With the many rumors circulating about the Tolkien vs. New Line lawsuit and what impact it might have on The Hobbit, it’s easy to get confused about the facts. Lucky for TORn, Douglas C. Kane, a.k.a. Voronwe the Faithful from our message boards, an attorney who has been closely following the case, has crafted an outstanding primer of all things “Tolkien Lawsuit.”
CLEARING UP MISCONCEPTIONS REGARDING THE TOLKIEN v. NEW LINE LAWSUIT
By Douglas C. Kane
There has been a lot of misconception and misinformation swirling around regarding the lawsuit that has been filed by the Tolkien family against New Line. Media reports have claimed that it was a “last crusade” by Tolkien’s son Christopher to stop the upcoming Hobbit films. Some have gone so far as to report that the famously reclusive Christopher (who lives in France) was scheduled to appear in court this past week and that a judgment was going to be issued. Other media reports have tried to tie the lawsuit to attempts to defame the Tolkien family. These reports are untrue. There also seems to be quite a bit of confusion as to exactly who is involved in the lawsuit, and just what the stakes are (particularly in regards to the upcoming films). The purpose of this essay is to clear up some of those misconceptions and give people a better idea of what to expect.
This lawsuit stems from two agreements that were entered into by United Artists (UA) in 1969, giving UA rights to make films based on Tolkien’s books The Lord of the Rings (including The Fellowship of the Ring, The Two Towers, and The Return of the King, and sometimes referred to as “The Trilogy), and The Hobbit. One of the agreements was between UA and a company called Sassoon Trustee and Executor Corporation, Ltd. (“the Sassoon Agreement”), which served as Tolkien’s representative. The other was between UA and George Allen & Unwin, Ltd. (“the GAU Agreement”), Tolkien’s publisher at the time. There is of course some controversy over the interpretation of these agreements, but generally speaking together they granted UA the exclusive right to make films based on Tolkien’s literary works in exchange for paying Sassoon (on Tolkien’s behalf) and George Allen & Unwin a total of 7.5% of the gross profits from said films after an “artificial payment level” of 2.6 times the final productions costs (and some other costs) is reached.
The people involved in a lawsuit are typically referred to as the “parties” to the lawsuit. The ones who are suing are called the “plaintiffs” and the ones who are being sued are called the “defendants”. Some media reports have implied that Christopher Tolkien is the sole plaintiff in this case, which is not true. Other people seem to be under the impression that the sole beneficiary of this lawsuit would be the charitable Tolkien Trust. That also is not correct. The following are the actual parties in the case.
Plaintiffs: Christopher, Priscella, Joan, and Baille Tolkien are all plaintiffs in their capacity as trustees of the charitable Tolkien Trust. But they, along with Simon Tolkien and Alan Graham Parker, are also plaintiffs in their capacity as trustees of something called the J.R.R. Tolkien 1967 Discretionary Settlement, a private trust the sole beneficiaries of which are the descendents of J.R.R. Tolkien. So the Tolkien family has a personal stake in the results of this lawsuit, not just an interest in preserving the interests of the charitable organization. They are plaintiffs in this case by virtue of being “successors-in-interest” to Sassoon. Essentially this means that the rights that Tolkien had related to the 1969 Sassoon Agreement have passed to these plaintiffs (in what way any proceeds due to the Tolkien family will be split between the charitable Tolkien Trust and the personal Tolkien Discretionary Settlement is unclear).
The other plaintiffs in the case are the publishers of Tolkien’s books: Harper Collins, George Allen & Unwin, and a related company, Unwin Hyman, Ltd. They are plaintiffs in the case because the rights that George Allen & Unwin obtained through the GAU Agreement have been distributed among these three companies.
Defendants: The defendants in the case are New Line and a subsidiary of New Line called Katja Motion Picture Corporation. New Line obtained certain rights to make films of The Lord of the Rings and The Hobbit by virtue of a series of agreements involving United Artists, Saul Zaentz, Miramax Films and New Line. In short, Zaentz purchased the rights to make the films (or most of them) from United Artists (which then was bought out by MGM), and then licensed those rights (rather than actually sold them, which will be important later on) first to Miramax, and then to New Line. Generally speaking, I will refer to New Line when talking about the defendants in the case.
The plaintiff’s claims are all based on their allegation that New Line breached the 1969 Agreements described above. They assert a total of eight “causes of actions” which are essentially different legal theories upon which they claim that they are entitled to some kind of compensation or other action.
The first cause of action is the main one, alleging breach of contract. In short, the plaintiffs claim that the Agreements provide that they are entitled to 7.5% of the gross profits of the Lord of the Rings films, and that the defendants have paid them nothing. They are seeking at least $150 million dollars in damages. The second cause of action is the one that most readers of TORN are most interested in, however. It is an action for “declaratory relief” in which the plaintiffs are seeking an order from the court granting them the right to terminate New Line’s rights to make the upcoming Hobbit films. Since this is the issue that many people are most interested in, and it is quite complicated, I will talk about it in its own section.
