SEGA ENTERPRISES LTD v. ACCOLADE, INC, 977 F.2d 1510 (9th Cir. 1992)
Before: William C. Canby, Jr., Stephen Reinhardt, and Edward Leavy, Circuit Judges.
…[copyright analysis]…
IV. Trademark Issues

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 a misuse of a trademark, both agree that there is unlawful mislabeling, and both agree that confusion may result. The issue, here, is - which party is primarily responsible? Which is the wrongdoer - the violator? Is it Sega, which has adopted a security system governing access to its Genesis III console that displays its trademark and message whenever the initialization code for the security system is utilized, even when the video game program was manufactured by a Sega competitor? Or is it Accolade, which, having discovered how to gain access to the Genesis III through the initialization code, uses that code even though doing so triggers the display of Sega's trademark and message in a manner that leads observers to believe that Sega manufactured the Accolade game cartridge? In other words, is Sega the injured party because its mark is wrongfully attached to an Accolade video game by Accolade? Or is Accolade wronged because its game is mislabeled as a Sega product by Sega? The facts are relatively straightforward and we have little difficulty answering the question.

Sega's trademark security system (TMSS) initialization code not only enables video game programs to operate on the Genesis III console, but also prompts a screen display of the SEGA trademark and message. As a result, Accolade's inclusion of the TMSS initialization code in its video game programs has an effect ultimately beneficial neither to Sega nor to Accolade. A Genesis III owner who purchases a video game made by Accolade sees Sega's trademark associated with Accolade's product each time he inserts the game cartridge into the console. Sega claims that Accolade's inclusion of the TMSS initialization code in its games constitutes trademark infringement and false designation of origin in violation of sections 32(1)(a) and 43(a) of the Lanham Trademark Act, 15 U.S.C. §§ 1114(1)(a), 1125(a), respectively. Accolade counterclaims that Sega's use of the TMSS to prompt a screen display of its trademark constitutes false designation of origin under Lanham Act section 43(a), 15 U.S.C. § 1125(a).

Because the TMSS has the effect of regulating access to the Genesis III console, and because there is no indication in the record of any public or industry awareness of any feasible alternate method of gaining access to the Genesis III, we hold that Sega is primarily responsible for any resultant confusion. Thus, it has not demonstrated a likelihood of success on the merits of its Lanham Act claims. Accordingly, the preliminary injunction it obtained must be dissolved with respect to the trademark claim also. However, we decline to instruct the district court to grant Accolade's request for preliminary injunctive relief at this time. The decision whether to grant such relief requires the making of factual and equitable determinations in light of the legal conclusions we express here. Such determinations are best left in the first instance to the district court.

A. False Labeling

Section 32(1)(a) of the Lanham Act creates a cause of action for trademark infringement against any person who, without the consent of the trademark owner, "uses in commerce any reproduction . . . of a registered mark in connection with the sale, offering for sale, distribution, or advertising of any goods or services on or in connection with which such use is likely to cause confusion, or to cause mistake, or to deceive. . . ." 15 U.S.C. § 1114(1)(a). Section 43(a) proscribes the use in commerce   [*1529]   of a false designation of origin in connection with goods or services where such use is "likely to cause confusion, or . . . mistake." Id. § 1125(a). Both Sega and Accolade agree that the screen display of the Sega trademark and message creates a likelihood of consumer confusion regarding the origin of Accolade's games. The question is: which party is legally responsible for that confusion? We disagree with the answer given by the district court.

The district court found that Accolade bore primary responsibility for any consumer confusion that resulted from the display of the false Sega Message. However, Accolade had no desire to cause the Sega Message to appear or otherwise to create any appearance of association between itself and Sega; in fact, it had precisely the opposite wish. It used the TMSS initialization code only because it wanted to gain access for its products to the Genesis III, and was aware of no other method for doing so. On the other hand, while it may not have been Sega's ultimate goal to mislabel Accolade's products, the record is clear that the false labeling was the result of a deliberate decision on the part of Sega to include in the Genesis III a device which would both limit general access and cause false labeling. The decision to use the SEGA trademark as an essential element of a functional device that regulates access and to cause the SEGA trademark and message to be displayed whenever that functional device was triggered compels us to place primary responsibility for consumer confusion squarely on Sega.

With respect to Accolade, we emphasize that the record clearly establishes that it had only one objective in this matter: to make its video game programs compatible with the Genesis III console. That objective was a legitimate and a lawful one. There is no evidence whatsoever that Accolade wished Sega's trademark to be displayed when Accolade's games were played on Sega's consoles. To the contrary, Accolade included disclaimers on its packaging materials which stated that "Accolade, Inc. is not associated with Sega Enterprises, Ltd. " When questioned regarding the Sega Message and its potential effect on consumers, Alan Miller testified that Accolade does not welcome the association between its product and Sega and would gladly avoid that association if there were a way to do so. Miller testified that Accolade's engineers had not been able to discover any way to modify their game cartridges so that the games would operate on the Genesis III without prompting the screen display of the Sega Message.

