The H3CZ Scump Activision Lawsuit A Lawyers Perspective
By Harris Peskin · Thu, Feb 22, 2024 5:53 PM
By Harris Peskin1
On February 15, 2024, Bloomberg broke the news that Hector Rodriguez (“HecZ”) and Seth Abner (“Scump”) initiated a complaint against Activision Blizzard. The complaint features two principal allegations. First, it alleges that Activision Blizzard took steps to establish a monopoly in the Call of Duty market,2 including by way of acquiring MLG,3 a market competitor, and no longer granting licenses to third parties to use the Call of Duty copyright for other tournaments or leagues.4 Next, it alleges that, once Activision Blizzard acquired its monopoly power, it used that power to impose unfavorable terms on teams and players now participating in the closed market.5 This article will focus on the first four causes of action alleged in the complaint, which are centered around Sections 1 and 2 of the Sherman Antitrust Act. Should plaintiffs prevail in this case, the esports ecosystem would be turned upside down.
Antitrust laws exist to promote the public welfare by encouraging businesses to compete.6 Intellectual property laws, on the other hand, grant exclusive rights to holders of intellectual property rights, such as copyrights and patents, as part of the constitutional mandate to “promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”7 The two laws sometimes appear to conflict, as market competition is ostensibly squandered through ownership of certain intellectual property rights.8 Although the U.S. Department of Justice and the Federal Trade Commission have taken the position that “antitrust doctrine does not presume the existence of [a] market from the mere presence of an intellectual property right,”9 markets can emerge around a copyright or patent. In this dynamic, the question is which law should prevail.10
The first four causes of action all raise allegations that Activision Blizzard violated Sections 1 and 2 of the Sherman Antitrust Act.11 Section 1 prohibits contracts or agreements that unreasonably restrain trade. In the first cause of action, HecZ specifically alleges that the Team Participation Agreement that conferred on Activision Blizzard the right to withhold consent to a slot sale between OpTic Gaming Los Angeles and himself amounted to a violation of Section 1.12 Separately, in the second cause of action, Scump specifically alleges that Activision Blizzard created a salary cap through the Team Participation Agreement that amounted to an unreasonable restraint on trade.13
Section 2 of the Sherman Act focuses more on an alleged monopolizer’s intent to engage in anticompetitive conduct and monopolize a relevant market to the detriment of others seeking to participate in the market.14 In the third and fourth causes of action, HecZ and Scump not only claim monetary damages resulting from their alleged inability to participate in competitions not owned by Activision Blizzard or create content relating to Call of Duty, they also seek injunctive relief to remove Activision’s alleged monopoly in the Call of Duty market.15
The case brings to the fore questions regarding a game developer’s rights to control their copyright and create or limit potential markets around that copyright. Some of these questions are relatively novel. First, most cases that address whether an intellectual property right holder has a duty to deal with potential competitors do so within the confines of patent law, whereas the relevant market here has emerged around copyright law.16 Second, no case to date has ever attempted to define an esports market, specifically, whether the applicable market is the entire esports competitive market or the Call of Duty market.17 Third, the Supreme Court has engaged in its own internal debate about whether antitrust law should be considered when determining the scope of patent law’s protection for licensing agreements allegedly violative of Section 1.18 To our knowledge, as of the time of this drafting, it has not engaged in a similar debate around copyright. Fourth, and perhaps most interestingly, arguments could emerge around the scope of Activision’s copyrights.19 Game developers have long relied on copyright doctrine created in the 1980s for justification of their expansive rights in all potential derivatives that emerge from the play of their game. Some commentators have urged that such an approach is unjustified and any change to this established doctrine would have a profound impact on the video games industry.
