by Joe Shea
American Reporter Correspondent
January 24, 2002
'GET EISNER DOWN HERE': RECORDS OF DISNEY AFFILIATE IN HONG KONG WERE SHREDDED, TOO
LOS ANGELES, Jan. 24, 2002 -- The Walt Disney Co. destroyed "hundreds of boxes and thousands of pages" of records from its Hong Kong manufacturing arm that showed how Winnie The Pooh-related products were made, shipped and licensed, newly-released documents in an 11-year-old lawsuit for hundreds of millions in past due royalties reveal.
The suit was brought in late February 1991 by the heirs of Stephen A. Slesinger, a New York literary agent who purchased commercial rights to Pooh from British author A.A. Milne in 1930 and expanded the agreement in 1932 and 1957. Slesinger's widow licensed the characters to Disney in 1961, and the parties revised their agreeement in 1983.
The destruction of Canasa Trading Corporation records that the Slesingers requested in 1991 went on for at least four years -- even after a 1994 warning from a discovery referee -- until a Los Angeles Superior Court judge slapped an injunction on the studio in July 2001 to stop it.
The heirs are seeking hundreds of millions of dollars in back royalties from Disney, and say they may terminate the contract if the jury finds for them at trial.
Court papers, including a motion filed by attorneys for Stephen Slesinger Inc. on April 13, 2001, that were unsealed last Friday by the trail judge detail the destruction and show that a far larger number of documents were destroyed by Disney than has been reported so far.
The studio already faces heavy evidence and monetary sanctions if the case goes to trial for shredding 40 other boxes of records after Los Angeles Superior Court Judge Ernest M. Hiroshige ordered it to preserve them.
The case is expected to go trial before Judge Hiroshige later this year, and could lead to a termination of the Pooh rights owned by the Slesingers.
The whimsical bear and his friends in Pooh Corner bring an estimated $4 billion a year into Disney's coffers, many reports say.
A former Superior Court judge who served as a court-appointed referee overseeing the discovery process was apparently infuriated at the company's failure to produce records and worried out loud about their possible disappearance, the court records show, and he threatened Disney with a contempt order if it did not begin to comply with his orders.
At one point, records show, referees threatened to have Disney's chairman, Michael Eisner, brought into court.
In 1994, former Los Angeles Superior Court Judge David Eagleson, the discovery referee, warned Disney to "produce everything they have if we have to get Eisner down here to put some push behind this, everything they have to let these people trace it. I don't care what it costs. It can cost millions, maybe. I don't care, ... [w]e don't want any material disappearing here," Eagleson said, according to a court transcript.
An accounting referee appointed by the court also voiced doubts about Disney's responses to requests for discovery. Referee John Costello warned in May 1994 that "the time for playing games has long since passed. We want everybody to produce what will give them a fair chance to figure out what's going on," the newly-opened documents show.
The motion also argues that thousands of accounting documents were shredded by Disney.
The court file in the case (BC 022365) were opened up last Friday by Judge Hiroshige after a suit by the Los Angeles Times, joined by the American Reporter, successfully argued that they were of "compelling public interest." The referee also told the studio to put any purged computer data on back-up disks to preserve them, the papers show.
The destruction continued for at least four more years, though, a Disney records retention supervisor said in her deposition. Sylvia Zaragoza, a Disney records retention supervisor, oversaw the destruction of the documents, according to a declaration described in the unsealed motion. Zaragoza said under oath in January 2000 that numerous documents covering 1982 to 1990 were destroyed after the 1994 hearing, some of them as late as 1998, the court papers show. Slesinger sources say she was fired by Disney after telling the court that before shredding the corporation would have removed any documents it wanted to preserve.
The Slesinger firm requested documents from Disney in August 1991, but none related to Canasa Trading were ever produced, the firm said. Disney acknowledged the destruction of the 40 boxes of records in Macrh 1998.
Then, in November 1999, "Disney's then counsel learned that Disney had destroyed a vast number of other documents ... plus hundreds of the files of Disney's subsidiary, Canasa Trading Corporation," the motion says. ... Disney deliberately concealed this highly relevant information from the Court and Slesinger" throughout a November 1999 hearing," and only told Slesinger about it in December 1999, the attorneys said.
The studio's law firm in 1999 was Skadden, Arps, Slate, Meagher & Flom, the country's largest law firm. They were forced to withdraw from the case when it seemed likely they would be called as witnesses for the Slesingers in the document destruction matter. Disney is now represented by O'Melveny & Myers. The Slesingers are represented by Greenberg, Glusker, a Century City firm with a high Hollywood profile.
Judge Hiroshige granted the family's request for an injunction against further destruction of the documents on July 19, 2001.
The court papers filed on April 13, 2001, contain declarations that are still under seal from Slesinger attorneys Elisabeth Moriarty, Bonnie Eskenazi and an unidentified third woman, Julia R. Haye, which are frequently referenced in the unsealed motion.
