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April 2, 1992

SEGA ENTERPRISES LTD., a Japanese Corporation Plaintiff,
ACCOLADE, INC., a California Corporation Defendant. ACCOLADE, INC., a California Corporation, Counterclaimant, v. SEGA ENTERPRISES LTD., a Japanese Corporation, and SEGA OF AMERICA, INC., Counterdefendants.

The opinion of the court was delivered by: BARBARA A. CAULFIELD


 This matter comes before the court on plaintiff's motion for preliminary injunction and defendant/counterclaimant's cross-motion for preliminary injunction. Oral argument was heard on March 13, 1992. After careful consideration of the parties' oral and written arguments, and documents and declarations filed in support thereof, the court hereby GRANTS plaintiff's motion for preliminary injunction and DENIES defendant/counterclaimant's motion for preliminary injunction.


 Sega Enterprises, Ltd. ("SEL") and its wholly owned subsidiary, Sega of America ("SOA"), develop and market video entertainment systems, including the Genesis console and video game cartridges. Accolade, Inc. ("Accolade"), founded in 1984, manufactures computer entertainment software, including game cartridges compatible with the Genesis console.

 A computer program consists of a series of instructions that cause a computer to perform certain operations. Computer programs are generally written in one of several special languages (e.g. BASIC, FORTRAN), which can be understood by a trained programmer. The "source code" is translated into a computer readable language called "object code," a series of 1's and 0's, which is difficult for humans to decipher. The object code is then imprinted onto a silicon chip.

 At about the same time, SEL developed a system to protect its trademark rights in response to counterfeiters in the United States and abroad. In March 1990, SEL licensed a patented process for the trademark 'security system ("TMSS") by which the console's operating system "reads" a game program for specific computer code. If the game program contains the TMSS initialization code, it prompts a visual display on the monitor which reads "PRODUCED BY OR UNDER LICENSE FROM SEGA ENTERPRISES LTD" (the "Sega Message").

 Although the new Genesis consoles with the TMSS ("Genesis III") were not released in the United States until September 1991, Accolade learned of the Genesis III in January of 1991 when it was displayed at the Consumer Electronics Show ("C.E.S."). It was also demonstrated at the C.E.S. that the Ishido game did not operate on the Genesis III. In response, Accolade disassembled and copied more SEL programs looking for the common code that could be part of the TMSS and which it thought might be functional. Accolade then copied that code and included it in its video game programs, which now prompt the Sega Message when played on the Genesis III console. Accolade admits that the Sega Message as displayed on its games is a false message since the games displaying the message are not produced under license from SEL.

 SEL filed this suit against Accolade on October 31, 1991 alleging copyright infringement, trademark infringement, and unfair competition. Accolade filed a counterclaim against SEL and SOA alleging false designation of origin and unfair competition. Accolade's claims are centered on allegations that SEL and SOA falsely attributed the source of Accolade's products to themselves, thereby injuring Accolade's reputation as an independent producer of video game products.


 SEL has moved the court for an order enjoining Accolade from:

 1. Disassembling, translating, converting or adapting the copyrighted object code in SEL's game programs in any manner whatsoever;

 2. Using, modifying, enhancing or embellishing SEL's disassembled code in any manner whatsoever;

 3. Developing, manufacturing, shipping, distributing or selling any Genesis-compatible video game programs that were derived from, based upon or otherwise created -- in whole or in part -- by means which included the disassembly, translation, transformation or enhancement of the copyrighted object code in SEL's game programs;

 4. Manufacturing, shipping, distributing or selling any Genesis-compatible video game program which prompts the message "PRODUCED BY OR UNDER LICENCE FOR SEGA ENTERPRISES LTD." when inserted in a Genesis console.

 Accolade in turn moves that the court enjoin SEL and SOA from manufacturing or distributing the Genesis III console.

 The Ninth Circuit has held that in order to obtain a preliminary injunction, the movant must demonstrate "either a likelihood of success on the merits and the possibility of irreparable injury, or that serious questions going to the merits were raised and the balance of hardships tips sharply in its favor." Johnson Controls. Inc. v. Phoenix Control Systems, Inc., 886 F.2d 1173, 1174, 12 U.S.P.Q.2D (BNA) 1566 (9th Cir. 1989), and cases cited.


 SEL claims that Accolade has infringed its copyrights, because its Genesis-compatible games are based upon illegal reproductions and adaptations of SEL's copyrighted works. The alleged illegal copying was accomplished as follows according to deposition testimony of Accolade's engineers: 1) the object code in SEL's copyrighted game programs was disassembled and translated into assembly language; 2) Accolade made intermediate copies of this derivative material and "embellished" it; and 3) Accolade wrote game programs based upon the allegedly illegal reproduction.

 Accolade attempts to frame the issue in terms of the permissibility of reverse engineering. SEL does not contend that reverse engineering is itself improper. Rather, the issue is whether the means employed infringed SEL's copyright. If the process of reverse engineering software entails the duplication of the copyrighted work and the recasting or transformation of the object code into a form more intelligible to humans, it may infringe upon the copyright owner's exclusive rights. See SAS Institute, Inc. v. S&H Computer Systems, Inc., 605 F. Supp. 816, 225 U.S.P.Q. (BNA) 916 (M.D. Tenn. 1985) (unauthorized, exact copies of the SAS source code infringed SAS's copyright), cited with approval in Atari Games Corp. v. Nintendo of America, Inc., 18 U.S.P.Q.2D (BNA) 1935 (N.D. Cal. 1991); *fn1" see also Apple Computer, Inc. v. Franklin Computer Corp., 714 F.2d 1240, 1253, 219 U.S.P.Q. (BNA) 113 (3rd Cir. 1983), cert. dismissed, 464 U.S. 1033 (1984); Hubco Data Products Corp. v. Management Assistance, Inc., 219 U.S.P.Q. (BNA) 450 (D. Idaho 1983) (MAI had a reasonable probability of showing that both written printout of object code and copying of object code inside the computer constituted copyright infringement).

 The court rejects Accolade's argument that SEL must establish substantial similarity between Accolades' final product and plaintiff's and that intermediate copies do not provide a basis for copyright infringement. The language of the Copyright Act itself indicates no such limitation. As explained in Walt Disney Productions v. Filmation Associates, 628 F. Supp. 871, 876, 230 U.S.P.Q. (BNA) 524 (C.D. Cal. 1986), copies are defined as "material objects . . . in which a work is fixed by any method now known or later developed, and from which the work can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device." 17 U.S.C. § 101. "A work is 'fixed' in a tangible medium of expression when its embodiment in a copy . . . is sufficiently permanent or stable to permit it to be perceived, reproduced, or otherwise communicated for a period of more than transitory duration." Id. "Where a work is prepared over a period of time, the portion of it that has been fixed at any particular time constitutes the work as of that time, and where the work has been prepared in different versions, each version constitutes a separate work." Id. "To constitute an actionable copy, therefore, an expression need only be a material object permanently case [sic] in some intelligible form." Walt Disney Productions, 628 F. Supp. at 876.

 Because the right of reproduction affords a copyright owner protection against an infringer even if he does not also infringe the § 106(3) right of distribution, the fact that the articles may never be published or, indeed, may be prepared only for the use of [defendants], does not obviate the possibility of infringement . . . the Act prohibits the creation of ...

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