Silicon Knights, Inc. v. Epic Games, Inc.

Filing 692

ORDER granting in part and denying in part 616 Motion in Limine, denying 624 Motion in Limine, and granting in part and denying in part 642 Motion to Seal Document. Signed by Chief US District Judge James C. Dever III on 11/8/2011. (Sawyer, D.)

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF NORTII CAROLINA

WESTERN DIVISION

No.5:07-CV-275-D

SILICON KNIGHTS, INC.,
Plaintiff,
v.
EPIC GAMES, INC.,
Defendant.

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ORDER

On July 8, 2011, Epic Games, Inc. ("Epic" or "defendant") filed a motion in limine regarding
various matters [D.E. 616] and a motion in limine to exclude alleged misrepresentations and
omissions [D.E. 624]. On July 15, 2011, Silicon Knights, Inc. ("SK" or "plaintiff') filed responses
in opposition [D.E. 631, 632] and a motion to seal one of SK's briefs and the supporting exhibits
[D.E.642]. On July 22, 2011, Epic replied [D.E. 660, 661]. As explained below, the court grants
in part and denies in part Epic's motion in limine regarding various matters and denies Epic's motion
in limine to exclude alleged misrepresentations and omissions. As for SK's motion to seal its
response, the court grants the motion to seal in part and denies the motion to seal in part.

1.
SK and Epic are both engaged in the business ofdeveloping video games. On May 10,2005,
SK entered into a license agreement to use Epic's video game engine, the Unreal Engine 3 ("UE3 "),
in SK's development of Too Humm:l, a game SK produced under a publishing agreement with
Microsoft. SK contends that problems with UE3 eventually forced SK to develop their own game
engine ("SKE"), which delayed the release of Too Human by nearly two years. In 2007, SK filed
suit against Epic. SK alleges that, during the parties' negotiations, Epic made false representations
concerning the license agreement and the functionality ofUE3. SK asserts multiple claims against
Epic, including breach of contract, fraud, and other torts. In response, Epic filed counterclaims

asserting breach of contract, copyright infringement, and misappropriation of trade secrets, and
seeking imposition ofa constructive trust. Epic alleges that SK misappropriated Epic's trade secrets
and infringed its copyright when SK used UE3 programming code to develop the SKE game engine.

n.
A motion in limine to exclude evidence should be granted only when the evidence is clearly
inadmissible on all potential grounds. E.g., Wilkins v. Kmart Corp., 487 F. Supp. 2d 1216, 1218-19
(D. Kan. 2007); Hawthorne Partners v. AT&T Techs .. Inc., 831 F. Supp. 1398, 1400--01 (N.D.lll.
1993); see generally 21 Charles Alan Wright & Kenneth W. Graham, Jr., Federal Practice &
Procedure § 5037.10 (2d ed. 1982). This principle applies because "a court is almost always better
situated during the actual trial to assess the value and utility ofevidence." Wilkins, 487 F. Supp. 2d
at 1218; see Hawthorne, 831 F. Supp. at 1400--01; Luce v. United States, 469 U.S. 38,41 (1984)
(noting that courts are "handicapped in any effort to rule on subtle evidentiary questions outside a
factual context").
Epic's motion in limine regarding various matters seeks to exclude the introduction of
evidence concerning ten different topics. The court addresses each in turn.

A.
First, Epic seeks to exclude evidence and argument concerning SK's dismissed claims and
the damages SK sought under those claims. Def.'s Mem. Supp. Mot. [D.E. 617] 2-8. SK argues
that the evidence regarding SK's damages remains relevant and admissible to their remaining claims.
Pl.'s Mem. Opp'n [D.E. 632] 4-11.
Of course, the parties cannot discuss SK's dismissed claims or introduce evidence on the
dismissed claims. The crux ofthe briefing between Epic and SK relates to the exclusion ofevidence
concerning (1) Epic's profits, and, (2) SK's lost profits on video games other than Too Human. The
court will address damages in connection with its ruling on the Daubert motion concerning Terry
Lloyd's testimony. As part of that Daubert analysis, the court will determine what is relevant as to

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damages on the remaining claims. The analysis will include addressing the admissibility of (1)
Epic's profits, and, (2) SK's hypothetical profits on The Ritualyst, Too Human II, Too Human ill,
and unnamed projects with software publishers Vivendi, THQ, Capcom, and NAMCO.

