To Arbitrate or Not to Arbitrate: Celador v. Disney Complicates the Answer

On July 8th the jury in the long-running (six years!) litigation between Celador International, Ltd, the creator in the U.K. of the "Who Wants to Be a Millionaire" game show, awarded the company a verdict of $269 million against Disney, based on Celador's claims that Disney breached a contract to pay the company royalties for the license to produce the show in the U.S.

The news commentaries about the verdict noted that it wasn't likely to have a significant impact on licensing practices because the contract language at issue was based on a 1998 contract. Licensing and profit participation agreements have been revised since then, making a contemporary dispute on these same terms unlikely.

What is important about this decision is its contribution to the long-standing debate over whether mandatory binding arbitration clauses should be included in IP and entertainment licensing agreements. In this instance the contract between Celador and Disney lacked such a clause (The same is true of the contract in the Don Johnson v. Rysher Entertainment case, decided the same day and providing a significant award to Johnson).

Those in favor of the inclusion of mandatory arbitration clauses point to its key benefits: 1) the substantial savings in litigation costs; 2) the much faster pace in moving the dispute to a hearing; and 3) the ability to choose arbitrators with knowledge of the often extremely complex IP and contract issues found in these kind of licensing deals. Critics of mandatory binding arbitration clauses point to their principal drawbacks: 1) the lack of a right of appeal; and 2) the absence of a right to jury trial in these cases.

For Celador, it seems almost certain that it benefited from the presence of a lay jury which accepted their characterization of themselves as the victim of bullying by the more powerful Disney company. The surprisingly high damages verdict is less likely to have been awarded if the case was presented to an industry savvy arbitrator.

What Celador loses by taking this case to trial is the ban on appeals which applies to arbitration cases. Disney announced immediately after the verdict that they intended to appeal it. The outcome of that appeal could take years, and Disney might use that time and added expense to negotiate a lower dollar settlement of the case in the interim.

The absence of an appeal right is a significant detriment in the arbitration process, and I suspect is the primary reason parties often opt out of that process. Given the benefits arbitration offers in the IP and entertainment law context, particularly in the area of arbitrator expertise in industry practices and IP law, this is a terrible choice to force on contracting parties. One hope is that this recent spate of cases may spur some legislative consideration of reforming the arbitration rules to allow for some forms of appeal.