenticates the user's license over the Internet. Id. ¶ 9. However, the game need not actually be played over the Internet; to the user, game play appears substantially the same as from the CD-ROM, id. ¶ 13, although the files appear somewhat different on the user's hard drive because of the encryption. See Defendants' CD-ROM, attached to Declaration of Tristan Smith, 1/3/05.
Both the CD-ROM version and the Exent version permit users to play each other over the Internet in fairly primitive fashion. Players must know each other's Internet Protocol addresses in order to connect their computers directly rather than each going to a central website to connect. In contrast, a user of Games.com can meet other potential players at that website and play against them without prior preparation, since the central server makes all necessary connections. See Smith Dep. at 155-58.
Plaintiffs' motion to have the Court strike this CD-ROM from evidence on the grounds of lack of authentication and failure to comply with expert disclosure rules is denied as moot.
Both the CD-ROM versions and the Exent-distributed versions of the games at issue feature various sophisticated graphics and sound effects (such as three-dimensional, animated game pieces in the case of Monopoly) as well as the ability to customize the rules and the "look" of the games in various ways, none of which is possible on the comparatively bare-bones Games.com versions.See Smith Dep. at 94-97, 141-54, 185-86. In addition, unlike the Games.com versions, the CD-ROM and Exent-distributed versions permit users to play against their computers. Id. at 144.
On January 12, 2004, Atari reached an agreement with Games, Inc. ("Games") under which Games would acquire certain assets, including the Games.com site, and exclusive licenses to certain intellectual property (described more fully below). See Purchase Agreement ¶ 20.1. In consideration thereof, Games was obligated to, among other things, immediately transfer to Atari $100,000 in cash and 10,250 shares of Games stock that could be redeemed by Atari for $1.025 million in cash by March 29, 2004. Games was also obligated to make additional transfers to Atari by March 31, 2004 of $3 million in cash and 20,000 more shares of Games stock redeemable for $2 million. Upon making this final transfer, Games would gain title to Games.com and the aforementioned assets and licenses. See id. ¶¶ 14-15. Until this final payment was made, however, Games would have only non-exclusive licenses. Id. ¶ 20.2. Furthermore, Atari reserved the right to immediately terminate the agreement, including Games's licenses, upon Games's failure to comply with its obligations. Id. ¶¶ 11, 14. The agreement stated that, upon such termination, all remaining payments would become due immediately and Games would have to stop immediately the sale and distribution of all licensed products. Id. ¶ 32.1. Chicago West Pullman LLC agreed to guarantee Games's payment obligations.Id. at 18.
In return for these payments, Games was to acquire, inter alia, an exclusive license to those "online games" in the licensed format "whose look and feel and scope of rule set and game play closely resemble the online versions of the Property on the Games.com website existing immediately prior to the execution of this Agreement." Id. ¶ 7. "Property" was defined as "the original versions of the classic board or arcade games" set out in a separate schedule, specifically excluding "downloadable or retail PC versions . . . that are not available on Games.com as of the effective date." Id. ¶ 4. Games would receive licenses only to products "playable solely when connected to a Licensee Web Site resident only on the World Wide Web as a client server application through a dial up, cable, DSL, or wireless connection from a Netscape or Internet Explorer browser from a PC only."Id. ¶ 11. A list of "Licensee Web Sites" was set forth in a separate schedule, with provisions made for amending that schedule as necessary. Id. at 22; id. ¶ 8. Atari retained all rights not expressly granted, id. ¶ 22.6, and specifically reserved "all rights to digitally distribute retail versions of the Property . . . via broadband digital download, streamed-playing and other mechanisms." Id.
Games made the initial $100,000 cash payment and delivered the first 10,250 shares on January 12, 2004. Deposition of Roger W. Ach II, 11/8/04 ("Ach Deposition"), at 168. Thereafter, however, it made no further payments. Prior to March 31, 2004, Games claimed that Atari had failed to comply with other provisions in the agreement and put Atari on notice that, as a result, it would not make the required remaining payments. See Settlement Agreement, attached as Exhibit 6 to Gardephe Decl., ¶¶ B, C. Specifically, Games claimed that Atari had failed to update and maintain the Games.com website, as it asserted Atari had been obligated to do by February 29. Id. ¶ C. To resolve this dispute, the parties entered into a Settlement Agreement, dated March 31, 2004, pursuant to which Games released Atari from any claims of breach of contract arising before March 31, "whether such claims are asserted or are unasserted, known or unknown, claimed or suspected," as well as clarifying that Atari had no obligation to perform certain tasks such as updating Games.com. Id. ¶¶ 3(c), 4(a). In exchange, Atari extended Games's time to make its remaining payments until April 30, 2004. Id. ¶ 1.
