Filed 3/22/17; pub. order 3/24/17 (see end of opn.)
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION SEVEN
WIND DANCER PRODUCTION B262426
GROUP et al.,
(Los Angeles County
Plaintiffs and Appellants, Super. Ct. No. BC501953)
v.
WALT DISNEY PICTURES et al.,
Defendants and Respondents.
APPEAL from a judgment of the Superior Court of Los
Angeles County, William Highberger, Judge. Reversed.
Greines, Martin, Stein & Richland, Robin Meadow, Robert
A. Olson, and Alana H. Rotter for Plaintiffs and Appellants.
O’Melveny & Myers, Daniel M. Petrocelli, Cassandra L.
Seto, and Timothy B. Heafner, for Defendants and Respondents.
________________________________
Plaintiffs and appellants are writers and producers who
entered into a profit participation agreement with defendant and
respondent Walt Disney Pictures regarding their work on the
television series, Home Improvement. The parties’ agreement
includes an “incontestability” clause, which requires a participant
to object in specific detail to Disney’s quarterly participation
statements within 24 months after the date sent, and to initiate
a legal action within six months after the expiration of that 24-
month period. In July 2008, following an audit of Disney’s books
of account, the producers objected to the participation statements
that were sent between June 2001 and March 2006. After Disney
rejected the objections as untimely, the producers filed this
action, alleging that Disney failed to properly account for and pay
them the amounts owed under the parties’ agreement. The trial
court granted Disney’s motion for summary adjudication on the
ground that the producers’ claims were time-barred by the
contractual limitations period in the incontestability clause.
For the reasons set forth below, we reverse.
FACTUAL BACKGROUND AND PROCEDURAL HISTORY
I. The Parties’ Agreement
Home Improvement was a popular television series that
aired on network television between 1991 and 1999. The series
continues to be sold in syndication and has generated substantial
revenues to date.1 Between 1989 and 1992, the parties entered
1 Plaintiffs and appellants Matt Williams, Carmen Finestra,
and David McFadzean were Home Improvement’s creators,
writers, and producers, and their services on the show were
furnished by plaintiffs and appellants Wind Dancer Production
Group, Wind Dancer Productions, Inc., Finestra Productions,
2
into a series of written agreements (collectively, the “profit
participation agreement”) under which the producers agreed to
transfer the rights to the series to Disney, and Disney agreed to
pay the producers 75 percent of all net profits earned by the
series. During the parties’ contract negotiations, the producers
were represented by highly regarded agents, attorneys, and
production companies.
The profit participation agreement sets forth the terms for
Disney’s accounting of the net profits owed to the producers. As
relevant here, the agreement states that Disney “shall render
statements to Participant showing in summary form the
appropriate calculations relating to the treatment of Gross
Receipts, including all distribution fees, distribution expenses,
other participations paid, interest and negative cost.” The
agreement further provides that Disney “shall keep books of
account” regarding the production and distribution of the series,
and that “[s]aid books, to the extent they have not become
incontestable or have not been previously examined, may be
examined at Participant’s expense once in each 12 month
period. . . . No such examination may continue beyond a period
of 60 days after commencement thereof.”
The agreement includes a clause entitled “Incontestability,”
which states in pertinent part: “Each statement shall be deemed
conclusively correct and binding on Participant as to the
transactions reflected therein for the first time on the expiration
Inc., and Tam O’Shanter Productions, Inc. Defendants and
respondents are Walt Disney Pictures, Buena Vista Television,
and The Walt Disney Company. For purposes of this appeal,
we shall collectively refer to plaintiffs and appellants as the
“producers” and to defendants and respondents as “Disney.”
3
of a period . . . of 24 months after the date sent. . . . The inclusion
of any item from a prior statement on a subsequent statement or
of cumulative figures provided to Participant as a courtesy shall
not render such prior-appearing item contestable or recommence
the running of the applicable 24-month period with respect
thereto. If Participant serves written notice on [Disney] within
the applicable 24 month period objecting in specific detail to
particular items and stating the nature of the objection, then
insofar as such specified items are concerned such statements
shall not be deemed conclusively correct and binding. If
Participant’s objections are not resolved amicably, Participant
may maintain or institute an action with respect to an objection
raised and not resolved amicably if commenced before the end of
6 months after the expiration of said 24 month period or prior to
the expiration of the period of the applicable statute of
limitations established by law as to such transactions or items,
whichever first occurs. [Disney’s] books of account and all
supporting documentation need not be retained and may be
destroyed after the expiration of said 24 month period unless
Participant has duly objected prior thereto and instituted an
action as herein provided.”
