Electronic Arts' college sports franchises have been sacked by a U.S. federal appeals court.
In a 2-1 vote, the 9th U.S. Circuit Court of Appeals agreed with a lower court that EA had used the images in its video games of several ex-NCAA athletes without their permission in its NCAA football and basketball series. The decision comes two weeks after EA lost the rights to put the NCAA logo and name on its games beyond this year.
Circuit Judge Jay Bybee, writing for the majority of the court, said EA's game "literally recreates [Arizona State University quarterback Samuel] Keller in the very setting in which he has achieved renown."
Circuit Judge Sidney Thomas dissented, however, arguing that the games' creative elements "predominate over the commercial use of the athletes' likenesses" and that "Keller's impressive physical likeness can be morphed by the gamer into an overweight and slow virtual athlete, with anemic passing ability".
The decision could open up additional legal action against the video game publisher from other former college athletes who have been unhappy with their likenesses being used in the games without compensation.
In a statement, EA said it was "disappointed with the ruling against First Amendment protection in the Keller case. We believe the reasoning in Judge Thomas' dissent in that decision will ultimately prevail as we seek further court review."
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EA is already facing similar suits to the one ruled on today by the appeals court. The company asked a judge on Tuesday to dismiss the latest complaint, which was filed on behalf of a group of athletes led by Ed O'Bannon, a former star at the University of California, Los Angeles. Also, in May, a federal appeals court revived a similar suit from former Rutgers University quarterback Ryan Hart.
EA had argued in the case that using the athletes' likeness was protected under the free expression clause of the First Amendment. Judges disagreed in the case of college athletes, but—in a separate decision—agreed with EA in the case of former pro players.
The court unanimously upheld the dismissal of a suit by Hall of Famer Jim Brown, whose image was used in EA's Madden game.
EA has used the First Amendment argument before when facing legal action for images in its games. In 2011, Bell Helicopter parent Textron sued over the game maker's use of images of a trio of real world helicopters in "Battlefield 3."
Textron argued its choppers were used without permission and EA failed to pay licensing fees. EA claimed protection under the First Amendment and the use of the aircraft constituted fair use.
The case is still pending, though EA did lose an attempt to have the complaint dismissed a year ago.
While the Madden franchise is a larger driver of revenues, EA still relied heavily on its NCAA franchise. But sales this year have been soft, say analysts. John Taylor of Arcadia Investment Corp. said he believes sales of the 2013 installment are off roughly 10 percent compared to the 2012 game.
And starting next year, the company won't be able to use the NCAA name. The league recently announced it would not negotiate a new contract with EA when the current one expires next June.
"We are confident in our legal position regarding the use of our trademarks in video games," the NCAA said at the time. "But given the current business climate and costs of litigation, we determined participating in this game is not in the best interests of the NCAA. ... The NCAA has never licensed the use of current student-athlete names, images or likenesses to EA. The NCAA has no involvement in licenses between EA and former student-athletes."
EA has vowed to continue making college sports games, however.
"Our relationship with the Collegiate Licensing Company [which manages the trademarks of the majority of the colleges in the game] is strong and we are already working on a new game for next generation consoles which will launch next year and feature the college teams, leagues, and all the innovation fans expect from EA Sports," said Andrew Wilson, executive vice president of EA in a statement.
Analysts say they don't expect the loss to have a material financial impact on Electronic Arts, noting that the NCAA was a co-defendant in the suit.
"The transgressor here is the NCAA, I believe," said Michael Pachter of Wedbush Securities. "I don't believe EA said to the NCAA 'can we use licensed images of the players.' The NCAA said 'no' and EA said 'we're going to do it anyway'."
"The NCAA has the right to license the athletes image without compensation to the athlete if he's playing in a [real world] game," Pachter added. "The question is: Can it exploit the likenesses out of the game? That depends on the contract the player signs with the NCAA."