Wednesday, May 26, 2010
Court of Appeal Upholds $3 Million Verdict Against Warner Bros
By SHERRI M. OKAMOTO, Staff Writer
This district’s Court of Appeal yesterday upheld a $3 million verdict against Warner Bros. Entertainment Inc. based on a claim that the company undervalued and underpaid the license fees attributable to certain films that it licensed to broadcasters as a package deal.
Div. Three explained that a practice employed by Warner Bros. known as “straight-lining”—where each film was allocated the same share of the licensing fee regardless of its value to the licensee—breached the implied covenant of good faith and fair dealing.
Warner Bros. and Alan Ladd Jr. entered into a joint venture to finance and develop firms in 1979. They terminated this arrangement in 1985 pursuant to a written agreement which entitled Ladd to an allocation of licensing fees from 12 firms: “Blade Runner,” “Body Heat,” “Night Shift,” “Tequila Sunrise,” “Outland,” “Chariots of Fire,” and the “Police Academy” franchise, consisting of the original and its six sequels.
Breach of Contract
Ladd later filed suit against Warner Bros. asserting causes of action for breach of contract and breach of the implied covenant of good faith and fair dealing. He alleged that Warner Bros.’ deprived him of the bargained for profit participation in their agreement by including those 12 movies in film packages licensed to television and cable networks.
At trial before Los Angeles Superior Court Judge Ricardo A. Torres in 2007, Ladd introduced evidence that Warner Bros. licensed films in a manner in which every movie in that package was given the exact same value.
The president of Warner Bros. domestic cable distribution arm, who was called by Ladd as an adverse witness, admitted that the entertainment company had an obligation to “fairly and accurately allocate license fees to each of the films based on their comparative value as part of a package.”
He testified that the valuation factors included “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 movie that’s too sexy that maybe you can only play at 10:00 at night.”
Ladd’s expert witness also opined that the practice of straight-lining resulted in films that were less valuable receiving a larger share of the licensing fees than they would otherwise be entitled to, resulting in animated films starring Daffy Duck or Bugs Bunny being allocated more money than the Academy Award-winning Chariots of Fire.
A jury returned a special verdict in Ladd’s favor, specifically finding that Warner Bros. breached the contract with Ladd or the covenant of good faith and fair dealing implied into the contract, and that Ladd suffered a monetary loss in the form of underpayment of profit participation as a proximate result of that breach. With respect to damages, the jury found Ladd should have been paid $3,190,625 in additional license fees.
Duty to Allocate
Writing for the appellate court, Presiding Justice Joan D. Klein concluded that substantial evidence supported the jury’s verdict. Based on the testimony of Warner Bros.’ president of domestic cable distribution, Klein reasoned that Ladd established that Warner Bros. owed a duty to fairly allocate license fees to each of the films based on their relative value in an overall package.
She rejected Warner Bros.’ claim that it engaged in straight-lining because its buyers insisted upon paying the same license fee for every firm they acquired, noting that the evidence indicated that licensees “only care about the aggregate amount they are paying for an entire package of films,” and that buyers could not dictate how Warner Bros. would allocate the monies from a licensing package to specific films within that package.
Additionally, even if straight-lining were a common practice as Warner Bros. claimed, Klein said, this would not absolve Warner Bros. of its duty to Ladd, as a profit participant, to fairly allocate fees derived from licensing packages.
As for Warner Bros.’ asserted affirmative defense based on the statute of limitations, Klein explained that the burden of producing evidence establishing that a portion of Ladd’s damages was time-barred fell on Warner Bros. and that it had failed to meet its burden at trial.
In an unpublished portion of the decision, Klein rejected Warner Bros.’ challenge to the sufficiency of the evidence supporting the damage award, but directed that the orders granting nonsuit on Ladd’s cross-appeal for fraud in connection with the “Blade Runner” film be reversed and remanded for retrial.
Justices Patti S. Kitching and Richard D. Aldrich joined Klein in her decision.
Warner Bros. was represented by John A. Taylor, Jr., Frederic D. Cohen and Jason R. Litt of Horvitz & Levy as well as Michael Bergman, Steven Glaser and Julie B. Ephraim of Weissman Wolff Bergman Coleman Grodin & Evall.
John M. Gatti and John J. Lucas of Stroock & Stroock & Lavan, together with Robert A. Olson and Edward L. Xanders of Greines, Martin, Stein & Richland, represented Ladd.
The case is Ladd v. Warner Bros. Entertainment, Inc., 10 S.O.S. 2767.
Copyright 2010, Metropolitan News Company