When the first Iron Man surpassed even the highest expectations, locking director Jon Favreau in as the director for the sequel seemed like a foregone conclusion. However, Marvel initially made him a paltry offer and there was a brief moment where fans contemplated the possibility of Iron Man 2 moving forward without Favreau calling the shots.
Ultimately Marvel came to their senses, realizing how integral Favreau was to the continued success of the franchise - and a much more lucrative deal was worked out. Favreau was initially concerned over how quickly Marvel wanted to get Iron Man 2 into production but evidently one of the reasons he agreed to the accelerated schedule was the opportunity for first dibs on The Avengers.
Though Favreau won that particular battle, it may have cost him the war.
"Marvel wasn’t willing to pay that kind of money again when it came time for The Avengers, and so even though Favs wanted to direct their superhero team-up movie, they didn’t want him. Instead Marvel has made it a point to seek out cheaper talent to direct all of their subsequent movies."
It seems extremely underhanded, if you believe that Marvel lead Favreau to believe he was the front-runner to helm The Avengers, while having already quietly decided they had no intentions of offering it to him. To add insult to injury, it was all the tedious Avengers set-up shoe-horned into Iron Man 2 that apparently kept Favreau from making the film he really wanted to make.
Cinema Blend's source claims that both Favreau and Robert Downey Jr. were unhappy with the end result of Iron Man 2 and blame Marvel's interference for its shortcomings. They even speculate that the director's relationship with the studio took such a beating he may not be interested in returning for Iron Man 3. The first Iron Man also entered production without a finished script - but Favreau was still able to deliver an extraordinary final product. I just assumed they weren't able to catch lightning in a bottle a second time.
Downey has no choice but to appear in Iron Man 3 - as he's still under contract. Although he was quite enthusiastic when the cast of The Avengers assembled for the first time at Comic-Con, Cinema Blend seems to think that after Iron Man 3, he won't likely extend his contract - and we probably won't see him as Tony Stark again.
I know Iron Man 2 has plenty of supporters and I'd never call it a bad film, but I don't think it's even close to the same league as its predecessor. I walked out of the theater feeling like Marvel's initial film adaptation successes had made them trigger happy - and that the movie would have greatly benefited from another year of development.
To hear Favreau had other ideas for Iron Man 2 is especially disappointing, as the S.H.I.E.L.D. storyline continually derailed what should have been the focus of the movie - Tony Stark's plight. It wasn't the only thing wrong with Iron Man 2 but it certainly didn't help. I wanted something that worked as a stand alone film in addition to being another stepping stone to The Avengers. Instead, the film only seemed concerned with telling us how cool the future Marvel movies were going to be.
Favreau didn't spend too much time wallowing in his grief, and if there was indeed this level of friction, he remained extremely diplomatic about it when discussing his involvement with The Avengers last fall. He of course moved on to Cowboys & Aliens and Marvel found an affordable director for The Avengers in Joss Whedon.
As reliable as Cinema Blend's source may be, we obviously can't consider any of this to be definitive - Favreau was discussing Iron Man 3 as recently as April and if there actually is some bad blood, there's a good chance things could get patched up before the film gets underway. Fan reaction to Thor, Captain America, and The Avengers is also going to play a huge part in the direction of future Marvel movies.
Source: Cinema Blend.