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The Hollywood Reporter Covers Johnson & Johnson's First-Round Victory in Sylvester Stallone's "Demolition Man" Fraud Lawsuit (Aug. 3, 2017)

Posted by Johnson & Johnson, LLP | Aug 03, 2017 | 0 Comments

Warner Bros. Can't Dodge Sylvester Stallone's Fraud Lawsuit

A judge will permit the actor to use his claims over 'Demolition Man' to explore how the studio's accounting might amount to unfair business practices impacting consumers, other talent and other studios.

The Hollywood Reporter

August 3, 2017

By Eriq Gardner

Warner Bros. Can't Dodge Sylvester Stallone's Fraud Lawsuit

Sylvester Stallone has scored an early and significant ruling in his lawsuit against Warner Bros. over profits from the 1993 science-fiction film Demolition Man. Not only has a Los Angeles Superior Court judge rejected the studio's bid to throw out breach of contract and fraud claims, but the actor is being permitted to bring a potentially big claim that Warners‘ accounting practices are likely to deceive the public, including others in Hollywood with profit participation agreements.

Through his loan-out company Rogue Marble, Stallone filed his lawsuit in April.

“The motion picture studios are notoriously greedy,” stated the complaint. “This one involves outright and obviously intentional dishonesty perpetrated against an international iconic talent. Here, WB decided it just wasn't going to account to Rogue Marble on the Film. WB just sat on the money owed to Rogue Marble for years and told itself, without any justification, that Rogue Marble was not owed any profits.”

According to the lawsuit, Warner Bros. initially asserted that nearly $67 million was unrecouped on Demolition Man and therefore nothing was owed to Stallone, who was to get 15 to 20 percent of defined profits on the film. After being challenged, the studio sent Stallone a check for $2.82 million. The actor wasn't satisfied.

There are many legal actions targeting “Hollywood accounting,” including the must-watch one from Frank Darabont over The Walking Dead. What makes Stallone's case provocative — besides an A-list actor suing the same studio that distributed 2015's Creed, which earned Stallone an Oscar nomination — is a claim of unfair business practices.

The lawsuit characterizes Warner Bros.' conduct as “unscrupulous, unethical and offensive,” causing injury to consumers and threatening to harm competition because other studios have their own agreements with profit participants. Stallone demanded injunctive relief in the form of “a full accounting, an explanation of how this practice came to be, interest, damages, and an end to this practice for all talent who expect to be paid by WB for the fruits of their labor.”

In response to the lawsuit, Warners challenged the sufficiency of the pleading with a demurrer motion.

At a court hearing on Thursday morning, judge John Doyle adopted a tentative ruling.

“The Court finds that Plaintiff's allegations as to general fraudulent accounting practices are sufficient to state a claim properly encompassing the general public, or at least competitors who stand to be injured by such practices,” writes Doyle.

Warner Bros. also can't use the statute of limitations at this juncture to beat a breach of contract claim. The studio pointed to the 1992 contract and argued that any violations dated to the 1990s were time-barred. Doyle disagrees, factoring a complaint alleging breaches over the past few years.

Oftentimes, judges will find fraud claims to be dressed-up contract ones without the necessary elements of an intentionally concealed or suppressed fact. Over the objection of Warner Bros. here, Doyle is allowing Stallone's fraud claim to survive as well.

The ruling states:

“Here, Plaintiff pleads that (1) Warner concealed the profits earned by the subject film, (2) there was a duty to communicate such facts as Warner had exclusive knowledge of such facts or alternatively the subject contract required payment of certain monies given such profits, (3) the concealment was intentional as Warner wished to retain the profits of the subject film for itself, (4) Plaintiff was unaware of the film's profits and would not have idly sat by for years without inquiring into the fees that should have been tendered as a matter of right, and (5) such concealment damaged Plaintiff in that it did not receive the profits due to it contractually. This is sufficient, at the pleadings stage, to state a claim for fraud.”

Rogue Marble is being represented by attorney Neville Johnson, while Warner Bros. is being handled by Glenn Pomerantz at MungerTolles & Olson. A trial is set for October, but the case is at an early enough stage where a postponement wouldn't be unusual. The plaintiff may need to clear other hurdles to get there.

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