Aside from the piece of crap that is this submission (watchman? really?)....
This isn't really a chance to bash off one over copyright law, because the heart of this case is really about film options and rights. These contracts are *extremely* complicated, particularly when the studio that's optioning the work decides (as in the case of Fox) not to make it.
In fact, this really isn't about copyright law at all - more contractual law. Options contracts allow studios to buy options on material that they may or may not produce. This is fairly standard practice, since promising books may turn out to be impossible to film, etc. The studio is basically buying the right to potentially make and distribute a motion picture at some future date. The studio then invests money in development, which doesn't always pan out. If development is successful, further contracts are signed and money paid to the author/rights holder to allow production.
However, if the studio decides not the make the film there needs to be a get out clause for the original rights holder to take it to other studios and avenues. Thus, most options contracts have an expiry date - if you haven't produced the film by a certain point, the option reverts back. Of course, the studio can also choose to extend their option, or add a myriad of clauses to hold options over.
What Fox are claiming (and what the judge agrees on) is that some part of their option never expired or wasn't bought out, meaning they still have an interest in this picture. This would really not, given precedent in entertainment law, be totally out of the question. It could well be that Fox genuinely still has some contractual interest as a result of previous rights options signed away that were never presented to Warners (the rights holder believing Fox to have given their options up). We shouldn't forget that Fox did spend a fair bit of money development their Watchmen project, and I could certainly understand them wanting to recoup that if it turns out they still have an interest in the picture.
Whilst the case was arguing over who owned copyright and distribution rights it would have been decided on *contractual* law...who signed what.
(IANAL, but I am involved in the entertainment industry and these types of contracts).