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Katz gets Mouse

Disney breached Katzenberg contract, judge rules

In a significant victory for Jeffrey Katzenberg, a judge has ruled that the former head of Disney’s film unit did not forfeit a lucrative bonus when he left the company in 1994 and is entitled to interest on any money he is owed.

Retired L.A. Superior Court Judge Paul Breckenridge Jr. also ruled that Disney may have breached its contract with Katzenberg even earlier than 1994, when he left the company without exercising a two-year contract extension. At stake is 10% statutory interest per year that would be tacked on to any award.

Breckenridge further ruled that Katzenberg can go after revenues earned by Disney merchandise created in-house (rather than licensed), and can go after online earnings, but only after the conglom’s Internet venture is deemed to be more than a promotional tool.

Breckenridge’s decision — which was made public Wednesday — closes the first phase of Katzenberg’s lawsuit against Disney and sets the stage for the second phase, where how much money he is owed from a controversial post-termination bonus will be determined.

Katzenberg is claiming that he is owed $250 million under the bonus, which pays him 2% of the revenues in perpetuity from all television and movie product made during his decade-long tenure as studio head.

Disney asserts Katzenberg forfeited the 2% deal when he exited the studio in advance of the termination date of his employment contract.

The judge’s decisions, however, gave a key point to Disney by finding that there was no fraud on the part of the studio’s execs in its efforts to deny Katzenberg monies due under his employment contract.

The trial drew huge media attention and provided an unprecedented view of Hollywood accounting practices. It also featured heated witness-stand sparring between Katzenburg and Michael Eisner. The Disney topper was forced to deflect questions about book interview notes that quoted him referring to Kaztenberg negatively and saying “I hate the little midget.”

Both sides satisfied

“We’re very pleased with the decision,” Katzenberg counsel Bert Fields told Daily Variety. Disney general counsel Lou Meisinger declined to comment. A Disney spokesman said that “the judge’s ruling was fair and gave us the critical points we asked for.”

The sides already predetermined that Katzenberg was entitled to a share of the income derived from the studio’s animation releases, such as “The Lion King” and “Beauty and the Beast,” and TV projects spawned under his aegis. But whether he was entitled to interest or income earned from several other ancillary revenue sources was still in dispute.

The first phase of the trial, held in the private law offices of plaintiff and defense counsels, contained the submission of evidence, testimony from witnesses such as Katzenberg and Eisner, as well as arguments by attorneys for both sides.

Breckenridge began his deliberations May 12 at the conclusion of the trial.

The second phase will tap the opinions of industry experts and accountants to determine values of Disney assets.

Fraud relief

Despite testimony during the often contentious two-week trial about secret documents and alleged plans to redirect revenues earned by the studio’s projects, the judge’s rulings are a relief to defense lawyers: A fraud finding could have significantly raised the financial stakes in favor of Katzenberg.

But legal insiders noted that the fraud claim was an alternative defense and that the no-fraud determination is still a victory for Katzenberg. It suggests that the court determined as binding a memo authored by the late Disney prexy/chief operating officer Frank Wells that enhanced Katzenberg’s contract.

“A fair reading of the 1984 and 1988 agreements … and the memo … leads to the inescapable conclusion” that Katzenberg did not forfeit his post-termination bonus when he elected not to extend the term of his contract with the studio, Breckenridge said in his eight-page decision. He also found that Disney breached its fiduciary duty to Katzenberg on the accounting issues.

Assessment put off

Breckenridge also determined that while Katzenberg is entitled to pre-judgment interest, he deferred the decision to when it should start being calculated until after the conclusion of the second phase.

He also deferred determining both the extent of Katzenberg’s role in the studio’s growth and how inflation affected the increase until the court hears opinions of economists and accountants who will be called to testify in phase two.

Katzenberg already has received more than $100 million from the studio as a down payment on any award he receives from the court.

(Janet Shprintz contributed to this report.)