Scholastic Inc. v. Harris

• Decision Date: 14 November 2000
• Docket Number: Docket No. 00-7465
• Citation: 259 F.3d 73
• Parties: (2nd Cir. 2001) SCHOLASTIC, INC. and SCHOLASTIC PRODUCTIONS, INC., Plaintiffs-Appellants, v. ROBERT HARRIS and HARRIS ENTERTAINMENT, INC., Defendants-Appellees. Argued:
• Court: U.S. Court of Appeals — Second Circuit

Page 73

259 F.3d 73 (2nd Cir. 2001)

SCHOLASTIC, INC. and SCHOLASTIC PRODUCTIONS, INC., Plaintiffs-Appellants, v. ROBERT HARRIS and HARRIS ENTERTAINMENT, INC., Defendants-Appellees.

Docket No. 00-7465

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

Argued: Nov. 14, 2000

Decided: July 26, 2001

Plaintiffs appeal the December 29, 1999 order of the district court, denying their motion for summary judgment and granting summary judgment to their former co-venturer on his cross-claim motion. Plaintiffs had sought a declaratory judgment that the defendant was not entitled to certain valuable executive compensation and a judicial accounting, while defendant claimed that plaintiff had breached the joint venture agreement between the parties by withholding those benefits.

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MICHAEL J. CHEPIGA, New York, New York (Michael A. Berg, Simpson Thacher & Bartlett, New York, New York, of counsel), for Plaintiffs-Appellants.

ALFRED R. FABRICANT, New York, New York (Ostrolenk, Faber, Gerb & Soffen, LLP New York, New York, of counsel), for Defendants-Appellees.

Before: CARDAMONE, CALABRESI, and KATZMANN, Circuit Judges.

CARDAMONE, Circuit Judge:

Plaintiffs, Scholastic, Inc. and its wholly-owned subsidiary, Scholastic Productions, Inc. (collectively Scholastic or appellant), appeal the December 29, 1999 order of the United States District Court for the Southern District of New York (Hellerstein, J.) that denied Scholastic's motion for summary judgment, but granted the cross-motion of defendants-appellees Robert Harris (Harris) and Harris Entertainment, Inc. (Harris Entertainment) for the same relief. Scholastic sought a declaration that Harris, its former partner in a joint venture formed to develop and produce motion pictures and television programs, was not entitled to certain stock appreciation rights (SARs) provided for in their joint venture agreement. Plaintiffs also sought a judicial accounting of the joint venture. Defendant Harris counterclaimed for breach of contract claiming that plaintiffs were obligated to him for the SARs. The district court granted Harris summary judgment on his breach of contract claim finding him entitled to the SARs, and denied plaintiffs' request for a declaratory judgment and for an accounting.

This appeal from the grant of summary judgment in defendants' favor plunges us into reviewing a contract dispute between the parties over the meaning of language used in the joint venture agreement. Although we think the contract ambiguous, it is not so vague as to make no pretense at meaning whatsoever. To the contrary, some of the key words are susceptible to different and distinct meanings in considerable tension with one another. Such circumstance raises questions of fact. For that reason, we cannot adopt the trial judge's view of what was meant, nor the divergent views of the parties, both of whom, like Humpty Dumpty, insist that the disputed words mean just what each of them chooses them to mean, neither more nor less. See Lewis Carroll, Through the Looking-Glass ch.6 at 106-09 (Schocken Books 1987) (1872). Thus, the resolution of this litigation must be made by a jury, which considering the disputed language in the light of extrinsic evidence, can get at the parties' intended meaning.

BACKGROUND

Appellant Scholastic, Inc. is a well-known publisher of children's books and magazines, and Scholastic Productions, Inc. is its motion picture and television subsidiary. Appellee Robert Harris is a prominent movie and television executive, having served as president of Universal Television, MCA Television Group (MCA, Inc. is the parent of Universal) and Imagine Films. During his tenure at MCA/Universal, Harris supervised the development and production of several successful television programs, including such notables as "Murder, She Wrote," "Magnum, P.I.," "Miami Vice," and "Knight Rider."

