In Re: DDMG Estate et al

Filing 35

MEMORANDUM ORDER affirming the Patent Sale Order and denying the appeal. Signed by Judge Sue L. Robinson on 10/1/2013. (nmfn)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE

In re:

) Chapter 11

DDMG ESTATE, et al.,

) Bankr. No. 12-12568-BLS

)
)

Debtors.

)

WALT DISNEY STUDIOS MOTION
PICTURE PRODUCTION, et al.,

)
)
)
)
)

Appellants,

) Civ. No. 13-007-SLR
)
)
)
)

V.

DDMG ESTATE, et al.,
Appellees.

MEMORANDUM ORDER
At Wilmington this 1st day of October, 2013, having reviewed the appeal 1 of an
order entered by the United States Bankruptcy Court for the District of Delaware
(hereafter, "the bankruptcy court") on December 21, 2012 ("the Patent Sale Order"),
and the papers filed in connection therewith;

1

Appellants include Walt Disney Studios Motion Picture Production and certain of
its affiliates, collectively referred to hereafter as "Disney." Appellees include debtor
Digital Domain Media Group ("DDMG") and ReaiD Inc. (''ReaiD"), collectively referred to
hereafter as "appellees."

IT IS ORDERED that the appeal is denied and the Patent Sale Order (D. I. 28,
ex. 3) is affirmed, for the reasons that follow:
1. Background. This dispute arises from an agreement entered into between
Disney and In Three, Inc. ("In Three") "with respect to [In Three's] services for the
theatrical motion picture tentatively entitled 'G-Force"' (hereinafter "the Agreement").
(D.I. 29 at 1) Through the Agreement, In Three was obligated to provide "the 2D to 3D
conversion services required by Producer [Disney]." (/d.) In Three also gave Disney
the right to use In Three's technology. More specifically, Section 7(b) of the Agreement
provided that,
[to] the extent any Company Technology is incorporated into (or is
necessary for the use or other exploitation of) [G-Force] or any element
thereof at the time of final delivery of [the film G-Force] (the "Incorporated
Company Technology"), Company hereby grants to Producer and its
"Affiliates" ... a perpetual, irrevocable, fully paid-up, royalty-free,
worldwide right and license to reproduce, distribute, display, perform,
modify and otherwise use and exploit ... the Incorporated Company
Technology in connection with displaying, developing, enhancing,
marketing, distributing or providing, maintaining, supporting, or otherwise
using or exploiting [the film G-Force].
(D.I. 29 at 7) The "Company Technology" included In Three's "patent or trade secret
rights" in any devices, computer graphic models, technologies and processes, and
software. (/d.)
2. Section 16, captioned "Covenant Not to Sue," provided that In Three would
not pursue "any claim or cause of action or otherwise assert any Company IP2
2

...

Defined in§ 16(c) as "patents and patent applications owned, controlled, or
acquired by Company 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 or

2

against Producer ... based on work for [Producer] by a third party vendor." (!d. at 10)
Section 16(b) provided that Disney
may, in its sole discretion, request from Company a license under the
Company IP. Within thirty (30) days of receiving such request,
Company 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 .... [l]n
the event that Company 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,
Company shall provide prompt written notice to Producer not less than
sixty (60) days prior to the completion of such sale, assignment, or
transfer, and Producer or its Affiliates may thereafter obtain a license
under the same terms set forth herein.
(/d. at 10) Section 16(d) stated that§ 16 "shall survive the expiration or termination of

this Agreement." (/d. at 11)
3. In 2010, In Three sold all of its assets, including the patents at issue, to
DDMG. On September 11, 2012, DDMG and certain of its affiliates filed voluntary
petitions for relief under chapter 11 of the bankruptcy code and, within a month, sought
approval to sell its assets, including the patents at issue. After DDMG filed its sale
motion, Disney objected, claiming to hold broad perpetual license rights to the patents
at issue pursuant to § 16 3 of the Agreement, even though Disney has conceded that it
neither requested nor executed such a license. In this regard, Disney argues, inter alia,

nature, in any form of medium." (/d. at 10-11) The "Company IP" shall also be referred
to as "the patents at issue."
3

