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January 17, 2005.

STAN LEE, Plaintiff,

The opinion of the court was delivered by: ROBERT SWEET, Senior District Judge


The defendant Marvel Enterprises, Inc. ("Marvel") has moved for partial summary judgment in accordance with Rule 56(a), Fed.R.Civ.P., dismissing the claims in the complaint seeking a profit participation from licensing of its characters for merchandising. The plaintiff Stan Lee ("Lee") has cross-moved for partial summary judgment declaring that he is entitled to 10% participation in profits derived by Marvel from television or movie productions, not limited by so-called "Hollywood Accounting," including film/television merchandising when the profits do not result from a fee for licensing. For the reasons set forth below, Marvel's motion is denied, and Lee's cross-motion is granted in part and denied in part.

As of the time these motions were filed, Lee continued to serve as Marvel's chairman emeritus. As discussed below, Lee has contributed significantly to Marvel's growth since his initial employment in 1940. Initially, Marvel's predominant business was publishing comic books, many of which featured characters created by Lee — e.g. Spider-Man, the Incredible Hulk, the X-Men, and the Fantastic Four. Marvel has subsequently expanded the use of its characters into movies, television, and merchandising. Lee had a contract with Marvel that permitted him to share in certain of these endeavors. Marvel then suffered the vicissitudes of a control contest and bankruptcy. When it emerged from bankruptcy with new leadership, it entered into a new contract with Lee (the "Agreement"). It is paragraph 4(f) of the Agreement, executed on November 17, 1998, that is the central focus of the present action. Paragraph 4(f) states:
[Lee] shall be paid a participation equal to 10% of the profits derived during [his] life by Marvel (including subsidiaries and affiliates) from the profits of any live action or animation television or movie (including ancillary rights) productions utilizing Marvel Characters. This participation is not to be derived from the fee charged by Marvel for the licensing of the product or of the characters for merchandise or otherwise. . . .
(Cohen Aff. Ex. 1 at 5.) This deceptively simple language, drafted by a company and an executive both skilled and experienced in the industry, has given rise to a multimillion dollar controversy because of changes in the way Marvel has conducted business since the execution of the Agreement in November, 1998.

  According to Marvel, paragraph 4(f) entitles Lee to 10% participation in only those television and motion picture production deals where Marvel has been afforded rights of net profit participation. (Such net profit participation arrangements are commonly referred to as "Hollywood Accounting" deals.)*fn1 Lee argues that paragraph 4(f) entitles him to 10% of all profits — including gross profits or gross proceeds — derived from contingent payments to Marvel in connection with the use of Marvel characters in film or television productions.

  According to Marvel, pursuant to the second sentence of paragraph 4(f), Lee is barred from any profits from merchandising. According to Lee, he is entitled to participate in all revenue from film/television merchandising with the exception of profits resulting from fees from licensing for merchandise.

  Skilled counsel for both sides praise the clarity of the language of paragraph 4(f) to reach directly contrary results. What follows is an effort to clarify and determine the terms of the contractual language under the applicable principles of procedure and construction. This determination has the potential to affect substantially the financial fortunes of the parties.

  Prior Proceedings

  Lee commenced the instant action against Marvel and Marvel Characters, Inc. ("Characters") on November 12, 2002.*fn2 In his first cause of action, Lee seeks damages as a result of the alleged breach of paragraph 4(f) and also of paragraph 2(c), which Lee contends entitles him to be named executive producer or co-executive producer of any movie or television production utilizing Marvel characters. (Lipson Decl. Ex. 3 at ¶¶ 34-37.) In his second cause of action, Lee seeks damages as a result of Marvel's alleged breach of a duty of good faith and fair dealing. (Id. at ¶¶ 38-43.) In his third cause of action, Lee seeks an order directing Marvel to comply with its alleged obligation to pay him amounts owed pursuant to the Agreement and to provide him with an accounting. (Id. at ¶¶ 44-46.) In his fourth cause of action, Lee seeks a declaration of his rights regarding the participation payable to him under the Agreement. (Id. at ¶¶ 47-50.) In discovery, Lee propounded various document requests and interrogatories to Marvel in which Lee requested that Marvel produce and identify, inter alia, all documents concerning Marvel's merchandising agreements and payments received by Marvel in connection with merchandising relating to movie and television productions.