B.
Second, Epic seeks to exclude evidence and argument concerning the alleged harm that other
UE3 licensees suffered. Def.'s Mem. Supp. Mot. 8. Epic argues that such evidence is inadmissible
hearsay, is prejudicial, and is not relevant because SK cannot recover damages for harm Epic
allegedly caused to other UE3 licensees. Id.; Def.'s Reply [D.E. 660] 3-4. SK responds that the
evidence is relevant to SK's claims for fraud, negligent misrepresentation, and unfair and deceptive
trade practices, as well as to SK's affirmative defenses, because it is probative ofEpic's notice and
state of mind regarding problems with UE3. Pl.'s Mem. Opp'n 11-13.
A plaintiff may offer evidence ofprior acts or events to prove a defendant's notice or state
of mind. See, e.g., Benedi v. McNeil-P.P.C.. Inc., 66 F.3d 1378, 1385-86 (4th Cir. 1995); FTC v.
Amy Travel Serv.. Inc., 875 F.2d 564, 576 n.ll (7thCir. 1989). When evidence is offered for the
limited purpose of proving notice, it is not hearsay. See Fed. R. Evid. 801(c); Benedi, 66 F.3d at
1385-86. Of course, the evidence is still subject to Federal Ru1e of Evidence 403, which permits
a court to exclude evidence if the "probative value is substantially outweighed by the danger of
unfair prejudice, confusion ofthe issues, or misleading the jury, or by considerations ofundue delay,

waste oftime, or needless presentation ofcumu1ative evidence." Fed. R. Evid. 403; see also Benedi,
66 F.3d at 1386.
Evidence of alleged harm to other UE3licensees is probative of Epic's notice and state of
mind at the time Epic and SK entered into the license agreement. Thus, evidence that Epic was
aware ofharm to other UE3 licensees when the parties entered the license agreement is relevant to
SK's claims for negligent misrepresentation, fraud, unfair and deceptive trade practices, and
common-law unfair competition. See, y:.. Phelps-Dickson Builders. L.L.C. v. Amerimann Partners,

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172 N.C. App. 427,437, 617 S.E.2d 664, 670-71 (2005). The court therefore denies Epic's motion
to exclude evidence of alleged hann that other UE3 licensees suffered before May 10,2005. The
court will instruct the jury that it may consider the alleged hann to other UE3 licensees only as proof
of notice and state of mind.
As for alleged harm that other UE3 licensees suffered after May 10,2005, the evidence is
confusing, potentially misleading, and a waste oftime. See Fed. R. Evid. 403. These considerations
substantially outweigh any probative value of the evidence. Therefore, Epic's motion to exclude
evidence and argument concerning alleged hann to other UE3licensees is granted in part and denied
in part.

C.
Third, Epic seeks to exclude evidence and argument concerning hearsay complaints that other
UE3 licensees made and specifically identifies an undated memorandum [D.E. 562-10] and a letter
from Buena Vista Games [D.E. 559-12]. Def.'s Mem. Supp. Mot. 9-10. Epic also notes that
complaints from other UE3 licensees are prejudicial and would result in mini-trials over collateral
issues. Id. at 9. SK responds that the complaints that other UE3 licensees made are not hearsay
because they are not offered for the truth ofthe matter. Pl.'sMem. Opp'n 13-14. Instead, SKoffers
the complaints to show Epic's notice and state ofmind. Id. at 14. Alternatively, SK argues that the
licensee complaints meet several hearsay exceptions. Id. at 14-16.
As noted, a plaintiff may offer evidence ofprior acts or events to prove a defendant's notice
or state ofmind.

See,~,

Benedi, 66 F.3d at 1385-86; Amy Travel, 875 F.2d at 576 n.ll. When

evidence is offered for the limited purpose ofproving notice or state of mind, it is not hearsay. See
Fed. R. Evid. 801(c); Benedi, 66 F.3d at 1385-86. Thus, SKmay offer evidence ofcomplaints that
other UE3 licensees made before May 10,2005, for the limited purpose of showing Epic's notice
and state ofmind. The court will instruct the jury that it may consider the complaints only as proof
ofnotice and state of mind and not as evidence that the information contained in the complaints is

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true. I As for any UE3 licensee complaints made after May 10, 2005, the court excludes the
complaints under Federal Rule of Evidence 403 as confusing, potentially misleading, and a waste
oftime. Accordingly, the June 7, 2006 letter from Buena Vista Games [D.E. 559-12] is excluded.
The court grants Epic's motion in part and denies the motion in part.

