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«APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE CENTRAL DISTRICT OF CALIFORNIA, CASE NO. CV 02-9326-MMM HON. MARGARET M. MORROW, JUDGE ...»

-- [ Page 1 ] --

Nos. 05-55374, 05-55421

IN THE

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

WARNER BROS. INTERNATIONAL TELEVISION DISTRIBUTION,

a division of TIME W ARNER ENTERTAINMENT COMPANY, L.P.,

Plaintiff and Appellee,

vs.

GOLDEN CHANNELS & CO.,

Defendant and Appellant.

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE

CENTRAL DISTRICT OF CALIFORNIA, CASE NO. CV 02-9326-MMM HON. MARGARET M. MORROW, JUDGE APPELLEE’S BRIEF HORVITZ & LEVY LLP BARRY R. LEVY (STATE BAR NO. 53977) FREDERIC D. COHEN (STATE BAR NO. 56755) 15760 VENTURA BOULEVARD, 18TH FLOOR ENCINO, CALIFORNIA 91436 (818) 995-0800 • FAX (818) 995-3157

ATTORNEYS FOR PLAINTIFF AND APPELLEE

WARNER BROS. INTERNATIONAL TELEVISION DISTRIBUTION,

a division of TIME W ARNER ENTERTAINMENT COM PANY, L.P.

TABLE OF CONTENTS

Page TABLE OF AUTHORITIES.......................................... v CORPORATE DISCLOSURE STATEMENT........................... ix INTRODUCTION AND SUMMARY OF ARGUMENT................... 1 JURISDICTIONAL STATEMENT.................................... 5 STATEMENT OF ISSUES........................................... 5 STATEMENT OF FACTS........................................... 6 A. Prior to 1999, Golden, acting through a purchasing cartel, licenses a select number of television programs from Warner through a series of short-term agreements............................. 6 B. In 1999, after the Israeli television cartel is broken, Warner negotiates a long term “output” agreement with Golden, which includes a requirement that Golden post a letter of credit as security................................................ 7 C. Warner exercises its option to extend the License Agreement, unaware that Golden was suffering financial problems and had determined to renegotiate the Agreement..................... 13 D. At Golden’s request, Warner agrees not to declare the License Agreement in default and draw down on the letter of credit.

Instea

–  –  –

III. BECAUSE GOLDEN REPUDIATED ITS OBLIGATIONS UNDER

THE LICENSE AGREEMENT, THE DISTRICT COURT WAS

ENTITLED TO AWARD WARNER THE LICENSE FEES IT COULD

HAVE EARNED FOR THE DURATION OF THE AGREEMENT,

LESS THE FEES WARNER RECOUPED BY LICENSING

PROGRAMS TO OTHER BROADCASTERS..................... 49

–  –  –

1 Corbin on Contracts, Formation of Contracts § 3.8 (1993)............... 45 1 Witkin, Summary of California Law, Contracts § 813 (9th ed. 1987)....... 49

–  –  –

Plaintiff and Appellee Warner Bros. International Television Distribution Inc. is owned by Burbank Television Enterprises Inc., which is in turn owned by Warner Bros. Entertainment Inc. Warner Bros. Entertainment Inc.’s parent is Time Warner Inc., publicly traded on the New York Stock Exchange under the symbol TWX.

–  –  –

WARNER BROS. INTERNATIONAL TELEVISION DISTRIBUTION,

a division of TIME WARNER ENTERTAINMENT COMPANY, L.P., Plaintiff and Appellee,

–  –  –

Warner Bros. International Television Distribution (Warner) filed this breach of contract action against Golden Channels & Co. (Golden), an Israeli cable company, after Golden fell seriously behind in its obligation to pay Warner license fees for television programs Golden licensed from Warner. Golden ultimately refused to make any further payments unless Warner forfeited certain rights under the parties’ License Agreement. Following a bench trial, the district court concluded that, by refusing to continue performing its contract obligations unless Warner relinquished certain rights, Golden had repudiated the License Agreement and committed a total breach. The district court, therefore, ruled Golden was liable for all unpaid license fees, past and future, that Warner would have earned under the License Agreement, less the fees Warner could make up by licensing its programs to other broadcasters.

The district court’s conclusion that Golden repudiated the License Agreement is based on its resolution of disputed issues of fact, and its resolution of those factual issues is subject to a highly deferential standard of review. As we demonstrate below, the record fully supports the district court’s findings.

First, the record supports the conclusion that Golden repudiated its obligations under the License Agreement. The district court found that when Golden began experiencing cash flow problems, it urged Warner to renegotiate the License Agreement to reduce Golden’s financial obligations. Warner said it would be willing to participate in such negotiations, on one condition: under the License Agreement, Golden was required to provide a $5 million letter of credit to secure its obligations for the first two and one-half years of the agreement and to provide some form of security thereafter; as a condition to participating in negotiations to amend the agreement, Warner insisted Golden agree to keep the letter of credit in place for the full five-year term of the License Agreement. Golden raised no objections to this requirement and entered into a year-long round of negotiations with Warner, during which time its debt continued to grow. Consistent with Warner’s condition for negotiations, when the letter of credit was about to expire after the initial two and one-half year term, Golden extended it for another year. Based on these facts, the court concluded that (1) Golden was estopped from denying that it had agreed to keep the letter of credit in place for the full five-year term of the License Agreement and (2) Golden, by allowing the letter of credit to be extended, entered into an implied-in-fact agreement to keep the letter of credit in place for another year. In either case, the district court concluded Golden breached the License Agreement by refusing to pay any past or future license fees unless Warner gave up the letter of credit. The court’s conclusions are fully supported by the record and should be affirmed.





