No 3-D for Disney
On October 1, 2013, Walt Disney Studios lost out on their appeal objecting to the sales of 2D-to-3D conversion patents by Digital Domain Media Group (“DDMG”). The dispute arose after DDMG, James Cameron’s visual effects studio, filed for Chapter 11 protection and attempted to sell its assets to satisfy its debts. Most of the assets were sold to Galloping Horse American and Reliance Mediaworks in 2012. More recently, DDMG tried to sell assets that included the prized patents to the 2D-to-3D conversion process that had been acquired after merging with the visual effects studio, In-Three, in November 2010.
In the past, In-Three had granted Disney and Marvel Entertainment the right to use the process for films such as Alice in Wonderland, Thor, and The Avengers. Moreover, this right had been extended for the 2009 film, G-Force, where the agreement contained an option on a general, nonexclusive license for the patented conversion technology. These are the rights that Disney claims remain in force today even after the purchase of the patents by DDMG. Despite these arguments, on December 10, 2012, the court held that Disney’s rights to the technology were limited to the four aforementioned films due to the fact that they had never exercised the option in the agreement prior to the purchase by DDMG. Therefore, the court allowed the sales to move forward.
Disney then filed an emergency appeal, which Bankruptcy Judge Brendon Shannon granted, providing the company with a 45-day stay in return for a $5.4 million bond to cover the projected patent sale fee. Disney claimed that without appellate review, the company would suffer harm by being denied the right to utilize the technology and being subjected to risks of infringement suits by third-party vendors on future film projects.
Ultimately, Delaware Federal Judge Sue Robinson issued an order denying the appeal and affirming the patent sale order, stating that the covenant not to sue only protected Disney from suits from In-Three based on work performed for Disney by third parties. Despite Disney’s claims that that it had broad IP rights to the conversion process based on this covenant, the court rejected the notion that the covenant was essentially a license that was enforceable on the same terms. Judge Robinson stated that such arguments “are misplaced for the simple reason that the covenant not to sue at issue is narrow”. Moreover, Disney failed to exercise the disputed option, which required a request from Disney as well as a negotiated fee. In fact, Disney had conceded that no formal request for the license or a negotiation deal regarding the fee took place and instead, contended that its negotiations with DDMG was sufficient for the exercise of the option.
In light of this decision, Disney might have to face the hard questions of whether it can distribute recent and upcoming 3D releases and reevaluate the future of their 3D films. In addition, the company may be subject to more suits and complications regarding its 2D-to-3D post-production conversions. This could mean that Disney will have to pursue a separate agreement with RealD, the purchasing party, to avoid future patent lawsuits concerning the conversion technology.