ENTERTAINMENT LITIGATION: DISNEY LOSES TRIAL REGARDING PROFITS FROM “THE PATRIOT”

STUDIO’S HOME VIDEO ARM ORDERED TO PAY OVER $6 MILLION TO CREDITORS OF PRODUCTION COMPANY

A Los Angeles Superior Court judge ruled that Buena Vista Home Entertainment (BVHE) breached its US video distribution agreement for the motion picture The Patriot when it deducted millions of dollars in alleged distribution costs. The judge also held BVHE liable for improperly terminating the video distribution of the picture, ruling that BVHE’s failure to distribute the picture violated the implied covenant of good faith and fair dealing.

After years of complicated litigation, BVHE was ordered to pay over $6 million.

THE LONG CHASE

A Korean investment company, Ilshin Investment Co., loaned millions of dollars to the production company which produced The Patriot. The picture was never released theatrically in the United States and starred Steven Segal. The move was released in the home video market in the United States in 1999.

In 2001, Ilshin sued the production company and obtained a $6.6 million judgment. When the production company could not pay that judgment, Ilshin sued BVHE in 2006, claiming that BVHE improperly withheld millions of dollars as impermissible “costs” from the video distribution of the picture. Ilshin’s suit sought to recover what was in essence the “assets” of the production company. After prolonged proceedings and a trial before the judge, BVHE was ordered to pay to Ilshin over $6 million, including prejudgment interest.

DISTRIBUTION COSTS CAP

BVHE’s distribution agreement with the production company limited the amount it could spend — to $900,000 — for distribution costs in the United States unless BVHE obtained the prior consent of the production company. BVHE exceeded that limit by almost $3,775,197 but never sought consent to exceed those limits.

During the litigation, BVHE claimed that the limitation on distribution costs was a mistake, applied only to “marketing” costs” or that the production company and its successors waived those limitations. (I was actually involved tangentially in the case, representing one of those third-party successors, Comerica Bank. One of my partners, Michael S. Sherman, represented the bank in connection with the bank’s secured interests in the motion picture. I also represented Sherman during his testimony in the trial in this case.)

Ilshin countered by stating that the cap on costs was necessary because BVHE did not provide the production company with any advances or guaranteed payments.

In holding BVHE liable to the production company’s creditor, Ilshin, the judge rejected all of BVHE’s contentions. The court ordered BVHE to pay the amounts it withheld in excess of the $900,000 cap — an amount totaling $3,775,197. The court also awarded prejudgment interest of $1,769,709 plus $1,034.30 per day after October 4, 2007. Through December 13, 2007, an additional $72,401 in interest is due to Ilshin, bringing the total amount awarded for this claim to $5,617,307.

BVHE ALSO ORDERED TO PAY LOST PROFITS FOR FAILURE TO DISTRIBUTE PICTURE

BVHE stopped distributing The Patriot in October 2005. BVHE contended that its distribution agreement for the picture incorporated by reference their standard provision for “Distribution Control” — which permitted BVHE to terminate distribution at its discretion. The court rejected that contention.

Accordingly, the court ordered BVHE to pay an additional $800,000 in damages based upon expert testimony of what the expected sales would have been during that period.

Thus, the total amount BVHE must pay to Ilshin, as of December 13, 2007, is $6,417,307.

LESSONS TO BE LEARNED

BVHE allocated video distribution costs of over $4 million for its US distribution of The Patriot — a motion picture which was not released theatrically in the United States. In this case, BVHE was unable to rely upon many of the standard Disney contractual provisions which permit distributors to recoup virtually limitless distribution costs and/or terminate distribution altogether. Obviously, the negotiations on the distribution agreement are critical to ensure that the production company — and any profit participants — are protected against excessive recoupment claims.

The more important lesson from this case may be the scope of the creditor’s (Ilshin’s) perserverance and patience in pursuing its remedies. Litigation over movie profits is complex and difficult. Most settle before going to court. However, perhaps the most important factor in pursuing such claims is the patience (and resources) to withstand years of difficult proceedings to vindicate your rights.

Even now, this case is not over for Ilshin or BVHE. The parties are still fighting over remaining claims in court. Accordingly, the parties’ patience and determination in litigating their various contentions against each other will continue to be tested.