Walt Disney Studios has filed an emergency motion in federal court looking to stay a recent ruling by the judge handling the bankruptcy of Digital Domain Media Group. At stake might be Disney's ability to create 3D movies without fear of being sued for patent infringement.
Digital Domain was the visual effects studio co-founded by James Cameron in 1993. In September, after declaring bankruptcy, most of the company's assets were sold out of bankruptcy to Galloping Horse America and Reliance MediaWorks for $30.2 million.
But parent DDMG still has significant debts and has sought to auction off some of its remaining assets for the benefit of its creditors. Among the most prized remaining assets is patents relating to the 2D-to-3D conversion processes, which DDMG acquired when it purchased 3D stereo studio In-Three in late 2010.
The prospect of the patents being sold has caused concern in Hollywood. Marvel sought to protect rights related to The Avengers and Lucasfilm sought to protect The Nightmare Before Christmas. But it was Disney who expressed the loudest objection, contending that the proposed sale could impair its rights to distribute such films as G-Force, Alice in Wonderland and Tron Legacy.
In December, Delaware bankruptcy judge Brendan Linehan Shannon approved the patent sale with certain stipulations. The judge also addressed Disney's concerns with a specially directed ruling concerning the company.
The judge noted the "long and complex history" of the dispute, which we detailed here and which began when Disney contracted In-Three to provide services on the films G-Force and Alice in Wonderland. As part of that agreement, the studio got an option to be granted a full, nonexclusive license for the patents as well as extracted "covenant not to sue rights."
In his ruling, Judge Shannon summed up the dispute this way: "Does the G-Force Agreement operate to grant Disney a right to use the In-Three Patents on a going forward basis? And to put a finer point on it, for purposes of the Debtor's Sale Motion, will whoever buys the In-Three Patents from the Debtor be required to permit Disney to use that technology, gratis, in perpetuity?"
The answers, say the judge, are, "No."
The judge concluded that Disney enjoyed a limited license to the patents and could rest easy that it wouldn't be sued over Alice in Wonderland and G-Force. But the judge also decided that Disney hadn't exercised an option under the G-Force Agreement for a perpetual license and that there was "no contractual privity between Disney and the Debtor that would enable Disney to enforce the G-Force Agreement against the Debtor."
The covenant not to sue applied to films that had been made under the original agreement, the judge ruled, not those that had yet to come. Disney's objection to the asset sale was thus overruled.
On Wednesday, Disney brought the matter to a Delaware federal court to gain time for further review, arguing that "the Debtors' interest in patents they purchased are subject to and limited by pre-existing licenses, thereby requiring that any subsequent sale of such patents in bankruptcy remain subject to such pre-existing licenses."
Disney says that without opportunity for a meaningful appellate review, it "will suffer ongoing harm -- the risk of being sued on account of alleged acts of infringement committed by third-party vendors on future film projects and of being denied the right to practice the In-Three Patents themselves -- in an amount that is impossible to ascertain currently."
The dispute is presented by Disney as a conflict between patent law and bankruptcy law. Debtors can't sell assets they don't own, but intellectual property rights are intangible. (Read Disney's full emergency motion here.) Disney advises a judge, "As far as can be determined, this is an issue of first impression at the appellate level."
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