The Pooh Files
Call it the case of Bear v Rodent; call it W. Pooh v M. Mouse; call it one of the biggest lawsuits that you've never heard of. But whatever the name, the court battle between the Walt Disney Co. and a Beverly Hills family may be now approaching trial after 11 years, with almost all of the proceedings conducted in total secrecy.
The family is suing over royalties generated by revenues from Winnie the Pooh, the beloved character created by British author A.A. Milne. It was the Disney artists who transformed the ragged teddy bear -- the back of his head worn from endless trips being dragged bump, bump, bump down the stairs -- into the jolly orange and marshmallow-puff cartoon figure known around the world. That "Silly old Bear" adds billions of dollars annually to the Disney honey pot, and Pooh's popularity makes Mickey's ratings look ratty. But the family that owns the rights to Pooh has spent most of its Disney royalty money trying to collect the fortune it says that Disney truly owes.
At stake is the right to sell Pooh and his pals Eeyore, Tigger, Piglet and Christopher Robin in the United States and Canada, an enterprise that globally is said to contribute as much as one-fifth of the $25 billion Disney generated in 2001 from sales on every continent but Antarctica. The judge in the case has said the family can terminate the Pooh contract if breach or fraud is found at trial sometime later this year.
The case now encompasses hundreds of thousands of documents and Disney has a small army of clerks, secretaries, lawyers, accountants and executives that have worked on the case for years. But all records -- except a 34-page list of some of the documents filed, an 18-page list of papers Disney wants to suppress and the judge's 1992 order that sealed and a December 2001 order that reopened it -- have been completely closed to public view for more than a decade.
Judge Ernest Hiroshige, who writes about issues of daunting complexity with remarkable clarity, has found that the Disney organization destroyed at least 40 boxes of documents that might have provided evidence to the widow of Stephen Slesinger -- the agent who secured the rights in 1929 from A.A. Milne. As a result, Hiroshige imposed some of the most severe issues sanctions any lawyer has ever seen.
That means that the Disney studio has virtually no hope of winning the case. Disney, fundamentally, is not allowed to argue that it doesn't owe royalties on the sale of nearly a billion dollars in Pooh videos and children's computer software, plus both the wholesale and retail gross of sales of stuffed dolls going all the way back to 1983, when the last contract between the two parties was signed.
But the sanctions, which were kept secret for two years, have never been revealed to Disney stockholders, who have been hit by wave after wave of bad news from the studio since 1998. If a jury decides the case in the family's favor, the cost to Disney could be enormous. The studio would likely be obliged to pay a fat chunk in royalties each year as well as past royalties and interest. For Disney, the alternative would be too horrible to imagine: Losing twenty percent of its revenues if the Slesingers license the Pooh franchise to a rival theme park operator and studio like Vivendi Universal.
So what's the big secret?
There are several comparisons here to the current Enron scandal. As everyone knows today, the totally-connected $86 billion Houston energy firm evaporated after its outside accountants -- who were simultaneously its business consultants -- guided its commodity traders through unbelievably complex deals that benefitted a host of offshore energy companies that were often headed by Enron executives. So in a rush to avoid spending the rest of their lives in prison, the auditors and executives shredded thousands of pages of potentially incriminating documents. They failed to shred one document, though, in which a courageous female executive warned that absolute disaster loomed ahead if the company did not change its accounting methods to reflect the hidden losses.
Disney, too, destroyed thousands of pages of potential evidence -- and is accused of a role in destroying another 500 or so boxes of documents held by Canasa, a subsidiary. But it failed to shred one little piece of paper that had just five words and a dash: "Winnie the Pooh - legal problems." Each one of those words and the dash is now potentially worth a hundred million dollars or more -- the amount Disney might have to pay for the U.S. and Canadian commercial rights to Pooh held by the Slesinger heirs. In a first order on sanctions in June 2000, Hiroshige found Disney liable for "willful suppression of evidence."
News of the sanctions did not reach Disney stockholders, though, until Garry Abrams, a columnist for the legal newspaper Los Angeles Daily Journal wrote a column in early January 2002 that quoted the Slesinger's famed Hollywood "superlawyer" Bert Fields as saying that the family had asked the judge to let them cancel the contract. That day, a generally good one for the market, Disney dropped almost a dollar, and lost another half-dollar the next. It recovered a few cents the next day, and then plunged another dollar when the overall market was badly hit by the Enron news.
Meanwhile, the Los Angeles Times, joined by the online American Reporter and two New York Yiddish publications, had gone to court on Nov. 7 in yet another effort to get the case records unsealed. For the Times, attorney Jens Koepke argued that a case could not be sealed if the court left no way for the public or the press to argue from the sealed documents that they were not legally entitled -- as "trade secrets" would be -- to be sealed. Judge Hiroshige granted the motion last month, citing "the public's right to know what is going in in their courts."
Disney was battered again when three judges of California's Second Appellate District Court of Appeal turned down a lengthy Disney request to toss out the sanctions before trial. Disney had not shown any "extraordinary circumstances," the higher court ruled, to justify canning sanctions now, instead of in an appeal after trial. Now, Disney has now appealed that ruling to California's Supreme Court, but observers give it little chance.
