On December 3, 2012, the U.S. Court of Appeals for the Ninth Circuit in Celador International, Inc. v. American Broadcasting Companies, Inc., et al. [enhanced version available to lexis.com subscribers] upheld an interesting jury verdict, resulting in a $319 million judgment against Disney relating to an agreement for ABC to obtain the North American rights to the hit TV show, "Who Wants to Be a Millionaire?"
The original 1999 agreement provided to Celador-the British television production company and creator of the hit show in the U.K.-50 percent of the show's profits. However, the agreement was ambiguous as to whose profits were required to be split with Celador, ABC's or only its production company subsidiary's, Buena Vista Television (BVT). The body of the agreement referenced a 50-percent split of "ABC/BVT's" profits, called "defined contingent compensation" in the agreement, but the definition in Exhibit B of defined contingent compensation was from a form document that related only to BVT with no mention of ABC. This ambiguity ended up being key because ABC assigned all rights under the agreement to BVT, which then licensed the rights back to ABC in exchange for a license fee equal to BVT's production costs. Since the revenues received by the owner of the rights, BVT, were equal to its costs, no profits were generated and no amount of profit-sharing consideration was paid to Celador.
The jury found Disney to be in breach of the agreement with Celador, ordering damages of $269 million, with $50 million in interest being added by Judge Phillips of the U.S. District Court for the Central District of California. The Ninth Circuit Court of Appeals upheld the verdict.
There are a number of key takeaways from this case for companies and lawyers engaged in licensing and similar transactions, including potential pitfalls of profit-sharing deals, the possible impact of affiliated entities and the need to carefully review exhibits to the transaction documents. Not only can the profit calculation itself be complicated in terms of identifying the various types of revenues and expenses that are to be included, but also even the identity of the party generating the revenues and incurring the expenses needs to be clear.
Furthermore, in all technology transactions and licenses (not only profit-sharing deals), it is important to consider the entities signing the agreement; the rights to assign, license or otherwise transfer rights to affiliates; the definition of affiliates; and whether the various payment terms include affiliates or only specifically identified entities.
This case also highlights the significance of paying close attention to the exhibits in an agreement. Unfortunately, there can be a tendency to not review exhibits as carefully as the body of an agreement, yet exhibits can be vital, particularly if they include definitions of terms or details of compensation arrangements.
If you have any questions about this Alert or would like a copy of the Ninth Circuit decision in this case or the original agreement between Celador and ABC/BVT, please contact David A. Charapp, the author of this Alert; any other member of the Technology Transactions and Licensing Practice Group; or any attorney in the firm with whom you are in regular contact.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, or should be construed, as legal advice. For more information, please see the firm's full disclaimer.
Duane Morris LLP & Affiliates. © 1998-2012
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