D.
Fourth, Epic seeks to exclude evidence and argument concerning any alleged
misrepresentations or omissions that SK did not identify in SK's answer to interrogatory 13. Def.' s
Mem. Supp. Mot. 10. Epic also seeks to prevent SK from calling any witnesses not listed in SK's
answer to interrogatory 13 regarding the alleged misrepresentations and omissions. Id. SK responds
that Epic's motion should be denied because the interrogatory did not ask SK to identify alleged
omissions Epic made to SK and did not ask SK to identify alleged misrepresentations or omissions
Epic made to third parties. Pl.'s Mem. Opp'n 16-18.
The court has examined interrogatory 13, SK's answer, and the transcript of the parties'
October 15, 2009 status conference with Magistrate Judge Gates [D.E. 406]. SK's answer to
interrogatory 13 includes all alleged misrepresentations and omissions that Epic made to SK. See

1 As for SK's alternative argument to admit licensee complaints for the truth of the matter
asserted, the two documents [D.E. 559-12,562-10] do not fit within any exceptions cited by SK.
First, habit evidence under Federal Rule ofEvidence 406 is not an exception to the hearsay rule. See
Brooks v. Haggen, No. C 07-2615 MEJ, 2010 WL 4226693, at *2-3 (N.D. Cal. Oct. 21, 2010). In
any event, SK does not explain why such habit evidence would be admissible. Second, the
documents are not contemporaneous observations. See Fed. R. Evid. 803(1). Third, the documents
are not excited utterances, but are a product of reflection. See Fed. R. Evid. 803(2); United States
v. Jennings, 496 F.3d 344, 349-50 (4th Cir. 2007). Fourth, the documents do not qualify as records
ofEpies regularly conducted business. See Fed. R. Evid. 803(6); Rowland v. Am. Gen. Fin.. Inc.,
340 F.3d 187, 194-95 (4th Cir. 2003). Fifth, SK may not rely on the residual hearsay exception
because SK has not provided notice or shown that it was unable to obtain admissible evidence. See
Fed. R. Evid. 807. Finally, SK cannot bootstrap the licensee complaints into evidence pursuant to
the rule ofcompleteness. See Fed. R. Evid. 106. As the party planning to offer Epic's responses into
evidence, SK does not qualify as an "adverse party" under the rule. Id. Moreover, Rule 106 is not
an exception to the hearsay rule. See United States v. Woolbright, 831 F.2d 1390, 1395 (8th Cir.
1987).

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Hr'g Tr. 26-31 (Oct. 15,2009, Status Conference). Thus, as for alleged misrepresentations and
omissions that Epic made to SK, SK is limited to those identified in the answer to interrogatory 13.
See id. at 30-31. However, interrogatory 13 does not address alleged misrepresentations or
omissions that Epic made to third parties. Thus, interrogatory 13 does not limit SK's ability to
introduce evidence or argument concerning Epic's alleged misrepresentations or omissions made to
third parties. As for SK' s witnesses, SK specifically reserved the right to supplement its witness list
for trial. See id. at 31-32. Therefore, SK's answer to interrogatory 13 does not limit who may be
a witness? Epic's motion is granted in part and denied in part.

E.
Fifth, Epic seeks to exclude evidence and argument concerning SK's alleged problems with
UE3 that SK did not identify in compliance with Judge Gates's June 13, 2008, order. Def.' s Mem.
Supp. Mot. 11. SK responds that the list ofalleged problems with UE3 was compiled to assist Epic
with document production, that the list never purported to be SK's list ofall evidence and arguments
regarding problems with UE3, and that Epic prepared the initial list. Pl.'s Mem. Opp'n 18-20.
The court has reviewed the documents cited by both parties, Judge Gates's June 13,2008
order [D.E. 106], and the transcript ofthe July 17,2008 status conference [D.E. 141]. The June 13,
2008 order and the list ofalleged UE3 problems concern Epic's document production and discovery
obligations. Epic's motion is denied.

