<i><b>Commentary</i> Lessons in Decision on Nash Bridges Actor Services Agreement</b>

The recent decision in Don Johnson Productions Inc. (DJP) v. Rysher Entertainment LLC, 209 Cal.App. 4th 919 (2012), packed a punch on a number of important issues. The background facts date all the way back to 1994, when DJP and Rysher Entertainment LLC entered into a contract whereby DJP agreed to provide the services of actor Don Johnson for the television series Nash Bridges and Rysher agreed to fund production of the series. The contract included detailed accounting provisions setting out the DJP's participation in revenues, but critically, a separate provision in the contract granted DJP a 50% interest in the series copyright, although Rysher retained distribution rights (other than on interactive devices, which weren't worth much in 1994). The contract was extended several times and the final episode of the TV series aired on May 4, 2001.

In 2001, 2929 Entertainment LP purchased Rysher, then in 2006 sold Rysher to Qualia Capital LLC. Some time prior to 2008, Qualia dissolved Rysher.

On May 16, 2002, DJP and Rysher had entered into a tolling agreement, which provided that tolling of the statute of limitations on litigation by DJP over the agreement would continue “until and unless you [i.e., Rysher] give us reasonable notice (30 days) rescinding this tolling agreement.” The rescission notice was never given and in 2009 DJP sued Rysher (and 2929 Entertainment and Qualia as alter-egos of Rysher), claiming that Rysher breached the contract by failing to pay DJP 50% of all profits from the series based on DJP's 50% copyright ownership.

The “tolling” of the statute of limitations had gone on for more than four years. California Code of Civil Procedure '360.5 states that a “waiver” of the statute of limitations shall not be effective for more than four years. Predictably, when DJP sued, the defendants alleged that the tolling agreement expired in 2006 under '360.5, so the statute of limitations had run. Sounds logical to me (and to the dissent in the case), but remarkably, the majority opinion of the Court of Appeal of California, Second Appellate District, held that “tolling” was somehow different than a “waiver” and that a “tolling” therefore could last forever. I am not so sure that I would rely on other courts to accept this distinction, but at least this one did.

Meaning of Co-Ownership of Copyright

The contract in question had given DJP “co-ownership of copyright,” although the distribution rights that generated the profits in question remained with Rysher. Most lawyers ' and definitely the defendants' counsel ' might assume that this was merely the grant of “naked copyright” to DJP that was more for vanity than anything else. However, DJP successfully argued that this clause gave the plaintiff 50% of the true profits from the underlying show, notwithstanding the detailed accounting provisions setting out the plaintiff's participation in revenues.

This issue comes up on every single slate financing deal with the studios, as the financing entities always ask for and get a grant of naked copyright for, one would think, cosmetic and marketing reasons. But don't be surprised if one of these financing entities makes a similar claim. The moral of this is that one should not be so cavalier in granting “naked” copyright, because the grantor may be the one that ends up naked.

By the time a jury rendered a verdict in the Nash Bridges case, more than 12 years had passed from the time that DJP claimed monies were owed. One would think that a valid element of damages would have been interest accruing all that time. However, the appellate court held that the jury did not have the authority to add pre-judgment interest.

The trial court judge had also added pre-judgment interest (not knowing that the jurors had done so). But the appellate court held that the trial court judge did not follow proper procedures by doing so through a grant of a motion for a new trial, which requires the reasons to be set out. [The jury and the judge awarded a combined $37 million in pre-judgment interest; the court of appeal affirmed $15 million in damages, with interest from July 2010.]

The moral of this part of the story, of course, is to not wait 12 years to sue.

Alter Ego Claim

Another extraordinary aspect of this case is that it permitted alter ego liability on reeds that were thin enough to send quivers up the spine of any corporate lawyer, as both 2929 Entertainment and Qualia were held liable for the judgment. For example, the appellate court upheld liability against 2929 Entertainment based on some inter-company loans that had effectively been initiated by 2929 Entertainment without consulting Rysher. Qualia was held liable because “one witness described Qualia as the public face of Rysher,” a valuation report combined the libraries of parent and subsidiary, and a company e-mail stated “income from Rysher” was “to be reflected as belonging to Qualia.” Ouch.

The moral here is to insist on arm's-length formalities when dealing with affiliates to avoid alter-ego claims ' or maybe to throw in the towel altogether.

So all in all, there is more to this case then most people would suspect from just reading the headlines. And it is all worth remembering, to avoid falling into the pitfalls that the Nash Bridges defendants did.

