by Steven Kent
—Ed Logg, game designer, Atari Games Corporation
On December 12, 1988, with three NES-licensed games on the market and a complete understanding of NES marketing and security, Atari filed suit against Nintendo, alleging that Nintendo was “improperly using its patent and greater market share to monopolize the home video game market.” Atari asked for $100 million in damages. All of the pieces were in place. Through the original licensing agreement, Atari had obtained access to retailers. Through the Copyright Office, it had obtained a complete understanding of NES technology. Atari could now manufacture its own cartridges, and the court action would work as a preemptive strike against any injunctions Nintendo might file.
One unanswered question about this case is why Hideyuki Nakajima chose such an aggressive tact for dealing with Nintendo. Some people quietly speculate that it dated back to licensing disagreements between Hiroshi Yamauchi, president of Nintendo, and Namco president Masaya Nakamura. Nakamura received some preferential treatment when he originally signed Namco as a Nintendo licensee, but when the contract expired, Yamauchi refused to renew those preferential terms. The change in terms led to an angry rift between Nintendo and Namco.
Mr. Yamauchi tried to take away all of the special provisions of the contract that Namco enjoyed as a first licensee, and because of that, the relationship suffered. I became very upset about the whole situation at that time, but looking back, that was just his business management philosophy. I shouldn’t have become upset about it, although I must admit that I was pretty upset at that time. But I have no ill sentiments now.
When you consider the technical expertise and the depth of the technical know-how of Namco, which Namco currently possesses as reflected by the success of Namco games, Nintendo may have lost a lot more than Namco by taking that approach.
—Masaya Nakamura, founder, Namco
One event that may have added to Hideyuki Nakajima’s resentment of Nintendo, and Minoru Arakawa in particular, was a small dinner gathering at Arakawa’s house in August 1988, at which Nakajima was a guest. According to several accounts, Arakawa, Howard Lincoln, and Nakajima had just finished dinner and gone out on a deck to talk. While they were outside, Arakawa, known for taking short naps whenever the urge struck, fell asleep for a few minutes. According to Lincoln, Nakajima seemed offended when he left the party later that evening. (Nakajima may have taken offense to Arakawa’s falling asleep, but it should be noted that Atari had already used the false affidavit to obtain the reproduction of the 10NES by that time.)
I’ve heard that story many times, and I don’t know that that influenced or impacted the licensing decision. I do know that there was a fairly consistent falling out between Nintendo and Atari Games. What the ultimate rationale behind that was, I don’t know that we’ll ever fully know, but as far as Mr. Arakawa’s dozing off with Hide, I somehow doubt that was the cause. I think Hide was bigger than that.
—Ted Hoff, former senior vice president of Sales and Marketing, Atari Games Corporation
Nakajima took an unusually aggressive stance toward Nintendo, and Arakawa responded by taking an uncharacteristically patient approach toward Atari Games. Ever since the Universal Pictures suit over Donkey Kong, Nintendo had a reputation for using the legal system to its advantage. In this case, however, Nintendo waited eleven months before responding to Atari’s charges by lodging a suit of its own. In November 1989 Nintendo launched a countersuit, accusing Atari of patent infringement, breach of contract, unfair competition, and tortious interference with contract. Before filing the suit, Nintendo took other measures, sending letters to retailers warning them not to carry Tengen products. Stores caught selling the games, the letters warned, would be subject to legal action.
This strategy caught Atari off guard and proved effective. Nintendo was the most lucrative product in the toy industry at the time, and many retailers would simply collapse if Nintendo cut off their supplies. Nintendo cartridges were one of the few toy products that sold steadily all year long. Though a few retailers such as Toys “R” Us considered ignoring Nintendo’s demands, every major chain eventually removed Tengen cartridges from its shelves and refused future shipments. Caught with expensive inventory and no sales outlets, Atari asked the courts to stop Nintendo from threatening customers. Judge Fern Smith responded by enjoining both Atari and Nintendo from interfering with each other’s customers. Both companies appealed the decision, and the injunction was lifted on both sides, opening the way for Nintendo to continue threatening retailers who stocked Tengen products.
The court battle went much the same way, with Atari’s lawyers making small gains, then finding themselves in a bad position. They attempted to make the point that the data stream created by the security chips during the authentication process was not protected by copyright law. On this issue they were correct. The copyright laws that protect computer software clearly stated that while programs could be covered by a copyright, the data they produced could not. Under that interpretation, Atari had the right to copy the data stream created by 10NES.
Atari also argued that Nintendo’s lock-out security gave the company an unfair advantage in the marketplace and that duplicating the code was the only way to break into the market. Atari then took the case one step further, asking for information that would ensure compatibility with future Nintendo consoles. The judge declined that motion.
