An important contract lesson from ruling in ‘The Jungle Book’ case

On July 21, a California appellate court issued a significant decision involving royalty agreements. In Gilkyson v. Disney Enterprises, Inc., 2021 DJDAR 7395, royalty agreements entitled a songwriter for the 1967 film "The Jungle Book" to a portion of the money Disney's wholly-owned music publisher "received" for his songs. After Disney first released "The Jungle Book" on home video in 1991, a dispute arose as to whether the songwriter was entitled to royalty payments for home video releases. The 2nd District Court of Appeal agreed with Disney and its publisher that he was not.

The decision, issued nearly 60 years after execution of the royalty agreements at issue, provides an important contract drafting lesson.

The Case

In 1963, Disney commissioned songwriter Terry Gilkyson to write songs for "The Jungle Book." Gilkyson wrote several songs for the film, each of which was subject to a royalty agreement that transferred ownership of the song to Disney and entitled Gilkyson to "[a]n amount of money equal to Fifty Percent (50%) of the net amount received by [Disney's] music publisher on account of licensing or other disposition of the mechanical reproduction rights in and to material so written by [Gilkyson]."

In the following decades, Disney's wholly-owned music publisher paid Gilkyson royalties in relation to soundtracks, albums and single song sales. When Gilkyson died in 1999, the publisher began paying Gilkyson's heirs.

In 1991, and thereafter, Disney released "The Jungle Book" on home video. Neither Gilkyson or his heirs received royalties for those home video releases. In 2013, Gilkyson's heirs initiated a lawsuit against Disney and its publisher, asserting claims for breach of contract and declaratory relief.

A jury found in favor of Gilkyson's heirs, and awarded damages for two types of "mechanical reproduction[s]" of Gilkyson's songs in the home video releases: (1) features in which Gilkyson's songs played alongside still images and (2) a bonus sing-along feature that displayed Gilkyson's lyrics.

On appeal, Disney and its publisher argued that the royalty agreements entitled Gilkyson only to a portion of money received by Disney's publisher for Gilkyson's songs, and that Disney had not paid the publisher for those songs in relation to the home video releases.

The 2nd District agreed. The court found that, under the royalty agreements, Gilkyson's right to receive royalties was dependent on Disney's publisher receiving payment. The court further found that the royalty agreements granted Disney discretion as to whether to charge an internal fee for its own use of Gilkyson's songs in home video releases. Accordingly, the 2nd District reversed the trial court's judgment in favor of Gilkyson's heirs.

An interesting aspect of the Gilkyson decision is its discussion of the implied covenant of good faith and fair dealing. The trial court had dismissed a separate claim asserted by Gilkyson's heirs for breach of the implied covenant on procedural grounds, and Gilkyson's heirs did not assert the implied covenant on appeal. Nonetheless, the 2nd District emphasized that the royalty agreements at issue "expressly granted" Disney unfettered discretion as to whether to generate royalties for Gilkyson, and noted that the implied covenant does not impose liability where "express provisions of the contract[] grant the right to engage in the very acts and conduct which would otherwise have been forbidden by an implied covenant of good faith and fair dealing." Thus, the court seemingly suggested that the implied covenant would not have changed the outcome of its decision.

A Lesson From Gilkyson

Gilkyson provides an important lesson: Contract language should be both specific enough to eliminate ambiguities and flexible enough to allow for technological and other changes.

First, contract language should eliminate ambiguities. In 1963, contract language that provided Gilkyson with a portion of payments Disney's music publisher "received" might not have seemed ambiguous. But, when the publisher did not "receive[]" payment for Disney's own use of Gilkyson's songs in home video releases, a lengthy litigation followed. Had the underlying royalty agreements been more explicit, the parties might have avoided litigation altogether.

Before executing an agreement, contracting parties should carefully scrutinize proposed contract language and consider all possible disputes that might arise regarding ambiguities. The contracting parties can prevent future litigation by adding clear language to the contract that eliminates those ambiguities.

Second, contract language should be flexible enough to allow for technological and other changes. When Disney and Gilkyson entered into royalty agreements in the 1960s, neither party knew that Gilkyson's songs would be used on DVDs, Blu-rays and other home video formats. Nonetheless, if the parties had included broad language that contemplated the potential for new distribution formats, the parties could have entered into an agreement that directly addressed Disney's use of Gilkyson's songs on home video formats, even though those formats did not yet exist.

By including flexible language that allows for technological and other changes, such as new media formats, contracting parties might avoid the type of dispute that arose in Gilkyson. 