Is Ovitz Parachute Pulling Strings for Katzenberg’s Suit?

If anyone could be happier than Michael Ovitz himself about the colossal settlement the former superagent received from Disney after a truncated 14 months as the company’s president, it’s undoubtedly Jeffrey Katzenberg.

Ever since it was revealed last month just how much money Ovitz would get for a job that didn’t work out, Hollywood has been buzzing about what a boon that could be for Katzenberg’s legal case against his former employer.

The theory is that if Ovitz can walk away with so many millions of dollars after achieving so little during his short stint at Disney, surely Katzenberg deserves the $250 million or more he claims is due him after spending 10 years helping to build the studio into a major profit center.

“On the merits of it, the Ovitz settlement is Exhibit A,” observes one industry executive.

But, equity is one thing. Legalities are another matter.

The crucial question is whether the Ovitz settlement will even be admissible as evidence in the civil case or whether it will be kept out on the grounds it is legally irrelevant.

Sources close to Katzenberg--who refused to be interviewed and declined comment through a representative--say his lead litigators, Bert Fields and Herbert Wachtell, are confident they’ll be able to make this an issue in their case.

Even if the judge rules that the Ovitz contract is not relevant to the case, sources say Katzenberg’s attorneys are aggressive and creative enough to find a way to introduce the information for a jury to hear.

“One way or another, this will get in before a jury,” said one entertainment attorney with knowledge of the suit.

However, legal sources in the Disney camp say the company’s attorneys will fight any attempt by Katzenberg’s representatives to introduce anything about the Ovitz severance into the trial and no doubt will file a pretrial motion arguing its irrelevancy.

They say the cases bear no similarity. Ovitz was paid a settlement of cash and stock options based on an uncontested employment contract, whereas Katzenberg’s case involves a disputed contractual entitlement.

Disney executives declined comment. A source close to the company said that even if the Ovitz settlement is introduced in court, “it’s proof we paid Michael exactly what was owed under his contract and Jeffrey was paid according to his contract.”

Last April, Katzenberg filed a breach of contract suit against Disney in which he alleged he is owed more than $250 million in incentive bonuses based on 2% of the estimated future value of movies and television programs produced or acquired for distribution during his tenure.

It first has to be proved whether Disney in fact owes Katzenberg the 2%, and if so, the ultimate value of the product he’s responsible for has to be determined. During the decade he spent at Disney, Katzenberg oversaw more than a dozen animated movies, including “The Lion King,” which are re-released every seven years and have great value on home video.

Though he was paid 2% of the company’s operating income of all product he put into production while he was there, Disney’s position is that Katzenberg gave up the right to his share of future profit by leaving the company in 1994, instead of in 1996.

Katzenberg’s attorney Fields has previously stated, “that’s an absurd interpretation of the contract.”

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In 1988, Katzenberg signed a six-year contract that would automatically extend to 1996 unless either party terminated it. In 1993, Katzenberg notified Disney he would terminate in 1994, but the parties continued to discuss terms of his staying aboard.

Finally, when Disney Chairman Michael Eisner decided not to promote Katzenberg to the position he coveted--Disney president--he quit in August 1994 and subsequently launched a new entertainment studio, DreamWorks SKG, with pals David Geffen and Steven Spielberg.

The bitter breakup ended a 19-year relationship between Eisner and Katzenberg, who before Disney had worked together at Paramount Pictures.

Ovitz’s aborted tenure at Disney no doubt has also strained his longtime personal relationship with Eisner, which goes back about 25 years.

When Ovitz left the company last month “by mutual agreement,” he received a cash payment of $38.9 million and stock options for 3 million shares at a price of $57. If he were to exercise those options at Disney’s closing price Monday of $70.50 a share, his total exit package would be worth nearly $80 million. But, it’s potentially worth a lot more depending on Disney’s stock performance in the next five years. Ovitz has until Sept. 30, 2002 to exercise the options.

Eisner, regarded as one of the top executives in the entertainment business, has been widely criticized in Hollywood and on Wall Street for giving Ovitz such a huge golden parachute.

Two Disney shareholder lawsuits were filed against the current and former directors of the company, charging them with wasting corporate assets.

Many industry insiders believe that because Eisner and the board have taken so much heat over the Ovitz severance package, an out-of-court settlement with Katzenberg is less likely than ever.

“It’s inhibiting to a settlement in the short run,” suggests a prominent industry attorney. “Eisner is under too much pressure to now turn around and make another large settlement.”

However, several legal experts say that down the road, if the case does go to trial, the Ovitz parachute could very well help Katzenberg. Presumably, said one industry observer, a judge and jury could surmise “if they paid Ovitz this kind of money for doing nothing, surely Jeffrey is worth the couple hundred million for all he did.”

Ironically, Ovitz served as a go-between and made several attempts to get Katzenberg and Eisner to settle, but nothing substantive ever materialized.

Attorney Pierce O’Donnell, talking as an impartial observer about the Ovitz factor in the Katzenberg lawsuit, says, “Strictly speaking, the two cases are apples and oranges. However, a creative lawyer like Bert Fields might very well argue that this is not the tire or sausage business and Hollywood doesn’t operate by the same norms or conventions as other industries do when it comes to compensating stars or senior company executives.”

O’Donnell, who represented Art Buchwald in his much-publicized suit against Paramount Pictures in 1988, says he believes an argument could be made that “there was a culture of executive indulgence at Disney.”

In Hollywood, he added, “there’s a climate of excess where normal business convention does not seem to prevail, so we cannot dismiss out of hand that Jeffrey had the deal he had,” even allowing for the fact that the Katzenberg and Ovitz contracts “were not constructed on the same formula.”

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Katzenberg says he’s contractually entitled to a piece of future profit from projects he oversaw at Disney, whereas Ovitz’s guaranteed severance package is tied to stock performance.

Another high-powered Hollywood attorney said that although Ovitz’s severance “is not relevant” to Katzenberg’s, he agrees with O’Donnell that the former studio head’s lawyers could make a case that Disney policies “are relevant to the issues.”

Meanwhile, lawyers on both sides have been exchanging documents for several months and depositions are to begin shortly.

The case, if not settled, could go to trial by the end of the year.

And, surely, it would provide some of Hollywood’s best entertainment yet.