I’ve always been a fan of spotlighting important legal issues that seem to fall between the cracks. So if net neutrality is “the most important public policy you’ve probably never heard of,” and if last year’s documentary filmmaking allowance was the most important DMCA exception nobody seemed to notice, then the Ninth Circuit’s February 17, 2011 decision in MDY Industries v. Blizzard Entertainment is the most important denial of a motion for rehearing that no one is talking about — especially if, like me, you love video games, justice, and legalese-laden 48-page opinions that read kind of like Conrad’s Heart of Darkness.

The Lawsuit

Admittedly, the premise of this case is pretty ridiculous. But beneath that ridiculous premise, and the pages upon pages of legal minutia, is a pretty important and interesting legal issue that has real influence on your everyday life.

MDY Industries centers on a “bot” (short for robot) program called “Glider.” Using the Glider software allows World of Warcraft gamers to put a WoW character on autopilot, thereby avoiding the laborious chore of “leveling” the character and acquiring weapons and gold. In other words, Glider allows WoW gamers to skip the nascent stages of character development and proceed straight to the joy of being powerful and wealthy — something many WoW gamers will never actually experience in real life. Conceptually, using Glider is similar to “gold farming” — i.e., paying someone in a developing country to acquire virtual money for you. (It would be fascinating to know what effect Glider has had on the hundreds of thousands of gold farmers in the developing world.)

The legal fight began more than four years ago, when MDY preemptively sued Blizzard for a declaration of its rights after Blizzard’s counsel visited MDY founder Michael Donnelly at home in October 2006, “threatening suit unless MDY immediately ceased selling Glider and remitted all profits to Blizzard.” Naturally, Blizzard had been very unhappy about Glider and (among other things) the effect Glider was having on WoW’s virtual economy.

From Donnelly’s perspective, his company made $3.5 million by selling a legitimate aftermarket product that made WoW more enjoyable for many gamers. From Blizzard’s perspective, it not only had to spend money dealing with “bot” complaints from its users, but it also lost substantial revenues from gamers who otherwise would have spent many more billable-months in their quests to obtain virtual fame and fortune (e.g., instead of subscribing to WoW for one year, a player might only subscribe to WoW for 6 months, since the player could achieve more in less time).

The Decision

Okay, the Ninth Circuit’s decision may not be as exciting as LeBron James taking his talents to South Beach on national television. But give it a chance!

First, the Court held that WoW gamers are licensees rather than owners of the WoW game. What does that mean as a practical matter? Well, after adding a healthy dose of convoluted legal analysis about covenants versus conditions, you ultimately end up at the conclusion that aftermarket companies like MDY Industries are off the hook for copyright infringement on a vicarious liability theory. (Interestingly, the status of software buyers as licensees rather than owners is vital to the software industry’s overall copyright posture, but here, cut against the game developer.) Case over, right? Not yet.

The second major holding relates to the Digital Millennium Copyright Act (the DMCA). Under the DMCA, aftermarket companies like MDY Industries can be found liable for breaking technological protection measures (TPMs) of a copyrighted work. In this case, Blizzard uses a TPM ominously called “Warden” to make sure WoW gamers are not using bots like Glider. Because Glider attempts to circumvent Warden through various technological tricks, the Ninth Circuit held that Glider violates the DMCA, even though (according to the first ruling) it does not do anything to promote actual copyright infringement.

In other words, the Ninth Circuit ruled that a company may be held liable under a statute specifically designed to prevent copyright infringement, even if it does not infringe or promote the infringement of copyrights.

This second holding doesn’t just run contrary to intuition — it also directly contradicts an opinion from the Court of Appeals for the Federal Circuit, which held that, in order to violate the DMCA, circumventing technology (e.g., Glider) must actually infringe or facilitate infringement of a copyright. Although this requirement is not found in the actual text of the DMCA, the Federal Circuit provided numerous important policy reasons for why it should be implied. The Ninth Circuit, on the other hand, rejected these reasons, mainly on the ground that the text of the DMCA is clear and that it is not the Ninth Circuit’s job to impose its policy preferences on existing law.

The Aftermath

The Ninth Circuit’s reading of the DMCA, while perhaps technically accurate, could stifle innovation and will lead to anti-competitive behavior. As Warren Buffet once said, “In business, I look for economic castles protected by unbreachable moats.” Of course, the combination of TPMs and the DMCA are a perfect unbreachable moat. Businesses can use the DMCA to create product lock-ins, obtain geographic market segmentation, prevent competitors from achieving product interoperability, and outright obliterate competition in almost any product’s aftermarket.

English translation: Interested in creating a product that will improve an existing video game or let you play it on a different platform? How about that idea for improving movie-watching or satellite television? How about selling a program that would allow for Braille translations on e-books? Or maybe you’d like to make a fair use of a copyrighted work that you already own. Then make sure you and your business aren’t circumventing any TPMs, or take your otherwise perfectly legal, socially productive, technologically intensive business plan to D.C. (where the Federal Circuit reigns). Those DMCA penalties can be stiff.