“Hollywood Accounting” Attack Upheld By The Ninth Circuit

|||“Hollywood Accounting” Attack Upheld By The Ninth Circuit

“Hollywood Accounting” Attack Upheld By The Ninth Circuit

December 2012

“Who Wants to be a Millionaire” is an American game show that is based on the UK program of the same name.  When ABC contracted for the show in North America, the program and concept were already successful.  The showed aired on Disney’s ABC in primetime for three years, and has been in syndication for ten years.

The agreement between the show’s owner and ABC included a 50% share of the profits.  But according to the profit participation accounting, the show lost millions of dollars, as did the related merchandising.   Because of the substantial success of “Who Wants to be a Millionaire”, this incredible overall loss result (particularly for a game show) gave rise to litigation.  ABC contended that the terms of the contracts were followed, even though ABC’s contract interpretations and a related party distribution agreement guaranteed that no amounts would ever be paid as profit participations regardless of how successful  “Who Wants to be a Millionaire” ever was.

A 2010 District Court trial in Riverside, California (certainly not a hotbed of entertainment types) heard a 15-day jury trial with twenty fact witnesses, and eight expert witnesses.  The jury awarded $269 million, which the Court increased by $50 million of interest to $319 million.  The trial attracted substantial interest in entertainment circles.

At its core, the dispute involves (i) the reasonableness and relevance of an agreement between two Disney-owned entities (ABC and distributor Buena Vista Television), and (ii) whether expenses could also be deducted under an agreement that provided a distribution fee that the program owner thought should have included the expenses.  These are recurring issues in entertainment and merchandising distribution.

Reviewing de novo, the Ninth Circuit found no reversible error in the trial Court’s verdict.  Although the decision was not approved for publication, the matter provides encouragement to other talent and show owners that so-called “Hollywood accounting” cases can be won if the results reported to the owner/talent stretch what someone not in the industry would perceive as being reasonable.

The Ninth Circuit found that the contract was ambiguous, both in terms of the network license claim and the merchandising.  Accordingly, consideration of other evidence and the jury’s deliberation of such matters were both appropriate.   Because the jury’s damage award was not “grossly excessive or monstrous, clearly not supported by the evidence, or based only on speculation or guesswork”, the damages award was also upheld.

Fulcrum Inquiry performs licensing audits as part of our forensic accounting practice.  We have substantial entertainment experience.

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