Clause & Effect: <b>Non-Monetary Benefits' Impact on Royalty Rights</b>

A right to net-profits participation from entertainment products has often been criticized as meaning little, given the many disputes that have arisen over non-payment. Even producers of highly successful products may argue that their ventures netted little or no net profits. Thus, revenue participants who obtain the right to a percentage of gross or adjusted-gross profits are usually considered in a better position than net-profits participants.

Still, a right to gross profits has its pitfalls. A key issue is what revenues belong in the gross-profit pool. The Court of Appeal of California, Second Appellate District, Division Seven, recently considered this in a case involving the gross-profit-participation right of the author of the book “Who Censored Roger Rabbit?” Wolf v. The Superior Court of Los Angeles County, B169265.

In 1981, author Gary Wolf entered into a deal memo with Walt Disney Pictures and Television under which Disney optioned most of the rights to Wolf's book. The deal gave Wolf a 5% royalty on merchandise based on the “Roger Rabbit” characters. In 1983, Disney and Wolf entered into a long-form agreement, after Disney exercised its option. The long-form agreement gave Disney:

“The sole and exclusive right to make, publish and vend, throughout the world, or to license others so to make, publish and vend, representations of the characters created by the Seller [Wolf] which are in the work (including said characters from the work appearing in any such motion pictures or other adaptations), upon, in and/or in connection with articles of merchandise, or the advertising, display or exploitation of merchandise or in connection with any commercial activities.”

The provision in the agreement covering Wolf's merchandising royalty rights stated:

“In the event that Purchaser [Disney] exercises any of the rights granted to it … Purchaser agrees to pay to Seller [Wolf] a sum equal to five percent (5%) of Purchaser's gross receipts derived from the exercise of such rights, which, in the event of Purchaser's licensing of any such rights to others, shall be composed of Purchaser's royalties so derived from the licensee. In the event that such licensee is a subsidiary of Purchaser, then such royalties received by Purchaser from such subsidiary shall be deemed to be not less than five percent (5%) of such subsidiary's gross receipts derived from the exercise of such rights. Purchaser's obligation to pay such sums to Seller shall not accrue unless and until monies with respect to which the same are to be paid shall have been received within the United States of America by, and placed at the unrestricted disposal of, Purchaser or Purchaser's subsidiary (or if restricted from being transmitted to the United States by applicable law or regulations ['restricted funds'] then the restricted funds shall be deemed to have been so received to the extent used by Purchaser or Purchaser's subsidiary in such territory from which such monies would have otherwise been transmitted). So long as such monies are so received, Purchaser shall render semi-annual statements to the Seller within forty-five (45) days after the end of each half of the calendar year, showing the sums of money so received during the preceding half with respect to which the said obligation applies; and said statements shall be accompanied by payment of the amount appearing thereby to be then due from Purchaser to Seller. All such statements shall be mailed to Seller at the address specified for notices herein, unless or until Purchaser is otherwise instructed in writing. All statements and accountings furnished by Purchaser hereunder shall be conclusively deemed correct unless the same shall be objected to within ninety (90) days from Purchaser's rendition thereof.”

(Following the 1988 release of the film “Who Framed Roger Rabbit?”, based on Wolf's book, several areas of dispute arose between the parties. Disney and Wolf settled their differences with a new agreement that included the author's 5% gross royalty right on merchandise.)

To promote the film's theatrical and home-video releases, Disney negotiated promotional agreements with several major companies ' including Burger King, McDonald's, Coca-Cola and Kodak ' to use the Roger Rabbit characters. In these deals, the companies paid Disney, Disney paid the companies or Disney received non-cash benefits.

In 2001, Wolf filed suit in Los Angeles Superior Court alleging that that he was entitled to a 5% royalty from all uses of his characters, including from Disney's receipt of “cash and other valuable consideration.” The trial court denied granted summary judgment to Disney on the ground that Wolf's merchandising royalty right clearly and unambiguously referred only to Disney's cash receipts from character exploitation.

Granting Wolf's petition for a writ of mandate, the court of appeal noted that that the term “gross receipts” had been specifically defined in the Wolf-Disney 1983 agreement under separate “Gross Receipts” headings covering motion picture and television rights. But in the merchandising clause, the receipts term wasn't included under a separate heading or even defined. Thus, the court of appeal added, “Moreover, the term is not even capitalized to suggest it has a special or limited meaning in the merchandising context. As a result, the term 'gross receipts' must be considered in light of all the circumstances and the overall context of the contract.”

The individuals who negotiated the 1983 agreement couldn't recall any discussions regarding the meaning of gross receipts in the merchandising royalty provision. But Wolf pointed to Black's Law Dictionary and to case law to argue that gross receipts also include the value of consideration received. Wolf also offered expert witness testimony from veteran entertainment attorney David Held that, under industry custom and practice, gross receipts refers to the value of consideration received if a contract doesn't otherwise limit or define the term.

The court of appeal ruled that the trial court erred in rejecting this extrinsic evidence from Wolf, noting, “At the very least, this conflicting evidence exposed an ambiguity in the term's meaning. … Thus, the industry expert's statements of fact were relevant and admissible to expose the latent ambiguity in the contract language regarding the industry's customary usage of the term.”

The court of appeal went on to decide that the conflicting interpretations of gross receipts precluded summary judgment as did the issue of the parties' direct and objective understanding of the term at the time that the 1983 agreement was negotiated.

The lesson of the court of appeal's ruling is straightforward. Despite what witness Held testified was long-term industry practice, it would benefit royalty participants if their representatives pushed for a specific contract definition of gross receipts to include the value received from non-cash sources.

