Breach of contract claim called a diversionary tactic

Blockbuster, the largest U.S. movie-rental chain, cheated Walt Disney Co.’s video unit out of about $120 million under a four-year revenue sharing agreement, according to a lawsuit filed by the studio.

Disney’s Buena Vista Home Entertainment unit claims Blockbuster improperly deducted “promotional” credits, failed to account for “hundreds of thousands” of missing videos and sold videos prematurely under the agreement they signed in 1997. Under the contract, Blockbuster was to share rental revenue from Disney films with the studio in exchange for reduced prices on videos.

“The claims made by Disney would make a better cartoon than they would a lawsuit,” said Blockbuster attorney Marshall Grossman, of Alschuler, Grossman, Stein & Kahan.

He called the lawsuit a diversionary tactic on the part of Disney to “deflect attention away from its well-known corporate difficulties.”

Disney’s breach of contract claim, filed in U.S. District Court in Los Angeles, seeks $120 million. Blockbuster ended the revenue-sharing agreement with the second-largest U.S. media company last year after Disney complained of the discrepancies, the suit says. The agreement covered only VHS tapes, not DVDs.

“Blockbuster has arrogated for itself huge sums belonging to Buena Vista Home Entertainment to which Blockbuster is not entitled,” according to the seven-page suit filed Tuesday.

Blockbuster is roughly 81% owned by Viacom Inc., the third-largest U.S. media company.

Blockbuster’s revenue-sharing agreement with major movie studios allowed the rental chain to buy more copies of hit movies to draw people into stores. The strategy helped Blockbuster boost its market share to almost 40% in 2001 from 28% in 1998, according to the company’s 2001 annual report.

Prior to the agreement, Blockbuster purchased videos from the studios for about $65 each and kept all the rental revenue. Under the pact, Blockbuster agreed to purchase movies from Disney for $7 a copy and then pay the studio a portion of the revenue from each rental, according to the suit.

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