Fraud Doesn’t Preclude Victory in Animation Tech Dispute: Ninth Circuit

OAKLAND, Calif. (CN) — In a dispute over “stolen” animation technology used in hit Disney films, the Ninth Circuit found Friday that fraud directed at a third party does not disqualify a technology company from obtaining a legal victory under the “unclean hands” doctrine.

San Francisco-based Rearden LLC accused a former employee of its subsidiary Rearden MOVA of illegally selling its MOVA Countour “facial performance motion capture” technology to a Chinese company in 2012. Years later in February 2015, another Chinese corporation called Shenzhenshi Haitiecheng sued Rearden in San Francisco federal court, claiming it legally acquired the MOVA assets from that employee, Greg LaSalle, in May 2013. Shenzhenshi later granted a China and India-owned company, Digital Domain 3.0, or DD3, an exclusive license to use the patents.

Rearden claims LaSalle stole its equipment and copies of its copyrighted software program from a secure storage facility before he left to start working for DD3 in May 2013.

Disney contracted with DD3 to create lifelike animated characters for top-grossing hit films including “Beauty and the Beast” in 2017, “Avengers: Age of Ultron” in in 2015, and “Guardians of the Galaxy” in 2014.

The MOVA Contour technology uses phosphorescent makeup on actors’ faces and synchronized cameras and software to transform the curves, expressions and movements of human faces into lifelike animations.

Virtue Global Holdings, a British Virgin Islands company, later acquired the “illegally obtained” version of the technology and intervened as a plaintiff in the lawsuit filed against Rearden in 2016.

During a seven-day bench trial in December 2016, Virtue presented evidence that Rearden’s founder and owner, Steve Perlman, lied to the lead investor of a company called OL2 to reacquire the MOVA Countour patents. The investor, Gary Lauder, testified that Perlman said the technology was old, unusable and not “monetizable.” Perlman told Lauder he planned for LaSalle and another Rearden subsidiary employee to take over the technology because he “would like nothing more than to see it continue in some fashion.”

In an August 2017 ruling, U.S. District Judge Jon Tigar found Perlman lied about the technology lacking value to “encourage Lauder to sell the assets or give them away cheaply.” Tigar also found Lauder’s claims about intending to have LaSalle and another employee run a subsidiary to develop the technology was also a deception designed to induce Lauder to sell the software at a cheaper price.

Invoking the “unclean hands” legal doctrine, Virtue argued that Rearden’s use of fraudulent tactics to reacquire the technology disqualified it from obtaining a legal victory in the patent ownership dispute. Judge Tigar rejected that argument, finding the “unclean hands” doctrine only applies to conduct between litigants, not fraud directed at a non-party like Lauder, who was not involved in the lawsuit.

In a 5-page unpublished opinion Friday, the Ninth Circuit affirmed Tigar’s decision.

“The district court did not abuse its discretion in concluding that Gary Lauder’s reliance on Perlman’s statement was irrelevant for purposes of the unclean hands defense,” Senior U.S. Circuit Judge J. Clifford Wallace, a Richard Nixon appointee, and U.S. Circuit Judge Susan Graber, a Bill Clinton appointee, concluded in a majority opinion.

U.S. Circuit Judge Daniel Collins, a Donald Trump appointee, partly dissented, arguing the case should be remanded so Tigar can reconsider another principle of the “unclean hands” defense called the in pari delicto doctrine. Under that doctrine, a court should not help parties who both engaged in wrongful conduct but instead “leave them just where it finds them, to settle these questions without the aid of the court,” Collins wrote, citing a 2011 ruling by California’s Second Appellate District in Brown v. Grimes.

“I would remand the case so that the district court can decide in the first instance whether, in light of the appropriate factors, Rearden’s participation in the wrongful conduct should disentitle it to any relief from the courts,” Collins wrote.

Attorneys for Rearden LLC and Virtue Global Holdings did not immediately respond to emails requesting comment Friday.

Rearden is represented by Steve Berman of Hagens Berman in Seattle. Virtue is represented by Holly Gaudreau of Kilpatrick Townsend & Stockton in San Francisco.

Rearden has also sued major film studios including Disney, Twenty-First Century Fox, Paramount Pictures and video game maker Crystal Dynamics, claiming they knowingly used a stolen version of its technology when they contracted with DD3 to make hit films and games.

In 2018, Judge Tigar denied Rearden’s bid to claim ownership of the movies and games, but he refused to dismiss claims of vicarious and contributory copyright infringement.

An attorney for Rearden said in 2018 that the film studios’ financial liability for those claims could be “very substantial.”

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