$289 million judgment vs. Disney may change profit contracts

When a jury hands down a $269 million verdict — and an appellate court confirms it — studios take notice.

The practice of “self-dealing” is at the heart of British production company Celador’s dispute with the Walt Disney Co. over profits from “Who Wants to Be a Millionaire.” On Dec. 3, a federal appellate panel refused to reverse a jury’s massive judgment against Disney. That ruling, however, is not likely to end this practice. Instead, it is likely to have a very different ripple effect: a heightened sophistication in the way contracts are worded, and an increase in studios’ resolve to have such cases decided by parties other than juries.

“You kind of have lawyers go back to the drawing board (and ask), ‘What do we do in order for this to not happen again?,’ ” says Tom Ara, part of the corporate and securities group at Reed Smith, where he is a partner.

For many in the entertainment legal community, particularly those who have taken on the studios over profit participation, the jury’s decision reinforced their ideas about Hollywood accounting. A generation ago, the Art Buchwald case over the returns to “Coming to America” brought studio financial habits into the public eye, and a myriad of disputes since then have helped the phrase “Hollywood accounting” become a further pejorative.

The Celador suit was the latest in a line of litigation on “self-dealing” — the notion that sister companies within the same media conglomerate are prone to make deals at the expense of profit participants. Celador claimed that ABC and Buena Vista Television breached terms of their 1998 agreement and the implied covenant of good faith and fair dealing by failing to include half of ABC’s profits in Celador’s returns from “Millionaire,” which became a runaway hit.

Celador argued that it had committed to a deal with ABC in which it would share profits 50-50, but that the network injected Buena Vista Television into the contract. The result, Celador claimed, was that ABC and Buena Vista entered into an agreement where the network would pay a license fee equal to Buena Vista’s production costs. Because Buena Vista also got a 10% overhead charge and interest, this guaranteed that the series “would show a perpetual, ever-increasing network-run broadcast loss,” Celador’s suit stated.

In its decision to uphold, the Ninth Circuit panel determined that trial court Judge Virginia Phillips did not err in submitting questions to the jury, because the terms of the contract were ambiguous. The appellate justices pointed to the contract’s referral of Celador’s compensation sometimes as coming from sums derived by “ABC/BVT” and other times to those only by “BVT.”

That discrepancy is a reminder for legal teams to take another careful review of a contract, says John Schulman, former general counsel of Warner Bros., now a partner at Mitchell Silberberg & Knupp. But he didn’t see it as meaning an overhaul to the way things are done.

Even Celador’s lead attorney, Roman Silberfeld of Robins, Kaplan, Miller & Ciresi, sees the ruling as one unlikely to have overarching ramifications.

“On the one hand, the operative documents that are used to try to express the relationship between talent and the networks, those have been made clearer,” Silberfeld says. “The core business practices and how the accounting is done? I am not so sure.”

The “Millionaire” dispute, playing out over the span of eight years, increases the studios’ desire to avoid the spectacle of a public trial. Around the same time as the jury’s decision for Celador came a hefty verdict in favor of Don Johnson over returns from “Nash Bridges,” as well as a California appellate judgment that largely favored Alan Ladd Jr. in his suit against Warner Bros. over movie profits.

But changes in contract deal terms tend to be evolutionary, and based very much on leverage (albeit an advantage that a shrinking number of players can claim).

Steven Sills, an accountant who specializes in studio audits, says the success of Celador in its litigation doesn’t mean there will be a rush to the courthouse among profit participants. Unlike the Celador case, most litigation that springs from a profit participant’s audit ends in a settlement. “There is still going to be some hesitancy on the part of financial representatives of talent where their clients have to spend a lot of money and there’s some risk involved,” he says.

Moreover, the biggest impact of the case seems to be not on accounting practices, but rather in studios’ need to demand more stringent arbitration clauses, in which disputes are resolved by retired judges, rendering final decisions often out of the sight of the public.

From studios’ point of view, it’s a matter of getting a fair shake: Before a jury, Ara notes, Disney can’t avoid being cast as an evil Goliath, even when the company on the other side, Celador, isn’t an American entity. “They came into a U.S. courthouse and were able to convince an American jury that one of the best-known American companies was the bad guy,” he says. “It is tough for studios to shake that, in any context, before a jury.”

Following the Ninth Circuit ruling, Disney said it was “disappointed,” and that ABC and Buena Vista Television “continue to believe that they fully adhered to the ‘Millionaire’ agreement.” Its attorneys argued that the trial court allowed the “implied covenant of good faith and fair dealing” to be stretched “far beyond its limits,” given that the license fee that ABC paid to Buena Vista was consistent with, if not better than, industry practice. The company can now ask for a rehearing from the panel, or for and en banc hearing from a larger group of Ninth Circuit judges. Or it could petition for review from the Supreme Court.

To put it another way: The options have narrowed.

Chad Fitzgerald of Kinsella, Weitzman, Iser, Kump & Aldisert says the impact from “Millionaire” and other “self-dealing” cases is that contracts contain more explicit clauses and waivers acknowledging a studio’s ability to sell a project to a sister company, making it more difficult for litigants to pursue claims of a sweetheart deal.

“If history is any indication, it is getting more difficult to pursue a vertical integration claim,” Fitzgerald says. “I think Celador will only accelerate that trend.”

Another fallout from the recent litigation, he says, is studios will make it much clearer that profit participants are not partners, a claim that may have helped Celador’s case.

Fitzgerald is representing the producers and creators of “Smallville” in their suit against Warner Bros. over the profits from the show. Like Celador, the claims are that the studio could have gotten a far greater license fee for the show had it not been sold to an affiliate company. In September, a Los Angeles Superior Court judge rejected Warner Bros.’ motion for summary judgment, with a trial set for June. Among the issues are whether Warner Bros. TV complied with a provision that agreements with sister companies be in “good faith” and be the “substantial equivalent of an arms-length basis.”

The relevant agreements in that case were signed in 1999, Fitzgerald notes, but contractual language to protect studios against vertical integration claims, as well as provisions for arbitration, have become much more the norm since then.

Yet even as litigators for talent decry arbitration clauses as tilting contracts in a studio’s favor, some say such clauses can benefit talent.

“These are complicated business deals,” says Lindsay Conner, partner at Manatt, Phelps & Phillips, who has represented many film studios and production entities. “They are better resolved by experienced arbitrators.”

And while Conner notes that arbitration is a positive to studios, he maintains it is also beneficial to producers, licensors and talent. “(It) is much more efficient,” he says, “and consumes less in legal fees in getting to a result.”

Celador attorney Silberfeld views arbitration as less advantageous for studios and large corporations than it used to be. He feels the outcome in the “Millionaire” case wouldn’t have been all that different with a retired judge reviewing the case, and notes that arbitrators are becoming much more willing to award sizable damages. “And,” Silberfeld adds, “(their decisions are) not reviewable.”

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