Napoleon Pictures Ltd. v. Fox Searchlight Pictures CA2/2

Filed 4/9/15 Napoleon Pictures Ltd. v. Fox Searchlight Pictures CA2/2
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION TWO
NAPOLEON PICTURES LIMITED, B248601
Plaintiff and Appellant, (Los Angeles County
Super. Ct. No. SC113978)
v.
FOX SEARCHLIGHT PICTURES, INC.,
Defendant and Respondent.
APPEAL from a judgment of the Superior Court of Los Angeles County.
Bobbi Tillmon, Judge. Affirmed.
Horwitz & Levy, Jeremy B. Rosen, John F. Querio; Lavely & Singer, Martin D.
Singer, Allison S. Hart for Plaintiff and Appellant.
Caldwell Leslie & Proctor, Linda M. Burrow, Michael D. Roth, Kelly Perigoe for
Defendant and Respondent.
___________________________________________________
In a dispute over film revenue, a referee rejected plaintiff’s claim that defendant’s
vice-president orally agreed to pay a high royalty rate of 31.66 percent for video sales.
The claimed undocumented oral understanding contradicts the parties’ written agreement,
which states that rentals have a high royalty rate while sales royalties are at 10 percent.
The evidence amply supports the judgment. We affirm.
FACTS
Napoleon Pictures Limited (Napoleon) premiered its film Napoleon Dynamite (the
Film) at the 2004 Sundance Film Festival. The Film was produced by 24-year-old
Jeremy Romney Coon, with an initial $404,000 from his family. Numerous film
distributors expressed interest; it was the most sought-after film at Sundance.
Napoleon hired John Sloss to negotiate a distribution agreement for the Film.
Sloss, an experienced entertainment lawyer who has sold 400 independent films, wanted
Fox Searchlight Pictures, Inc. (Fox), to distribute the Film. He immediately began to
negotiate terms with a friend, Fox vice-president Joseph De Marco, with whom Sloss had
arranged at least 10 movie distribution deals. Sloss profits from the Film’s distribution
through his “advisory company,” which receives 10 percent of all revenue arising from
commercial exploitation of the Film.
Sloss and De Marco made a handshake deal on January 18, 2004, one day after the
Film premiered. A “Term Sheet” was signed two days later. Fox paid Napoleon an
acquisition price of $4.75 million, with a 50 percent gross profits participation rate. The
acquisition price was high, compared to what Fox paid for other films between 2000 and
2006. When Fox pays a high acquisition price, it takes a more aggressive stance on other
terms of the distribution agreement.
Central to the parties’ dispute are the terms for home video royalties. Video
exploitation of films is a greater source of revenue than theatrical release.1 In 2004, the
standard home video royalty rate was 20 percent. At the time, the home video market
1 “Video” is a generic term for DVD’s or VHS cassettes, the two formats in home
movies.
2
was changing rapidly from consumer rentals to consumer purchases. Coon understood
the importance of the home video market. During negotiations with Fox at Sundance, he
was told that the home video royalty for the Film would be approximately 25 percent.
The Term Sheet’s “participation terminology” clause reads, “Payment of any
amounts provided for hereunder and all other terms and conditions related to such
amounts shall be in accordance with the terms and conditions set forth herein or, if not
addressed herein, in Searchlight’s Definitions of Net Profits (High Price Product Royalty
shall be 31.66%, with Schedule ‘1’-Glossary attached thereto (‘Participation
Definition’).” The Term Sheet does not define “High Price Product.” However, it
contemplates that “formal documentation memorializing the parties’ agreement will be
prepared, and will contain the balance of the terms governing this agreement, which other
terms shall be in accordance with Searchlight’s standard agreements of this type . . . .”
Sloss did not see the Participation Definition before the Term Sheet was signed,
and neither did Jeremy Coon. However, Sloss knew that the Participation Definition is a
pre-negotiated, standardized document created by Fox, from his past dealings with
De Marco. At trial, Sloss referred to the Participation Definition as “boilerplate” that
“was never negotiated,” but was part of past agreements. In each distribution deal, Sloss
and De Marco discussed the sell-through rate for video royalties, which “was always the
10 percent in the boilerplate,” although he believed that the 10 percent rate only applied
to “bargain bin” sales. Sloss agreed that “bargain bin” sales are not mentioned in the
Term Sheet or the Participation Definition, or anywhere else, although the Participation
Definition defines other important capitalized terms in the Term Sheet, such as
“Remaining Gross Receipts,” “Net Profit,” and “Distribution Expenses.”