F.
Sixth, Epic seeks to exclude evidence and argument concerning Epic's future revenue and
value projections, as well as bonuses paid to Epic's officers. Def.'s Mem. Supp. Mot. 12-13. Epic
contends that this financial information is not relevant and is unfairly prejudicial. Id. SK responds
that the financial information is relevant to Epic's motive, the bias and credibility ofEpic's officers

2 Ofcourse,

SK subsequently submitted a witness list, which does limit who SK may call as
witnesses. See Proposed Joint Pretrial Order [D.E. 674] 707-17.
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who may testify as witnesses at trial, and the amount ofSK's compensatory and punitive damages
awards. Pl.'s Mem. Opp'n 21.
To the extent this motion implicates the testimony of Terry Lloyd or the proper calculation
of SK's damages, the court will address those issues in connection with the Daubert motion
concerning Lloyd. As for Epic's projected revenue and value as evidence of Epic's motive, such
evidence is barely relevant. Likewise, bonus payments to Epic's officers are barely relevant as
evidence of motive, bias, or credibility. Even assuming that this financial information is relevant,
the evidence is confusing, a waste oftime, and unfairly prejudicial to Epic. See Fed. R. Evid. 403.
Therefore, to the extent SK seeks to offer the evidence to prove motive, bias, or attack a witness's
credibility, the evidence is excluded under Rule 403.
The court also rejects SK's claim that Epic's bonus payments, projected revenue, or projected
value are relevant to punitive damages. The purpose ofpunitive damages is ''to punish a defendant
for egregiously wrongful acts and to deter the defendant and others from committing similar
wrongful acts." N.C. Gen. Stat. § ID-I. UnderNorthCarolinalaw,aplaintiffmayrecoverpunitive
damages only if the defendant is liable for compensatory damages and the plaintiff proves an
aggravating factor (such as fraud) by clear and convincing evidence. Id., § 1D-I 5; Schenk v. HNA
Holdings. Inc., 170 N.C. App. 555, 559,613 S.E.2d 503, 507 (2005). To award punitive damages
against a corporation, "the officers, directors, or managers of the corporation [must have]
participated in or condoned the conduct constituting the aggravating factor giving rise to punitive
damages." N.C. Gen. Stat. § ID-Is(c). Ifthe jury reaches the issue of punitive damages, thejury
(1)

(2)

[s]hall consider the purposes ofpunitive damages set forth in [N.C. Gen. Stat
§] ID-I; and
[m]ay consider only that evidence that relates to the following:
a.
The reprehensibility of the defendant's motives and conduct.
b.
The likelihood, at the relevant time, of serious harm.
c.
The degree of the defendant's awareness of the probable
consequences of its conduct.
d.
The duration of the defendant's conduct.
e.
The actual damages suffered by the [plaintiff].
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f.
g.
h.
1.

Any concealment by the defendant ofthe facts or consequences ofits
conduct.
The existence and frequency of any similar past conduct by the
defendant.
Whether the defendant profited from the conduct.
The defendant's ability to pay punitive damages, as evidenced by its
revenues or net worth.

N.C. Gen. Stat. § ID-35 (emphasis added). Thus, the statute permits evidence of a defendant's
actual revenues or net worth. The statute does not, however, permit evidence of a defendant's
projected revenues, projected values, or projected net worth. Likewise, the statute does not permit
evidence ofa defendant's bonus payments to employees. Therefore, the court grants Epic's motion.
G.
Seventh, Epic seeks to exclude evidence and argument concerning the operability ofUE3 on
the PlayStation 3 console. Def.' s Mem. Supp. Mot. 14-15. Epic argues that "SK cannot maintain
any actionable claim associated with the alleged breach of warranty regarding PlayStation 3 when
it did not pay a license fee to use UE3 for that purpose." Id. 14. SK responds that Epic's motion in
limine is actually a belated motion for partial summary judgment, misconstrues the license
agreement, and ignores factual disputes regarding Epic's alleged breach of contract. Pl.'s Mem.
Opp'n 21-24.
Epic's motion is an untimely motion for summary judgment on SK's breach of warranty
claim. Thus, it is denied as procedurally improper. Additionally, in light of the record, the factual
issues in dispute, and the governing law, Epic's motion lacks substantive merit and is denied.

