Disney Seeks to Protect Right to Create 3D Movies in Digital Domain Bankruptcy

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The Walt Disney Co. is a tad worried that it might lose the right to distribute films including Tron: Legacy and Alice in Wonderland that incorporate 3D VFX.

That concern, as well as a fear that it might be hampered in its ability to create new 3D films, was expressed in the ongoing bankruptcy proceeding of Digital Domain Media Group, which sold most of its assets to Galloping Horse America and Reliance MediaWorks in September after filing for bankruptcy.

Among the assets not yet sold are patents relating to the 2D-to-3D conversion processes. In October, DDMG sought a bankruptcy judge's approval to auction off the intellectual property, which we previously highlighted as having the potential to cause trouble.

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And so it follows that's what has happened.

Disney has filed a limited objection to the IP sale, premised on the theory that it had made agreements with the 3D stereo studio In-Three, Inc., the originator of the patents in question. In late 2010, DDMG acquired In-Three. Now, the question is whether a non-exclusive, fully paid, royalty-free license agreement has survived and will survive a patent auction.

In papers submitted in the bankruptcy proceeding, Disney says, "The real dispute appears to concern the Disney Entities' broader rights to use the In Three Patents to create new films and for other purposes -- rights that arise from the G-Force Agreement."

In 2008 and 2009, 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."

Then, DDMG bought In-Three in 2010. The following year, DDMG sued one company for violating its patent, got Samsung Electronics to agree to license the 3D technology, and sounded the alarm through the industry.

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 "Who is infringing?" ex-chief executive of DDMG John Textor once said. "Everybody that has an interest in a 3D film...from the content creators to the production companies to the distributors, the exhibitors, the projector companies … the theaters, down to the television sets and the videogames."

In a declaration submitted in DDMG's bankruptcy proceeding, Robert Faulkner, principal counsel at Disney Studios, describes what happens next.

In December 2011, Faulkner says he engaged Digital Domain in discussions regarding its obligation under the G-Force Agreement. He says that Digital Domain took the position that it had only purchased In-Three's assets, and disputed that it was bound by the licensing obligations.

But Faulkner adds that Digital Domain was willing to make a deal -- that it would grant license on the 3D patents on a royalty-free basis if Disney retained the company to do VFX work on the film Maleficent.

The parties continued discussions and Digital Domain got to work on Maleficent, which paid the company approximately $3.8 million.

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Faulkner says that the two sides were deep into negotiations, and that Digital Domain had a draft form of the license agreement, with all of the material terms allegedly having been agreed upon.

Then, DDMG declared bankruptcy.

Now, Disney only wants the patent auction to go forward if there's an understanding that its license is in full force. In other words, Disney doesn't want to be sued for making 3D films and is worried about continued rights over the films it previously created with In-Three and Digital Domain.

DDMG's debtors, which are looking to use the proceeds of the auction to be repaid millions of dollars, assert that Digital Domain never assumed In-Three's obligations, that Disney never exercised an option to obtain a broader license on the 3D patents, and that the deal described by Faulkner was merely "proposed." They want Disney's objections overruled.

Disney isn't liking this at all.

The company has told a bankruptcy judge, "In effect, 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. On the contrary..."

E-mail: eriq.gardner@thr.com; Twitter: @eriqgardner