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SCHOLASTIC INC. v. HARRIS

December 29, 1999

SCHOLASTIC INC. AND SCHOLASTIC PRODUCTIONS, INC., PLAINTIFFS,
v.
ROBERT HARRIS AND HARRIS ENTERTAINMENT, INC., DEFENDANTS.



The opinion of the court was delivered by: Hellerstein, District Judge.

  AMENDED OPINION AND ORDER

This case involves a joint venture formed by a publisher of children's books and its subsidiary, plaintiffs Scholastic Inc. ("Scholastic") and Scholastic Productions Inc. ("SPI") (collectively, the "Plaintiffs"), respectively, and a former movie studio executive, Defendant Robert Harris, and his production company, Defendant Harris Entertainment, Inc. ("HEI"), to create a motion picture production company to produce full-length feature films. Scholastic and SPI were to provide the capital, and Harris and HEI, their knowledge and skill, in acquiring, developing and producing motion pictures and other forms of entertainment. Pursuant to an agreement (the "Agreement") signed by SPI, Harris and HEI on October 12, 1990, Harris claims that he is entitled to 100,000 stock appreciation rights (the "SARs") in Scholastic, to be issued at designated intervals at $18 per share.

I hold that the Agreement is complete and unambiguous, and that Harris did not breach the terms and conditions of that contract, and, consequently, that Harris is entitled to the SARs. Accordingly, I deny Plaintiffs' motion for partial summary judgment, and I grant Defendants' motion for summary judgment dismissing the complaint and granting judgment on Defendants' First Counterclaim.*fn1

STATEMENT OF FACTS

A. The Parties

Defendant Robert Harris is a citizen of the State of Connecticut and the President and CEO of HEI, a California corporation. (Defendants' Am. Statement of Undisputed Facts Pursuant to Rule 56.1 ("Harris 56.1"), at ¶¶ 1,2). Prior to his involvement with the Defendants, Harris was the President of Universal Television at MCA, Inc./Universal and the President of Imagine Films, and had more than 25 years experience in the entertainment industry. (Harris Aff. at ¶ 5). Harris & Company ("Harris & Co.") is a partnership whose offices are located in Los Angeles, California. SPI and HEI are the two 50% owners of Harris & Co.

Scholastic, Inc. ("Scholastic") is a corporation organized under the laws of the State of New York whose stock is publicly traded on NASDAQ. Scholastic, Inc. ("SPI"), also a New York corporation, is a wholly-owned subsidiary of Scholastic. The Court has diversity jurisdiction over the parties. 28 U.S.C. § 1332.

B. The October 12, 1990 Agreement

In early 1990, SPI and Scholastic commenced negotiations with Harris and HEI to develop a motion picture production company. (Plaintiffs Scholastic and SPI's Statement of Undisputed Facts ("Scholastic 56.1"), at ¶ 1). In addition to having a stake in the produced films, Scholastic hoped to reap synergies from the motion picture production company, like books, licenses, and other ancillary products created from successful motion pictures. (Scholastic 56.1, at ¶ 2). During 1990, Harris & Co. provided Scholastic and SPI with a seven-year business plan, outlining the proposed lines of business for the venture, as well as anticipated revenues and expenditures. (Harris Aff., at Ex.6).

On October 12, 1990, SPI, agreed with HEI and Harris to a written joint venture agreement (the "Agreement") for the development and production of theatrical motion pictures and television programs. (Harris 56.1, at ¶ 6). SPI agreed to provide an initial $2,000,000 on a non-recourse basis for HEI's "development costs as requested by HEI," and approximately $116,000 per month for a 12 or 24 month period, according to the options set out in the Agreement, from the initial development funding date (the "IDFD") (the date the $2,000,000 was contributed) until:

  (a) 24 months following the IDFD or (b) 12 months
  from the date SPI makes available the Development
  Loans to HEI pursuant to this paragraph as production
  costs and overhead to permit HEI to develop
  properties and provide services for such joint
  venture.

(Agreement, at § 1(b)). The Agreement thus provided that SPI was to contribute $2,000,000 initially, at HEI's request for HEI's "development costs," and later, at SPI's option, another $4,000,000 for "Development Loans" to HEI. In addition, SPI undertook to pay HEI's overhead costs, that is, salaries to and expenses of, officers and employees of HEI, including salaries to and expenses of Plaintiff Harris, at the rate of $116,000 per month for defined periods of time, for either a one-year or two-year period, depending on the amount and extent of developmental funding that SPI agreed to provide.

Under the terms of the Agreement, SPI and HEI agreed to "jointly and equally own all motion picture and television properties developed with the first $2,000,000 of SPI's development funds." SPI was also given an option to acquire a 50% equity stake in HEI ("SPI's Equity Election"). (Id.). SPI also had the right to terminate funding on a certain date and retain its Equity Election, but for only a 25% equity state in HEI. (Id.). Thus, the Agreement provided:

  At any time up to the end of fifteen months following
  the IDFD, SPI shall have the right, at its sole
  discretion, to give written notice to HEI terminating
  SPI's continuing development funding obligations
  beyond the initial $2,000,000 set forth above ("SPI's
  Termination Right"). If SPI gives such notice, SI
  (sic) shall thereafter have the right at any time to
  exercise SPI's Equity Election and in such event SPI
  shall only be entitled to acquire 25% of the equity
  of HEI.