H.
Eighth, Epic seeks to exclude evidence and argument concerning the court's summary
judgment rulings on SK's remaining claims. Def. 's Mem. Supp. Mot. 15. SK responds that it never
intended to offer evidence or argument concerning the court's summary judgment rulings. Pl.'s
Mem. Opp'n 25. SK notes that Epic's motion "is simply appropriate trial practice" and requests the
court, to the extent necessary, to bar both parties from referencing the court's prior rulings. Id.

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Both parties are precluded from making arguments concerning the court's rulings on each
party's motion for summary judgment. Thus, neither party shall mention that the court dismissed
some claims and permitted others to proceed to trial.

I.
Ninth, Epic seeks to exclude the introduction of evidence and argument concerning the
court's orders compelling discovery and the sufficiency ofeach party's discovery responses. Def.' s
Mem. Supp. Mot. 15-16; see Def.'s Reply 8. SK agrees that excluding all prior court rulings is
appropriate, but maintains that Epic's answers to discovery questions are admissible. Pl.'s Mem.
Opp'n 25-27.
Both parties are precluded from referencing any order setting forth the court's discovery
rulings or the sufficiency of a discovery response. Nonetheless, this ruling does not preclude SK
from asking Epic's witnesses about Epic's initial identification of 1,427 alleged trade secrets in UE3
in response to an interrogatory, or Epic's subsequent decision to rely on 333 alleged trade secrets in
Epic's trade secret counterclaim. The 1,427 alleged trade secrets identified in the interrogatory
constitute an admission by Epic, as do the 333 alleged trade secrets later identified. See Fed. R.
Evid. 801 (d){2). The decision not to rely on approximately 1,100 alleged trade secrets identified in
the interrogatory is likewise an admission by Epic. Id. In sum, the answers to discovery questions
by either party are admissions and are admissible. Epic's motion is granted in part and denied in
part.

J.
Tenth, Epic seeks to prevent Christopher Holland, SK's lead trial attorney in this case, from
testifying as a rebuttal witness at trial, pursuant to the North Carolina Revised Ru1es ofProfessional
Conduct. Def. 's Mem. Supp. Mot. 16-18. SKresponds that Holland shou1d not be disqualified, that
disqualification wou1d be a substantial hardship, and that Epic "created the issue thorough [sic] its
owndelay." Pl.'sMem. Opp'n27-30. Epic replies that SKhas been aware ofthis potential conflict

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for over three years; therefore, SK cannot now claim prejudice and Holland must choose a role.
Def.'s Reply 8-10.
A trial court has discretion to exclude an attorney's testimony when such testimony would
violate the rules ofprofessional conduct. See State v. EI~ 56 N.C. App. 590,593-94,289 S.E.2d
857,860 (1982); Town ofMebane v. Iowa Mut. Ins. Co., 28 N.C. App. 27, 31-32, 220 S.E.2d 623,
626 (1975). The North Carolina Revised Rules of Professional Conduct provide that
(a)

[a] lawyer shall not act as an advocate at a trial in which the lawyer is likely
to be a necessary witness except where:
(1) the testimony relates to an uncontested issue;
(2) the testimony relates to the nature and value oflegal services rendered
in the case; or
(3) disqualification ofthe lawyer would work substantial hardship on the
client.

N.C. Rev. R. Prof. Conduct § 3.7(a). The local rules of this court incorporate North Carolina's
Revised Rule of Professional Conduct § 3.7(a). See Local Civil Rule 83.1(j), EDNC.
Rule 3.7(a) provides a framework for the general rule that a lawyer acting as an advocate at
trial shall not be a witness. Thus, as a general proposition, Holland should not be a witness, whether
in SK' s case-in-chiefor as a rebuttal witness. SK argues that disqualification ofHolland would work
substantial hardship on SK. However, this is not a case of unfair surprise. See N.C. Rev. R. Prof.
Conduct § 3.7(a), cmt. 4 ("It is relevant that one or both parties could reasonably foresee that the
lawyer would probably be a witness."); see also EEOC v. Bardon. Inc., No. RWT 08cv1883, 2010
WL 323067, at *2 (D. Md. Jan. 19,2010). On May 13,2008, Epic raised the issue of Holland's
possible testimony at a status conference, and SK acknowledged that it was on notice ofHolland's
potential disqualification. See Hr' g Tr. 66-70 [D.E. 105] (May 13, 2008, Status Conference). 3 Epic
subsequently noticed Holland's deposition, and SK sought a protective order in February 2010. See

