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Sunday, March 1, 2015

Accounting Essay on Artists' Rights and the Lady Tramp


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 12.5% 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 12.5% 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 ’20s.” 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. 2

Assume that Lee prevails in the lawsuit; calculate the amount of Lee's damages based on 12.5% of profits. Support your calculation with an explanation of your logic.
Exhibit 1 Lady & the Tramp Project Income Statement *
For the year ended 12/31/87

Sales  $      72,236,000
Cost of Goods Sold 31,963,480
Marketing Expenses 3,487,316
General & Administrative 9,545,460
Profit before Tax  $      27,239,744

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

• 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 expense since taxes are determined on Disney's worldwide operations.

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