Activision Blizzard will need to respond to the complaint, and we anticipate that it will file a motion to dismiss.20 In doing so, with respect to both Section 1 and Section 2 Sherman Act claims, Activision Blizzard might first argue that it is merely exercising its rights as the holder of valid copyrights in Call of Duty, and therefore plaintiffs’ claims relating to both Sections 1 and 2 fail as a matter of law.21
Causes of action three and four allege Activision Blizzard violated Section 2 of the Sherman Act when it took steps to prevent other competitors from hosting tournaments in the competitive Call of Duty market. Implicit in this allegation is the claim that Activision Blizzard has an obligation to permit competitors to make use of its copyright in the market. This form of a claim is typically referred to as a rightholder’s “duty to deal.”22 With the exception of the 9th Circuit, which has historically been more favorable towards plaintiffs in duty to deal cases, courts will generally find that a rightsholder is free to withhold licenses to its intellectual property from competitors.23 We note that plaintiffs filed their complaint in the Central District of California, which is in the 9th Circuit.
The fate of causes of action one and two is even less certain. The allegations boil down to claims that the Team Participation Agreement contained various sorts of unreasonable restraints on trade. Unlike duty to deal cases, there is less authoritative consensus as to whether a defendant’s licensing agreement is shielded from antitrust scrutiny by virtue of its intellectual property rights.24
The most recent Supreme Court case law suggests that patent monopolies do not shield licensing agreements from antitrust scrutiny. In other words, a defendant cannot solely rely on its patent rights as a shield. The Supreme Court has attempted to reconcile monopoly rights granted to a patent holder with the Sherman Act’s prohibition on monopoly by reference to a balancing test considering anticompetitive effects, redeeming virtues, market power, and “potentially offsetting legal considerations . . . such as those related to patents.”25
When Activision Blizzard parses through each allegation in causes of action one and two, some arguments it will raise will likely be familiar to observers that have followed sports law antitrust suits. We anticipate that Activision Blizzard will claim (i) that the Team Participation Agreement does not amount to a conspiracy under Section 1 of the Sherman Act because it acted as an independent actor in imposing the restrictions therein,26 and (ii) even if the Team Participation Agreements amounted to a conspiracy, each alleged restraint on trade should be subjected to analysis under the “rule of reason in lieu of the stricter per se standard.” Certain restrictions lack any redeeming virtue have anti-competitive purposes, and are so frequently assessed by courts that they do not require further examination under the rule of reason. Courts classify these restrictions as per se violations of the Sherman Act.27A rule of reason analysis discusses the reasonableness of the restraint, including by analyzing pro-competitive and anti-competitive effects.28
Whether the rule of reason should be applied will be a separate analysis for each challenged restraint on trade. The competitive balance tax alleged in the complaint is similar to a wage-fixing agreement which, in certain horizontal agreement contexts, have been subjected to a per se analysis.29 The wage-fixing standard may change if the Team Participation Agreement is deemed to be a vertical arrangement. Whether an agreement is horizontal or vertical often turns on whether the parties might compete in the market but for the agreement.32 Similarly, horizontal customer restrictions, like the one alleged by HecZ, are generally viewed as per se unlawful unless they are necessary to promote efficiency.30 Vertical customer restrictions are subjected to the rule of reason and may be deemed to have a procompetitive justification in that they maximize the value of the licensed product.31
Additionally, if a restraint is necessary for the product to be available at all, courts forego analysis under the per se rule and instead apply the rule of reason.33 This form of argument may be available for a justification of the competitive balance tax,34 but not for the customer restriction alleged by HecZ.35
Without making any predictions on the ultimate outcome of this lawsuit, we note that there is a great deal which hangs in the balance, particularly with respect to the outcome of the third and fourth causes of action. If Activision Blizzard has a duty to deal and is required to license out its copyrights to assist competitors in organizing esports leagues, the entire esports ecosystem will immediately shift overnight to an open ecosystem more akin to what we saw in the late 2000s before publishers reclaimed their intellectual property rights from grassroots organizers. There are also several novel and interesting legal issues at play, including the definition of the relevant Activision Blizzard market, the protection of rights conferred through the copyright act as a shield against antitrust, and the scope of protection conferred by copyright in video games. We will continue to monitor this case for developments on these topics.
