On September 20, The Hollywood Reporter and The Dominion Post (Wellington’s newspaper) broke the story that progress has finally been made in the lawsuit Peter Jackson brought against New Line Cinema way back in March of 2005. The Dominion Post site is subscription only, but immediately the story was on stuff.co.nz, a New Zealand news site. (The piece is dated Sepember 21, but of course they’re a day ahead of us.) TheOneRing.net quickly picked up on this, and a few other sites have noted the judge’s decision. On September 21, the Los Angeles Times posted the longest and most informative news story I’ve seen so far. Oddly, Variety has not mentioned the decision.

Briefly, the news is that the first court action in the case has been taken. A judge has fined New Line $125,000 for failing to produce certain documents and ordered it to come up with them and to pay for an independent search through their digital files (emails, etc.).

There has been amazingly little reaction to this news across the internet. A few fan sites and forums have commented, but only briefly. I suspect this is because most people have little basis for interpreting what the decision means. Some hail the ruling as a step in the right direction as far as the question of whether Jackson will direct The Hobbit is concerned. Progress at last. Others are frustrated because they assume it means that New Line is even less likely to offer him the job.

From right, New Line co-president Michael Lynne, Peter Jackson, and co-president Bob Shaye in happier days

I’m going to try and clarify the implications of the ruling by giving some background information about the case. As always, I have been told nothing by the people involved on either side. All the information I use below is available on the internet.

I’m not going into a lot of detail specifically on the developments in the negotiations over The Hobbit. I’ve been covering those since October 2 of last year. If you read the series of essays in the Hobbit film category in chronological order (i.e., bottom to top), you’ll get a pretty thorough history of the various public statements made by those involved and what they imply for the chances that Jackson will direct. Nothing that has happened subsequently has changed or challenged what I’ve said up to now. Here I’ll stick to the lawsuit.

Why did PJ sue NL?

When I wrote about the suit on January 13, the full text of the complaint was online. Unfortunately it has been taken down, and the link I gave there now leads only to an article describing the suit. It offers a brief summary of the complaint’s allegations:

Wingnut claims that defendants failed to (a) properly account, calculate and pay to Wingnut its share of the profits derived from the distribution and exploitation of the Film; (b) license, market and exploit the Film subject to reasonable business judgment exercised in good faith; (c) negotiate certain sales and licenses on an arm’s length non-discriminatory and customary basis in good faith, and (d) properly allocate license fees paid with respect to packages of defendants’ film properties that include the Film. It also alleged breach of various provisions of the Agreement.

“The Film” in question is The Lord of the Rings: The Fellowship of the Ring.

As I have pointed out, lawsuits by filmmakers against studios over secret or dubious accounting practices are not uncommon.

I mentioned that Saul Zaentz (owner of Tolkien related trademarks and the person who sold the production rights for Rings to Miramax) had sued New Line in July of 2005. His allegation was fairly straightforward. His contract gave him 5% of gross international receipts for Rings. He claimed the payment given him was calculated on the net receipts. He was, he said, owed $20 million. New Line soon settled out of court for an undisclosed amount.

Jackson’s allegations against New Line are far more complicated. I’m no lawyer, but as I understand it, clauses (b) and (c) and possibly (d) indicate that this is partly what is called a “vertical integration” lawsuit. Essentially this means that within big media conglomerates, one company may sell merchandising licenses, distribution rights, and various other contracts cheaply to another company within the same conglomerate rather than putting them up for sale to the highest bidder. The price being lower, less money goes to those who are getting percentages as royalties or residuals.

Such cases have been brought before. One of the most famous came in August, 1999, when David Duchovny filed a lawsuit against 20^th Century Fox. He claimed that his share of the profits from The X-Files had been unfairly low because “by licensing reruns of the series to appear on Fox’s broadcast and cable networks for less money than it could have fetched on the open market.”

X-Files fans will probably remember the case, since as the suit dragged on, there was the possibility that Duchovny would not appear in the 2000-2001 season of the program. Fox settled the suit out of court in May of 2000, and the actor was able to be in about half the episodes in that season. He had sued for $25 million and settled for Fox’s offer of $20 million. (See here for a summary of the situation.) His lawyer in the case was Stanton “Larry” Stein, head of Dreier Stein & Kahan LLP’s entertainment and media department. Stein specializes in such “vertical integration” cases. He’s one of the top—if not the top—specialist in them, with an impressive record of successes. (For a profile of Stein and further information on “vertical integration” cases, see here.)