In late April, 2004, however, Games again charged that Atari had breached the agreement — this time because online versions of Scrabble were available on at least three websites. See Letter dated April 28, 2004, attached as Exhibit 18 to Gardephe Decl. By letter dated April 28, 2004, Games refused to make the payments that were now due on April 30. Id. However, there was no mention in this correspondence of the unrelated disputes (relating to Exent-distributed games) that Atari now contends constituted a breach of the agreement, and Games does not presently contend that the Scrabble offerings constituted a breach.
On May 3, 2004, Atari exercised its right to terminate the agreement because of Games's non-payment. See Letter dated May 3, 2004, attached as Exhibit 21 to Gardephe Decl. Atari and the other plaintiffs then filed this suit on May 17. On May 18, the Court granted a temporary restraining order ("TRO") enjoining Games from using, displaying, or publishing any of Hasbro's or Atari Interactive's intellectual property. On June 10, it entered a preliminary injunction to the same effect.
Games's compliance with this injunction, however, was less than punctilious. As late as May 24, 2004, Games still claimed on two websites that it owned Games.com. See Letter of May 24, 2004, attached as Exhibit 9 to Declaration of Paul G. Gardephe in Support of Sanctions, 11/29/04 ("Gardaphe Sanctions Decl."). Furthermore, on June 22, 2004, Games filed a registration statement with the Securities and Exchange Commission ("SEC") that stated in several places that Games owned Games.com. See June 22, 2004 Registration Statement, attached as Exhibit 10 to Gardephe Sanctions Decl. On July 13, 2004, Games issued a press release that stated, in its boilerplate language describing the company, that: "The company features three community focused online game sites with exclusive licenses to widely-known classic games from Hasbro and Atari that have been adapted to the Internet." It invited readers of the press release to visit Games.com. See July 13, 2004 Press Release, attached as Exhibit 11 to Gardephe Sanctions Decl. Only in response to demands from plaintiffs were these violations of the preliminary injunction rectified. See First Letter of July 16, 2004, attached as Exhibit 12 to Gardephe Sanctions Decl.; Second Letter of July 16, 2004, attached as Exhibit 13 to Gardephe Sanctions Decl. Nor did the violations end there. On October 1, 2004, Games filed an annual report with the SEC, asserting that Games "features three community-focused online game sites with exclusive licenses to widely-known `classic games' from Hasbro and Atari that have been adapted for the Internet" and that Games "currently owns and operates" a list of websites, including Games.com. See Form 10-KSB, attached as Exhibit 14 to Gardephe Sanctions Decl., at 4. On October 5, Atari demanded that Games withdraw this filing. See October 5 Letter, attached as Exhibit 18 to Gardephe Sanctions Decl. On November 3, Games filed an amended annual report that made similar statements but cast them in the past tense (e.g., Games "owned" or "operated" Games.com). See Form 10-KSB/A, attached as Exhibit 15 to Gardephe Sanctions Decl., at 4. It made the same claims in two subsequent filings. See November 12 Quarterly Statement, attached as Exhibit 16 to Gardephe Sanctions Decl.; November 24 Registration Statement, attached as Exhibit 17 to Gardephe Gardephe Sanctions Decl.
Against this background, the Court turns, first, to plaintiffs' motion for summary judgment on their claims of breach of contract. Under New York law, which both parties agree governs this case, once one party to a contract repudiates an agreement the other side is excused from performance and may recover as damages from the repudiating party all amounts the repudiating party had agreed to pay over the life of the contract. See Am. List Corp. v. U.S. News World Report, Inc., 75 N.Y.2d 38, 44 (1989). Thus, if Games effectively repudiated the contract by wrongly claiming breach and using that as an excuse to once again avoid making required payments, it is liable for all remaining payments. Conversely, if Atari had in fact breached first, then Games would not be liable and indeed could recover its own damages. As noted above, Games no longer claims that Atari breached first by offering Scrabble. It claims, instead, that Atari breached first by allowing other companies to distribute online, through Exent's streaming technology, many of the same games for which the agreement contemplated Games's acquiring exclusive licenses for online play. But this claim is unsupportable, for several reasons.