The agreement also includes a section on “Standard Terms
and Conditions” with provisions on waiver and modification. The
“waiver” clause provides “[n]o waiver by either Lender, Artist, or
[Disney] of any failure of the other party to fulfill any term hereof
shall be deemed a waiver of any preceding or succeeding breach
of nonfulfillment of the same or of any other term hereof.” The
“prior agreements” clause states that “[t]his Agreement
constitutes the entire agreement between [Disney] and Lender
and Artist and supersedes all prior written or oral agreements
4
pertaining hereto, and cannot be modified except by a writing
signed by Lender and Artist and [Disney]. . . .”
II. The Audits of the Participation Statements
Since Home Improvement’s debut in 1991, the producers
have exercised their contractual right to audit Disney’s books
of account regarding the series on six occasions. The current
lawsuit concerns Audits 4 and 5. According to Marcia Harris, the
attorney who has represented the producers since 1997, Disney
has not allowed the producers to conduct audits annually, nor
has Disney permitted them to timely commence an audit upon
receiving notice of such intent. Instead, Disney has advised the
producers that they must remain in a queue while other audits
are pending. Over the course of the parties’ business dealings,
Harris regularly communicated with Disney’s in-house attorney,
Christina Oswald, and there were occasions when they agreed,
either orally or in writing, to toll the limitations period for certain
participation statements during the pendency of an audit. A
summary of the audits requested by the producers and Disney’s
responses to those audits is set forth below.
A. Audit 1
In 1997, the producers filed a lawsuit against Disney based
on their audit of the participation statements for the period from
the inception of the series to March 31, 1996 (Audit 1). Although
many of the statements that were the subject of Audit 1 were
more than 30 months old when the litigation commenced, Disney
did not assert the limitations period in the incontestability clause
as a defense to the producers’ Audit 1 claims. The parties settled
the lawsuit in April 1999.
5
B. Audits 2 and 3
After the lawsuit related to Audit 1 settled, the producers
conducted an audit of the participation statements for the period
from April 1, 1996 to December 31, 1998 (Audit 2), followed by an
audit of the participation statements for the period from January
1, 1999 to December 31, 2000 (Audit 3). The producers did not
object to the statements that were the subject of Audits 2 and 3
while those audits were pending. The auditors retained by the
producers issued an Audit 2 report in December 1999, and an
Audit 3 report in May 2002. In August 2002, the parties began
negotiating a resolution of the claims raised by Audits 2 and 3.
Although many of the statements at issue in those audits were
more than 24 months old when the settlement negotiations
commenced, Disney never asserted that the producers’ Audit 2 or
3 claims were time-barred under the incontestability clause. Six
years later, in May 2008, the parties settled the claims raised by
Audits 2 and 3 without proceeding to litigation.
C. Audits 4 and 5
On November 18, 2003, while the producers’ Audit 2 and 3
claims were still pending, Harris orally notified Oswald that the
producers intended to audit the participation statements for the
period from January 1, 2001 to December 31, 2003 (Audit 4).
Harris and Oswald also orally agreed to toll the limitations
period for the statements that were the subject of Audit 4 until 90
days after the submission of the Audit 4 report to Disney. Harris
memorialized the parties’ oral agreement regarding the Audit 4
statements in a written tolling agreement, which was sent to
Oswald, but was never signed. On January 12, 2004, Harris
6
provided Oswald with written notice of the producers’ intent to
commence Audit 4. On February 4, 2004, Oswald sent Harris a
letter stating that Disney agreed to extend the limitations period
for the Audit 4 statements until October 15, 2004, provided that
it received the Audit 4 report by that date. On November 10,
2004, nearly 10 months after the producers gave Disney written
notice of their intent to conduct Audit 4, Disney sent the auditors
a confidentiality agreement, without which the auditors could not
commence their field work for the audit.
