Scene set for battle over Rings fortune

Tolkien's works have a litigation history. Peter Jackson, who directed all three Lord of the Rings films, sued New Line in 2005.

J.R.R. Tolkien sold movie rights to his Lord of the Rings novels 40 years ago for 7.5 per cent of future receipts. Three films and US$6 billion ($9.3 billion) later, his heirs say they haven't seen a dime from Time Warner.

The accounting methods used by New Line Cinema, the Time Warner unit that made the movies, will face a jury's scrutiny in October, when the heirs' lawsuit against the New York-based media company is set for trial in Los Angeles Superior Court.

The case may provide a window into accounting practices that let Time Warner deny proceeds of the Oscar-winning films to Tolkien's heirs. The litigation also threatens to derail two films of The Hobbit that, if their predecessors are a guide, could generate US$4 billion in sales.

"Usually it's not outright thievery by the studios, but death by contract," said Pierce O'Donnell, the Los Angeles-based lawyer who represented the late columnist Art Buchwald in a successful case against Viacom's Paramount Pictures in 1988.

Tolkien's family and a British charity they head, the Tolkien Trust, seek more than US$220 million in compensation, said Bonnie Eskenazi, an attorney with Greenberg Glusker, the Los Angeles firm representing the heirs.

The Tolkiens also want the option to terminate further rights to the author's work, as the original contract lets them do in the event of a breach. News Corp's HarperCollins Publishers, which holds Tolkien's publishing rights, is also a plaintiff.

The two sides have held settlement talks, Eskenazi said, adding they remain far apart and are going to trial.

"Should this case go all the way through trial, we are confident that New Line will lose its right to release The Hobbit," Eskenazi said.

Time Warner's attorney, Brad Brian of Munger Tolles, said the contract was ambiguous. The company is asking Judge Ann I. Jones to reject the heirs' claim they can revoke rights to The Hobbit.

"The studios have historically played hardball in litigation," O'Donnell said. "Also, these are hard times and they maybe think it's cheaper to pay the lawyers than to pay a large claim. And maybe the lawyers think they have meritorious defences."

Time Warner and Metro-Goldwyn-Mayer are collaborating on the new films. MGM holds international distribution rights through its ownership of United Artists, which struck the original deal with Tolkien and later sold production rights that ended up with New Line.

Tolkien's works have a litigation history. Peter Jackson, who directed all three Rings films, sued New Line in 2005, claiming the studio miscalculated his proceeds from the first movie. They settled for an undisclosed sum in 2007. Jackson is in pre-production in Wellington for the two Hobbit films, said Scott Rowe, a spokesman for Warner Bros.

Producer Saul Zaentz, who once owned film rights to the Rings, also sued New Line over his share of the receipts and settled in 2005 for US$168 million, Variety reported.

The three films based on Tolkien's fantasy epic - 2001's The Fellowship of the Ring; The Two Towers in 2002; and The Return of the King, released in 2003 - have generated almost US$3 billion in worldwide box-office receipts, and another US$3 billion from DVDs, merchandise and other sources, Rowe said.

Tolkien, a writer and professor at Oxford University who died in 1973, received US$250,000 from United Artists when he signed over the film rights in 1969, a copy of the original contract shows. New Line was to pay a percentage of all gross receipts, after deducting 2.6 times the production costs, plus advertising expenses in excess of a certain amount, according to Eskenazi.

The heirs, including Tolkien's son, Christopher, 84, and his daughter, Priscilla, 80, say New Line inflated expenses and excluded revenue from its calculation, meaning the family "will never see any payment at all".

Gross receipts consisted of the studio's share of box-office sales and revenue from sources such as home video, TV, merchandise and music royalties, O'Donnell said.

New Line's accounting included 20 per cent of home-entertainment revenue, instead of the 100 per cent called for, the heirs say.

The studio excluded foreign revenue, saying Warner Bros, not New Line, received those sales for distributing the films abroad.

"The agreement says 'all'. All does not mean 20 per cent. All means all," Eskenazi said.

"My instinct tells me this is Hollywood accounting in the extreme," said O'Donnell. "If I was a betting man I'd say there's money owed."

- BLOOMBERG