Katzenberg May Have Won, but Eisner Made Him Pay a Price

“Congratulations, Mr. Katzenberg,” a waiter in the dining room of the Four Seasons Hotel said Tuesday to the man seated at his usual corner table, back to the window.

It was the morning after the former Disney Studios chief had scored a settlement in a $250-million breach-of-contract suit against his former employer. Only in Hollywood can a legal victory elicit the kind of congratulatory greeting usually reserved for the producer of a movie that’s topping the latest box-office charts.

Still, the waiter was on to something.

At least on the face of it, Jeffrey Katzenberg looks to be the early winner in the 19-month-old lawsuit, though the exact amount he will ultimately be paid must be worked out in arbitration over the next few months.

“If I were handicapping it, the first round would go to Katzenberg,” says litigator Ron Silverman, a partner in the Beverly Hills law firm Weissmann Wolff Bergman Coleman & Silverman. “Implicit in this settlement is that he is owed something.”

That by itself is a victory of sorts. Until a couple of weeks ago, Walt Disney Co. Chairman Michael Eisner, for whom Katzenberg worked 19 years until a bitter falling-out three years ago, seemed determined to pitch a shutout.

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Still, the settlement isn’t without its price for Katzenberg. It could easily be argued that Eisner wrought significant damage in making this what had to be the most miserable year-and-a-half of Katzenberg’s life.

Katzenberg is known to downplay how much the dispute with Disney occupied his thoughts, comparing himself to an athlete who stays focused on his game regardless of distractions. But anyone who knows Hollywood’s quintessential type-A executive believes he has obsessed over the case in the same way he obsesses over everything from casting to song lyrics in the movies he oversees.

The case has clearly taken up enormous time and energy over the last two years as Katzenberg has worked overtime--and with mixed success--with partners Steven Spielberg and David Geffen to get their DreamWorks SKG studio off the ground.

It’s possible Eisner knew all along that Disney would settle with Katzenberg rather than risk exposing its business and accounting practices. Eisner would have been grilled mercilessly by Katzenberg’s lawyers, who would have tried to trip him up and paint him as an executive lacking in credibility and truthfulness.

The same treatment probably would have befallen Disney lawyer Joe Santaniello, considered the studio’s other key witness. He negotiated contracts for the company and was especially close to late Disney President Frank G. Wells, who allegedly wrote some damaging memos supporting Katzenberg’s case.

Some say Eisner intentionally waited until the eleventh hour--a week before the trial was to have begun next Tuesday--to resolve the dispute so it would cost Katzenberg that much more aggravation, time and, of course, money. Lawyers don’t come cheap, and Katzenberg had 12 of the best on his legal team, headed by two of the highest-paid litigators in the country, Bertram Fields of Los Angeles and Herbert W. Wachtell of New York. In September, Fields estimated Katzenberg’s lawyers had spent 9,000 hours on the case, although the compensation they get is expected to hinge on the settlement amount, not the hours worked.

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In the course of the case, Katzenberg often remarked to friends that Eisner was making the legal ordeal as painful, costly and distracting as he could. While the case is also costing Disney dearly in legal fees, Katzenberg’s share comes out of his own pockets, which aren’t nearly as deep as Disney’s or his billionaire partners at DreamWorks.

Subtle signs that Eisner might settle started appearing last month. Ears in Katzenberg’s camp perked up Sept. 24 when Eisner, in an interview on PBS’ “Charlie Rose” show, said of the lawsuit: “This is a contractual conflict, and it will be resolved in the way contractual conflicts are usually resolved--which is either in a settlement or in a court of law.”

The mere mention of the word “settlement” was considered significant.

Adding to that was the intense pressure both sides were under from two Superior Court judges who served as mediators, Enrique Romero and Owen Lee Kwong. Far from being passive referees, the two aggressively got the sides together, even using psychological pressure by telling each side it was unlikely to win.

“From the inception, I never thought the case would go to court,” says Silverman. “I could not conceive of Michael Eisner and Jeffrey Katzenberg sitting in a courtroom and airing their dispute, which goes right to the heart of how Disney does business.”

Attorney Ken Suddleson of Katten Muchin & Zavis says his personal view is that “nobody ever really wins in these cases, because of all the psychic cost that goes into it.” He added, “It’s nice to see two people who worked together for years and shared success together finally put this behind them and move on.”

