Discman digs in

DVD pioneer in bonus blowup with TW

The ouster of Warren Lieberfarb from his post as president of Warner Home Video shocked Hollywood in December 2002, but the specifics of the departure of “the godfather of DVD” were murky. Until now.

Court papers filed Friday as part of an ongoing arbitration detail Lieberfarb’s firing by Warner Bros. chairman-CEO Barry Meyer in the lobby of the Four Seasons Hotel and his subsequent claim for more than $30 million in damages.

Lieberfarb contends he was hoodwinked into relinquishing a $25 million cash bonus in exchange for now-worthless stock options by the promise of his friend and colleague, former Time Warner chairman Gerald Levin, that the company intended to “make him a very, very rich man.”

Lieberfarb is represented by Robert Dwyer and David Boies, of Boies Schiller & Flexner. The firm declined to comment on the arbitration except to say that certain issues had been resolved and the remainder are scheduled for a November hearing in the private arbitration.

Time Warner reps declined to comment.

Lieberfarb filed an arbitration claim with the American Arbitration Association in October 2003. The object of much speculation, it has been under wraps ever since. The claim surfaced Friday in L.A. Superior Court as part of court papers attorneys for Warner Home Video filed seeking permission to issue subpoenas outside of California. Warner is pursuing a counterclaim against Lieberfarb alleging that he is required to mitigate damages by turning over a portion of income he has received in his post-Warner employment.

By not settling Lieberfarb’s claim, TW risks having details of the lengthy arbitration become public, which may prove reminiscent of the Katzenberg-vs.-Disney suit but at lower numbers.

A number of TW execs, past and present, share Lieberfarb’s bitterness over seeing their potential paper fortunes dissolve into now-worthless options. As the case develops, top TW execs, including some who have left the company, could be summoned to testify about alleged exaggerated representations made to them.

Earlier arbitration rulings apparently freed Lieberfarb from the threat of losing his existing severance payments and hence spurred his efforts to move forward with the litigation.

Since leaving Warners, Lieberfarb has been involved in consulting for a number of studios, mostly about homevideo strategy, technology and marketing.

During his tenure with Warner, Lieberfarb was credited with the launch and commercial development of the DVD format. He saw DVD grow from a movie studio sideline into the main revenue generator.

Last year, DVD sales accounted for 60% to 70% of most studios’ revenues. Consumer spending on DVDs topped $21 billion in the $24 billion homevideo market.

As detailed in the arbitration statement, Lieberfarb’s 1998 contract provided for a “special one-time bonus” in recognition of his role in the creation and development of the DVD. The bonus was to be determined by Warners. Lieberfarb had received a $1 million bonus in 1997, before DVDs had developed into a huge profit center for the studio.

In July 1999, Lieberfarb met with Levin and then COO Richard Parsons to discuss his role at the company in the wake of Bob Daly and Terry Semel’s departure. A month later, Lieberfarb was informed that Meyer and Alan Horn would be CEO and COO of Warner Bros., and he realized he would not have an expanded role. He was subsequently turned down in his request to be responsible for the licensing of movies to network and pay and cable television or global responsibility for pay-per view and video-on-demand.

At the same time, Lieberfarb was approached by Howard Stringer about coming to Sony as a senior executive. Lieberfarb then approached Meyer about allowing him to establish a new Home Entertainment Group that would include technology, online, home video, video games and worldwide pay per view and video on demand.

Following the dismissal of his proposal by Meyer, the two met again in January 2000 and Lieberfarb was offered a new five-year deal and 100,000 in TW stock options. When he asked about the customary cash bonus, Lieberfarb was told that stock options were the new form of incentive. Just before the TW-AOL merger, Lieberfarb met with Levin, who told him that TW had changed its policy on cash bonuses. Levin made it clear that he would not pay the DVD bonus in cash and urged him to take 250,000 in stock options.

According to the arbitration complaint, Levin said, “Warren, I think you should take this. My intention is to make you very, very rich, a very, very wealthy man with a once in a lifetime reward.” A confessed neophyte when it came to the Internet, Lieberfarb relied on Levin’s representations because of their 30-year relationship and Lieberfarb’s belief that Levin paid extraordinary attention to detail and had an in-depth knowledge of every area of the company.

In an attempt to test the value of stock options, Lieberfarb concluded that the bonus should be worth $25 million, and according to the arbitration document, an executive in the Human Resources department agreed. Detailed schedules prepared by the department showed that the value of the options would be no less than $35 million in the worst-case scenario and more likely $74 million. Lieberfarb also studied the business plan for AOL and Time Warner, which had not yet officially merged. but was acting as one company.

The only risks forecast were slower industry growth and pricing pressure. There was no indication of any risk related to AOL’s advertising sales. Relying on all these representations, Lieberfarb signed a new employment agreement on August 8, 2000, which included 250,000 stock options instead of the DVD cash bonus.

The options granted in the agreement were at $56.00 per share. AOL Time Warner stock reached an all-time low of $8.60 in July 2002. It is now trading at between $17 and $18 per share.

Lieberfarb then watched in horror as AOL TW admitted accounting irregularities and the stock price plummeted. At the same time, the profitability of DVDs continued to grow. Lieberfarb complained to Meyer, Parsons, and Levin about his discontent that Warner Bros. had not kept its promise to him. On Dec. 11, 2002, Meyer asked Lieberfarb to meet him in the lobby of the Four seasons Hotel in New York.

Meyer fired him, saying, “You have created a negative environment that has created conditions adverse to the company achieving its profitability objectives and goals and you should move on.”

Lieberfarb was locked out of his office on Dec. 20, 2002.

In his arbitration, Lieberfarb claims breach of contract and negligent misrepresentation. He is seeking approximately $30 million. The largest portion is the $25 million cash bonus for the DVD. Of the remaining $5 million, the bulk of it is a claim that the $10 million severance pay he received in 2003 was inadequate because it undervalued the bonus provisions under his contract. He also claims that the mitigation clause in his contract should not be enforced. Warners has counterclaimed, alleging that it is entitled to a portion of any income he receives.

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