Digital Domain’s New Legal Setback Freezes VFX Tech Used by Major Studios

Prominent Hollywood visual effects company Digital Domain 3.0 has lost the right to use one of its most powerful tools, a facial motion capture technology known as MOVA that has been featured in such top-grossing hits as Deadpool, Guardians of the Galaxy and The Curious Case of Benjamin Button.

On June 17, a federal judge in San Francisco issued a preliminary injunction targeting the two Chinese firms that purchased and now own MOVA, which is licensed by Digital Domain.

In a remarkable 16-page ruling, District Court Judge John S. Tigar found that Virtual Global Holdings and Shenzhen Haiticheng Science and Technology had behaved “fraudulently” with regards to how the MOVA technology was transferred between various Chinese firms after its 2013 acquisition from Greg LaSalle, who sold it to SHST for $25,000 in May 2013.

The surprising ruling is just the latest twist in a years-long saga that involves a set of characters straight out of central casting, including shady Chinese investors, economic espionage investigators from the FBI, an eccentric Silicon Valley inventor and some of Hollywood’s most creative visual artists.

The preliminary injunction, which is explained in publicly available legal documents, effectively freezes the technology and forces all of its licensees, including Digital Domain and major Hollywood studios, to stop using it until further notice, or until a trial resolves the issue.

“Shenzhenshi Haitiecheng Science and Technology Co., Ltd. (“SHST”) and Virtue Global Holdings Limited (“VGH”) are hereby restrained and enjoined, pending trial, from selling, using, moving, concealing, transferring or otherwise disposing of any MOVA Asset in its possession, custody or control,” the ruling says.

“For Hollywood, the technology is temporarily out of play,” says Nancy Mertzel, head of the Intellectual Property Group at Herrick, Feinstein in New York, an attorney who reviewed the legal documents for The Hollywood Reporter. “Movie studios who licensed MOVA from Shenzhenshi, VGH or Digital Domain 3.0 must stop using it. A studio that is currently using MOVA, or planned to, will have to wait for the injunction to be lifted, or find an alternative.”

A spokesperson for Digital Domain declined to respond to several email and telephone requests for comment.

In an immediate appeal to have the injunction modified, Digital Domain conceded that the effects of the ban could be disastrous:

“If DD3 is prohibited from using MOVA, DD3 cannot complete pending MOVA projects, develop new MOVAwork, and is hindered in developing non-MOVA business of which MOVA is a component. After selling clients on MOVA for almost three years, Digital Domain would be required to tell its clients that MOVA is not available at Digital Domain — or anywhere. This information inevitably, indeed necessarily, will cause clients to seek alternatives to MOVA, which will permanently injure MOVA’s brand and advance competitor interests.”

Notably, the injunction does not extend to finished movies created with MOVA before the injunction was issued.

But the ruling could have ripple effects across the industry.

“DD3/Digital Domain already has captured data of an Academy Award-winning actress for a $120 million motion picture,” Digital Domain’s lawyers wrote. “The movie release date is December 2016. Although the capture is complete, the data from this project has not been processed and must be. In addition, DD3/Digital Domain also has captured another well-known actress for a character that is integral to the story of a sequel of a well-known science fiction film.”

The court also ordered the MOVA hardware to be physically transferred within 10 days to a place chosen by the defendant, in this case Rearden Inc., LaSalle’s former employer.

In practical terms, the ruling, which Tigar himself described as an “extraordinary remedy,” has essentially opened the door to what could become a massive and potentially very damaging copyright infringement case, or series of cases.

It also has put Digital Domain in the awkward position of being obliged to put several of Hollywood’s most prominent studios — including 20th Century Fox and Marvel, both of whom are listed as production companies for Deadpool — on notice that some of their biggest and most successful movie franchises could be dragged into further lawsuits and other legal entanglements.

The ownership dispute pits LaSalle, one of Digital Domain’s senior employees, against his former mentor and boss, Silicon Valley serial inventor Steve Perlman, whose company, Rearden Inc., is a party to the lawsuit.

Their fight erupted publicly in 2014 at the SciTech Academy Awards when LaSalle and three other visual artists received the award for the “design, development and integration” of the MOVA technology.

Perlman, who was excluded from the awards, fired back immediately, writing a protest letter to the Academy laying out the reasons why he, and not LaSalle, should have won that year.

Silicon Valley inventor Steve Perlman.

In a letter to the Sci Tech judges obtained by THR in 2014, Perlman wrote that Lasalle was “not even on the R&D team … made no essential inventions or major contributions to its development.” He added: “It is horrifying to see a decade of my life’s work credited to someone who was no more than a trainee of the end result.”

At the time of the dispute, a Digital Domain spokesperson reaffirmed LaSalle’s contributions: “We are confident we have the proper license to operate this technology.”

The dispute has grown more complicated since that 2014 incident. SHST preemptively sued Rearden, accusing Perlman of having a “severe bout of seller’s remorse.” Thus began a legal drama involving dozens of attorneys that is still unfolding.

According to documents unsealed last week, Perlman’s most immediate concern may have had little to do with Hollywood. The MOVA technology, specifically the source code, was apparently prohibited from export.