Because Audit 4 was taking longer than anticipated, Harris
and Oswald also orally agreed to toll the limitations period for
participation statements that were issued after December 31,
2003 (the end date of the Audit 4 period) until the audit was
completed. On August 3, 2005, Harris memorialized the parties’
oral agreement regarding these post-2003 statements in a
written tolling agreement, which was sent to Oswald. Disney
never objected to Harris’s request to toll the limitations period for
the statements issued after December 31, 2003.
As of January 2006, the producers had three open audits
pending with Disney.2 On February 16, 2006, two years after the
producers notified Disney of their intent to conduct Audit 4, the
auditors completed their field work for the audit and sent the
2 In a January 23, 2006 email responding to Harris’s request
that the parties move forward on their settlement negotiations
regarding Audits 2 and 3, Oswald reminded Harris that Disney’s
“practice was not to permit additional audits prior to closure of
the pending audit period,” and that Disney had done so in this
case as an accommodation to the producers. Oswald also noted
that the producers’ “present stance would seem to prove the
adage of no good deed going unpunished.”
7
producers an Audit 4 report. Of the 11 potential claims identified
in that report, eight were listed as “undetermined” because the
auditors were still awaiting information or documentation that
they had requested from Disney.
The following day, on February 17, 2006, Harris provided
Oswald with written notice that the producers intended to audit
the participation statements for the period from January 1, 2004
to December 31, 2005 (Audit 5). Harris was advised, however,
that the producers could not begin the audit at that time, but
rather would have to remain in a queue. On September 12, 2007,
one and a half years after the producers notified Disney of their
intent to conduct Audit 5, the auditors completed their field work
for the audit and sent the producers an Audit 5 report. Ten of the
13 potential claims identified in that report were listed as
“undetermined” because Disney had not provided all of the
information or documentation requested by the auditors to assess
those claims.
On July 29, 2008, Harris sent Disney the Audit 4 and 5
reports, which constituted the producers’ written objections to the
participation statements issued by Disney for the period from
January 1, 2001 to December 31, 2005. On August 13, 2008,
Jacob Yellin, Disney’s in-house attorney who had replaced
Oswald, notified Harris that the time for objecting to the Audit 4
and 5 participation statements had already expired because the
incontestability clause “effectively requires that any claim be
made within 24 months after the first statement for the audit
period is sent.” Yellin’s response was the first time in the parties’
relationship that Disney had asserted that the producers’ audit
claims were time-barred under the incontestability clause.
8
Harris and Yellin thereafter entered into a written tolling
agreement that tolled the limitations period for the Audit 4 and 5
claims from October 3, 2008 through March 1, 2013, while the
parties attempted to negotiate a resolution of those claims.3 The
agreement provided, however, that the parties were preserving
whatever rights, claims, or defenses they had as of October 3,
2008, and that the agreement would not operate to revive any
rights that may have been extinguished prior to that date.
D. Audit 6
On March 27, 2009, Harris provided Disney with written
notice that the producers intended to audit the participation
statements for the period from January 1, 2006 to the date that
the audit commenced (Audit 6). In response, Jennifer Manenti,
the head of Disney’s Participations and Royalties Department,
advised Harris that there was a wait to begin new audits, and
that Disney would agree to toll the limitations period for the
participation statements that were the subject of Audit 6 until
that audit was allowed to commence.
On June 18, 2013, more than four years after the producers
notified Disney of their intent to conduct Audit 6, Manenti
informed Harris that the audit could begin for the participation
statements issued through December 31, 2012. On November 7,
2013, while Audit 6 was underway, Harris provided Disney with
3 In a November 13, 2008 email to Yellin, Harris requested
that the tolling agreement extend to participation statements
rendered after December 31, 2005 (the end date of the Audit 5
period) while the parties engaged in settlement negotiations
regarding Audits 4 and 5. Yellin refused, however, to toll the
limitations period for any post-2005 statements.
9
written objections to “each and every line item and category set
forth in the Audit 6 statements,” to preserve the producers’
potential Audit 6 claims under the incontestability clause.
