Kermit Vs. Mickey Mouse

WARNING: This story should not be read by children under the age of 12.

There's nothing quite like the sight of adults fighting over a bunch of lovable kids' characters. It all started in August 1989 with the planned marriage of Mickey Mouse and Miss Piggy. In a gush of mutual admiration, The Walt Disney Co., creator and marketer of some of the world's most popular characters, announced it would buy Henson Associates, Inc. and its family of the equally beloved Muppets like Kermit the Frog and Miss Piggy. It was, said Disney chairman Michael Eisner, a match "made in family-entertainment heaven." For creator Jim Henson, the $150 million deal would ensure for the Muppets a long and profitable life. Children around the world, at least those who read the business pages, went to bed smiling that night.

Sorry, kids, there may be a Santa Claus, but we're talking big bucks here. Jim Henson died suddenly last year, and the merger deal was never consummated; last week licensing talks between the two companies broke up in a row of brutal name-calling. Henson Associates filed an invective-filled lawsuit that charged Disney with infringing on the trademark and copyrights that protect its Muppet characters. It asked a federal court in New York to halt a Muppet 3-D movie scheduled to begin showing next month at Walt Disney World in Florida. Among other niceties, Henson's suit accused Disney of "sheer corporate arrogance...... corporate greed" and running "roughshod" over the Muppets. For its part, Disney said the suit contained an "enormous distortion of the facts" and painted the Henson heirs as balky children reneging on their famous father's wishes. It was as if Mickey Mouse had called Miss Piggy ugly one time too many.

Legal issues aside, the Henson suit is a public-relations nightmare, particularly for image-sensitive Disney. Disney has a reputation for vigorously defending copyrights on its own characters. Lawyers point to its suit two years ago against the Academy of Motion Picture Arts and Sciences for using Snow White in the opening number of the Oscars show. Said one copyright lawyer, "Disney writes the book on being tough. They'll sue anybody and anything." Responds Disney spokesman Erwin Okun, "I don't think we're any more tough than other studios."

How did Mickey and Miss Piggy get into such a mess? The dispute stems in part from a clash in corporate cultures: the rigidly controlled, $6 billion Disney empire versus the family-run Henson shop. While both companies were started by creative geniuses, Henson staffers say they felt uncomfortable working with the hard-driving Disney people. A few months after the deal was announced, according to Henson employees, Jim Henson and about 25 staffers were flown to Florida for a get-acquainted meeting. Jeffrey Katzenberg, chairman of Walt Disney Studios, asked Henson how things were going. Henson said he was happy except that he found Disney's negotiators "offensive." He reportedly went on to say, "All I really want out of this is a fair deal." Katzenberg supposedly responded: "Fair deal! Get out of the '60s, pal. You're in Hollywood now." Katzenberg says he doesn't recall the incident. Okun, referring to Henson employees as "moonbeams," says that Disney has enjoyed a tremendous "creative rebirth" in recent years.

The relationship between the two sides actually began quite smoothly nearly 25 years ago when Henson and Eisner, then at ABC, developed a friendship. By 1989 Disney had grown into a movie--and-theme-park powerhouse. Henson's company, too, had grown, thanks to the Muppet TV shows, movies and "Sesame Street." But Henson, says a company source, was looking for a "permanent home for Miss Piggy and Kermit." Disney saw the Muppet characters as a valuable set of "evergreens"--properties that could be introduced to new generations of children.

The two sides signed a letter of intent to give Disney use of the Muppet characters in its theme parks, television and movies. Henson would produce TV shows and films for Disney. Notably excluded from the deal were Henson's "Sesame Street" characters, like Big Bird; they would remain with the Children's Television Workshop.

While the media described the merger as a done deal, in negotiations were just beginning. Without a formal merger or licensing agreement, Henson plunged into projects with Disney. He built some "walk around" Muppet characters for Florida's Disney World that would appear on stage shows. He also began working on a new blockbuster movie for Disney World, "Kermit the Frog Presents Muppetvision 3-D."

Why did Henson and Disney proceed without a contract? "Jim didn't give a damn about legalities and he almost didn't care about money," says a Henson lawyer familiar with the negotiations. Disney, which says it spent $90 million on joint shows at Disney World, is expected to argue that Henson's cooperation represented an "implied license" allowing Disney to use the Muppet characters.

Last May, Henson died suddenly of pneumonia at the age of 53. His son, Brian, 27, took over as president. Although Eisner supposedly assured the family the price wouldn't change, the merger talks went from bad to worse. Disney last week put the blame on Henson's heirs, saying they sought to scuttle the deal after their father's death by adding one "impossible" demand after another. Disney contended it offered an additional $50 million after Henson's death but was rejected.

Not so, responds the Henson side. Those additional dollars were "Disney dollars-not a real one in the group," says Henson lawyer Peter Schube. In fact, the suit claims that after Henson's death Disney backed away from its original offer and started making impossible demands. Among them, the suit says, was a proposal to restrict the licensing of the "Sesame Street" characters.

Finally last December, the suit alleges, Disney president Frank Wells cut the offering price by "tens of millions of dollars." The Henson side claims that Disney purposely dragged out negotiations after Henson's death until his associates had completed programming for the 3-D movie. The alleged reason: to obtain "all the fruits" of Henson's creative work without paying for it.

The talks soon collapsed and the merger was called off. An attempt to reach a licensing agreement to allow Disney to use the Muppet characters also broke down in recriminations. Meanwhile, the Henson camp says Disney used the Muppet characters without a license. Henson cites a Disney World commercial featuring Muppet characters and the use of Muppet characters in Disney's annual report, T shirts, hats and other items.

At the moment, Henson insists Disney isn't paying for the right to use the Muppet characters. And as long as Kermit and Co. are prancing around Disney World, no other company--like rumored MCA or Sony--would want to buy or do business with Henson. But there's another twist to this story. Disney and Henson are working together--more or less amicably--on the new TV show "Dinosaurs," which debuts this Friday. Both sides could realize millions if the show is a hit. Given that prospect, the combatants may try to settle the Muppets suit quickly. As a negotiator, they might want to call on Mister Rogers.

The Disney-Henson merger had all the makings of a fairy tale: two well-liked partners searching for peace and security. They found each other for a while but, alas, there was no happy ending.

The proposed merger started out as sweet as a child's smile. Eisner and Henson were embarking on a business relationship that seemed mutually beneficial. The Muppets would have a safe home in the Magic Kingdom, and Disney would have an array of new characters.

Henson plunged into a variety of projects with Disney. He produced puppets for a Disney Channel special (never completed). He built some "walk around" Muppet characters for a Disney World stage show. Henson also began work on what they hoped would be a big hit: "Kermit the Frog Presents Muppetvision 3-D." Disney World began clearing land for a special Muppet area.

On May 16,1990, Henson died suddenly of pneumonia. Eisner supposedly assured the family that the merger price wouldn't change. But the honeymoon was shattered. Negotiations, still tentative, soured. Each side started to blame the other for wanting to end the deal. Hard words filled the conference room.

Last December the two sides ended merger talks in bitter recriminations. Both Disney and Brian Henson maintained the other was making "impossible" demands. Disney said it offered another $50 million, but Henson contends that Disney had cut the price.

An effort to hammer out a licensing agreement to allow Disney to use Muppet characters also broke down, and Henson filed suit last week charging copyright infringement. Meanwhile, the two combatants are working more or less amicably on a new TV show, "Dinosaurs", which debuts Friday. Both have a lot riding on it.