Fourth Age Limited v. Warner Bros. Digital Distribution Inc.

Ninth Circuit affirms district court’s holding that Warner Bros. can assert counterclaims against estate of J.R.R. Tolkien in action over right to make digital merchandise based on Tolkien’s books, as counterclaims were adequately pleaded contract-based claims.

Plaintiffs, the heirs of J.R.R. Tolkien, book publisher HarperCollins Publishers, Ltd. and others, brought a breach of contract suit against Warner Bros. Entertainment, Warner Bros. Digital Distribution, the Saul Zaentz Co. and others, claiming defendants exceeded the scope of their merchandise rights by developing video games and other digital merchandise based on two of Tolkien’s books—The Lord of the Rings and The Hobbit.

In 1969, plaintiffs granted United Artists merchandising and other rights to the two books. The Warner Bros. defendants and Zaentz are United Artists’ successors-in-interest with respect to the rights at issue.

The Warner Bros. defendants counterclaimed for breach of contract, asserting that plaintiffs breached the 1969 agreement and that this breach caused them to lose millions in licensing opportunities. Zaentz counterclaimed for declaratory relief and for breach of the implied covenant of good faith and fair dealing. Plaintiffs moved to dismiss or strike the counterclaims, arguing they violated California’s anti-SLAPP (Strategic Lawsuits Against Public Participation) statute because they were brought to punish plaintiffs for exercising their fundamental right to petition the court.

The district court declined to dismiss defendants’ counterclaims, and plaintiffs appealed. The Ninth Circuit affirmed the district court’s ruling, stating that it was “simply not convinced” that the counterclaims arose from the plaintiffs’ filing of their 2012 complaint. According to the court, the contract-related counterclaims arose out of the parties’ disagreement about the scope of the defendants’ contractual rights, and the fact that the plaintiffs filed suit first does not turn the counterclaims into SLAPP actions. “At bottom, this aspect of the litigation is a routine contract dispute that gave rise to claims and counterclaims because all advocates of the competing interpretations are seeking affirmative relief.” The contract-related counterclaims lacked the “hallmark characteristics” of SLAPP suits, the panel said, adding, “[f]or example, it does not appear that by filing the contract-related counterclaims, the [defendants] obtained any meaningful financial advantage over [the plaintiffs].”

The Ninth Circuit also noted that the contract-based counterclaims do not arise out of protected speech, are not barred by the litigation privilege, and are not disguised claims for malicious prosecution, and that they were adequately pleaded.