The Hobbit: An unexpected lawsuit

by 07 Feb 2014
In a hole in the ground there lived a hobbit...But who has the right to benefit from the film depiction of that hobbit?  This is the issue raised by the claim recently filed by Miramax LLC, and its managing directors Harvey and Robert Weinstein ("the Plaintiffs"), against Warner Brothers Entertainment Inc. and New Line Cinema Corporation.
In 1998 Miramax sold the film rights for The Lord of the Rings and The Hobbit to New Line.  In return, Miramax would receive 5% of the gross receipts from the “first motion picture” based on each book.

At the time of the Agreement, it appears the parties contemplated that only one film based on each of the books would be made.  However The Hobbit was divided into three motion pictures.  The Plaintiffs claim they are entitled to a share in the revenue of all three movies.  Warner Brothers says the Plaintiffs are only entitled to be paid for the first film based on the book: The Hobbit: An Unexpected Journey.   According to Warner Brothers, the 1998 sale was “one of the great blunders in movie history".
The Plaintiffs have brought claims for declaratory judgment, breach of contract, breach of implied covenant of good faith and promissory estoppel. 

The first two causes of action turn on the proper interpretation of the Agreement.  The Plaintiffs seek a declaration that they are entitled to be paid for the last two instalments of The Hobbit, and claim that Warner Brothers’ denial of this entitlement is an anticipatory breach of contract.

The Agreement provided that 5% of gross receipts would be payable for each of the “Original Pictures … produced for intended theatrical release”.  “Original Pictures” is defined with, respect to each of the four books, as “the first motion picture, if any, based in whole or in part upon such book … but excluding remakes”.

The Plaintiffs say that Warner Brothers has taken the “absurd position” that the final instalments are “remakes”.  Given that a remake, in a cinematic sense, usually refers to a film that takes its source material from another film (whether as a shot-for-shot remake or a looser adaptation), the Plaintiffs are probably correct that the final instalments of The Hobbit cannot be classed as “remakes” of the first instalment.  However this does not necessarily aid the Plaintiffs.  Although the final instalments are not “remakes”, neither are they the “first motion picture” based on The Hobbit. 

The Plaintiffs deal with this by arguing that the trilogy is effectively one motion picture divided into three parts, which collectively tell the entire story of The Hobbit.  The Plaintiffs note that all three movies have “The Hobbit” in their titles and point to statements by Peter Jackson that the instalments were “written and shot as part of a single motion picture.

However this approach does not completely deal with why the Agreement restricts the Plaintiffs' entitlement to payment to the first motion picture based on each of the books.  Remakes are already excluded from the definition of “Original Pictures”, so if the Agreement is to have the effect contended for by the Plaintiffs, it arguably should have said that they would be paid for all motion pictures based on the books (excluding remakes).

Finally, the Plaintiffs allege that Warner Brothers’ position is inconsistent with the parties’ intentions.  It appears that the Plaintiffs' position is that the intention was for them to be compensated for the film depiction of The Hobbit in its entirety. 

The difficulty for the Plaintiffs in advancing arguments based on their intentions is that the New York courts will usually not admit extrinsic evidence about the interpretation of a contractual term unless the term is ambiguous. It could be argued that the words "first motion picture" are plain and unambiguous.  There is authority that a plaintiff cannot create ambiguity by introducing extrinsic evidence or asserting a different interpretation is possible.  Whether ambiguity exists in a contract is a question of law that the courts will determine on a case-by-case basis.

The second cause of action is based on breach of the implied covenant of good faith and fair dealing.  This implied covenant is set out in § 1-304 of the Uniform Commercial Code of the United States, providing that every contract or duty governed by the Code "imposes an obligation of good faith in its performance and enforcement".  The courts have held that this obligation includes the principle that each party must refrain from any act that would injure the other party's right to receive the benefit of the contract.

The Plaintiffs allege that Warner Brothers has attempted to deprive the Plaintiffs of "their rightful share of the revenues from two of the three filmed instalments of The Hobbit".  The issue the Plaintiffs may face is showing they have actually been deprived of the benefit of the Agreement.  The Agreement provides that the Plaintiffs are entitled to a share of the revenue of the first motion picture based on The Hobbit, and that is what the Plaintiffs have received.  In order to show the benefit of the contract to the Plaintiffs has been diminished, they would potentially need to show that their share of the revenue from The Hobbit as a single film would have been greater than the amount they have received from The Hobbit: An Unexpected Journey.

The final cause of action is based on promissory estoppel.  Where a promise is made on which the promisee should reasonably be expected to rely, and the promisee does rely on the promise to his or her detriment, that promise can be enforced to prevent injustice.

The Plaintiffs assert that Warner Brothers promised them compensation for the film exploitation of The Hobbit, and they reasonably relied on the promise when they entered into the Agreement.  If there was a representation that the Plaintiffs would benefit from the film exploitation of The Hobbit in its entirety, or that there would only be one film based on The Hobbit, the Plaintiffs may be on stronger ground here.

It has been reported that Warner has applied for arbitration of the dispute, so these issues may not be determined by the courts.  In any case, this case highlights the need to ensure that a contract actually provides the benefit intended, and to consider how it might operate if the parties' factual assumptions change.  

Article by:
Sarah Hoffman, Solicitor

Wynn Williams