conspiracy theories- david j. myers, esq

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  1. 1. MCII AI'I'lCl. I IND III}-AIIIIIMIN1 III? By reading this article and answering the accompanying test quations,you can ecim one MICLE credit.To applyfor credit,please IoIIow the insfrlactions on rhe test answer sheei on page 39.Ieiit-crtaiiimentaWlSSuifsponsored byace jby david j.myersconspiracy .theoriesParticipants in entertainment projects that are cnsnared in litigationface potential personal liability under a variety of statutes and common lawrving Berlins legendary anthem still says it best:there's no business like show business.Few if any other industries offer the glamour,fame,and fortune,or comparable opportuni- ties for creativity and individuality Along with the ben- ets,however,come a number of vagaries.Multimillion-dollar transactions are routinely con- ducted based on deal memos that lack sufficient doc- umentation or even signatures,a practice that inex- orably leads to considerable uncertainty about the determination of rights.Ideas are printed.Accounting practices often defy comprehension,with prot par- ticipations in even the most successful projects some how being circumvented.No matter what type of conict emerges,aggrieved parties often seek alternate,deep pocket sources of recovery,perhaps in response to a partyspotential or actual nancial instability,or maybe as a form of leverage to encourage an adversary to throw in the towel.For deal participants,the potential to become embroiled in litigation,even for those seem- ingly without fault,is signicant.Concluding that t. l1e risks are remote,the exposure minimal,or that a brewing controversy is someone elses problem,could not be more wrong. The danger of liability may seem less signicant in contract claims,or when settlement appears likely,or in claims against nancially viable parties.However,a participanfs potential exposure should never be dis- counted if tort remedies also are availab1eand theyDavid].Myers specializes in business and entertain- ment litigation.He was deznse counsel prior to trial in Kidron 1).Movie Acquisition Corporation. LOS ANGELES LAWYER /APRIL 1999 35
  2. 2. usually are.Settlements frequently are less likely than they may first appearand can fall through for seemingly unimportant differ- ences.As for nancial viability,joint tortfea sors will nd that collectibility is no guaran- tee against someday having their own opportunity to explain to a jury why they should not be punished. Remedies for claims of wrongdoing in the entertainment industry usually are available under collective bargaining agreements,fed- eral copyrightlaw,the l. anhamAct,and other federal statutes.Plaintiffs counsel,however,often seek to forego federal claims in favor of state law claims. The choice to avoid federaljnrisdiction is based on the perceived benets of California state law over federal law,including the like lihood of arguing a claim before a jury because summary judgment motions are more difcult to obtain in California courts than in federal courts.Also,juries in California state courts consist of 12 members (versus 6 in federal court),and agreement among only 9 jurors will support a verdict (versus the require- ment of unanimity in federal court).Perhaps most significantly,punitive damages are per- ceived to be potentially greater in value than the statutory remedies available under federal law.Beyond the issue of preferred jurisdic- tion,however,the likelihood is great that California law will govern the scope of avail- able relief in an entertainment dispute,even if a claim is brought in a federal court or another states court,given the amount of entertainment business that is (and arguably could be) subject to California law. There are numerous sources of potential exposure under California law for partici- pants involved in entertainment projects that are mired in claims of misconduct: 0 A participant is jointly and severally respon- sible for the liabilities of a partnership or joint venture. 0 A participant may be jointly and severally liable under contract law,statute,or equity based on principles of agency,trust,guar- anty,indemnity,or alter ego. 0 Any person or entity that comes into pos- session of wrongfully acquired property may be required,as a constructive trustee,to return the property to its rightful owner,regardless of culpability. A participant thus could be required to disgorge the very assets acquired by the participation. 0 An entire investment can be lost or tied up in litigation if the project is frustrated by an injunction. 0 A participant also could face tort damages,both directly and vicariously as a cocon- spirator or alder-abettor. "5 Even if innocent of wrongdoing,a participant may risk poten- tially devastating litigation by being included36 LOS ANGELES LAWYER /APRIL 1999i{emecllesf()1* claims of wrongdoing inthe entertainment industry usually areavailable under various fedleral statutes, but plaintiffs often seek to forego fed-eral claims in fa YOI of state law claims. in a project that is confronted with a claim of misconduct.