Ninth Circuit Ruling Guts Enforceability of Open Source Licenses

A recent Ninth Circuit Court of Appeals decision elucidated a new rule that a contract obligation will be considered a license condition only if the obligation contains a “nexus” to the exclusive rights accorded to the copyright owner via the US Copyright Act. The Ninth Circuit’s ruling casts considerable doubt on the ability of open source licensors to effectively enforce open source copyleft obligations.

The free and open source software movement depends on the use of licenses that obligate users of open source to take certain steps in furtherance of the movement's objectives. These obligations include the requirement that any modifications, improvements or derivative works of open source software be made available under the same terms as the license under which the original open source software is accessed.  The latter is oftentimes referred to as the "copyleft" obligation, in that the proprietary rights of copyright law, traditionally employed to restrict use, are instead used as a means of enforcing the liberalization ideals of the free software movement. The most popular open source license in use today, the General Public License (GPL), contains such an obligation. The GPL permits anyone to modify GPL-licensed code and distribute such modified code, provided that the entire derivative work thereby created by such modification is licensed as a whole under the terms of the GPL itself.

Characterization of these obligations as either independent covenants or conditions on the scope of the license is of extreme importance with respect to the practical enforceability of open source licenses. Violation of conditions to the license rights, that is, exceeding the scope of the license, is tantamount to copyright infringement. As such, violation of license conditions gives rise to copyright infringement remedies, including injunctive relief (ie a court order, enforcing compliance). Violation of independent contractual covenants, on the other hand, generally does not give rise to injunctive relief, and permits merely compensation for direct economic loss. In the open source context, where software is licensed without charge, establishing economic loss would prove challenging. The availability of injunctive relief and statutory damages under the Copyright Act are essentially the only meaningful remedies open source licensors have.

In December of last year, the Ninth Circuit Court of Appeals, which covers appeals from all federal district courts in California and other western states, issued a ruling in MDY Industries, LLC v. Blizzard Entertainment, Inc., in which the court elucidated a new rule that a contract obligation will be considered a license condition only if the obligation contains a “nexus” to the exclusive rights accorded to the copyright owner via the US Copyright Act. The Ninth Circuit’s ruling casts considerable doubt on the ability of open source licensors to effectively enforce open source copyleft obligations.

The case concerns Blizzard Entertainment’s popular multiplayer on-line role-playing game World of Warcraft, and a software cheat program (a “bot”), created by MDY Industries.  This bot allows players to automatically gain virtual currency and experience points so that players need not play through all of the levels of the game in order to amass advanced powers, armor and weapons. Blizzard claimed that MDY’s bot program constituted a violation of the game service’s terms of use to which all players must agree prior to downloading the client-side (PC or Mac) software needed to connect to the Blizzard game servers. Blizzard maintained that by inducing players to violate the terms of use, MDY was in fact inducing players to infringe the copyright to the client-side program by exceeding the scope of the license contained in the terms of use.

Blizzard’s terms of use contained the following restrictions (“Limitations on Your Use of the Service”):

You agree that you will not . . . (ii) create or use cheats, bots, “mods,” and/or hacks, or any other third-party software designed to modify the World of Warcraft experience; or (iii) use any third-party soft- ware that intercepts, “mines,” or otherwise collects information from or through the Program or Service.

The court analyzed whether use of the MDY bot program constituted copyright infringement due to exceeding the scope of the license Blizzard granted in the terms of use.

As a pure drafting matter, the authors of the Blizzard terms of use plainly failed to articulate the anti-bot restrictions as conditions to the license to use the PC-installed software. The Ninth Circuit exerted little effort in pointing out that “limitations on” use, as the anti-bot section’s heading stated, are not the same as conditions to use. Nowhere in the terms of use was there any statement conditioning use or access of the software on compliance with any anti-bot requirement on the part of the user.

Unfortunately, the court did not rest its decision solely on its construction of the terms of use in question.  Rather, the court articulated a new requirement that contractual terms must have a “nexus” to copyright’s exclusive rights of reproduction, distribution, or the creation of derivative works, in order for such terms to be considered license conditions.  Infringement arising from violation of licensing terms occurs “only where the licensee’s action (1) exceeds the license’s scope (2) in a manner that implicates one of the licensor’s exclusive statutory rights.” (emphasis added).

The court proceeded to observe that the the anti-bot obligation was not sufficiently “grounded” in Blizzard’s exclusive rights of copyright.

