Fox Beats 'Napoleon Dynamite' Producers on Appeal of Big Profits Ruling

With at least $10 million on the line, Fox Searchlight's written deal triumphs over one lawyer's oral understanding of what happened at the Sundance Film Festival.
Courtesy of Photofest

Fox Searchlight will have more money for tots thanks to a ruling on Thursday by a California appeals court preserving its December 2012 trial victory dealing with Napoleon Dynamite profits.

The lawsuit was brought by Napoleon Pictures, the production company behind the film, which in 2004 made a deal at the Sundance Film Festival for distribution by Fox. At the festival, Napoleon was represented by well-known indie film lawyer John Sloss, who made a handshake deal with Fox Searchlight vice president Joseph De Marco.

Fox agreed to acquire the picture for $4.75 million — a hefty sum for a movie that only cost $404,000 to produce, but one that made sense given the bidding war that ensued when Napoleon Dynamite premiered. As is often the case, the quick agreement was followed by a longer-form, written deal.

In this instance, Sloss believed Fox has represented to him that producers would be getting a 31.66 percent royalty from home video. The term sheet didn't address differences between "high price product," otherwise known as videos intended for rental, and "sell-through product," otherwise known as videos intended for purchase, but Searchlight had been using a participation definition in most of its deals that provided for a 10 percent royalty on sell-throughs.

The parties disputed whether Fox Searchlight's "Definition of Net Profits" was incorporated into the Napoleon Dynamite deal. Sloss said he hadn't seen it, that it was "boilerplate" that "was never negotiated," and that he believed the 10 percent rate only applied to "bargain bin" sales.

Fox said it had sent drafts, and nevertheless, that the signed agreement had referenced it.

A lot of money was at stake. The film made $45 million in box office at the theater, but was even more successful in its post-theatrical run. In 2012, an auditor reported to Sloss, "Had Fox reported to you based on the negotiated terms of the Agreement of 31.66%, home video royalties would have been increased by $26,176,571.”

In 2012, a retired judge, acting as a binding "referee," handed Fox the win, declining to adopt a 31.66 percent royalty rate, rejecting Sloss' testimony because it was "not only contrary to the terms of an expressly integrated agreement, but is not memorialized or confirmed in a single piece of paper” or email. The referee also cited Sloss' experience in the industry and said it "strains reason" that he wouldn't document the oral agreement he believed he got.

The referee did find that Fox inadequately documented advertising expenses and credited Napoleon with $125,357, but with at least $10 million on the line, the case went up on appeal.

In Thursday's ruling, the appeals court finds that Fox's profits definition document was indeed incorporated into the agreement, finding it referenced and further that Sloss had a duty to familiarize himself with Fox's "standard agreements," and that he was so familiar, imputing his knowledge to the producer.

"Sloss’s reliance on oral assurances was unfounded, not to mention barred by the Agreement’s integration clause," states the opinion by appellate Justice Roger Boren.

The justice also finds the parole evidence not to be convincing of an oral understanding, saying that the "the referee, as exclusive judge of witness credibility, was free to disbelieve Sloss," while also noting that "De Marco, the only person who could gainsay the alleged oral understanding, died before Napoleon filed suit."

Additionally, Napoleon can't overturn the referee's decision through argument of a mutual mistake nor a misrepresentation on the part of Fox. Nor was Napoleon successful in challenging a deal made between Fox and MTV where the Viacom network got a profit participation in exchange for substantial promotion of the film. The justice calls Napoleon's claim "odd," given that a straight pay-up would have resulted in Fox giving MTV $2 million more. The justice also says that given the success of the movie, Fox's decision to partner with MTV was hardly foolish.

Here's the full decision. Caldwell Leslie & Proctor represented Fox while Napoleon was repped by Horvitz & Levy as well as Lavely & Singer.