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Neville Johnson Quoted by The Hollywood Reporter on Profit Participation Lawsuits (July 7, 2010)

Posted by Johnson & Johnson, LLP | Jul 07, 2010 | 0 Comments

‘Millionaire' aftermath: Why do studios keep losing lawsuits?

The Hollywood Reporter

July 07, 2010

By Matthew Belloni

Perhaps studio execs should start volunteering for jury service.

Wednesday's $270 million verdict against the Walt Disney Co. over profits from “Who Wants to Be a Millionaire” is part of a trend that should have Hollywood heavyweights worried: Juries lately are skeptical of so-called “Hollywood accounting” — and are not hesitant to award huge damages to creative types who cry foul.

Consider the evidence: A Riverside, Calif., jury of five women and four men, none of whom work in entertainment, awarded $269.4 million in damages to “Millionaire” producer Celador after only three days of deliberations — by far the largest jury award ever in a case alleging self-dealing among studio-owned entities. It unanimously endorsed Celador's argument that Disney-owned ABC and Buena Vista Television violated a complex deal to produce and distribute “Millionaire” in North America by brokering sweetheart deals that cheated the U.K.-based Celador out of its 50% participation in the show.

“All the testimony showed there would be a sharing of rewards,” Celador lead trial attorney Roman Silberfeld said. “It became a huge success, but Disney changed the agreement. The jury roundly rejected that notion.”

That rejection is becoming a common theme.

The verdict came on the same day that actor-producer Don Johnson was awarded $23 million in profits from Rysher Entertainment over “Nash Bridges.” Last month, an appeals court upheld a $3.2 million jury verdict for Alan Ladd Jr. against Warner Bros. over profits from several Ladd-produced films. And in 2007, a case brought by “Will & Grace” creators Max Mutchnick and David Kohan against NBC Universal was settled shortly after a jury reached a $48.5 million verdict.

After seemingly disappearing for a few years, the “vertical integration” case is back — with a vengeance.

“This is a game changer,” said Larry Stein, a litigator who brought some of the first lawsuits challenging studio self-dealing in the 1990s on behalf of such participants as David Duchovny (against Fox over “The X-Files”) and the creators of “Home Improvement” (against Disney/ABC).

The elimination of “fin-syn” rules in the '90s led to a wave of consolidation in the television business. For the first time, big media conglomerates were both producing and distributing highly lucrative content, often sitting across from affiliated entities at the bargaining table. Creative partners soon began challenging certain deals, claiming they were designed to shortchange third-party profit participants.

But after an initial wave of vertical integration cases (some of which settled with big payouts), many studios changed deal language to limit damages and require private arbitration of claims. A key appeals court decision involving Gary Wolf, a profit participant on “Who Framed Roger Rabbit,” also helped the studio cause, ruling that participants aren't owed fiduciary duties, which eliminates the possibility of punitive damages in most cases.

“Everyone got discouraged,” said Stein, who represented Celador in the first few years of the six-year litigation but was not involved in the trial. “But then the studios decided to fight a few of these cases on the older deals. A jury is always going to ask, ‘How much money did the studio make and how much did the profit participant make?' And the jury will look at it and say, ‘That can't be.' ”

During the three-week trial, Silberfeld hammered home the accounting issue, arguing that ABC artificially deflated fees the network should have paid BVT and Disney-owned Valleycrest, which in turn decreased Celador's share of revenue. In the 1999 deal, ABC received broadcast nights to the show, while BVT got other rights like production and distribution. In exchange, Celador received an executive producer fee for each network episode (weekly fees in syndication) plus backend participation based on BVT's–but not ABC's–gross receipts, subject to deductions.

Damages requests reached as much as $395 million but the jury ultimately awarded $260 million on the network license fee claim and about $9 million on a claim over merchandising revenue.

Disney vowed to appeal the ruling.

“The judge and the jury got this all wrong,” Disney CEO Bob Iger told The Hollywood Reporter on Wednesday at the Sun Valley executive confab.

Iger was one of several top execs that testified during the trial in front of U.S. District Court Judge Virginia Phillips.

Former WMA agents Ben Silverman, Greg Lipstone and John Ferriter all discussed under oath the dealmaking that brought “Millionaire” to the U.S., as did Celador topper Paul Smith.

WMA was not a defendant but it packaged the show and came under fire in the trial. Disney, led by attorney Marty Katz, argued that the agents and Celador's in-house lawyers were aware of the license fee arrangement. Celador and/or its reps “knew they were never going to make money off the network run,” Katz told the jury during closing arguments. Lipstone, the chief negotiator for Celador and now an ICM agent, testified that he did not know that ABC was going to set a license fee equal to the show's production costs until long after the 1999 contract was signed. He said if he knew that was going to be the arrangement, he would have informed Celador and would not have closed the deal.

Former Disney chairman and CEO Michael Eisner never appeared at trial, although an e-mail was read in which Eisner estimated the value of the show's rights at $1 billion and said it would reverse the network's fortunes. During Iger's testimony, he contradicted Eisner's e-mail by calling him a “great enthusiast” who might have been making “wild guesses” in describing the “Millionaire” franchise's worth.

Jurors were presented with four possible damages scenarios and chose none of them, instead fashioning their own calculation. Disney will likely focus on these calculations in an appeal that could take years to meander through the courts.

Reaction from the Hollywood litigation community focused on the recent spate of anti-studio verdicts in profits cases. Is this a coincidence or are juries sending a message that studio accounting practices will be scrutinized more closely in the future?

“Juries are highly skeptical and view studios in the same light as insurance companies,” said Neville Johnson, a litigator who is representing actor Jack Klugman in a profits case against NBC Universal over “Quincy M.E.” that has a September trial date.

“These are the types of claims that juries respond to in a visceral manner,” added Michael Kump, who is representing the creators of “Smallville” in another profits case against Warner Bros. “Even though they have complicated issues of accounting, juries can get their arms around it.”

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