Between February and May 2004, Fox’s in-house counsel Jamie Taylor sent drafts
of a formal agreement to a partner at Sloss’s firm, Paul Brennan. Initial drafts did not
include an exhibit relating to home video royalties (and other issues), entitled
“Exhibit ‘A’ Definition of Defined Net Proceeds/Acquisition” (Exhibit A). Attorney
3
Brennan stated that he only reviewed exhibits provided to him, and might not be aware if
a document referred to in the Term Sheet is missing from the long-form agreement.2
On appeal, Napoleon does not contest that Taylor sent a hard copy of Exhibit A to
Brennan on May 10, 2004, though neither Brennan nor Sloss recalled it. Two days later,
Taylor sent a letter to Brennan that alluded to Exhibit A, along with a copy of the
agreement to be signed by Napoleon. Brennan denied receiving Exhibit A, but never
asked Taylor to provide a copy, despite Taylor’s repeated references to Exhibit A in his
correspondence.
Napoleon’s principal Coon signed the agreement on Brennan’s advice and the
document was returned to Fox on May 20, 2004. A fully executed copy of the
Agreement and its attachments—including Exhibit A—was sent to Brennan in July 2004.
Brennan did not contact Taylor to inquire about Exhibit A, and Sloss did not recall
reading it.
The document signed by the parties is entitled “Standard Terms and Conditions
Distribution Rights Acquisition Agreement” (the Agreement). The signature page of the
Agreement states, “No representations or warranties of any kind have been made by
either of the parties to induce the making of this Agreement, except as set forth
specifically herein.” The Agreement provides that “All terms initially capitalized are
specifically defined terms and shall be defined as set forth in the documents in which
they appear within quotation marks” in the Term Sheet. The words “Participation
Definition” are quoted in the Term Sheet and “High Price Product Royalty” is
capitalized.
The Term Sheet is six pages long and contains capitalized-but-undefined terms.
The main body of the Agreement is 12 pages. By contrast, Exhibit A of the Agreement
(plus its Glossary) is 49 pages. Exhibit A states in bold letters that it “is a contractual
formula for the definition and possible payment of contingent compensation which
2 The referee deemed Brennan’s testimony “illogical and implausible” and “simply
not believable.”
4
Participant acknowledges to be highly speculative.” Contingent compensation is money
earned after Fox recouped its acquisition fee of $4.75 million.
Exhibit A addresses video royalties. It defines “High Price Sales/Rental Royalty”
as monies Fox derives from video cassette distribution to wholesale dealers, which are
intended for rental by the public. It defines “Sell-Through Royalty” as 10 percent of the
monies Fox derives from sales of videos intended for purchase by the public. Exhibit A
makes no distinction between full price sales and discounted sales.3 Sloss told De Marco
that the definitions of high price and sell-through royalties in Exhibit A are ”vague” and
“confusing,” but did not ask De Marco to clarify the terms during their negotiations or
have De Marco write down that the high price royalty rate of 31.66 percent will apply to
the great majority of video distribution.
After acquiring the Film, Fox engaged MTV to promote it. MTV and the Film
both appeal to a youthful audience. Fox agreed to pay MTV 5 percent of the Film’s
defined gross proceeds in exchange for promotional support, including airtime and the
creation of advertising spots. MTV hosted live appearances by the Film’s cast and
created nine “interstitial” advertisements ending with the words “Go see Napoleon
Dynamite” that aired on MTV 1,612 times from June to August 2004.
The value of the airtime provided by MTV was over $4.5 million. MTV received
compensation of $2.4 million from Fox. Under the terms of Exhibit A, Fox deducted the
compensation it paid to MTV as a cost “directly related to or allocable to (as Fox may
reasonably determine in good faith) the advertising, publicizing and promoting of the
Picture in any way . . .” in publications, radio or television, websites, and so on.
The Film was successful when released in June 2004, with theatrical revenues of
nearly $45 million. Fox made payments to Napoleon (and to Sloss’s advisory company)
as described in the Term Sheet and Exhibit A. Sloss thought that the home video
3 A prior version of Exhibit A dating to the 1990’s had a formula for determining
“Economy Line Sales.” By 2001, the Exhibit A to distribution agreements negotiated by
Sloss and De Marco no longer included “economy line sales.”
5
payments were “low” in the 2005-2006 participation statements, but he did not call
De Marco to inquire about the low numbers.
In 2006, Napoleon demanded an audit of Film revenues. Exhibit A authorizes an
audit, as noted by Roy Silva, an attorney Coon consulted, who reviewed all documents
from Fox that Coon had in his possession. Napoleon appointed as its auditor Steven
Sills, a CPA and lawyer who has performed over 2,000 motion picture and television
audits since 1982. Sills negotiates contracts and settlements, and is a certified fraud
examiner.
