2d Civil No. B204015 IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA SECOND APPELLATE DISTRICT DIVISION THREE ALAN LADD, Jr., et aI., Plaintiffs, Respondents and Cross-Appellants, vs. WARNER BROS. ENTERTAINMENT, INC., et aI., Defendants, Appellants and Cross-Respondents. Appeal from Los Angeles Superior Court, No. BC300043 Honorable Ricardo Torres COMBINED RESPONDENTS' BRIEF AND CROSS-APPELLANTS' OPENING BRIEF GREENBERG TRAURIG, LLP GREINES, MARTIN, STEIN & RICHLAND LLP John M. Gatti (SBN 138492) Robert A. Olson (SBN 109374) John J. Lucas (SBN 216236) Edward L. Xanders (SBN 145779) 2450 Colorado Avenue, Suite 400N 5700 Wilshire Boulevard, Suite 375 Santa Monica, California 90404 Los Angeles, California 90036-3697 Telephone: (310) 586-7700 Telephone: (310) 859-7811 Facsimile: (310) 586-7800 Facsimile: (310) 276-5261 E-Mail: [email protected] E-Mail: [email protected] [email protected] [email protected] Attorneys for Plaintiffs, Respondents and Cross-Appellants ALAN LADD, JR., JAY KANTER, L-K PRODUCERS CORPORATION, KETRAM CORPORATION and KANTER CORPORATION 2d Civil No. B204015 IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA SECOND APPELLATE DISTRICT DIVISION THREE ALAN LADD, Jr., et aI., Plaintiffs, Respondents and Cross-Appellants, vs. WARNER BROS. ENTERTAINMENT, INC., et aI., Defendants, Appellants and Cross-Respondents. Appeal from Los Angeles Superior Court, No. BC300043 Honorable Ricardo Torres COMBINED RESPONDENTS' BRIEF AND CROSS-APPELLANTS' OPENING BRIEF Court ofAppeal ORIGINAL State of California Second Appellate DistrictcouRTor APPEAL. SECOND DIST. CERTIFICATE OF INTERESTED ENTITIESWR }:k~o~1IID .. DEC 07 200 C'~ JOSEPH A. LANE Court ofAppeal Case Number: B204015 Deputy Clerk 9.: CARBONE Please check the applicable box: ~ There are no interested entities or parties to list in this Certificate per California Rules of Court, Rule 8.208(d)(3). D Interested entities or parties are listed below: Name ofInterested Entity or Person Nature ofInterest 1. 2. 3. 4. Please attach additional sheets with Entity or Person Information ifnecessary. i ~ ~»I/ / V\--.-..-' '-- I .. , \ Slgnfture orAttomeylPa PriI1l{ed Nalne: John M. Gatti Addless:/ Greenberg Traurig, LLP .~ 2450 Colorado Avenue, Suite 400E 'Saptil M.onica, CA 90404 . :...'. State Bar No: J 3lS492 ' Party Represented: Plaintiffs and Appellants Alan Ladd, Jr., et al. SUBMITPROOF OFSERVICE ONALL PARTIES WITH YOUR CERTIFICATE TABLE OF CONTENTS Page CERTIFICATE OF INTERESTED ENTITIES OR PERSONS 1 RESPONDENTS' BRIEF 1 INTRODUCTION 1 STATEMENT OF FACTS 4 A. Warner And Ladd Enter Into A Unique Joint Venture-A "Mini-Studio Within A Studio." 4 B. During The Joint Venture, Ladd Produces, Finances And Acquires Numerous Successful Movies. 5 c. The Joint Venture Is Terminated, Leaving Warner With Exclusive Control Over Licensing And The Continuing Obligation To Provide Profit Participation To Ladd. 7 D. Warner Licenses Films In Groups, Allocating Licensing Fees To Individual Films Ostensibly According To Their Comparative Value. 7 E. In 1992, Ladd Audits Warner's Records; Warner Later Settles The Audit Issues. 9 F. After 1992 And Through Trial, Warner Consistently Under-Allocates Licensing Fees To Ladd's Movies In Group Licenses. 10 G. Ladd Discovers Warner's Deception In 2001; A 2002 Audit Reveals License Fee Underallocations. 