The recent decision in Don Johnson Productions Inc. (DJP) v. Rysher Entertainment LLC , 209 Cal.App. 4th 919 (2012), packed a punch on a number of important issues. The background facts date all the way back to 1994, when DJP and Rysher Entertainment LLC entered into a contract whereby DJP agreed to provide the services of actor Don Johnson for the television series Nash Bridges and Rysher agreed to fund production of the series. The contract included detailed accounting provisions setting out the DJP's participation in revenues, but critically, a separate provision in the contract granted DJP a 50% interest in the series copyright, although Rysher retained distribution rights (other than on interactive devices, which weren't worth much in 1994). The contract was extended several times and the final episode of the TV series aired on May 4, 2001.

In 2001, 2929 Entertainment LP purchased Rysher, then in 2006 sold Rysher to Qualia Capital LLC. Some time prior to 2008, Qualia dissolved Rysher.

On May 16, 2002, DJP and Rysher had entered into a tolling agreement, which provided that tolling of the statute of limitations on litigation by DJP over the agreement would continue “until and unless you [i.e., Rysher] give us reasonable notice (30 days) rescinding this tolling agreement.” The rescission notice was never given and in 2009 DJP sued Rysher (and 2929 Entertainment and Qualia as alter-egos of Rysher), claiming that Rysher breached the contract by failing to pay DJP 50% of all profits from the series based on DJP's 50% copyright ownership.

The “tolling” of the statute of limitations had gone on for more than four years. California Code of Civil Procedure '360.5 states that a “waiver” of the statute of limitations shall not be effective for more than four years. Predictably, when DJP sued, the defendants alleged that the tolling agreement expired in 2006 under '360.5, so the statute of limitations had run. Sounds logical to me (and to the dissent in the case), but remarkably, the majority opinion of the Court of Appeal of California, Second Appellate District, held that “tolling” was somehow different than a “waiver” and that a “tolling” therefore could last forever. I am not so sure that I would rely on other courts to accept this distinction, but at least this one did.

Meaning of Co-Ownership of Copyright

The contract in question had given DJP “co-ownership of copyright,” although the distribution rights that generated the profits in question remained with Rysher. Most lawyers ' and definitely the defendants' counsel ' might assume that this was merely the grant of “naked copyright” to DJP that was more for vanity than anything else. However, DJP successfully argued that this clause gave the plaintiff 50% of the true profits from the underlying show, notwithstanding the detailed accounting provisions setting out the plaintiff's participation in revenues.

This issue comes up on every single slate financing deal with the studios, as the financing entities always ask for and get a grant of naked copyright for, one would think, cosmetic and marketing reasons. But don't be surprised if one of these financing entities makes a similar claim. The moral of this is that one should not be so cavalier in granting “naked” copyright, because the grantor may be the one that ends up naked.

By the time a jury rendered a verdict in the Nash Bridges case, more than 12 years had passed from the time that DJP claimed monies were owed. One would think that a valid element of damages would have been interest accruing all that time. However, the appellate court held that the jury did not have the authority to add pre-judgment interest.

The trial court judge had also added pre-judgment interest (not knowing that the jurors had done so). But the appellate court held that the trial court judge did not follow proper procedures by doing so through a grant of a motion for a new trial, which requires the reasons to be set out. [The jury and the judge awarded a combined $37 million in pre-judgment interest; the court of appeal affirmed $15 million in damages, with interest from July 2010.]

The moral of this part of the story, of course, is to not wait 12 years to sue.

Alter Ego Claim

Another extraordinary aspect of this case is that it permitted alter ego liability on reeds that were thin enough to send quivers up the spine of any corporate lawyer, as both 2929 Entertainment and Qualia were held liable for the judgment. For example, the appellate court upheld liability against 2929 Entertainment based on some inter-company loans that had effectively been initiated by 2929 Entertainment without consulting Rysher. Qualia was held liable because “one witness described Qualia as the public face of Rysher,” a valuation report combined the libraries of parent and subsidiary, and a company e-mail stated “income from Rysher” was “to be reflected as belonging to Qualia.” Ouch.

The moral here is to insist on arm's-length formalities when dealing with affiliates to avoid alter-ego claims ' or maybe to throw in the towel altogether.

So all in all, there is more to this case then most people would suspect from just reading the headlines. And it is all worth remembering, to avoid falling into the pitfalls that the Nash Bridges defendants did.