Hollywood production company Threshold Entertainment, Inc. (Threshold) may be in danger of losing its rights to create additional Mortal Kombat-based feature films, television programs, and other media as a result of the video game developer’s impending bankruptcy sale of its assets. On June 24, 2009, Threshold filed a complaint against Debtor video game developer Midway Games Inc. (Midway) in the US Bankruptcy Court for the District of Delaware, seeking a judgment describing the scope of Threshold’s exclusive and implied non-exclusive licenses, copyrights, and trademarks in Mortal Kombat-related intellectual property and declaring that Midway’s bankruptcy sale of assets will not impact Threshold’s rights.  In re: Midway Games, Inc., Threshold Entertainment, Inc. v. Midway Games Inc., No. 09-10465 (KG) (Bankr. D. Del.). 

In the mid-1990s, Threshold entered into several agreements with Midway to produce certain derivative works based on Midway’s Mortal Kombat video game.  Subsequently, Threshold produced two feature films, a television special, a Web site, a live stage show, a direct-to-video animated special, and other media based on Mortal Kombat.  According to the complaint, Threshold’s creative input in the above derivative works is responsible for turning the Mortal Kombat videogame into the multimedia enterprise it is today. Threshold also claims to be expanding the enterprise currently by producing a third feature film and a second direct-to-video animated film.  The complaint states that, as a result of its agreements with Midway and the creation of the above works, Threshold holds a perpetual exclusive license to prepare derivative works in film and television based on the Mortal Kombat video game; copyrights in certain of its own derivative works based on Mortal Kombat; implied non-exclusive licenses to use Midway’s copyrighted material, including, for example, Mortal Kombat characters, in its derivative works; and trademark rights in the word mark MORTAL KOMBAT for use in connection with entertainment services. 

In connection with its bankruptcy proceedings, Midway proposes to sell substantially all of its assets, including Mortal Kombat-related intellectual property, to Warner Bros. Entertainment, Inc.  Threshold does not object to the sale of Midway’s intellectual property rights, so long as Threshold is able to retain its own rights. It argues that the sale of Midway’s assets should not divest Threshold of its Mortal Kombat-related intellectual property interests. Threshold seeks a judgment describing the existence and scope of its licenses and interests in the intellectual property, and declaring that Midway cannot sell, assign or otherwise impair those interests.

Intellectual property is treated similarly to tangible property in the context of a bankruptcy sale of assets. Under the Bankruptcy Code, a license covering intellectual property may not be sold free and clear of all liens, claims, interests, and encumbrances unless the licensee consents. Threshold’s complaint functions as an objection to the sale sufficient to preclude its consent. In response, if the court determines that it would be necessary to protect Threshold’s interests, it may issue an order requiring that the intellectual property remain subject to the licenses giving Threshold the right to create derivative works and use Mortal Kombat-related intellectual property in those derivative works even after the transfer. The fate of Threshold’s alleged copyrights and trademark depends upon the court’s determination as to the legal ownership of the interests, as Midway cannot assign rights it does not own.

Arent Fox is currently monitoring this case for further developments. For more information, contact:

Anthony V. Lupo
lupo.anthony@arentfox.com
202.857.6353

Loni J. Sherwin
sherwin.loni@arentfox.com
202.715.8581