Silicon Knights v. Epic Games
Earlier we posted West and Zampella v. Activision and Gate Five LLC v. Beyoncé Knowles-Carter, the first two of what we consider the 5 Most Influential Video Game Lawsuits of 2012.
The discussion continues here with Silicon Knights v. Epic Games, which, so far, has ended badly for Silicon Knights.
Recently concluded Silicon Knights v. Epic Games could be considered the legal equivalent of a cowboy barroom brawl, complete with broken chairs and bottles. In this case, Silicon Knights took a cowboy swing at Epic, but was countered with a vicious uppercut and then thrown through the saloon window and out onto the street.
The conflict began in 2005 when well-regarded Canadian independent video game developer Silicon Knights entered into an agreement with Epic Games to use Epic's software engine, Unreal 3, in a game called Too Human, which Silicon Knights was developing for Microsoft Game Studios.  Key to the decision was Epic’s promise to deliver a working version of Unreal for Xbox 360.  When Epic failed to do so—as Silicon Knights interpreted the contract—they sued.
Silicon Knights' first swing was impressive. In its initial complaint, filed in July 2007, it claimed fraud, negligent misrepresentation, intentional interference with contractual relations and economic advantage, breach of warranty, breach of contract, and other related issues. Silicon Knights suggested that the most incriminating evidence was the completeness of Epic’s own game, Gears of War, which, in comparison to Too Human, was vastly superior, when previews of both were shown at E3 in 2006.  Silicon Knights then unabashedly accused Epic of intentionally and fraudulently diverting resources owed to its licensees in order to ensure the success of Epic's own game. 
Over the next five years, hundreds of documents and dozens of motions were filed. But in May 2012, Silicon Knights suffered a significant setback when the court disqualified an expert witness who had testified on their behalf on the amount of damages they had theoretically suffered.  That decision meant was that even if Silicon Knights had won, its damages would be limited to $1. 
By the end of the eleven-day trial, which concluded this year, not only had Silicon Knights lost the case entirely, but Epic prevailed on a counterclaim for breach of contract, copyright infringement, and misappropriation of trade secrets. Epic’s award, including damages, costs, and attorney fees, was a whopping $9 million.  Adding insult to injury, the court also ordered Silicon Knights to recall and/or destroy all copies of Too Human, X-Men: Destiny, Siren in the Maelstrom, The Sandman, and The Box/Ritualyst. 
In December 2012, Silicon Knights appealed, although many consider their chances at winning slight, given the weighty evidence against them. 
Why it’s Important
Shortly after filing suit against Epic, Silicon Knights publicly announced that they had scrapped Unreal and wrote their own engine in order to complete Too Human.  However, court documents reveal something slightly different. According to presiding Judge James C. Denver, Silicon Knights took portions of Epic’s Unreal Engine, in violation of their contractual agreement and copyright law. In Judge Denver’s decision, he stated that Silicon Knights had initiated a prolonged cover-up, taking steps to deliberately disguise and conceal hundreds of lines of Epic’s proprietary software, even going so far as to remove Epic’s copyright notices and other markings.  In that, Silicon Knights made a fatal mistake.
Within the context of a contractual dispute, a party has a general right (and obligation) to mitigate damages by taking steps to minimize costs and expenses. But mitigation has never included the right to infringe another’s copyright. The two are mutually exclusive, and Silicon Knights strengthened Epic’s case when they copied Epic's proprietary code and then made efforts to conceal it. 
Silicon Knights, no doubt, thought things would end differently. After all, in a suit they filed against Crystal Dynamics a decade earlier, they came out much better.
Silicon Knights v. Crystal Dynamics
In 1997, Silicon Knights sued video game publisher Crystal Dynamics.  According to court documents, the two had entered into a contract wherein Crystal Dynamics agreed to provide development funding and distribution for Blood Omen: Legacy of Kain in exchange for royalties and the right to create derivatives (sequels).  When Crystal Dynamics began working on a sequel without input from Silicon Knights, Silicon Knights sued, alleging, among other things, that Crystal Dynamics had entered into the original agreement with no intent to preform, and, echoing a similar assertion to what they argued against Epic, said that Crystal Dynamics had caused them several months of delay in their software development. 
The parties eventually settled out of court, with Crystal Dynamics retaining the underlying intellectual property, requiring credit to Silicon Knights. When they initiated their suit against Epic, perhaps Silicon Knights thought things would end similarly? If so, it was another fatal mistake.
What it Means to the Industry
Both in the initial complaint and publicly thereafter, Silicon Knights had openly accused Epic of sabotaging its licensees by intentionally diverting resources to ensure its own success. In essence, they questioned Epic's good faith and fair dealings with all its existing, and, perhaps more importantly, future customers, saying,
“…rather than provide support to Silicon Knights and Epic’s other many licensees of the Engine, Epic intentionally and wrongfully has used the fees from those licenses to launch its own game...” 
Further, consider that Epic’s Unreal Engine had already been phenomenally successful. Epic maintained vital relationships with hundreds of licensors and partners,  and its software licensing business was worth millions of dollars in annual income. When Silicon Knights put Epic's reputation on the line, they put Epic in a position where it had to win in order to save face. That isn't wise when you're out-gunned.
Legal disputes are expensive, and the majority of independent developers can't sustain protracted litigation. Silicon Knights v. Epic illustrates just how badly things can go, and the lesson learned, regardless of whether you’re right (or think you are), is that throwing a punch at a bigger more experienced cowboy rarely ends favorably.
By Dan Lee Rogers (c) 2013
Read other Influential Video Game Suits of 2012
 Silicon Knights v. Epic complaint, #49.
 Id. at #55.
 Epic’s Gears of War won best of show at E3 in 2006: http://www.ign.com/articles/2006/06/01/best-of-show-game-critics-e3-2006-winners. In comparison, Too Human was generally berated by reviewers: http://kotaku.com/280050/dyack-details-too-humans-e3-disappearing-act
 http://www.gamesindustry.biz/articles/2012-03-23-too-human-got-a-bad-rap-sequels-still-possible-says-dyack; and http://www.develop-online.net/news/30355/SK-v-Epic-Justice-will-be-done-says-Dyack
 Id., at page 18.
 Silicon Knights v. Crystal Dynamics, 983 F. Supp. 1303 (N.D. Cal. 1997)
 Id. at p. 64.
 Silicon Knights v. Epic complaint at introduction.
Dan Rogers is a practicing attorney within the video game and digital media industries. He’s also the author of several articles on the video game industry, technology, and digital law.