ARP Films, Inc. v. Marvel Entertainment Group, Inc.

• Decision Date: 24 December 1991
• Docket Number: 1750,D,Nos. 1585,s. 1585
• Citation: 952 F.2d 643
• Parties: ARP FILMS, INC., Amerex Films, Inc., and Claude S. Hill, Plaintiffs-Appellants, Cross-Appellees, v. MARVEL ENTERTAINMENT GROUP, INC., Defendant-Appellee, Cross-Appellant. ockets 91-7195, 91-7197.
• Court: U.S. Court of Appeals — Second Circuit

Page 643

952 F.2d 643

21 Fed.R.Serv.3d 887

ARP FILMS, INC., Amerex Films, Inc., and Claude S. Hill, Plaintiffs-Appellants, Cross-Appellees, v. MARVEL ENTERTAINMENT GROUP, INC., Defendant-Appellee, Cross-Appellant.

Nos. 1585, 1750, Dockets 91-7195, 91-7197.

United States Court of Appeals, Second Circuit.

Argued June 24, 1991.

Decided Dec. 24, 1991.

Jared Stamell, New York City (Stamell, Tabacco & Schager, E. Allan Farnsworth, of counsel), for plaintiffs-appellants, cross-appellees.

Gideon Cashman, New York City (Stephen F. Huff, Jamie M. Brickell, Charles B. McKenna, Pryor, Cashman, Sherman & Flynn, of counsel), for defendant-appellee, cross-appellant.

Before CARDAMONE, MINER, and MAHONEY, Circuit Judges.

MAHONEY, Circuit Judge:

Plaintiffs-appellants, cross-appellees ARP Films, Inc. ("ARP"), Amerex Films, Inc. ("Amerex"), and Claude S. Hill ("Hill") (collectively "plaintiffs") appeal, and defendant-appellee, cross-appellant Marvel Entertainment Group, Inc. ("Marvel") cross-appeals, from orders and a judgment of the United States District Court for the Southern District of New York, Kenneth Conboy, Judge, entered in this action arising from a contractual dispute involving the distribution of cartoon films.

For the reasons that follow, we affirm in all respects.

Background

This action arises out of a contract dispute between Marvel and ARP involving the distribution of copyrighted properties. Marvel is the successor in interest to a series of corporations that have owned the copyrights to Spiderman and other fictional cartoon characters. The parties' long and often contentious relationship began in 1968, when a predecessor to Marvel, Magazine Management Company ("Magazine"), and a predecessor to ARP, Krantz Films, Inc. ("Krantz"), entered into an agreement (the "1968 Agreement") which granted Krantz the right to produce and exploit cartoon films embodying characters copyrighted and trademarked by Magazine, including Spiderman. Hill is the president of ARP and former principal of Krantz. The 1968 Agreement ultimately became the subject of litigation in which Marvel and Magazine sought to terminate Krantz's rights under the 1968 Agreement.

That litigation concluded in a 1976 settlement which gave rise to a new agreement (the "1976 Agreement") between Cadence Industries Corporation ("Cadence") ¹, Magazine, and ARP. ² Under the terms of the 1976 Agreement, a new company, Amerex, was formed to distribute certain cartoon film properties, the rights to which were owned by Marvel. ARP was to own the stock of Amerex. Half of that stock, however, was to be held in escrow by Marvel. Marvel's prior written approval was required regarding any proposed transfer of the Amerex stock held in escrow by Marvel.

In addition, the stock certificates of Amerex were to bear a legend specifying that the holder of the stock evidenced by the certificate had read, understood, and agreed to be bound by the 1976 Agreement. It was further agreed that Hill would be the sole owner of the stock of ARP, but that such stock could be assigned by Hill with the written approval of Marvel, which was not to be unreasonably withheld. Paragraph 8 of the 1976 Agreement provided:

In addition to all other remedies, ARP shall have the right to terminate the license as provided for by this agreement in the event of Marvel not substantially abiding by the terms and conditions of this agreement and in the event of Marvel's licensing rights to the Series to another, and Marvel shall have the right to terminate the license as provided by this agreement in the event of [Amerex's], ARP's or Claude Hill's not substantially abiding by the terms and conditions of this agreement or failing to substantially abide by the terms and conditions of the license for distribution of the Series and rights related thereto, which terms and conditions include prompt accounting for such distribution, but except for such termination of license this agreement shall continue in full force and effect [emphasis added].

ARP was to provide distribution services, including the personal services of Hill, to Amerex. Amerex was obligated to remit specified percentages of its gross receipts to Marvel and ARP, and to provide Marvel and ARP with periodic accountings of the exploitation of the Marvel properties. In addition to the 1976 Agreement, several letter agreements in 1979 and 1980 (the "Side Agreements") gave ARP the right to distribute new Marvel-owned cartoon film characters on a commission basis, and to distribute a new first-run series of Spiderman cartoons on a commission basis.

