Antitrust Law Daily Wrap Up, ANTITRUST—CDCal: Antitrust Claims Fail Against World of Warcraft Developer over Prohibition on Use of Third-Party Add-On Software, (Apr 29, 2013)

By Tobias J. Gillett, J.D., LL.M.

A developer of add-on software for Blizzard Entertainment, Inc.’s World of Warcraft (WoW) online roleplaying game failed to state antitrust claims against Blizzard because WoW users knowingly and voluntarily agreed to use only Blizzard-licensed software and hardware add-ons before purchasing the game, and therefore the developer did not allege Blizzard’s market power over a legally cognizable aftermarket for such add-ons (Blizzard Entertainment, Inc. v. Ceiling Fan Software LLC, April 16, 2013, Selna, J.).

Blizzard developed and sells WoW. Ceiling Fan Software, LLC created and sold "bot" programs to automatically control WoW characters, permitting their owners to achieve higher character levels without spending as much time actively playing the game. Blizzard’s End User License Agreement (EULA) and Terms of Use (ToU), both now and when Ceiling Fan began designing its bots, expressly prohibit licensees from using any third-party add-on software and hardware, including bots.

Blizzard filed suit against Ceiling Fan, asserting claims for intentional interference with contractual relations, breach of contract, unjust enrichment, and unfair competition. Ceiling Fan filed antitrust counterclaims, alleging that Blizzard had monopolized "the aftermarket for add-on hardware and software specific to the WoW that enables WoW players to advance their character levels at a faster-than-normal rate."

Blizzard allegedly accomplished this by (1) requiring in its EULA and ToU that users only employ hardware or software sold or licensed by Blizzard, (2) using technology barriers to restrict the interoperability of third-party hardware and software, (3) using software updates to disable third party add-ons, (4) selling its own products to advance WoW play while precluding the sale of competing products, (5) threatening lawsuits against entities that create unauthorized add-ons despite having no contractual or business relationship with the entities and (6) selectively suing those entities. Ceiling Fan also claimed that Blizzard had tied "the sale of its WoW software on the condition that users of WoW will not purchase any unauthorized third-party hardware or software," in an attempt to monopolize the aftermarket.

Product market. The court initially rejected Blizzard’s argument that Ceiling Fan’s market definition was too broad because the WoW-branded keyboards, mice, and in-game "Recruit a Friend" and "Scroll of Resurrection" promotions that Blizzard sold or licensed were not reasonably interchangeable with Ceiling Fan’s bots. The court concluded that the issue of whether the bots were "reasonably interchangeable" with keyboards, mice, and promotional programs that advance play was a factual issue that could not be decided on a motion to dismiss, and that the market definition was not "facially unsustainable."

Market power. The court concluded, however, that, although "an antitrust claimant can allege a single-brand aftermarket," the contractual obligations in Blizzard’s EULA and ToU here were not "a cognizable source of market power." The court explained that the relevant case law established that a claimant could not assert an antitrust claim "resting on market power that arises solely from contractual rights that customers knowingly and voluntarily gave to the defendant." The Ninth Circuit, in its 2008 decision in Newcal Indus., Inc. v. Ikon Office Solution, 513 F.3d 1038, 2008-1 Trade Cases ¶76,010, considered four aspects of the complaint in determining whether it stated a valid antitrust claim, and the court here reviewed those aspects in reaching its decision.

The first aspect the court addressed was whether "the aftermarket here is wholly derivative from and dependent on the primary market." Although the market for WoW add-ons would not exist without the market for online role-playing games, the court observed that the relevant issue was not "whether the aftermarket for WoW add-ons is wholly derivative," but rather whether Blizzard gained monopoly power in a derivative aftermarket where that market power was not contractually mandated. Here, the EULA and ToU restricted the aftermarket to Blizzard-authorized software and hardware, and therefore the aspect was more analogous to cases where no valid antitrust claim had been found.

The court next considered "whether the allegations of illegal anticompetitive acts related only to the aftermarket and not the initial market." Here, the EULA and ToU prohibited the use of the unauthorized third-party add-on software and hardware, and Blizzard sold the WoW software to individuals only after they agreed to the terms of the EULA and ToU. Therefore, the exclusivity agreement was part of the initial market, rather than an agreement reached after obtaining an initial contract that might be part of a separate and derivative aftermarket, and the situation was "more akin" to cases where the claimant had knowingly agreed to the challenged restraint.

The court then addressed "whether the market power [was] derived from contractual provisions [Blizzard] obtained in the initial market," or whether the market power was obtained "through the contractual relationship it has with its consumers." Here, Blizzard’s alleged market power was derived from the provisions of the EULA and ToU, and not from "leverag[ing] an existing relationship with users to gain power over the aftermarket for WoW add-ons." Therefore, the aspect was again more similar to cases where no valid antitrust claim had been found.

Finally, the court considered whether Ceiling Fan’s complaint alleged "market imperfections" that would "rebut the economic presumption that consumers made a knowing choice to restrict their aftermarket options when they decided to sign the initial contract." The court observed that the language in the ToU and the EULA was "clear" and "unequivocal" about restricting the use of "cheats, automation software (bots), hacks, mods or any other unauthorized third-party software designed to modify the World of Warcraft experience." Moreover, nothing "prevented users from discovering the restrictions at the outset." Therefore, no "market imperfections" had "confused WoW users’ knowledge of the aftermarket restrictions."

Since the complaint alleged only an aftermarket in which users had contractually agreed to exclusively use authorized WoW add-ons that advance play, and Blizzard was entitled to condition the use of its software on such restrictions, "any resulting market power in the aftermarket cannot be the basis for antitrust claims," in the court’s view. Therefore, Ceiling Fan had failed to alleged market power over a legally cognizable market, and the court dismissed its antitrust claims with prejudice. Moreover, since Ceiling Fan had based its California Unfair Competition Law (UCL) claims on its antitrust claims, the court dismissed its UCL claims as well.

The case is No. SACV 12-00144 JVS(RNBx).

Attorneys: Daniel A. Kohler (Mitchell Silberberg and Knupp LLP) for Blizzard Entertainment, Inc. Christopher W. Arledge (One LLP) for Ceiling Fan Software LLC.

Companies: Blizzard Entertainment, Inc.; Ceiling Fan Software, LLC

Cases: Antitrust CaliforniaNews