Disney Survives an Appeals Court Scare in 'Pirates of the Caribbean' Case

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Disney Enterprises, Inc.

The Japanese box office has yet to fully recover from the devastating earthquake and tsunami in March. Revenue sunk more than 20 percent for the year, although the latest "Harry Potter" and "Pirates of the Caribbean" installments each grossed more than $100 million.

Few took seriously a billion-dollar lawsuit against Disney over its Pirates of the Caribbean franchise, but on Tuesday, the studio only narrowly preserved a victory against Florida author Royce Mathew at the 9th Circuit Court of Appeals.

For more than a decade, Mathew has been in and out of court alleging that the Johnny Depp films used his work. He first sued in 2005, but then withdrew the complaint after Disney presented old "theme park art" that predated his own and represented that it had independently created "the unique supernatural elements in [Pirates of the Caribbean] that involves pirates transforming and turning into living skeletons under the moonlight due to a hideous curse affecting them."

When Mathew withdrew his lawsuit, he signed a release form.

But he would later sue a second time, and then a third time, and in his last complaint, he claimed that Disney had "altered and tampered" with the artwork and procured his release by fraudulent means. 

A district judge then dismissed the complaint, ruling that Mathew had to properly rescind the release he signed, and the fact that he waited until the complaint was filed to do so was an unexcusable delay that prejudiced Disney.

Today, two circuit judges at the 9th Circuit affirm that holding. (See here.)

"While a finding of substantial prejudice is generally premature at the 12(b)(6) stage," they write, referring to the stage of litigation where judges look at the plausibility of pleadings, "here the Second Amended Complaint alleges that since May 28, 2010, Disney has continuously exploited the Pirates of the Caribbean Franchise 'in movies, television, on-line streaming, DVD's, video games, merchandising and otherwise in connection with... public showings, distribution, licensing, and merchandising,' released a fourth movie in the series, and worked on developing a fifth movie. These allegations are sufficient to hold that Disney suffered economic prejudice from Mathew's delay in seeking rescission because, relying on its presumed rights, including the comprehensive Release obtained from Mathew, Disney expended significant resources in developing its Pirates of the Caribbean Franchise. Accordingly, Mathew cannot rescind the Release."

The decision would be unremarkable but for the dissenting opinion from 9th Circuit judge Richard Clifton, who is a tad bit skeptical about the prejudice Disney suffered.

"That Disney would not have pursued the Pirates of the Caribbean franchise if it had known of Mathew’s subsequent intent to try to rescind the Release is more than a little implausible," he writes. "More to the point, that is a factual determination that cannot properly be made on a motion to dismiss based on the allegations contained in Mathew’s complaint. Substantial prejudice is a fact-intensive question that Disney had the burden to prove."

Clifton then moves on to attack his colleagues at the 9th Circuit for misunderstanding the circuit's holding in Petrella v. Metro-Goldwyn-Mayer (a copyright case concerning Martin Scorsese's Raging Bull, which later went to the Supreme Court).

"[T]he majority cites Petrella for the proposition that substantial prejudice exists whenever a defendant shows that it 'invested money to expand its business or entered into business transactions based on its presumed rights' during the delay,'" he writes. "Petrella made clear that the proposition quoted above only applied in instances of extraordinary delay, in that case of 18 to 19 years, where less proof of prejudice was required. The delay in our case was less than four years. That does not mean that Mathew’s delay should be disregarded, but it does mean that it cannot be presumed that Disney must have suffered prejudice so substantial that Mathew’s claim should be dismissed on a motion to dismiss."

Fortunately for Disney, as it gets ready to release its latest installment of Pirates of the Caribbean, Clifton was outvoted.