BY:Neil J. Rosini, Michael I. Rudell
(Originally published in the Entertainment Law column of the New York Law Journal, June 27, 2008)
On the ladder of contingent compensation, a share of “gross receipts” is considered the highest rung, ahead of “adjusted gross receipts” and well ahead of “net profits” and “net proceeds.” This is the case whether the computation relates to box office revenues or sales of merchandise and other commercial uses of names and characters. But even a top rung “gross” participation, as it turns out, may have devils lurking in the details of the parties’ contract and in the interplay of industry custom and other “extrinsic” sources of evidence when ambiguous contract language – such as the meaning of “gross receipts” itself — is disputed.
Gary Wolf wrote the novel Who Censored Roger Rabbit? in which he originated the characters of Roger Rabbit, Jessica Rabbit, Baby Herman and Eddie Valiant and their doings in “Toontown.” When he sold film and merchandising rights in the novel in 1983, he obtained a share of gross receipts from merchandising uses. The deal was memorialized in his agreement with Walt Disney Productions, which co-produced the resulting film, Who Framed Roger Rabbit? In a dispute over the accuracy of royalty payments based on those gross receipts, Mr. Wolf’s interpretation of the contractual language was rejected in favor of Disney’s in key respects in a recent decision of California’s Second Appellate District of the Court of Appeal.1
Couched in the procedural details of the decision are discussions of practical issues relating to the definition of the terms. These include whether non-monetary benefits are embraced and whether the term “Purchaser” – the recipient of those “gross receipts” on which royalties will be paid — refers only to the contracting parent company or to its subsidiaries as well. The decision also addressed whether royalties from gross receipts would be due on the sale of nationally licensed goods at Disney parks. The answer turned on a conjunction.
In 1983, Gary Wolf, his company Cry Wolf!, Inc., and Walt Disney Productions entered into a written purchase agreement which expressly granted Disney the right to exploit the Roger Rabbit characters in a variety of contexts including television programs, motion pictures and merchandising. In exchange, Disney agreed to pay Wolf 2.5% of any motion picture net profits (not in issue here) and 5% of gross receipts that Disney derived from exploiting the characters. Their contract lacked, however, a definition of “gross receipts.”
It turned out that the parties had substantially different ideas about the breadth of Disney’s payment obligations. In 2001, Wolf and his company sued Disney for underreporting and failing to report revenue streams generated by merchandising, asserting causes of action for breach of contract, breach of fiduciary duty, and breach of the implied covenant of good faith and fair dealing, seeking declaratory relief and an accounting. Disney filed a cross complaint asserting several causes of action, including one for unjust enrichment on the basis that it had overpaid royalties.
After Wolf’s claim for breach of fiduciary duty was eliminated2 and another interim appeal3 was done, the jury and the trial judge addressed the remaining issues. The result was a damages award to Wolf of $395,362, including $216,803 Disney conceded was due. Both sides appealed.
The Meaning of “Purchaser”
The parties to the 1983 Agreement were Gary Wolf, referred to as “Seller,” and “Walt Disney Productions,” Disney’s parent company, referred to as “Purchaser.” The agreement explicitly included within “Purchaser” the “successors, privies [sic] and assigns” of Walt Disney Productions. Disney subsidiaries were not made part of that group, although another clause provided that a payment to “Purchaser or Purchaser’s subsidiary” in the U.S. triggered a payment to Wolf. The answer mattered because Wolf’s five percent royalty rate was to be applied against the “Purchaser’s gross receipts” derived from exercising the licensed rights. Wolf argued that if a subsidiary could be interposed to collect a license fee from a third party and then pay the parent company 10% of that, Wolf’s royalty would be only 5% of 10% instead of 5% of the entire amount received by the subsidiary at the source. At trial, Wolf also noted that Disney’s accounting practices for more than a decade based Wolf’s royalty on the gross receipts of subsidiaries. (Disney called this a mistake and demanded a refund.) The jury agreed with Wolf, finding that “Purchaser” included Disney’s subsidiaries. Disney then argued on appeal that the word’s meaning should have been determined solely by the trial judge and that the opposite interpretation was the correct one as a matter of law.
The appellate Court tasked itself with finding the meaning of the 1983 Agreement “as intended at the time of contracting. It began with the rule that interpreting a contract is a judicial function and that extrinsic evidence of any prior agreement or contemporaneous oral agreement to vary or contradict “clear and unambiguous terms of a written, integrated contract” generally may not be considered. However, the Court acknowledged that extrinsic evidence is admissible to interpret an agreement when a material term is ambiguous. And only if there is a conflict in extrinsic evidence — as when the plaintiff and defendant offer inconsistent proof concerning the meaning of ambiguous language — will that conflict be resolved by a jury. (This is similar to the New York’s rule, except that California will provisionally receive proffered extrinsic evidence to determine whether it is relevant to prove a meaning to which the language of the contract is reasonably susceptible, even if unambiguous on its face.4)
The Court faulted the trial court for submitting the meaning of “Purchaser” to the jury because the evidence of Disney’s “pre-dispute conduct” was not in conflict. There was therefore no factual issue for the jury to resolve and interpretation of the term was purely a judicial function. Taking that duty for itself, the appellate Court favored Disney’s interpretation for several reasons. First, the express definition of the term “Purchaser” in the 1983 Agreement included Walt Disney Productions, its successors and assigns, but made no mention of subsidiaries. Second, another provision of the agreement protected the plaintiff from a “sweetheart deal” by making any contract between Disney and one of its subsidiaries the economic equivalent of a licensing agreement between Disney and a third party. This provision imputed a minimum royalty of 5% to “Purchaser” if it received less than that share of the subsidiary’s “gross receipts derived from the exercise of [the subsidiary’s] rights.” This mention of the word “subsidiaries” showed the Court that the parties knew how to use the word when inclusion was intended. Moreover, if “Purchaser” included subsidiaries, the imputation protection provision would include a subsidiary’s “licensing itself.” Further, if Wolf were entitled to a royalty on gross receipts earned not only by Walt Disney Productions but also by its subsidiaries, there would be no need to include any imputation protection at all.
