California Supreme Court Rejects Disney Appeal

by Joe Shea

The Feb. 20 decision by five of the court's seven judges -- Chief Justice Ronald George and Associate Justice Janice Brown recused themselves -- sent the case back to Los Angeles Superior Court and removed the last major hurdle to a possible trial later this year.

There has been extensive settlement discussion, alhough little movement, behind the scenes in recent weeks, sources close to the matter say.

Disney had appealed in December from a decision by the Second Appellate District of California which found that Disney's appeal of the sanctions was not an emergency that should be heard by the court before a trial of the underlying matter.

That is the case of Stephen Slesinger Inc,, a small Tampa firm owned by the heirs of branding pioneer and literary agent Stephen Slesinger, who acquired some rights to Winnie The Pooh from British author A.A. Milne in 1930 and expanded them in a 1932 agreement.

After Slesinger's death in 1953, his widow, Shirley Slesinger Lasswell, sold the rights to Walt Disney in negotiations that began with the studio founder himself. That 1961 contract was renegotiated in 1983 to correct royalty payments and embrace then-imminent new technologies including computer software, video cassettes and DVDs.

In 1967, according to a memo unearthed in the voluminous file from Disney's brother Roy Disney, the studio was unaware how broad Slesinger's rights were when they purchased them, and worried that it would allow the family to either reap a bonanza or take back the property after the studio had developed it more fully. The current trial seems to validate that fear.

The sanctions that Disney appealed are probably among the most severe ever levied against a major studio, since they basically provide that Disney cannot argue against the contention of Slesinger and her daughter that a Disney executive who signed their contract promised them that royalties would be paid on the first two items, which would embrace the development of the third. The studio appears to be limited to arguing that the executive, the late Vincent Jefferds, did not have the authority to make such promises.

But Disney says those rights were either acquired by the studio from Milne in separate agreements or were not covered by the contract. Arguments by both sides have changed dramatically since the case was filed on February 27, 1991, and the Slesingers have amended their original complaint asking $1,000,000 in damages two more times, asking hundreds of millions in the most recent amendment in 2001.

In allowing that amendment, Los Angeles County Superior Court Judge Ernest M. Hiroshige also said that if fraud or breach of contract is proved, the Slesingers can terminate the contract and take their rights elsewhere. An auction in such an eventuality could prove enormously lucrative.

No one seems to know how much Disney earns from Pooh and other characters from the Hundred Acre Wood, but the amount has seemed to increase or diminish as the case gets closer to trial, depending on who is asked. Newspaper reports show that Disney chairman Michael Eisner said in 1999 that the cute little bear earned $3.3 billion for the studio, and the Merrill Lynch analyst who follows Disney said in 1999 that the figure would be close to $6.0 billion now. Disney president Robert Iger said in 2000 that the revenues total about $4 billion.

But last week on the O'Reilly Report, a Fox News cable channel talk show, Disney attorney Daniel Petrocelli said only "3 or 4" percent of Disney's annual $25 billion in revenues come from Pooh, or about $1 billion. Disney paid the Slesingers $13 million last year for what he called their "small portion" of the rights.

The case goes back into the courtroom to set a trial date and to determine which of the documents Disney wants to keep secret in the case will be opened to the public. An unusual aspect of the trial is that it was conducted in near total secrecy, with all the documents sealed, for nearly 11 years. The Los Angeles Times, joined by The American Reporter, sued successfully to get them unsealed in December.

Among the documents court-watchers might seek, the most challenging may be the divorce proceedings of a former Disney attorney, John Donovan of Skadden, Arps, Slate, Meagher & Flom, the nation's largest law firm, which was forced to resign from the case when they would have been called to testify for the plaintiffs on the document destruction issue.

The divorce papers are said to contain evidence of a potential conflict of interest posed by Donovan's relationship with the court-appointed forensic accountants, Gursey & Schneider, and accounting referee John Costello. A decision in that aspect of the trial has been pending for more than six months, although attorneys for both sides said at the final hearings on the accounting matters last August that they expected the ruling to be made that day.