LucasArts Entertainment Co. v. Humongous Entertainment Co., 815 F. Supp. 332 (N.D. Cal. 1993) (full-text).
This suit arises from an agreement between Electronic Arts, Inc. (Electronic Arts) and defendant Humongous Entertainment Company (Humongous) granting Electronic Arts the right to distribute Humongous' products, including a computer videogame entitled "Putt Putt Joins the Parade." Humongous' principals are former employees of plaintiff LucasArts Entertainment Company (LucasArts) who created a software tool called Script Creation Utility for Maniac Mansion (SCUMM) System. This is a tool used in the [sSoftware development|development]] of computer videogames. LucasArts licensed the SCUMM System to Humongous under limited terms and conditions. The license agreement provided that Humongous may not sell its games which utilize the SCUMM program to any third party distributor other than LucasArts for less than a certain price and that Humongous must verify its compliance with the license agreement at LucasArts' request.
District Court Proceedings
LucasArts brought this suit alleging that Humongous violated the terms of the license agreement by failing to follow the terms of the price restriction provision and by allowing a third party (Electronic Arts) to publish “Putt Putt Joins the Parade.” LucasArts asked the court to grant a preliminary injunction against Humongous. LucasArts would be entitled to a preliminary injunction if it could show either: (1) probable success on the merits and the possibility of irreparable injury or (2) serious questions going to the merits and a balance of hardships tipping in its favor.
LucasArts claimed that Humongous had breached at least three material aspects of the license agreement. First, Humongous breached its obligation to sell its games developed with SCUMM System to third parties at a certain price when it contracted with Electronic Arts to sell SCUMM-based games below that price. Second, Humongous breached its contractual obligation to make available to LucasArts documentation that would verify Humongous' compliance with the pricing regime to which it had agreed. Third, the license agreement only permitted Humongous to publish SCUMM-based games and Humongous breached this obligation by serving as a contract games developer for other publishers, such as Electronic Arts.
Humongous did not dispute that it failed to make its documents available or that it sold the software at a lower price. But Humongous argued that the license agreement was never intended to prohibit Humongous from selling any SCUMM-based products to third party publishers. LucasArts said otherwise. But the court disagreed with LucasArts' interpretation.
LucasArts also argued that the breaches amounted to a material failure of consideration. LucasArts contended that Humongous' agreement to publish its own games and not to develop SCUMM-based games for a competitor, such as Electronic Arts, provided the essential consideration to LucasArts for the license agreement. However, the court found that the consideration for the contract would have been something more valuable, such as promises for continued support and upgrades, rather than just the promise not to sell any SCUMM-based games for less than a certain price. Thus, the court found that Humongous' failure to abide by the license agreement did not amount to a material failure of consideration.
Next, LucasArts argued that the material failure of consideration gives LucasArts the right to rescind its license agreement with Humongous. However, since the court found that there was no material failure of consideration, rescission was not available as a remedy. LucasArts also claimed that after the license agreement was rescinded, Humongous' continued use of its copyrighted SCUMM System constituted copyright infringement. But, again without a material failure of consideration, there could be no rescission and thus no copyright infringement.
LucasArts claimed that it would suffer irreparable harm if the court did not enjoin Humongous. The court found that since LucasArts failed to show a reasonable likelihood of success on the merits of its claim, it was not entitled to a presumption of irreparable harm. Finally, LucasArts claimed that the balance of hardships tipped in its favor. The court found otherwise. As a result, the court denied plaintiff's motion for a preliminary injunction.