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The Lawsuit of the Rings
By ROSS JOHNSON
Published: June 27, 2005
What if Frodo Baggins, instead of confronting the evil empire in "The Lord of the Rings," just got himself a lawyer and sued?
The real-life corollary is going on now in Hollywood where Peter Jackson, one of the film industry's most powerful and popular directors, is suing New Line Cinema, the subsidiary of Time Warner that financed and distributed his Oscar-winning "Lord of the Rings" film trilogy.
In his lawsuit, Mr. Jackson claimed that New Line committed fraud in its handling of the revenues generated by 2001's "The Fellowship of the Ring," and as a result, he was underpaid by millions.
The suit does not specify a damage award. But in an interview last week, his lawyers said that, after New Line applied its contract interpretation from "Fellowship" to the other two movies, Mr. Jackson was underpaid by as much as $100 million for the trilogy.
Lawsuits in Hollywood are as common as hobbits in Middle Earth. What makes Mr. Jackson's suit draw such widespread interest here, other than his clout in the industry and the amount at stake, is one specific allegation about New Line's behavior. The suit charges that the company used pre-emptive bidding (meaning a process closed to external parties) rather than open bidding for subsidiary rights to such things as "Lord of the Rings" books, DVD's and merchandise. Therefore, New Line received far less than market value for these rights, the suit says.
Most of those rights went to other companies in the New Line family or under the Time Warner corporate umbrella, like Warner Brothers International, Warner Records and Warner Books. So while the deals would not hurt Time Warner's bottom line, they would lower the overall gross revenues related to the film, which is the figure Mr. Jackson's percentage is based on.
According to people on both sides of Mr. Jackson's lawsuit, the claim strikes at the heart of the modern vertically integrated media company. One of the apparent - though largely unproven - benefits of media integration is the ability of conglomerates like the Walt Disney Company, Time Warner, the News Corporation, Viacom, Sony and General Electric to sell subsidiary rights to the many divisions within the company.
By painting this corporate synergy as "self-dealing," Mr. Jackson's lawsuit and similar suits filed in the last few years, called vertical integration lawsuits, argue that the idea of the media conglomerate is at odds with the interests of the creative minds behind the content.
If that idea was not enough to make studio heads very nervous, Mr. Jackson's status in the business could encourage other directors and stars who take a percentage of gross revenues to look more carefully at the accounting on their films. And because deals between corporate siblings are approved at the highest levels, vertical integration lawsuits often focus on senior division executives and their sales chiefs..
Since no studio head or corporate executive wants to be subpoenaed in a lawsuit over accounting, vertical integration lawsuits are almost always settled before reaching open court.
Citing corporate policy, Richard Socarides, a New Line spokesman, declined to comment on details of the litigation, but released a statement that said, "We don't agree with plaintiff's claims, and will defend ourselves vigorously." A litigator for New Line, speaking on the condition of anonymity because he is working on this lawsuit, said the money paid to Mr. Jackson so far is in line with the contract he signed.
"Peter Jackson is an incredible filmmaker who did the impossible on 'Lord of the Rings,' " this lawyer said. "But there's a certain piggishness involved here. New Line already gave him enough money to rebuild Baghdad, but it's still not enough for him."
Mr. Jackson's suit was filed on Feb. 28. In an April 29 court filing, New Line categorically denied all of his claims. Currently, both sides are sending out deposition notices, and Mr. Jackson's lawyers are preparing discovery demands allowing them to see detailed financial statements of New Line and its corporate sibling, Warner Brothers.
According to Peter Hoffman, a tax lawyer for leading Hollywood producers in the 1980's and a former chief executive of Carolco Pictures, all the legal saber rattling around claims of self-dealing and pre-emptive bidding could be avoided if studios turned the clock back and compensated stars based on net profits, not gross revenues.
"Once upon a time, Hollywood studios paid a lot of money to net profit participants, and it was a fair deal," said Mr. Hoffman, who is known in Hollywood for his knowledge of arcane deal making. "Then the studios got greedy and stopped paying, and now we have gross players who used to be net players fighting over vertical integration. The studios brought this problem on themselves."
