New Zealand: The Hobbit: an unexpected lawsuit - breach of contract?

Last Updated: 17 January 2014
Article by Sarah Hoffman

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 the mid-1990s, Miramax acquired the film rights to The Hobbit and The Lord of the Rings trilogy after Peter Jackson, who had previously worked with Miramax, proposed to produce film adaptations of Tolkien's works. Jackson and his team began work on two films that would be based on The Lord of the Rings trilogy, and the Plaintiffs say that they spent over $10 million on the project. Ultimately, Miramax was unwilling to finance the estimated $150 million cost of production, and New Line took over the project.

This resulted in the transaction that is the subject of the present lawsuit. In 1998 Miramax sold the film rights for The Lord of the Rings and The Hobbit to New Line. As consideration for the transfer, 5% of the gross receipts from the "first motion picture" based on each book would be paid to Miramax.

At the time of the Agreement, it appears the parties contemplated that only one film based on each of the books would be made – this was the case for The Lord of the Rings Trilogy. However The Hobbit was made into three motion pictures. The Weinstein brothers and Miramax claim they are entitled to a share in the revenue of all three movies. Warner Brothers (which merged with its subsidiary New Line in 2008) 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 forceful opening line of the claim states that "this case is about greed and ingratitude", perhaps intending to evoke a picture of Warner Brothers as the dragon jealously perched on a pile of gold.

The first two causes of action relate to the proper interpretation of the Agreement. That is, the Plaintiffs first seek a declaration that they are entitled to be paid for the last two instalments of The Hobbit, and secondly claim that Warner Brothers' denial of this entitlement is an anticipatory breach of contract, for which they seek $75 million in damages.

The Agreement, which is annexed to the claim document, 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 which is produced by or pursuant to the authority of [New Line or Warner Brothers], but excluding remakes".

The Plaintiffs argue that Warner Brothers has taken the "absurd position" that the final instalments are "remakes". 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 of an old movie with new actors (such as Gus Van Sant's Psycho) or as a looser adaptation of the older movie (such as Ocean's Eleven). Thus 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 purpose of excluding "remakes" may simply have been to clarify that the Plaintiffs would not be paid for remakes of the first motion picture based on each of the books.

The Plaintiffs deal with this issue by arguing that the trilogy is effectively one motion picture divided into three parts, which collectively tell the entire story of The Hobbit. On that basis, the "Original Picture" definition encompasses the final instalments of The Hobbit. The Plaintiffs compare the structure of The Hobbit films to a long form television series, noting that all three movies have "The Hobbit" in their titles. They also point to statements by Peter Jackson that the instalments were "written and shot as part of a single motion picture". In other words, it could be argued that the three instalments must be viewed in their totality, each being part of a greater whole.

The issue with this approach is that it 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 the "first motion picture" provision arguably imposes a further restriction. That is, the Plaintiffs do not need to be paid for remakes or second or subsequent motion pictures that are based on each of the books. 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 are suggesting that the intention was for them to be compensated for the film depiction of The Hobbit in its entirety. It is noted that the Agreement was signed in 1998, before it was in vogue for directors to break up movies based on a single source into different parts. This has since become more common, for example, the final Harry Potter and Twilight books had two-part film adaptations. On that basis it is possible that the splitting of any of the books into more than one film was simply not contemplated by the parties at the time of the Agreement.

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" based on The Hobbit are plain and unambiguous. There is authority to the effect that the Plaintiffs 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 by splitting The Hobbit into three instalments, and stating the Plaintiffs are only entitled to revenue from the first film, Warner Brothers sought 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 contract. The contract 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. The Plaintiffs may be able to deal with this by arguing that the benefit of the contract to them has been diminished by Warner Brothers' conduct, but 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, which is similar to promissory estoppel as it is understood in common law jurisdictions. It allows for a promise made without consideration to be enforced to prevent injustice, but only if the promisor should have reasonably expected the promisee to rely on the promise, and the promisee did act in reliance on the promise to his or her detriment.

The Plaintiffs assert that Warner Brothers clearly and unambiguously promised them compensation for the film exploitation of The Hobbit book, and they reasonably relied on the promise when they entered into the Agreement. As a result of the alleged breach by Warner Brothers, the Plaintiffs say they have been injured by amounts expected to exceed $75 million. There is not much further detail in the claim document, and this issue will probably turn on the nature of the representations made to the Plaintiffs and the extent of their reliance on such representations. 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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Sarah Hoffman
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