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A Dream Case: Statutory Damages for Infringement of Illegal Bingo Gambling

April 24, 2009

Most everyone knows that federal copyright laws protect an author’s expression of an idea. When someone infringes a protected work, either by copying or distributing it without permission, the copyright owner is generally entitled to damages. In Dream Games of Arizona v. PC Onsite, — F.3d — (April 2, 2009), the Ninth Circuit addressed a question of first impression in the circuit: Whether illegal use or operation of a work by the copyright owner precludes the award of actual or statutory damages for copyright infringement.

Dream Games of Arizona is a company that creates, designs, develops, and sells electronic video bingo games, including a game called Fast Action Bingo. In March 2002, Dream Games entered into negotiations with PC Onsite for a software upgrade to Fast Action Bingo. The parties signed a nondisclosure agreement in which it was clear that Dream Games retained all intellectual property in the game.

PC Onsite created a new version of Dream Game’s Fast Action Bingo, and cleverly called it Fast Action Bingo II. When PC Onsite presented it to Dream Games, however, negotiations for an agreement to go forward with the new game broke down. Immediately thereafter, PC Onsite created Quick Play Bingo I, a game remarkably similar to, and in fact based upon, Fast Action Bingo II. PC Onsite registered the copyright of the source code for its new game, and marketed it through City Entertainment. PC Onsite and City Entertainment agreed to install and operate Quick Play Bingo I in bingo parlors in Utah and Wyoming. Several of the bingo parlors with the Quick Play games already had Fast Action Bingo games, and the two games competed directly.

Dream Games discovered the Quick Play Bingo I games, and not surprisingly, filed suit for copyright infringement, breach of contract, and unjust enrichment. A complicating factor in the case was the fact that gambling is illegal in both Utah and Wyoming. In fact, the Wyoming Supreme Court specifically found that Fast Action Bingo machines were illegal in its state, and several machines had been seized in Utah. During the ensuing jury trial, the district court ruled that Dream Games could not recover actual damages for Fast Action Bingo’s lost profits because the game was offered illegally in Utah and Wyoming. The court did not preclude statutory damages, however, and the jury eventually awarded Dream Games $25,000 in statutory damages. PC Onsite appealed. Dream Games filed a cross-appeal, but apparently did not challenge the ruling that it was not entitled to actual damages.

On appeal PC Onsite first argued that the district court erred when it allowed evidence that included the unprotected elements of the Fast Action Bingo game along with the four elements that were protected by the copyright. The Ninth Circuit had no problem dispensing with this argument, citing case law that held copyright infringement can be based on infringement of a combination of unprotected elements. The court pointed out that in combination, the jury might find these elements protectable, and to allow the possibility of such a finding, the jury must be allowed to see the complete work. It is necessary for the unprotectable elements to be identified to the jury, and the district court did that in its jury instructions. Contrary to PC Onsite’s argument, the Ninth Circuit held that the district judge is not also required to specify the elements which are protectable.

The court then turned to the question of damages. PC Onsite argued, logically, that Dream Games should not be entitled to damages for copyright infringement because the use that it was infringing, bingo parlors in Utah and Wyoming, was illegal. The argument has some initial appeal. If the use by the copyright owner was illegal, then awarding damages for infringement allows the owner to be compensated because the infringer cut into its illegal revenue. This can’t be right, can it?

As it turns out, although it had never addressed the issue before, the Ninth Circuit held that it is right. With a closer look, perhaps that makes sense after all.

The court started by exploring the broad basis for copyright protection, and prior cases holding that fraudulent content of a work was not a basis for denying copyright protection. The court quoted Nimmer on Copyright for “the prevailing view [ ] that no works are excluded from copyright by reason of their content.” It went on to say that “there is nothing in the Copyright Act to suggest that the courts are to pass upon the truth or falsity, the soundness or unsoundness, of the views embodied in a copyrighted work.” Indeed, as the court noted, “the gravity and immensity of the problems, theological, philosophical, economic, and scientific, that would confront a court if this view were adopted are staggering to contemplate.”

The court also pointed out that the Fast Action Bingo machine, while illegal in Wyoming or Utah, was not illegal in other geographical areas. In the court’s view, “it would be absurd to deny a work the protection of a federal copyright because it is capable of illegal use in one or more states, but capable of perfectly legal use in other states.” One of the purposes of copyright protection is to deter infringement. To preclude damages based on the content of the work would be contrary to this goal, and provide no incentive to avoid copying another’s work.

The court held that “an award of either type of damages available under the Copyright Act – actual or statutory – is not precluded by evidence of illegal operation of the copyrighted work, at least where the illegality did not injure the infringer.” With this holding, it is interesting that Dream Games did not appeal the denial of actual damages. Had it done so, it is likely that a new trial on damages would be necessary given the ruling. Assuming more than $25,000 in actual damages was at issue, this seems like a costly mistake for Dream Games.

Finally, during the trial the court did not allow PC Onsite to present evidence of illegality to the jury. It ruled that the jury should focus on PC Onsite, and that any possible illegal activity by Dream Games was irrelevant to the willfulness or innocence of PC Onsite’s conduct. PC Onsite objected to the district court’s exclusion of evidence of the illegality of Dream Games’ activity in determining the amount of statutory damages to award, and appealed that ruling as well. The Ninth Circuit seemed to have little trouble dismissing this argument, also, holding that the evidence was properly excluded under Rule 403 due to the possibility of unfair prejudice. “Here, because of the district court’s familiarity with the details of the case and its greater experience in evidentiary matters, it was not an abuse of discretion to exclude evidence of illegal operations.”