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4Kids Entertainment, a U.S. distributor of Japanese kids animation including the immensely popular TV series Yu-Gi-Oh!, is on the verge of pulling off a remarkable comeback.
Last March, the Japanese studios behind Yu-Gi-Oh! conducted an audit that turned up nearly $5 million in owed money for allegedly hidden revenue, improper royalty deductions, wrongful tax withholdings, and more. TV Tokyo Corporation and Nihon Ad Systems canceled their licensing agreement and filed a lawsuit against 4Kids. The moves rattled the American children’s entertainment company, which replaced its top staff and filed for bankruptcy.
Now, almost a year to the day after 4Kids was rocked by news that their Japanese partners were walking away, the two sides have resolved the dispute. To close the case, the plaintiffs are paying the defendant $8 million. In addition, the settlement agreement recognizes that 4Kids continues to hold rights to distribute Yu-Gi-Oh! around the world outside of Asia.
After TV Tokyo filed the lawsuit, 4Kids filed bankruptcy and brought counterclaims. Last year, the parties submitted testimony, and a bankruptcy judge held a trial.
The Japanese studios presented an audit report that turned up all sorts of purported accounting irregularities. For example, 4Kids was said to have made an agreement with Funimation Productions to exploit the YGO series on home video before conspiring to hide much of the income from the Japanese companies. 4Kids was also accused of wrongfully deducting $2.5 million worth of international withholding taxes, bank charges, insurance coverage, YGO style guide art, the cost of the audit itself, and even the cost of dubbing the series into English.
But testimony in the case raised serious doubts about these claims. Last December, U.S. Bankruptcy Judge Shelley Chapman issued post-trial findings of fact that shredded many of the plaintiffs’ contentions.
The judge found that in the home video business, it is common for home video companies to use outside vendors to physically manufacture and distribute the VHS tapes and DVDs. The judge concluded that 4Kids hadn’t maintained improper relationships or concealed and withheld royalty payments in deals with Funimation and Majesco Sales Inc, which produced videos of YGO on Nintendo’s Gameboy system. These were distributors, not sublicensees, ruled Chapman. Many of the other allegations, such as tax withholdings, were also knocked down.
“Even if it were the case that Licensor had properly complied with the formal notice of breach and termination requirements in the 2008 Agreement,” wrote the judge, “The termination was nonetheless ineffective because the notice sent by Licensor was substantively defective. Plaintiffs’ purported basis for termination – 4Kids’ failure to promptly pay the royalty underpayment reflected in the audit – was improper because the amount owed to Plaintiffs, if any, was nowhere near the $4.819 million amount asserted in the termination letter and the purported notices of breach.”
TV Tokyo lost big, leading to a settlement that was submitted last Thursday by the parties for the judge’s approval.
The plaintiffs will pay 4Kids $8 million, which doesn’t include the return of an additional $1 million that 4Kids had made in a “good faith” payment before the filing of the litigation. The deal also allows 4Kids to continue exploiting the YGO franchise.
“The settlement provides much needed liquidity and lifts the cloud on title on the Debtors’ most significant asset, the Yu-Gi-Oh! license, thus greatly improving the Debtors’ reorganization prospects,” wrote the attorneys, including Paul Llewellyn at Kaye Scholer, who represented 4Kids in the case.
4Kids is now celebrating the development.
“We are very pleased that the Yu-Gi-Oh! litigation has been settled,” said Michael Goldstein, interim Chairman of 4Kids. “We are looking forward to continuing to work with our long-standing partners ADK, TV Tokyo, Shueisha and Konami on the Yu-Gi-Oh! brand and on the new Yu-Gi-Oh! television series, Zexal.”
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