11 H. Warner's Breaches Substantially Damage Ladd. 12 11 TABLE OF CONTENTS (Continued) Page STATEMENT OF THE CASE 12 A. Ladd Sues On July 31, 2003. 12 B. The Tried Claims: Breach OfContract And Breach Of The Implied Covenant Of Good Faith And Fair Dealing. 13 c. Various Witnesses Confirm That Warner Consistently Under-Allocated Licensing Fees To Ladd's Films. 13 1. Expert David Simon. 13 2. Expert David Armstrong. 16 3. Auditor James Perry. 17 4. Jay Kanter and Alan Ladd, Jr. 17 5. Leslie Cohen (HBO). 18 6. Anthony Friscia (former Warner vice president). 18 7. Warner witnesses. 19 D. Ladd's Damages Evidence: Over $3 Million In Unpaid Participation Profits. 20 E. After Ladd's Case In Chief, The Court Rules That The Statute OfLimitations Bars Recovery For Pre-July 31, 1999 Profit-Participation Payments; Warner Presents No Evidence Allocating Between Pre- And Post­ Limitations Period Profits. 23 F. The Jury Unanimously Finds Breach And Damages. 24 111 TABLE OF CONTENTS (Continued) Page G. After Trial, Warner Chooses An All-Or-Nothing Approach OfSeeking JNOV Only And Not A New Trial. 24 H. The Court Denies Warner's JNOV Motions. 25 I. Ladd And Warner Both Appeal. 25 ARGUMENT 26 I. ANY FAILURE TO SEGREGATE WHICH PORTION, IF ANY, OF LADD'S PROVEN DAMAGES MAY HAVE BEEN BARRED BY THE STATUTE OF LIMITATIONS OR THE 1992 RELEASE WAS A FAILURE OF PROOF BY WARNER ON ITS AFFIRMATIVE DEFENSES. 26 A. Substantial Evidence Establishes That Warner Damaged Ladd During Any Conceivable Limitations And Post-Release Period. 26 B. Warner Bore The Burden OfProving Its Statute Of Limitations And Release Affirmative Defenses, Including The Amount Of Damages, IfAny, Those Defenses Barred. 28 C. Warner's Cases Are Inapposite; None Addresses A Defendant's Burden OfProving An Affirmative Defense. 34 D. It Is Far Too Late For Warner's Novel Factual Theories-Never Presented To The Trial Court Or The Jury-Either As A Basis To Reduce The Judgment Or For ANew Trial. 36 1. Warner premises its appellate arguments on entirely new factual theories and presentation. 36 IV TABLE OF CONTENTS (Continued) Page 2. Warner's abandonment ofits new trial motion precludes its excessive damages arguments. 37 3. Warner waived its arguments by never presenting them to the jury and trial comi. 39 a. Warner is batTed from presenting brand new evidence and arguments on appeal. 39 b. Warner's waiver was intentional. 42 4. Warner cannot ask this Court for a new trial to present the case that it abjured in the trial court. 43 5. Eicher is inapposite. 44 II. IN ANY EVENT, THE DAMAGES AWARDED ALL FALL WITHIN THE CORRECT STATUTE OF LIMITATIONS PERIOD AND OUTSIDE THE 1992 RELEASE. 46 A. The Statute OfLimitations Did Not Commence Until The 2002 Audit Revealed Warner's Breaches. 46 1. The discovery rule governs Ladd's contract claims. 46 2. The trial court erroneously created an obligation to audit without inquiry notice that neither the law nor the parties' contract imposes. 49 3. A duty-to-audit approach would be bad policy, spurring continuous auditing and hair-trigger lawsuits. 51 v TABLE OF CONTENTS (Continued) Page B. Alternatively, Whether Viewed As An Open Book Account Or A Continuing Violation, All OfLadd's Damages Were Recoverable Under The Statute Of Limitations. 52 c. Substantial Evidence Supports That The Damage Award Did Not Include Pre-1992 Claims. 