Sills obtained from Sloss or Napoleon the Term Sheet, the Agreement and
Exhibit A. Coon referenced Exhibit A in an e-mail he sent to Sills on January 9, 2008.
Proceeding from the assumption that these documents govern profit participation, Sills’s
first report in 2010 applied a 31.66 percent rate for High Price royalties and 10 percent
for Sell-Through royalties.
After discussion with Sloss, Sills redrafted his report. Sloss sent Fox the “final
audit report” on February 16, 2011. It states, “The Agreement provides for a 31.66%
royalty on ‘High Price’ receipts and a 10% royalty on ‘Sell Through’ receipts. You have
informed us that during the negotiation of the Agreement, Fox’s representatives informed
you that they anticipated a net overall royalty rate of 25%. [¶] Due to the change in the
video marketplace from a rental market to a sell-through market, 87% of the Picture’s
video sales were at the lower rate, resulting in an overall video royalty rate of 12.88%. It
should be noted that this rate is approximately one-half of the industry standard minimum
rate of 20%. [¶] Had Fox reported to you based on the 25% overall rate provided to you
during the contract negotiations, home video royalties would have been increased by
$16,894,429.” At trial, Sloss felt that Sills “misunderstood” their discussion, resulting in
the language Sills employed about an anticipated overall royalty rate of 25 percent.
In 2012, during this litigation, Sills amended his report yet again, writing that “the
Exhibit A that we had in our file, which we used in preparation of the initial reports, was
not applicable to this contract.” Sills reached this conclusion after speaking to Sloss, who
6
believed that Fox promised a 31.66 percent royalty on everything except “bargain bin”
videos that a shopper might pick up in the center aisle at Walmart.
Sills’s revised 2012 audit report states that all home video sales should be reported
at a 31.66% royalty rate, regardless of whether it was “high price” or “sell-through.” It
concludes, “Had Fox reported to you based on the negotiated terms of the Agreement of
31.66%, home video royalties would have been increased by $26,176,571.” The new
report omits reference to a 25 percent overall rate promised during contract negotiations.
PROCEDURAL HISTORY
Napoleon filed suit against Fox in 2011, alleging claims for breach of contract;
promissory estoppel; negligent misrepresentation; reformation; and an accounting. The
Term Sheet, the Agreement, and Exhibit A were attached to the complaint. The
complaint alleges that Fox’s De Marco (who died in 2008, before this lawsuit was filed)
represented that Napoleon would receive a net overall royalty of approximately 25
percent of the net profits from home video sales. Napoleon relied upon this when
granting Fox distribution rights to the Film. Napoleon claimed that it received Exhibit A
“for the first time” in July 2004, two months after Coon signed the Agreement.
As required by the Agreement, the parties stipulated to the appointment of a
referee, a retired judge. (Code Civ. Proc., § 638.) The referee conducted a 14-day bench
trial. During trial, Napoleon amended its complaint to allege that Fox improperly
deducted payments made to MTV. The referee issued a statement of decision. The trial
court adopted the statement of decision and entered judgment on it.
THE STATEMENT OF DECISION
The referee produced an 80-page statement of decision with an extensive summary
of the evidence. She found that the preliminary Term Sheet incorporated by reference a
Participation Definition.4 Before Napoleon executed the final agreement, it was advised
of the applicable Participation Definition. For nearly seven years, the parties conducted
4 Exhibit A to the Agreement is the Participation Definition, which plaintiff calls
“the Definition” and defendant calls “the A-level Acquisition Definition.”
7
themselves in a manner consistent with the understanding that Fox’s Participation
Definition governed their agreement. When the Term Sheet is read in conjunction with
the Participation Definition, it discloses that the High Price Royalty of 31.66 percent
applies only to video rentals and not to consumer purchases of the video: it cannot be
construed to apply to all home video sales except bargain bin. The parties’ agreement
provides a 10 percent royalty rate for all sell-through revenue. The referee characterized
the parties’ agreement with respect to royalties as “not ambiguous.”
The referee declined to reform the parties’ agreement to reflect an oral agreement
that the 31.66 percent royalty rate applies to all video sales (other than bargain bin). The
only evidence of an oral understanding came from Sloss, because De Marco died before
trial. The court rejected Sloss’s testimony because it “is not only contrary to the terms of
an expressly integrated agreement, but is not memorialized or confirmed in a single piece
of paper” or e-mail. It “strains reason” to believe that an aggressive, experienced lawyer
like Sloss would not document a purported oral agreement limiting the 10 percent royalty
rate to bargain bin sales.
