USDC C.D. California, August 13, 2008

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The district court denied defendant Warner’s motion to dismiss for failure to state a claim in a dispute over ownership of the motion picture rights in the graphic novel Watchmen.

Fox sued Warner for copyright infringement and interference with contract due to Warner’s intent to release the motion picture Watchmen in March, 2009. In its motion to dismiss, Warner argued that its acquisition of all rights to distribute and produce Watchmen could be traced through documents attached to or referenced in the complaint. In considering Warner’s motion to dismiss, the court provided a detailed summary chronology “taken from the complaint, attachments and agreements.” Included in this chronology by the court were, among others, the following events and conclusions by the court:

  • Fox acquired the motion picture rights in Watchmen between 1986 and 1990.
  • In 1990, Fox entered into a domestic distribution agreement with Largo Entertainment, a joint venture of JVC Entertainment Inc., Golar (Lawrence Gordon), and BOH, Inc. This agreement (the “Largo Agreement”) established Fox’s domestic distribution rights in defined motion pictures (the “subject pictures”).
  • In June, 1991, Fox entered into a “Quitclaim Agreement” with Largo International, N.V. (Purchaser), through which Fox “quitclaims to Purchaser all of Fox’s right, title and interest in and to the Motion Picture project presently entitled ‘WATCHMEN’.” The agreement provided that, “if Purchaser elects to proceed to production, the[Watchmen] shall be produced by Purchaser and shall be distributed by Fox as a Subject Picture pursuant to the terms of the Largo Agreement . . . .” In consideration for the rights to Watchmen, Fox was to be reimbursed for its development costs and interest and to receive profit participation in the worldwide net proceeds of any Watchmen picture. Later in 1991, the Largo Agreement was amended and Watchmen was listed as a project quitclaimed to Largo.
  • In November, 1993, Lawrence Gordon, through his company Golar, withdrew from the Largo Entertainment joint venture and Largo conveyed any rights it had in Watchmen to Gordon/Golar. The court found that it could infer that, based on the 1991 quitclaim, Gordon now stood in the shoes of Largo with respect to Watchmen and held whatever rights it acquired through the 1991 Quitclaim, leaving Fox with the distribution rights it retained through that agreement.
  • In 1994, Fox negotiated a “Settlement and Release” agreement with Gordon which contemplated that the Watchmen project would be put in “perpetual turnaround” to Lawrence Gordon Productions, Inc. The “turnaround notice” gave Lawrence Gordon Productions the perpetual right to acquire all of the right, title and interest of Fox pursuant to the terms and conditions provided in the notice. The turnaround notice then described the formula for determining the buy-out price in the event that Gordon elected to acquire Fox’s interest. According to the court, this document suggests that Gordon acquired an option to acquire Fox’s interest in Watchmen for a price. The notice also provided that the agreement was personal to Gordon and that, prior to payment, he could not assign rights or authorize any person to take any action with respect to the project.
  • In May, 2006, Warner, allegedly with knowledge of the 1991 Quitclaim, entered into a quitclaim agreement with Gordon under which it claims to have acquired the rights to the Watchmen project.

In denying Warner’s motion to dismiss for failure to state a claim, the court held that Fox succeeded in stating a claim for copyright infringement, even if it does not hold the entire bundle of rights, by providing agreements that purportedly gave Gordon the option to acquire Fox’s distribution rights and alleging that Gordon never exercised such option and therefore could not transfer the distribution rights to Warner. The court found that nothing on the face of the complaint or the documents provided to the court established that Gordon, the claimed source of Warner’s rights, had acquired any rights in Watchmen. The court concluded that to succeed in its arguments that it was actually Fox that held an unexercised option to acquire the relevant distribution rights, Warner will need to find support beyond the face of the complaint and applicable agreements.

The court also denied Warner’s motion to dismiss the interference with contract claim. Fox alleged that Warner disrupted Gordon’s performance of his obligations under the 1991 Quitclaim by entering into an agreement with Gordon under which Warner succeeded to Gordon’s interest under the Quitclaim and then, with the objective of defeating Fox’s contractual rights, arguing that any obligation Gordon may have had to Fox was extinguished. The court held that these allegations “establish the existence of an agreement, Warner Brothers’ knowledge of the agreement, Warner Brothers’ intentional acts that were designed to, and in fact did, disrupt the relationship between Fox and Gordon, with resulting harm,” which it held was sufficient to state a claim for interference with contract.

The court also rejected Warner’s argument that it could not be sued for interference because it assumed obligations under the agreement at issue. The court stated that “[w]hile it is correct that one contracting party may not sue another contracting party for interference, such a claim may be brought against a stranger to the contract. That the stranger who is alleged to have interfered with a contractual relationship ultimately claims to assume obligations under the disrupted agreement does not change the analysis. Permitting suit in that circumstance is consistent with the underlying policy of protecting the legitimate expectations of contracting parties against frustration by the actions of those with no legitimate interest in the contractual relationship.”