Disney specifically describes § 7 of the Agreement as containing only "filmspecific rights." (D. I. 23 at 5)

3

that it exercised the option under§ 16(b) by negotiating with DDMG, thereby acquiring a
license to the patents at issue.
4. On December 10, 2012, the bankruptcy court issued a letter opinion
overruling Disney's objections, holding that Disney did not hold a broad general license
under§ 16 of the Agreement. (D. I. 28, ex. 2) On December 14, 2012, DDMG held an
auction for the patents at issue, at which ReaiD was the successful bidder. On
December 17, 2012, the bankruptcy court overruled Disney's objections to the sale,
denied its request for reconsideration of the letter opinion, and approved the sale of the
patents at issue to ReaiD. On December 21, 2012, the bankruptcy court entered the
Patent Sale Order, from which Disney appeals.
5. Standard of review. This court has jurisdiction to hear an appeal from the
bankruptcy court pursuant to 28 U.S.C. § 158(a). In undertaking a review of the issues
on appeal, the court applies a clearly erroneous standard to the bankruptcy court's
findings of fact and a plenary standard to that court's legal conclusions. See Am. Flint
Glass Workers Union v. Anchor Resolution Corp., 197 F.3d 76, 80 (3d Cir. 1999). With
mixed questions of law and fact, the court must accept the bankruptcy court's "finding of
historical or narrative facts unless clearly erroneous, but exercise[s] 'plenary review of
the [bankruptcy] court's choice and interpretation of legal precepts and its application of
those precepts to the historical facts."' Mellon Bank, N.A. v. Metro Communications,
Inc., 945 F.2d 635, 642 (3d Cir. 1991) (citing Universal Minerals, Inc. v. C.A. Hughes &
Co., 669 F.2d 98, 101-02 (3d Cir. 1981)). The district court's appellate responsibilities
are further informed by the directive of the United States Court of Appeals for the Third

4

Circuit, which effectively reviews on a de novo basis bankruptcy court opinions. In re

Hechinger, 298 F.3d 219, 224 (3d Cir. 2002); In re Telegroup, 281 F.3d 133, 136 (3d
Cir. 2002).
6. Analysis. Looking at the four corners of the Agreement, as the court must
when undertaking a contract interpretation exercise, 4 the court rejects Disney's claim to
the expansive license it seeks. In the first instance, to the extent that Disney
characterizes the covenant not to sue contained in§ 16(a) as equivalent to a nonexclusive license, Disney's arguments are misplaced for the simple reason that the
covenant not to sue at issue is narrow. It protects Disney from lawsuits by In Three
based on work performed by third parties for Disney; it does not protect Disney or third
parties from a lawsuit by In Three against Disney for unauthorized use of the patents at
issue.
7. With respect to the option contained in§ 16(b), the language clearly
contemplates a two-step process, to wit, a formal request by Disney for such a license
followed by a negotiated fee. Especially when read in conjunction with the broad
definition of the patents at issue found in § 16(c), it simply strains credulity to think that
In Three and Disney bargained to give Disney a virtually unfettered license to the
patents at issue, without any obligation on Disney's part to even honor the process
contemplated under the Agreement.
8. Having never exercised the option under the Agreement, Disney may not now
4

A court's interpretation of a contract "will give priority to the parties' intentions as
reflected in the four corners of the agreement." GMG Capitallnvs., LLC v. Athenian
Venture Partners I, L.P., 36 A.3d 776, 779 (Del. 2012) (citing Paul v. Deloitte & Touche,
LLP, 974 A.2d 140, 145 (Del. 2009)).

5

claim that it has rights to the patents at issue that have survived the sale of such to
ReaiD. The bankruptcy court's well-reasoned opinion contains no errors of law and,
therefore, the Patent Sale Order will be affirmed. 5

United States

5

istnct Judge

The motion to strike filed by DDMG (D. I. 26) is denied as moot.

6