April 12, 2012 12:20pm PT by Eriq Gardner
'Smallville' Lawsuit: New Claim Alleges Warner Bros. Paid Itself for Superman Rights (Exclusive)
Six months before an important trial, Warner Bros. has experienced a setback in an ongoing lawsuit over whether the studio shortchanged the writers and producers of Smallville by tens of millions of dollars.
On Wednesday, a California judge allowed the plaintiffs the opportunity to amend their complaint to add a huge new allegation -- that Warners reduced the profit participation of Tollin/Robbins Prods. by including Warners' sister company, DC Comics, into the profit pool without obtaining approval as required by contract. The plaintiffs say this "egregious act of self-dealing" cost them more than $13.4 million and that essentially, "WBE is in effect paying itself for the Superman rights and then reducing Tollin/Robbins' profit participation by that payment to itself."
After the plaintiffs last month submitted a motion to amend their complaint, Warners objected vigorously. But the judge is allowing the new claim to be asserted in a case that's quickly heating up.
In March, 2010, creators/executive producers Miles Millar and Alfred Gough and series co-producer Tollin/Robbins Prods. sued Time Warner and its various divisions, including Warner Bros. Television (WBTV). The plaintiffs disputed license fee deals for Smallville with the WB network and then the CW that "were not arms-length." The lawsuit promised to present another battle on "vertical integration" in Hollywood -- a topic that has caused pain to some studios, including a $270 million jury verdict against the Walt Disney Co. over profits from Who Wants to Be a Millionaire.
The plaintiffs originally sued for breach of contract, breach of good faith and fair dealing, and breach of fiduciary duty, but the latter claim was later tossed by a judge, who agreed with Warners' theory that the profit-sharing relationship for writers and producers on a TV show doesn't amount to a partnership or joint venture.
But now a new allegation has come forward, presented by Chad Fitzgerald, one of the plaintiffs' lawyers at Kinsella Weitzman Iser Kump & Aldisert, in a motion last month.
According to the court filing, the plaintiffs discovered during the discovery process that WBTV reduced Tollin/Robbins' profit participation by the "3rd party participation" of DC Comics, which owns the Superman rights. (Some of those rights are being terminated by the heirs of the Superman co-creators in a separate lawsuit that is currently under appeal.) WBTV gave five percent of the gross receipts of Smallville, which lasted ten seasons on television, to DC for the rights to the Superman character.
The plaintiffs say that DC isn't a "third party" but rather a wholly-owned subsidiary of Warners and that the studio had no contractual right to do this without authorization. The alleged act of self-dealing is calculated as having cost the series co-producer at least $13.4 million
Warners objected to the new complaint by saying that the defendants had known about this arrangement for nine years.
In April, 2003, Tollin/Robbins then attorney Jeffrey Blye sent WBTV business affairs executive Bret Paul a letter containing a "schedule of the variables" which would determine the net profits.
Paul wrote back that he "included the approved third party participants on each project whose participations reduce the [Tollin/Robbins] participations."
The list included DC Comics.
Blye objected with handwritten comments. Paul is said to have later replied with his own handwritten comments saying that "DC is a participant."
Warners contended that the plaintiffs had ample notice, that they delayed in bringing the claim, and that the new claim would open up extensive "new discovery" demands.
Tollin/Robbins responded that the complete correspondence between the parties from almost a decade ago showed that that Warners was "deliberately confusing" knowledge of a disagreement with approval.
As proof, the plaintiffs attach internal e-mails from Warners' executives.
In one e-mail from 2004, Laura Valan, a senior vice president at Warners who works in the finance and administration department of the TV group, asks Paul whether there was any "final resolution" on the issue of whether DC Comics would be deducted from the the profit participation. She notes that "the agent indicated that DC Comics is not deducted" and adds that it "makes a difference as DC Comics will make over $20mm from Smallville (whole lot more than [Tollin/Robbins])."
Paul wrote back, "Not sure there is anything more than our disagreement to rely upon. I'll have to investigate further..."
The plaintiffs say that when they informed Warners of their intention to amend the complaint, the studio cancelled a planned deposition and also informed them that they would not allow Paul to answer any questions regarding DC Comics. "Any prejudice or delay caused by the proposed amendment is the result of the Defendants' actions," adds the plaintiffs in support of a motion to file a second amended complaint.
A judge considered the issue and is now allowing the plaintiffs to go forward with the new claim. The judge will also permit Warners the opportunity to conduct discovery to prepare for the allegations. There's no word yet on whether that means the trial will be delayed. It's currently set for October 9, 2012.
Warner Bros. declined comment.