-Until a recent series of decisions by California's appellate courts,transaction par- ticipants-sucl-:as nanciers.producers,dis- tributors,and even talent-could only spec- ulate about the consequences of their involvement in any project that could possibly face future claims of wrongdoing,such as assertions that the project was based on stolen or fraudulently acquired rights.By estab- lishing several limitations that,if applicable,can shelter a participant from liability for the misconduct of others,courts now can offer some guidance and comfort. Applying the new protections success- fully,however,may be an uncertain enter- prise in itself.Nevertheless,potential par- ticipants in entertainment projects have new,albeit limited,tools to measure the pre- dictability of the risk of signing on to a proj- ectand potential claimants can use the same tools to avoid insupportable lawsuits,potential sanctions,and malicious prosecu- tion claims. The Conspiracy RiskN 0 case better illustrates the potential prob- lems confronting participants in a project clouded by accusations than Kidron v.Movie Acquisition Corporation. The published por- tion of the decision afrmed a judgment of nonsuit in favor of one participant,but the unpublished portions of the decision reversed judgments in excess of $50 million against var- ious parties involved in the production and distribution of a television series.These par- ties were held liable merely because they participated in the series after receiving notice of the plaintiffs claims of wrongdoing against the series producer. The case involved a dispute between a television producer and the producer s joint venture partner,the purported creator of the concept for the series,who alleged that the producer fraudulently acquired the rights tohis concept When the dispute could not be resolved,all the primary participants in the seriesthe nanciers,distributors,broad- casters,production executives,and the writerwere sued along with the producer as coconspirators in the producers alleged fraud and breaches of duciary duty,even though the participants either were already under contract or were allowed to participate in the series without the claimants objection. After extensive litigation (in which,luck- ily for individual defendants,the producer provided a defense),the participants who were contractually committed to the series before receiving notice of the claims obtained summary judgment or voluntary dismissal before trial.However,all the postnotice par- ticipants were forced to endure a lengthy trial many cases,they sustained adverse judgments. Fortunately for future potential defen- dants,the Kidron court set forth several strict requirements for claims that depend upon proof of a conspiracy.First.the court claried that no conspiratorial agreementin other words,no agreement to injure-can exist without the requisite intent both to commit an act and to injure.Therefore,the court held that proof of intentional participation in wrong- doing,without proof of participation with the intent to injure the claimant,was legally insuf- cient to implicate the participants. Second,for plaintiffs to establish the required conspiratorial agreement.the court required proof that the defendants had actual knowledge of wror1gdoingas opposed to knowledge of a claim of wrongdoingbefore the completion of the underlying tort,which the court held occurred at the time of the acquisition of rights.Absent such evidence,the court refused to impose a duty of inquiry upon potential participants,who do not have the responsibility or means to investigate or police relationships between third parties. Third,in barn'. ng the plaintiffs attempt to implicate the participants in the producersi
  3. 3. alleged breaches of duciary duty,the Kidron Vcourt relied on Applied Equipment Corpor- ation v.Litton Saudi-Arabia,Ltd. and held that,as a matter of law,a cause of action could not be stated against a nonduciary for con- spiracy to breach a duciary duty.Notwithstanding these limitations on lia-bility,reliance on Kidron should be guardedfor a host of reasons.Intent,for example,is generally a question of fact,and questions of fact are generally resolved by trials.Also,a seemingly completed tort may actually be a continuing tort,and thus a conspiracy could exist based on later-acquired knowledge.Moreover,the distinction between a claim of wrongdoing and "evidence" of wrongdoing can be less than clear,which could lead to a nding that the knowledge of certain facts is sufcient to impart actual knowledge of wrongdoing.In addition,another court could impute knowledge of wrongdoing to a par- ticipant who turns a blind eye to circum- stances that impart constructive notice or are sufciently suspicious to create a duty of inquiry. Kidran also fails to reach issues such as the dangerous possibility that constructive or inquiry knowledge may be sufficient to support liability