In contrast, Sega officials testified that Sega incorporated the TMSS into the Genesis console, known in Asia as the Mega-Drive, in order to lay the groundwork for the trademark prosecution of software pirates who sell counterfeit cartridges in Taiwan and South Korea, as well as in the United States. Sega then marketed the redesigned console worldwide. Sega intended that when Sega game programs manufactured by a counterfeiter were played on its consoles, the Sega Message would be displayed, thereby establishing the legal basis for a claim of trademark infringement. However, as Sega certainly knew, the TMSS also had the potential to affect legitimate competitors adversely. First, Sega should have foreseen that a competitor might discover how to utilize the TMSS, and that when it did and included the initialization code in its cartridges, its video game programs would also end up being falsely labeled. Sega should also have known that the TMSS might discourage some competitors from manufacturing independently developed games for use with the Genesis III console, because they would not want to become the victims of such a labeling practice. Thus, in addition to laying the groundwork for lawsuits against pirates, Sega knowingly risked two significant consequences: the false labeling of some competitors' products and the discouraging of other competitors from manufacturing Genesis-compatible games. Under the Lanham Act, the former conduct, at least, is clearly unlawful.

"Trademark policies are designed '(1) to protect consumers from being misled . . . (2) to prevent an impairment of the value of the enterprise which owns the trademark; and (3) to achieve these ends in a manner consistent with the objectives of free competition.'" Anti-Monopoly, Inc. v. General Mills Fun Group, 611 F.2d 296, 300-01 (9th Cir. 1979). Sega violated the first and the third of these principles. "The trademark is misused if it serves to limit competition in the manufacture and sales of a product. That is the special province of the limited monopolies provided pursuant to the patent laws." Id. at 301 (citation omitted).

Sega makes much of the fact that it did not adopt the TMSS in order to wage war on Accolade in particular, but rather as a defensive measure against software counterfeiters. It is regrettable that Sega is troubled by software pirates who manufacture counterfeit products in other areas of the world where adequate copyright remedies are not available. However, under the Lanham Act, which governs the use of trademarks and other designations of origin in this country, it is the effect of the message display that matters. Whatever Sega's intent with respect to the TMSS, the device serves to limit competition in the market for Genesis-compatible games and to mislabel the products of competitors. Moreover, by seeking injunctive relief based on the mislabeling it has itself induced, Sega seeks once again to take advantage of its trademark to exclude its competitors from the market. The use of a mark for such purpose is inconsistent with the Lanham Act.

B. Functionality

Sega argues that even if the legal analysis we have enunciated is correct, the facts do not support its application to this case. Specifically, Sega contends that the TMSS does not prevent legitimate unlicensed competitors from developing and marketing Genesis III-compatible cartridges that do not trigger a display of the Sega trademark and message. In other words, Sega claims that Accolade could have "engineered around" the TMSS. Accolade strongly disagrees with Sega's factual assertions. It contends that the TMSS initialization sequence is a functional feature that must be included in a video game program by a manufacturer in order for the game to operate on the Genesis III. Sega's factual argument stands or falls on the Nagashima declaration and the accompanying modified game cartridges that Sega introduced at the hearing. Having carefully reviewed the declaration, we conclude that Sega has not met its burden of establishing nonfunctionality.

Based on the Nagashima declaration and on the modified cartridges, the district court concluded that the TMSS initialization sequence was not a necessary component of a Genesis-compatible game. 9 The court found that Accolade could have created a game cartridge that lacked the TMSS initialization code but would still operate on the Genesis III, or could have programmed its games in such a way that the false Sega Message would not be displayed on the screen. The court further found that either modification could have been accomplished at minimal additional expense to Accolade. Accordingly, the court ruled that Accolade could not assert a functionality defense.

 The question whether a product feature is functional is a question of fact. Inwood Laboratories, Inc. v. Ives Laboratories, Inc., 456 U.S. 844, 855, 72 L. Ed. 2d 606, 102 S. Ct. 2182 (1982). Determination of the correct legal standard to apply in evaluating functionality, however,   [*1531]   is a question of law which we review de novo. Id. at 855 n.15. The burden of proving nonfunctionality is on Sega. See Rachel v. Banana Republic, Inc., 831 F.2d 1503, 1506 (9th Cir. 1987). In the case before us, we conclude that the district court's finding of nonfunctionality was based on its use of an incorrect legal standard. Viewed in the correct light, the record before us supports only one conclusion: The TMSS initialization code is a functional feature of a Genesis-compatible game and Accolade may not be barred from using it.

