BY:Michael I. Rudell
(Originally published in the Entertainment Law column in the New York Law Journal, March 28, 2003.)
A California court has denied the claim of a party to a contract with Walt Disney Pictures and Television (“Disney”) that his right to a percentage of future revenues derived from “Who Framed Roger Rabbit” creates a fiduciary relationship in an otherwise arm’s-length business transaction¹. In so doing, the Court held that because a contingent entitlement to future compensation is within the exclusive control of one party, that party does not become a fiduciary in the absence of other indicia of a confidential relationship.
Gary Wolf, the author of the novel “Who Censored Roger Rabbit,” entered into a written agreement with Disney in 1983 in which he assigned to it the rights to the novel and the Roger Rabbit characters. In exchange, Disney paid Wolf fixed compensation upon execution of the agreement, a percentage of net profits from a motion picture based on the novel and additional compensation equal to 5% of the gross receipts earned by Disney from merchandising or other exploitation of the Roger Rabbit characters. The agreement stated that Disney was not “under any obligation to exercise any of the rights” granted to it and Disney had the right to assign or license any and all rights granted to it under that agreement as it “s[aw] fit.”
Thereafter, Disney developed and co-produced with Steven Spielberg’s Amblin Entertainment, a motion picture entitled “Who Framed Roger Rabbit” based upon Wolf’s novel and its characters. After a dispute arose between Wolf and Disney regarding certain terms contained in the 1983 agreement, the parties entered into an agreement in 1989 which: (a) confirmed Wolf’s entitlement to the contingent compensation set forth in the 1983 agreement, (b) granted Wolf certain audit rights, and (c) contained a provision similar to the one contained in the 1983 agreement which stated that “[n]othing herein contained shall be deemed to create a third party beneficiary agreement, nor a partnership or joint venture between [Disney and] Wolf… nor create a relationship between [Disney and] Wolf other than creditor-debtor.”
When a dispute arose between Wolf and Disney, Wolf filed a complaint alleging that each time he attempted to exercise his rights of audit, Disney failed to provide access to pertinent records. He also alleged that Disney under-reported revenues it received in connection with the Roger Rabbit characters and failed to disclose the nature of its third party agreements concerning the characters and the compensation received. His complaint contended that such conduct not only constitutes a breach of contract but also a breach of fiduciary duty because Disney enjoyed “exclusive control over the books, records and information concerning the exploitation of the Roger Rabbit characters and the revenue and gross receipts royalties derived therefrom.”
The trial court ruled that the contract between Wolf and Disney did not create a fiduciary relationship as a matter of law. Wolf then petitioned for a writ of mandate compelling the trial court to vacate its order sustaining without leave to amend the demurrer to the breach of fiduciary claim. The Court issued an order to show cause why Wolf’s requested relief should not be granted.
In its discussion, the Court indicates that a fiduciary relationship is one existing between the parties to a transaction in which one of them is duty-bound to act with the utmost good faith for the benefit of the other. Ordinarily, such a relationship will arise when a confidence is placed by one person in the integrity of the other and, in such a relationship, the party in whom the confidence is reposed, if it voluntarily accepts or assumes to accept the confidence, can take no advantage from its acts relating to the interests of the other without the other’s knowledge or consent.
After citing examples of traditional fiduciary relationships in a commercial context (trustee/beneficiary, directors and majority shareholders of a corporation, agent/principal) the Court notes that inherent in each of these is the duty of undivided loyalty the fiduciary owes to its beneficiary, imposing on the fiduciary obligations far more stringent than that required of ordinary contractors.
Although conceding that his complaint is devoid of allegations showing an agency, trust or other “traditionally recognized” fiduciary relationship, Wolf nonetheless argues that such an absence is not dispositive of the question as to whether a fiduciary duty exists. He alleges that because his contractual right to contingent compensation necessarily required him to repose trust and confidence in Disney to account for the revenues received, and because such revenues and their sources are in the exclusive knowledge and control of Disney, the relationship is confidential in nature and necessarily imposes a fiduciary duty on Disney, at least with respect to accounting to him for the gross revenues received.
The Court indicates that, contrary to Wolf’s contention, the contractual right to contingent compensation in the control of another never, by itself, has been sufficient to create a fiduciary relationship where one would not otherwise exist. A debt is not trust, whether the debtor’s liability is certain or contingent.
Nor, does the Court see merit in Wolf’s contention that a fiduciary relationship exists because he necessarily placed trust and confidence in Disney to perform its contractual obligation to pay him the contingent compensation agreed upon in the contract. It indicates that every contract requires one party to repose an element of trust and confidence in the other to perform. For this reason, each contract contains an implied covenant of good faith and fair dealing, obligating each contracting party to refrain from doing anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.
The Court distinguishes Stevens V. Marco² which Wolf cites to support his claim. There, the plaintiff agreed to assign his invention to the defendant who agreed, in turn, to secure patent protection and give the plaintiff a percentage of the net revenues from the sales of the product. The agreement further provided the plaintiff would continue to work on improvements and assign any interest in such improvements to the defendants and, in turn, would receive a percentage of the revenues from any improvement made by either party. The court stated that when an inventor entrusts his secret idea or device to another under an arrangement whereby the other agrees to develop, patent and commercially exploit the idea in return for royalties to be paid to the inventor, there arises a confidential or fiduciary relationship. At a minimum, there were sufficient facts for the jury to find that the parties were allied in an enterprise similar to that of a joint venture for mutual gain.