3 In fact, when Epic raised the issue at the status conference, SK's counsel stated that Epic
"is basically advising the court and advising us ... that this issue [of Holland' s disqualification] may
arise and [that Epic's counsel] doesn't want us to cry wolf somewhere down the road saying oh, it's
a surprise to us. We're on notice about it." Hr'g Tr. 70 (May 13,2008, Status Conference).

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Def.'s Reply, Ex. 2 (SK's Motion for Protective Order). SK stated that Holland's testimony would
be duplicative of information available through SK's corporate deponent and through other SK
employees. Id. 1-3. In doing so, SK essentially represented to the court that Holland's testimony
was unnecessary. The court has grave concerns about a violation of Rule 3.7(a), the potential for
juror confusion, and the prejudice to Epic. Holland therefore must choose whether he will act as an
advocate at trial or serve as a rebuttal witness. Holland may not do both. Holland shall notify the
court by November 29, 2011, whether he intends to be a witness. If he does intend to be a witness,
he will not act as an advocate at trial.

m.
Epic's motion in limine to exclude alleged misrepresentations and omissions seeks to
exclude thirty-six misrepresentations and nine omissions alleged by SK. Epic argues that these
alleged misrepresentations and omissions are legally insufficient to support a finding offraud. Def.' s
Mem. Supp. Mot. in Limine [D .E. 625] 1. Epic also argues that SK lacks factual support for certain
alleged misrepresentations and omissions. Id.2-9. Accordingly, Epic argues that the thirty-six
alleged misrepresentations and nine alleged omissions should be excluded under Federal Rules of
Evidence 402 and 403 because they are not relevant to SK's fraud claim and are unfairly prejudicial.

In response, SK cites the court's order denying Epic's motion for summary judgment. See
Silicon Knights. Inc. v. Epic Games. Inc., 5:07-CV-275-D [D.E. 592] slip op. at 12-25 (E.D.N.C.
Jan. 25, 2011), memorandum and recommendation adopted, [D.E. 605] (E.D.N.C. Mar. 24, 2011).
With respect to SK's fraud claim, the court observed that
[w]hile [some] representations ... or [the] corresponding omissions do appear to be
in the nature of opinions or promises, the court cannot say that they are non­
actionable as a matter oflaw by virtue oftheir nature. Rather, they present a question
for the jury that will depend on the intent behind them ....
Id. at 16. SK contends that, even if the misrepresentations and omissions are not independently
actionable, they are still admissible as evidence of Epic's ongoing scheme to defraud licensees and
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are probative ofEpic's intent. Pl.'sMem. Opp'nMot. in Limine [D.E. 631] 9-13. Additionally, SK
argues that the evidence is relevant to other claims, including SK's claims for negligent
misrepresentation, unfair and deceptive trade practices, and common-law unfair competition. See
id. 19-22.
The court has reviewed the thirty-six alleged misrepresentations and nine alleged omissions.
Epic has failed to establish that the evidence is clearly inadmissible on all potential grounds. See
Wilkins, 487 F. Supp. 2d at 1218-19; Hawthorne, 831 F. Supp. at 1400--01. Therefore, Epic's
motion in limine to exclude the alleged misrepresentations and omissions is denied. See Luce, 469
U.S. at 41; Wilkins, 487 F. Supp. 2d at 1218-19; Hawthorne, 831 F. Supp. at 1400-01.

IV.
In sum, the court GRANTS in part and DENIES in part Epic's motion in limine regarding
various matters [D.E. 616]. The court DENIES Epic's motion in limine to exclude alleged
misrepresentations and omissions [D.E. 624]. The court GRANTS in part and DENIES in part SK's
motion to seal the response in opposition [D.E. 642]. Sections m.A, m.B, m.e, m.D, m.E, m.G,
and m.! ofSK's response and the supporting documents are properly sealed. The balance of the
memorandum is not.
SO ORDERED. This...8.... day ofNovember 2011.

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