Disney rejected those objections, however, on the grounds that
any claims based on statements sent before September 30, 2007
were time-barred, and that the objections as a whole were not
sufficiently detailed to satisfy the specificity requirement in the
incontestability clause. Disney contended that the time for
objecting to any Audit 6 participation statement remained 24
months from the date the statement was sent.
III. The Current Litigation
The parties were unable to reach a settlement of the
claims arising from Audits 4 and 5. On February 27, 2013, the
producers filed this action against Disney, alleging causes of
action related to Audits 4 and 5 for breach of contract, breach of
the implied covenant of good faith and fair dealing, declaratory
relief, unfair competition, and accounting. The gravamen of the
complaint was that Disney had licensed the Home Improvement
series in the New York syndication market at below its fair
market value, and had underreported the net profits owed to the
producers by, among other acts, improperly charging certain
distribution fees and costs and failing to include certain revenue
in gross receipts. The complaint included allegations that the
parties had entered into a series of tolling agreements, both oral
and written, express and implied, under which the time for
objecting to the participation statements and filing a legal action
for claims arising from the statements was tolled until March 1,
2013. The complaint also included allegations that Disney was
estopped from asserting that the producers’ claims in this action
10
were time-barred based on Disney’s course of conduct in refusing
to allow the producers to meaningfully exercise their audit rights.
On February 4, 2014, Disney filed a motion for summary
adjudication as to all causes of action except declaratory relief.
Disney argued that these claims were time-barred under the
incontestability clause because the producers did not object to the
participation statements on which their claims were based within
24 months of the date the statements were sent. Disney also
argued that the claims were not saved by any tolling agreement
because the profit participation agreement expressly provided
that it could not be modified except by a writing signed by the
parties, and the only written tolling agreement signed by the
parties took effect after the limitations period for the claims at
issue in this action had expired.
On October 10, 2014, the producers filed an opposition to
the motion for summary adjudication. Among other arguments,
the producers contended that the incontestability clause did not
bar their claims because the 24-month limitations period applied
only to “transactions reflected” in the participation statements,
and their claims were based on transactions that did not appear
on the face of the summary statements issued by Disney. The
producers also asserted that the limitations period was tolled by
the parties’ oral and written tolling agreements, and by the
discovery rule based on Disney’s secret breach of the profit
participation agreement. In addition, the producers argued that
Disney was estopped from relying on the incontestability clause
because it had pursued a course of conduct, including authorizing
and then delaying audits of allegedly incontestable statements,
which had caused the producers to refrain from filing suit until
after the expiration of the limitations period.
11
On January 6, 2015, the trial court granted Disney’s motion
on the ground that each challenged cause of action was time-
barred under the incontestability clause. The court concluded
that the contractual limitations period was enforceable and not
subject to the discovery rule, and applied to any transaction that
occurred in the period covered by the participation statement.
The court further concluded that the producers had failed to show
the existence of a valid, written tolling agreement that preserved
their claims, and that any alleged oral tolling agreement was not
enforceable because the parties’ profit participation agreement
expressly precluded oral modifications. The court also concluded
that Disney was not estopped from relying on the incontestability
clause because it was fulfilling its contractual obligations under
the parties’ agreement when it allowed the producers to audit
participation statements that had already become incontestable
by the time those audits commenced.
Following the trial court’s order granting Disney’s motion
for summary adjudication, the producers voluntarily dismissed
the remaining cause of action for declaratory relief because that
claim had become part of a separate lawsuit that had been filed
against Disney arising out of Audit 6. The trial court thereafter
entered judgment in favor of Disney in this action, and the
producers filed a timely appeal.
DISCUSSION
I. Standard of Review
“[T]he party moving for summary judgment bears the
burden of persuasion that there is no triable issue of material fact
and that he is entitled to judgment as a matter of law.” (Aguilar
12
v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 850, fn. omitted
(Aguilar).) “Once the [movant] has met that burden, the burden
shifts to the [other party] to show that a triable issue of one or
more material facts exists as to that cause of action . . . .” (Code
Civ. Proc., § 437c, subd. (p)(2); Aguilar, supra, at p. 850.) The
party opposing summary judgment “may not rely upon the mere
allegations or denials of its pleadings,” but rather “shall set forth
the specific facts showing that a triable issue of material fact
exists . . . .” (Code Civ. Proc., § 437c, subd. (p)(2).) A triable
issue of material fact exists where “the evidence would allow a
reasonable trier of fact to find the underlying fact in favor of the
party opposing the motion in accordance with the applicable
standard of proof.” (Aguilar, supra, at p. 850.)
