A federal jury in Riverside has dealt what could be a severe blow to how Hollywood studios report profits in television shows and movies, in a decision Wednesday that orders Walt Disney Co. to pay nearly $270 million in damages to the creator of "Who Wants to Be a Millionaire."
The decision, if upheld on appeal, potentially undercuts the rationale that drove a wave of consolidation that swept the entertainment industry over the last two decades, in which media giants contended that it was economically advantageous to control both the production and distribution of TV programming.
So-called vertical integration has come under attack by producers and talent, who claim the structure allows the corporate giants to stack program deals in their favor at the expense of partners.
The British-based creator of "Millionaire," Celador International, sued Disney in 2004, claiming that it had been denied the ability to profit from the success of the game show, which aired on the entertainment giant's ABC network for three years beginning in the summer of 1999. Celador argued that a series of "sweetheart deals" struck among a clutch of Disney-owned companies kept the show in the red, even as it became ABC's first No. 1 show in more than a decade.
Celador asked the jury to award damages of up to $395 million, based on experts' estimates of the profit "Millionaire" would have generated had the network paid a fair market price — instead of a fee tied to the cost for producing the game show. The company also claimed that it was owed $10 million in revenue from the sale of games and other merchandise inspired by the show.
The jury arrived at a figure that was slightly less — $260 million in network fees and $9.2 million in money owed from the sale of merchandise.
"It's stunning how studio accounting works — or in this case, didn't work. And it took a jury to make it right," said Celador's attorney, Roman Silberfeld. "I think the next time that a studio wants to use some creative accounting mechanism, they're going to think twice."
Disney said it plans to challenge the award.
"We believe this verdict is fundamentally wrong and will aggressively seek to have it reversed," Disney said in a statement.
The case was described by the plaintiffs as a classic case of "Hollywood accounting," in which a hit TV show never returns a dime in profit. Over the course of the four-week trial, Celador's attorneys introduced evidence that "Millionaire" generated $515 million in revenue from broadcast license fees over the course of its prime-time run, not including $70 million in merchandising revenue. The show also reaped $1.8 billion in advertising for ABC, according to research firm Kantar Media.
But according to Disney's accounting, Millionaire has run a $73-million deficit.
Entertainment lawyers said Wednesday's verdict shows that juries are taking a dim view of studio accounting that minimizes reported profit. It follows a state appeals court ruling in May that upheld a $3.2-million jury award to producer Alan Ladd Jr. in a suit against Warner Bros. regarding his share of profits from a dozen motion pictures.
About an hour after the jury announced its decision in Riverside, a jury in Los Angeles County Superior Court awarded actor Don Johnson $23.2 million from the 1990s show "Nash Bridges."
"If this ["Millionaire"] decision withstands what I presume to be the numerous attacks that Disney will make on it, you'll see a body of law that establishes some rules for the studios that they're going to have to follow in terms of accounting for, and reporting, profit," said Ricardo P. Cestero, an attorney at Greenberg, Glusker, Fields, Claman & Machtinger in Century City who specializes in entertainment law.
Larry Stein, an entertainment lawyer who initially was involved in the "Millionaire" case and has brought several similar suits against studios, said the judgment would embolden others who felt they've been deprived of a rightful share of a show or movie's profit.
"I've always said, if you have a case that gets to a jury, the studios will be in trouble," Stein said. "Because the average person will find the way in which they conduct themselves, from an accounting point of view and a self-dealing point of view, as objectionable."