Napoleon’s auditor, Sills, initially wrote a report following the terms of the
written Term Sheet and Participation Definition, applying a 10 percent royalty rate to all
sales. No agreement was ever reached defining “bargain bin” and it was never clarified
how Fox’s accounting department could implement an undocumented and undefined
agreement. The “final” audit report that Sloss sent to Fox refers to the Term Sheet and
Exhibit A, but notes an oral representation about a net overall royalty of 25 percent.
Sloss did not claim a purported 31.66 percent agreement for everything but bargain bin
until after this litigation started. There is no proof of a mutual or unilateral mistake, and
Sloss’s version of the parties’ agreement is “inherently incredible.”
Fox cannot be liable on a theory of negligent misrepresentation. As a “shrewd
and experienced negotiator,” Sloss knew that the Fox definitions included a 10 percent
royalty for all sell-through. The alleged oral misrepresentations are inconsistent with the
written agreement, which is fatal to Napoleon’s claim. Parol evidence cannot be used to
contradict the terms of the written contract. The claim for promissory estoppel fails
8
because the alleged promise is not sufficiently delineated, the parties executed a written
agreement for consideration, and Sloss did not reasonably rely on De Marco’s
representations that sell-through royalties would be de minimis.
The referee rejected Napoleon’s claim that Fox misclassified $7.6 million in home
video revenue as sell-through, rather than rental. First, Napoleon did not assert this claim
at trial. Second, the claim was not established. Sills testified that Fox properly accounted
for revenues based on the definitions in Exhibit A.
The referee rejected Napoleon’s contract claims for underreported video on
demand; merchandising fees; residuals; foreign version costs; price protection reserves;
prime time media charges; foreign tax credits; and paying for MTV advertising through a
participation plan. The referee did find that Fox inadequately documented advertising
expenses and credited Napoleon with $125,357. Also, Napoleon was credited with a
small amount for electronic sell-through.
DISCUSSION
1. Appeal and Review
Appeal is taken from the judgment. (Code Civ. Proc., § 904.1, subd. (a)(1).)
Napoleon challenges the sufficiency of the evidence supporting the referee’s decision,
which we review as if made by the trial court. (Code Civ. Proc., § 645.) We must affirm
the judgment if the record contains substantial evidence, contradicted or uncontradicted,
to support the referee’s determinations; we cannot substitute our deductions for those of
the trier of fact. (Bowers v. Bernards (1984) 150 Cal.App.3d 870, 873-874.) Substantial
evidence has ponderable legal significance, is reasonable, credible and of solid value.
(Ibid.; Roddenberry v. Roddenberry (1996) 44 Cal.App.4th 634, 651.)
“On substantial evidence review, we do not ‘weigh the evidence, consider the
credibility of witnesses, or resolve conflicts in the evidence or in the reasonable
inferences that may be drawn from it.’” (Do v. Regents of University of California
(2013) 216 Cal.App.4th 1474, 1492.) Because there is a statement of decision setting
forth factual and legal bases, “any conflict in the evidence or reasonable inferences to be
drawn from the facts will be resolved in support of” the determinations made in the
9
decision. (In re Marriage of Hoffmeister (1987) 191 Cal.App.3d 351, 358.) The
statement of decision makes repeated credibility assessments about witness testimony.
The finder of fact “is the exclusive judge of the credibility of the witnesses. [Citations.]
The trial court is free to disbelieve and reject the testimony of witnesses even though they
are uncontradicted and unimpeached.” (Maslow v. Maslow (1953) 117 Cal.App.2d 237,
243; Meiner v. Ford Motor Co. (1971) 17 Cal.App.3d 127, 140-141.)
Although a contract is interpreted de novo, if extrinsic evidence is admitted as an
aid to interpretation, the trial court’s reasonable construction of the agreement—
supported by substantial evidence—will be upheld if it “turns upon the credibility” of
conflicting evidence. (Parsons v. Bristol Development Co. (1965) 62 Cal.2d 861, 865;
In re Marriage of Fonstein (1976) 17 Cal.3d 738, 746-747; Roddenberry v. Roddenberry,
supra, 44 Cal.App.4th at p. 651.) Extrinsic evidence cannot be used to give the contract a
meaning to which it is not reasonably susceptible. (Parsons, at p. 865.)
2. Breach of Contract Claim
a. Rules of Contract Interpretation
A contract is interpreted to give effect to the mutual intention of the parties at the
time of contracting, if ascertainable. (Civ. Code, § 1636.) The parties’ mutual intent is
determined solely from the language of a written contract whenever possible, analyzing
the clear and explicit meaning of its provisions in their ordinary and popular sense. (Civ.
Code, §§ 1638, 1639; ASP Properties Group, L.P. v. Fard, Inc. (2005) 133 Cal.App.4th
1257, 1269.) The execution of a written contract “supersedes all the negotiations or
stipulations concerning its matter which preceded or accompanied the execution of the
instrument.” (Civ. Code § 1625.)
