Yu-Gi-Oh! Lawsuit Results: 4Kids Retains Yu-Gi-Oh! License; TV Tokyo, NAS Fail to Terminate Licensing AgreementDecember 31, 2011 at 2:58 am | Posted in 4Kids, Other Stuff | 6 Comments
The fun’s over.
The lawsuit brought against Yu-Gi-Oh! licensee 4Kids Entertainment by Japanese licensors TV Tokyo Corporation and Nihon Ad Systems, Inc. (NAS) has concluded. On December 29, Shelley C. Chapman, the presiding judge of the case at the U.S. Bankruptcy Court for the Southern District of New York, released her 152-page ruling, concluding that the licensors did not justifiably terminate the Yu-Gi-Oh! License with 4Kids. As such, 4Kids retains the Yu-Gi-Oh! License and can continue to manage and market the property outside of Asia, as it has been doing since 2001.
The reasons for the ruling are numerous. As this case was a contract dispute, the heart of the outcome was the result of the court’s scrutiny of the language within the two parties’ agreements and communications.
Terminating the Yu-Gi-Oh! License
The court concluded that the TV Tokyo and NAS did not properly terminate their agreement with 4Kids. First, the Yu-Gi-Oh! License requires that any party who violates the terms of the License be given 10 business days to correct (“cure”) the offense before the License can be terminated. Despite this stipulation, the licensors, in their communications with 4Kids, never invoked this 10-day cure period by using the sort of strict, objective language that satisfied the court.
Even if TV Tokyo and NAS had notified 4Kids that the cure period was in effect, their notices to 4Kids were not delivered by express mail, as required by the License. Additionally, the court noted that by continuing their negotiations with 4Kids as they had been doing for several months, the licensors would have been behaving “inequitabl[y] and improper[ly]” if they had then terminated the License without providing 4Kids one final cure period.
In any case, the court found that the complaints brought against 4Kids — that it owed the licensors $4.8 million from a variety of underpayments and improper deductions of fees — were virtually all unjustified or have been withdrawn and did not approach the $4.8 million total that the licensors were seeking. And because the licensors used this incorrect amount as the basis of their claim that 4Kids violated the agreement, their termination of the License was rendered ineffective. In fact, the court indicated that if even one of the licensors’ complaints was baseless, that would have been enough for the termination of the License to be ineffective. The court sought precision from the licensors’ claims, emphasizing that merely being “[c]lose enough” to the actual supposed dollar amounts was “decidedly not good enough under the facts and circumstances.”
4Kids and Funimation
Of particular interest to many fans are the details of the contracts between 4Kids and Funimation. The court disagreed with the licensors’ claim that 4Kids had sublicensed the Yu-Gi-Oh! home video rights to Funimation, which, per the Yu-Gi-Oh! License, would have entitled the licensors to claim a portion of the fees Funimation paid 4Kids.
On the contrary, the court concluded that 4Kids maintained full control of the video rights and provided services — like designing DVD packages, preparing trailers and advertisements, and producing DVD extras — that it would not otherwise have handled had it sublicensed the rights. The fees Funimation paid 4Kids for these services need not be included in the royalty payments to the licensors, said the court, as they were not considered part of the income that 4Kids earned from video sales as defined by the License. Funimation, with its know-how in video production and connections in the home video supply chain, served as an independent service contractor, not as a sublicensee. Its role is analogous to that which Upper Deck once played for Konami with regard to the Yu-Gi-Oh! Trading Card Game.
The court also concluded that the nature of the widely maligned “secret” agreement between 4Kids and Funimation is of no relevance. So long as 4Kids paid the licensors the royalties they were owed, the requirements of the Yu-Gi-Oh! License were fulfilled. The licensors did not provide evidence sufficiently demonstrating that the secret agreement between 4Kids and Funimation was used as an avenue to hide money or commit fraud. The Yu-Gi-Oh! License does not require that 4Kids disclose the details of its relationships with third parties.
(On a more humorous note, Judge Chapman scoffed at the licensors’ concerns about secret agreements after a confidential internal email circulating at ADK, the parent company of NAS, was uncovered during the trial. The email revealed that ADK intended to establish its own U.S.-based company to replace 4Kids as the Yu-Gi-Oh! merchandise licensing agent and licensee of the anime.)
What’s Next for 4Kids?
4Kids has indicated that it will seek monetary damages resulting from the events brought about by the licensors. The exact nature of these damages is yet to be seen. In the meantime, 4Kids remains in Chapter 11 bankruptcy protection. With the trial now behind it, the company will undoubtedly look to quickly piece itself back together. 4Kids has been hemorrhaging money from all of its legal fees since the onset of the lawsuit and bankruptcy proceedings.
Perhaps it would be more poignant to ask what the licensors’ next steps will be, now that they remain locked in a contract with a party who they insisted incurably breached their trust.
Well, it’s been a crazy ride. I’ve enjoyed following the events of the lawsuit, though I regret never having the time to provide a breakdown of all of its intricacies, like the contents of the contracts, the licensors’ complaints, and the arguments presented by the two parties. (It took me around eight hours over two days to digest this ruling alone, haha.) Oh well, maybe I’ll put something fun together when the one-year anniversary of this case’s conclusion comes around. We’ll see.
In light of the types of questions and comments I’ve received since I first wrote about this lawsuit nine months ago, and in anticipation of any forthcoming comments, I think it’s important to again emphasize that this lawsuit was a contract dispute that sought to answer one question: Did TV Tokyo and NAS effectively terminate their agreement with 4Kids? That’s all. This case is not about copyright infringement, the merits of 4Kids’ editing practices, the attitudes of network censors, or anything else.
Catch up on the Yu-Gi-Oh! lawsuit from the beginning! Check my “lawsuit” tag to follow all of my previous coverage of this tale.