This week, the California Court of Appeal upheld a $3.2 million jury verdict for producer Alan Ladd, Jr. in his profit participation lawsuit against Warner Bros. And if you are neither a Warner Bros. stockholder nor named Alan Ladd, Jr., you may well have yawned and gone about your day (actually, Ladd is rich enough that he may have yawned and gone about his day). But if so, then tsk tsk: the Ladd case is big news for everyone in the entertainment industry, be they talent, producers, studio executives, or the lawyers scrambling for their business. That’s because the Ladd case features two truly rare and precious commodities: a jury verdict and a published decision.
The actual claims asserted in Ladd aren’t novel. They were largely based on the misallocation of revenues among films included in multi-picture licensing deals to broadcast television and cable networks. Similar profit participation lawsuits were recently launched by Mark Cuban against Paramount and by the creative team of Chicago against Miramax. But while such claims have long been mainstays of any respectable motion picture audit, the closed-door negotiations arising out of those audits have always been carried out in a sort of legal “black box,” because these cases typically settle before ever reaching a jury or appellate court. And this makes sense: your average profit participant wants to get paid, your average studio/distributor (which deals with countless such claims every year) wants to avoid putting unfavorable law on the books, and your average everyone wants to avoid years’ worth of legal fees (Ladd’s lawsuit was filed in July 2003).
So it takes a special plaintiff (read, “a plaintiff whose deep sense of principle is matched only by his or her deep pockets”) and a special defendant (read, “a powerful defendant with a serious mean streak and no litigation cost sensitivity”) to produce a complete trial and appeal. And now that we’ve gotten just that, what have we learned?
Well, we’ve learned that the California Court of Appeal is basically your mom. She wants you to play nice with the other kids, be fair, and tell the truth. And like any good mother, she’s got some life lessons to share:
Lesson #1: Play Fair
The implied covenant of good faith and fair dealing in a complaint is sort of like the leading lady in a Judd Apatow movie: sure, she gets a good line every once in a while, but she usually doesn’t add a whole lot. But Ladd’s $3.2 million verdict was won and upheld squarely on the basis of the implied covenant alone. In fact, the jury was specifically instructed that “[t]here are no express contractual obligations restricting the discretion afforded to [Warner] in licensing the library films in which [Ladd] [has] a participation interest.” The Ladd case is a needed reminder that the implied covenant of good faith and fair dealing is not merely a throwaway claim under California law, but rather, imposes real and meaningful obligations on contracting parties — and presents real and meaningful challenges for litigants.
Lesson #2: Share and Share Alike
It’s one thing to say that the implied covenant of good faith and fair dealing counts, but what does it count for? In Ladd, the court held — and latched onto the testimony of a Warner executive who admitted — that the implied covenant imposed a duty upon Warner to “fairly and accurately allocate license fees to each of the films [in a multi-picture license] based on their comparative value as part of a package.” That same executive testified — and the Court seemed to agree — that relevant valuation factors include “the vintage of the film, the box office, the genre, the star, the awards, the utility, can you play it in multiple day parts or is it a move that’s too sexy that maybe you can only play at 10:00 at night.” The Ladd decision focused on only one allocation method called “straight-lining,” a practice by which studios allocate the same share of the licensing fee to every movie in a multi-picture package, regardless of its value to the licensee. As Warner testified, it was by no means the only studio in town using this allocation method…and now it seems that all of them have been violating the law.
There are, of course, any number of ways that a studio can go about allocating licensee fees among various pictures in a single output deal (and, if you ask a motion picture auditor, cheating the participants) — Warner straight-lined, the plaintiff’s expert in Ladd used an A/B/C grading system, while some other studios rely on (usually capped) tiers tied to local box office performance. The Ladd decision itself only addresses straight-lining, but seems to suggest that any allocation method by which a less valuable film receives an unduly high allocated value (at the expense of the more successful films in the package) would be improper. This raises substantial doubts over whether other common studio allocation methods (which often tamp down the imputed value of very successful films and inflate those of their underperforming counterparts) would pass muster before a judge or jury.
Your real mom probably always told you that sharing is caring. But under California law, not sharing properly isn’t just uncaring — it may well be actionable.
Lesson #3: Don’t Lie to Your Mother!
When Ladd’s expert opined, based on his examination of Warner’s multi-picture license deals and allocations, that Warner was “overallocating license fees to movies that were studio owned or that did not have profit participations,” Warner did what any self-respecting defendant would do: it pointed the finger at someone else. Specifically, Warner argued that in certain cases, film buyers insisted on paying the same licensee fee for every film they acquired, regardless of desirability. And because studios have long been smart enough to recognize the legal issues presented by practices like straight-lining, licenses with television broadcasters often include provisions that recite that the agreements (and fees) were negotiated “at arms length” (although the Ladd opinion does not mention whether such a provision was present here).
But neither the trial jury nor the Court of Appeals bought it. As the Court noted, “evidence showed licensees cared only care about the aggregate amount they are paying for an entire package of films,” and not about the individual fee attributed to any one picture. At the same time, a defense expert testified that the buyers/licensees “did not have a say in what the allocation would be from Warner Bros.’s standpoint,” and could not dictate how Warner would internally allocate money from a licensing package. In other words, the Court of Appeal did not simply take Warner’s word about how these deals were negotiated, but independently investigated the claim. And like any mom who catches her kid in a lie, the Court was displeased, derisively dismissing Warner’s “the buyer made me do it” defense as meritless.
Lesson #4: Just Because Everyone Else Is Doing It Doesn’t Make It Right
Growing up, how many time did your mother ask you, “If everyone else jumped off a bridge, would you jump off too?” Even if you were like me and managed to come up with some smart-alecky rebuttal (“Maybe, after this conversation…”), you probably found your mom was not convinced. The California Court of Appeal reacted no differently when Warner tried to defend its straight-lining of films in a licensing package on the ground that it is “undisputed” that straight-lining is common in the industry. Expressing skepticism about just how undisputed that fact really is, the Court held that even if straight-lining were a common practice, such ubiquity would not render it lawful under the implied covenant. In an industry where everybody looks to what the other guy is doing to decide whether what they’re doing is right, this holding in particular ought to send chills down executive spines.
Lesson #5: Wash Behind Your Ears
I assume this one is just in the unpublished portion of the decision.