(Id.). If SPI chose not to exercise its Termination Right before the date, 15 months after the IDFD, SPI was obligated to provide, as stated above, an additional $4,000,000.00 in funding, as "Development Loans." (Id.)*fn2.

According to the Agreement, HEI was to be run by Harris as the CEO and chairman of the board, with an executive from Scholastic to serve as the vice-chairman of its board of directors. (Agreement, at § 2). Harris was given "complete authority and control over all creative and business decisions of HEI," except that certain major transactions, as defined by the Agreement, would require the approval of SPI. (Id.). Harris was to enter into an employment agreement with HEI providing for Harris' exclusive services (except on projects he was working on with Imagine Studios) for a period of three years from the IDFD, provided that if SPI exercised its Termination Right, as described above, Harris had the right to terminate his exclusive employment arrangement with HEI. (Id.). In that event, Harris could continue his employment on a basis non-exclusive to HEI without any reduction in his salary. (Id.)

With respect to the projected corporate activities of HEI, the Agreement provided that the joint venture would be primarily focused on the "development, packaging, production and distribution of theatrical feature films, (`A' titles), while also involved "on a material level" in television development and production." (Agreement, at § 3). In aspirational language, the Agreement provided that:

  HEI expects to develop at least five to ten new
  feature film projects each year and to have at least
  one film go into production during year two followed
  by one to two films in production in year three.
  Thereafter, it is HEI's goal to be in a position to
  have two or three motion pictures commence production
  each year.

(Id.). Harris agreed that a minimum of "approximately 50% of HEI's theatrical motion picture development will involve seeking and developing projects (`Scholastic-franchise' projects) which complement or are suitable for exploitation by Scholastic's publishing and other entertainment-related activities." (Id.). The Agreement provided also that for "approximately 20% of [Harris'] work time, he will be available to Scholastic and SPI for consultation and meetings in accordance with a schedule mutually approved by HEI and SPI. . . . (Id.). Nothing in the Agreement, however, provided for an objective measurement of the quality of Harris' services or a definite quantification of his output.

The parties agreed that Harris' compensation would be $500,000 in annual salary, plus a percentage of the production and overhead fees, bonuses on licensing and royalties, and other ancillary rights, (Agreement, at § 4) and, the issue of this lawsuit, 100,000 SARs.

  100,000 stock appreciation rights to be issued at $18
  per share and which shall vest one-third at the
  conclusion of the fourth year of HEI's operations,
  one-third at the conclusion of the fifth year of
  HEI's operations and one-third at the conclusion of
  the sixth year of HEI's operations.*fn3

Scholastic and SPI were granted the "first opportunity" to license any "print publishing, merchandising and direct mail home video distribution rights to HEI projects," "on equitable terms," and without being subjected to "a competitive bidding situation for such rights." (Agreement, at § 5).

The Agreement contained a merger and integration clause, providing that it was the "entire agreement" between the parties (Agreement, at § 8j). The clause made reference to the parties' intention to "enter into a long form agreement setting forth the terms hereof and other terms and conditions customary in the motion picture negotiations," but provided that until such long form agreement was negotiated and executed, "this agreement" — the one that the parties signed — "shall remain a complete and mutually binding agreement." (Id.).

  8. Miscellaneous. This agreement constitutes the
  entire agreement between HEI and SPI. It is further
  intended by the parties that they shall enter into a
  long form agreement setting forth the terms hereof
  and other terms and conditions customary in the
  motion picture industry (which shall be subject to
  good faith negotiations), but until such long form
  agreement is executed, this agreement shall remain a
  complete and mutually binding agreement . . .

(Agreement, at § 8). The Agreement was executed by HEI, SPI and Harris.

C. After the Execution of the Agreement

Despite their expressed intention to negotiate a "long form agreement," and the exchange of written drafts for such an agreement, the parties never came to another meeting of minds. (Scholastic 56.1, at ¶ 13). Instead, they agreed to twenty-one written amendments to the Agreement, confirming and implementing the October 12, 1990 agreement.*fn4 The amendment executed on August 28, 1991, for example, explicitly confirmed the joint venture between SPI and HEI, and provided that they would do business as a partnership, Harris & Co. (Scholastic 56.1, at ΒΆ 26). Other amendments changed the date upon which SPI had to exercise its Termination Right (the First Amendment) and modified various funding dates and modified the amounts of funding. (Harris Aff. at Ex. 4). Another Amendment gave Harris discretion to utilize the funds contributed to the Joint Venture by Scholastic. Significantly, the Amendments referred specifically to the "[A]greement" between the parties, i.e., the agreement executed on October ...


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