The third cause of action is also one for declaratory relief. There is a bizarre aspect to the way that these Agreements were written that led New Line to conclude that only 2.5% of profits are due on The Two Towers, rather than the 7.5% that the parties agree are due on The Fellowship of the Ring, The Return of the King and The Hobbit. The plaintiffs are seeking to confirm that the Agreements should be interpreted such that the same 7.5% rate applies to all the films. Failing that, the fourth cause of action requests that the Agreements be “reformed” so that the 7.5% rate applies to all the films, since that was the intention of the parties.
The fifth cause of action is for fraud. As will be seen, this one is hotly disputed. Essentially the plaintiffs argue that New Line has made misrepresentations and concealments of material facts that they relied upon to their harm. They allege that in addition to damages that this has caused them, they are entitled to punitive damages from New Line. I’ll talk more about this further on.
The sixth cause of action is simply seeking an order for an accounting of the films so that the amount due to the plaintiffs can be determined.
The seventh cause of action seeks a determination that because New Line has failed to pay the plaintiffs their share of the profits, it has essentially held that money in trust for the plaintiffs, and that therefore it should pay them any profits that it has made from holding that money. Finally, the eighth cause of action alleges that New Line breached a “fiduciary duty” to the plaintiffs. They seek punitive damages for this cause of action as well, and it is another one that is hotly disputed. Again I’ll talk more about it later.
WHAT HAS HAPPENED SO FAR
The plaintiffs filed their Complaint on February 11, 2008, and served the defendants within a few days of that. Normally, the defendant has 30 days from the date of service to file a responsive pleading. Generally speaking, there are two kinds of responsive pleadings. An Answer is a formal response to the Complaint that essentially begins the litigation. A defendant can also, however, file a responsive pleading called a Demurrer that challenges the validity of all or part of the Complaint. Here, no responsive pleading was filed within 30 days, fueling some speculation that a settlement had been reached. That speculation was further encouraged when the parties filed a stipulation (agreement) asking the court to grant a further 30 day extension of time for the defendants to file a responsive pleading, indicating that some progress had in fact been made in settlement discussions.
Apparently those settlement discussions have not yielded results (at least not yet). Finally, on May 14, 2008, New Line filed a Demurrer as its initial responsive pleading. This Demurrer does not challenge the validity of the whole case, however. It only challenges the validity of the fifth cause of action for fraud, and the eighth cause of action for breach of a fiduciary duty. Since those are the two causes of action on which the plaintiffs seek punitive damages, New Line concurrently filed a Motion to Strike the request for punitive damages.
Meanwhile, the court scheduled a Case Management Conference for June 6, 2008. This is standard procedure that happens in all cases, but it was widely misinterpreted. Some suggested that this conference was requested by the plaintiffs and was a sign that a settlement was near. Others, more strangely, reported that it was a hearing at which Christopher Tolkien was going to appear and ask that the Hobbit films be stopped, even indicating that the case would be resolved at this time. This was completely ridiculous, patently false reporting, particularly venal in the false picture of Christopher Tolkien that it painted. In fact, the Case Management Conference is nothing more than a meeting between the judge and the attorneys in which the time table for the case is discussed, and sometimes a trial date is set.
The court actually requested that the conference be postponed so that it could be held at the same time as the hearing on the Demurrer and Motion to Strike, but apparently the lawyers for one or both sides balked, because the conference occurred as scheduled. And at that conference, the court set a trial date of October 19, 2009, for a jury trial scheduled to last an estimated 15-20 days. So, unless the case settles, or the trial date gets continued (a common occurrence), that is when the case will be finally decided (unless of course there is an appeal filed by the losing side, a likely event that could drag things out for another several years).
WHAT WILL HAPPEN NEXT
The next thing that will happen in the case is that the court will hold a hearing on New Line’s Demurrer and Motion to Strike, on either June 24 or June 27. As discussed above, New Line is challenging the validity of the fraud and breach of fiduciary duty causes of action, and the request for punitive damages that go with those causes of action. In order to prevail on a Demurrer to a cause of action, the defendant needs to establish that even if the allegations asserted in the Complaint are true, they still do not legally support the cause of action.
In order to prove a case of fraud, it must be proven that the defendant made some misrepresentation that they knew or should have known was false, which the plaintiff relied upon, causing the plaintiff some harm. Normally it is difficult to allege fraud in a contract case unless it can be shown that the fraud induced the plaintiff to enter into the contract. Here that is certainly not the case. The plaintiffs are alleging that New Line committed fraud by misrepresenting the profit figures. New Line is arguing that even if they did misrepresent the profits (which they deny), the plaintiffs can’t argue that they relied on those representations in any way that harmed them. In other words, the contract already existed, and its terms were set, so there can’t be any valid cause of action for fraud, even if the plaintiff’s allegations were proven to be true. I think that is a pretty strong argument.
