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Judge Deals Disney a Setback in Pooh Dispute

19 Jun, 2002 By: Holly J. Wagner

In a ruling that could end up costing The Walt Disney Co. millions of dollars, a Los Angeles judge has dismissed the accountants who audited royalties from Winnie the Pooh merchandise and ordered a new formula for calculating past royalty payments to Pooh license holders.

“We're going to file briefs next Friday where we will take issue with parts of the ruling we disagree with,” said Disney attorney Daniel Petrocelli, who called the order a “split decision.”

The case involves two major issues: the amount of royalties the plaintiff family is due from Pooh merchandise like clothing and toys; and whether the family is owed any money for Pooh video and computer software products and promotional activities using Pooh characters.

Los Angeles Superior Court Judge Ernest Hiroshige's ruling addresses only the accounting issues and specifies that the dispute over video, software and promotional activities remains to be resolved at trial.

The order tosses out major portions of an earlier auditor's report and chastises Disney counsel for omitting or withholding information crucial to assessing how much the parties should receive from sales of Pooh products ranging from software to breakfast cereal.

Among other problems, the judge found that Disney applied flawed logic in the accounting, in particular by assuming Pooh generated no revenue in cases where product revenues could not be broken out by character.

“Where the accountants could not, because of inadequate documentation, determine the amount of revenues attributable to Pooh, they simply ignored entire categories of products rather than treat the amount as an error…” Hiroshige quoted from an expert witness' testimony. “Thus they omitted the ‘unknown' multicharacter products completely from the error rate, treating those products as if they were not Pooh related and treating the matter as if Slesinger [the license holder], rather than Disney, had the burden of proof.”

As a result, Hiroshige ruled that for most products, including those without breakouts by character, auditors must assume Pooh accounted for 12.5 percent of revenues. That percentage will apply to all character merchandise sold at Disney theme parks, via Disneystore.com, the Disney Catalogue, international and domestic licensing. For book revenues, Pooh is deemed to constitute 15 percent of revenues from two publishers and 12.5 percent from another.

“This was a big victory for the [plaintiffs] and another big loss for Disney,” said plaintiffs' attorney Bonnie Eskenazi. “The court dismissed the accountants and threw out the accounting referee's report. It doesn't get much better than that.”

Lawyers for the Walt Disney Co. and SSI, a family-owned company that owns the merchandising rights to A.A. Milne's Winnie The Pooh characters, have been slugging it out in court for years.

New York literary agent Stephen Slesinger bought the rights from author A.A. Milne in 1929. Though Slesinger died many years ago, his wife and daughter sued Disney in 1991, alleging the Mouse House has underpaid merchandise royalties and erroneously excluded packaged media from royalties paid under a licensing deal forged in 1961 and renegotiated in 1983.

Disney attorneys have argued that video royalties are covered under a separate license and the Slesingers have received all they are due for videos and computer software. But the Slesingers' attorneys contend Disney has refused to give a fair and proper accounting for the money it has made on the products and has barred them from the accounting process. The judge agreed.

“The accountants held weekly meetings with Disney personnel in which Disney provided guidance to the accountants on the problems they encountered and attempted to convince the accountants to take a different position on issues and that [plaintiff] SSI was excluded from these regular meetings on the ground that Disney's non-Pooh financial documents were privileged, even though SSI repeatedly requested to attend the meetings,” the judge wrote. “That SSI was excluded from the auditing process is evident from the fact that he accountants provided Disney but not SSI with drafts of the final reports for the audits, and Disney in fact convinced the auditors to make significant modifications to the drafts.”

He also rejected Disney attorneys' contention that the studio tightened oversight of Pooh accounting after the suit was filed and that since 94 percent of the disputed revenues were post-1994, a different rate should be applied for that period.

“This action was filed in 1991 and there is no evidence that there has been more accurate reporting of Pooh revenues after the filing of this action” aside from an unsubstantiated Disney accounting report, he wrote.

Hiroshige fined Disney $90,000 last August for shredding boxes of documents related to the disputed agreement. As part of the same sanction, the judge ruled it would treat as fact the plaintiffs' contentions that former Disney attorney Vincent Jefferds, who died in 1992, assured the Slesinger heirs the videos were covered under the agreement.

The judge's order gives both sides until June 28 to submit arguments about Tuesday's order, but it appears unlikely he will change his order unless attorneys are able to demonstrate a substantial error in his legal reasoning.

Trial in the case is scheduled for March 5.

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