The Ultimate History of Video Games: From Pong to Pokémon and Beyond—The Story Behind the Craze That Touched Our Lives and Changed the World (59 page)

Trott found in favor of Epyx and reversed Ingram’s decision. Epyx was allowed to market
World Karate Championship.
This decision would have a decisive impact on several future decisions, including another case with Data East. In 1993, Capcom released the game
Street Fighter II
, which became an international arcade sensation. Shortly after the game was released for home systems, Data East released the fighting game
Fighter’s History
, which had similar combatants
and moves. Capcom took Data East to court, claiming infringement, but the courts ruled in Data East’s favor.

In 1985, Steven Ross, president of Warner Communications, divided Atari into two companies and sold off shares of each. He sold 75 percent of Atari Corporation, formerly known as the consumer division, to Jack Tramiel. He kept 40 percent of Atari Games Corporation, the arcade division, and sold the rest to Masaya Nakamura, founder of Namco. Nakamura had hoped to develop synergy between the two companies. Instead, he found the arrangement unsatisfactory and decided to sell his stake in Atari. Backed by a group of employees and Time Warner, Hideyuki Nakajima, the man Nakamura sent to manage Namco’s American operations, bought Atari Games in 1987.

Nakajima is generally remembered as a smart and extremely likable man with a long history in the video game industry.
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When Nolan Bushnell first opened Atari Japan, in 1973, he hired Nakajima to manage it. One year later, Bushnell sold the operation to Namco and Nakamura hired Nakajima to continue running the company.

Shortly after taking over Atari, Nakajima decided to leverage some of Atari’s arcade games as consumer products. He could not publish the games under the Atari banner because the consumer rights to the Atari name belonged to
Atari Corporation. Instead, Nakajima created a wholly owned subsidiary of Atari Games called Tengen.
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At the time, the only viable outlet for video games was the hugely lucrative Nintendo Entertainment System (NES) market. Sega was not licensing games for the Master System, and the Atari 7800 had barely made a dent in the market. To break into the market, Nakajima knew he would need to become a licensee of Nintendo, so he met with Nintendo president Minoru Arakawa and senior vice president Howard Lincoln in 1987 to discuss the terms of their licensing agreement.

Nakajima wanted special privileges that had not been granted to other licensees.
**
As the only company with access to the Atari library, he felt Tengen had more to contribute, but Arakawa insisted that all licensees receive the same terms. Nakajima ultimately agreed to Nintendo’s terms and signed on as a licensee in December 1987. What Arakawa and Lincoln did not realize was that they were entering into a trap.

It is not known if Nakajima ever planned to honor the licensing agreement, but Atari engineers began trying to discover ways around the security devices in the Nintendo Entertainment System a full year before he signed the agreement. (The NES had a custom-designed security chip containing a protocol called “10NES programming” that detected unlicensed cartridges and prevented them from working on the console.)

Nintendo Co, Ltd., did not have this security system when the Famicom was released in Japan. The system was designed for the NES, and it was built around a special chip that was placed in all consoles and cartridges. The chips worked like a lock and key, communicating signals in an initialization process. The NES simply ignored cartridges that lacked the security chip, and Atari’s engineers were unable to duplicate it.

In 1988, as Nakajima agreed to release licensed versions of
Pac-Man, RBI Baseball
, and
Gauntlet
, his lawyers found another method of analyzing the security chip. They illegally obtained a reproduction of the 10NES program through the Copyright Office by signing a false affidavit stating that they needed it for use in a copyright infringement suit Nintendo had filed against them. The suit was entirely fictional.

Submitting the false affidavit was a mistake that would haunt Atari in future court actions. According to several accounts, a team of Atari engineers running a “Clean Room” operation was close to breaking the 10NES code. By illegally obtaining a reproduction of the code from the Copyright Office, Atari tainted the operation.

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.

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.)

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.

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.

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.
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The judge found in favor of Nintendo, but the battle with Atari was only beginning.