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Awaiting judgment

Disney-Katz bonus arguments wrap up

Following two weeks of sometimes explosive testimony, the case of Jeffrey Katzenberg vs. the Walt Disney Co. is now in the hands of retired L.A. Superior Court Judge Paul Breckenridge, who will decide what Disney products should be included in determining a disputed bonus for Katzenberg.

Disney attorney Lou Meisinger Tuesday wrapped up his final arguments, which were followed by a brief rebuttal from Katzenberg’s attorney Bert Fields.

While legally a classic contract dispute, the case has provided an unusual window into the rarefied top levels of operations and finances at a major Hollywood studio.

Katzenberg is claiming that he is owed some $250 million from a controversial bonus of 2% of the income derived from all movie and TV product in perpetuity made during his decade-long tenure as studio chief.

The bulk of the income will come from the video releases of such animation hits made during Katzenberg’s tenure as “Lion King” and “Beauty and the Beast,” and it is undisputed that he is entitled to a share of that income.

Ancillary product

However, the parties are still squabbling over what ancillary product goes into the pot to be valued. The biggest bone of contention has been whether to include Disney-sold as opposed to licensed merchandising, but also in dispute are income from Club Disney, income from “Toy Story” sequels and whether Katzenberg is entitled to some kind of payment, known as an imputed royalty, from the use of characters such as Ariel from “The Little Mermaid” on Disney’s Web site.

Also expected to be resolved are questions about how to apply an inflation rate and growth rate to the award, and most important, whether Katzenberg will receive pre-judgment interest — interest on whatever payment is awarded to Katzenberg from when it should have been paid to when he receives it.

According to Fields, Disney’s refusal to pay pre-judgment interest required him to prove that Disney breached the contract and to put on evidence that the refusal to pay the bonus was due to the personal “animus” of Disney CEO Michael Eisner.

Although Disney conceded liability in a settlement with Katzenberg in 1997, it apparently did not admit to a breach of contract. The Mouse House has already paid Katzenberg more than $100 million in partial settlement of his claims.

Disney attorney Meisinger’s position is that the interest issue was a pretext for a “titillating, media-drive” exercise that went far afield from the original purpose of the current phase of the trial.

Meisinger was no doubt referring to the fact that the parties in the case at one time intended it to be a private matter, but because of a successful motion by Daily Variety to gain press access, the trial has been public.

‘Bad behavior’

Fields has argued that an award of interest is mandatory, but should the judge decide it is discretionary, he should look at the “bad behavior” of Disney and award it anyway. Disney claims it is discretionary and has devoted much of its efforts to showing it had a good-faith belief that Katzenberg was not entitled to the bonus and that Eisner was not motivated by animus.

Some of the more spicy testimony occurred last week as Fields attempted to show Eisner had animus toward Katzenberg when he grilled the Disney chief on the witness stand, producing book interview notes that quoted Eisner as saying “I hate the little midget,” referring to Katzenberg.

When pressed to verify that he said those words, Eisner told Fields the line of questioning was “ill-advised” and “not in your client’s best interest or mine, but particularly your client’s.”

In his closing arguments Monday, Fields characterized Eisner’s response as a threat from the witness stand.

Meisinger responded that he “heard a plea, not a threat, from Eisner not to take this case into personal areas.”

In addition to Eisner’s testimony about Katzenberg, financial information revealed during the trial has been a source of great interest in Hollywood. Documents have reinforced perceptions that animated releases provided the bulk of Disney’s profits, shown how film costs are written off, how much profit Disney has made with its move into Broadway, and reawakened interest in the issue of how the studios account to their profit participants.

In fact, the so-called Bill Clark memo, which was prepared by Disney’s longtime head of profit-participation accounting and details potential areas where revenues might be underreported and expenses overreported, resurfaced yet again during Disney’s closing argument Tuesday.

Apparently addressing the furor the memo has generated, Meisinger said, “This is nothing more than Mr. Clark summarizing the same types of allegations that have been leveled against studios for all of my 30 years-plus in this business, and there is no reference in here to actual misaccountings.”

Not the ‘bad guy’

In starting his closing arguments, Meisinger went to great lengths to dispute that Eisner displayed any animus or that he was “the bad guy” in the story. Meisinger concluded his arguments Tuesday by saying that important valuation issues such as merchandising and income from Club Disney were waived in the 1997 settlement.

Breckenridge is expected to render an opinion within a week. The next phase of the trial will be valuing the items determined in the current phase of the trial, and it is expected to begin the week of May 24.

A final phase will involve Katzenberg’s claim of improper audits by Disney.