Time Warner does not break out the revenue of feature films from total entertainment revenue in its statements, and a spokesman for New Line declined to comment on financial numbers. Mr. Jackson, who is directing a remake of "King Kong" for Universal Pictures with a budget of $150 million that includes a $20 million advance to Mr. Jackson to be applied against his share of gross revenue, was also not available for comment.
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Integrating One Film Trilogy With Many Subsidiaries
John Schulman, who since 1984 has been general counsel at Warner Brothers Entertainment, the sublicensee of many of the rights of the "Rings" film trilogy, said that the studio has never used self-dealing to cheat profit participants, and always sets any pre-emptive bid at market rates. "We value our relationship with talent, and it is in our interest to maximize profits to our participants."
The "Rings" film trilogy, produced for an aggregate $281 million, has made more than $4 billion in retail sales from worldwide film exhibition, home video, soundtracks, merchandise and television showings, and cleared more than $1 billion for New Line after payments to profit participants, according to one of Mr. Jackson's lawyers, Peter Nelson.
Thanks to escalators in the contract Mr. Jackson signed to serve as director, co-writer and co-producer of the trilogy, he reportedly receives about 20 percent of the gross revenue realized by New Line for the trilogy, minus expenses such as taxes.
Mr. Nelson declined to confirm the terms of the deal he negotiated for his client, but did state that Mr. Jackson had received almost $200 million to date from New Line for the trilogy.
One thing is certain: if it were not for Stanton Stein of the Santa Monica firm of Alschuler Grossman Stein & Kahan, life would be much easier for studio accountants.
Mr. Stein, the litigation lawyer who filed Mr. Jackson's suit against New Line, first brought a vertical integration action for the producers of the "Home Improvement" television series against Disney in 1997.
Mr. Stein, known as Larry, would later file similar suits against the Fox Television, a division of the News Corporation, for the producers of the show "Cops," and for Alan Alda and David Duchovny, the stars of the shows "M.A.S.H." and "The X-Files."
Mr. Stein's legal strategy in these lawsuits was to use a "top down" theory of insider conspiracy. According to Mr. Stein, there was only one place to point the finger of blame. "The foot soldiers inside a studio can't do this self-dealing," he said, "without the people at the top knowing what's going on."
Mr. Stein has sought to depose the News Corporation chairman, Rupert Murdoch, in all of his vertical integration lawsuits against Fox. All the suits, as well as the "Home Improvement" suit, were settled before Mr. Stein could depose a company chairman or chief executive.
"It's true I don't do trials, because if you have a good lawyer, you don't have to go to trial," Mr. Stein said. "A lot of attorneys think what I do on vertical integration litigation is easy, and they take a run at it. But if you don't know a hell of a lot about studio accounting and intellectual property law, it's amateur hour."
In the "Rings" matter, home video, television and merchandising were handled by divisions of New Line, except for certain foreign rights, which were handled by Warner Brothers. Soundtrack sales were handled by Warner Records, a Time Warner subsidiary that was recently sold to an investor group led by Edgar Bronfman.
But Mr. Socarides said some lucrative rights did not go to Time Warner companies. The pay television deal went to Starz, not Time Warner's HBO. He added that the "Rings" book trilogy remains with Houghton Mifflin, which is not a Time Warner subsidiary (although editions related to the films were released by Warner Books).
To defend itself, New Line has hired Robert Schwartz, the head of entertainment litigation at O'Melveny & Myers, who has gone against Mr. Stein in many profit participation cases.
Mr. Schwartz declined to comment on the specifics of Mr. Jackson's claims, except to say that he is accustomed to dealing with litigants "who say they're not going to settle for anything less than 100 cents on every dollar in dispute." He added that "in my experience, these are the guys who in the end walk away with a nickel on every dollar."
When told of Mr. Schwartz's comment, Mr. Nelson replied, "I'm confident that after we see all the financial records from New Line and Warner Brothers that we're trying to get to, every dollar in dispute will become four dollars."