In early 1990 Scholastic and Harris began negotiations to form a new production company which was to be financed by Scholastic and managed by Harris. Scholastic wanted to assume an active role in the production of family-oriented feature films and television programs. Along with its financial interest in the production company's projects, Scholastic sought to capitalize on any ancillary rights, such as books and merchandise. Harris was anxious to form his own independent production company and felt it critical that any new position provide him compensation comparable to the seven-figure annual income he was then receiving. In June 1990 prior to a formal agreement on the terms of collaboration, Scholastic advanced $464,350 for the initial overhead expenditures of the proposed production company.

The Joint Venture Agreement

Four months later on October 12, 1990 the parties signed a joint venture agreement (Agreement) that set forth their obligations regarding the management, operation and funding of the production company. The Agreement was signed by a representative from Scholastic, and by Harris in his own capacity and on behalf of his preexisting personal company, Harris Entertainment.

Scholastic agreed to pay an initial $2 million for development costs plus $116,000 per month for the venture's overhead expenses commencing 12 months after the date on which the initial $2 million was allotted (funding date). Scholastic and Harris Entertainment would equally own all properties developed. Scholastic could terminate funding for up to 15 months after the funding date, in which case it would not provide future funds, but its equity interest in the venture would be reduced to 25 percent. If Scholastic did not exercise its termination right, it maintained its 50 percent interest in the joint venture and became obligated to pay an additional $4 million in development funds.

The Agreement further provided that Harris would be in charge of the venture's daily operations with authority over creative and business decisions. Agreement ¶2, at 5. The projected corporate activities of the joint venture included the development, production and distribution of feature films ("A" titles), and also involved television development and production. It was agreed that 50 percent of the motion picture developmental activities be "suitable for exploitation by Scholastic's publishing and other entertainment-related activities." Agreement ¶3, at 6. Harris agreed to work exclusively on venture projects for a three-year period, unless Scholastic exercised its right to terminate funding, in which case he could become non-exclusive.

Harris' Compensation Package

Harris' compensation was fixed at $500,000 annually "in each of HEI's first three years of operations," plus a share of the production fees on each project and a 15 percent bonus on revenues from licensing fees, royalties, and the like. Agreement ¶4, at 6-7. Further, of primary relevance to the instant dispute, the Agreement provided that Harris would receive stock appreciation rights in Scholastic stock:

SI [Scholastic, Inc.] will grant to Robert Harris 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.

Agreement ¶4, at 7. Stock appreciation rights are a form of executive compensation that give the holder the right to a cash payment or stock in an amount representing the difference between the market price and the fixed or strike price specified on the face of the SAR. Searls v. Glasser, 64 F.3d 1061, 1064-65 (7th Cir. 1995).

According to Scholastic's expert, SARs are valuable because they allow the holder to reap gains on a share price without the risk of suffering a loss should the market price of the stock decline. In light of this, Scholastic alleges the SARs are almost always contingent upon certain performance conditions for the executive, and usually stipulate that the SARs only vest when the grantor has received a designated benefit. In this case, Scholastic contends the performance-related condition was that Harris must complete a stated minimum period of continuous service after the date on which the SARs were granted.

Although the Agreement envisioned a long form agreement fully setting forth the terms and conditions of the joint venture and the parties' reciprocal obligations, no such agreement was ever executed. Instead the parties added 21 written amendments to the Agreement. Each amendment supplemented the Agreement's terms but reaffirmed that, unless explicitly amended, the October 12, 1990 Agreement controlled.

The Parties' Performance of the Agreement

Scholastic contributed the initial $2 million on December 1, 1990. As stipulated in the First Amendment, Scholastic's initial contribution established that date as the funding date, thus setting the vesting dates for the SARs as December 1 in the years 1994-95-96 (i.e. four, five and six years after the commencement of "HEI's operations").

The parties dispute the venture's relative success. Harris recognizes the venture never made a profit, but declares that since its inception he commissioned 17 scripts and developed over 30 projects. Some projects that Harris has developed are allegedly active to date. Scholastic insists that there is little to show from Harris' labor. It thinks the venture an utter failure, since none of the projects developed by Harris resulted in a theatrical release and only a minority of the films produced were suitable for Scholastic's target audience.

The Alleged Termination of the Venture

Appellant contends that because of its losses, it terminated the joint venture and ended its business relationship with Harris. Although Scholastic did not produce a formal written notice of termination, it asserts that a series of events and conversations, beginning in 1992 and...