The cautionary tale of the Black Pearl

Over the last decade and a half, the Walt Disney Company has reaped billions from its "Pirates of the Caribbean" movie franchise. Yet on May 2, with little fanfare, the ultimate fate of those box office doubloons was only narrowly secured by a two-to-one ruling at the 9th U.S. Circuit Court of Appeals.

The issue at the heart of the dispute was your classic allegation of copyright infringement, but the legal battle that ensued was fought over a Federal Rule of Civil Procedure 12(b)(6) motion to dismiss and the concept of substantial prejudice. While Disney prevailed, the ruling and particularly Circuit Judge Richard Clifton's dissent, should serve as a cautionary tale.

There's a bit of history here. The plaintiff, Royce Mathew, a Florida-based writer of supernatural adventure stories, first sued Disney in 2005, nearly two years after the release of the franchise's inaugural film, "Pirates of the Caribbean: The Curse of the Black Pearl." The premise of the infringement allegation stemmed from Mathew's claim that Disney stole his art to conceive a scene where the titular pirates transform from humans to living rotting skeletons when moonlight reveals their dreaded curse. Mathew dismissed that initial suit, but he then sued a second time in 2006 only to again retreat after Disney submitted previously unpublished "theme park art" meant to show they had independently created the protectable work in question. This time around, Disney had Mathew sign a release.

Fast forward to 2009: Mathew suspects more skullduggery after he sees a "Pirates" book has been published using modifications of the same theme park art, but this time attributing it to a completely different artist than had been presented three years earlier. Mathew then tried to rescind his release by writing a letter to Disney accusing them of fraud, and then by using an online alert interface asking the company to respond in advance of filing charges.

Four years then passed with the issue of proper notice of rescission unresolved. In that time, Disney held course with their franchise, releasing a fourth film in the series, plotting a fifth (due out later this year), all the while earning billions through various distribution platforms, videogames and other licensing and merchandising. In 2013, Mathew finally filed his third suit; this time alleging Disney "used false and fraudulent evidence to procure a settlement."

But there has been, and will be, no discussion of copyright or the circumstances surrounding the alleged infringement and fraudulent art tampering. Judge Robert Klausner of the U.S. District Court for the Central District of California concluded that Mathew had failed to properly allege notice of rescission of the 2006 release, and as such granted Disney's 12(b)(6) motion to dismiss.

In their recent affirmation of the decision, the 9th Circuit's majority cites California Civil Code Section 1693, which provides that a claim for rescission "shall not be denied because of delay in giving notice of rescission unless such delay has been substantially prejudicial to the other party" [emphasis added]. The majority goes on to note that determining substantial prejudice is a "fact-specific inquiry," and precedent holds that it would exist where the defendant had "invested money to expand its business or entered into business transactions based on its presumed rights."

The precedent in this instance is Petrella v. Metro-Goldwyn-Mayer, Inc., 695 F.3d 946 (9th Cir. 2012), overruled on other grounds by Petrella v. Metro-Goldwyn-Mayer, Inc., 134 S. Ct. 1962 (2014), better known as the "Raging Bull case" - a far more influential ruling on issues of copyright and timeliness related to the De Niro/Scorcese boxing classic. The majority then seemingly wraps a nice bow around their Petrella reference by citing Danjaq LLC v. Sony Corp., 263 F.3d 942, 956 (9th Cir. 2001), which held that prejudice existed where there was "uncontested evidence" of substantial expenditure.

The majority banks its decision on these two cases. To wit, Disney continued to expand its investment in the "Pirates" property based on the presumption that they owned that property outright (Mathew had signed the release, after all), and in the ensuing years they amassed a fortune, a fact that Mathew highlights in the opening paragraph of his complaint, leading the court to deem it "uncontested evidence" of prejudice, and therefore barring Mathew from another shot at rescission.

Ostensibly this appears to be open-and-shut logic. And yet, in his dissent, Clifton wields language from both Petrella and Danjaq to nimbly dismantle the majority's conclusion.

Clifton leads with Danjaq, noting that the ruling does not simply stipulate that any subsequent investment and reward results in substantial prejudice. Instead, Disney should have had to prove that "it took actions or suffered consequences that it would not have, had the plaintiff brought suit promptly." If Disney had proceeded with the "Pirates" franchise juggernaut despite knowing that Mathew would attempt to rescind the release, then it cannot establish prejudice based on delay.

Clifton rightly alludes to the nature of Hollywood tent-pole franchises. Given that Disney was already one film and billions of dollars deep in "Pirates" windfall by the time Mathew even brought his claim, the idea that the company, at that point, would have even considered a course correction is hard to believe. More likely the mantra was Damn the torpedoes! Full speed ahead!

This may or may not be true, but Clifton's larger contention is that this 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."

Indeed, the majority opinion concedes that determining prejudice at the 12(b)(6) stage is typically premature, but then goes on to do just that by citing Petrella.

Clifton is then quick to point out that the Petrella court did not determine substantial prejudice on a motion to dismiss, but at the summary judgment phase, after evidence had been developed on the issue. For Clifton (and in this author's opinion), that fact signals the majority's fundamental misreading of Petrella, wherein prejudice could not be presumed due to expenditure alone, as this would necessitate a finding of prejudice in almost any case involving delay. Instead, such presumption is only appropriate in circumstances of "extraordinary delay," or somewhere in the neighborhood of 20 years, as was the case in Petrella.

While this case welcomes speculation as to the outcome of a hypothetical motion for summary judgment (not to mention the underlying debate over copyright infringement), there should be far less debate over the question of whether the decision constitutes good law. Disney's treasure is safe for now, but concluding that major studios will now be able to simply spend their way to substantial prejudice would be specious.