Terms contained in a writing intended to be the final expression of the parties’
agreement “may not be contradicted by evidence of a prior agreement or of a
contemporaneous oral agreement.” (Code Civ. Proc., § 1856, subd. (a).) Evidence of an
oral agreement cannot alter the obligations in a written instrument. (Casa Herrera, Inc.
v. Beydoun (2004) 32 Cal.4th 336, 344.) Contractual terms may be explained or
supplemented by evidence of consistent additional terms, unless the court determines that
10
the writing was intended as a complete and exclusive statement of terms; terms may be
explained or supplemented by course of dealing, usage of trade, or by course of
performance; and evidence may be admitted to show a mistake or imperfection in the
writing. (Code Civ. Proc., § 1856, subd. (b).)
Extrinsic evidence is admissible to interpret a contract that is either ambiguous on
its face or is reasonably susceptible of two or more interpretations. (Bill Signs Trucking,
LLC v. Signs Family Limited Partnership (2007) 157 Cal.App.4th 1515, 1521.) A two-
step process applies to the admission of extrinsic evidence. First, the court provisionally
receives any credible evidence concerning the parties’ intentions to determine
“ambiguity,” i.e., whether the contract language is reasonably susceptible to the
interpretation urged by a party. Second, if it finds an ambiguity, the court admits the
extrinsic evidence to interpret the contract. (Ibid.; Pacific Gas & E. Co. v. G.W. Thomas
Drayage etc. Co. (1968) 69 Cal.2d 33, 37.)
b. Exhibit A Is Incorporated into the Parties’ Agreement
Napoleon contends that the referee erroneously interpreted “High Price Product
Royalty” in the Term Sheet. In plaintiff’s view, the term “takes its meaning from the
parties’ mutual understanding at the time the term sheet was signed—i.e., that the 31.66
percent royalty rate applies to all home video sales except bargain bin sales.” This oral
understanding applies, Napoleon argues, because Exhibit A is not incorporated by
reference into its agreement with Fox.
A document may be incorporated by a clear and unequivocal reference that is
called to the attention of and consented to by the contracting party, and is known or easily
available to the parties. (Shaw v. Regents of the University of California (1997) 58
Cal.App.4th 44, 54.) The Term Sheet states that “participation terminology” payment
amounts, if not defined in the Term Sheet itself, “shall be” in accordance with Fox’s
Participation Definition. The Term Sheet does not define “High Price Product Royalty.”
As a result, the participation definitions contained in Exhibit A must be incorporated into
the Term Sheet. On its face, Exhibit A states that it is “a contractual formula for the
definition and possible payment of contingent compensation,” which includes royalties.
11
The reference in the Term Sheet to Fox’s participation definitions is clear and
unequivocal. It is not necessary that the definitions incorporated by reference be
physically part of the basic contract, nor is there a need to recite that the contract
“incorporates” another document, so long as the party is guided to it. (Chan v. Drexel
Burnham Lambert, Inc. (1986) 178 Cal.App.3d 632, 641; Avidity Partners, LLC v. State
of California (2013) 221 Cal.App.4th 1180, 1194.) Exhibit A is part of previous film
distribution deals that Sloss negotiated with De Marco: Sloss knew that Exhibit A is
always part of Fox’s agreements, even if he dismissed it as “boilerplate.” The distinction
between “High Price” rentals to the public and “Sell-Through” sales to the public in
Exhibit A existed in 2001, when Sloss negotiated terms with De Marco for the movies
Kissing Jessica Stein, The Waking Life, Super Troopers, and The Deep End. In each
instance, the “Sell-Through” rate was 10 percent, as it is here. Fox’s definitions were
always in an “Exhibit A.”5 Between 2001 and 2004, Sloss did nothing to ensure that the
“Sell-Through” rate was only applied to “bargain bin” sales.
The Term Sheet contemplated that “formal documentation memorializing the
parties’ agreement will be prepared, and will contain the balance of the terms governing
this agreement, which other terms shall be in accordance with Searchlight’s standard
agreements of this type . . . .” The Term Sheet authorized the incorporation of Exhibit A,
which is Fox’s standardized, pre-negotiated rider. Sloss acknowledged that De Marco
said during negotiations, “‘I will give you an A-Level Rider’” (meaning Exhibit A), the
best deal that Fox gives to anyone. An experienced film agent like Sloss, who is familiar
with a movie studio’s standard contract, binds his principal to it, even if he fails to
communicate the provisions to his client. (Columbia Pictures Corp. v. DeToth (1948) 87
5 The reply brief pushes boundaries by arguing that Sloss was “under a duty not to
disclose” Fox’s standard participation definitions to Napoleon because Exhibit A is
privileged and confidential. Fox created Exhibit A. Fox is not Sloss’s client, so
information Fox provided to Sloss is not secret. (Bus. & Prof. Code, § 6068, subd. (e)
[an attorney must “preserve the secrets of his or her client”].)
