Client Alert: Ladd v. Warner Bros. – Can They Really Do That?

Producer Alan Ladd, Jr. is responsible (with others, of course) for such popular and even iconic motion pictures as Blade Runner, Body Heat, The Brady Brunch Movie, Braveheart, Chariots of Fire, Night Shift, Once Upon a Time in America, Outland, Police Academy 1–6 and The Right Stuff.  He is in that upper stratum of film makers whose output includes films that are critically acclaimed, commercially successful or both.  On top of that, he is Hollywood “royalty” – his father was a major movie star of the 1940’s, 50’s and early 60’s.

When, however, a number of Ladd, Jr.’s films were licensed for television in a group with other films (a so-called “package”), Ladd was given rather common, not royal treatment.  Warner Bros., the distributor of the films for television, simply pro-rated the total license fee for the entire package in equal amounts per film, a practice known as “straight-lining.”  In other package deals, Warner allocated significantly more license fees to its wholly-owned but minor pictures than to well known Ladd pictures in the same package.  In both scenarios, Warner disregarded the relative value of the pictures in the package, the result of which was to put more money in Warner’s pockets and less in the pockets of Ladd – who had a gross participation (a share of his films’ gross revenues before deduction of costs) of 2.5% to 5%, depending on the movie.

Last month, on May 25, in Ladd v. Warner Bros. Entertainment, Inc.[1] (hereafter, Ladd), a California appeals court confirmed a jury award to the Ladd parties of just under $3.2 million.  The Court’s decision potential may have a bigger absolute dollar impact where tentpole films are financed by non-studio parties – such as in slate and securitization financings – and the studio takes only a modest distribution fee plus distribution expenses.

Good Faith and Fair Dealing

Unlike much in the law, the general principle applied by the Ladd Court is simple:  contracting parties must deal fairly with each other.  Even the Court’s more elaborate statements of this principle are relatively simple.  Under California law, every agreement carries with it an “implied covenant [that is, promise] of good faith and fair dealing ‘neither party will do anything which will injure the right of the other to receive the benefits of the agreement’ . . .  ‘especially where one party is invested with a discretionary power affecting the rights of another.’”[2]

Key Evidence

But in the rough and tumble world of television distribution, what really happens, and how is the principle of fair dealing applied?  In Ladd, the Court cited this testimony and conduct of Warner:

  •  “[I]n one licensing deal, Warner added a group of old Tarzan movies to a licensing package at no cost [to the buyer].  Warner then allocated a license fee of $40,000 to each of the Tarzan movies, thereby reducing other movies’ allocations in the package.” Id. at *14 n.6.

  • In other packages, “Daffy Duck and Bugs Bunny animated films were allocated double the money that was allocated to Chariots of Fire, a valuable feature film which won multiple Academy Awards, including Best Picture.  Those animated films are wholly owned by Warner, which means Warner keeps every dollar generated by licensing fees [allocated to] those films.” Id. at *6.

  • Despite such allegedly abusive allocations, a Warner executive, called as a hostile witness, testified that Warner 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.” Id. at *1, *3, *5.

Cost Benefit Analysis

The legal obligation to deal fairly in business transactions is familiar territory not only to judges and lawyers but to executives as well.  So how does a television distributor go from knowledge of this obligation, to the value equation “Daffy Duck = 2 times Chariots of Fire”?

Undoubtedly, a sophisticated television distributor can devise a suite of objective allocation formulas each of which is more or less fair, but which as a group lead to a relatively broad range of valuations.  In such circumstances, is it good business to pick a middle-of-the-road formula which, while somewhat favoring the distributor, still passes the smell test?  Or does it make more business sense to select an outlier formula which, while harder to defend, may be even more favorable to the distributor?  At least three cost vs. benefit factors figure into the distributor’s decision:  the type of damage remedies available to the revenue participant, such as compensatory vs. punitive damages (the latter being damages intended to punish the wrongdoer); the possible shifting of attorney fees to the losing party; and the distributor’s appetite for risk. 

U.S. law overwhelmingly favors compensatory over punitive damages and, in commercial cases, absent specific statutory or contract provisions, it is highly unusual for courts to shift attorney fees.  That leaves risk tolerance as the pivotal factor.

Appetite for Risk

In this case, Ladd seems to have bumped up against a distributor with a high tolerance for risk.  If that isn’t absolutely clear in the allocation part of the case, it may turn out to be clear in another part.  In his pleading, Ladd claimed that Warner deleted producer credits and his company logo from Chariots of Fire and Once Upon a Time in America.  Unlike Warner’s license fee allocations, which directly benefited the studio, the alleged credit stripping, if true, has no obvious benefit to Warner, while potentially generating significant harm to Ladd.  The Court of Appeals remanded this part of the case to a lower court for trial.

A wise person once said, “In school, first you get the lesson, then you get the test.  In life, first you get the test, then you get the lesson.”  If Ladd ultimately prevails on his credit stripping claim, the Court may present Warner with yet another lesson which, while likely to be based on express rather than implied contract terms, nevertheless shares an underlying theme with the principle of fair dealing:  Without sufficient basis and cause, it can be risky business to unnecessarily “injure the right of the other to receive the benefits of the agreement.”

 * Ezra Doner is a New York-based entertainment lawyer who specializes in the motion picture industry. Before entering private practice, he worked at film companies in LA and NY, including Gladden Entertainment, Cinema Group and Miramax Films.

[1] Ladd v. Warner Bros. Entertainment, Inc., No. B204015, 2010 WL 2044878, at *1 (Cal. Ct. App. May 25, 2010)

[2] Ladd, WL 2044878 at *5 (internal citations omitted)