Lawsuit with Epic Games
On July 19, 2007, Silicon Knights sued Epic Games for failure to "provide a working game engine", causing the Ontario-based game developer to "experience considerable losses." The suit alleged that Epic Games was "sabotaging" Unreal Engine 3 licensees. Epic's licensing document stated that a working version of the engine would be available within six months of the Xbox 360 developer kits being released. Silicon Knights claimed that Epic not only missed this deadline, but that when a working version of the engine was eventually released, the documentation was insufficient. The game studio also claimed Epic had withheld vital improvements to the game engine, claiming they were "game specific", while also using licensing fees to fund development of its own titles rather than the engine itself.
In August 2007, Epic Games counter-sued Silicon Knights, alleging the studio was aware when it signed on that certain features of Unreal Engine 3 were still in development and that components would continue to be developed and added as Epic completed work on Gears of War. Therefore, in a statement, Epic said that "SK knew when it committed to the licensing agreement that Unreal Engine 3 may not meet its requirements and may not be modified to meet them." Additionally, the counter-suit claimed that Silicon Knights had "made unauthorized use of Epic's Licensed Technology" and had "infringed and otherwise violated Epic's intellectual property rights, including Epic's copyrighted works, trade secrets, know how and confidential information" by incorporating Unreal Engine 3 code into its own engine. Furthermore, Epic claimed the Canadian developer broke the contract by employing this derivative work in an internal title and a second game with Sega, a partnership for which it never received a license fee.
On May 30, 2012, Epic Games prevailed against Silicon Knights' lawsuit, and won its counter-suit for $4.45 million on grounds of copyright infringement, misappropriation of trade secrets, and breach of contract, an injury award that was later doubled due to prejudgment interest, attorneys' fees and costs. Consistent with Epic's counterclaims, the presiding judge, James C. Dever III, stated that Silicon Knights had "deliberately and repeatedly copied thousands of lines of Epic Games' copyrighted code, and then attempted to conceal its wrongdoing by removing Epic Games' copyright notices and by disguising Epic Games' copyrighted code as Silicon Knights' own." Evidence against Silicon Knights was "overwhelming", said Dever, as it not only copied functional code but also "non-functional, internal comments Epic Games' programmers had left for themselves."
As a result, on November 7, 2012, Silicon Knights was directed by the court to destroy all game code derived from Unreal Engine 3 and all information from licensee-restricted areas of Epic's Unreal Engine documentation website, and to permit Epic Games access to the company's servers and other devices to ensure these items had been removed. In addition, the studio was instructed to recall and destroy all unsold retail copies of games built with Unreal Engine 3 code, including Too Human, X-Men Destiny, The Sandman, The Box/Ritualyst, and Siren in the Maelstrom (the latter three titles were projects never released, or even officially announced).
Talking to IGN in 2019, Dyack expressed regrets over the lawsuit not just because of the loss but also the fact he underestimated the amount of time it took to settle the litigation. Had he known then, Dyack said he would have reconsidered pursuing the lawsuit.
