Silicon Knights, Inc. v. Epic Games, Inc. is a dispute between a game studio and the developer of a game engine over the terms of an engine licence. The Fourth Circuit’s unpublished opinion of 6 January 2014 records that Silicon Knights had licensed Unreal Engine 3 from Epic for use in developing a single video game, Too Human.[1] The case is a useful reference for licence managers because it turns on three common questions: what a licence limited to one title permits, how far written warranty disclaimers protect a vendor from oral promises, and how licence-fee and infringement remedies interact.
Background
Silicon Knights appealed from the Eastern District of North Carolina, where Chief Judge James C. Dever III had presided over the action numbered 5:07-cv-00275-D.[1] The studio had sued Epic for fraud and related claims about the functionality of Unreal Engine 3. Epic’s counterclaims for copyright infringement and misappropriation of trade secrets went to a jury, which returned a verdict against Silicon Knights.[1] The parties’ written licence agreement is described as governed by North Carolina law.[1]
The dispute
The fraud claim
Silicon Knights argued that Epic made false oral representations about the functionality of the engine. The written licence expressly disclaimed any warranty that the engine’s functions would meet the studio’s requirements and disclaimed all other express or implied, oral or written warranties, conditions or representations about the engine.[1] Silicon Knights also did not dispute that it knew Unreal Engine 3 was a work in progress when the alleged statements were made.[1] Under North Carolina authority cited by the court, warranties cannot be asserted by parol and forward-looking promises do not generally constitute legal fraud, so the district court’s judgment as a matter of law for Epic on the fraud claim was proper.[1]
The copyright and licence-scope claims
On Epic’s counterclaims, Silicon Knights argued that Epic had not proved a valid copyright because it did not put the deposited portions of the work into evidence. The court held that a copyright registration is sufficient evidence of a valid copyright.[1] Silicon Knights also argued its copying was de minimis. The court noted that the studio admitted in its briefing that over 20% of the code in its game engine was copied from Unreal Engine 3, and that it did not dispute that it copied Unreal Engine 3 in toto when it began development on a project called The Box, a use that the written licence did not authorize; the jury therefore had a legally sufficient basis to find for Epic.[1]
Remedies
Silicon Knights did not appeal the jury verdict for Epic on the breach of contract counterclaim.[1] It argued that Epic obtained a double recovery. The court disagreed: the contract damages represented Epic’s actual damages, the unpaid licensing fees due under the written licence agreement, while the copyright damages represented the profit Silicon Knights generated from the use of the infringed code, and the Copyright Act allows recovery of both actual damages and the infringer’s profits attributable to the infringement that are not taken into account in the actual damages.[1] The trade secret damages were coextensive with the copyright damages and the verdict form awarded a single measure for both.[1]
The district court had also awarded Epic attorneys’ fees on the copyright and trade secret counterclaims on its own finding that Silicon Knights’ infringement was willful and in bad faith, which the Fourth Circuit held was adequately supported by the record and did not need a jury finding.[1] The studio’s challenge to a permanent injunction in Epic’s favour was held waived because it was raised only in a footnote of the opening brief and developed with new arguments in the reply.[1]
Decision or outcome
The Fourth Circuit affirmed the judgment of the district court in its entirety.[1] The opinion is unpublished and the court notes that unpublished opinions are not binding precedent in the circuit.[1] The opinion also leaves some issues undecided: because Silicon Knights did not appeal the contract verdict, the court did not decide whether its expert damages testimony was properly excluded.[1] This article relies only on the appellate opinion; it does not restate jury amounts or the terms of the injunction, which are in the district court record and are not described in the opinion.
Significance for software licensing and SAM practice
The case is a reminder that an engine or platform licence is commonly scoped to a named product. Epic’s present agreements keep that structure in a different form: the Unreal Engine EULA scopes rights to Products made under the licence, requires seats or royalties depending on the Product, and allows Epic to audit books and records for compliance.[2] See Unreal Engine EULA royalties and seats for the current terms and Epic Games licensing for the overview. The 2014 licence at issue is not the current EULA, and the opinion should not be read as describing present terms.
Lessons learned
- A licence for one title is not a licence for the next. The court treated the studio’s start of work on a second project by copying the engine as a use the written licence did not authorize.[1] Tie each engine copy to the product it was licensed for and obtain a new grant before reusing engine code elsewhere.
- Warranty disclaimers in the licence carry weight. Oral statements about functionality could not support fraud against an express written disclaimer, particularly where the licensee knew the engine was still in development.[1] Put any performance commitments in the contract.
- Substantial copying is not de minimis. An admission that more than 20% of an engine’s code came from the licensed engine left no room for that defence.[1]
- Fees and infringement profits can both be recovered. Unpaid licence fees and profits from infringing use compensate different interests, so a licensee that overruns its licence can face both, plus attorneys’ fees if the infringement is found willful.[1]