Ladd v Warner Bros. – Straight-Lining The Package

Straight-lining is the practice of allocating a license for a package of films equally across all films in the package. It may be fair and proper in some instances, or unfair and abusive in others.

Producer Alan Ladd, Jr. is responsible (with others, of course) for such popular and even iconic motion pictures as Blade Runner, Body Heat, The Brady Brunch Movie, Braveheart, Chariots of Fire, Night Shift, Once Upon a Time in America, Outland, Police Academy 1–6 and The Right Stuff. He is in that upper stratum of film makers whose output includes films that are critically acclaimed, commercially successful or both. On top of that, he is Hollywood “royalty” – his father was a major movie star of the 1940’s, 50’s and early 60’s.

When, however, a number of Ladd, Jr.’s films were licensed for television in a group with other films (a so-called “package”), Ladd was given rather common, not royal treatment. Warner Bros., the distributor of the films for television, simply pro-rated the total license fee for the entire package in equal amounts per film, a practice known as “straight-lining.” In other package deals, Warner allocated significantly more license fees to its wholly-owned but minor pictures than to well-known Ladd pictures in the same package. In both scenarios, Warner disregarded the relative value of the pictures in the package, the result of which was to put more money in Warner’s pockets and less in the pockets of Ladd – who had a gross participation (a share of his films’ gross revenues before deduction of costs) of 2.5% to 5%, depending on the movie.

Last month, on May 25, in Ladd v. Warner Bros. Entertainment, Inc.[1] (hereafter, Ladd), a California appeals court confirmed a jury award to the Ladd parties of just under $3.2 million. The Court’s decision may potentially have a bigger absolute dollar impact where tentpole films are financed by non-studio parties – such as in slate and securitization financings – and the studio takes only a modest distribution fee plus distribution expenses.

Good Faith and Fair Dealing

Unlike much in the law, the general principle applied by the Ladd Court is simple: contracting parties must deal fairly with each other. As the Court explained, under California law, every agreement carries with it an implied covenant of good faith and fair dealing that ‘neither party will do anything which will injure the right of the other to receive the benefits of the agreement’…‘especially where one party is invested with a discretionary power affecting the rights of another.’

Key Evidence

But out in the fields and factories of television distribution, what really happens? In Ladd, the Court cited this testimony and conduct of Warner:

“[I]n one licensing deal, Warner added a group of old Tarzan movies to a licensing package at no cost [to the buyer]. Warner then allocated a license fee of $40,000 to each of the Tarzan movies, thereby reducing other movies’ allocations in the package.”
In other packages, “Daffy Duck and Bugs Bunny animated films were allocated double the money that was allocated to Chariots of Fire, a valuable feature film which won multiple Academy Awards, including Best Picture. Those animated films are wholly owned by Warner, which means Warner keeps every dollar generated by licensing fees [allocated to] those films.”
Despite such seemingly unfair allocations, a Warner executive, called as a hostile witness, testified that Warner had an obligation to “fairly and accurately allocate license fees to each of the films based on their comparative value as part of a package.”

Cost Benefit Analysis

The legal obligation to deal fairly in business transactions is familiar territory not only to judges and lawyers but to executives as well. So how does a television distributor go from knowledge of this obligation, to the value equation “Daffy Duck = 2 times Chariots of Fire”?

Undoubtedly, a sophisticated television distributor can devise a suite of objective allocation formulas each of which is more or less fair, but which as a group lead to a relatively broad range of valuations. In such circumstances, is it good business to pick a middle-of-the-road formula which, while somewhat favoring the distributor, still passes the smell test? Or does it make more business sense to select an outlier formula which, while harder to defend, may be even more favorable to the distributor? At least three cost vs. benefit factors figure into the distributor’s decision: the type of damage remedies available to the revenue participant, such as compensatory vs. punitive damages (the latter being damages intended to punish the wrongdoer); the possible shifting of attorney fees to the losing party; and the distributor’s concern for appearances.

U.S. law overwhelmingly favors compensatory over punitive damages and, in commercial cases, absent specific statutory or contract provisions, it is highly unusual for courts to shift attorney fees. That leaves concerns for appearances as a pivotal factor.

In this case, the distributor was apparently not much concerned with appearances.

[1] Ladd v. Warner Bros. Ent., 184 Cal. App. 4^th 1298 (2010)

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Ezra Doner is an entertainment and copyright lawyer who focuses on the film, TV and other content sectors. He has worked both as an in-house business and legal executive and as a private lawyer. He does not represent any of the parties in this case.