By requiring independent game developers to carefully study a particular security system and discern which program instructions are truly necessary for present compatibility, console manufacturers will have a limited period of time in which to control the market for compatible games. In this time period, some third party game developers are likely to enter license agreements with Nintendo, particularly if they have limited resources. After a relatively short period of time, however, other developers will enter the game market with independently produced, but still compatible games. In addition, if third party developers who entered license agreements later find the license agreements to be onerous, there still exists the option of reverse engineering the security system after the expiration of their license agreement. Thus, a fair use defense which allows copying for present compatibility balances the incentives for both the game developers and console manufacturers.
The extension sought by Atari would destroy this balance by eliminating the console manufacturers’ lead time.9
—Judge Fern M. Smith
The case came down to a few simple points. Since Atari did not dispute Nintendo’s ownership of 10NES, the trial revolved around two specific questions: Was Rabbit a direct copy of 10NES? And would companies need to copy the program to compete in the market? The question of copying was solved when Nintendo showed that Atari had duplicated nonfunctional parts of the 10NES code.
In particular, the Court finds that the existence of program elements in the Rabbit program which serve no function other than authenticating the console firmly establish illicit copying.10
—Judge Fern M. Smith
Nintendo’s lawyers were also able to prove that there was more than one way around the NES security system and that Atari did not need the illegally obtained reproductions from the Copyright Office to access the NES.* The judge found in favor of Nintendo, but the battle with Atari was only beginning.
Tetris
The most notable casualty of the war between Nintendo and Atari Games was the Tengen version of the game Tetris, a game that was created by Soviet mathematician Alexey Pajitnov while working at the Computer Center of the Moscow Academy of Science. Pajitnov came up with a computer game in which players organized two-dimensional geometric shapes. The blocks would fall from the top of the screen, and players had to rotate and place them before they landed. If the player organized the blocks into complete and unbroken lines as they landed, the blocks would disappear. If the line was broken, it would remain on the screen and blocks would pile on top of it. The game ended when the blocks reached the top of the screen.
Pajitnov developed
the game on an Electronica 60, an antiquated computer that was the Russian clone of the PDP (Programmable Data Processor) computers made for the Department of Defense by Digital Equipment.** Because his computer could display only alphanumeric characters, Pajitnov teamed up with Vadim Gerasimov, a gifted young hacker with access to a PC, to create a better-looking interface for the game.
In 1986, a friend of Pajitnov’s sent a copy of Tetris to the Institute of Computer Science, in Budapest, Hungary. It was there that Robert Stein, president of the London-based software company Andromeda, happened to see the game.
Sometime in 1986, Robert Stein was in Hungary and saw Tetris. … just one of the pirate copies. I didn’t call them pirated back then, I gave it out myself everywhere. So, he feels that this is a really good game and approached the Computer Center and wanted to make a license and publish it. He had no idea what it means to deal with the Russians, with the Russian bureaucracy.
—Alexey Pajitnov, creator, Tetris
Stein contacted the Moscow Academy of Science and began negotiating with Pajitnov for the rights to Tetris. Thinking Pajitnov had the authority to make a deal, Stein next began calling executives at large software publishers with an offer to license the game. He sold the European computer rights to Tetris to Mirrorsoft and the American rights to Spectrum Holobyte, both backed by British publishing magnate Robert Maxwell. Stein had not counted on the difficulties of dealing with the Soviets, however, and granted these rights before securing them for himself. Mirrorsoft and Spectrum Holobyte released versions of Tetris in January 1988. The Soviets did not sign Stein’s contract until the following month. Stein’s contract specifically gave him control of the personal computer versions of Tetris created for Western markets.
He finally came to us and said, “Well, I want this right, I want those rights, I want those rights.” So, basically, because we promised him the PC rights, they were given to him, and we legalized our relationship at this point. But the game was on the shelf already and I do believe that he sold his video rights as well without having an agreement. He approached us immediately, asking for all the rights, but we didn’t know who the hell he was.
—Alexey Pajitnov
Then the confusion began. Spectrum Holobyte sold the Japanese computer and coin-op rights of Tetris to an entrepreneur named Henk Rogers, who had strong ties to Nintendo. At the same time, Mirrorsoft sold the exact same rights to Atari Games. Mirrorsoft wielded more power in the Maxwell organization, so the rights went to Atari. Atari, in turn, sold the Japanese coin-operated game rights to Sega Enterprises and the Japanese console and PC rights to Rogers. What nobody realized was that Stein had never received the rights to make any of these deals.
After looking over the various arrangements, Rogers realized that no one owned the handheld rights to Tetris, so he flew to Moscow and met with the Soviets. He had hoped to secure the rights as an agent for Nintendo. Nintendo was preparing to unveil the Game Boy, and Arakawa thought Tetris would be the perfect lead title for the new handheld game system. While Rogers was there, the Soviets surprised him by offering the worldwide video game rights as well. He had been under the impression that Atari and Mirrorsoft controlled those rights, and fearing a legal battle with those companies, Rogers brought Nintendo into the negotiations. On March 22, 1988, Howard Lincoln and Minoru Arakawa signed a contract with representatives of Electronorgtechnica (ELORG), the Soviet agency handling the transaction, sealing the worldwide home video game rights to Tetris.