Where summary judgment is granted, we review the trial
court’s ruling de novo. (Aguilar, supra, 25 Cal.4th at p. 860.) We
consider all the evidence presented by the parties in connection
with the motion (except that which was properly excluded) and
all the uncontradicted inferences that the evidence reasonably
supports. (Merrill v. Navegar, Inc. (2001) 26 Cal.4th 465, 476.)
We affirm summary judgment where it is shown that no triable
issue of material fact exists and the moving party is entitled to
judgment as a matter of law. (Code Civ. Proc., § 437c, subd. (c).)
II. Evidentiary Rulings
As a preliminary matter, we address the evidence that is
properly before us on appeal. In the trial court, Disney objected
to certain statements in the declaration submitted by Marcia
Harris in support of the producers’ opposition to the summary
adjudication motion. Disney specifically objected to statements
that the parties had entered into oral tolling agreements
13
consistent with “the custom and practice in the entertainment
industry” and “the course of conduct between the parties.” The
trial court sustained Disney’s objections to the custom-and-
practice evidence as an improper offer of purported expert
testimony, but did not sustain the objections to the course-of-
conduct evidence. Accordingly, for purposes of this appeal, we
consider Harris’s statements regarding the alleged oral tolling
agreements as evidence of the parties’ course of conduct, but we
do not consider those agreements as evidence of any custom or
practice in the entertainment industry.
In ruling on the evidentiary objections, the trial court also
sustained Disney’s objection to an exhibit that was attached to
Harris’s declaration. That exhibit was an August 2005 email
from Harris to Oswald concerning the parties’ settlement
negotiations over the Audit 2 and 3 claims. The court sustained
Disney’s objection to the email on the ground that prior
settlement negotiations were an improper basis for proving
liability under Evidence Code section 1152. However, that email
also attached an unsigned tolling agreement for the Audit 5
participation statements, which were not part of the parties’
settlement negotiations for the Audit 2 and 3 claims. On appeal,
the producers contend that the trial court erred in sustaining the
objection as to the Audit 5 tolling agreement. We agree that the
tolling agreement was admissible because it was not offered to
prove liability for any prior audit claims, and it is relevant to
determining whether the limitations period for the Audit 5 claims
at issue in this action may have been tolled. Even if the tolling
agreement itself is not considered, however, Harris described the
agreement in her declaration, and the trial court did not exclude
those statements in ruling on the objections.
14
III. The Meaning of the Incontestability Clause
The trial court granted summary adjudication in favor of
Disney on the ground that the challenged causes of action were
time-barred by the 24-month contractual limitations period in the
incontestability clause. On appeal, the producers argue that the
limitations period in the incontestability clause does not apply to
any of their claims because the clause is limited to transactions
that are apparent on the face of the participation statements.
The producers further assert that Disney failed to satisfy its
burden of showing that their claims are based on transactions
that appear on the face of the participation statements because
Disney did not offer any of those statements into evidence in
support of its summary adjudication motion.
A. Relevant Law
“The rules governing the role of the court in interpreting a
written instrument are well established. The interpretation of a
contract is a judicial function. [Citation.] In engaging in this
function, the . . . court ‘give[s] effect to the mutual intention of
the parties as it existed’ at the time the contract was executed.
[Citation.] Ordinarily, the objective intent of the contracting
parties is a legal question determined solely by reference to the
contract’s terms. [Citations]. [¶] The court generally may not
consider extrinsic evidence of any prior agreement or
contemporaneous oral agreement to vary or contradict the clear
and unambiguous terms of a written, integrated contract.
[Citations.] Extrinsic evidence is admissible, however, to
interpret an agreement when a material term is ambiguous.
