In Re: DDMG Estate, et al

Filing

NOT PRECEDENTIAL OPINION Coram: SMITH, SHWARTZ and ROTH, Circuit Judges. Total Pages: 9. Judge: ROTH Authoring.

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NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
____________
No. 13-4278
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In Re: DDMG ESTATE, et al.,
Debtors
Walt Disney Studios Motion Picture Production,
Briar Rose Production, Ltd.,
and Extinction Productions, Ltd.,
Appellants

On Appeal from the United States District Court
for the District of Delaware
(D. C. No. 1-13-cv-00007)
District Judge: Honorable Sue L. Robinson

Argued on September 9, 2014
Before: SMITH, SHWARTZ and ROTH, Circuit Judges
(Opinion filed: February 5, 2015)

Lisa H. Fenning, Esquire (Argued)
Arnold & Porter
777 South Figueroa Street
44th Floor
Los Angeles, CA 90017
Counsel for Appellants

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Paige H. Forster, Esquire (Argued)
Eric A. Schaffer, Esquire
Reed Smith
225 Fifth Avenue
Suite 1200
Pittsburgh, PA 15222
Counsel for Appellee

O P I N I O N*

ROTH, Circuit Judge:
Walt Disney Studios Motion Picture Production1 appeals the order of the District
Court, which affirmed a Bankruptcy Court decision overruling Disney’s objections to the
sale of six patents pursuant to Sections 363(b) and 365 of Chapter 11 of the Bankruptcy
Code. In re DDMG Estate, No. 12-12568 (Doc. No. 658) (Bankr. D. Del. Dec. 10,
2012). Because we agree that the sale was not subject to a broad license to the patents
beyond the G-Force film, we will affirm. 2

* This disposition is not an opinion of the full Court and pursuant to I.O.P. 5.7 does not
constitute binding precedent.
1
Appellants include Walt Disney and several affiliates (collectively, Disney), and
appellees include debtor Digital Domain Media Group (DDMG) with other affiliated
entities and RealD Inc. (collectively, Appellees).
2
Judge Smith concurs dubitante.
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I. Background
On April 18, 2008, Disney and In Three, Inc. agreed that In Three would perform
3D conversion services for the film G-Force (the G-Force Agreement).3 In 2010, well
after the production and release of G-Force, In Three sold all of its assets, including the
3D patents used in G-Force, to DDMG. It is undisputed that DDMG did not assume or
take by assignment the G-Force Agreement when it acquired the In Three patents. In
September 2012, DDMG filed for Chapter 11 bankruptcy and sought approval of the sale
of all of its assets, including the 3D patents, to RealD Inc. Disney objected, asserting a
continuing interest in the 3D patents. Disney argued that, pursuant to Sections 16(a) and
16(b) of the G-Force Agreement, the holder of the 3D patents could not sue Disney for
infringement by vendors “engaged in ‘work’ for Disney,” even if the work was not for
the film G-Force.
Section 16(a), captioned “Covenant Not to Sue” provides that In Three:
will not pursue any claim or cause of action or otherwise assert any
Company IP 4 . . . against [Disney], its Affiliates or any of their respective
customers, agents and distributors . . . based on work for any of the
Producer Parties by a third party vendor. Such agreement does not restrict
[In Three’s] right to pursue a claim or cause of action against a third party
for services performed by such third party for the Producer Parties;
The G-Force Agreement, titled “G-FORCE/Conversion Work,” sets forth the terms
“with respect to [In Three’s] services for the theatrical motion picture tentatively entitled
‘G-Force.’” It refers to Acceleration Productions, Inc., which for our purposes is Disney,
as the “Producer” and refers to In Three as the “Company.”
4
Section 16(c) of the G-Force Agreement defines “Company IP” as “patents and patent
applications owned, controlled, or acquired by [In Three] or its Affiliates as of the
effective date of this Agreement or at any time in the future that relate to or are otherwise
associated with the creation, capture, development, distribution, editing, production or
display of a motion picture, television show, animation, or other entertainment image or
depiction of any kind of nature, in any form of medium.”
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provided, however, [In Three] and its Affiliates agree that they will not
pursue any claim or cause of action or otherwise assert any Company IP
against such third party entity which might interrupt such third party
entity’s services to or on behalf of the Producer Parties.
Section 16(b) granted Disney the option of acquiring a broader license to the 3D
patents and technology:
[Disney] may, in its sole discretion, request from [In Three] a license under
the Company IP. Within thirty (30) days of receiving such request, [In
Three] shall grant to such entity a non-exclusive, transferable (but only to
an Affiliate), non-sublicensable, irrevocable, perpetual, worldwide license
to make, have made, use, sell, offer for sale, and import any product and
perform any method under the Company IP at a fee to be negotiated by the
parties in good faith in accordance with then-current industry standards,
provided that such fee shall not exceed the lowest license fee provided by
Company to any third party.... [I]n the event that [In Three] seeks to sell,
assign or otherwise transfer any of the Company IP, or its interest in any of
the Company IP, to a third party, [In Three] shall provide prompt written
notice to [Disney] not less than sixty (60) days prior to the completion of
such sale, assignment, or transfer, and [Disney] or its Affiliates may
thereafter obtain a license under the same terms set forth herein.
On December 10, 2012, the Bankruptcy Court overruled Disney’s objections. The
Bankruptcy Court determined that Disney did not hold a broad license to the patents
under either subsection. Specifically, the Bankruptcy Court found that the covenant not
to sue in Section 16(a) does not grant Disney a perpetual license to the patents, and
Disney never exercised the option to acquire broad rights to the patents in Section 16(b).
Disney moved for reconsideration and requested that the Bankruptcy Court hold that “the
Section 16(a) [covenant not to sue] [r]ights are not limited to the G-Force film, but rather
to any ‘work’ being done for [Disney].” After a hearing, the Bankruptcy Court approved
the sale and entered the Patent Sale Order on December 21, 2012. The U.S. District