According to a deposition that was made public last week, Perlman called a contact in Washington, a member of the powerful House Permanent Committee on Intelligence. That organization  is “charged with the oversight of the United States Intelligence Community, which includes the intelligence and intelligence related activities of 17 elements of the U.S. Government, and the Military Intelligence Program.”

“Do you recall … reporting to any U.S investigative or criminal authority a concern that Mr. LaSalle had stolen property and was transmitting that property to people in the People’s Republic of China?” an attorney asked Perlman in a 2015 deposition, some of whose contents were recently made available.

Perlman replied that he had, and that the Intelligence Committee had then forwarded the information to the FBI “as soon as it became apparent that — it became — it seemed likely that the actual software had been disclosed to a non-U.S. entity.”

He continued: “I was left with the impression at that point that they were now in possession of the actual source code.”

Perlman then left open the possibility that the technology itself might have uses other than purely for entertainment value. “The parties that have been involved with this technology were not working for me,” he said, without specifying who the parties were working for.  

There was someone else who had gotten an inkling that the MOVA tech might be interesting beyond just the entertainment field: one of Digital Domain’s founders, Dr. Scott Ross.

Ross and Perlman had spoken once and the topic had come up briefly. “The ability to be able to read lips, do lip sync, do digital avatars, I’m not quite sure what one would do with it,” Ross tells THR, “But Perlman seemed to feel there was [Department of Defense] interest into what MOVA was and what he was doing and couldn’t talk about it when I asked him.”

Soon the FBI got involved, looking for signs of economic espionage. Investigators from the San Francisco office with expertise in that particular area of intelligence gathering began poking around, trying to suss out what, if anything, was going on.

The FBI “looked into it and considered it,” says a senior government official with knowledge of the lawsuit and the FBI’s interest who declined to be named because of the sensitive nature of the case.

A recent filing by lawyers for the Chinese firm SHST confirms the involvement of at least two U.S intelligence bodies: “This is not the first time Defendants have let xenophobia get the best of them. Long before this action commenced, their CEO Perlman raised the issue of purported disclosure of MOVA software to a non-U.S. entity with the House of Representatives Permanent Subcommittee on Intelligence. Then the FBI apparently became involved. Not surprisingly, the U.S. government took no action.”

A senior government official familiar with the case confirmed that there was “not enough there for us to take it further,” though he declined to discuss exactly what had or had not been done.  

The FBI also declined to discuss whether the case remained open. But a spokesperson said investigators remained interested in the topic more broadly. “We are willing to hear any compelling evidence that is relevant,” said Prentice DannerIII, an FBI spokesperson. “Investigations into economic espionage is a priority of the FBI, and we will continue pursue cases relating to this matter.”

For now, it’s unclear whether there is any link between the potentially fraudulent activity by the Chinese firms as described by the federal judge and the suspicions raised by U.S intelligence bodies.

China watchers say this kind of financial and industrial upheaval is both common and disturbing. Andrew Wedeman, who directs the China Studies Initiative at Georgia State University and who reviewed some of the legal documentation available for this story, concluded that something was amiss.

Several corporate shuffles in Hong Kong, Los Angeles and Beijing had blurred the lines about ownership of the MOVA tech.

“It looked like they were setting up this complicated series of structures,” says Wedeman. “Maybe it was a plan. But it also looked like something of a scam, just buying and selling companies and trying to make a fast buck.”

The seemingly incessant shuffling of companies that purportedly owned it didn’t sit well with the judge, who came to the conclusion last week that “badges of fraud exist in this case.”

Tigar found that SHST had acted “suspiciously” and found other indications of “fraudulent intent” when it came to transferring ownership and chain of title of the MOVA tech.

The judge also found that SHST had “absconded” from its legal duties. “The confluence of these several badges of fraud constitutes substantial evidence of VGH and SHST’s actual intent to defraud,” Tigar wrote.

Mertzel says the ruling was “significant” in terms of how it could affect companies that license the MOVA tech.

“The situation that led to the ruling is unusual for an intellectual property case because the preliminary injunction is not based on a finding of infringement. Here, the injunction was based on a California statute that voids fraudulent transfers,” she says. “The judge found that Shenzhenshi’s transfer of ownership rights in the MOVA assets to Virtue Global Holdings Limited was fraudulent, and done to avoid liability.”

After the injunction ruling, Digital Domain 3.0 also filed a proposed ruling to modify the injunction that it hopes Judge Tigar will review on Aug. 4. Citing Digital Domain president O.D. Welch, the motion states: “The removal of MOVA from the market needlessly interferes with a huge current feature film project, two pending major feature film projects and a video game project, and an ongoing business segment for DD3/Digital Domain that is employing people, generating revenues and contributing to the completion of major creative projects for significant companies.”

Welch’s statement continues: “The removal of MOVA from the market will send all the wrong signals and damage MOVA, its brand and its value. No legitimate asset protection or “anti-dissipation” goal is achieved by taking MOVA off the market and risking that it will become obsolete. The sudden, court-mandated removal of MOVA from the market does not protect anyone. The removal of MOVA from the market is purely destructive of MOVA’s value for everyone involved — including media industry clients who count on MOVA for their projects.”

This is the first part of an ongoing series.