[Citations.]” (Wolf v. Walt Disney Pictures & Television (2008)
15
162 Cal.App.4th 1107, 1125-1126.) We ascertain “‘the intent and
scope of [an] agreement by focusing on the usual and ordinary
meaning of the language used and the circumstances under
which the agreement was made.’” (Riverside Sheriffs Assn. v.
County of Riverside (2009) 173 Cal.App.4th 1410, 1424.) “We
consider the contract as a whole and interpret its language in
context so as to give effect to each provision, rather than
interpret contractual language in isolation. [Citation.]” (Legacy
Vulcan Corp. v. Superior Court (2010) 185 Cal.App.4th 677, 688.)
“If contractual language is clear and explicit and does not involve
an absurdity, the plain meaning governs. [Citation.]” (Ibid.)
B. The Producers’ Claims Are Within the Scope of
the Incontestability Clause
The incontestability clause contained in the parties’ profit
participation agreement states that a participation statement
becomes “conclusively correct and binding . . . as to the
transactions reflected therein for the first time” unless the
participant objects to the statement in “specific detail” within “24
months after the date sent.” The producers interpret the phrase
“as to the transactions reflected therein” to mean that the 24-
month limitations period solely applies to transactions that are
apparent on the face of the participation statement, and thus,
does not include transactions that can only be discovered through
the audit process. Disney, on the other hand, interprets the
clause as applying to all transactions that occur within the
accounting period covered by the participation statement,
including transactions that are not apparent on the face of the
statement but rather are reflected as part of the total revenues
or costs in the relevant period. We conclude that, based on the
16
plain language of the agreement, Disney’s interpretation of the
incontestability clause is correct.
In setting forth the terms of Disney’s accounting of net
profits from the series, the agreement provides that Disney will
issue quarterly participation statements, “showing in summary
form the appropriate calculations relating to the treatment of
Gross Receipts, including all distribution fees, distribution
expenses, other participations paid, interest and negative cost.”
The agreement does not require that each license fee, distribution
expense, or other transaction related to the series be itemized on
the participation statements issued by Disney. To the contrary,
the agreement expressly contemplates that the calculations for
the various types of transactions encompassed by the statements
will be presented “in summary form.” As reflected in the
exemplar participation statement provided by the producers,
Disney lists the total gross receipts received for the series by the
type of license fee (e.g., syndication, basic cable, home video), and
the total deductions charged to the series by the type of
distribution expense (e.g., advertising, taxes, trade dues). Each
statement thus reflects Disney’s calculations of the total revenues
and total costs from the preceding quarter, and necessarily
encompasses all of the underlying transactions on which those
calculations are based.
The producers argue that the phrase “as to the transactions
reflected therein” must be construed as a limitation on the types
of transactions that are subject to the incontestability clause, or
else the phrase has no meaning and is mere surplusage. (In re
Tobacco Cases I (2010) 186 Cal.App.4th 42, 49 [“[w]e must give
significance to every word of a contract, when possible, and avoid
an interpretation that renders a word surplusage”].) The plain
17
language of the clause, however, does not support that reading.
The sentence containing the “transactions reflected therein”
phrase states: “Each statement shall be deemed conclusively
correct and binding on Participant as to the transactions reflected
therein for the first time on the expiration of a period . . . of 24
months after the date sent. . . .” The next sentence states: “The
inclusion of any item from a prior statement on a subsequent
statement or of cumulative figures provided to Participant as a
courtesy shall not render such prior-appearing item contestable
or recommence the running of the applicable 24-month period
with respect thereto.”
When considered together, these two sentences make clear
that, once a participation statement is sent, the running of the
24-month limitations period commences as to those transactions
that are reflected in a statement “for the first time,” but does not
recommence as to those transactions that were reflected in “a
prior statement,” for example, by being included in a cumulative
total column on the most recent statement. Accordingly, rather
than acting as a limitation on the types of transactions that are
subject to incontestability, the phrase “as to the transactions
reflected therein” identifies how the 24-month limitations period
applies to transactions that may be reflected in multiple
participation statements. Specifically, the 24-month clock begins
to run “the first time” a transaction is “reflected therein,” and
does not start anew whenever such transaction is reflected in a
subsequent statement.