12
Cal.App.2d 620, 628-631, cited with approval in O’Riordan v. Federal Kemper Life
Assurance Co. (2005) 36 Cal.4th 281, 288.)
Sloss and Brennan had a duty to familiarize themselves with Fox’s “standard
agreements” (including Exhibit A) that “contain the balance of the terms governing this
[Term Sheet].” If they failed to receive or misplaced Exhibit A, after Taylor referred to it
in correspondence, additional copies were easily available. A contracting party is bound
by terms contained in an unattached, but easily available, Exhibit A. (Wolschlager v.
Fidelity National Title Ins. Co. (2003) 111 Cal.App.4th 784, 787, 791.) There is no
plausible reason why the attorneys failed to examine Exhibit A before Coon signed the
Term Sheet in January 2004, and if necessary, obtain written clarification of the rate for
“Sell-Through” before Coon signed the Agreement in May 2004. Their failure to do so
“flies in the face of reason,” as stated by the referee. Sloss’s reliance on oral assurances
was unfounded, not to mention barred by the Agreement’s integration clause.
Coon and his attorney Roy Silva relied upon Exhibit A in demanding an audit of
the Film’s revenues. Only Exhibit A authorizes an audit, not the Term Sheet or the main
body of the Agreement.6 Silva’s e-mail to Coon referred to Exhibit A as “the contract”
and described it as “pretty clear.” Coon forwarded the e-mail to Sills, who prepared an
initial audit report based on Exhibit A and the Term Sheet.
Napoleon cannot cherry-pick favorable parts of Exhibit A as being incorporated
into the Term Sheet (such as the right to an audit), while claiming that the part that is
unfavorable (the Sell-Through royalty rate) is not incorporated. Sloss sent Fox a 2011
“final audit report” that acknowledged a written agreement to pay 10 percent for Sell-
Through (from Exhibit A), but suggests an oral agreement that Fox “anticipated a net
overall royalty rate of 25%.” The claim that Exhibit A does not apply at all was devised
after this lawsuit was filed.
6 In its reply brief, Napoleon for the first time contends that it relied upon the
implied covenant of good faith and fair dealing to request an audit, not on Exhibit A. No
evidence supports this newly minted theory.
13
Although the Term Sheet describes Fox’s participation definition as encompassing
“Definitions of Net Profits” and Exhibit A is entitled “Definition of Defined Net
Proceeds,” Sloss acknowledged that the industry moved away from the term “net profits”
but the change in terminology did not affect the “substance of what those agreements
said.” Indeed, before Napoleon signed the Agreement, Fox attorney Jamie Taylor
pointed out in a letter to Napoleon attorney Paul Brennan that the Term Sheet uses the
“obsolete” words “net profits” when referring to Fox’s participation definitions, although
Exhibit A attached to his letter uses “net proceeds.”
No evidence supports Napoleon’s claim that Exhibit A is not incorporated by
reference into the Term Sheet. The Term Sheet contemplates that Exhibit A will provide
necessary participation definitions. Exhibit A was sent to Brennan before Napoleon
signed the Agreement, and it was previously used by Sloss and De Marco in other
distribution agreements. As noted by the referee, the only portion of Exhibit A that did
not “exist” when the Term Sheet was executed was the blank space for Napoleon’s name.
The parties’ conduct in conducting an audit shows their mutual awareness that Exhibit A
was incorporated by reference and governs their relationship.
c. Parol Evidence of an Oral Understanding Does Not Control
Contrary to Napoleon’s claim, parol evidence of an oral understanding between
Sloss and De Marco does not control here. The referee characterized the parties’ written
agreement as “not ambiguous.” We agree. Exhibit A, which was incorporated by
reference into the Term Sheet, clearly draws a distinction between “High Price” royalties
(defined as video rentals to the public) and “Sell-Through” royalties (defined as video
sales to the public). The negotiated rate of 31.66 percent applies to “High Price” sales.
“Sell-Through” was 10 percent. The parties’ agreement is not ambiguous on its face.
Extrinsic evidence may be received to determine whether contract language is
reasonably susceptible to the interpretation urged by plaintiff. (Bill Signs Trucking, LLC
v. Signs Family Limited Partnership, supra, 157 Cal.App.4th at p. 1521.) The referee
rejected plaintiff’s extrinsic evidence, finding it “strains reason” to believe that an
experienced lawyer like Sloss would fail to memorialize or confirm an alleged oral
14
understanding in a single piece of paper or e-mail, particularly when the signed
Agreement expressly forbids reliance on oral representations by either party.
