Vol. 12, No. 2,856W - The American Reporter - March 18, 2006

The Pooh Papers

by Joe Shea
American Reporter Correspondent
Hollywood, Calif.

LOS ANGELES, August 15, 2001 -- Upping the stakes significantly in the long-running royalties dispute between the Walt Disney Co. and the Tampa-based owners of exclusive U.S. and Canadian rights to the many commercial adventures of Winnie The Pooh, Hollywood superlawyer Bert Fields told The American Reporter today that his clients would elect to take Pooh elsewhere if a judge finds early next year that Disney engaged in breach of contract and fraud in not paying royalties on the popular character, which contributed gross revenues of $5 billion to Disney's $25-billion bottom line last year. Disney spokesperson Michelle Bergman said she had no comment on the issue.

In a third amended complaint filed earlier this year, the heirs of Stephen Slesinger - the Hollywood producer of "Red Ryder" and other films who bought the U.S. and Canadian rights to Pooh for television, radio, motion pictures and merchandising, from English author A.A. Milne in 1929 - asked Los Angeles Superior Court Judge Ernest J. Hiroshige to allow them to sever ties with Disney as one remedy to a finding of breach of contract or fraud.

In May, Judge Hiroshige ruled that both the Disney contract and state law would permit them to do so if he makes such a finding at a trial expected to take place six months from now.

Hiroshige has already ordered sanctions against Disney that include telling a jury hearing the matter that Disney willfully destroyed evidence in the case to prevent the plaintiffs from learning what royalties were actually due them.

"And he's correct. We have asked for that relief," Fields said after Wednesday's hearing.

"Disney is very good," Fields said, "but probably we could get more revenue from somebody else. And I think that there's more than just money involved. I think that if given the choice, and if the court says they have the right to rescind, [Slesinger] would probably make that election."

Although he's not sure what he would recommend, Fields said, "I think there would probably be lots of other people out there who would love to have this. It's generating $5 billion a year. So while Disney is very good at their job, I suspect we would want to go another way if thejudge says we can."

"I'm not familiar with that ruling, so I really can't [react]," Disney director of corporate communications Michelle Bergman said moments later. "Not to mention the fact that it hasn't come to that point yet, so it would be inappropriate for me to comment on something that's a hypothetical."

Pooh and his friends from the Hundred-Acre Wood - Tigger, Rabbit, Eeyor and Christopher Robin, among others - would probably be a welcome addition to character rosters at both AOL Time Warner, whose characters include Bugs Bunny and Porky Pig, and Vivendi Universal, which like Disney owns theme parks where Pooh products could be sold.

Testimony during the hearing so far has revealed that about 25 percent of Disney's merchandising income is generated by Pooh characters that have earned Disney gross revenues of more than $12 billion in the past three years. That far surpasses Disney's Mickey Mouse income and that from and other Disney characters, courtroom statements have indicated.

$100 Million Discrepancy

The hearing has already extended two days over the original schedule, which called for final arguments on Tuesday, and then again today. Judge Hiroshige is leaving on vacation on Saturday, and Petrocelli said he hopes he will rule before then, or even from the bench after final arguments that are now scheduled for Thursday.

Fields today called Slesinger's own accounting expert, Prof. Douglas Carmichael of New York's Bernard M. Baruch College of the City University of New York, to comment on the findings of an independent referee assigned by Judge Hiroshige to conduct an independent audit of Disney's payments to Slesinger in two representative years of their 18-year contract.

The audits of six-month periods in 1988 and 1994 did not turn up a discrepancy of more than $100 million from Pooh revenues not reported to Slesinger, which Disney corrected with a $619,000 payment in 1997. Instead, the payment was made after Disney executive Peter Nolan said in a deposition that it was owed to Slesinger for the period from 1983 to 1993.

Including that error would add significantly to any Disney payment to Slesinger after a trial, since by extrapolating from those sample periods, the auditing referee was asked to establish an error rate that could then be applied to the entire 1983-2001 period.

That has proved complex and costly. Forensic accountant Michael Miskei testified Monday that he and his firm had billed 5,000 hours to Disney to complete the audit. Today, Judge Hiroshige said he was "not satisfied" with Miskei's proposed error rate, or "extrapolation theory" as it is being called in court, because it left out the largest errors. Carmichael said those errors should have been included in formulating an error rate, but that doing a better audit would be unacceptably time-consuming and expensive.

He also testified that Miskei's error rate did not reach the generally accepted standard accounting principle that for whatever period is sampled, the error rate must include all errors, whether they are random or otherwise. Doing so could vastly increase the royalties Disney may have to pay Slesinger. Disney attorney Robert Welsh told the court any error rate that includes the larger sums would skew the accuracy of the finding because while most of the large errors occurred before 1995, 94 percent of the Pooh revenues reportable to Slesinger were earned after 1994.

Disney's revenue reports for 2000 topped $1.1 billion, but did not include billions more on items Slesinger says are part of its licensing contract. Disney does not report on those items, including videos and computer software.

The sober and sometimes tedious proceedings were dramatically interrupted when Judge Hiroshige took over questioning for the second time in two days and asked Carmichael to come up with a "total picture" that would represent a compromise of Slesinger's proposed "100 percent rule" and allow him to make a judgment call about how to treat the past-due royalties.

The 100 percent rule states that in years for which no accounting was provided because Disney destroyed the associated documents, 100 percent of revenues in the particular category - theme parks, foreign licensing, domestic licensing, domestic publishing, catalog sales and Disney stores - should be attributed to Pooh.

Noting that the laptops Slesinger's lawyers had on the plaintiff's table contained spreadsheets that could make the calculations in 10 minutes, Fields and Carmichael agreed to come up with the numbers over lunch.

In fact, Judge Hiroshige had to request the numbers three times, with Fields explaining twice that he had misunderstood the request. When the numbers were finally produced on a portable screen from an Excel spreadsheet near the end of the day, Judge Hiroshige overruled objections from Disney attorney Daniel Petrocelli and admitted them into evidence.

"We think that these numbers are without foundation," Bergman fumed outside the courtroom a few minutes later. But Bergman said her lawyers had declined to provide copies of the charts and tables it earlier provided as a basis for its calculation of an error rate and "extrapolation theory."Disney believes that the records in the case should be sealed.

The numbers Hiroshige sought, however, could be welcome news for Disney. The calculation, if accepted by Disney and the court, would require a payment to Slesinger of $17,300,000, or half of the $35 million that was raised as a ballpark figure by Slesinger attorneys yesterday, for the 1983-2001 period on items that Disney agrees it must pay royalties to use. The error rates ranged from a low of 4.4 percent on Disney Stores revenue to 119.48 percent on theme park income.

A vastly larger sum - perhaps in the hundreds of millions - will be at issue at a trial, which is expected next February or March, including royalties on videos, DVD and computer software bearing Pooh's name or likeness that gross billions more per year.

Copyright 2006 Joe Shea The American Reporter. All Rights Reserved.

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