Nintendo Of America, Inc. v. Lewis Galoob Toys, Inc.

16 F.3d 1032 (9th Cir. 1994)

Purchase the Printed Copy at bsmsphd.com

Nature of the Case

To access this section all you need to do is click here and register.

Facts

P was the most popular home video game system in the United States from the late 1980s until the early 1990s. Several years after P introduced the NES, D announced its intention to begin selling the Game Genie, an electronic device allowing NES owners to change aspects of NES video games. The Game Genie would permit a video game character to run faster, jump higher, or become immortal. Immediately after the product announcement, D received orders for over 550,000 Game Genies and expected to sell well over a million units in 1990. Expert witnesses later testified D could have sold as many as 6.5 million units over the product's lifetime. Only one month after D's announcement, P obtained a preliminary injunction against the sale of the Game Genie. P's lawsuit and request for a preliminary injunction responded to an earlier lawsuit filed by D in which D sought a declaratory judgment that its Game Genie did not violate any of P's intellectual property rights. D contended that the Game Genie allowed an 'adaptation . . . created as an essential step in the utilization of a computer program,' which 17 U.S.C. §117 states is a permissible use of a copyrighted work. The district court granted the injunction, believing at the time it was likely 'P will prevail on its claims that D [has infringed] P's copyright rights; [and] that P will suffer immediate and irreparable harm as well as the loss of profits.' The district court required P to post a $100,000 bond as security for the injunction. This amount was later raised to $5 million and then to $15 million. P resisted these increases but nevertheless posted bond in the increased amounts. At trial, D contended that the Game Genie was a fair use of P's copyrights under 17 U.S.C. §107 and that the game did not create infringing derivative works. D prevailed at trial, and in July 1991 the district court vacated the injunction. The injunction had been in effect approximately one year. D then sold about one million units in the United States that year and was expected to sell as many as 800,000 in 1992. In September 1991, the district court ordered the execution of the bond in favor of D 'in an amount to be determined by the Court.' A 'lost sales' hearing was held. By analogy, D used the sales of the 'Nintendo Advantage,' a joystick, manufactured and sold by Nintendo to show its lost sales. The Advantage reached a 'market penetration' of ten percent. The district court determined D lost at least 1.6 million Game Genie sales. In arriving at this number, the district court assumed the Game Genie was at least as attractive to NES owners as was the Nintendo Advantage. Because the NES's installed base was 30 million at the end of 1991, and the Advantage's market penetration was ten percent, D should have sold at least three million Game Genies, or ten percent of 30 million, over the product's lifetime had the court not issued the injunction. Noting testimony that four million more NES units would be sold in 1992, the district court then added another ten percent, or 400,000 units, to the figure of three million and concluded D would have sold 3.4 million Game Genies over the product's lifetime. The court subtracted the one million Game Genies D sold in 1991 and the estimated 800,000 it would sell in 1992. The court concluded D lost 1.6 million Game Genie sales due to the injunction. The district court also held a 'profits hearing.' D established that the average net wholesale price for the Game Genie was $34.28. Po does not contest this figure but does contest the district court's finding that D's net profit margin was 27.6 percent. The district court applied this percentage to the average net wholesale price to determine D's net profit on each Game Genie (27.6% x $34.28 = $9.46). The district court found D suffered at least $15,138,048 in lost profits due to the injunction. The district court awarded D the entire amount of the bond, plus costs, under Federal Rule of Civil Procedure 65.1. This appeal followed.