Feb. 16 (Bloomberg) -- Walt Disney Co., the world's second- largest media company, lost a court bid to void the rights to the Winnie the Pooh characters held by Stephen Slesinger Inc.

U.S. District Judge Florence-Marie Cooper ruled yesterday in Los Angeles federal court that Disney and the granddaughters of Pooh author A.A. Milne and illustrator Ernest Shepard can't challenge a licensing agreement struck with Slesinger in 1983.

The ruling, disclosed on the court's Web site today, eliminates a procedural hurdle to Slesinger seeking more than $2 billion in damages from Disney. Disney had tried to terminate Slesinger's rights to characters the media company has marketed for more than four decades. Slesinger acquired the rights from Milne in 1930.

``This is definitely a setback for Disney,'' said Carole Handler, an intellectual property lawyer with Foley & Lardner in Los Angeles. ``They tried to dismantle the license of the party that has been most troublesome to them in court.''

The ruling is part of a larger 16-year legal battle between Burbank, California-based Disney and closely held Slesinger that's being fought in state and federal courts and the U.S. Patent and Trademark Office.

Last week, Los Angeles-based Slesinger asked the Patent Office to cancel rights to 25 Pooh-related names obtained by Disney since 1996. Disney ``was not the owner of the registered marks at the time that these filings were made,'' Slesinger said in a petition. The company was ``at most, only a licensee.''

Pooh Royalties

Stephen Slesinger, a publisher, acquired the U.S. and Canadian merchandising rights to the Pooh characters from Milne in 1930. Disney acquired some rights from his widow in 1961. Under an agreement, Slesinger's company was entitled to 4 percent of the Pooh sales in royalties. Under a separate accord, Milne's estate received 2.5 percent.

The three parties negotiated a new agreement in 1983 that doubled the Milne heirs' share of the royalties and revoked the previous agreements.

In 1991, Slesinger sued Disney in state court, saying the company underreported sales of Pooh-related merchandise. That suit was thrown out after the judge found Slesinger illegally obtained evidence from Disney's trash bins. Slesinger is appealing that decision.

Disney's Lawyer

``The ruling has no bearing whatsoever on Disney's rights to the Pooh characters,'' Disney lawyer Dan Petrocelli said in a telephone interview. ``Nor does it effect the judgment Disney won throwing out the state court case.''

Cooper in 2004 ruled against a similar effort by Milne's granddaughter, Clare Milne, to terminate Slesinger's rights. That ruling was upheld by the 9th U.S. Circuit Court of Appeals in San Francisco, and the U.S. Supreme Court turned away Milne's subsequent appeal.

``Now that Disney's misguided claims have been dismissed, we can focus on pursuing Slesinger's claims against Disney for damages, trademark and copyright infringement, breach of contract, and fraudulently underpaying royalties, and seeking in excess of $2 billion in compensatory and general damages,'' Barry Slotnick, Slesinger's attorney, said in a statement.

Milne and Disney challenged the 1983 licensing agreement in 2002 under the so-called Sonny Bono Copyright Term Extension Act of 1998 that offered greater protection to the heirs of authors. The federal appeals court in 2005 held the 1983 agreement couldn't be voided under the new law because the termination provisions didn't apply to arrangements made after 1978.

Shares of Disney rose 22 cents to $34.89 at 4:18 p.m. in New York Stock Exchange composite trading. They have gained 29 percent in the past year. Time Warner Inc. in the world's largest media company.

The case is Clare Milne et al v. Stephen Slesinger Inc., U.S. District Court, Central District of California, 02-8508.

To contact the reporter on this story: Edvard Pettersson in Los Angeles at epettersson@bloomberg.net.

Last Updated: February 16, 2007 19:27 EST