1.
This article was prepared with the assistance of Yen-Shyang Tseng, a Senior Attorney at ESG Law, and Nathan McKay, a Law Clerk at ESG Law.
2.
The Complaint defines the market as the market for “professional Call of Duty competitions”
3.
Dean Takahashi, Activision Blizzard buys MLG for estimated $46M to build ‘ESPN of esports’, Games Beat, (Jan. 4, 2016, 2:00 PM), https://venturebeat.com/games/activision-blizzard-buys-mlg-for-estimated-46m-to-build-espn-of-esports/.
4.
Complaint Demand For Jury Trial at 15, paragraph 50, Rodrigez v. Activision Blizzard Inc.
5.
Id. at 16-28, paragraphs 52 through 81.
6.
Intellectual Property and Antitrust Handbook 2d. ABA. [hereinafter, the “Handbook”]. Importantly and controversially, consumers and producers often both claim to be serving the public welfare in a way which advances their antitrust interests. By way of example, a consumer would likely claim that its interests are advanced when numerous competitors offer the same product. They can get the product for cheaper and be protected against market failure. Conversely, economists argue that producer success is an appropriate metric for measuring contribution to the public welfare because of its positive externalities. See Kenneth Heyer, A World of Uncertainty: Economics and the Globalization of Antitrust, 72 ANTITRUST L.J. 375, 402, n.33 (2005).
7.
Article I, Section 8, Clause 8 of the United States Constitution.
8.
The law attempts to resolve this by finding complementary effects. “The two bodies of law are actually complementary, as both are aimed at encouraging innovation, industry and competition" Atari Games Corp. v. Nintendo of Am., Inc., 897 F.2d 1572, 1576 (Fed. Cir. 1990).
9.
U.S. DEP’T OF JUSTICE & FTC, ANTITRUST ENFORCEMENT AND INTELLECTUAL PROPERTY RIGHTS: PROMOTING INNOVATION AND COMPETITION 2 (2007).
10.
See Erik Hovenkamp, The Antitrust Duty to Deal in the Age of Big Tech, 131 Yale L.J., (2022) (“At bottom, both IP law and antitrust care about the same things when assessing whether the dominant firm should have a right to exclude rivals from using its technology. It boils down to the tradeoff between static competition and dynamic innovation. But in terms of policing this tradeoff, IP law obviously has a far more specific mandate, so it is natural that antitrust should defer to it on such questions.”)
11.
See Rodriguez supra note 4. Plaintiffs allege violations of Section 4 and 16 of the Clayton Act which respectively provides for (i) treble damages and costs including reasonable attorneys fees, and (ii) injunctive relief when a violation of the antitrust laws threatens loss or damages.
12.
Id. at 32, paragraph 101.
13.
Id. at 33, paragraph 111.
14.
15 U.S.C.A. § 2.
15.
Rodriguez supra note 12 at 34-36, paragraphs 120-139.
16.
The Supreme Court has dealt with Section 1 Sherman Act disputes dealing with copyright. See Broadcast Music Inc. v. CBS, 441 U.S. 1, (1979) for a discussion on price fixing in the context of blanket composition public performance license agreements offered by BMI and ASCAP. See also Brief for Petitioners Broadcast Music, Inc., et al. at 18, Broadcast Music Inc. v. CBS, 441 U.S. 1, (1979) (No. 77-1578) on writs of certiorari to the US Court of Appeals for the Second Circuit (“While a copyright may, like a patent, be of significant value, copyrights do not approach the leading patents in terms of their impact on the market and on others. Unlike the owner of a patent, the owner of a copyrighted song cannot exercise control over any market. Even the most original and outstanding song may be replace by many other songs under copyright or in the public domain.”).
17.
For a discussion on esports markets, see Michael Arin, Competing Competitions: Anticompetitive Conduct by Publisher Controlled Esports Leagues, 104 Univ. of Minn. L. Rev. 1585, (2020).