Accordingly, taking the contract as a whole and without reference to any extrinsic evidence, the Court concluded that Wolf was entitled solely to a share of gross receipts received by the parent company whether or not the revenues were generated by a third party or by one of its own subsidiaries, and there was no function for the jury.
Duty to Monetize
Disney entered into promotional agreements with McDonald’s, Burger King and others in which it licensed the right to exploit the Roger Rabbit characters in consumer products (like cups) that promoted the Roger Rabbit movie. Wolf complained that these promotional agreements didn’t always include payment of cash to Disney, with the result that Disney received “substantial promotional benefits” and paid Wolf nothing. At trial, Wolf presented extrinsic evidence from a former executive at another studio, who testified that it was “custom and practice” in the entertainment industry to include “money and all other valuable benefits received” within the term “gross receipts.” Disney countered that “gross receipts” included only monies actually received and non-monetary payments that could be “monetized” in the sense of being “recorded in the book of accounts.”
Disney’s expert witness, an entertainment and tax lawyer and adjunct professor, approached the question by referring to the practice of the Writers Guild of America, which used the phrase “absolute gross” (a synonym for “gross receipts”) which it defined as “monies remitted.” On the basis of that evidence, Disney persuaded the trial court that a special verdict form submitted to the jury should contain questions relating to the knowledge of the WGA agreement by the contract negotiators, and whether they took the WGA agreement “into account.” The jury decided in Disney’s favor that “gross receipts” included only monetized benefits and the appellate Court left that finding undisturbed.
The Court also supported the trial court’s directed verdict in favor of Disney on a related claim without reference to extrinsic evidence. Wolf had asserted that if the term “gross receipts” were intended to mean only monetized benefits received by Disney in exchange for licensing the Roger Rabbit property, then Disney breached the implied covenant of good faith and fair dealing by purposefully orchestrating promotional agreements for which it received no monetary consideration. The Court confirmed, however, that there was no disputed factual issue for the jury because the agreement gave Disney unfettered discretion in the following terms: “Purchaser shall not be under any obligation to exercise any of the rights granted to Purchaser hereunder; and any and all said rights may be assigned by Purchaser, and/or licenses may be granted by Purchaser with respect thereto, as Purchaser may see fit.” Accordingly, no implied covenant could be read into the contract to prohibit Disney from doing that which was expressly permitted by the agreement itself. It was Wolf’s choice to accept or reject the bargain offered, said the Court, and terms that proved unsatisfactory to Wolf would not be amended.
The Court also noted a lack of extrinsic evidence that Disney had acted in bad faith or that non-monetary promotional agreements were objectively unreasonable.
Royalties from Disney Retail
Disney refused to include in royalty-bearing gross receipts any payment from merchandise it sold at Disney venues, which had been manufactured by third parties pursuant to a licensing agreement with Disney and then purchased by Disney for resale. Disney based this position on another provision of the 1983 Agreement which granted to Disney “[t]he sole and exclusive rights to make, publish and vend, throughout the world, or to license others so to make, publish and vend, representations of the [Roger Rabbit] characters…” (italics added by the Court). The trial court interpreted this clause as a matter of law to grant Disney two distinct merchandising rights: the right to make, publish and vend and secondly the right to license others the right to make, publish and vend the merchandise. The trial court held — and the appellate Court agreed — that when Disney purchased merchandise made pursuant to a license it had granted and sold it as a retailer at a Disney venue, it was neither making, publishing and vending nor licensing others to make, publish and vend. “Rather, it is acting like any other retailer who would buy nationally-licensed merchandise from a wholesaler or manufacturer.”
Wolf argued that this issue should have been submitted to the jury, but the Court disagreed. A former Disney executive testified that when she negotiated a 1989 settlement agreement between the parties, she thought the plaintiff was entitled to a royalty when Roger Rabbit merchandise was sold at Disney venues; however, the Court observed, she did not say that entitlement included royalties for the sale of licensed Roger Rabbit merchandise. Further, in 1989 the parties simply agreed that the 1983 Agreement would control the plaintiff’s merchandising rights, which had no impact on the question of the parties’ intent in 1983. Accordingly, there was no conflict in the extrinsic evidence as to the parties’ “objectively intended meaning of the terms at issue,” and nothing to submit to a jury.
Agreements between rights holders and motion picture studios often contain terms such as “gross receipts” and “Purchaser,” which are subjects of this decision. Although it rarely is possible to cover every contingency that may arise in construing these and other defined terms, the discussion in the Roger Rabbit decision provides a useful primer on considerations relevant to drafting contractual provisions and the interplay of extrinsic evidence.
1 Wolf v. Walt Disney Pictures and Television, (California) Second Appellate District, Division Seven, No. B192656 (May 9, 2008).
2 Wolf v. Superior Court, 107 Cal. App. 4th 25 (2003)
3 Wolf v. Superior Court, 114 Cal. App. 4th 1343 (2004)
4 Greenfield v. Philles Records, Inc., 98 N.Y.2d 562, 574 (2002); South Road Associates, LLC v. International Business Machines Corporation, 4 N.Y. 3d 272, 278 (2005).