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Court for the District of Delaware affirmed for the same reasons as the Bankruptcy Court.
Disney now appeals.
II. Standard of Review 5
“We exercise plenary review over the District Court’s appellate review of the
Bankruptcy Court’s decision and exercise the same standard of review as the District
Court in reviewing the Bankruptcy Court’s determinations.” In re Miller, 730 F.3d 198,
203 (3d Cir. 2013) (internal quotation marks and citation omitted). “[W]e review a
bankruptcy court’s legal determinations de novo, its factual findings for clear error, and
its exercises of discretion for abuse thereof.” Id. (alteration in original) (internal
quotation marks and citations omitted).
III. Discussion
The sole issue on appeal is the scope of the covenant not to sue in Section 16(a) of
the G-Force Agreement. 6 Disney argues that the covenant created a general license to
use the 3D patents that extended to all films, not just G-Force. Disney contends that
(1) as a matter of patent law, any sale of the patents should have been held subject to the
Section 16(a) covenant not to sue because covenants not to sue for infringement are
enforceable as patent licenses; and (2) the debtor’s rights in the patents are limited by
prior licenses and covenants not to sue. DDMG and RealD counter that (1) the covenant

5

The U.S. Bankruptcy Court for the District of Delaware had jurisdiction under 28
U.S.C. §§ 157 and 1334(a), the District Court had jurisdiction under 28 U.S.C. § 158(a),
and this Court has jurisdiction under 28 U.S.C. § 158(d)(1).
6
On appeal, Disney “elected to discontinue [its] efforts to enforce [subsection 16(b)].”
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not to sue relates only to G-Force; (2) the covenant not to sue does not grant a broad
license; and (3) the sale of the patents was not subject to the covenant not to sue.
We conclude that the G-Force Agreement, including Section 16(a), is limited to
the G-Force film.
Reading the G-Force Agreement in its entirety, as we must, see State v.
Continental Ins. Co., 281 P.3d 1000, 1004-05 (Cal. 2012), the contract is generally
limited to the use of In Three’s 3D patents in the G-Force film. At the outset, the GForce Agreement clearly “set[s] forth the principal terms of the Agreement . . . with
respect to [In Three’s] services for the theatrical motion picture tentatively entitled ‘GForce.’” The G-Force Agreement provides specific instructions for delivery of the
completed material for G-Force, “including a left eye and right eye digital 3D conversion
of 17 minutes of [G-Force],” and formatting instructions specific to the G-Force film.
Section 7(b) grants Disney “a perpetual, irrevocable, fully paid-up, royalty-free,
worldwide right and license,” but expressly in conjunction with “displaying, developing,
enhancing, marketing, distributing or providing, maintaining, supporting, or otherwise
using or exploiting [G-Force].” The integration clause in Section 19, captioned “Entire
Understanding,” reiterates that this “Agreement expresses the entire understanding
between [Disney] and [In Three] with respect to [In Three’s] services in connection with
[G-Force].” Thus, key provisions in the contract limit the scope and use of the 3D
patents to G-Force.
Although Section 16(a) does not expressly mention G-Force, its scope is limited
to G-Force when read in conjunction with other provisions of the G-Force Agreement.
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Section 16(b), for example, grants Disney the option to request a broad license to the 3D
patents from In Three, but includes a detailed and multi-step negotiation process for
doing so. Section 16(b) would have allowed Disney to do the work in-house, pursuant to
an agreement between the parties. Similarly, Section 3(a), titled “Additional Services,”
allows Disney the option to use In Three on additional Disney projects for a period of
