- Court holds that plaintiffs, heirs of one of the creators of the Superman character, failed to show that Superman film and television agreements between Warner Bros. and its corporate affiliate DC Comics were below fair market value
In this action, plaintiffs sought an accounting for revenue derived from the film and television licensing agreements entered into between Warner Bros. and its corporate sibling DC Comics between 1999 and 2002. One issue before the court was whether the price paid for the film and television rights represented the fair market value for those rights or whether the licenses for the works between the related entities was a “sweetheart deal.”
The court’s first task was to determine a value for the audiovisual rights to the Superman copyright in the marketplace during the relevant time period (1999 to 2002). The court stated that it found some witnesses to be credible and others not to be credible at all, specifically singling out the film industry expert witness testimony proffered by both parties as notable for their lack of credibility. Plaintiffs and defendants also proffered dozens of third-party film and television licensing agreements, apparently negotiated at arms length, that were intended to provide a “comparable” to what the Superman film and television licenses would have garnered on the open market. Plaintiffs provided agreements for well-known musicals such as My Fair Lady and Annie and best-selling novels by authors such as Thomas Clancy and J.R.R. Tolkien; defendants provided agreements for “low-tier” comic book characters such as The Green Hornet, the book series Tarzan, and The Lone Ranger. However, as with the parties’ expert witnesses, the court stated that it was “troubled by the highly stilted nature of the evidence presented. . . . The parties have submitted evidence as if the film and television rights to the entirety of the Superman property was comparable in value” to musicals, best selling novels, and less popular comic book characters. The court stated that the evidence presented consisted of “incomparable” agreements and that many of the most obvious comparable properties – arms-length transactions for the film licensing rights to other notable and contemporaneously popular comic book characters – were not presented or, if so, were presented by defendants, albeit in an incomplete fashion to refresh a witness’ recollection.
Ultimately, the court determined that the testimony of the president of Warner Bros. was the most persuasive; he described the Superman property as “viable . . . but challenged,” partly due to the poor track record of previous Superman films. In addition, the court found that “among the agreements produced at trial by the parties,” the most comparable deal for the Superman property was the agreement for film rights to the X-Men comic book, although that agreement was not actually admitted into evidence, but was identified by a witness and shown to him to refresh his recollection of its terms.
While noting that not all the possibly relevant direct economic terms in the X-Men film agreement were in the record, the court held that much of the economic terms in the Superman film agreement were within the same range as those identified in the X-Men film agreement, specifically observing that the 5% of first dollar distributor worldwide gross in the Superman film agreement was as good as or better than that in the X-Men agreement, and that the amount of the initial, up-front option payments contained in both agreements were equal to one another. The court also determined that the film agreements for some lesser known comic characters served as a baseline or floor for evaluating the Superman agreement, and that the terms in the Superman agreement well exceeded this floor. However, the court stated that one direct economic term in the Superman film agreement – the up-front, fixed fee that DC Comics received under the agreement – lay, at best, at the bottom of the range that a willing seller would have sold the property for, finding that a reasonable, market-driven up-front fee during the relevant time period would have been $4 to $6 million, rather than the $1.5 million in the Superman agreement.
Despite this “defect” in the Superman film licensing agreement, the court went on to rule that the plaintiffs’ failure to even attempt to place a value on that part of the Superman property which DC Comics transferred to Warner Bros. of which the plaintiffs are co-owners and have an un divided one-half interest precluded recovery for plaintiffs. “At present, plaintiffs are the co-owners to the copyright in the Superman material published in Action Comics No. 1. They are not the owners of the entirety of the Superman copyright. . . . This co-ownership dilutes the value of this particular subset of the overall Superman property from the rest, as it allows for any buyer of such rights to force a bidding war among the co-owners, playing each off the other to obtain the lowest possible purchase price. In this sense, plaintiffs cannot piggyback off the value to the entire 70 years’ worth of Superman material to overcome the need to present proof as to the separate value of the non-exclusive rights to Action Comics No. 1.” Thus, although the court acknowledged certain “troubling valuation questions” regarding the Superman film agreement, it held that “plaintiffs have done nothing to value DC Comics’ non-exclusive transfer of what they own. . . . Some separate valuation was needed by plaintiffs – an evidentiary burden they never attempted to meet.”
The court then turned to the indirect economic terms of the Superman film licensing agreement, noting that, unlike virtually all of the third-party licensing agreements produced by the parties, it did not include a reversion of rights clause, and stating that “the key problem with the Superman film agreement is not so much its direct economic terms . . . but the very real danger of the property’s value being substantially diminished by the action or inaction of Warner Bros.” According to the court, the value of a piece of intellectual property, especially one that has a franchise nature such as Superman, is not in just the large, one-time economic windfall that comes from the release from a single movie, but from the continuing ability to exploit and ensure more such windfalls for a long period of time.
The lack of a reversion clause, said the court, is problematic and makes it difficult to determine the fair market value of the film licensing agreement. However, the court held that plaintiffs failed to show that the lack of a reversion caused harm. “For plaintiffs to succeed in proving that the Superman film agreement was in fact below fair market value, they must establish that there would have been a film sequel or a reversion of rights by this point if the agreement contained such a reversion clause keyed to film development. This they have not shown.”
The court found that the average reversion period for beginning production of a sequel or reversion to occur is three to five years after the release of the prior film. Superman Returns was released in 2006 and the court determined that, if there were a reversion clause in the Superman film agreement, Warner Bros. would not be required to start production until 2009 at the earliest and 2011 at the latest. “Unless and until it can be shown at that point in time that no filming of a sequel to Superman Returns has commenced, it cannot be said, with any degree of certainty, that the Superman film agreement’s failure to contain a reversion clause keyed to continued and regular development of the property in film has caused any harm.”
The court acknowledged that it is unlikely that the filming of a Superman sequel will commence in 2009 because there is no script. However, it is “the possibility that filming could begin on a Superman sequel in 2011 that has stayed the court from making a finding on the reasonable certainty of harm having occurred. Given that the potential for said commencement of filming exists at the present time, plaintiffs have not shown that the Superman film agreement, sans a reversion clause, is below the reasonable range for what a willing buyer would pay for the property from a willing seller. If, however, by 2011, no filming has commenced on a Superman sequel, plaintiffs could bring an accounting action at that time to recoup the damages then realized for the Superman film agreement’s failure to contain a reversion clause.”
Accordingly, the court held that there is insufficient evidence that the Superman film agreement between DC Comics and Warner Bros., whether judged by its direct economic terms or its indirect ones, was consummated at below its fair market value. The court also examined the Superman television agreement, compared its economic terms to comparable television licensing agreements, and held that its terms were not below fair market value.