Robbins Umeda LLP* Attorneys Discuss "The Avengers" in Law360

By Brian J. Robbins and Gregory E. Del Gaizo

As featured in Law360's Expert Analysis column on May 3, 2012.

On May 4, 2012, the Walt Disney Co. (through its wholly owned subsidiary, Marvel Entertainment LLC) will release what is to be the biggest movie of the summer, "The Avengers." The Avengers is a team consisting of some of the most well-known superheroes ever created, including Thor, Captain America, Hulk and Iron Man. In building up to this movie, Marvel gave each of these superheroes their own standalone movie, and each movie beat box office expectations. "The Avengers" has already received rave reviews in screenings. Many are predicting it to have a $100 million-plus opening weekend.

The movie's impending release has also reignited a controversy within the comic book industry: Who is responsible for the creation of many of Marvel's most popular comic book characters, including the main members of "The Avengers"? Many in the comic industry credit the late Jack Kirby with the creation of many of Marvel's iconic characters. Kirby left Marvel, however, in 1970 because he felt that he was treated unfairly.

When he left Marvel, he left behind his creations and all the benefits that came from those creations. In 2009, Kirby's heirs attempted to reclaim Kirby's characters, which led to litigation with Marvel. The court ultimately ruled that Marvel (now Disney) owned and controlled The Avengers and the other Kirby works, regardless of whether Kirby actually created the characters. Now, with "The Avengers" getting ready to break box office records, influential people within the comic book industry are threatening to boycott the movie over Marvel's treatment of Kirby.

Disney is a public company with approximately 1.8 billion shares outstanding. The directors and officers of the company are required to operate it for these shareholders. In light of the ruling that Disney legally owes nothing to the Kirby heirs, can Disney's directors, consistent with its fiduciary duties to shareholders and the company, provide the Kirby heirs with substantial compensation for the use of the Kirby-created characters? As explained below, the answer is yes.

Marvel v. Kirby

Jack Kirby either created or co-created some of the most iconic comic book characters ever, depending on which account you believe. Kirby played a role in the creation of The Fantastic Four, The Incredible Hulk, The X-Men, Spiderman, Thor, Iron Man and many more. While Kirby was vital in the creation of these characters, the real benefit of their creation went to Marvel Comics, its owners, and executives. It was these Kirby created characters that served as the backbone of Marvel's recent resurgence over the last decade (Marvel went bankrupt in 1996), as movies based on Spiderman and Iron Man reaped billions in box office sales. This, in turn, led to Disney acquiring the company for over $4 billion in 2009.

Jack Kirby died in 1994. While his works were already very popular back then, he did not live to see how monumental they would become. While Kirby's widow and children witnessed the popularity of his work, they did not see any of the profits. So on Sept. 16, 2009, the Kirby heirs served Marvel with 45 notices purporting to terminate Kirby's assignment of his copyrights (essentially the Kirby created characters) to Marvel. If valid, the termination notices would give control to the Kirby heirs of one of the most valuable pieces of intellectual property in the comic book industry.

After engaging in some negotiations with the Kirby heirs, Marvel took the offensive when it sued for a declaration that the termination notices were a nullity in the Southern District of New York. Marvel argued that it was the actual owner of the copyrights to the Kirby works.

The lawsuit brought out testimony from many of the titans in the comic world including John Romila (an artist who worked at Marvel from 1951 to 1958 and then 1965 to 1996), Lawrence Lieber (a writer for Marvel starting in 1958), Roz Thomas (a writer who worked at Marvel from 1965 to 1980), and, most notably, Stan Lee. A legend in his own right, Stan Lee is the person who hired Kirby and the other artists and writers at Marvel. As art director and editor, Lee developed the ideas and stories for all of Marvel's comic books. He is also the smiling, grandfatherly looking individual that has a brief cameo in almost all of Marvel's movies.

The issue in the lawsuit was relatively straightforward. As Judge Colleen McMahon explained, the case was not whether Kirby was treated fairly or who was the actual creator of the Kirby works. Rather, it was whether Kirby's work qualifies as work for hire under the Copyright Act of 1909. If it did, Marvel wins; if it did not, the Kirby heirs win. Relying mostly on the testimony of Stan Lee, on July 28, 2011, the court found for Marvel and granted its motion for summary judgment. Fair or not, the law and facts were clear: According to the court, the copyright for the material in question belonged to Marvel.

Could Disney Provide the Kirby Heirs with Remuneration in Light of the Court's Ruling and Continued Criticism of the Treatment of Kirby?

Almost a year after Judge McMahon's ruling, the issue of Marvel's treatment of Jack Kirby is again being debated and criticized. With the release of "The Avengers," Marvel (now Disney) is again about to make a ton of money while Jack Kirby (actually, his heirs) will get nothing. This time, prominent people within the comic book community have publicly stated that they will boycott "The Avengers" and have encouraged others to do the same.

What if, however, Disney's board of directors thought what happened to Jack Kirby and how he was treated was not right? What if the board thought that Disney, the ultimate purveyor of "good always wins," should do something to make things right?

The Misplaced Continued Reliance on Dodge v. Ford and Shlensky v. Wrigley

Disney is a publicly traded company operated for the benefit of its shareholders. It already has a judgment saying that the Kirby heirs are entitled to nothing. Therefore, any amount of money or other benefit Disney wishes to confer on the Kirby heirs is really just charity. Can a public company basically give away vast sums of money because it believes (or, more accurately, the people that control it believe) it is the right thing to do?