The parties operated successfully under the 1976 Agreement for a period of several years, but problems developed in the early 1980's. Beginning in 1981, Marvel began licensing home videocassette distributions of its films. In 1982, ARP confronted Marvel with the claim that the 1976 Agreement granted Amerex the exclusive right to distribute the films on videocassette for home use. Marvel disagreed, but ARP continued to assert this claim in the context of the ongoing distribution relationship. The discord mounted, and according to ARP, resulted in several efforts by Marvel to pressure ARP into relinquishing the claim to videocassette distribution. These alleged acts included the actual and threatened termination of certain distribution rights, threats of costly litigation, and, in 1986, the invoking of the pertinent provision of the 1976 Agreement to prevent a public offering of ARP's stock.

In July 1986, plaintiffs commenced the present action in state court against Marvel, which removed the case to the United States District Court for the Southern District of New York on the basis of diversity of citizenship. A separate action by Marvel against plaintiffs in the latter court was consolidated on plaintiffs' motion, without opposition. Plaintiffs claimed in their amended complaint that Marvel breached the 1976 Agreement by distributing Marvel cartoons on videocassette in violation of plaintiffs' exclusive right to do so, and by unreasonably withholding its consent to the public offering of ARP common stock. Marvel claimed, inter alia, that the 1976 Agreement conveyed no rights to distribute videocassettes, that Marvel's consent to the public sale of ARP stock had not been unreasonably withheld, that plaintiffs had breached the 1976 Agreement in numerous respects, resulting in its termination, and that plaintiffs had also committed various infringements of copyrights and trademarks held by Marvel.

By a letter to Hill (in his capacities as president of ARP and Amerex) dated November 12, 1986 (the "First Termination"), Marvel purported, on the basis of asserted violations of the 1976 Agreement, to terminate all distribution rights previously granted by Marvel to ARP and Amerex. The letter offered to allow the continued distribution of the properties covered by the 1976 Agreement, on a "courtesy" and "at will" basis, provided that the procedures specified in the 1976 Agreement were followed. Plaintiffs thereafter continued to receive payments under licenses entered into before the First Termination, and for a while continued to remit the appropriate percentage of those receipts to Marvel. Marvel, however, refused to approve any new licenses for the properties covered by the 1976 Agreement, contending that the information provided by plaintiffs concerning the proposed new licenses was inadequate, and not in accord with the 1976 Agreement.

In February 1987, plaintiffs stopped paying Marvel any share of distribution proceeds under the 1976 Agreement, and in April of that year plaintiffs ceased reporting to Marvel concerning the licensing activities of ARP and Amerex. By a letter to Hill dated September 2, 1987 (the "Second Termination"), Marvel advised that ARP's "failure to remit any monies to Marvel since March, 1987 constitutes an unjustified and material breach of any agreement by which ARP purports to have [distribution] rights and if all rights had not already been effectively terminated--which they most assuredly were--they are hereby so terminated."

After the close of discovery, Marvel moved for partial summary judgment. Marvel contended that plaintiffs had materially breached the 1976 Agreement as a matter of law by, inter alia, since early 1987 (1) refusing to account for the results of their exploitation of the Marvel properties, and (2) withholding payments due to Marvel from such exploitation. The court granted the motion in part, holding that plaintiffs had affirmed the contract after the First Termination by continuing licensing activity, and therefore could not continue to exploit their rights under the contract while at the same time indefinitely withholding their own performance pending adequate assurances from Marvel. See Marvel Entertainment Group, Inc. v. ARP Films, Inc., 684 F.Supp. 818, 819-21 (S.D.N.Y.1988). The failure to perform on the part of ARP was therefore found to be a breach of the 1976 Agreement. The court concluded, however, that it could not decide as a matter of law that the breach was sufficiently material to give Marvel the right to terminate the contract, noting that "[m]ateriality of breach is ordinarily a question of fact to be determined at trial." Id. at 821.

Upon Marvel's subsequent renewal of its motion for summary judgment, however, the court reconsidered. The district court stated that paragraph 8 of the 1976 Agreement, quoted supra herein, specifically granted Marvel the right to terminate that agreement because of plaintiffs' admitted failure properly to account for the exploitation of the Marvel properties. ³ The court also stated that "it is now clear that ARP has withheld in excess of $400,000 of Marvel's contractual share of ARP's exploitation activities." The court concluded that "the 1976 Agreement terminated on September 2, 1987."

The grant of partial summary judgment was followed by a six week jury trial, at the conclusion of which the...