Lee v. Marvel Enterprises, Inc.
386 F. Supp. 2d 235 (2005)
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Rule of Law:
Under New York law, an undefined contractual term such as 'profits' is given its plain and ordinary meaning of a valuable gain or return, not a narrow, technical definition like 'net profits'. A contract must also be interpreted to give effect to all its terms, meaning a specific exclusion clause will not be read so broadly as to nullify a general grant of rights.
Facts:
- Stan Lee, a longtime Marvel employee and creator of many of its iconic characters, entered into a new employment Agreement with Marvel on November 17, 1998, after the company emerged from bankruptcy.
- Paragraph 4(f) of the Agreement granted Lee '10% of the profits derived... from... movie (including ancillary rights) productions utilizing Marvel Characters.'
- A second sentence in Paragraph 4(f) specified, 'This participation is not to be derived from the fee charged by Marvel for the licensing of the... characters for merchandise or otherwise.'
- In a prior 1995 agreement, Marvel had paid Lee a 10% participation based on gross receipts, which Marvel itself had characterized in a letter to Lee as '10% of the profits.'
- Following the 1998 Agreement, Marvel shifted its business model away from 'Hollywood accounting' (net profit) deals, which often yielded no return, to highly lucrative 'gross profit participation' deals for films like Spider-Man.
- Marvel also earned substantial merchandising revenue through various means, including direct sales via its ToyBiz division and profits from a 50/50 joint venture with Sony for Spider-Man merchandise.
- Marvel refused to pay Lee any portion of the proceeds from its gross participation film deals or its non-licensing merchandising ventures, arguing that these did not constitute 'profits' under the Agreement and that all merchandising was excluded.
Procedural Posture:
- Stan Lee filed a lawsuit against Marvel Enterprises, Inc. in the U.S. District Court for the Southern District of New York.
- Lee's complaint included causes of action for breach of contract, breach of the duty of good faith and fair dealing, and sought damages, an accounting, and a declaratory judgment of his rights under the 1998 Agreement.
- During discovery, a dispute arose over the proper interpretation of Lee's profit participation rights.
- Marvel filed a motion for partial summary judgment, seeking to dismiss Lee's claims to profits from merchandising.
- Lee filed a cross-motion for partial summary judgment, asking the court to declare that he is entitled to 10% of all profits from film and television productions, including certain merchandising revenues not derived from a licensing fee.
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Issue:
Does an agreement granting a party '10% of the profits' from movie productions, including 'ancillary rights,' but excluding participation in a 'fee charged... for the licensing of... merchandise,' limit that party's share to only 'net profits' and completely bar participation in all merchandising revenue?
Opinions:
Majority - Sweet, J.
No. The agreement does not limit Lee's share to only 'net profits' or exclude all merchandising revenue. The term 'profits,' being undefined in the contract, must be given its ordinary dictionary definition of 'a valuable gain or return,' which encompasses the gross participation payments Marvel received. Marvel's own public statements in annual reports and investor presentations consistently referred to these earnings as 'profit participation,' reinforcing this broad interpretation. Furthermore, both parties' experts agree that 'ancillary rights' in the entertainment industry includes merchandising. To interpret the second sentence's exclusion of 'licensing fees' as a bar to all merchandising revenue would improperly nullify the grant of 'ancillary rights' in the first sentence. Therefore, the exclusion is read narrowly to apply only to revenue derived specifically from a 'fee charged... for licensing,' not to profits from other merchandising arrangements like joint ventures or direct sales.
Analysis:
This case serves as a key precedent for contract interpretation in the entertainment industry, particularly concerning profit participation agreements. The court's decision prevents a party from using an undefined, general term like 'profits' to narrowly restrict payments, especially when its own business practices and public statements contradict that narrow interpretation. It establishes that a party cannot unilaterally alter its business model (e.g., shifting from net to gross participation deals) to effectively eliminate a counterparty's bargained-for share of revenue. The ruling also reinforces the canon of construction that contracts should be read as a whole, ensuring that specific exclusionary clauses are not interpreted so broadly that they render other affirmative grants of rights meaningless.
