A judge has overturned a $128 million punitive damages award to the producers and stars of the Fox series “Bones,” handing a major victory to the studio in what was one of the largest profit participation cases in Hollywood history.
Judge Richard Rico issued a minute order on Thursday overturning the award from arbitrator Peter Lichtman. A full decision was expected to be issued later. The ruling leaves in place a $50 million award for compensatory damages, interest and attorneys fees.
Nevertheless, it is a huge win for Daniel Petrocelli, the attorney who was hired to contest the arbitrator’s award, which was issued in February. In Rico’s court on Monday, Petrocelli argued that Lichtman had exceeded his authority and ignored a clear provision of the arbitration agreement that barred the profit participants from obtaining punitive damages.
“This court must be the ultimate judge of whether an arbitrator exceeded his powers,” Petrocelli argued, saying the arbitrator was barred from “distributing their own brand of industrial justice.”
The stars of the TV series “Bones,” Emily Deschanel and David Boreanaz, joined with two producers in filing suit in 2015 that accused Fox of shortchanging them on millions of dollars residual payments. They alleged that 20th Century Fox Television, which produced the show, charged absurdly low licensing fees to its affiliates, Fox Broadcasting and Hulu, thereby lowballing the payments to participants.
The case followed a well-worn path of litigation involving alleged self-dealing by vertically integrated media companies. The inclusion of Hulu added a new wrinkle for the streaming era. Lichtman found that Fox shorted the “Bones” producers and stars out of $10.1 million when it handed streaming rights to Hulu, of which Fox owned 30%, in exchange for a cut of advertising revenue.
Lichtman found that the arrangement was excessively generous to Hulu, and noted that a single Fox executive — Dan Fawcett — signed the licensing contract for both Fox and Hulu. That award, which still stands, suggests that companies may face further challenges if they attempt to prop up their own streaming platforms by offering content on terms that would not be available to rivals like Netflix and Amazon.
“There will be a lot of additional litigation in this area,” said Stanton “Larry” Stein, an attorney who pioneered the field of self-dealing suits at vertically integrated companies. “The fundamental issue is, if a product is successful, how should the parties be sharing in the success? You need to build into the contracts ways of resolving these disputes.”
Lichtman issued a blistering ruling in February, accusing top Fox executives of lying under oath to cover the fraud against the plaintiffs. Lichtman awarded a total of $179 million, including the $128 million punitive damage award, which he said was needed punish Fox’s “reprehensible conduct” and deter it from similar behavior in the future.
Fox did not contest the arbitrator’s award of $50 million in compensatory damages, attorneys’ fees, and interest, finding that it was beyond the scope of what Rico could review. But the studio — now owned by Disney — hired Petrocelli to challenge the punitive damages award. Petrocelli argued in his motion to overturn the award that Lichtman’s ruling was riddled with errors and betrayed animus against Fox executives.
Lichtman held that the clause in the arbitration agreement that bars punitive damages does not apply to the claims in this case, and that the clause was invalid anyway as it is against public policy.
Speaking for the plaintiffs, attorney Daniel Saunders argued that the arbitrator’s ruling cannot be reviewed or overturned.
“It was entirely the arbitrator’s right to interpret the contract,” he said. “It’s not for this court to review.”
Saunders said in a statement, “Today’s decision in no way impacts the arbitrator’s findings that our clients are owed more than $50 million for Fox’s fraudulent and deceitful accounting. It deals only with the technical issue of whether our clients waived their right to receive punitive damages. As the arbitrator concluded, they did not – and we look forward to showing the Court of Appeal why it should reverse today’s ruling.”
The plaintiffs plan to appeal the decision.
Fox issued a statement, saying “We are pleased with the Court’s decision to strike punitive damages from the award and vindicating our position. We look forward to concluding the litigation.”
Dale Kinsella, the attorney for the show’s executive producer Barry Josephson said in a statement, “We respectfully and profoundly disagree with the trial court’s order eliminating the punitive damages award against Fox. While the ruling contains no reasoning, we are confident that when the appellate court reviews the Award with the required deference, without regard to the trial court’s finding, the original award will be reinstated. The balance of the award for compensatory damages, attorneys’ fees and prejudgment interest in excess of $50 million dollars remains intact, and today’s ruling does not disturb the Arbitrator’s findings in any way.”
Lichtman blasted Fox executives Peter Rice, Gary Newman and Dana Walden, among others, accusing them of giving false testimony during the arbitration. Rice and Walden have since taken high-level positions at Disney, and Disney CEO Bob Iger was compelled to issue a statement defending their character and integrity.
Update May 7: The judge’s full ruling is posted below. Rico found that the arbitrator exceeded his powers by ignoring an express provision of the arbitration agreement which forbade punitive damages.