In the instant case, the Court notes that there are no allegations as to the formation of a joint venture or a relationship akin to a joint enterprise. To the contrary, the Court states that the agreement created a debtor/creditor relationship, expressly providing that in exchange for compensation both certain and contingent, Disney, as the new owner of the rights, could exploit those rights or not exploit them as it saw fit. Disney was under no obligation to maximize profits from the enterprise or obtain Wolf’s approval for its contracts. Instead, in authorizing Disney to use those rights as it saw fit, the contract plainly allowed an opportunity for non-mutual profit that is absent in a fiduciary relationship.
The Court also rejects Wolf’s argument that a fiduciary duty exists because Disney’s exploitation of the characters, if profitable, would inure to the joint benefit of the parties. It indicates that distribution agreements, negotiated at arm’s-length, do not create a fiduciary relationship between the owner of the product and the distributor even though both parties stand to benefit from the distributor’s sales of the product.
Wolf also argues in the alternative that fiduciary duties exist with respect to Disney’s obligation to provide an accounting even though the relationship itself is not otherwise fiduciary in character. He cites Waverly Productions, Inc. v. RKO General, Inc.³ in which RKO entered into an agreement with a producer to distribute two of the producer’s motion pictures. The distributor then entered into sublicensing agreements with foreign distributors. The producer sued RKO claiming RKO breached its fiduciary duty by subcontracting the distribution duties to the foreign distributors who made little or no effort to distribute the films. The Court rejected the claim of the producer that the distributor was a fiduciary but stated: “We think it clear that RKO was not a fiduciary with respect to the performance of the terms of this contract (except as to accounting for rentals received) and that arguments predicated on the assumption that it was are directed to a false issue.”
Relying on the parenthetical reference to RKO’s obligation to provide an accounting, Wolf argues that Waverly acknowledged the existence of a fiduciary relationship between the distributor and the producer with respect to the accounting that applies equally to issues surrounding Disney’s contractual obligations to him, even if their contract does not otherwise create a fiduciary relationship. The Court distinguishes Waverly by stating that “whether the parties are fiduciaries is governed by the nature of the relationship, not by the remedy sought. Waverly recognized simply that RKO had a duty to account, not that RKO was a fiduciary with respect to its accounting obligation.”
The Court further indicates that the duty to provide an accounting of profits under the profit-sharing agreement in Waverly is appropriately premised on the principle that a party to a profit-sharing agreement may have a right to an accounting, even absent of fiduciary relationship, when such a right is inherent in the nature of the contract itself. The right to obtain relief in an accounting is not confined to partnerships, but can exist in a contractual relationship requiring payment by one party to another of profits received. That right can be derived, not from a fiduciary duty, but simply from the implied covenant of good faith and fair dealing inherent in every contract, because without an accounting, there may be no way by which such a party entitled to sharing profits could determine whether there were any profits. In the present case, the parties do not dispute that the contract itself calls for an accounting, but that contractual right does not itself convert an arm’s-length transaction into a fiduciary relationship.
Wolf’s final argument for finding a fiduciary relationship is based upon the practical assessment that, without such a finding and the corresponding shift in the burden of proof that such a relationship affords, he would be unable to prove any breach by Disney because all information regarding the proper calculation of contingent compensation is within Disney’s exclusive control. The Court agrees that the burden of proving that a plaintiff has been paid contingent compensation in accordance with an agreement between the parties is properly placed on a defendant in exclusive control of essential financial records (thereby imposing on the defendant the risk of any incompleteness in such records), but this determination regarding evidentiary burdens does not alter the contractual nature of the relationship between the parties. Conditions of fairness and practicality, while relevant to an analysis under the Evidence Code of California, cannot serve to create a fiduciary relationship where one does not otherwise exist.
In a separate opinion, Judge Johnson dissents from that portion of the majority opinion which finds that Disney owed no fiduciary duty, as a matter of law, to accurately and honestly account to Wolf for his share of the gross receipts attributable to Disney’s exploitation of Wolf’s intellectual product.
He notes that evidence may develop establishing that Disney and Wolf were involved in a joint venture, at least a contingent one which Disney elected to activate. He notes that no amount of contractual disclaimers avowing that this was a debtor-creditor relationship instead of a joint venture can turn it into something it was not. Further, even if the arrangement ultimately fails to qualify as a true joint venture, Disney does not necessarily escape a fiduciary duty to honestly and accurately account to the author of the intellectual property for the receipts earned from the intellectual property on which that author’s compensation is based. Under the terms of the contract, Disney undertook the accounting responsibility for the author as well as itself – a responsibility arguable carrying with it a fiduciary duty to accurately and honestly report the true receipts and profits. He notes that “Accountants, like lawyers, owe a fiduciary duty to their clients.”
Judge Johnson indicates that on the record before the Court, he is not quite prepared to determine that Disney assumed a fiduciary duty to maintain honest and accurate records as to its exploitation of Wolf’s characters, but he is close to such a conclusion. He would reserve that question for another day.
¹ Wolf v. Walt Disney Pictures and Television, B157178, Court of Appeal of California, Second Appellate District, February 25, 2003.
² 147 Cal. App.2d 357 (1956).
³ 217 Cal. App.2d 721 (1963).