Stephen Slesinger, Inc. v. Walt Disney Co.

• Decision Date: 25 September 2007
• Docket Number: No. B178340.,B178340.
• Citation: 155 Cal.App.4th 736,66 Cal.Rptr.3d 268
• Court: California Court of Appeals Court of Appeals
• Parties: STEPHEN SLESINGER, INC., Plaintiff and Appellant, v. The WALT DISNEY COMPANY, Defendant and Respondent.

66 Cal.Rptr.3d 268

155 Cal.App.4th 736

STEPHEN SLESINGER, INC., Plaintiff and Appellant, v. The WALT DISNEY COMPANY, Defendant and Respondent.

No. B178340.

Court of Appeal, Second District, Division 2.

September 25, 2007.

Howard, Rice, Nemerovski, Canady, Falk & Rabkin, Steven L. Mayer, Steven N. Sherr and Jerome B. Falk, Jr., San Francisco, for Plaintiff and Appellant.

O'Melveny & Myers, Alan Rader, Victor H. Jih, Kevin L. Vick and Daniel M. Petrocelli, Los Angeles, for Defendant and Respondent.

WILLHITE, Acting P.J.

In this case of first impression in California, we hold that when a plaintiffs deliberate and egregious misconduct makes any sanction other than dismissal inadequate to ensure a fair trial, the trial court has inherent power to impose a terminating sanction.

In 1991, plaintiff Stephen Slesinger, Inc. (SSI) sued defendant the Walt Disney Company (Disney), alleging that Disney failed to pay certain royalties under its licensing agreement with SSI. That agreement granted Disney rights to exploit the Winnie the Pooh series of children's stories—rights that SSI's founder had obtained in 1930 from Pooh's creator, A.A. Milne. In 1992 or 1993, to assist in prosecuting its lawsuit, SSI hired an investigator to surreptitiously obtain Disney documents. Other than a purported admonition to obey the law, SSI provided no direction or supervision for the investigator's activities. Working at least until 1995, the investigator took thousands of pages belonging to Disney, including documents marked privileged and confidential. He obtained the documents by breaking into an uncertain number of Disney office buildings and secure trash receptacles, and by trespassing onto the secure facility of the company with which Disney had contracted to destroy its confidential documents. The documents were passed on to SSI's attorneys and principals, who reviewed them, but kept no records of the documents they received or of those they discarded. Until 2002, SSI concealed the investigator's activities from Disney and the court. In 2004, following an evidentiary hearing on a motion by Disney for a terminating sanction, the trial court concluded that no lesser sanction could protect Disney against SSI's use of illicitly-obtained information. Therefore, as an exercise of its inherent power, the court dismissed SSI's lawsuit with prejudice.

On SSI's appeal from the terminating sanction, we conclude that California trial courts have inherent power to issue a terminating sanction when a plaintiffs misconduct is deliberate, is egregious, and makes lesser sanctions inadequate to ensure a fair trial. Because substantial evidence shows that SSI's misconduct meets this standard, we also conclude that the trial court did not abuse its discretion in dismissing SSI's case as an exercise of the court's inherent power.

FACTUAL AND PROCEDURAL BACKGROUND

1. The Litigation

British author A.A. Milne created the Winnie the Pooh series of children's stories. In 1930, Stephen Slesinger acquired from Milne the rights to commercially exploit the works in the United States and Canada. Stephen Slesinger formed a corporation, SSI, to which he assigned the Pooh rights. In 1961, SSI licensed certain rights of commercial exploitation to Disney. SSI and Disney modified their licensing agreement several times. In 1983, they executed a new contract, which became the focus of the instant litigation.

In February 1991, SSI sued Disney for breach of contract, fraud, and declaratory relief. In the operative third amended complaint, SSI alleged that Disney breached its contractual obligations to account and pay for its exploitation of the Pooh rights under the 1983 agreement, including sales of Pooh merchandise. SSI also alleged that during the negotiations leading to the 1983 agreement Disney misrepresented, among other things, the items for which it would pay royalties, and that Disney thereafter misrepresented its compliance with its contractual obligations to account for royalties. In its declaratory relief claim, SSI sought a declaration that it could terminate the contract based on Disney's breaches.

Lengthy, bitter litigation followed, occasioned by claims and counterclaims of misconduct. In 2001, SSI obtained evidentiary and monetary sanctions against Disney for destroying substantial portions of the files of Vincent H. Jefferds, a senior Disney vice-president who was Disney's principal representative in negotiating the 1983 licensing agreement. A key dispute in SSI's lawsuit involves representations allegedly made by Jefferds during the negotiations.

