Royce Mathew v. the Walt Disney Co. , 690 F. App'x 509 ( 2017 )


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  •                            NOT FOR PUBLICATION                           FILED
    UNITED STATES COURT OF APPEALS                        MAY 2 2017
    MOLLY C. DWYER, CLERK
    U.S. COURT OF APPEALS
    FOR THE NINTH CIRCUIT
    ROYCE MATHEW,                                   No.    15-56726
    Plaintiff-Appellant,            D.C. No.
    2:14-cv-07832-RGK-AGR
    v.
    THE WALT DISNEY COMPANY et al.,                 MEMORANDUM*
    Defendants-Appellees.
    Appeal from the United States District Court
    for the Central District of California
    R. Gary Klausner, District Judge, Presiding
    Argued and Submitted April 7, 2017
    Pasadena, California
    Before: CLIFTON and OWENS, Circuit Judges, and ANTOON,** District Judge.
    Plaintiff Royce Mathew appeals from the district court’s grant of Disney’s
    motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) and from the
    district court’s entry of a consent judgment as to Disney’s counterclaim. As the
    parties are familiar with the facts, we do not recount them here. We have
    *
    This disposition is not appropriate for publication and is not precedent
    except as provided by Ninth Circuit Rule 36-3.
    **
    The Honorable John Antoon II, United States District Judge for the
    Middle District of Florida, sitting by designation.
    jurisdiction under 
    28 U.S.C. § 1291
    , and we affirm.
    1. Mathew’s nearly four-year delay in providing notice of rescission
    substantially prejudiced Disney.
    Mathew learned of Disney’s alleged fraudulent procurement of their mutual
    release (the “Release”) on June 1, 2009. As Mathew conceded at oral argument, he
    did not provide Disney notice of his intent to rescind the Release until he filed suit
    on May 28, 2013, nearly four years after “‘discover[ing] the facts which entitled
    him to rescind.’” Citicorp Real Estate, Inc. v. Smith, 
    155 F.3d 1097
    , 1104 (9th Cir.
    1998) (quoting 
    Cal. Civ. Code § 1691
    ). The notice was not prompt.
    California Civil Code § 1693 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.” 
    Cal. Civ. Code § 1693
    . Whether
    a party has been substantially prejudiced by a delay is a fact-specific inquiry.
    Wilke v. Coinway, Inc., 
    64 Cal. Rptr. 845
    , 854 (Ct. App. 1967).
    This court, in the context of laches, has held that substantial prejudice exists
    where a defendant shows that during a plaintiff’s delay, the defendant “invested
    money to expand its business or entered into business transactions based on its
    presumed rights.” Petrella v. Metro-Goldwyn-Mayer, Inc., 
    695 F.3d 946
    , 953 (9th
    Cir. 2012) (internal quotation marks and alteration omitted), overruled on other
    grounds by Petrella v. Metro-Goldwyn-Mayer, Inc., 
    134 S. Ct. 1962
     (2014); see
    also Danjaq LLC v. Sony Corp., 
    263 F.3d 942
    , 956 (9th Cir. 2001) (holding that
    2
    the record supported a finding of economic prejudice where there was
    “uncontested evidence” that the defendant invested a billion dollars in developing,
    producing, and marketing the James Bond films).
    While a finding of substantial prejudice is generally premature at the
    12(b)(6) stage, here the Second Amended Complaint alleges that since May 28,
    2010, Disney has continuously exploited the Pirates of the Caribbean Franchise
    “in movies, television, on-line streaming, DVD’s, video games, merchandising and
    otherwise in connection with . . . public showings, distribution, licensing, and
    merchandising,” released a fourth movie in the series, and worked on developing a
    fifth movie. These allegations are sufficient to hold that Disney suffered economic
    prejudice from Mathew’s delay in seeking rescission because, relying on its
    presumed rights, including the comprehensive Release obtained from Mathew,
    Disney expended significant resources in developing its Pirates of the Caribbean
    Franchise. Accordingly, Mathew cannot rescind the Release.
    2. The district court did not err in entering a consent judgment in favor
    of Disney on Disney’s counterclaim.
    “[U]pon agreement of the parties,” the court entered judgment in favor of
    Disney on Disney’s counterclaim in the amount of $3,500. A consent judgment
    that “appears by the record to have been rendered by consent, is always affirmed,
    without considering the merits of the cause.” United States v. Bechtel Corp., 
    648 F.2d 660
    , 663 (9th Cir. 1981) (internal quotation marks omitted). Because Mathew
    3
    does not contest that he consented to the entry of judgment, the consent judgment
    must be affirmed.
    AFFIRMED.
    4
    FILED
    No. 15-56726, Royce Mathew v. The Walt Disney Co.