By ROSS JOHNSON
Published: June 27, 2005
What if Frodo Baggins, instead of confronting the evil empire in "The Lord of the Rings," just got himself a lawyer and sued?
The real-life corollary is going on now in Hollywood where Peter Jackson, one of the film industry's most powerful and popular directors, is suing New Line Cinema, the subsidiary of Time Warner that financed and distributed his Oscar-winning "Lord of the Rings" film trilogy.
In his lawsuit, Mr. Jackson claimed that New Line committed fraud in its handling of the revenues generated by 2001's "The Fellowship of the Ring," and as a result, he was underpaid by millions.
The suit does not specify a damage award. But in an interview last week, his lawyers said that, after New Line applied its contract interpretation from "Fellowship" to the other two movies, Mr. Jackson was underpaid by as much as $100 million for the trilogy.
Lawsuits in Hollywood are as common as hobbits in Middle Earth. What makes Mr. Jackson's suit draw such widespread interest here, other than his clout in the industry and the amount at stake, is one specific allegation about New Line's behavior. The suit charges that the company used pre-emptive bidding (meaning a process closed to external parties) rather than open bidding for subsidiary rights to such things as "Lord of the Rings" books, DVD's and merchandise. Therefore, New Line received far less than market value for these rights, the suit says.
Most of those rights went to other companies in the New Line family or under the Time Warner corporate umbrella, like Warner Brothers International, Warner Records and Warner Books. So while the deals would not hurt Time Warner's bottom line, they would lower the overall gross revenues related to the film, which is the figure Mr. Jackson's percentage is based on.
According to people on both sides of Mr. Jackson's lawsuit, the claim strikes at the heart of the modern vertically integrated media company. One of the apparent - though largely unproven - benefits of media integration is the ability of conglomerates like the Walt Disney Company, Time Warner, the News Corporation, Viacom, Sony and General Electric to sell subsidiary rights to the many divisions within the company.
By painting this corporate synergy as "self-dealing," Mr. Jackson's lawsuit and similar suits filed in the last few years, called vertical integration lawsuits, argue that the idea of the media conglomerate is at odds with the interests of the creative minds behind the content.
If that idea was not enough to make studio heads very nervous, Mr. Jackson's status in the business could encourage other directors and stars who take a percentage of gross revenues to look more carefully at the accounting on their films. And because deals between corporate siblings are approved at the highest levels, vertical integration lawsuits often focus on senior division executives and their sales chiefs..
Since no studio head or corporate executive wants to be subpoenaed in a lawsuit over accounting, vertical integration lawsuits are almost always settled before reaching open court.
Citing corporate policy, Richard Socarides, a New Line spokesman, declined to comment on details of the litigation, but released a statement that said, "We don't agree with plaintiff's claims, and will defend ourselves vigorously." A litigator for New Line, speaking on the condition of anonymity because he is working on this lawsuit, said the money paid to Mr. Jackson so far is in line with the contract he signed.
"Peter Jackson is an incredible filmmaker who did the impossible on 'Lord of the Rings,' " this lawyer said. "But there's a certain piggishness involved here. New Line already gave him enough money to rebuild Baghdad, but it's still not enough for him."
Mr. Jackson's suit was filed on Feb. 28. In an April 29 court filing, New Line categorically denied all of his claims. Currently, both sides are sending out deposition notices, and Mr. Jackson's lawyers are preparing discovery demands allowing them to see detailed financial statements of New Line and its corporate sibling, Warner Brothers.
According to Peter Hoffman, a tax lawyer for leading Hollywood producers in the 1980's and a former chief executive of Carolco Pictures, all the legal saber rattling around claims of self-dealing and pre-emptive bidding could be avoided if studios turned the clock back and compensated stars based on net profits, not gross revenues.
"Once upon a time, Hollywood studios paid a lot of money to net profit participants, and it was a fair deal," said Mr. Hoffman, who is known in Hollywood for his knowledge of arcane deal making. "Then the studios got greedy and stopped paying, and now we have gross players who used to be net players fighting over vertical integration. The studios brought this problem on themselves."