"Functional features of a product are features 'which constitute the actual benefit that the consumer wishes to purchase, as distinguished from an assurance that a particular entity made, sponsored, or endorsed a product.'" Vuitton et Fils S.A. v. J. Young Enterprises, Inc., 644 F.2d 769, 774 (9th Cir. 1981)  [**64]   (quoting International Order of Job's Daughters v. Lindeburg & Co., 633 F.2d 912, 917 (9th Cir. 1980), cert. denied, 452 U.S. 941, 69 L. Ed. 2d 956, 101 S. Ct. 3086 (1981)). A product feature thus is functional "if it is essential to the use or purpose of the article or if it affects the cost or quality of the article." Inwood Laboratories, 456 U.S. at 850 n.10. The Lanham Act does not protect essentially functional or utilitarian product features because such protection would constitute a grant of a perpetual monopoly over features that could not be patented. Keene Corp. v. Paraflex Industries, Inc., 653 F.2d 822, 824 (3d Cir. 1981). Even when the allegedly functional product feature is a trademark, the trademark owner may not enjoy a monopoly over the functional use of the mark. Job's Daughters, 633 F.2d at 918-19.

In determining whether a product feature is functional, a court may consider a number of factors, including - but not limited to - "the availability of alternative designs; and whether a particular design results from a comparatively simple or cheap   [**65]   method of manufacture." Clamp Mfg. Co. v. Enco Mfg. Co., Inc., 870 F.2d 512, 516 (9th Cir.), cert. denied, 493 U.S. 872107 L. Ed. 2d 155, 110 S. Ct. 202 (1989). The availability of alternative methods of manufacture must be more than merely theoretical or speculative, however. The court must find "that commercially feasible alternative configurations exist." Id. (emphasis added). Moreover, some cases have even suggested that in order to establish nonfunctionality the party with the burden must demonstrate that the product feature "'serves no purpose other than identification.'" Keene Corp., 653 F.2d at 826 (quoting SK&F Co. v. Premo Pharmaceutical Laboratories, Inc., 625 F.2d 1055, 1063 (3d Cir. 1980)). With these principles in mind, we turn to the question whether the TMSS initialization code is a functional feature of a Genesis-compatible game.

It is indisputable that, in the case before us, part of "the actual benefit that the consumer wishes to purchase" is compatibility with the Genesis III console. The TMSS initialization code provides that compatibility. Sega argues that the modified cartridges that were introduced in the district court establish the actual existence of technically and commercially feasible alternative methods of gaining access to the Genesis III. The cartridges were prepared by Nagashima, an employee in Sega's Hardware Research and Development Department who was "familiar with the TMSS system". At most, the Nagashima affidavit establishes that an individual familiar with the operation of the TMSS can discover a way to engineer around it. It does not establish that a competitor with no knowledge of the workings of the TMSS could do so. Nor is there any evidence that there was any public or industry awareness of any alternate method for gaining access to the Genesis III. Evidence that an individual, even an independent expert, produced one or more cartridges is not sufficient proof that an alternate method exists. What is needed for proof of that fact is proof of the method itself. Here, such proof is totally lacking. What is also needed is proof that knowledge of the alternate method exists or is readily available to knowledgeable persons in the industry. That proof also is totally lacking here. Accordingly, the district court erred as a matter of law in concluding that the Nagashima declaration and the modified cartridges were sufficient to establish nonfunctionality.

  [*1532]   Because the TMSS serves the function of regulating access to the Genesis III, and because a means of access to the Genesis III console without using the TMSS initialization code is not known to manufacturers of competing video game cartridges, there is an insufficient basis for a finding of nonfunctionality. Moreover, we note that the only evidence in the record (other than the Nagashima declaration) relating to Accolade's ability to gain access to the Genesis III through the use of any process other than the TMSS is the affidavit of Alan Miller. Miller stated that Accolade's software engineers - who, absent any evidence to the contrary, we presume to be reasonably competent representatives of their profession - have not been able to discover such a method. This evidence supports our conclusion that Sega has not met its burden of establishing nonfunctionality.