Larry Stein is also Jackson’s lawyer in his lawsuit against New Line. Those fans who picture Jackson as the little guy risking being crushed by the Hollywood system can take comfort. His legal team is on a par with New Line’s.

New Line’s defense is not being handled by its own small in-house legal staff. Instead another big firm specializing in entertainment law is doing the job. Robert Schwartz, of O’Melveny & Myers, heads the team for the Jackson case—and headed the one on the Zaentz case mentioned above. O’Melveny & Myers typically defend big entertainment companies like Sony and Warner Bros.

Why the fine?

The $125,000 fine against New Line involves the first court decision in the case. The LA Times article gives the most detailed and vivid description of the ruling:

In an often angry ruling dated Sept. 18, U.S. Magistrate Judge Stephen J. Hillman found that New Line may have destroyed (or failed to prevent the destruction of) documents and failed to search diligently for documents and e-mails it was required by the court to produce. Hillman recounts any number of examples where the studio’s searches were not meaningful or “haphazard.” He was particularly critical of how New Line treated e-mails related to the film and its accounting.

“No witness can say with any degree of certainty what individuals searched their own e-mail files or how any of those searches were conducted,” the magistrate wrote. Furthermore, he wrote, “New Line did not suspend the automatic deletion of e-mails and other electronic documents as part of a litigation hold; instead, to this day, e-mails continue to be purged from every employee’s in-box every thirty days.”

Convinced New Line has not and will not scour its electronic records appropriately, Hillman instructed the studio to retain and pay for an outside document retrieval vendor within three weeks. He also said some New Line witnesses may face further depositions to discuss new documents that should have been produced earlier but weren’t.

The $125,000 in sanctions is intended to reimburse Jackson’s attorneys some of their costs in pursuing the documents. In July 2006, Hillman ordered New Line to produce sales and licensing documents the studio had argued were confidential and proprietary.

Most “vertical integration” and indeed other types of lawsuits brought against Hollywood companies are settled out of court, like the Zaentz and Duchovny ones. The reasons Judge Hillman gave for imposing the fine don’t bode well for New Line coming out on top if they do fight the case out in court. (The fact that the judge was “often angry” doesn’t, either.) And even if they eventually won, obviously details on the kinds of practices the judge lambastes would come out in public.

By the way, the practices described in this ruling would seem to refute any accusations from New Line officials and fans that in bringing his lawsuit Jackson was just being greedy. However much money he has already been paid, if the accounting was wrong and he is legitimately owed more, he should have it.

As I argued in an earlier entry, Jackson and partner Fran Walsh spent a lot of their own money to build up the facilities in Wellington where the trilogy was made. (I don’t know how much, but it was certainly multiple tens of millions of dollars, not including the ongoing overhead and employee costs.) Those facilities achieved an epic film for perhaps half what it would have cost if made in the U.S. Now Jackson has to keep his companies, with their hundreds of employees, in business. They’re doing well now, but a downturn in the film business in New Zealand could someday make keeping those companies functioning very, very expensive. With commitments of that kind, it’s no wonder that Jackson wants whatever he is owed.

Now what?

My best guess is that Judge Hillman’s ruling will be the move that finally breaks the logjam. Sooner or later New Line will settle out of court with Jackson. (What they do about the comparable amounts of money presumably owed on The Two Towers and The Return of the King is another matter, but it’s hard to believe that New Line would want another lawsuit or two.)

Would resentment make New Line cross Jackson permanently off the list of prospective directors for The Hobbit? I find it hard to believe. Fox didn’t fire Duchovny when they paid him the bulk of what he sued them for. They put him back to work. Indeed, the long-rumored X-Files film sequel is currently said to be going ahead after Fox settled a suit brought by its director, Chris Carter! That’s how things work in Hollywood.

This is business, and the firm’s executives know full well that Jackson’s name on The Hobbit would virtually guarantee its success. Another director might come up with a film that made nearly as much, but why take a chance? Where the bottom line is concerned, Hollywood companies can’t afford to hold resentments. Besides, MGM is co-producing the film and has said publicly that they want Jackson for it.

I’ve been predicting all along that there was a good chance that Jackson would end up directing (or at least producing) The Hobbit. I don’t see any reason to change my opinion. I’m just glad some progress has been made.

[Added September 24: Variety has run a story on the fine imposed on New Line, but the author discusses the case almost entirely in terms of it's implications for the current negotiations between the Writers' Guild of America and the Alliance of Motion Picture & Television Producers. No mention of The Hobbit.]