But what is the underlying case all about? What did Disney do that was so wrong? Why were the Slesingers willing to go so far -- spending virtually all the money they made from Disney -- to win the case? Why was there no settlement offer, or at least any that both sides would acknowledge? And are there more parallels to the Enron matter lurking in Disney's arm's-length partnerships with companies like Canasa, the Tokyo-based Oriental Land Company and its subsidiary, Asian Sourcing? Insiders hint that charges of money laundering and other dirty deeds may arise as the case gets closer to a trial expected this summer.
The answers to those questions will largely have to await that trial, since most of the documents remain sealed. But thousands of documents that were released January 18 provide clues -- including that the Walt Disney Co,. paid at least $750,000 to the family in 1982 after it was accused of cheating them on royalty payments and threatened with a lawsuit.
The $750,000 -- a sum that was later increased, the heirs say -- shows that Disney's behavior as alleged in the current case seeking hundreds of millions in back royalties "is a second offense" in a troubled relationship the heirs have repeatedly threatened to end.
The documents also show that Disney paid royalties to the heirs for 15 years on at least two computer software titles and then claimed it had done so in error and did not owe royalties for that category of merchandise. The change of heart apparently claim as revenue from computer-related products soared with the public's discovery of the Internet.
Problems with Disney began as early as 1966
The new documents reveal a long, complex story that began in 1929, when New York literary agent Stephen Slesinger purchased most U.S. and Canadian rights to Pooh from British children's author A.A. Milne, who had created the beloved bear for his son, Christopher Robin Milne.
In a 1932 letter agreement, Milne and Slesinger expanded the original grant of rights to include live television, radio and puppet shows, as well as phonograph records and devices that would be "analogous" to television in the future.
The meaning of the 1932 agreement is still being disputed by Disney in 2002, which acquired other rights from the Milne estate and his late wife Dorothy, and all the rights not held by the Slesingers in 2001 for $340 million.
The relationship between the Slesingers and Milne and his estate, as described in the documents, was a friendly and cooperative one. Milne's mind "was greatly relieved" when Slesinger agreed to allow him to develop the property's film rights while still seeking new ways to boost Pooh's sales. Slesinger was entitled to revenue for movies using the characters in dramatizations not based on the stories in the original four books, to which Milne retained the rights.
Slesinger developed a best-selling set of phonograph records featuring the characters in the '30s and '40s, oversaw the making if a popular Pooh cartoon, and in the 1950's his widow placed a line of Pooh children's clothing at major department stores across the country, including Saks Fifth Avenue in New York City. On getting the license in 1961, Disney almost immediately relicensed the characters to Sears & Roebuck, the 1960's retail giant that dominated the U.S. dry goods market.
But problems began as early as 1966 in the relationship with Disney when the Slesinger's widow, Shirley Slesinger Lasswell, began to find Pooh items on sale at Sears and elsewhere that were not recorded in her royalty reports. As the number of such items grew with the character's popularity, her lawyers threatened Disney with a "cease and desist" order terminating the contract unless the disputed payments could be amicably resolved.
The $750,000 "catch up" payment indicates that Disney eventually chose to resolve the dispute, but a long list of Pooh items sold at Disneyland and elsewhere continued to grow. Many of those were listed and illustrated, along with a private detective's notes, in the volumes examined yesterday covering activity in the case from 1998 to the present.
The Slesingers, backed up by multiple legal opinions released yesterday and and other documents that were part of the legal discovery process and remain under seal, say that Vince Jefferds, Disney's senior vice-president for merchandise licensing, and Disney attorney Peter Nolan assured them a revised agreement that incorporated the 1930 contract with Milne, the 1932 letter, and the 1961 agreement and would cover "private" video rentals not made to public institutions such as schools, and also computer software.
An undated page of lawyer's notes say "Jefferds confirmed" that private rentals of video, then a business in its infancy, were not "public" and thus would be subject to royalty payments. The letters still under seal , which Petrocelli said he will investigate for their authenticity, support the same claim, he says.
But whether those documents are sufficient to prove the heirs' claim or not may be immaterial, since in an August 2001 ruling on sanctions sought against Disney by the Slesingers for destroying evidence in the case, Judge Hiroshige ordered that Disney will not be able to claim at trial that Jefferds had not promised to pay video royalties.
Disney can claim that Jefferds did not have the authority to make such promises, Judge Hiroshige said, but the late executive's signature is on a number of contracts for merchandise that have now been made public.
The studio appeal the sanctions order to the California Supreme Court on Jan. 10. Earlier, in a Nov. 7 petition for a writ of mandate that would terminate the sanctions, the studio told the California Court of Appeal that the sanctions were "potentially crippling" and that Hiroshige had given the Slesinger "virtually everything they asked for."
Disney seeks to keep the court from releasing more documents, and Judge Hiroshige will address that issue in a hearing on March 1.