Ladd v. Warner Bros. Entertainment, Inc., California Court of Appeal, Second Appellate District, May 25, 2010

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The California Court of Appeal holds that Warner Bros breached the implied covenant of good faith and fair dealing owed to plaintiff, Alan Ladd Jr, a profit participant in several movies, when it allocated the same share of licensing fees to every movie in packages of films regardless of each movie’s value.  

Plaintiff Alan Ladd Jr. entered into a joint venture agreement with Warner Bros. to produce several movies, including Blade Runner, Body Heat, Night Shift, Tequila Sunrise, Outland, Chariots of Fire, and the Police Academy franchise. Later, Ladd and Warner entered into a Termination Agreement, under which the parties terminated their joint venture and Warner agreed to pay Ladd profit participation as outlined in the agreement. Thereafter, Warner licensed packages of movies to broadcast television and cable networks, and Ladd’s movies were included in these packages. In a practice known as “straight-lining,” Warner allocated the same share of the licensing fee to every movie in a package, regardless of its value to the licensee.

Ladd filed an action for, among other things, breach of contract and breach of the implied covenant of good faith and fair dealing. Ladd alleged that by allocating the same portion of the licensing fee to every movie in a package without regard to the true value of each movie, Warner deprived Ladd of a fair allocation of the licensing fees to which Ladd was entitled as a profit participant. A jury returned a special verdict in Ladd’s favor on the contract claims and awarded Ladd $3,190,625 in damages. Warner appealed, and the California Court of Appeal affirmed, holding that under the implied covenant of good faith and fair dealing, Warner was bound to act in good faith toward profit participants and to fairly and accurately allocate license fees to each of the films based on their comparative value as part of a package. The court referred to evidence provided by Ladd indicating that Warner assigned a letter grade of A, B, or C to movies in the packages, that all of Ladd’s movies were rated A or B, and that in some licensing deals, C movies were added to the package for free. Ladd also produced evidence that the licensees typically were not concerned with how the licensing fee was allocated to each movie by Warner and instead were only concerned with the overall cost to license the package of movies.

The appeal court also addressed Warner’s challenge to the amount of the damage award, which was made to the trial court in the form of a motion for JNOV, rather than a motion for new trial. Warner asserted that some of the damages were barred by the statute of limitations. However, the appeal court held that because the statute of limitations is an affirmative defense, a defendant who asserts the plaintiff’s claims are partially barred by the statute of limitations has the burden of proving which portion of the plaintiff’s damages are time-barred. In this case, the appeal court affirmed the award of damages to Ladd in its entirety because Warner failed to present evidence of which part of the damages award should be time-barred. As the court stated, “The obligation to segregate the damages should fall upon the wrongdoer and not upon the person he has harmed.” The appeal court also noted that Warner’s counsel had intentionally placed the trial court in a “dilemma”, by not seeking a new trial on the ground of excessive damages and moving solely for JNOV where there was substantial support for the damages awarded.

In an unpublished part of the opinion, the court also reversed the trial court’s judgment of nonsuit on Ladd’s claim of fraud relating to the movie Blade Runner and claims relating to the deletion of promised screen credits and company logos from the films Chariots of Fire and Once Upon a Time in America, allowing these claims to go forward. Regarding the fraud claim, Ladd had raised concerns about the lack of profits from Blade Runner as early as 1992. At that time, Warner informed Ladd that Blade Runner had lost $19.5 million as of December 31, 1991, and told Ladd that there was no reason to send accounting statements or to bother with a costly audit because the movie was so unprofitable. Ladd relied on Warner’s representations and entered into a settlement agreement with Warner releasing Warner from claims relating to Blade Runner, among others. In 2001, Ladd learned that Warner was paying profit participation to another entity. The court held that Warner’s payment of profit participation to the other entity, but not to Ladd, on the same movie, is sufficient to raise a triable issue as to fraud.

Regarding deletion of screen credit and company logos, the appeal court held that the trial court’s ruling that there was no evidence of any lost opportunity or any ascertainable loss due to loss of screen credit was clearly erroneous. The court stated that “[t]he mere fact the damages cannot be determined with precision does not mean that Ladd is not entitled to compensation for the deprivation of valuable screen credit and logo rights to which Ladd was entitled.”