The discussion on company charity inevitably turns to Dodge v. Ford, 170 N.W. 668, 204 Mich. 459 (1919), law school's version of Action Comics No. 1 (the first appearance of Superman). Dodge has been told so many times that, like the origin of Superman, one does not even need to read the source materials to know the story. Basically, the Dodge brothers sued Henry Ford because he refused to have Ford Motor Co. issue a dividend. Instead, Ford said he planned on using his company's profits to increase wages, add jobs and basically do what he thought was in society's best interest.

The Michigan Supreme Court found for the Dodges and ordered Henry Ford and his company to issue a dividend because he owed a duty to operate the company for the profit of shareholders. If Dodge is the law, the answer is clear; Disney cannot give any money to the Kirby family.

Dodge, however, is nearly 100 years old and of little significance in modern corporate law. In a discipline that still studies pregnant cows and peppercorns, 100 years may not seem that old. Corporate law, though, is different than contract law. The law has undergone fundamental changes in 100 years. The biggest limitation of Dodge, however, is that it is a Michigan Supreme Court decision about a Michigan company.

The vast majority of public companies are incorporated in Delaware, making Delaware law the controlling law on substantive issues of corporate law. Disney is one of these companies. Despite thousands of Delaware decisions coming down since the Michigan Supreme Court decided Dodge, a quick Westlaw search shows that it was only cited in Delaware three times and even then only in passing. Thus, Dodge provides little guidance to most of corporate America.

The oft-cited counterpoint to Dodge, Shlensky v. Wrigley, 237 N.E. 2d 776, 95 Ill. App. 2d 173 (1968) is only slightly more helpful. In Wrigley, the plaintiff sued Philip Wrigley to force the installation of lights at Wrigley Field so that the Chicago Cubs could play home night games like every other baseball team at that time. The plaintiff explained that night games had significantly higher attendance than day games but Wrigley refused to install lights based on his personal belief that baseball should only be played during the day. Thus, Wrigley was not operating the company for the benefit of shareholders and, therefore, breached his fiduciary duties. Illinois' highest court disagreed, explaining that Wrigley could have the long-term interest of the company in mind, such as the property value of the surrounding neighborhood.

The problem with relying on the Wrigley decision is similar to that of Dodge. While Wrigley involved a Delaware company and is not as ancient as Dodge, it is still an old decision. Further, according to Westlaw, no Delaware court has ever cited Wrigley in a written decision. Thus, while law professors continue to put these cases in textbooks and teach them in classes, something that seems unstoppable, they are apparently of little persuasive value to the final arbiters of a fiduciary of a Delaware company's duties, and, thus, to Disney's decision on whether it can pay the Kirby heirs.

The Business Judgment Rule

Delaware corporate law has embraced what is known as the business judgment rule. Under this theory, a court will not second-guess the decisions of a board of directors as long as there are no loyalty issues (i.e., self-dealing) and the process leading up to that decision is reasonable. The business judgment rule provides directors with wide latitude to make decisions, good or bad, and despite the common misconception, except in limited circumstances, the decision does not have to be based on what is in the best interest of shareholders.

In the seminal case Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985), the Delaware Supreme Court discussed the steps a board could take in response to a takeover offer. The court explained that the steps must be considered in light of the business judgment rule. In reaching a decision, the Delaware Supreme Court instructed directors to analyze the effect of the bid on the "corporate enterprise." This term does not mean just the company's current shareholders. In fact, in Unocal, the Supreme Court explicitly stated that among a director's concerns can be the "impact on 'constituencies' other than shareholders (i.e., creditors, customers, employees, and perhaps even the community generally)." Id. at 955.

In light of Unocal, it would not just be acceptable, but proper for Disney's directors to consider how effectively shutting out the Kirby family would appear to Marvel's major customers, comic book fans. For example, taking such a stance might alienate Marvel's core customers or cause a more general public backlash. In fact, this is exactly what is occurring, as some influential members of the comic book community have called for a boycott of "The Avengers" and any other Marvel product linked to a Kirby created character.

Or, if employees believed that Marvel and Disney treated a legend like Kirby unfairly it might cause a dip in employee morale. Under Unocal, each of these considerations is valid. If Disney's directors decided it was in the best interest of the corporate enterprise to provide the Kirby family with remuneration, that decision would be difficult to challenge because of the business judgment rule. Therefore, it would be legally defensible for Disney to provide the Kirby heirs.

Conclusion

The board of directors of Disney can, consistent with their fiduciary duties, make a sizable payment to the Kirby heirs, despite a ruling saying Disney has no legal obligation to do so. Directors of public companies have an affirmative duty to the companies they have ultimate control over to consider how business decisions will affect the corporate enterprise.

Disney's directors have multiple valid reasons to provide the Kirby heirs with substantial compensation for the use of the Kirby-created characters. If they choose to provide this compensation to the Kirby heirs because they in good faith believe it is in the best interests of Disney, the business judgment rule will likely protect the Disney directors' decision against a potential shareholder derivative action.

Brian Robbins is a partner, and Gregory Del Gaizo is an associate, in Robbins Umeda LLP's San Diego office.

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* The firm name changed from Robbins Umeda LLP to Robbins LLP on January 1, 2013.