Atari Games Corp. v. Nintendo of America, Inc.

• Decision Date: 07 March 1990
• Docket Number: Nos. 89-1396,89-1426,s. 89-1396
• Citation: 14 USPQ2d 1034,897 F.2d 1572
• Parties: , 1990-1 Trade Cases 68,946, 14 U.S.P.Q.2d 1034 ATARI GAMES CORPORATION and Tengen, Inc., Plaintiffs/Cross-Appellants, v. NINTENDO OF AMERICA, INC., and Nintendo Co., Ltd., Defendants-Appellants.
• Court: U.S. Court of Appeals — Federal Circuit

Page 1572

897 F.2d 1572

58 USLW 2555, 1990-1 Trade Cases 68,946,

14 U.S.P.Q.2d 1034

ATARI GAMES CORPORATION and Tengen, Inc., Plaintiffs/Cross-Appellants, v. NINTENDO OF AMERICA, INC., and Nintendo Co., Ltd.,

Defendants-Appellants.

Nos. 89-1396, 89-1426.

United States Court of Appeals, Federal Circuit.

March 7, 1990.

Rehearing Denied April 3, 1990.

Morgan Chu, Richard C.P. De Bodo, and Dorette S. Feit, Irell & Manella, Los Angeles, Cal., argued for plaintiffs/cross-appellants. Robert Steinberg, Irell & Manella, Los Angeles, Cal., of counsel.

Thomas G. Gallatin, Jr., Mudge Rose Guthrie Alexander Ferson, New York City, argued for defendants-appellants. With him on the brief was John J. Kirby, Jr. Also on the brief were George A. Cumming, Jr., Jeffrey S. Kingston and Thomas M. Kingston, Brobeck, Phleger & Harrison, San Francisco, Cal.

Before MARKEY, Chief Judge, SMITH, Senior Circuit Judge, and NORGLE, ^* District Judge.

NORGLE, District Judge.

Atari Games Corporation, (Atari) and its wholly owned subsidiary, Tengen Inc. (Tengen), have brought suit against Nintendo of America, Inc. and Nintendo Co., Ltd., (collectively Nintendo) for unfair competition and violations of section 2 of the Sherman Anti-Trust Act, 15 U.S.C. Sec. 2 (1988), based upon alleged monopolization and attempted monopolization of the markets for home video game machines and home video games and game cartridges playable on the Nintendo Entertainment System. Nintendo has also brought suit against Atari and Tengen for alleged patent infringement, Lanham Trade-Mark Act and RICO violations, breach of contract, unfair competition and tortious interference with contract. Atari and Tengen sought a preliminary injunction enjoining Nintendo from filing lawsuits for contributory infringement against customers of Atari. The district court granted the motion but also enjoined Atari and Tengen from filing suit against Nintendo customers. Both parties have appealed. For the following reasons, the court vacates the preliminary injunction and remands this action to the district court for disposition consistent with this opinion.

BACKGROUND

Nintendo manufactures the Nintendo Entertainment System (NES). The NES has met with enormous success and Nintendo now is the undisputed industry leader in home video game entertainment, occupying an 80% share of the market for home video games. The NES includes a base console which allows the playing of various video games on a television screen and cartridges containing those games for use in the console. The NES contains a security system, which consists of a master computer chip in the base console and a slave computer chip in the cartridge. Atari says the security system renders it impossible to play a video game cartridge on the NES unless both chips are present. On January 24, 1989, Nintendo obtained a patent on the security system encompassing both the master chip and the slave chip described in the patent as necessary for a game cartridge to be played on the NES.

Tengen obtained a license from Nintendo, the patent owner, for the development and distribution of game software for the NES. Under the licensing agreement, Tengen was to create video games for use on the NES. Nintendo reserved the right to approve the game and manufacture the game cartridge. Nintendo would then sell the completed cartridges to Tengen for distribution. Tengen developed three games for Nintendo: "Pac-Man", "Gauntlet" and "RBI Baseball".

In December 1988, Atari, without obtaining a license from Nintendo, began to manufacture and sell its own Nintendo compatible cartridges which were able to circumvent the NES security system. On December 12, 1988, Atari filed this suit against Nintendo. Atari has asserted that Nintendo is improperly using its patent and greater market share to monopolize the home video game market. Specifically, Atari asserts that, once Nintendo received a patent

on its security system, Nintendo sent letters to retailers of Nintendo and Atari game cartridges, such as Toys "R" Us and Bradlees, threatening suit for patent infringement against any retailer who continued to sell unauthorized NES compatible game cartridges. Nintendo then filed suit against Atari, alleging among other things patent infringement and Lanham Act and RICO violations.

DISTRICT COURT PROCEEDINGS

The suits were consolidated and Atari sought a preliminary injunction preventing Nintendo from suing retailers of Atari's NES compatible cartridges. The district court granted the preliminary injunction, concluding that the practices alleged by Atari "raised serious questions going to the merits" of Atari's antitrust claims. The court further determined that the balance of hardships and public interest favored imposition of an injunction restraining Nintendo from filing lawsuits against customers, retailers, distributors and dealers of Atari game cartridges. However, the court went further than Atari asked, making the injunction reciprocally binding on Atari and Tengen as well. Both parties then appealed that decision to this court.