53 III. WARNER HAS WAIVED ITS SUBSTANTIAL EVIDENCE CHALLENGE TO THE JURY'S CONTRACT-BREACH FINDING; REGARDLESS, SUBSTANTIAL EVIDENCE SUPPORTS THE JURY'S FINDING. 55 A. Warner Waived Its Substantial Evidence Challenge By Failing To State All The Evidence Favoring The Verdict. 55 1. The standard. 55 2. Warner's waiver. 56 B. Even Without Warner's Waiver, Overwhelming Substantial Evidence Supports The Jury's Finding That Warner Breached Its Contract With Ladd. 57 1. Warner contractually promised to pay Ladd proper profit participation. 57 2. In addition, California law implies a duty of good faith and fair dealing to properly allocate profits to Ladd's movies. 58 3. Warner breached by consistently failing in group licenses to allocate individual licensing fees to Ladd's movies that reflected their true comparative value. 59 VI TABLE OF CONTENTS (Continued) Page 4. Warner's conduct fails under both the subjective and objective standards ofgood faith and fair dealing. 63 5. On appeal, Warner cannot avoid its unfair underallocations by blaming them on buyers. 65 6. Warner cannot avoid the unreasonableness of straight-lining by claiming the practice is common. 67 IV. WARNER HAS ALSO WAIVED ITS SUBSTANTIAL EVIDENCE CHALLENGE TO THE DAMAGE AWARD; REGARDLESS, SUBSTANTIAL EVIDENCE SUPPORTS THAT AWARD. 68 A. Warner Has Waived Its Substantial Evidence Attack On Ladd's Expert's Damage Methodology By Failing To State All The Evidence Favoring That Approach. 68 B. Warner Urges An Exactitude In Determining Damages That California Law Does Not Require. 69 C. Substantial Evidence Supports Ladd's Damage Theory; Ladd Did Not Have To Introduce Into Evidence Every Licensing Agreement Reviewed For The Jury To Adopt The Proffered Damages Analysis. 71 1. Ladd's expert testified that he reviewed all of the license agreements produced and that they showed comparable undervaluations by Warner; that testimony more than suffices to justify his analysis. 71 2. A party need not introduce into evidence all of the documentation that an expert reviews. 74 VB TABLE OF CONTENTS (Continued) Page 3. Warner fundamentally misconceives the import ofthe third-party licensing agreements. 77 4. Once again, Warner's cases are inapposite. 77 D. There Is No Legal Requirement That Ladd's Expert Apply Any Particular Methodology. 80 CONCLUSION 82 CROSS-APPELLANTS' OPENING BRIEF 83 INTRODUCTION 83 A. Warner's Improper Failure To Pay "Blade Runner" Profits. 83 B. Warner's Improper Deletion OfLadd's Logo And Other Credits From DVDs. 84 STATEMENT OF ADDITIONAL FACTS 85 A. Warner's Improper Failure To Pay "Blade Runner" Profits. 85 1. Ladd pays $15.8 million in "Blade Runner" production costs, with Empress funding halfof Ladd's payment. 85 2. Until 2001, Warner consistently misrepresents to Ladd that the movie will never be profitable, providing Ladd only one accounting statement. 86 3. Warner settles pre-1992 claims based on Ladd's audit of allegedly profitable movies, but not "Blade Runner." 86 V111 TABLE OF CONTENTS (Continued) Page 4. Ladd learns ofWarner's payments to Empress for "Blade Runner" profits. 88 5. Warner admits that "Blade Runner" is profitable, paying Ladd some ofwhat it owed. 89 6. Warner still owes Ladd almost $1 million in unrecompensed "Blade Runner" profits and interest.