Henson Heirs Allege Disney Is Illegally Using Muppets : Licensing: Suit cites trademark, copyright violations in bitter custody fight over characters of late puppeteer.

A bitter custody fight over Kermit the Frog, Miss Piggy and other creative offspring of the late Jim Henson has erupted between the Muppet creator’s natural heirs and the Walt Disney Co.

Claiming that they are trying to prevent the “outright theft of Jim Henson’s legacy,” a pair of companies controlled by Henson’s heirs filed suit here Wednesday to stop the Burbank-based entertainment giant from using the Muppets at Disney theme parks without a license.

“It’s ironic that Disney, of all people, should be named in a suit like this,” said Christopher P. Dixon, entertainment industry analyst at Kidder, Peabody & Co., noting that Disney is famous for going to great lengths to protect its own stable of characters. “It looks like Disney is being hoist by its own petard.”

The U.S. District Court suit followed the breakdown of merger negotiations between Henson’s heirs and Disney last December and the collapse of licensing talks between them on Tuesday night.

Disney had signed a letter of intent with Jim Henson to acquire Henson Associates and rights to such celebrated characters as Kermit and Miss Piggy in August, 1989. But the $150-million deal, once hailed by Disney as “a business association made in family entertainment heaven,” foundered after Henson, 53, died suddenly last May.

“Even though Disney walked away from its offer to buy our company, it is acting as if it owns the Muppets,” charged Brian Henson, president of Henson Associates and one of Jim Henson’s five children.

In its suit, Henson Associates noted that Disney has used the Muppets in promotional materials and a live stage show, and it claimed that Disney plans to open an attraction called “Kermit the Frog Presents Muppetvision 3-D” at Walt Disney World on May 4.

Disney, in a statement, called the Henson charges “outrageous” and “an enormous distortion of the facts,” adding: “Ever since Jim Henson’s untimely death in May, 1990, his heirs, aided by a barrage of lawyers, executors and advisers, have sought to scuttle the arrangement with Disney.”

Erwin Okun, Disney’s senior vice president and chief spokesman, argued that the close working relationship between Henson Associates and Disney officials, which continued after the puppeteer’s death, had created “an implied license” for Disney to use the Muppet characters.

Okun acknowledged that Disney has used the Muppets in a stage show and on some merchandise, but he said the opening date for the 3-D attraction “is yet to be determined.” Disney, which has promoted the 3-D show as “the most incredible theatrical event of a lifetime,” said it has invested $90 million to build Muppet-related attractions and facilities.

“From the beginning,” the Disney statement contended, “Jim Henson wanted this 3-D attraction to be a permanent part of Walt Disney World regardless of whether the Henson Co. was finally acquired by Disney.”

Disney files about 200 lawsuits and regulatory actions a year against alleged violators of its own copyrights and trademarks. The company once threatened to sue a day-care center that featured paintings of Disney characters on its outside walls.

“It’s difficult to determine whether Henson’s case has merit or is a negotiating tactic,” analyst Dixon said.

The lawsuit charges Disney with an ongoing pattern of trademark and copyright infringement, fraud and related unlawful activities. Among other things, the suit alleges that Disney “tried to take advantage of (Henson’s) passing to recast the deal” to acquire the Henson company.

Specifically, the suit alleges that Disney sought to interfere with the special relationship that existed between Henson interests and Children’s Television Workshop, the nonprofit educational corporation that produces “Sesame Street” and has exclusive rights to such Henson-created characters as Big Bird and the Cookie Monster.

Concessions demanded by Disney “threatened Sesame Street’s very existence” and were an attempt to “emasculate a nonprofit institution in the name of corporate profit,” the suit alleges.

“Fearing a public relations nightmare, Disney chose to back down” after the nonprofit company hired a law firm to defend its interests and its respected former president, Joan Ganz Cooney, threatened to bring Disney’s conduct to the attention of Congress, the suit charges.

Okun said the charge regarding Sesame Street “is frankly too offensive to deserve the dignity of a response.” Okun added: “We understood from the beginning how precious ‘Sesame Street’ was to Jim. . . . The thought of us threatening Children’s Television Workshop, or anyone for that matter, is absurd.”

Cooney could not be reached, and a spokeswoman for Children’s Television Workshop declined to comment.

The lawsuit and Disney gave flatly contradictory accounts of negotiations after Henson died. The suit alleges that Disney demanded “tens of millions of dollars in givebacks.” Disney, on the other hand, claimed it offered to pay “additional sums and incur additional costs and risks amounting to approximately $50 million.”

The dispute was based in part on Disney’s calculation that Henson’s accounts receivable were lower than it originally thought.

Disney’s Okun, denouncing the lawsuit’s charges as “scurrilous” and “fantasy,” said: “There are tears in Mickey’s eyes today.”