Having obtained sanctions against Disney, however, SSI fell victim to its own litigation abuses. In 2003, Disney moved for a terminating sanction against SSI, alleging that SSI had committed pervasive misconduct. In February 2004, the trial court (a different judge from the one who had sanctioned Disney) held a five-day evidentiary hearing on Disney's motion. The evidence was complex and conflicting; it included, among other things, live testimony, deposition testimony, witness declarations, correspondence between the parties, and prior discovery pleadings. What emerged was a portrait of litigation misconduct run riot, involving SSI's employment of an investigator, Terry Lee Sands, to take documents from Disney facilities and trash receptacles as well as the secure facility of the document destruction firm retained by Disney. We summarize the entire record under the applicable standard of review: in the light most favorable to the trial court's ruling terminating SSI's lawsuit, drawing all inferences in support of the trial court's ruling which are reasonably supported by the evidence. (See Laguna Auto Body v. Farmers Ins. Exchange (1991) 231 Cal.App.3d 481, 487, 491, 282 Cal.Rptr. 530 (Laguna).)

2. SSI's Principals and Agents, and the Hiring of Terry Lee Sands

SSI is a family run corporation. During the period relevant to this appeal, its sole corporate officer (President) and sole board member was Shirley Slesinger Lasswell, widow of SSI's founder Stephen Slesinger. Lasswell was responsible for managing SSI. She lived in Florida, and kept SSI's Winnie the Pooh files in her office there. Lasswell died while this appeal was pending.

SSI's sole shareholder is Pati Slesinger, Lasswell's daughter by Stephen Slesinger. Pati Slesinger managed SSI's lawsuit against Disney from the inception, keeping in close contact with Lasswell.

One of SSI's agents was David Bentson, Pati Slesinger's husband.¹ Bentson performed many tasks to assist SSI in its lawsuit, and worked directly with Terry Lee Sands, the investigator whose conduct lies at the heart of Disney's sanction motion.

Sands was never a licensed private investigator. Nonetheless, in 1992 or 1993 he was working for the Nick Harris Detective Agency when the agency was hired by SSI's then-attorney, Marshall Morgan, to work on SSI's lawsuit.² Within a month, Sands began working directly with David Bentson and attorney Morgan. His assignment was to help SSI prosecute its lawsuit by surreptitiously obtaining Disney documents.

Sands' employment lasted at least until 1995, and probably longer.³ Based on the advice of SSI's counsel, Bentson admonished Sands to "make sure what you're doing is legal and that you do it by the book." Bentson, however, took no steps to ensure that Sands obeyed the admonition. As Bentson testified at the sanction hearing, "That wasn't my job.... All I did was pay his bills ... [and] receive[ ] documents." Bentson would pass the documents delivered by Sands on to SSI's attorneys. He also reviewed at least some of them. Those he believed might be of interest to Lasswell he faxed to her in Florida. In his sanction hearing testimony, he did not know how many documents he faxed to Lasswell: "It could have been two, it could have been five." Bentson and Pati Slesinger also reviewed some of the documents together at the offices of SSI's lawyers.

With no supervision by SSI, Sands was free to obtain Disney documents as he saw fit. Although SSI first employed Sands in 1992 or 1993 to take Disney documents, it did not reveal that fact until March 2002. In the interim, Disney's knowledge of Sands activities evolved by starts and spurts, beginning with two anonymous telephone calls received by Disney security in June 1994.

3. The Anonymous June 1994 Calls

Disney security received the first anonymous call on June 1, 1994. According to the report of the call prepared by a Disney security officer, the caller said that "he worked for a David B. (unknown last name)" and "worked with a Terry Lee Sands." The caller explained that "he and Terry knew when Disney had their pick-up days for trash and went to their dumpster locations, broke in and took copies of documents that included contracts and royalties for the animated feature Winnie The Poo[h]____ [T]hey would take paperwork from locations in Northridge, Burbank, Glendale and trash cans on Flower Street. [¶] ... [T]here was even one incident where they were able to get [past] the security guard at the Olive Building[,] enter some of the offices and take documents (i.e., contracts) off the desks." The caller said that he was giving Disney this information because he had not been paid for his services.

The second call occurred two weeks later, on June 14, 1994. According to the security report, the caller reiterated that "he and Terry Lee Sands were hired by David Benson/Brenner to go through Disney trash and take contracts, papers and other documents relating to a court case going on now involving licensees, contracts and underpayment; of royalties by Disney for `Winnie the Pooh' items____ [T]hey were able to obtain information that would be harmful to Disney if it ever came out." The caller said that he was "upset" because "David and Terry" had learned of his first call and "were after him."

Disney security investigated the calls, but found no reports that documents were missing....