    MAY 02 2017
    CLIFTON, Circuit Judge, dissenting:                                      MOLLY C. DWYER, CLERK
    U.S. COURT OF APPEALS
    I respectfully dissent.
    The majority disposition rests on a determination that Disney was
    substantially prejudiced by Mathew’s delay in giving notice of his intent to rescind
    the Release. Specifically, the majority concludes, at 3, that “Disney suffered
    economic prejudice from Mathew’s delay in seeking rescission because, relying on
    its presumed rights, Disney expended significant resources in developing its
    Pirates of the Caribbean Franchise.”
    That Disney invested a lot of money to reap the enormous rewards it has
    collected from that franchise does not itself establish substantial prejudice,
    however. There is a necessary piece missing from that finding. Disney had to
    “sho[w] that it took actions or suffered consequences that it would not have, had
    the plaintiff brought suit promptly.” Danjaq LLC v. Sony Corp., 
    263 F.3d 942
    , 955
    (9th Cir. 2001) (emphasis added).
    If Disney would have proceeded with the Pirates of the Caribbean movie
    series even if it had known that Mathew would attempt to rescind the Release, then
    it cannot establish prejudice from the delay, under California law. The California
    Supreme Court said so in Conti v. Bd. of Civ. Serv. Commissioners, 
    461 P.2d 617
    ,
    623 (Cal. 1969), which held: “If the delay has caused no material change in statu
    quo, ante, i.e., no detriment suffered by the party pleading the laches, his plea is in
    vain.” Our court’s cases construing California law have said as much as well. See
    Russell v. Price, 
    612 F.2d 1123
    , 1126 (9th Cir. 1979) (“[T]he detriment
    [defendant] claims to have suffered as a result of plaintiff’s delay in bringing this
    action does not constitute prejudice within the meaning of the laches doctrine.
    [Defendants] at no time changed their film distribution activities in reliance on
    [plaintiff’s] conduct. [Defendants] cite no case in which a false sense of security
    alone has been enough to bar an otherwise proper claim.”); Evergreen Safety v.
    RSA Network Inc., 
    697 F.3d 1221
    , 1227-28 (9th Cir. 2012) (defendant proved it
    was prejudiced by unreasonable delay in suing because defendant “would not have
    produced or revised and reproduced the infringing manual multiple times had
    [plaintiff] initiated its infringement action” earlier).
    It is hardly obvious that Disney would have abandoned such a lucrative
    movie series simply because Mathew threatened to try to rescind the Release.
    Mathew did not notify Disney of his claim until after the first, very successful
    movie in the series had been released. Substantial revenues had already started
    flowing to Disney before the Release was ever negotiated with Mathew. The
    second movie in the series, Dead Man’s Chest, was released in July 2006, after
    Mathew had made Disney aware of his claim but a year before that Release was
    2
    signed. It wound up being the number one movie of the year at the box office,
    reportedly generating more than one billion dollars in ticket sales worldwide.
    Mathew’s complaint alleged that the third movie in the series, At World’s End, was
    released in 2007 and also generated more than one billion dollars in box office,
    merchandising, and licensing receipts. A fourth movie was released in 2011, and a
    fifth is scheduled for release later this year, even while Mathew’s lawsuit is
    pending before us. That Disney would not have pursued the Pirates of the
    Caribbean franchise if it had known of Mathew’s subsequent intent to try to
    rescind the Release is more than a little implausible.
    More to the point, that 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. E.g., Conti v. Board of Civil Service Commissioners, 
    461 P.2d 617
     (Cal. 1969); Bono v. Clark, 
    128 Cal. Rptr. 2d 31
    , 38 (Ct. App. 2002). It is true
    the complaint filed by Mathew alleged that Disney has pursued the Pirates
    franchise in multiple ways. It did not allege that Disney suffered substantial
    prejudice, however, and it certainly did not allege that Disney would have
    abandoned the Pirates franchise or run it at all differently had it known earlier of
    Mathew’s intent to rescind the release.