Until the settlement announcement, Disney’s position was that Katzenberg forfeited any bonuses he was entitled to when he left the company, and didn’t deserve any of the 2% he claimed he was owed of the profit from films and TV shows produced during his 10 years at the studio.

Under the terms of the agreement, Katzenberg is guaranteed a minimum, undisclosed payment. It amounts to an advance against the eventual total to be decided in an arbitration hearing sometime next year. Disney, sources have said, will ultimately pay a discounted amount of that total negotiated by the lawyers.

Exactly how much Katzenberg will eventually get is anybody’s guess. But in the past he’s made it known he wants at least as sweet a deal as the much-criticized one Disney gave its former president, Michael Ovitz, who waltzed off last year with a cash and stock settlement currently worth more than $100 million.

Although there’s no cap on the amount Disney could pay, sources close to the situation say the second phase isn’t as open-ended as it might seem. Thus, both sides will enter the arbitration procedure next year with a certain degree of comfort in knowing there’s some predictability to the outcome.

Those sources say enough ground rules and parameters--including definitions of such things as future inflation rates, which movies are to be included, and even intangible issues such as the impact “The Mighty Ducks” movie had on the earnings of Disney’s hockey team--have been agreed upon to take a lot of the guesswork out of the range of money Katzenberg stands to get.

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Disney still may have to face the music with shareholders, already livid over the Ovitz settlement late last year and now having to pay out another, presumably costly, one.

Settlements are a sensitive matter with Disney. This week, its executives have been been furious that some details of the top-secret settlement appeared in a Times report. The company is pointing fingers at people around Katzenberg and is even threatening to seek a penalty against them.

Disney reacted similarly when Ovitz left amid reports that pegged his golden parachute at $90 million. It made subtle threats that the settlement had been violated, and began a spin control campaign to put out the word that the numbers were wrong, even though the terms were in Ovitz’s contract on file with the Securities and Exchange Commission.

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In the end, though, Disney was right. The $90-million figure was incorrect--it was too low, because Disney’s stock options soared, making Ovitz’s deal worth even more.

While some attorneys question whether the Katzenberg case will actually have much impact in Hollywood, others, like litigator Pierce O’Donnell, believe it will.

“The type of claim Katzenberg had and the kind of numbers he was talking about, just like the Ovitz settlement, raises the bar on executive salaries, which has an escalating effect on star and director salaries,” says O’Donnell. “That ups the ante and continues to drive skyward the cost of movies.”

In his book “David vs. Goliath in Hollywood,” to be published next year, O’Donnell’s first chapter, titled “Excess of Success,” illustrates that point, using Katzenberg and Ovitz as examples.

Both Silverman and Suddleson suggest that the upward momentum in Hollywood compensation is already so irreversible that unique situations like that of Katzenberg and Ovitz have little effect.

“I think Jeffrey’s deal and his position are unique,” says Silverman. “So you can’t draw industrywide repercussions from it.”

Suddleson agrees: “This is really a unique contract dispute, and it doesn’t set precedents.”

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Intertwined Careers

Jeffrey Katzenberg and Michael Eisner

* 1975: Katzenberg moves up from the Paramount Pictures mail room to become assistant to then-Chairman Barry Diller. One year later, Diller persuades Eisner to leave ABC to become president of Paramount.

* 1977: Katzenberg is promoted to executive director of marketing for Paramount. Several months later, Eisner transfers Katzenberg to Los Angeles as vice president of programming for Paramount Television.

* 1984: Eisner leaves Paramount to become chairman of Walt Disney Co. He brings Katzenberg--by then president of production for Paramount--with him as chairman of Walt Disney Studios.

* 1989: “The Little Mermaid” launches a string of Disney animated hits that Katzenberg oversees.

* April 1994: Frank G. Wells, president and chief operating officer of Walt Disney Co. since 1984, dies in a helicopter crash. Speculation begins almost immediately about whether Katzenberg will succeed Wells.

* September 1994: Katzenberg, denied promotion, resigns as chairman of Walt Disney Studios.

* October 1994: The launch of DreamWorks SKG is announced by founders Katzenberg, Steven Spielberg and David Geffen.

* April 1996: Katzenberg files suit against Disney, alleging the company owed him $250 million based on a bonus of 2% of profit from films and TV shows put into production by him.

* November 1997: Disney announces settlement of the Katzenberg suit for amount yet to be determined.