18.
See U.S v. Line Material Co. 333 U.S. 287, (1948); See also F.T.C. v. Actavis, Inc., 570 U.S. 136, (2013).
19.
This discussion is outside the scope of this article though certain commentators have argued in recent years that certain Section 106 rights should be revisited, including the right to publicly perform a video game and the right to create derivative works. See Ryan Fairchild, Thirty Five years Without Player Rights in Gameplay: Is a New Challenger Approaching?, 2019 Esports Bar Ass’n J. 1, 4 (2019) ( (discussing Allen v. Academic Games League of Am holding that playing a board game did not constitute a public performance). Developers typically respond by citing Red Baron-Franklin Park, Inc. v. Taito Corp which held that playing a video game in an arcade constituted a violation of a copyright holder’s public performance right. See also Tyler Ochoa, Who Owns an Avatar? Copyright, Creativity, and Virtual Worlds, 14 Vanderbilt J. of Ent. & Tech. 959, (2012) (arguing by analogy that certain derivative works should not be owned by a programmer because those derivatives are not “fixed” at the time of programming, just as the programmer of microsoft paint did not envision and should not own each microsoft painting performed by a user). But see, Midway Mfg. Co. v. Arctic Int’l, Inc., 704 F.2d 1009, 1011 (7th Cir. 1983) (“The question is whether the creative effort in playing a video game is enough like writing or painting to make each performance of a video game the work of the player and not the game’s inventor… Playing a video game is more like changing channels on a television than it is like writing a novel or painting a picture”).
20.
A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) argues that the complaint fails to state a claim upon which relief can be granted.
21.
“Intellectual property rights do not confer a privilege to violate the antitrust laws” U.S. v. Microsoft Corp. 253 F.3d 34, 65 (D.C. Circ. 2001). But see In re Indep. Serv. Organizations Antitrust Litig., 203 F.3d 1322, (Fed. Cir. 2000). There independent service organizations competed against Xerox in the copy-machine service market and alleged Xerox’s policy of refusing to sell replacement parts to them violated Section 2 of the Sherman Act. The Federal Circuit stated that “while intellectual property rights do not confer a privilege to violate the antitrust laws … ‘the antitrust laws do not negate the patentee’s right to exclude others from patent property.” For a discussion on when a refusal to deal in IP should be immune from antitrust scrutiny, see Hovenkamp supra note 9 “A refusal to deal in IP should be immune from antitrust scrutiny whenever the defendant would likely be entitled to an injunction in the hypothetical event that its rival had obtained its desired access to the defendant’s IP without permission.” This defense will be plaintiff’s opportunity to challenge the scope of Activision’s copyright.
22.
“The U.S. Supreme Court has not squarely addressed whether owners of intellectual property can be subject to potential antitrust liability under Section 2 of the Sherman Act when they refuse to sell or license their intellectual property.” Handbook at 171.
23.
The 9th Circuit decided in Image Technical Services v. Eastman Kodak Co. that Kodak had an obligation to provide replacement parts to independent service organizations which competed with Kodak in its servicing of Kodak copy machines. See Eastman Kodak Co. v. Image Tech. Serv.’s, 504 U.S. 451, (1992). The court stated that while a defendant’s desire to protect its IP rights by refusing to deal is presumptively valid, that presumption can be rebutted by showing evidence of pretext for an anticompetitive refusal to deal. Whether Kodak remains good law after the Supreme Court’s decision in Verizon Communications Inc. v. Law Offices of Curtis V. Trinko is an open question. See Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, 540 U.S. 398, (2004). Numerous circuit courts now require “Section 2 plaintiffs to establish that defendants had a voluntary prior course of dealing and were willing to forgo short term-profits” to succeed on a the claim. Handbook page 182. “A district court in the Ninth Circuit maintained that Kodak ‘does not apply where . . . there is no evidence of a prior course of dealing.’” Id at 183.