    3
    It is fundamental that Rule 12(b)(6) requires a court to construe the
    allegations of the complaint in the light most favorable to the nonmoving party, in
    this case Mathew. See, e.g., Wyler Summit Partnership v. Turner Broadcasting
    System, Inc., 
    135 F.3d 658
    , 661 (9th Cir. 1998). The district court did not do that,
    and neither has the majority in its disposition. The conclusion that Disney was
    substantially prejudiced by Mathew’s delay in giving notice of his intent to rescind
    the Release was wildly premature.1
    At oral argument, counsel for Disney realistically acknowledged that it was
    possible that the series might have gone forward anyway, but he pointed out that
    there were other steps Disney might have taken, such as to file a declaratory relief
    1
    The district court may have been influenced by a concern for the threat that
    Mathew would seek to recover all of Disney’s substantial profits from the Pirates
    franchise and may have presumed that the threat necessarily would have affected
    how Disney managed its franchise. If so, this was improper. The Supreme Court
    in Petrella v. Metro-Goldwyn-Mayer, Inc., 
    134 S. Ct. 1962
     (2014), cautioned that a
    plaintiff would not be entitled to all, or even most, of the defendant’s profits
    because “the District Court, in determining appropriate injunctive relief and
    assessing profits, may take account of [his or her] delay in commencing suit,” the
    plaintiff would only be able to recover for infringement within the Copyright Act’s
    3-year period of limitations, the defendant “may prove and offset against profits
    made in that period ‘deductible expenses’ incurred in generating those profits,” and
    “the defendant may prove and offset ‘elements of profit attributable to factors other
    than the copyrighted work,” thus, the defendant “may retain the return on
    investment shown to be attributable to its own enterprise, as distinct from the value
    created by the infringed work.” 
    Id. at 1973-78
     (citations and quotations omitted).
    A court cannot presume substantial prejudice by inferring that Disney would have
    behaved a certain way based on a mistaken view of the law.
    4
    action to resolve Mathew’s claim earlier rather than later. Possibly so, but that is
    not something that can be derived from the complaint, nor is it so certain that it can
    be found as a matter of law. Moreover, as it seems likely that Disney would have
    continued to pursue the Pirates franchise in the meantime rather than run the risk
    that it would wither in value, it would limit Disney’s laches defense to the
    additional amount that it might have been able to save if it had been able to take
    that action. That would still leave open the possibility of a claim by Mathews for
    some share in the profits received by Disney in the meantime.
    Despite the majority’s acknowledgment, at 3, that “a finding of substantial
    prejudice is generally premature at the 12(b)(6) stage,” the majority nonetheless
    tries to justify its affirmance of the dismissal in this case based on 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). The
    district court in Petrella did not presume substantial prejudice on a motion to
    dismiss, however. The court in Petralla found substantial prejudice at the
    summary judgment stage, after the parties had an opportunity to develop and
    submit evidence on the issue. 694 F.3d at 953-54. That approach was consistent
    with the fact-intensive nature of the substantial prejudice inquiry, unlike the
    approach taken in this case.
    5
    In addition, the majority cites Petrella for the proposition that substantial
    prejudice exists whenever a defendant shows that it “invested money to expand its
    business or entered into business transactions based on its presumed rights” during
    the delay. 695 F.3d at 953. But this fundamentally misunderstands Petrella and
    would bring that decision into conflict with our decisions in other cases, including
    Internet Specialties West, Inc. v. Milon-Digiorgio Enterprises, Inc., 
    559 F.3d 985
    ,
    991-93 (9th Cir. 2008) (“If this prejudice could consist merely of expenditures in
    [the allegedly infringing work], then relief would have to be denied in practically
    every case of delay.”). Petrella made clear that the proposition quoted above only
    applied in instances of extraordinary delay, in that case of 18 to 19 years, where
    less proof of prejudice was required. 695 F.3d at 952-53. The delay in our case
    was less than four years. That does not mean that Mathew’s delay should be
    disregarded, but it does mean that it cannot be presumed that Disney must have
    suffered prejudice so substantial that Mathew’s claim should be dismissed on a
    motion to dismiss.
    Danjaq, the other case the majority cites as supporting its position regarding
    the finding of substantial prejudice to support the application of a laches defense,
    involved an even longer delay by the plaintiff in asserting its claim, a delay of
    nearly 40 years. 
    263 F.3d at 956
    . Danjaq, moreover, did not involve a dismissal at
    6
    the stage of a 12(b)(6) motion, either. The court there only concluded that there
    was substantial prejudice after a bench trial. 
    Id. at 950
    .
    Disney may still prove substantial prejudice sufficient to make out the
    affirmative defense of laches. If the district court thought that issue was likely to
    be dispositive, it could organize the litigation to focus on it, by limiting discovery
    to that issue and directing the parties to brief an appropriate motion for summary
    judgment. Disposal of Mathew’s claim might be appropriate then. It is not
    appropriate now, however.
    The claim presented by plaintiff Royce Mathew strikes me as unlikely to
    succeed in the end, for multiple reasons, but that perception does not give us leave
    to resolve this case at the stage of motion to dismiss under Federal Rule of Civil
    Procedure 12(b)(6) based on a determination that is essentially factual. I would
    vacate the district court’s order of dismissal under Rule 12(b)(6) and remand for
    further proceedings.
    7