The second principal issue in the appeal concerns the scope of Warner’s damages for Golden’s breach. The law in California is well established that when a party has repudiated its contract obligations by imposing an improper condition on performance, the injured party is entitled to “benefit of the bargain” damages equal to the benefits the non-breaching party would have received had the contract been performed. In this case, those benefits include the license fees Golden was contractually obligated to pay over the life of the License Agreement, less the fees Warner could recoup by licensing programs to other broadcasters. Golden’s contention it did not have notice Warner was seeking benefit of the bargain damages based on a “repudiation” or “anticipatory breach” theory is belied by the numerous pre-trial pleadings that addressed that specific issue and that cited the very cases upon which the district court based its award of future damages.

–  –  –

1. Does the record support the district court’s factual conclusion that Golden breached the License Agreement by refusing to pay past due or future license fees unless Warner gave up the letter of credit that secured Golden’s ongoing financial obligations?

2. Did the district court correctly rule that Golden repudiated the License Agreement and was therefore liable for “benefit of the bargain” damages that included future license fees it owed Warner under the agreement?

–  –  –

A. Prior to 1999, Golden, acting through a purchasing cartel, licenses a select number of television programs from Warner through a series of short-term agreements.

Warner Bros. International Television Distribution Inc. (Warner) is one of the largest distributors of entertainment programming in the international market, licensing television programs and feature films in more than 100 countries. (ER 210;

SER 17.) Golden Channels & Co. (Golden) is an Israeli cable company. (Id.) In 1989, Golden, acting in concert with two other Israeli cable companies, Tevel and Matav, created Israel Cable Programming Ltd. (ICP) to jointly operate two broadcast channels that each cable company independently made available to subscribers – Channel 3, known as “The Family Channel,” and Channel 4, known as “The Movie Channel.” (Id.) At the time they created ICP, Golden, Tevel, and Matav were the sole providers of multi-channel television in Israel. (ER 210.) With no competition from other multi-channel providers, ICP had considerable leverage in choosing the programs it wished to license and the prices it wished to pay. (SER 44.) Between 1989 and 1999, ICP, acting with cartel-like powers, entered into a series of one-year contracts with Warner for a select number of shows of their own choosing, at relatively low license fees. (SER 17, 44-44A.) B. In 1999, after the Israeli television cartel is broken, Warner negotiates a long term “output” agreement with Golden, which includes a requirement that Golden post a letter of credit as

–  –  –

In January 1999, Israel issued a license to DBS Satellite Services that allowed DBS to begin broadcasting multi-channel television via satellite. (ER 210.) DBS immediately began negotiating with several studios, including Warner, for the exclusive right to broadcast television programs that Golden had previously been licensing under short term agreements. (Id.; SER 195A.) DBS offered to pay higher fees than those the cable stations had been paying. (SER 46.) In June 1999, Warner was on the verge of concluding a license deal with the satellite company. (SER 45The entry of DBS into the Israeli television market abruptly ended ICP’s ability to operate as a purchasing cartel. Concerned about losing the right to broadcast Warner’s programs, Golden began to aggressively pursue entering into its own exclusive long-term license agreement with Warner. (SER 64, 195A.) Golden and DBS went back and forth submitting progressively higher license fee proposals to Warner. (SER 18.) By mid-July 1999, Golden finally outbid the satellite company, and Warner’s and Golden’s negotiators sat down to memorialize their new agreement.

(Id.) The agreement, captioned “Basic Subscription License Agreement” and signed on July 13, 1999, differed materially from the parties’ previous agreements in

numerous respects, including the following:

(1) The agreement was for multiple years: In contrast to prior license agreements between Golden and Warner, which were one-year deals, the initial term of the new agreement was 30 months (two and one-half years), from December 1, 1999 to May 31, 2002. (ER 211, 493.) In addition, the agreement gave Warner the unilateral option to extend the agreement for an additional 30 months, from June 1, 2002 to November 30, 2004. (ER 496.) (2) The agreement specified the minimum number of hours of programming Golden was obligated to license each year: In contrast to Golden’s previous agreements with Warner, in which Golden was able to cherry-pick a select number of programs for each broadcast season (SER 44), the License Agreement prescribed a set minimum number of hours of programming that Golden was obligated to purchase each year, in five separate categories: New Series, Renewal Series, Library Series, Re-Run Series, and Special Programs. (ER 487-90.) In addition, the agreement required Golden to license from Warner all New Series for which Warner controlled the rights, and all subsequent series of shows previously licensed.

(ER 487, 506.) As to New and Renewal series, the License Agreement was therefore an “output” agreement, meaning one in which the client “secures all of the production of the Warner company so that we don’t take it onto the market and offer it to other companies.” (SER 117-18.) Warner’s lineup included some of the premier shows on television, including “Friends,” “ER,” “The West Wing,” and “Sopranos.” (SER 36.) (3) The agreement specified the minimum payments Golden was required to make each year. In addition to agreeing to license a minimum number of hours of programming each year, Golden also agreed to license enough programs to satisfy the

agreement’s “Minimum Spend Commitment[s],” which broke down as follows:

Year 1 – $5 million; Year 2 – $5.5 million; Year 3 – $6 million; Year 4 – $7 million;

Year 5 – $7.5 million. (ER 494, 496.) It agreed to pay these license fees on a quarterly basis on December 1, March 1, June 1, and September 1. (ER 495.) The agreement also required that Golden pay a $1.5 million “Initial Fee,” and a $500,000 “Extension Option Fee” if Warner exercised its option to extend the agreement’s term.

(ER 496.) (4) The agreement imposed “Life of Series” commitments for New Series:



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