"On December 6, 2000, Ms. Moriarty was shown several hundred boxes of Canasa documents. She sampled them as best she could. Her inspection revealed that the boxes contained abundant entries about Winnie the Pooh products and uses by a myriad of Disney licensees in shipping documents, purchase orders, manufacturing documents and the like. Obviously, this was of direct relevance to the issues in this case," the April 13 motion says. Many were from the C&H Toy Co., and "recorded quantities of Winnie the Pooh merchandise shipped to the theme parks and other Disney outlets," the motion charges. Many other records from C&H Toy Co. covering Pooh uses between 1990 and 1997 were destroyed, the attorneys said. "And this is only an example," the company added.
"The hundreds of additional boxes of Canasa files Disney destroyed during the litigation contained several hundred, if not thousands, of Canasa files from 1982-1990," the Slesinger motion says. The number of boxes was put at 500 by knowledgeable sources. Worse, Slesinger charged,the document destruction was kept secret at a 2000 hearing on the destruction of the 40 boxes of Pooh records.
"... Disney concealed from this court at the [earlier] hearing on its document destruction that it had destroyed far more documents than were known to the court or to Slesinger at that time," the plaintiffs charged in the April 13 motion. That hearing led to a first order for sanctions on June 16, 2000. The court initially found that Disney had "engaged in a misuse of the discovery process" before adding more stringent sanctions last summer. "Disney misconduct has not been limited to this case," the Slesinger firm charged. "It appears to reflect a corporate pattern and practice."For instance, the motion states, "In Katzenberg v. Disney, Disney intentionally destroyed critical files and purged them from its computer memory."
Eskenazi was an attorney for former Walt Disney Co. president Jeffrey Katzenberg, who was forced out by Eisner and sought hundreds of millions from the studio. Like, Katzenberg, the Slesinger heirs are also represented by Hollywood superlawyer Bert Fields.
"Disney's action in both this case and Katzenberg establishes a continuing pattern and practice of intentionally destroying documents unfavorable to Disney's position in litigation," the Slesingers' motion said.
The sources said the documents included licensing agreements entered into for Pooh merchandise by Canasa, a possible violation of the studio's agreement with the Slesingers. Disney counsel Gina Limandri at one point in the 1994 hearings contradicted its own in-house attorney and told the Slesingers that Canasa Trading Co. had no role in the license, manufacture and distribution of Winnie the Pooh items.
The sources also said that in many cases Canasa shipped Pooh merchandise directly to theme parks, Disney stores and other Disney retailers, thus avoiding inventory reports the Slesingers could audit at Walt Disney warehouses. Other records commingled income from Disney and Slesinger-owned characters, making it difficult to tell where royalties were supposed to go.
The Slesingers produced a Nov. 16, 1990, letter from Disney attorney Peter Nolan saying the records would provide Slesinger what their lawyers called a "true amount" of products on which they were entitled to receive royalties.
"Canasa Trading Company is a subsidiary that acquires specially manufactured merchandise (including Winnie the Pooh merchandise) for our parks and retail stores," Nolan wrote.
"It is my understanding that we have been paying royalties on the sales of that merchandise made for Canasa for sale at our retail shops. Canasa only sells to Disney's own retail establishment," Nolan emphasized.
"They destroyed any means they would have had to show us what they had manufactured and sold anywhere in the world," a Slesinger family source told The American Reporter yesterday.
About 400 of the boxes of Canasa's Pooh records were preserved, the sources said. None of them were produced in response to a broad 1991 discovery request, the plaintiffs also said.
Disney attorney Daniel Petrocelli told The American Reporter on Jan. 11 that Canasa also destroyed a box of documents labeled "Winnie the Pooh - legal problems." That box may have been a key factor in the severe sanctions that were levied against the studio by Judge Hiroshige on August 17, 2001. Observers say those sanctions have made the studio's defense against charges of breach of contract and fraud difficult to mount.
The Slesinger motion says the box containing "legal problems" belonged to a vice president of Canasa Trading Co., Dewey Gaines. According to the motion, Gaines said he gave permission to destroy the documents a year before the litgation began, but document retention records from Disney say they were not destroyed until 1997.
Other Disney executives, acording to the motion, also destroyed their records of dealings by the studio in Winnie the Pooh matters.
Under a ruling on a third amended complaint filed last year, the Slesinger can terminate Disney's American and Canadian rights if a jury finds fraud or breach of contract by the studio.
The whimsical bear and his friends in Pooh Corner bring an estimnated $4 billion a year into Disney's coffers, many reports say, and termination could be catastrophic for the studio, which has not established a reserve for possible losses in the case. Disney stock is down sharply from its 2001 highs, closing at $21.20, off 21 cents on Thursday.