In November 2004, Marvel Comics filed a lawsuit against City of Heroes developer Cryptic Studios, publisher NCsoft, and game administrator NC Interactive (NCI), alleging that the game not only allowed, but actively promoted, the creation of characters who infringe copyrights and trademarks owned by Marvel. The suit sought unspecified damages and an injunction halting further sales and shutting down the game.
The game includes in its User agreement strong language against such activity, however. It forbids the creation of potentially infringing characters, and NCI has been known to delete or rename such characters. The User Agreement additionally holds players accountable to indemnify (reimburse) NCI and its affiliates against third-party infringement claims, and demands either a granting of sole ownership in player created content, including characters, to NCI, or a warranty that a third party owner of the rights in player created content has made such a grant. It is unclear whether this grant is an exclusive assignment or a non-exclusive license, however.
The defendants replied that the lawsuit was frivolous. Many intellectual property analysts agree, but others have noted that trademark law is structured such that if Marvel believes their marks are being infringed upon, they have little choice but to file a lawsuit, regardless of its outcome, to preserve the strength of the marks. At least one has noted similarities to Fonovisa, Inc. v. Cherry Auction, Inc., a case in which a company that ran a flea market was successfully sued over intellectual property infringement because a vendor had been selling bootlegged records at that flea market. Although Cherry Auction had not been directly selling the infringing items, the court found that it was vicariously or contributorally liable for the infringement.[citation needed]
As of December 14, 2005, all claims have been settled. Although the settlement has not been disclosed, no changes will be made to the City of Heroes client.
Although details of the settlement are private, it can be seen that Marvel's case was, at least in part, struggling because Marvel had admitted that some of the allegedly infringing characters cited in the complaint had been made by Marvel's own investigators. This led the court to strike those exhibits from the complaint. Further, the court had dismissed, with prejudice, some of the claims, specifically the ones alleging indirect trademark infringement, because Marvel had not pled use in commerce, by players, of Marvel's marks. Use in commerce is a required element of trademark infringement under American statutes.
Despite all of this, in October 2006 Marvel Comics selected Cryptic Studios to develop its own superhero MMORPG for Windows Vista and Xbox Live, titled Marvel Universe Online. The news of the alliance led to a surprised reaction from players, but developer Matt "Positron" Miller assured fans on Cryptic's official website that development and maintenance would continue separately on both games, proved later by the complete split between City of Heroes and Cryptic Studios. Marvel Universe Online was eventually cancelled by Microsoft.