Vol. 12, No. 3,009 - The American Reporter - October 19, 2006

The Pooh Papers

by Joe Shea
American Reporter Correspondent
Hollywood, Calif.

Printable version of this story

HOLLYWOOD, Calif., Jan. 18, 2002 -- Call it the case of Bear v Rodent;

call it W. Pooh v M. Mouse; call it one of the biggest lawsuits that you've never heard of. But whatever the name, the court battle between the Walt Disney Co. and a Beverly Hills family may be now approaching trial after 11 years, with almost all of the proceedings conducted in total secrecy.

The family is suing over royalties generated by revenues from Winnie the Pooh, the beloved character created by British author A.A. Milne. It was the Disney artists who transformed the worn teddy bear -- the back of his head worn from endless trips being dragged bump, bump, bump down the stairs -- into the jolly orange and marshmallow-puff cartoon figure known around the world.

That "Silly old Bear" adds billions of dollars annually to the Disney honey pot, and Pooh's popularity makes Mickey's ratings look ratty.But the family that owns the rights to Pooh has spent most of the money ithas received from Disney trying to collect the money it says it's owed.

At stake is the right to sell Pooh and his pals Eeyore, Tigger, Piglet and Christopher Robin in the United States and Canada, an enterprise that globally is said to contribute as much as one-fifth of the $25 billion Disney generated in 2001 from sales on every continent but Antarctica. The judge in the case has said the family can terminate the Pooh contract if breach or fraud is found at trial sometime later this year.

The case now encompasses hundreds of thousands of documents and Disney has a small army of clerks, secretaries, lawyers, accountants and executives that have worked on the case for years. But all records -- except a 34-page list of some of the documents filed, an 18-page list of papers Disney wants to suppress and the judge's 1992 order that sealed and a December 2001 order that reopened it -- have been completely closed to public view for the past 10 years.

Since Feb. 27, 1991, when it was filed, it has employed the talents of the nation's largest law firm, two other firms that are among world's most powerful, and nine others, and of at least five present and former judges of the Los Angeles Superior Court, along with eight more on two California appellate courts, and countless bailiffs, clerks andreporters -- both of the legal and the journalistic kind -- all innear-total secrecy, and at the cost of thousands of billable legal hours-- some running as high as $1,500 each.

The legal expense on the family's side of the case, for at least five different sets of lawyers and associated acountants, experts andsecretaries, is estimated at nearly $12 million. On the studio's side the cost is likely to be at least as large. But tens of billions of dollars in past, present and future revenues from Pooh until 2026 are at stake, and for the winner -- and possibly the loser, too -- it may well be worth it in the end.

Los Angeles Superior Court Judge Ernest Hiroshige, a careful man who writes about issues of daunting complexity with a strong, sober clarity that nonetheless leaves a reader feeling shocked, has found that the Disney organization destroyed at least 40 boxes of documents that might have provided evidence to the widow of Stephen Slesinger -- the agent who secured the rights in 1929 from British author A.A. Milne and memorialized them in a contract in 1932 -- and so has taken virtually any hope Disney had of winning the case away from the studio by imposing some of the most severe issues sanctions any lawyer has ever seen.

Disney, fundamentally, is not allowed to argue that it does notowe royalties to the Slesingers on the sale of nearly a billion dollars inPooh videos and children's computer software, and on both the wholesaleand retail gross of sales of Pooh dolls, or "plush," going all the wayback to 1983, when the last contract between the two parties was signed.

The sanctions, which were secret for two years, have never been revealed to Disney stockholders, who have been hit by wave after wave of bad news from the studio since 1998 and probably don't need much more.

The cost to Disney if the Slesinger family's claims are proved is likely to be far larger in the future than on the day, if it ever comes, when a jurydecides the case in the family's favor.

That is because the studio will then will either be obliged to pay vastly larger amounts in royalties each year, a vast sum for the rights, or will lose a fifth of its revenues when the Slesingers take their share of the Pooh franchise to a rival like theme park operator and studio Vivendi Universal.

So What's The Big Secret?

In a contemporaneous case that has seized the imagination of headline writers around the world, a totally-connected $86 billion commodity-trading Houston energy firm called Enron evaporated after its outside accountants -- who were simultaneously its business consultants --guided its commodity traders through unbelievably complex deals that benefitted a host of offshore energy companies that were often headed by Enron executives.

