BIT PARTS

The producers of the hit TV series Home Improvement signed a series of profit participation agreements with Walt Disney Pictures. The agreements gave the producers the right to 75% of all net profits earned by the series and to conduct an audit of Disney's books once per year (though the producers' attorney Marcia Harris claimed Disney restricted annual audits). The participation agreements also contained an “incontestability” clause that required the producers to raise objections to their quarterly participation statements within two years after Disney sent them, and to file any legal action within six months following the end of the two-year limitations period. In July 2008, after their auditors finished an audit of Disney's books, the producers objected to the participation statements sent them between June 2001 and March 2006. Disney and the producers then agreed the incontestability limitations period would be tolled while they tried to negotiate a settlement. But in February 2013, the producers filed suit in L.A. Superior Court alleging, among other things, breach of contract, and breach of the implied covenant of good faith and fair dealing. In particular, the producers claimed Disney syndicated the Home Improvement series in New York for below fair market value and had made improper charges in calculating the producers' net profits. The trial court ruled the producers' suit was time-barred by the incontestability clause. On the producers' appeal, the California Court of Appeal first noted that under the language of the incontestability clause: “[I]f the producers' interpretation of the incontestability clause as applying solely to transactions apparent on the face of the statement were correct, it would nullify the contractual limitations period in all but the narrowest of circumstances.” Wind Dancer Production Group v. Walt Disney Pictures, B262426 (Cal. Ct. App. 2017). But the producers also argued the discovery rule should allow them to proceed with their lawsuit on the ground that they couldn't have discovered or reasonably discovered the alleged underpayments until they actually got to conduct the audit in question. On this, the court of appeal decided the producers waived use of the discovery rule when signing the incontestability clause. According to the court of appeal: “The clause accordingly provides that a claim arising from a participation statement accrues on the date the statement is sent, irrespective of whether the participant knows, or has reason to know, the facts supporting the claim.” But the court of appeal went on to reverse the lower court, by finding: “Based on the totality of evidence presented about Disney's alleged conduct, including the oral [incontestability] tolling agreements, the prior failure to enforce the incontestability clause, and the chronic delays in the audit process, we conclude that there are triable issues of material fact as to whether Disney may be estopped from asserting the contractual limitations period as a defense to the producers' claims.”

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