The issue with the fraud cause of action is not whether the Plaintiffs have sufficiently pleaded (argued) that New Line has made misrepresentations; they certainly have (and I think that that allegation is likely to be supported by the evidence, although that is irrelevant at this stage of the game). The real issue is whether the plaintiffs have sufficiently pleaded that they relied on those misrepresentations to their harm. They are arguing that New Line’s misrepresentations caused them to “refrain from taking action to protect their interests.” The problem with that argument is two-fold. First, there is no indication that the plaintiffs ever believed the representations, and in fact they have been arguing about this since shortly after FOTR came out. But that is an issue of fact which shouldn’t determine the demurrer. More important at this stage is the fact that they HAVE taken effective steps to protect their interests by filing this action. Even if they could successfully argue that the misrepresentation delayed their filing of the action, I don’t see what harm they can argue that caused them, since they would still be entitled to whatever damages the breach of the contract caused, plus applicable interest.
There is another allegation that they may be able to rely on to successfully support the fraud cause of action, and ironically they have Peter Jackson to thank for it! They allege “on information and belief” that New Line has “destroyed documents to prevent the discovery of the true facts favorable to the plaintiffs.” This is a direct reference to Jackson’s suit, in which New Line was sanctioned for failing to produce documents. The plaintiffs may be able to successfully argue that the delay caused by the misrepresentations allowed New Line to destroy evidence, thus making it impossible to determine the true extent of the breach. That doesn’t really seem to be their argument, though. Their argument seems to be that the misrepresentations allowed New Line to retain millions of dollars that they were owed, and that the delay in paying them further harmed them. I’ve never heard of such an argument being successful in converting a breach of contract case into a fraud case, but I haven’t researched the question thoroughly, and more importantly I am familiar with California law, and this case is to be determined under New York law. The same basic legal principles should apply however.
As for the breach of a fiduciary duty, the plaintiffs allege that a fiduciary duty exists because the relationship between the parties is “a long-standing relationship of trust and confidence.” It’s not clear that that is sufficient to give rise to a fiduciary duty. But the court might want to give the plaintiffs and opportunity to expand on that. We’ll see.
While New Line has some good arguments on these two causes of action, it is fairly rare for a cause of action to be thrown out on a demurrer, because the court wants to see just what evidence there is to support to the causes of action. In any event, the case will still go on whatever happens with the Demurrer. After that is decided, the defendants will need to file an Answer to all remaining causes of action. Then the “discovery” phase of the litigation begins, in which both sides can take deposition, and ask for documents, and seek other information.
Both sides have expressed a willingness to participate in a mediation at some point. A mediation is a meeting between the two sides with a neutral “mediator” who attempts to broker a compromise between the two sides. It is a very common way for civil lawsuits to be resolved these days. My best guess is that will be what will eventually happen in this case. But if it doesn’t settle, either at a mediation or through direct negotiations, and the trial date is continued, the case should be decided, at least initially, at the trial scheduled to begin in October of 2009. Even though it is scheduled to be a jury trial, the issue of whether the plaintiffs will be given the ability to terminate New Line’s rights to make the Hobbit films may not be decided by the jury. That is purely a question of law, and thus should be decided by the judge.
Of course, which ever side loses on any of these issues could potentially file an appeal, which would delay things further.
THE BILLION DOLLAR QUESTION
Now, we finally come to the question that you all are most interested in. What are the chances that this lawsuit will actually stop the Hobbit films? The answer, I’m sure you will be happy to hear, is that it is not very likely at all.
The plaintiffs’ claim that the Agreements give them the right to cancel New Line’s right to make further films based on either The Lord of the Rings or The Hobbit because of the breach of New Line’s payment obligation. It is not entirely clear, but it appears that they are only asking for the right to cancel New Line’s rights to make the films, in which case those rights would revert to Zaentz, particularly since the complaint specifically acknowledges that any right to terminate New Line’s rights would be “subject to the potential rights of innocent parties.” On the other hand, the Complaint also alleges that New Line “stands in the shoes” of UA, Zaentz and Miramax as a result of the various agreements that resulted in New Line obtaining the rights to make the films. The problem with the plaintiffs’ position is that being granted the right to terminate New Line’s rights to make the films would essentially be giving them the right to terminate New Line’s separate agreement with Zaentz. I am not aware of any authority that would give them that right, but again I haven’t thoroughly researched the question, so I really can not predict what might happen.
One thing is clear, however. The plaintiffs will not be able to request that the court stop The Hobbit movies while it is determined how much money they are owed for the Lord of the Rings films. Pursuant to the language of the Agreements, they don’t have the right to do that. The Agreements specifically provide that are not entitled to any kind of revocation until there has been a “final determination” by a court that there was a material monetary breach of the agreement. So they can’t obtain any right to stop The Hobbit films until a final determination has been made that New Line owes them money for The Lord of the Rings.
I don’t think that there is very much of a chance that a judge is going to put the brakes on a project that will already we well on the way by the time any such final determination is made.
This is only a very brief summary of some of the potential legal twists and turns this case has taken, and is likely to take in the future. As to what the final resolution may be, Manwë and Varda may know, but they have not revealed it, and it is not declared in the dooms of Mandos.
Douglas C. Kane is a civil rights attorney and Tolkien scholar living in California. His first book, Arda Reconstructed: The Creation of the Published Silmarillion is due to be released by the Lehigh University Press in 2009. He posts here at TORN as Voronwë_the_Faithful.