When the trier of fact finds the lead witness’s testimony “inherently incredible,” as
it did here, it is not our role as a reviewing court to credit testimony that the referee
rejected. De Marco, the only person who could gainsay the alleged oral understanding,
died before Napoleon filed suit. Nevertheless, the referee, as exclusive judge of witness
credibility, was free to disbelieve Sloss, even if his testimony was uncontradicted. “The
trier of the facts is not required to accept the testimony of a witness as true though it
stands uncontradicted where the trier of the facts determines that such testimony is false.”
(People v. Woods (1946) 75 Cal.App.2d 246, 248.) Sloss is not a neutral witness: he
stands to benefit from the outcome of this litigation because his advisory company is
entitled to 10 percent of Fox’s payment.
Absent credible evidence of an oral understanding, the parties’ distribution
agreement is not reasonably susceptible of the interpretation that Napoleon places on it.
“High Price” and “Sell-Through” are specifically defined terms, with different royalty
rates. The purported oral understanding—that there was one royalty rate for everything
except bargain bin sales—contradicts the writings. The Term Sheet indicates that the
high rate applies to “High Price” royalties. Just above the signature line, the Agreement
states, “No representations or warranties of any kind have been made by either of the
parties to induce the making of this Agreement.” Applying the usual rules of contract
interpretation, the terms of the writing cannot be contradicted by evidence of a
contemporaneous oral agreement. (Code Civ. Proc., § 1856, subd. (a); Casa Herrera,
Inc. v. Beydoun, supra, 32 Cal.4th at p. 344.)
3. Reformation of Contract Claim
Napoleon asserts that the referee should have reformed the parties’ agreement due
to mutual mistake. A written contract may be reformed when, through fraud or mutual
mistake of the parties, it “does not truly express the intention of the parties.” (Civ. Code,
§ 3399.) Mutual mistake may be shown with undisputed evidence that all parties
incorrectly believed their written documents were sufficient to carry out their manifest
15
intentions. (Jones v. First American Title Ins. Co. (2003) 107 Cal.App.4th 381, 389.)
Napoleon maintains that it has “amply demonstrated that Sloss and De Marco intended
the 31.66 percent royalty rate to apply to all home video sales except bargain bin sales
and mistakenly assumed that the term ‘High Price Product Royalty’ in the term sheet
would encompass that understanding.”
The record does not demonstrate that De Marco intended for the royalty rate for
home videos to be anything other than what is expressed in the parties’ written
agreement. Prior film distribution agreements negotiated by Sloss and De Marco had
two-tiered royalty rates, including a 10 percent Sell-Through rate. Fox’s agreement with
Napoleon was consistent with the parties’ prior agreements, not a mistake.7
The concept of “bargain bin” does not appear in the Term Sheet, the Agreement,
or Exhibit A. Nor does it appear elsewhere, such as a letter or e-mail. Sloss admitted as
much at trial. There is no credible showing that the parties ever negotiated a “bargain
bin” price. There was no proof that De Marco instructed Fox’s accounting department to
separate out “bargain bin” sales and make 10 percent royalty payments on those sales
alone. All Fox sales, whether full price or deeply discounted, flow through the “sell-
through” classification in the company’s general ledger. Without any proof of a meeting
of the minds regarding “bargain bin” sales, the written agreement cannot be reformed.
Critically, the referee discounted Sloss’s testimony regarding an undocumented
agreement to pay a high royalty rate for video sales, finding that it “strains reason [that]
he did not document any of the several identical conversations he purports to have had
repeatedly with De Marco” for five movies, including the Film. Sloss could have
pursued a resolution of this purported misunderstanding with De Marco in 2005-2006,
when Sloss first noticed that Fox’s payments were “low.” Instead, Sloss waited until
De Marco’s death to posit the existence of an oral understanding about royalty rates that
7 Sloss and De Marco negotiated a 31.66 percent rate for both high price and sell-
through royalties in 2006, for the movie Little Miss Sunshine, as shown in the term sheet
for that deal.
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conflicted with Napoleon’s written agreement. The referee properly declined to reform
the parties’ written agreement because there is no substantial evidence of a mutual intent
that is different from what is expressed in the Term Sheet and Exhibit A.