First, in the March 31 settlement, Games signed away any claims that Atari breached by permitting its games to be distributed in this manner. The settlement releases Atari from all claims related to the underlying agreement that had arisen by March 31, including those of which Games was unaware. By then, Atari had been permitting Yahoo to distribute its games via Exent technology for more than two years. It had, a month earlier, also permitted Exent to distribute the games. Finally, the day before the settlement, it had begun distributing the games itself. Even if these arrangements somehow had violated the original agreement, after the settlement Games had no cause to claim that Atari was in breach.
Second, the games distributed in this manner are not within the scope of the exclusive licenses the agreement was to confer upon Games. The agreement restricted Games's licenses to games that are "playable solely when connected to a Licensee Web Site resident only on the World Wide Web as a client server application through a dial up, cable, DSL or wireless connection from a Netscape or Internet Explorer browser from a PC only." Purchase Agreement ¶ 11. While the latter part of this provision may leave room for argument about what technologies are covered, the former part clearly limits its scope to those games that are playable solely when connected to one of Games's websites, comporting with the obvious intent of the agreement to allow Games to offer the games present on Games.com at the time of the deal. The games at issue here require no such connection to Games.com or one of Games's other websites to play. At most, they require a brief connection to one of several other websites (not a "Licensee website") to authenticate a user's license. While the parties have spent considerable time wrangling over whether Exent streaming is a "client server application" and whether a browser is required to play the games, the Court need not reach those questions to find that the agreement does not confer exclusive licenses to the games in question.
Third, the games at issue are the "retail versions" to which Atari expressly retained the rights. The games distributed are functionally precisely the same as those sold over the counter, the rights to which indisputably were reserved by Atari. The only difference is the authentication requirement, the purpose of which is to allow users to purchase monthly subscriptions rather than buying permanent rights to the game. Defendants argue that a game is not the "retail version" unless a user has such permanent rights. However, the agreement specifically permits Atari to distribute retail versions through streaming technology, which generally involves a user not ending up with a complete, permanent copy of the program. See Lexmark Int'l, Inc. v. Static Control Components, Inc., 387 F.3d 522, 545 (6th Cir. 2004). Defendants' proposed interpretation thus would render this provision meaningless.
Defendants also argue that the fact that the Exent version distributes files differently on a user's hard drive than does the CD-ROM version makes it not the "retail version." But this proves too much. Under defendants' theory, Games (and only Games) would have been permitted to offer any of Atari's games over the Internet so long as it modified the way files were allocated on users' hard drives; clearly the contract did not anticipate this result. The only sensible reading of this contractual provision is that Atari reserved the rights to versions of the game that offered the same user experience as the versions that Atari was then offering at retail.
The Court declines to reach another of plaintiffs' arguments, i.e., that the Exent-streamed games were not similar in "look, feel and play" to the versions on Games.com. However, it may be noted that any reasonable fact-finder must conclude that the Exent-technology versions are far more similar in look, feel and play to the CD-ROM versions than either of those two versions is to the Games.com offerings. It would be anomalous to find that the Exent-technology versions are so dissimilar to the CD-ROM versions as to not be encompassed within the "retail version" carve-out, yet be similar enough to the Games.com version to fall within the exclusive license grant.
Because Atari did not breach the agreement, as modified by the settlement, before Games repudiated it, the Court grants plaintiffs summary judgment on their breach of contract claims and dismisses defendants' counterclaims. By the terms of the contract, Atari is entitled to any payments not made by Games and plaintiffs are further entitled to an order barring defendants from any further use of their copyrighted material.
However, it is unnecessary to impose sanctions upon defendants for failure to comply with the Court's injunction. While defendants seem initially to have been less than "reasonably diligent and energetic in attempting to accomplish what was ordered," Powell v. Ward, 643 F.2d 924, 931 (2d Cir. 1981), it appears that, at least since October, they have acted in good faith to comply, and there is no evidence that plaintiffs have been in any way harmed or defendants benefitted by defendants' lack of diligence. As to the November SEC filings, the Court now has made it clear that the defendants' legal analysis was erroneous; they did not, in fact, ever own or operate Games.com. But it would be unjustified for the Court to sanction defendants for taking in their SEC filings the same legal position they were advocating in this litigation, as wrong as they turned out to be. Accordingly, the Court declines to impose sanctions, with the expectation that defendants will immediately update all filings and other public statements to conform with this decision.
For the reasons stated above, plaintiffs' motion for summary judgment on their breach of contract claims is granted and defendants' counterclaims dismissed. Plaintiffs' motion to strike evidence is denied as moot. The parties are ordered to convene a conference call to Chambers to set a briefing schedule for calculating damages, as well as to inform the Court whether plaintiffs plan to proceed with their remaining copyright and trademark claims.
SO ORDERED.