Eisner Gets to Keep Pooh's Honey Pot

A judge's surprising and scathing dismissal of a long-running royalty suit could save Disney hundreds of millions of dollars

Walt Disney (DIS ) CEO Michael Eisner, in the midst of fighting off angry shareholders who would like to see him go, received some welcome news on Mar. 29, when a California court threw out a 13-year-old suit by heirs to the estate that controls the popular Winnie the Pooh franchise.

The decision by Judge Charles W. McCoy Jr. is all the more spellbinding because, until recently, it appeared that the Slesinger family was winning the case and that Disney would have to pay hefty royalties to continue selling T-shirts, videos, and other products featuring Winnie, Piglet, and the rest of the characters created in 1926 by British author A.A. Milne. Indeed, in its most recent 10-K financial filings with securities regulators, Disney said if the Slesinger family prevailed, "damages...could total as much as several hundred millions dollars and adversely impact the value to the company of any future exploitation of the licensed rights."


  Now, that appears unlikely. McCoy's decision makes it clear that he believes representatives of the Slesingers, including private investigators they hired, illegally obtained many of the documents they were using to press their claim. Indeed, McCoy said the family's "misconduct is so egregious that no remedy short of terminating sanctions can effectively remove the threat and project the institution of justice and [Disney]."

In a statement, representatives of the Slesinger family, which will continue to earn an estimated $12 million a year from Pooh, said it was "appealing to get our Pooh rights back." Disney analysts believe that Pooh has surpassed even Mickey Mouse as Disney's hottest-selling character. By some estimates, the sweet bear brings in as much as $100 million in annual royalties.

Little wonder that the Slesingers say they'll appeal. The family also claims that the court's decision "unfortunately sends a strong message to Corporate America that it is O.K. for companies like Disney to steal and renege on its contractual promises, and [that it is] just fine to destroy a million pages of evidence along the way."


  The family previously claimed that it is owed closed to $1 billion in unpaid royalties, largely because Disney expanded its use of Pooh to videos and other outlets not contemplated in 1961, when the Mouse House bought the licensed U.S. rights from the estate of Stephen Slesinger.

Until this decision, the Slesinger family seemed to have their prey on the run. The family claimed that Disney, in internal documents, had promised that the family's royalties would be expanded to include home video and other new outlets. In 2002, a different judge, Ernest M. Hiroshige, found that Disney had hidden some of the pertinent documents. Judge Hiroshige later turned over the case to Judge McCoy.

After reviewing the transcript, Judge McCoy found that the Disney documents the Slesingers used to press their case were acquired through "deception." In his decision, McCoy found that a private investigator hired by the Slesingers "does not impress the court as a person who considers himself constrained by trespass laws." The judge said the private investigator committed "multiple trespasses" to get Disney documents and also took documents from a plant in Canoga Park, Calif., where trash was taken from Disney to be "pulverized." The judge then says the Slesingers and their attorneys "secretly read Disney's privileged thinking on a core issue in this litigation."


  The judge also cast grave doubts on the testimony by Patty Slesinger -- daughter of Stephen -- who testified in open court that the documents her family received came from legitimate sources and that she hadn't removed designations marking them "confidential and privileged." "Her demeanor on the witness stand when making those denials, coupled with evidence directly linking her to the documents, convinces the court that Ms. Slesinger's denials were false," wrote the judge. A Slesinger family spokesman says she was truthful.

Where the lawsuit goes next is uncertain. The case was dismissed "with prejudice," meaning that the Slesingers cannot resubmit their claims. Thus, the family has to rely on a state appeals court to overturn the judge's decision.

The dismissal means Eisner has one fewer concern as he faces down shareholders disappointed by Disney's earnings and the way he has run the Mouse empire for more than 15 years. The CEO, several board members, and even public-relations executives have swung into high gear to defend Disney's future financial prospects. At least one prospect just got better. For now, the honey-loving bear is no longer a bother.

By Ronald Grover in Los Angeles

Edited by Patricia O'Connell

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