In a rush to avoid spending the rest of their lives in prison, the auditors and executives shredded thousands of pages of potentially incriminating documents. They failed to shred one document,though, in which a courageous female executive named Sherrie Watkins warned Enron's chairman -- President Bush's largest single contributor and fund-raiser -- that absolute disaster loomed ahead if the company did not change its accounting methods to reflect the losses hidden in the outsidepartnerships.

And although Disney, too, destroyed thousands of pages of potential evidence -- and is accused of a role in destroying another 500 or so boxes of documents held by Canasa, a subsidiary -- it failed to shred one little piece of paper that used just five words and a dash to describe the contents of the missing box: "Winnie the Pooh - legal problems." Each one of those words and the dash is now potentially worth a hundred million dollars or more -- the amount Disney might have to pay for the U.S. and Canadian commercial rights to Pooh held by the Slesinger heirs. Here's how Disney saw it, in one recent pleading:

"In support of SSI's claims, the court not only ordered thatclearly erroneous and highly prejudicial jury instructions will be givenat the trial of this action, but it imposed far-reaching monetary andevidence sanctions against Disney ... depriving Disney of the ability tofully present its defense to SSI's unmeritorious claims for hundreds of millions of dollars and conferring upon SSI a prohibited windfall."

Indeed, in a first order on sanctions in June 2000, Hiroshige had found Disney liable for "willful suppression of evidence," and said "Disney has misused the discovery process ... for its evasive responses toSSI's requests."

In August 2002, Hiroshige went even further, Disney said, "imposing a vast array of issue, evidence, and monetary sanctions,granting almost all the sanctions SSI sought -- and in many cases going well beyond them. For Disney, these arbitrary and punitive sanctions are potentially crippling."

News of the sanctions did not reach Disney stockholders, though, until Garry Abrams, a columnist for the Los Angeles Daily Journal, a legal newspaper, wrote a column in early January 2002 describing the second order and quoting the Slesinger's famed Hollywood "superlawyer," Bert Fields, as saying that the family had asked the judge to let them cancel the contract.

That day, a generally good one for the market, Disney dropped almost a dollar, and lost another half-dollar the next. It recovered a few cents the next day, and then plunged another dollar when the overall market was badly hit by the Enron news.

Meanwhile, the Los Angeles Times, joined by the online American Reporter and two New York Yiddish publications, had gone to court on Nov. 7 in yet another effort to get the case records unsealed. For the Times, attorney Jens Koepke argued that a case could not be sealed if the court left no way for the public or the press to argue from the sealed documents that they were not legally entitled -- as "trade secrets" would be -- to be sealed.

In a relatively brief ruling that was handed out in the courtroom as reporters arrived in Dec. 10, Judge Hiroshige granted the motion, citing the precedent Koepke argued and "the public's right to know what is going in in their courts." The following day, that story ran at the top of the first column on page 2 of the Times Business section -- right atop another one in which Disney was fined $900,000 for paying $2-an-hour wages through a second company to several thousand at-home "piece" workers that made Disneyland's "magic wands."

Although the magic wands weren't the kind that made Enron disappear, the story -- and others in which Disney chairman Michael Eisner tried to reassure stockholders through yet another crisis as the huge Echostar cable company indicated it would not carry the $4.4 billion ABC Family channel Disney had just acquired from Fox -- must have rattled the studio's bosses and board.

They were battered again when three judges of California's Second Appellate District Court of Appeal turned down a lengthy Disney petition for a writ of mandate that would toss out the sanctions before trial. Disney had not shown any "extraordinary circumstances," the higher court ruled, to justify canning the sanctionsnow instead of in an appeal after trial. Now, Disney has appealed that ruling, too, to California's Supreme Court. Observers give it little chance of victory.

But what is the underlying case all about? What did Disney do that was so wrong? Why were the Slesingers willing to go so far -- spending virtually all the money they made from Disney -- to win the case? Why was there no settlement offer, or at least any that both sides would acknowledge?

And are there more parallels to the Enron matter lurking in Disney's arm's-length partnerships with companies like Canasa, the Tokyo-based Oriental Land Company and its subsidiary, Asian Sourcing? Insiders hint that charges of money laundering and other dirty deeds may arise as the case gets closer to a trial expected this summer.

The answers to those questions will largely have to await that trial, since all the documents as of this date remain sealed (many of them will be available for public inspection this morning), and the others Disney seeks to keep secret will not be addressed by the court until a hearing on March 1.

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

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