Sega argues that it is not required to share with Accolade or with any other competitor the secrets of how the TMSS works, and how to engineer around it. Sega is correct - the law does not require that it disclose its trade secrets to Accolade in connection with its effort to prevail on its Lanham Act claim, nor in connection with its effort to defend itself against Accolade's counterclaim. Nevertheless, a Lanham Act plaintiff is not entitled to prevail in litigation solely on the basis of unsupported assertions. Rather, it has a choice. It can take its chances and proceed to trial without the sensitive evidence. Alternatively, if it believes the evidence important to the resolution of the dispute, it may seek a protective order from the court pursuant to Federal Rule of Civil Procedure 26(c)(7) governing discovery. "The protective order is not a substitute for [evidence relevant to the merits]. Its purpose . . . is to prevent harm by limiting disclosure of relevant and necessary information." Micro Motion, Inc. v. Kane Steel Co., Inc., 894 F.2d 1318, 1325 (Fed. Cir. 1990) (emphasis omitted). Upon a showing that a protective order is warranted, see American Standard, Inc. v. Pfizer Inc., 828 F.2d 734, 739-44 (Fed. Cir. 1987), the court may restrict access to the disputed material to the opposing party's counsel, or may allow the parties to retain independent experts to evaluate material that is subject to the protective order. See, e.g., Safe Flight Instrument Corp. v. Sundstrand Data Control, Inc., 682 F. Supp. 20, 22 (D. Del. 1988) (listing cases). The latter solution is particularly helpful to the court in a case such as this one, in which the dispute is highly technical in nature. However, neither the district court nor Sega took advantage of this procedure. Thus there is no independent evidence to support the conclusion offered by Nagashima.

In summary, because Sega did not produce sufficient evidence regarding the existence of a feasible alternative to the use of the TMSS initialization code, it did not carry its burden and its claim of nonfunctionality fails. Possibly, Sega will be able to meet its burden of proof at trial. We cannot say. However, we conclude that in light of the record before the district court, Sega was not entitled to preliminary injunctive relief under the Lanham Act. 10

C. Accolade's Request for Preliminary Injunctive Relief

Finally, we decline to order the district court to grant Accolade preliminary injunctive relief on its Lanham Act claim. If requested, the district court may reconsider that issue in light of the legal principles we   [*1533]   have set forth. The parties have presented arguments regarding the hardships they would suffer under various circumstances. We believe those arguments should be weighed by the district court before any affirmative relief is ordered. Moreover, the parties may have additional factual material they wish to present regarding the question of Accolade's right to preliminary injunctive relief. Pending further consideration of this matter by the district court, we are content to let the matter rest where it stands, with each party as free to act as it was before the issuance of preliminary injunctive relief. We are confident that preserving the status quo in this manner will not lead to any serious inequity. Costs on appeal shall be assessed against Sega.

FOOTNOTES

9 Accolade challenges the admissibility of the Nagashima declaration and the modified cartridges on several grounds. First, it argues that the district court promised to hold an in camera hearing on the declaration, but never did so. However, the record reveals that the district judge ultimately promised to hold such a hearing only if she felt it was necessary.

Second, Accolade contends that because Nagashima never specified the nature of the modification that he had made to Accolade's cartridges, the district court erred in admitting the cartridges as evidence without ascertaining that the TMSS initialization sequence really had been omitted. In a preliminary injunction proceeding, the district court is accorded broad discretion in ruling on the admissibility of evidence. Flynt Distributing Co., Inc. v. Harvey, 734 F.2d 1389, 1394 (9th Cir. 1984). In the absence of any evidence that Nagashima was lying, it was not an abuse of discretion for the district judge to admit his declaration and the altered Accolade cartridges as evidence. The fact that neither Accolade nor the district court was able to verify Nagashima's statements affects the weight to be given the statements and the proffered cartridges, not their admissibility.

10 Sega contends that even if the TMSS code is functional, Accolade, as the copier, was obligated to take the most effective measures reasonably available to eliminate the consumer confusion that has arisen as a result of the association of Sega's trademark with Accolade's product. The district court relied on Plasticolor Molded Products v. Ford Motor Co., 713 F. Supp. 1329, 1339 (C.D. Cal. 1989), a decision it acknowledged had been vacated. See Plasticolor Molded Products v. Ford Motor Co., 767 F. Supp. 1036 (C.D. Cal. 1991). When a product feature is both functional and source-identifying, the copier need only take reasonable measures to avoid consumer confusion. American Greetings Corp. v. Dan-Dee Imports, Inc., 807 F.2d 1136, 1141 (3d Cir. 1986); Job's Daughters, 633 F.2d at 919 (the degree of protection afforded a product feature that has both functional and source-identifying aspects depends on the characteristics of the use and on the copier's merchandising practices). Assuming arguendo that the rules applicable to copiers apply here, the measures adopted by Accolade satisfy a reasonableness standard. Accolade placed disclaimers on its packaging materials which stated that "Accolade, Inc. is not associated with Sega Enterprises, Ltd. " While Accolade could have worded its disclaimer more strongly, the version that it chose would appear to be sufficient.