Time Warner does not break out the revenue of feature films from total entertainment revenue in its statements, and a spokesman for New Line declined to comment on financial numbers. Mr. Jackson, who is directing a remake of "King Kong" for Universal Pictures with a budget of $150 million that includes a $20 million advance to Mr. Jackson to be applied against his share of gross revenue, was also not available for comment.
Skip to next paragraph Multimedia
Integrating One Film Trilogy With Many Subsidiaries
John Schulman, who since 1984 has been general counsel at Warner Brothers Entertainment, the sublicensee of many of the rights of the "Rings" film trilogy, said that the studio has never used self-dealing to cheat profit participants, and always sets any pre-emptive bid at market rates. "We value our relationship with talent, and it is in our interest to maximize profits to our participants."
The "Rings" film trilogy, produced for an aggregate $281 million, has made more than $4 billion in retail sales from worldwide film exhibition, home video, soundtracks, merchandise and television showings, and cleared more than $1 billion for New Line after payments to profit participants, according to one of Mr. Jackson's lawyers, Peter Nelson.
Thanks to escalators in the contract Mr. Jackson signed to serve as director, co-writer and co-producer of the trilogy, he reportedly receives about 20 percent of the gross revenue realized by New Line for the trilogy, minus expenses such as taxes.
Mr. Nelson declined to confirm the terms of the deal he negotiated for his client, but did state that Mr. Jackson had received almost $200 million to date from New Line for the trilogy.
One thing is certain: if it were not for Stanton Stein of the Santa Monica firm of Alschuler Grossman Stein & Kahan, life would be much easier for studio accountants.
Mr. Stein, the litigation lawyer who filed Mr. Jackson's suit against New Line, first brought a vertical integration action for the producers of the "Home Improvement" television series against Disney in 1997.
Mr. Stein, known as Larry, would later file similar suits against the Fox Television, a division of the News Corporation, for the producers of the show "Cops," and for Alan Alda and David Duchovny, the stars of the shows "M.A.S.H." and "The X-Files."
Mr. Stein's legal strategy in these lawsuits was to use a "top down" theory of insider conspiracy. According to Mr. Stein, there was only one place to point the finger of blame. "The foot soldiers inside a studio can't do this self-dealing," he said, "without the people at the top knowing what's going on."
Mr. Stein has sought to depose the News Corporation chairman, Rupert Murdoch, in all of his vertical integration lawsuits against Fox. All the suits, as well as the "Home Improvement" suit, were settled before Mr. Stein could depose a company chairman or chief executive.
"It's true I don't do trials, because if you have a good lawyer, you don't have to go to trial," Mr. Stein said. "A lot of attorneys think what I do on vertical integration litigation is easy, and they take a run at it. But if you don't know a hell of a lot about studio accounting and intellectual property law, it's amateur hour."
In the "Rings" matter, home video, television and merchandising were handled by divisions of New Line, except for certain foreign rights, which were handled by Warner Brothers. Soundtrack sales were handled by Warner Records, a Time Warner subsidiary that was recently sold to an investor group led by Edgar Bronfman.
But Mr. Socarides said some lucrative rights did not go to Time Warner companies. The pay television deal went to Starz, not Time Warner's HBO. He added that the "Rings" book trilogy remains with Houghton Mifflin, which is not a Time Warner subsidiary (although editions related to the films were released by Warner Books).
To defend itself, New Line has hired Robert Schwartz, the head of entertainment litigation at O'Melveny & Myers, who has gone against Mr. Stein in many profit participation cases.
Mr. Schwartz declined to comment on the specifics of Mr. Jackson's claims, except to say that he is accustomed to dealing with litigants "who say they're not going to settle for anything less than 100 cents on every dollar in dispute." He added that "in my experience, these are the guys who in the end walk away with a nickel on every dollar."
When told of Mr. Schwartz's comment, Mr. Nelson replied, "I'm confident that after we see all the financial records from New Line and Warner Brothers that we're trying to get to, every dollar in dispute will become four dollars."
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