Divided Ninth Circuit panel affirms dismissal of author’s claims that Disney tricked him into waiving rights to sue studio for using his copyrighted work in “Pirates of the Caribbean” franchise, saying author’s delay in seeking to rescind waiver caused substantial economic prejudice to Disney.

Author Royce Mathew sued The Walt Disney Co. and related entities and individuals in Florida, claiming that the studio’s “Pirates of the Caribbean” movie franchise infringed his copyright in a supernatural pirate story he wrote in 1993 and its derivative works. Shortly after filing suit in 2005, Mathew voluntarily dismissed his complaint. One year later, Mathew sued again in California, but he withdrew that complaint in 2007, after Disney presented unpublished artwork that predated Mathew’s works as proof that it had independently created the supernatural elements found in the “Pirates of the Caribbean” franchise, namely “pirates transforming and turning into living skeletons under the moonlight.” Upon withdrawing his lawsuit, Mathew signed a release agreement waiving his right to bring future actions against Disney based on the copyright claims released as a result of the agreement.

Mathew filed a third lawsuit against Disney in 2013, first filing in Florida and then refiling in New York and eventually transferring it to California. In addition to copyright infringement claims, Mathew asserted a claim for rescission of the 2007 release agreement, alleging that in 2009 he discovered Disney had intentionally falsified the artwork supporting its assertion that it had independently created the supernatural elements at issue, and therefore fraudulently procured the release agreement. Disney counterclaimed that Mathew breached the release agreement by filing his present suit. Following a bench trial, the district court dismissed the complaint, concluding that because Mathew failed to provide proper notice of rescission to Disney until he filed suit in 2013, his rescission claim failed and his copyright infringement claims were moot. The district court also entered a consent judgment as to Disney’s counterclaim in favor of Disney. Mathew appealed.

In a 2-1 decision, the Ninth Circuit affirmed the district court’s ruling, finding that Mathew could not rescind the release agreement because his nearly four-year delay in providing Disney notice of his intent to rescind substantially prejudiced Disney. The Ninth Circuit relied on its 2012 decision in Petrella v. Metro-Goldwyn-Mayer (which was subsequently overruled on other grounds by the Supreme Court) that substantial prejudice exists where a defendant shows that, during a plaintiff’s delay, a defendant “invested money to expand its business or entered into business transactions based on its presumed rights.” It found that, although a finding of substantial prejudice is generally premature at the motion to dismiss stage, Mathew’s complaint sufficiently alleged facts showing that Disney, “relying on its presumed rights” under the release agreement, had “expended significant resources in developing its Pirates of the Caribbean Franchise” during Mathew’s delay. The Ninth Circuit also affirmed the district court’s entry of a consent judgment in favor of Disney on its counterclaim because Mathew did not contest that he consented to entry of the judgment.

In a dissenting opinion, Judge Richard Clifton argued that Disney’s alleged significant investment of resources in the “Pirates of the Caribbean” franchise does not itself establish substantial prejudice; rather, Disney had the burden of showing that “it took actions or suffered consequence that it would not have, had the plaintiff brought suit promptly.” He expressed skepticism that “Disney would have abandoned such a lucrative movie series simply because Mathew threatened to try to rescind” the release agreement.

Further, Judge Clifton argued that whether Disney would have pursued the “Pirates of the Caribbean” franchise had it known of Mathew’s subsequent intent to rescind is “a factual determination that cannot properly be made on a motion to dismiss based on the allegations contained in Mathew’s complaint,” as “[s]ubstantial prejudice is a fact-intensive question that Disney had the burden to prove.” Finally, Judge Clifton maintained that his fellow judges misunderstood the Petrella decision. The proposition that substantial prejudice exists when a defendant shows it invested money for expansion or entered into business transactions based on its presumed rights applies only in instances of extraordinary delay – 18 or 19 years in the Petrella case – which is much longer than the four years at issue in the present case.

Summary prepared by Jonathan Neil Strauss and Amanda-Jane Thomas