Judge tosses out audit favoring Disney

The Walt Disney Co. was dealt a potential multimillion-dollar setback Tuesday in its long-running litigation over royalties on “Winnie the Pooh” characters.

In a tentative ruling, Los Angeles Superior Court Judge Ernest M. Hiroshige threw out substantial parts of a report from a court-appointed auditor and ruled that accounting methods proposed by plaintiff Stephen Slesinger Inc. — the company that licenses Pooh characters to Disney — should be used instead. He also ordered a new independent accountant to be appointed who will conduct another audit.

Slesinger is suing Disney over its contention that it has been underpaid on royalties from Pooh character merchandise such as stuffed toys and lunchboxes. Slesinger also contends, and Disney denies, that it is owed royalties on videocassette sales and computer programs that use Pooh characters.

Hiroshige, in his 28-page ruling, castigated the auditors, saying their report on whether Disney properly paid royalties does not comply with generally accepted accounting principles, applied inconsistent and unfair standards and involved pervasive absence of documentation.

As part of the ruling, Hiroshige decreed that 12.5% of Disney merchandise sales since 1983 in various categories will be assumed to come from Pooh products.

Slesinger attorney Bonnie Eskenazi called the ruling a significant victory for her client, noting that it validated their major complaints about the audit report, including the fact that Slesinger representatives were not allowed to look at company records with the accountants.

However, Disney attorney Dan Petrocelli said it is “premature to speculate what the ruling means.” He noted that it is preliminary, meaning it is the tentative thoughts of the judge, who is now inviting comments on the ruling.

Petrocelli called the ruling “a split decision,” saying the judge had accepted much of the original audit report and had not accepted many of the Slesinger proposals.

Neither side in the case was willing to put a dollar figure on what the tentative ruling, if made final, would mean for Slesinger royalties. People close to the case in the past have speculated that Slesinger could be due another $35 million from underpaid royalties and as much as $300 million if videocassettes and computer products are included.

The long-running case has generated controversy as pre-trial motions proceeded. In June 2000, Disney was fined for destroying documents and the court ruled a jury would be entitled to an instruction that Disney willfully destroyed evidence in the case.

The Slesinger lawsuit was filed in 1991 over provisions in a 1983 licensing agreement between Slesinger and Disney.

Disney first licensed Pooh character rights in 1961 from the heirs of Stephen Slesinger and A.A. Milne, the author of the Pooh books. Slesinger controlled most North American rights while the Milne estate had rights in the rest of the world.

Disney purchased all the Milne rights last year in a deal worth $350 million.

The long-running case is now scheduled to begin trial on March 5.

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