Jim Henson, whose production company was taken over by his children on his death in 1990, created numerous Muppets used in Sesame Street but the rights to the puppets were sold to Sesame Workshop in 2000. Melissa McCarthy stars as a police officer who gets a new puppet partner and is tasked with solving a series of connected murders.
STX Productions LLC says in a statement it is confident in its legal position.
The American childhood staple "Sesame Street" - which premiered in 1969 to high viewership and glowing reviews - features a cast of Jim Henson's Muppets including the bright yellow Big Bird and the furry red monster Elmo, known for his falsetto voice.
CNN has reached out to Sesame Workshop for further comment.
And the people at Sesame Workshop think the promo material deliberately links the film with Sesame Street in a bid to "deceive consumers into believing that Sesame was involved in the creation, promotion, and/or distribution of the movie The Happytime Murders". The film promises loads of violence, drug use, and felt-on-felt sex, and is definitely not a movie you'd want to take your kids to.
The trailer features one puppet offering to suck McCarthy's dick for 50 cents, before being told she doesn't have a dick, and a sex scene showing another puppet ejaculating profusely.
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'Defendants threaten to inflict serious, irreparable damage to Sesame's mark and brand by associating their adult movie with Sesame Street'.
The Happytime Murders will hit theaters on August 17.
The Happytime Murders uses the tagline "No Sesame, All Street".
Specifically they state that they will lose the ability to 'cultivate and maintain trust with its audience of parents and young children'.
In a release before the film was made, STX said it would be produced by The Jim Henson Company's Henson Alternative banner, On The Day Productions, and STXfilms, along with individuals including Brian Henson, Lisa Henson, Melissa McCarthy and Ben Falcone, among others.
Sesame Workshop seeks a permanent injunction on the use of its marks in connection with the marketing of The Happytime Murders. "All Street." tagline, would Sesame Workshop drop the suit?