4. Negligent Misrepresentation Claim
The elements of a claim for misrepresentation are a misrepresentation of fact with
reasonable grounds for believing it to be true, made with the intent to induce reliance, and
justifiable reliance on the misrepresentation. (Thrifty Payless, Inc. v. The Americana at
Brand, LLC (2013) 218 Cal.App.4th 1230, 1239.) The alleged misrepresentation is that
De Marco assured Sloss that the overwhelming majority of home video royalties comes
from “high price” receipts, and other video receipts (“sell-through”) were de minimis,
drastically reduced sales to the public.
To the extent that De Marco tried to prognosticate future sales at any price point,
Sloss could not reasonably rely on that speculation because Sloss himself testified that
the video market “was mutating on a daily basis” and “was in complete flux” in 2004. In
any event, as an experienced film agent, Sloss was as well placed as De Marco to predict
whether home video sales trends would continue or dissipate.
Beyond that, Napoleon’s claim of misrepresentation once again seeks to ignore the
terms of the parties’ written, integrated agreement and enforce an undocumented oral
assurance at odds with the written agreement. This cannot be done. (Alling v. Universal
Manufacturing Corp. (1992) 5 Cal.App.4th 1412, 1436-1437.) The parol evidence rule
protects the terms of a valid written contract, although it does not bar evidence
challenging the validity of the agreement itself if the plaintiff wishes to prove that the
instrument is void or voidable because it was procured by fraud. (Code Civ. Proc.,
§ 1856, subds. (a), (f); Riverisland Cold Storage, Inc. v. Fresno-Madera Production
Credit Assn. (2013) 55 Cal.4th 1169, 1174-1175, 1182 [“fraud undermines the essential
validity of the parties’ agreement”].) Napoleon does not argue that its agreement with
Fox is void and invalid; rather, it wants to enforce the agreement but get more money.
Even if Napoleon’s parol evidence was considered, it did not prove its claim because the
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referee disbelieved Sloss, whose testimony about the alleged misrepresentations made by
De Marco was “inherently incredible.”
5. Napoleon’s Challenge to Payments Made to MTV
The Term Sheet specifies that distribution expenses are to be deducted from
Napoleon’s profit participation. Exhibit A defines distribution expenses as the cost of
purchasing advertising time on television (among other costs). There is no limitation on
how payments to advertisers must be structured, only that Fox exercise good faith in
assessing costs directly related to publicizing and promoting the Film.
Napoleon objects to the deal Fox struck with MTV—giving MTV a profit
participation instead of paying outright for the 1,612 interstitial advertisements that ran
on MTV in 2004. Exhibit A, which is incorporated into the Term Sheet, does not
prohibit the arrangement that was reached between Fox and MTV. The advertisements
were a cost of purchasing television time to maximize the Film’s exposure, especially
when tied into appearances by the Film’s cast on MTV. Napoleon’s claim is odd: had
Fox paid MTV directly for the airtime, instead of through a participation agreement, it
would have cost Fox (and Napoleon) over $4.5 million. Fox paid MTV only $2.4
million, less than half the value of the airtime. It makes no sense for Napoleon to argue
that Fox should have paid MTV twice as much for the Film’s MTV air time.
Sloss testified that he wanted Fox to distribute the Film because of its superior
marketing techniques. Obviously, that turned out to be true: the Film’s revenues
exceeded its production costs by tens of millions of dollars. It cannot be said, given the
Film’s success, that Fox’s decision to partner with MTV was foolish, or that charging the
cost to Napoleon was in bad faith. Napoleon must bear its share of the cost of the
agreement to secure advertising on MTV.
CONCLUSION
Despite a lengthy record, this case is not complicated. The parties entered a
written film distribution agreement in 2004 that contains two royalty rates, one for home
video rentals and one for consumer purchases, plus a clause stating that “no
representations or warranties of any kind have been made by either of the parties to
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induce the making of this Agreement, except as set forth specifically herein.” Plaintiff’s
agent-attorney Sloss testified to an oral understanding that contradicts the written
agreement. The trier of fact found the written agreement “not ambiguous” and also found
that the testimony contradicting it is “inherently incredible” and “defies reason.”
Plaintiff insisted that Exhibit A was a newly created and mysterious addition to the
Term Sheet. Exhibit A is always part of Fox’s film deals because it defines participation
terms. The Term Sheet and the Agreement are meaningless without the implementing
language in Exhibit A. That is why the Term Sheet is only six pages, but Exhibit A is 49
pages. Plaintiff relied on Exhibit A to determine its right to an audit and Fox allowed the
audit thanks to Exhibit A. Sloss was familiar with Exhibit A as Fox’s standard agreement
containing the balance of the terms governing the parties’ relationship. This knowledge
is imputed to plaintiff.
DISPOSITION
The judgment is affirmed.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS.
BOREN, P.J.
We concur:
ASHMANN-GERST, J.
HOFFSTADT, J.
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