24.
See U.S v. Line Material Co. 333 U.S. 287, (1948) (concluding [that nothing can be found in U.S v. General Electric Co. 272 U.S. 476, (1926)] which will serve as a basis to argue otherwise than that the precise terms of [patent law] define[s] the limits of a patentee’s monopoly and the area in which the patantee is freed from competition of price, service, quality or otherwise.”) But see F.T.C. v. Actavis, Inc., 570 U.S. 136, (2013) for an interpretation of Line Material explaining apparent incongruities as the court’s attempt to balance antitrust law with patent law. “In short, rather than measure the length or amount of a restriction solely against the length of the patent's term or its earning potential, as the Court of Appeals apparently did here, this Court answered the antitrust question by considering traditional antitrust factors such as likely anticompetitive effects, redeeming virtues, market power, and potentially offsetting legal considerations present in the circumstances, such as here those related to patents. Whether a particular restraint lies ‘beyond the limits of the patent monopoly’ is a conclusion that flows from that analysis and not, as THE CHIEF JUSTICE suggests, its starting point.” Id. at 149.
25.
Id. at 149.
26.
“The key is whether the alleged ‘contract, combination . . . ., or conspiracy’ is concerted action - that is, whether it joins together separate decisionmakers. The relevant inquiry, therefore, is whether there is a ‘contract, combination . . . ., or conspiracy’ amongst ‘separate economic actors pursuing separate economic interests,’ such that the agreement ‘deprives the marketplace of independent centers of decision making.’” American Needle, Inc. v. National Football League 560 U.S. 183, 195 (2010) discussing the Copperweld Corp v. Independence Tube Corp., 467 U.S. 752 (1984) conspiracy rule. Activision Blizzard will likely argue that its exclusive copyright in Call of Duty gave it the ability to dictate draconian terms into the Team Participation Agreement, and that it has reserved for itself nearly complete control and discretion over implementation and rights related to the Call of Duty League. As such it it should be viewed as an independent economic actor with teams subservient and completely joined in economic goals, acting without the capacity to independently make decisions. Interestingly, such an argument may have relevance in the future if a joint employment action were ever brought against Activision Blizzard.
27.
BMI v. CBS 441 U.S. 1 (1979).
28.
Id.
29.
The DOJ and FTC jointly issued a guidance advising that they intended to bring suit against would-be defendants engaging in wage-fixing schemes. U.S. DEP’T OF JUSTICE & FTC, ANTITRUST GUIDANCE FOR HR PROFESSIONALS (2016). See In re Animation Workers Antitrust Litigation, 123 F.Supp.3d 1175 (2015) for an analogy between price-fixing and wage-fixing in the civil context. See also, Leegin Creative Leather Products v. PSKS, Inc. 551 U.S. 877 (2007) overruling Dr. Miles Med. Co. v. John D. Park & Sons, 220 U.S. 373 (1911). Now, vertical agreements affecting price-fixing must be evaluated under the rule of reason. For discussion on what distinguishes a vertical from horizontal agreement, see infra note 30.
30.
United States v. Topco Assocs., 405 U.S. 596 (1972).
31.
In re Yarn Processing Patent Validity Litig., 541 F.2d 1127.
32.
Defining the market is thus a necessary component of the analysis.
33.
American Needle at 202 paraphrasing NCAA v. Board of Regents of University of Oklahoma 467 U.S. 85 (1984).
34.
See Harris Peskin, Fixing Esports Finances: A Salary Cap Course Taught By Traditional Sports, ESG Law (Jan. 10, 2024, 2:54 PM), https://www.esglaw.com/publications/salary-caps-in-esports for a discussion on the necessity of salary caps to restore competitive and financial balance to the fledgling esports industry. But consider that other esports leagues were able to operate for several years prior to the implementation of any salary cap.
35.
See Rodriguez note 4 at 32 paragraph 101.