OPINION

The decision to grant or deny a preliminary injunction is within the sound discretion of the district court. Xeta, Inc. v. Atex, Inc., 852 F.2d 1280, 1282, 7 USPQ2d 1471, 1473 (Fed.Cir.1988). This court may reverse the district court's decision only if the district court has committed an abuse of discretion, if the decision is based upon an error of law or if the court misapplied the law to particular facts. Xeta, 852 F.2d at 1282, 7 USPQ2d at 1473. When the questions on appeal involve law and precedent on subjects not exclusively assigned to the Federal Circuit, the court applies the law which would be applied by the regional circuit. Panduit Corp. v. All States Plastic Mfg. Co., 744 F.2d 1564, 1575, 223 USPQ 465, 472 (Fed.Cir.1984). In this action, the applicable law is that of the Ninth Circuit.

The Ninth Circuit has long held that, in order to obtain a preliminary injunction, a movant must show: 1) a strong likelihood of success on the merits, 2) the possibility of irreparable injury to the plaintiff if the preliminary relief is not granted, 3) the balance of hardships favoring the plaintiff, and 4) advancement of the public interest. Los Angeles Memorial Coliseum Comm. v. National Football League, 634 F.2d 1197, 1200 (9th Cir.1980); William Inglis & Sons Baking v. ITT Continental Baking Co. Inc., 526 F.2d 86, 87 (9th Cir.1975). A party may meet the burden under these four factors by demonstrating either: 1) a combination of probable success on the merits and the possibility of irreparable injury, or 2) that serious questions of law are raised and the balance of hardships tips sharply in its favor. Fong v. Lawn, 851 F.2d 1559, 1561 (9th Cir.1988); L.A. Memorial Coliseum, 634 F.2d at 1197; Inglis, 526 F.2d at 88.

As a general rule, a preliminary injunction should not issue on the basis of affidavits alone. People ex rel. Hartigan v. Peters, 871 F.2d 1336 (7th Cir.1989); Medeco Sec. Locks, Inc. v. Swiderek, 680 F.2d 37, 216 USPQ 577 (7th Cir.1981); Carter-Wallace, Inc. v. Davis-Edwards Pharmacal Corp., 443 F.2d 867, 169 USPQ 625 (2d Cir.1971). Moreover, a district court should be wary of issuing an injunction based solely upon allegations and conclusory affidavits submitted by plaintiff. See American Passage Media Corp. v. Cass Communications, 750 F.2d 1470 (9th Cir.1985) (reversing grant of preliminary injunction of alleged antitrust violations based on conclusory affidavits); Oakland Tribune, Inc. v. Chronicle Publishing Co., 762 F.2d 1374 (9th Cir.1985) (denying preliminary injunction of alleged antitrust violations supported by only two affidavits). When granting an injunction, Rule 52(a) requires that a court set forth the findings of fact and conclusions of law which are the basis of its decision. Fed.R.Civ.P. 52(a). The district court need not make binding findings of fact, but at the very least, must find probabilities that the necessary facts can be proved. Sierra On- Line, Inc. v. Phoenix Software, Inc., 739 F.2d 1415, 223 USPQ 227 (9th Cir.1984).

A preliminary injunction takes on special significance when the injunction involves patent rights and antitrust allegations. The patent laws were enacted by Congress pursuant to Article I, section 8 of the United States Constitution. ¹ Congress gave inventors the right to obtain patents on their inventions and thereby gain the right to exclude others from making, using or selling the invention, without the consent of the patent owner, for a period of seventeen years. 35 U.S.C. Sec. 154 (1982). Moreover, Congress has specifically granted patent owners the right to commence a civil suit in order to protect their inventions. 35 U.S.C. Sec. 281 (1982); 7 J. Von Kalinowski, Antitrust Laws and Trade Regulation at 59-15 (1989). As stated by the Ninth Circuit, "[p]atentees must be permitted to test the validity of their patents in court through actions against alleged infringers." Handguards, Inc. v. Ethicon, Inc., 601 F.2d 986, 993, 202 USPQ 342, 348 (9th Cir.1979), cert. den., 444 U.S. 1025, 100 S.Ct. 688, 62 L.Ed.2d 659 (1980); see also, 7 J. Von Kalinowski, Antitrust Laws and Trade Regulation, at 59-111 (infringement suits, in and of themselves, do not violate antitrust laws).

When the patented product is merely one of many products that actively compete on the market, few problems arise between the property rights of a patent owner and the antitrust laws. SCM Corp. v. Xerox Corp., 645 F.2d 1195, 1203, 209 USPQ 889, 899 (2d Cir.1981). However, when the patented product is so successful that it creates its own economic market or consumes a large section of an existing market, the aims and objectives of patent and antitrust laws may seem, at first glance, wholly at odds. However, the two bodies of law are actually complementary, as both are aimed at encouraging innovation, industry and competition. Loctite Corp. v. Ultraseal Ltd., 781 F.2d 861, 876-77, 228...