Disney Breached Katzenberg Pact, Referee Decides

A court referee on Wednesday ruled that Walt Disney Co. breached former studio chief Jeffrey Katzenberg’s contract in 1994, should pay interest on a bonus withheld from him after he left the company and also should include sales from Disney-generated merchandise in computing how much money he is owed.

Disney had argued that Katzenberg was not entitled to a special bonus because he left the company two years before his contract expired. But retired Los Angeles Superior Court Judge Paul G. Breckenridge Jr. said he reached “the inescapable conclusion” that Katzenberg did not forfeit the bonus, which the executive has claimed could be worth $250 million.

Wednesday’s ruling is a preliminary but important step toward the ultimate decision Breckenridge will make in a few weeks about exactly how much money Disney owes Katzenberg.

Breckenridge also found that Disney breached its fiduciary duty to Katzenberg in failing to properly account to him for the merchandise on which he deserved payments.

But Disney need not pay him a royalty when it uses in online promotions characters created in projects he oversaw during the 10 years he ran Disney’s film and TV division. Katzenberg also need not be compensated for profit stemming from its Club Disney entertainment centers for children. Breckenridge also found that Disney did not commit fraud against Katzenberg.

Although the ruling delivered a mixed result to both sides, it probably tilts more toward Katzenberg because it favors him on what are widely regarded as the bigger issues.

Still, both sides issued brief comments claiming to be thrilled with the result.

“I’m very happy,” Katzenberg attorney Bertram Fields said.

A Disney spokesman said: “We are extremely pleased with the court’s decision.”

In claiming victory, sources in the Katzenberg camp pointed to the findings regarding interest and merchandise as highly significant. But sources in Disney’s camp countered by characterizing most of Breckenridge’s findings as narrow, suggesting that his rulings will ultimately benefit the company when he computes a final figure.

Breckenridge postponed a ruling on the major question of the date from which Disney should pay interest to Katzenberg, a decision that could affect millions of dollars in payments.

Katzenberg left Disney in 1994 in a falling out with Chairman Michael Eisner. He sued Disney in 1996 for more than $250 million, arguing that the company failed to pay him a large lump-sum bonus he was to get two years after leaving the company as called for in his contract.

Under that plan, Katzenberg would get a payment based on 2% of the projected profits that films and TV shows created under his leadership--such as “The Lion King,” “Aladdin” and “Sister Act”--would generate “into perpetuity.”

Disney paid Katzenberg $117 million in a partial settlement of the case in 1997. The second, current phase, which both sides agreed would be conducted by a referee, is aimed at determining the eventual amount Disney should pay the executive, now a principal at rival studio DreamWorks SKG. The referee’s ultimate decision can be appealed.

Breckenridge eventually will determine a dollar amount. Disney will then pay 72.5% of the amount he decides, a discount both sides agreed to in the partial settlement.

Disney had disputed whether it owed any interest at all to Katzenberg during the time he was pressing to get the bonus. Under the partial settlement, Katzenberg was entitled to 10% interest “as required by law,” a vague phrase that ended up in dispute.

That dispute led to more than two weeks of hearings by Breckenridge to decide what items would be used to compute the payment Katzenberg receives and any interest payments.

The hearings turned into a legal brawl, with Fields confronting Eisner on the witness stand with evidence that Eisner has said that he hates Katzenberg and has referred to him disparagingly as a “little midget” and “the end of my pompom.” Disney countered by claiming that the live-action movies made under Katzenberg lost $231 million, a point his side disputed.

Breckenridge’s ruling Wednesday does not address any of the testimony or evidence regarding Eisner’s feelings about Katzenberg.

Disney argued that a clause in Katzenberg’s last negotiated contract with the company suggested that he would give up the bonus if he were to leave early. But if that were the case, Breckenridge ruled, the company was obligated to clearly advise Katzenberg of that fact.

The trial will continue next week with a series of expert witnesses, called by both sides, whose testimony will help Breckenridge calculate the future value of films and TV shows created under Katzenberg. First up will be Nathan Myhrvold, chief technology officer at Microsoft Corp. and widely regarded as one of the nation’s leading technology futurists.