by Joe Shea
American Reporter Correspondent
August 15, 2001
LOS ANGELES, August 15, 2001 -- Final arguments are due today in Los Angeles County Superior Court after a two-day hearing on accounting methods used by the Walt Disney Co. to calculate Winnie The Pooh royalties paid to the heirs of "Red Ryder" producer Stephen A. Slesinger.
The Hollywood producer of movies and serials purchased U.S. and Canadian merchandise rights to the popular children's character from English author A.A. Milne in 1929, and his widow licensed them to Walt Disney, Jr. in 1961.
Judge Ernest Hiroshige ruled in May that under terms of the contract, Slesinger's heirs may sever their relationship with Disney if charges of fraud and beach of contract against the entertainment giant are proved. Testimony Tuesday indicated that Pooh has earned more than $10 billion in gross revenues for Disney for character merchandise sales since 1998.
The heirs say Disney has cheated them of royalties by not reporting sales of Pooh merchandise to foreign licensees for years, and by not paying anything on other items they say were covered in their contract with Disney. A Disney lawyer said yesterday that the Slesingers are not owed anything.
The case has pitted two of the nation's best-known lawyers, Hollywood attorney Bert Fields for the heirs and O.J. Simpson figure Daniel Petrocelli for Disney, against each other in a battle that Fields says could cost Disney "hundreds of millions" in years to come. That figure would be formed by new payments to Slesinger on disputed items including video and computer software that Disney stopped paying for in the 1980s, shortly before those items began experiencing meteoric growth.
The undisputed items in today's hearing, while important in determining how other royalties due Slesinger may be compensated in the future, represent just a tiny fraction of all the royalty payments that are at issue in the case. A jury trial is expected to begin in February or March.
Slesinger's widow, Shirley Slesinger Lasswell, was in court for the second time today. Now in her 80s, she was widowed again in March, and lost her only sister in June. She declined to talk to the press today, but yester= day charged Disney with "absolute piracy" in its treatment of royalties due the heirs on Disney's billions of dollars of revenues from Pooh toys and products. She filed suit in 1991 and Disney has significantly increased its payments to the heirs since then.
The hearing is expected to yield at least a tentative ruling on Friday, Disney corporate communications director Michelle Bergman said late Tuesday. Whatever it is, both sides agree, a blizzard of motions and briefs will follow.
For the second day, an accountant and an "accounting referee" appointed in 1995 by Judge Ernest Hiroshige at Disney's request testified that they thought the accounting audit of payments for 1988 and 1994, which were thought to serve as two representative years of the lengthy contract, had produced a "fair" result.
But in cross-examination by Fields, accounting referee John J. Costello admitted he had served as outside counsel to the accounting firm of Gursey, Schneider & Co. before he recommended them to Judge Hiroshige as the forensic accountants in the complex case. After the hearing, Petrocelli rejected suggestions that the relationship constituted a conflict of interest. Costello said the outside counsel position with the Gursey, Schneider firm was the only such contract he had.
Petrocelli had seemed to make substantial inroads in the Slesinger case Monday when he called forensic accountant Michael Miskei of Gursey, Schneider & Co, and led him through a series of questions that undermined some of Miskei's testimony in a declaration earlier in the case.
In his testimony, Miskei cast doubt on claims by Slesinger that its private CPA, Steven Sills, had been "frozen out" of key decisions on the audit.
Under cross-examination by Fields on Tuesday, however, Miskei said he ha= d no objections to Sills' presence during the audit at Disney's offices, and Costello testified that Disney officials - allegedly concerned about other clients Sills represented with claims against Disney - "weren't going to let Mr. Sills look at unredacted information."
"They wouldn't let him in the door," Costello testified.
Miskei said Sills was permitted to examine "work papers" after they were prepared by Miskei's team and transported to Gursey, Schneider & Co,'s offices.
In another development, Petrocelli was overruled by Hiroshige after he offered strong objections to testimony by Miskei on the topic of $100 million in large one-time errors discovered by his team that were considered either outside the scope of the audit or easily redressed, and were therefore not included as part of the basis for an "error rate" that is soon to be "extrapolated" to determine how much, if anything, Disney should pay Slesinger as back royalties on the renegotiated licensing contract since 1983.
Among those errors were three discovered during the 1994 audit that Disney copncedes totaled $100 million. Disney eventually made a "catch up" payment of $619,000 to Slesinger to correct those errors, but Miskei said auditors did not include them in formulating an error rate.
That led Judge Hiroshige to question Miskei directly about the excluded amounts, which he conceded would increase the error rate significantly. Hiroshige's questions won an admission from Miskei that there are no standard or generally accepted accounting principles that could be applied to the circumstances of the Disney case.
"Yes, we're in uncharted areas. An audit like this or an examination like this just doesn't have the kinds of rules, regulations and formats that would allow you to know what to do under these circumstances," Miskei told The American Reporter after the hearing.
Some of Tuesday afternoon's testimony touched on "black binders' prepared by the Big 4 accounting firm of Deloitte Touche, hired by Slesinger to study Disney's royalty payments before the court-appointed audit. Those binders contained hundreds of instances, Miskei noted, where apparent errors discovered by Deloitte Touche were resolved during Miskei's audit by explanations from Disney personnel. Costello echoed Miskei on that point, noting that "six inches" of Deloitte Touche error reports were reduced to "four pages" by Disney's explanations.
Yet the absence of many records and the studio's arcane accounting practices did not prove so baffling to auditors hired by Disney, who produced an error report for recent years that shows a miniscule error rate in payments. Fields said he was not shown that report until the hearing began this= week.
Fields said he believes, but Disney does not, that Judge Hirsoshige can rule "de novo" -- a legal term meaning "like new" -- on whether or not the excluded amounts must be included in the error rate applied to all the years of the contract.
Hiroshige ruled late last year that the absence of many records that would have helped auditors was due to Disney's "willful destruction" of 40 boxes of Pooh-related legal and other documents. Disney's law firm, Skadden,= Arps, quit the case after the ruling when it became apparent that they might have to testify against Disney on the document destruction issue. Disney was made subject to sanctions during the jury trial by the ruling.
And in a recent ruling allowing Slesinger to file a third amended complaint, Hiroshige noted that despite Disney's arguments the case was not about minor accounting errors "but breach of contract and fraud" that could allow Slesinger to end its 40-year relationship with Disney and seek another licensee for Pooh products.
Fields said after Tuesday's hearing that Winnie The Pooh makes more money for Disney than any other character, including Mickey Mouse and Donald Duck, and accounts for about 25 percent of all character merchandise manufactured and sold by Disney's far-flung operations.
Fields said in court that Disney chairman Michael Eisner told the Orange County Register in 1998 that Pooh sales in 1997 were $3.3 billion. The same year, Disney analysts estimated sales of Pooh merchandise would reach $6.1 billion in 2001. Pooh sales were $4.3 billion in 1999, Fields said as he cross-examined Miskei.