A right to net-profits participation from entertainment products has often been criticized as meaning little, given the many disputes that have arisen over non-payment. Even producers of highly successful products may argue that their ventures netted little or no net profits. Thus, revenue participants who obtain the right to a percentage of gross or adjusted-gross profits are usually considered in a better position than net-profits participants.

Still, a right to gross profits has its pitfalls. A key issue is what revenues belong in the gross-profit pool. The Court of Appeal of California, Second Appellate District, Division Seven, recently considered this in a case involving the gross-profit-participation right of the author of the book “Who Censored Roger Rabbit?” Wolf v. The Superior Court of Los Angeles County, B169265.

In 1981, author Gary Wolf entered into a deal memo with Walt Disney Pictures and Television under which Disney optioned most of the rights to Wolf's book. The deal gave Wolf a 5% royalty on merchandise based on the “Roger Rabbit” characters. In 1983, Disney and Wolf entered into a long-form agreement, after Disney exercised its option. The long-form agreement gave Disney:

“The sole and exclusive right to make, publish and vend, throughout the world, or to license others so to make, publish and vend, representations of the characters created by the Seller [Wolf] which are in the work (including said characters from the work appearing in any such motion pictures or other adaptations), upon, in and/or in connection with articles of merchandise, or the advertising, display or exploitation of merchandise or in connection with any commercial activities.”

The provision in the agreement covering Wolf's merchandising royalty rights stated:

“In the event that Purchaser [Disney] exercises any of the rights granted to it … Purchaser agrees to pay to Seller [Wolf] a sum equal to five percent (5%) of Purchaser's gross receipts derived from the exercise of such rights, which, in the event of Purchaser's licensing of any such rights to others, shall be composed of Purchaser's royalties so derived from the licensee. In the event that such licensee is a subsidiary of Purchaser, then such royalties received by Purchaser from such subsidiary shall be deemed to be not less than five percent (5%) of such subsidiary's gross receipts derived from the exercise of such rights. Purchaser's obligation to pay such sums to Seller shall not accrue unless and until monies with respect to which the same are to be paid shall have been received within the United States of America by, and placed at the unrestricted disposal of, Purchaser or Purchaser's subsidiary (or if restricted from being transmitted to the United States by applicable law or regulations ['restricted funds'] then the restricted funds shall be deemed to have been so received to the extent used by Purchaser or Purchaser's subsidiary in such territory from which such monies would have otherwise been transmitted). So long as such monies are so received, Purchaser shall render semi-annual statements to the Seller within forty-five (45) days after the end of each half of the calendar year, showing the sums of money so received during the preceding half with respect to which the said obligation applies; and said statements shall be accompanied by payment of the amount appearing thereby to be then due from Purchaser to Seller. All such statements shall be mailed to Seller at the address specified for notices herein, unless or until Purchaser is otherwise instructed in writing. All statements and accountings furnished by Purchaser hereunder shall be conclusively deemed correct unless the same shall be objected to within ninety (90) days from Purchaser's rendition thereof.”

(Following the 1988 release of the film “Who Framed Roger Rabbit?”, based on Wolf's book, several areas of dispute arose between the parties. Disney and Wolf settled their differences with a new agreement that included the author's 5% gross royalty right on merchandise.)

To promote the film's theatrical and home-video releases, Disney negotiated promotional agreements with several major companies ' including Burger King, McDonald's, Coca-Cola and Kodak ' to use the Roger Rabbit characters. In these deals, the companies paid Disney, Disney paid the companies or Disney received non-cash benefits.

In 2001, Wolf filed suit in Los Angeles Superior Court alleging that that he was entitled to a 5% royalty from all uses of his characters, including from Disney's receipt of “cash and other valuable consideration.” The trial court denied granted summary judgment to Disney on the ground that Wolf's merchandising royalty right clearly and unambiguously referred only to Disney's cash receipts from character exploitation.

Granting Wolf's petition for a writ of mandate, the court of appeal noted that that the term “gross receipts” had been specifically defined in the Wolf-Disney 1983 agreement under separate “Gross Receipts” headings covering motion picture and television rights. But in the merchandising clause, the receipts term wasn't included under a separate heading or even defined. Thus, the court of appeal added, “Moreover, the term is not even capitalized to suggest it has a special or limited meaning in the merchandising context. As a result, the term 'gross receipts' must be considered in light of all the circumstances and the overall context of the contract.”

The individuals who negotiated the 1983 agreement couldn't recall any discussions regarding the meaning of gross receipts in the merchandising royalty provision. But Wolf pointed to Black's Law Dictionary and to case law to argue that gross receipts also include the value of consideration received. Wolf also offered expert witness testimony from veteran entertainment attorney David Held that, under industry custom and practice, gross receipts refers to the value of consideration received if a contract doesn't otherwise limit or define the term.

The court of appeal ruled that the trial court erred in rejecting this extrinsic evidence from Wolf, noting, “At the very least, this conflicting evidence exposed an ambiguity in the term's meaning. … Thus, the industry expert's statements of fact were relevant and admissible to expose the latent ambiguity in the contract language regarding the industry's customary usage of the term.”

The court of appeal went on to decide that the conflicting interpretations of gross receipts precluded summary judgment as did the issue of the parties' direct and objective understanding of the term at the time that the 1983 agreement was negotiated.

The lesson of the court of appeal's ruling is straightforward. Despite what witness Held testified was long-term industry practice, it would benefit royalty participants if their representatives pushed for a specific contract definition of gross receipts to include the value received from non-cash sources.