In

$1952$

$,$

$$singer Peggy Lee entered an agreement with Disney to work on the animated film Lady and the

Tramp. Peggy Lee wrote six songs, sang three, and was the voice for four characters in the

$1955$

$$film$.$

Lee was paid $

$3$

$,$

$500$

$$for her participation. Disney retained all rights to revenues earned from distributing

the movie to theatres and television broadcasting companies in domestic and foreign markets. Lee

retained the right to residual payments at

$12\mathrm{.}5$

$\%$

$$for such items as phonographic recordings sold to the

public.

Specifically, the contract gave Disney the right to distribute the film including the rights to

$$

any other

technology yet to be invented,

$$

$$but

$12($

b

$)$

$$of the agreement provided that

Anything herein to the contrary notwithstanding, it is agreed that nothing in this agreement

contained shall be construed as granting to us

$($

Disney

$)$

$$the right to make phonograph recordings

and

$/$

or transcriptions for sale to the public, wherein results or proceeds of your services

hereunder are used.

In

$1987$

$$Disney began distributing videocassettes of the film. Lee sued in March

$1988$

$,$

$$claiming she was

entitled to $

$9$

$$million$.$ Specifically, she claimed that she was entitled to

$12\mathrm{.}5$

$\%$

$$of the profits Disney

generated from the sales of videocassettes of Lady and the Tramp on the basis that the distribution of the

videocassettes was not authorized by the

$1952$

$$contract$.$ Disney countered that the distribution of the

videocassettes was authorized in the contract and that Lee was therefore entitled only to residual

payments for her songs and voice performances, which would be capped

$($

under union rules

$)$

$$at

$

$381$

$,$

$000$

$.$

Disney introduced evidence that it was their

$$

custom

$,$

$$practice and usage

$$

$$not to allow profit participation

deals for voice performers in animated movies, a policy which

$$

evolved

$,$

$$

$$according to the testimony of

Roy Disney,

$$

from the notion of absolute ownership, no strings attached...It stems from bad experiences

Dad and Walt had in the

$20$

s

$.$

$$

$$Further$,$ there was testimony from Jodi Benson, the voice of Ariel in The

Little Mermaid

$($

released in

$1989)$

$,$

$$and Cheech Marin, a voice in Oliver & Co

$.$

$($

released in

$1988)$

$,$

$$who

each testified that Disney did not give voice actors profit participation deals.

$1$

Required

Assume that your consulting team has been hired by Art and History Magazine to provide an unbiased

report on the merits of this litigation and the damage claims made by Ms

$.$

$$Lee$.$

$($

Use the guidelines for

writing a report found on the course website.

$)$

$$The magazine

$$

s editors intend to use your report to write

an informative article that will appear in an issue of their journal.

In preparing your answer, be sure to review financial accounting concepts

$2$

$$and

$7$

$,$

$$management

accounting concepts

$7$

$$and

$8$

$,$

$$and business law concepts

$1$

$$and

$2$

$.$

$11$

Breach of Contract: Lee v

$.$

$$Walt Disney Productions,

$$

$$The Entertainment Litigation Reporter, April

$8$

$,$

$1991$

$.$

Exhibit

$1$

$$Lady & the Tramp Project Income Statement

$*$

For the year ended

$12/31/87$

Sales $

$77$

$,$

$970$

$,$

$000$

Cost of Goods Sold

$32$

$,$

$698$

$,$

$047$

Marketing Expenses

$3$

$,$

$610$

$,$

$772$

General & Administrative

$10$

$,$

$050$

$,$

$027$

Profit before Tax $

$31$

$,$

$611$

$,$

$154$

$*$

These are fictitious statements and do not represent the actual results that Disney received from Lady and

the Tramp.

Notes:

$$

$$Cost of Goods Sold includes the costs to produce the videocassettes for sale to the public.

$$

$$Marketing Expenses include the direct expenses of marketing and distributing these videocassettes

to the public.

$$

$$General and Administrative expenses are the indirect costs of running Buena Vista Home Video.

They are allocated to each project of Buena Vista based on a formula. The formula is each project's

sales revenue divided by total sales revenue generated by all projects multiplied by the total general

and administrative costs of Buena Vista.

$$

$$Individual projects of Buena Vista are not charged income tax expenses since taxes are determined

suit:

a

$.$

$$Bach of contract: Specifically identify contractual language that supports each

party

$$

s argument. Discuss both sides of the issue of whether the distribution of the

videocassette was authorized by the

$1952$

$$contract$.$ Reach a conclusion based on

your analysis.

Answer this questions:

Q

$.$

$3$

$.$

$$If Disney prevails in this lawsuit, how much is Lee entitled to

$?$

Q

$.$

$4$

$.$

$$How did Lee calculate her claim of $

$9$

$,$

$000$

$,$

$000$

$?$

Q

$.$

$5$

$.$

$$Explain the difference between sales revenue, gross profit, contribution to overhead, and

profit before tax.