  Upon the October 22, 2003 argument on a motion to compel discovery that turned on interpretation of Lee's rights under the Agreement, it was concluded that the proper construction of the Agreement would be better addressed in the context of a motion for summary judgment. The instant motion by Marvel to bar Lee from profits arising out of merchandising and Lee's cross-motion to obtain profits from film/television productions and from certain film/television merchandising were heard and marked fully submitted on September 8, 2004.

  The Parties

  Lee became employed by Marvel's predecessor in interest in 1940 and, with the exception of approximately two years in the early 1940's when he served in the military service and one month in 1998, he has remained in Marvel's employ ever since. During this period, Lee created or co-created Marvel characters including the X-Men, the Incredible Hulk, Daredevil, the Fantastic Four, Iron Man, Doctor Strange, the Silver Surfer, and Spider-Man. Lee's various roles at Marvel have included editor, art director, head writer, and publisher. In 1980, Lee moved from New York to California to set up and run Marvel's animation studio and to pursue Marvel's involvement with television and motion pictures.

  Marvel and its predecessors in interest started out in the business of publishing comic books based on fictional characters in 1938. The first Marvel character to be used in another medium was Captain America, which was featured in a 1944 motion picture serial produced by Republic Pictures. In the 1960's, Marvel expanded its business to include the merchandising of consumer products utilizing Marvel characters. In 1966, a half-hour animated cartoon series produced by the Grant-Ray-Lawrence Company called The Marvel Super Heroes was syndicated to television stations around the country. Between 1967 and 1970, half-hour television programs featuring The Fantastic Four and Spider-Man appeared on the ABC television network each Saturday morning.

  By the late 1970's, the licensing of Marvel characters for merchandise had become a principal line of Marvel's business, and Marvel had entered into agreements with third parties to license its characters for use in connection with dozens of types of consumer products. Marvel's Los Angeles office sought to promote Marvel characters for television and movies, and it continued its efforts to license such characters to third parties for use in connection with television and movie productions.

  Marvel was in bankruptcy from December 1996 through October 1998. During this period Ronald Perelman, Carl Icahn, and ToyBiz, Inc. ("ToyBiz") sought control of Marvel. ToyBiz prevailed in this contest.

  The Agreement And Subsequent Events

  Prior to the 1994 bankruptcy, the parties entered into an agreement granting Lee a share of Marvel's profits. In 1995, pursuant to this agreement, Marvel paid Lee a 10% participation, which was based on revenue received by Marvel under an arrangement with Danchuk Productions. Under this arrangement, Lee received a percentage of gross receipts. The payments to Marvel were characterized as "profit participation." Marvel remitted 10% ($4,994) to Lee without any deduction for costs. Marvel stated to Lee that this sum "represent[ed] your 10% of the profits." (Cohen Aff. Ex. 23.) The executory portion of this prior agreement was rejected by Marvel during the bankruptcy.

  After Marvel emerged from bankruptcy, the parties on November 17, 1998 executed the Agreement. In addition to paragraph 4(f), the Agreement contains other relevant provisions. Under paragraph 2, Lee is required to devote ten to fifteen hours per week to Marvel's affairs. As consideration for his services, Lee is entitled to receive an annual base salary of $810,000 for the years beginning November 1, 1998 and 1999, $850,000 for the year beginning November 1, 2000, $900,000 for the year beginning November 1, 2001, and $1,000,000 for the year beginning November 1, 2002 and each year thereafter until his death. Upon Lee's death, the Agreement provides for Lee's wife to receive survivor payments in an amount equal to 50% of Lee's base salary as of the time of his death through the time of her death, and for Lee's daughter thereafter to receive survivor payments of $100,000 per year for five years. Under paragraph 4(c) of the Agreement, Lee received 150,000 valuable stock options which Lee has already exercised for a net gain of approximately $1.4 million. (Lipson Decl. ¶ 13, Ex. 2 at ¶ 4(c).)

  Between November 17, 1998 and today, Marvel has entered into over a thousand merchandising agreements pursuant to which it has licensed to third parties the right to use its characters in connection with various toys, games, collectibles, apparel, interactive games, arcade games and electronics, stationery and school products, health and beauty products, snack foods and beverages, sporting goods, party supplies, and amusement ...

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