Walt Disney Studios has lost an appeal in a dispute that could open up questions about whether it still has the right to distribute some of its recent 3D blockbusters as well as create new films using a patented 2D-to-3D conversion process.
The dispute emanates from the bankruptcy of Digital Domain Media Group, a visual effects studio co-founded by James Cameron in 1993 that sold most of its assets to Galloping Horse America and Reliance MediaWorks last year. DDMG, the parent company, remained in bankruptcy and to satisfy debts, sought to sell its remaining assets including prized patents relating to the 2D-to-3D conversion. The bankrupt company had acquired these patents when merging with In-Three, another visual effects studio, in late 2010.
Disney objected to the sale of the patents and last autumn, warned a bankruptcy judge about the consequences.
In court papers, Disney said that "debtors appear to contend that the proposed sale of the In Three Patents can cut off or impair the Disney Entities' rights to distribute, modify, and otherwise exploit their own films, including among others Tron Legacy and Alice in Wonderland, just because those Works incorporate 3D VFX that were created using the In Three Patents -- VFX work that was previously commissioned and paid for by the Disney Entities."
The judge allowed the sale to move forward anyway. Afterwards, Disney filed an emergency appeal and got a 45-day stay in return for a $5.4 million bond. But that expired, and eventually, the patents were acquired by RealD, the giant in 3D cinema. Still, Disney pressed on in an attempt to limit the impact.
At issue were agreements made in 2008 and 2009 wherein Disney contracted In-Three to provide services on the films G-Force and Alice in Wonderland. As part of that agreement, according to Disney, the studio got an option to be granted a full, nonexclusive license for the patents as well as extracted "covenant not to sue rights."
The courts were tasked in determining what rights survived the patent sale -- a question potentially highlighting a conflict between patent law and bankruptcy law. Disney said it was an "issue of first impression at the appellate level."
On Tuesday, a Delaware federal court judge issued a memorandum order denying Disney's appeal and affirming the patent sale order.
U.S. District Judge Sue Robinson articulates the reasons why Disney can't claim a license to the patents in question.
"In the first instance, to the extent that Disney characterizes the covenant not to sue contained in §16(a) [of the In Three agreement] as equivalent to a nonexclusive license, Disney's arguments are misplaced for the simple reason that the covenant not to sue at issue is narrow," she writes. "It protects Disney from lawsuits by In Three based on work performed by third parties for Disney; it does not protect Disney or third parties from a lawsuit by In Three against Disney for unauthorized use of the patents at issue."
The judge also notes that Disney didn't go forward with the procedure as described in the agreement. Disney had to make a request and then a fee would be negotiated. But Disney never executed its option to do so.
"It simply strains credulity to think that In Three and Disney bargained to give Disney a virtually unfettered license to the patents at issue, without any obligation on Disney's part to even honor the process contemplated under the Agreement," the judge says.
The judge adds in conclusion that "Disney may not now claim that it has rights to the patents at issue that have survived the sale of such to RealD."
As a result, Disney might have incentive to come to some new agreement with RealD. Otherwise, it could face trouble on patents that were once described as being infringed by "everybody" doing 3D. Plus, RealD saw some value in acquiring them. Disney hasn't yet responded to a request for comment.