June 19, 2012 9:13am PT by Eriq Gardner
Fox Stands Trial in $10 Million 'Napoleon Dynamite' Case
A trial is underway in a case that will determine whether Fox Searchlight shortchanged producers of the hit 2004 comedy Napoleon Dynamite.
Napoleon Pictures, the production company behind the film, filed a lawsuit against Fox in August that claimed it is owed $10 million for allegedly underreported royalties and improper revenue deductions from the indie comedy that grossed $44.5 million domestic. Last month, a judge rejected Fox's attempt to defeat the lawsuit on summary judgment, setting the stage for a trial by judge that will determine exactly what was negotiated when the studio acquired rights to the picture in a bidding war at the 2004 Sundance Film Festival.
Napoleon Dynamite was a big hit at Sundance that year. The comedy directed by Jared Hess and starring Jon Heder had its choice of several distributors, but producers say they went with Fox Searchlight not only because of a $4.75 million upfront fee but because of high royalties promised for home video sales. Since the film has enjoyed tremendous success over the years, the terms of the original deal are now hotly in dispute.
The producers say Fox agreed to pay slightly more than 31 percent of net profits on home video. But Fox has only been paying 10 percent.
The multimillion-dollar difference in the royalty rate arises from different interpretations of the deal agreement on the film -- specifically, two major elements of the deal now being fussed over before the judge.
The first is whether Fox Searchlight's "Definition of Net Profits" is incorporated into the term sheet for the deal. How net profits are classified, including accounting treatments and the appropriateness of certain deductions, can have large impact on what is shared. In the Napoleon Dynamite deal, Fox's definition isn't explicitly spelled out in the core of the agreement, but it is referenced.
Fox contends that the reference is enough to establish incorporation into the agreement, plus it says that one of its executives faxed and mailed the definition to the producers. Additionally, Fox says that well-known attorney/sales agent John Sloss, who negotiated the Napoleon Dynamite deal at Sundance on behalf of the producers, had been familiar with the definition because it has been incorporated into other deals with the studio.
The producers say they never negotiated the definition nor saw it until after the term sheet was executed. They have also accused a Fox executive of perjury in saying that he sent it over for review.
The second major element of dispute is whether the 31 percent royalty rate applies to home video sales or merely rentals. According to the term sheet, producers are owed 31 percent on the "high price product," but the two sides have different interpretations of what qualifies as such.
According to the aforementioned definition, "high price sales" are video sales generally intended for rental, and Fox says the definition on "sell-through sales" are video sales intended for purchase. The latter provides for a 10 percent royalty. That's why Fox believes it is entitled to get away with a lower rate.
The producers, on the other hand, say this is inconsistent with industry norms and point to testimony by Sloss in which he said he never would have agreed to a rate below 20 percent and that no other studio would have paid less than 20 percent.
But, of course, since this wasn't clearly articulated in the term sheet, it puts Judge Patricia Collins in a tricky spot.
As she wrote in a decision last month:
"True, the Term Sheet references a 'Definitions of Net Profits' and Defendant relies on parol evidence merely to identify the precise document that the parties allegedly intended to reference. However, by the same token, Napoleon asserts that its parol evidence is to shed light on the ambiguous reference in the Term Sheet to 'high price product' that is not found in the Definition."
In other words, both sides are trying to support their contractual interpretations on evidence outside the scope of the actual language of the agreement.
Now the judge is holding a trial to figure out exactly how to read this contract. Monday marked the seventh day of the judicial reference trial, meaning it is being heard by a judge but not a jury.
Representing Napoleon Pictures is Marty Singer at Lavely & Singer. Arguing on behalf of Fox is Caldwell Leslie.
A decision is expected soon.