five years when In Three has been offered an outside project, but that option, like Section
16(b), contains a formal mechanism by which Disney and In Three would have to
separately negotiate and accept the terms of the additional Disney project. Thus,
although Sections 3(a) and 16(b) of the G-Force Agreement provide options for
additional work and a broader license, the inclusion of a formal negotiating process and
the requirement of separate approvals for any additional projects suggests that the GForce Agreement, including Section 16(a), is limited to the G-Force film absent further
action and agreement.
Turning to patent law, Disney argues that DDMG and RealD acquired the 3D
patent rights subject to the preexisting rights in Section 16(a). Specifically, Disney
contends, “[a]s a matter of well-established patent law, pre-existing licenses are binding
upon successors in interest and subsequent exclusive licensees.” See, e.g., U.S. Philips
Corp. v. Int’l Trade Comm’n, 424 F.3d 1179, 1189 (Fed. Cir. 2005) (“A nonexclusive
patent license is simply a promise not to sue for infringement.”). Disney’s argument
assumes that the G-Force Agreement provides Disney with a broad license to the 3D
patents beyond work on G-Force. Disney, however, did not exercise the option for an
expansive license in Section 16(b) and, for the same reasons discussed above with respect
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to the narrow covenant in Section 16(a), Disney’s rights to the 3D patents are limited to
G-Force. We agree with the District Court that, “[h]aving never exercised the option
under the Agreement, Disney may not now claim that it has rights to the patents at issue
that have survived the sale of such to RealD.” Thus, to the extent there was a license to
the 3D patents, it was limited to the work performed on G-Force and there was no patent
right beyond G-Force to transfer.
In addition, Disney contends that Sections 16(d) and 19 of the G-Force Agreement
confirm that In Three granted the covenant not to sue with the intention to bind
subsequent owners. Section 16(d) provides that Section 16 “shall survive the expiration
or termination of this Agreement.” Section 19 provides “[t]he provisions hereof shall be
binding upon the Company and the Company’s heirs, executors, administrators,
successors, and assigns.” Yet under Section 10 of the G-Force Agreement, In Three did
not have the right to assign the limited license: “This Agreement and Company’s rights
and obligations hereunder may not be assigned by Company.” Disney, not In Three, had
the right to assign the Agreement. Therefore, Section 19 is inapplicable to DDMG and
RealD as neither was a party to the G-Force Agreement, neither has contractual privity
with Disney, and neither could have served as an assignee under Section 10. Moreover,
the Bankruptcy Court determined that RealD, the successful bidder, is not a successor to
the debtor.
Finally, at oral argument on September 9, 2014, Disney asserted that the
Bankruptcy Court should not have reached the issue of the scope of Section 16(a). This
is a new argument, inconsistent with Disney’s position at the bankruptcy hearing and on
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appeal. Disney advocated for a particular interpretation of Section 16(a) in its objections
to the Bankruptcy Court’s letter ruling and at the second bankruptcy hearing. In its
opening brief, it argued that Section 16(a) should be given effect beyond work on GForce. It continued to press its argument in its reply brief. We find that Disney
presented the issue for adjudication to the Bankruptcy Court and on appeal. It cannot
now argue that we should remand the case for further hearings if we find that Section
16(a) is ambiguous.
IV. Conclusion
For the foregoing reasons, we will affirm the judgment of the District Court.

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