Atari Games had already begun work on the Tengen version of Tetris for the NES by that time.
I was there when they locked up Tetris. The Tetris story was kind of an interesting one, and to this day the people at Tengen believe that the Russians double dipped. The product was in negotiation for licensing, and at virtually the same time, the product was licensed to two companies. We had manufactured Tetris and put it on the market, and, in fact, it became the number one seller on the Nintendo platform.
—Ted Hoff
On March 31, nine days after signing the contract in Moscow, Lincoln and Arakawa sent a fax to Hideyuki Nakajima, informing him that Nintendo had secured video game rights to Tetris. Two weeks later, Atari Games quietly filed for a copyright for the game.
Atari released its Tengen version of Tetris in May, 1989; Nintendo released its version one month later. The Tengen version, which was created by veteran arcade designer Ed Logg,* had both single-player and two-player modes and looked almost exactly like the arcade game. Nintendo’s version was a single-player game. Most reviewers agreed that Tengen had done a better job with the game.
Judge Smith, who handled the case concerning Atari’s duplication of the 10NES, presided over the Tetris case as well. The trial hinged on determining who had legal ownership of the game. Nintendo’s pedigree was obviously stronger. Nintendo had signed statements from Soviet officials confirming the sale and a note signed by Stein, defining computers as PC computers with, among other things, a keyboard and a monitor. Recognizing that Nintendo would almost certainly prevail when the case went to trial, Judge Smith granted Nintendo’s motion to force Atari to recall its cartridge. The case ended without a trial, however. On November 13, 1989, Smith canceled the trial and ruled that Nintendo owned the rights to the game.
I think to this day, anyone you talk to will certainly say that the best Tetris was the two-player Tetris that came out on Nintendo and was published by Tengen. Without a doubt, it was the best Tetris. At one point, you could look in the back of any of the gaming magazines and find people who would be willing to pay you $300 for a Tengen Tetris cartridge.
There were 268,000 of them locked up, bolted, padlocked in Milpitas on Sycamore [Street]. If people knew that they were $300 each and knew that there were that many of them, they probably would have picked the lock. But that was a well kept secret in a dark room. And those cartridges were never shipped. When I left the company two years ago, the cartridges were still under lock and key. My understanding is that they were subsequently destroyed.
—Ted Hoff
Nintendo sold more than 3 million copies of its NES Tetris cartridge and more than 40 million copies of Tetris cartridges for Game Boy. (The game came packed in with the system.) Pajitnov, the creator of the game, did not make any royalties from any of these sales, but his association with the game enabled him to emigrate to the United States. In 1996, all of the rights that ELORG had sold expired and reverted to Pajitnov. Hoping to help Pajitnov finally profit from the game, Henk Rogers helped him establish the Tetris Company, Llc., which would then control all rights to the game. From that time on, companies that made games based on Tetris had to purchase the rights from Pajitnov.
Sega Enterprises, Ltd. v. Accolade, Inc.
Ordinarily in a trademark case, a trademark holder contends that another party is misusing the holder’s mark or is attempting to pass off goods or services as those of the trademark holder. The other party usually protests that the mark is not being misused, that there is no actual confusion, or that for some other reason no violation has occurred. This case is different. Here both parties agree that there is misuse of a trademark, both agree that there is an unlawful mislabeling, and both agree that confusion may result. The issue here is—which party is primarily responsible?11
—Judge Stephen Reinhardt
In 1984, Bob Whitehead and Alan Miller, two of the original VCS programmers who left Atari and started Activision, founded a software company called Accolade. Accolade started out as a computer game company, but when Sega released the Genesis in 1989, Whitehead and Miller decided to convert some of their PC titles to work on the new console.
They had licensed approximately thirty other companies, and the licensing deal, it turns out, is a very expensive deal. One pays them between $10 and $15 per cartridge on top of the real hardware manufacturing costs, so it about doubles the cost of goods to the independent publisher. It winds up with the consumer generally paying a lot more for the cartridge, but that’s the licensing
deal, and they have a right to establish whatever they consider to be a fair deal.
We chose to not accept the licensing deal and instead to independently study the system, figure out how to do games for it, and then publish several games for the system.
—Alan Miller, cofounder, Accolade
Mike Lorenzen led a team of Accolade engineers that purchased a Genesis console and three game cartridges, then wired the console so that they could make printouts of the executable code of the games. They compared each game’s code to locate identical chains, believing that all of the games would use the same programming instructions to disable any security locks Sega placed in the Genesis. They used this information to create a “development manual” for making Genesis games.
According to Accolade, at this stage it did not copy Sega’s programs but relied only on the information concerning interface specifications for the Genesis that was contained in its development manual. Accolade maintains that with the exception of the interface specifications, none of the code in its games is derived in any way from its examination of Sega’s code.12
—Judge Stephen Reinhardt
Accolade released Ishido, its first Genesis game, in 1990. Previously released as a Macintosh and PC computer game, Ishido was a strategy board game in the same vein as Go.