For instance, ToU [terms of use] § 4(D) forbids creation of derivative works based on WoW [World of Warcraft] without Blizzard’s consent. A player who violates this prohibition would exceed the scope of her license and violate one of Blizzard’s exclusive rights under the Copyright Act. In contrast, ToU § 4(C)(ii) prohibits a player’s disruption of another player’s game experience. Id. A player might violate this prohibition while playing the game by harassing another player with unsolicited instant messages. Although this conduct may violate the contractual covenants with Blizzard, it would not violate any of Blizzard’s exclusive rights of copyright. The anti-bot provisions at issue in this case, ToU § 4(B)(ii) and (iii), are similarly covenants rather than conditions. A [bot] user violates the covenants with Blizzard, but does not thereby commit copyright infringement because [the bot] does not infringe any of Blizzard’s exclusive rights. For instance, the use does not alter or copy WoW software.

(emphasis added).

The law in the Ninth Circuit now is such that the only contractual “conditions” that are the appropriate subject of copyright remedies in the event of their breach are those that would result in an independent claim of copyright infringement in the absence of any license at all. The rule now is that the act constituting a violation of the contractual restriction must also qualify as an independent infringement of one of the exclusive rights of copyright for that restriction to be deemed a condition.

Under this reasoning, breach will result in copyright recovery only for those conditions that are essentially restatements of the copyright owner’s exclusive rights. This is an extremely crabbed and restrictive view of license conditions, and essentially renders them superfluous.  If the license states, “I grant you the right to reproduce, perform and make derivative works, provided that [you do x]”, the license does not contain a condition redressable by copyright unless violation of “x” itself infringes one of the exclusive rights granted the copyright owner, under the Ninth Circuit’s logic.  If “x” is, for example, “preserve copyright notices in all copies”, or “maintain compatibility of derivative works with industry standard specifications”, or “license derivative works under the same terms as licensed to you”, the Ninth Circuit would hold that “x” is a mere contractual covenant and not a license condition, because violation of “x” is not an infringement of one of the exclusive rights of copyright.

What if “x” is “pay me royalties”? May a copyright owner in a license agreement condition the license on payment of royalties, such that failure to pay results in copyright infringement? After all, the right to remuneration is not one of the exclusive rights granted to the copyright owner. Yet, it’s fairly settled law that failure to pay royalties can be considered to be exceeding the scope of a license, entitling the copyright owner to copyright infringement remedies, in certain circumstances. The Ninth Circuit summarily disposed of this rather inconvenient fact in a footnote, essentially by dismissing payment as a singular, one-off exception:

A licensee arguably may commit copyright infringement by continuing to use the licensed work while failing to make required payments, even though a failure to make payments otherwise lacks a nexus to the licensor’s exclusive statutory rights. We view payment as sui generis, however, because of the distinct nexus between payment and all commercial copyright licenses, not just those concerning software.

Obviously this is a weak and unsatisfying explanation for why breach of payment conditions are redressable via copyright remedies but breach of all other conditions that are not basically mere restatements of exclusive rights under copyright are not.

The Ninth Circuit’s holding in MDY Industries is a significant threat to the practical enforceability of conditional obligations in open source licenses like the Artistic License and the GPL. Such licenses grant the right to create modifications and derivative works of licensed code, provided that the licensee makes such modifications and derivative works available to anyone under the same terms as applicable to the licensee. Because violation of this condition does not itself constitute an infringement of one of the exclusive rights of copyright, under the Ninth Circuit’s reasoning such breach is redressable solely by contract remedies – that is, mere recovery of economic loss. If the Ninth Circuit’s decision is allowed to stand, open source licensors are now in a considerably weaker position in enforcing the copyleft obligations of open source licenses, to the long-term detriment of the free and open source software movement.  In the words of the Federal Circuit Court of Appeals in the Jacobsen v. Katzer case (of which I wrote about here):

Copyright holders who engage in open source licensing have the right to control the modification and distribution of copyrighted material. … Copyright licenses are designed to support the right to exclude; money damages alone do not support or enforce that right. The choice to exact consideration in the form of compliance with the open source requirements …, rather than a dollar-denominated fee, is entitled to no less legal recognition.  Indeed, because a calculation of damages is inherently speculative, these types of license restrictions might well be rendered meaningless absent the ability to enforce through injunctive relief

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