After Stunning 'Bones' Decision, Fox Aims to Wipe Out $128M in Punitive Damages

A whopping ruling in arbitration came after Fox licensed the Emily Deschanel series to Hulu for very little. Next week, the parties appear in open court for the next round of the dispute.

For years, some plaintiff-side litigators in Hollywood have complained that when it comes to arbitration, the cards are stacked in favor of big studios, which repeatedly use these alternative dispute-resolution forums. But in February, the tables turned when one JAMS arbitrator decided that not only did 21st Century Fox cheat the creative talent behind Bones out of tens of millions of dollars in profits, but that the fraud was so reprehensible that Fox should also pay an additional $128 million in punitive damages.

Now comes the second round.

On April 29, Bones executive producer Barry Josephson, stars David Boreanaz and Emily Deschanel, and Kathy Reichs, author of the Temperance Brennan novels on which the series is based, will defend their stunning success in Los Angeles Superior Court. In turn, Fox finds itself in an unfamiliar position — hoping to overturn something that happened in arbitration.

Peter Lichtman, the JAMS arbitrator, suggested in his ruling that Fox's top executives gave "false testimony" in an attempt to justify the low license fees that Fox Broadcasting, Hulu and Fox’s foreign affiliates were paying its studio division for rights to air the series.

Fox certainly doesn't agree with Lichtman's conclusions — namely, that it had any obligation to review nonaffiliate transactions (like the deal for House) to ensure that Bones was getting a fair market license fee. The studio, which was sold by Rupert Murdoch to Disney, also takes issue with how the arbitrator "attacked Fox witnesses in personal terms."

But such gripes are relegated to footnotes now as Fox's attorneys surely know how steep an uphill climb it would be to do anything about the $32 million in compensatory damages, $10 million in prejudgment interest, and more than $9 million in attorney fees and costs. After all, public policy favors the sanctity of arbitration, and although there's theoretically some room to vacate an arbitration award for misconduct by an arbitrator, it's basically unprecedented in the entertainment industry.

Fox will let what's above go, but it is not accepting the additional $128 million punitive award. Not when Fox's agreements with Bones' stars provided that the "sole remedy against Fox for any alleged failure … to comply with the terms … shall be actual damages" and that Josephson, Boreanaz, and Deschanel contractually agreed to "waive any right to seek … punitive relief in connection with any such alleged failure."

Since the contract forbids punitive damages, argues Fox's attorney Daniel Petrocelli, the arbitrator has exceeded his authority.

To this contention, the creatives make three counter-arguments.

First, in what they frame as a "classic case of buyer's remorse," the Josephson side says that having pushed this dispute into arbitration (remember, it didn't begin there), Fox is "bound by the result."

The two sides previously clashed over the availability of punitive damages during the arbitration process. According to Josephson's attorney Dale Kinsella, that means Fox forfeited any later objection. Not so, responds Petrocelli, arguing that Fox may have addressed liability issues but preserved challenges over remedies.

Second, the Josephson parties argue that the arbitrator voided the punitive damages waivers in the Bones agreements as a matter of public policy.

The two sides point to competing legal precedent about whether it is permissible to contract around punitive damages. The creatives believe that fraud, by its nature of being unforeseeable, means that punitive damages can't be foreclosed when it happens — but this is all a moot issue anyway because legal error or not, this isn't reviewable. Fox interprets past appellate decisions upholding contractual bars on punitive damages to mean a check on an arbitrator's powers.

Third, even if the punitive damages waiver applies, the Josephson side says the arbitrator still didn't exceed authority because such a waiver only applies to claims against 20th Century Fox Television, not affiliated entities, and that the waiver only applies to contract claims.

In his decision, Lichtman found the huge punitive damages award was warranted not from any direct contract breach, but due to the way that Fox tortiously interfered in the licensing of Bones to Hulu. (The arbitrator essentially found Fox's studio division gave its sister companies the benefit of digital rights for very little consideration.)

Fox believes that punitive damages aren't available for contract breaches anyway, so the agreements would make no sense if the punitive damages bar only applied to contract breaches. Regardless, Fox sees the tort claims involving Hulu as "inextricably connected with Fox’s compliance."

Clearly, there's a lot of legalese here, and the debate over punitive damages makes for less exciting reading than Lichtman's write-up of testimony during the arbitration and his conclusion that Fox exhibited a "company-wide culture and an accepted climate that enveloped an aversion for the truth."

Nevertheless, the coming decision figures to be historic. Either a judge upholds one of the biggest punitive damage awards in entertainment industry history or a judge takes the super-rare step (in any industry) of correcting an arbitration award. It will be a landmark ruling no matter how it goes.