June 24, 2005

Lawyers’ Bookshelf: DisneyWar

Published in: New York Law Journal | volume 231
Written by: Jeffrey M. Eilender

James B. Stewart’s "DisneyWar" should be required reading for litigators as a case study of the impossible CEO client, and for anyone who just likes scintillating Hollywood gossip.

The book is in essence a biography of Michael D. Eisner, from his beginnings growing up in an affluent Jewish family in New York, briskly covering his rise at Paramount and of course, focusing on his 20-plus-year reign as chief executive officer and chairman of the board at Disney. The book culminates in the shareholder revolt which resulted in Eisner resigning as chairman in November of 2003. He announced his retirement from Disney altogether in March of 2005, on the heels of the publication of this book. Stewart, the famed author of "Den of Thieves," is well qualified to tell the story of the rise and fall of the hubristic corporate giant. Although 500-plus pages, the book is a quick read with fascinating details as to how the modern entertainment conglomerate operates, with plenty of back-stabbing and conspiracies.

What makes the book particularly interesting for attorneys is that much of "DisneyWar" is about either lawsuits brought by or against Disney or the irresponsible deals into which it entered (Euro-Disney, ABC), mostly because of Eisner’s pique.

First case in point is Eisner’s tumultuous and jealous relationship with Jeffrey Katzenberg, his protCzgCz at Paramount whom he brought with him to Disney in 1984. As related by Stewart, Katzenberg bore a large responsibility for the turnaround of Disney in the 1980’s, because he oversaw the animation department, which after decades of flops became hot again because of such hits as "The Little Mermaid," "Beauty and the Beast" and "The Lion King." Under Katzenberg’s agreement with Disney, he was to receive an enormous buyout payment (two percent of Disney’s revenue of the films he oversaw) if he were terminated. In 1994, soon after the great success of "The Lion King," Eisner fired Katzenberg, but refused to pay him the bonus out of spite. As detailed by Stewart, who reviewed the documents produced in the litigation, at one point Katzenberg was willing to settle for $90 million, when the various parties involved, including those negotiating for Disney, thought that Disney’s liability could be upward of $200 million. Eisner refused to pay a penny, however. Katzenberg sued. The key issue was whether Disney had breached Katzenberg’s contract by refusing to pay him his bonus, in which case it owed him the bonus plus interest. Thus, any motive on Eisner’s part to breach the contract, such as personal hostility towards Katzenberg, was also an important element to the case.

Unfortunately for Eisner, during the time period that he had terminated Katzenberg, he had been talking to Tony Schwartz, an author ghost-writing Eisner’s autobiography. Katzenberg’s lawyers subpoenaed the notes taken by the author, "replete with unguarded and devastating evidence of Eisner’s hostility toward Katzenberg,…his petulant outburst that they would not pay him anything; not to mention plenty of indiscrete remarks about" officers still at Disney.

Schwartz could not claim that Eisner had been a confidential source speaking to a journalist. Disney’s lawyers resisted the subpoena on his behalf, but the court ruled that the notes had to be handed over and the author had to give a deposition, at which he swore that the notes reflected a near-verbatim account of what Eisner had told him. "Schwartz wished that he had not written so much down, especially things that he knew Eisner would never allow in the book. Yet, he had no way of knowing it would come to this.’

At trial, Eisner was cross examined extensively on the admissions in Schwartz’s notes. Among other things, Schwartz quoted Eisner as saying "I think I hate the little midget." Eisner was further asked, "Did you say to Mr. Schwartz, I don’t care what he thinks, I am not going to pay him any of the money?" Eisner conceded that "I would say again, in anger I said that." The great revelation to litigators is that, "Eisner seemed surprised by Schwartz’s notes (and later contended that he was surprised), which, if true, was an inexcusable lapse on the parts of his lawyers who should have reviewed them with Eisner before he took the stand." Although he could have settled the case for $90 million, Disney was ultimately forced to pay Katzenberg $280 million.

Another fascinating story is Eisner’s passionate recruitment of Michael Ovitz, one of his closest friends, to Disney and then his obsessive desire to fire him the moment he started. Ovitz was the Byuber-agent who headed Creative Artists Agency (CAA). Because of their close personal friendship, Eisner had long begged Ovitz to join him at Disney to be his number two. Knowing his friend very well, and his refusal to share credit or power, Ovitz refused for a long time. Finally, to the ultimate regret of both of them, Ovitz changed his mind. During the negotiations, Eisner promised Ovitz that they would share power. Astonishingly, although Ovitz was the hard-edged negotiator for most of the top celebrities in Hollywood, there was never any writing memorializing Eisner’s promises of Ovitz’s responsibilities. Based on Eisner’s verbal assurances only, Ovitz arranged to sell his interest in CAA. Once Ovitz joined Disney, however, Eisner feeling jealous, as he did of Katzenberg, immediately isolated him and deprived him of any responsibility. Although Eisner had only a short time before he aggressively urged the Disney board to allow him to hire Ovitz at an astronomical salary; he now attacked Ovitz to the board members as being unethical and irresponsible. Within a year and a half, Eisner terminated Ovitz, triggering an almost $140 million buyout provision in Ovitz’s employment agreement. The hiring and firing of Ovitz and the enormous cost to Disney–all at the whim of Eisner–led to a shareholder derivative lawsuit in Delaware Chancery Court, at which both Eisner and Ovitz had to testify.

A third case in point is Disney’s acquisition of The Family Channel in 2001 for $5.2 billion. Apparently, an assumption of the transaction was whether Disney could syndicate its own programming through that channel and thus increase its ratings. Prior to closing, no one had checked to determine whether Disney’s agreements with the other television networks that did carry Disney-originated programming would allow it to re-syndicate these shows on another channel. In fact, those agreements did not permit such a measure. As noted by Stewart, "It was an egregious failure of the kind of due diligence routinely conducted before a major acquisition…[which] simply confirmed the arrogance of the strategic planners, and Eisner’s blindness to potential obstacles once his mind was made up." This sentence sums up the theme of this book, and the work Disney’s lawyers had cut out for them.