Moreover, if the producers’ interpretation of the
incontestability clause as applying solely to transactions
apparent on the face of the statement were correct, it would
nullify the contractual limitations period in all but the narrowest
18
of circumstances. Specifically, the 24-month period for objecting
to participation statements would rarely, if ever, be triggered
because the statements rendered by Disney do not delineate any
particular transactions, but rather provide a summary of the
total revenues and costs generated in a given quarter, as
expressly permitted by the parties’ agreement. While the
producers offer a few examples of hypothetical errors that might
appear on the face of a statement, their interpretation of the
contract, if accepted, also would mean a single statement could be
subject to conflicting time requirements. Under the producers’
reading, there would be a 24-month deadline for objecting to
those very rare transactions that appear on the face of the
statement, but no deadline for objecting to all other transactions
covered by that statement. The time for filing suit also could be
subject to two different limitations periods–one contractual and
one statutory–depending upon the transactions underlying the
claim. When the agreement is considered as a whole and in
context, however, there is no indication the parties intended for
the incontestability clause to be construed so narrowly.
The producers do not dispute that, under their reading of
the agreement, the incontestability clause would rarely apply due
to the summary nature of the participation statements issued by
Disney. They assert, however, that Disney can trigger the 24-
month limitations period whenever it wants simply by itemizing
the transactions on the participation statements, and they argue
that if Disney instead chooses to issue summary statements, it
foregoes the benefit of the incontestability clause. Yet there is
nothing in the plain language of the agreement to suggest that
the parties intended for the provision expressly authorizing the
issuance of participation statements in summary form to nullify
19
the incontestability clause whenever a summary statement is
issued. Such an interpretation of the parties’ agreement would
render the incontestability clause ineffective. Rather, when these
two provisions are considered together, the only reasonable
interpretation is that a participation statement must reflect all
transactions that occur during the relevant accounting period in
“summary form,” and that the statement becomes “conclusively
correct and binding” as to those transactions unless the
participant objects within 24 months after the date sent.
The producers contend that this interpretation of the
contract is unreasonable because they are required to object to
the participation statements “in specific detail” within 24 months
after the date sent, but they have no way of knowing if Disney
is properly accounting for all revenues and costs based on the
summary statements that are issued. However, the agreement
grants the producers the right to audit Disney’s books of account
on an annual basis so that they can independently assess
whether Disney’s calculations of the net profits owed are correct.
The producers argue that Disney has acted to deprive them of the
benefit of their audit rights by causing long delays in the audit
process, such as forcing them to wait in an audit queue and
failing to provide necessary information and documents to their
auditors. As discussed below, Disney’s alleged practice of
delaying the audits to the point that the producers are unable to
timely object is relevant to determining whether Disney may be
estopped from asserting the incontestability clause as a defense
in this case. Disney’s alleged failure to raise the incontestability
clause in prior audits also is relevant to the estoppel analysis.
While course-of-performance evidence can be relevant to
ascertaining what the parties intended the contract to mean at
20
the time of execution, such evidence may not be used to vary or
contradict the unambiguous terms of a written agreement. (In re
Tobacco Cases I, supra, 186 Cal.App.4th at p. 52.) Even if
relevant on the issue of intent, the evidence concerning Disney’s
course of conduct does not reflect that the parties understood and
intended the incontestability clause to only apply to transactions
that are apparent on the face of the statements. Rather, such
evidence shows that, at various times in the parties’ relationship,
Disney simply did not enforce the incontestability clause with
respect to any transaction whatsoever.
Because the plain language of the agreement reflects that
the incontestability clause applies to all transactions that occur
in the accounting period covered by the participation statements,
Disney satisfied its burden of proof on summary adjudication by
presenting evidence showing the dates on which the participation
statements were sent, and the dates on which the producers first
notified Disney of their objections to those statements. Disney
was not required to put all of the statements into evidence, or to
trace each transaction underlying the producers’ claims to a
particular statement. It is undisputed that the producers’ claims
in this action are based on transactions that occurred between
January 1, 2001 and December 31, 2005 (the Audit 4 and 5
periods), and that the participation statements covering those
accounting periods were sent between June 29, 2001 and March
31, 2006. It is also undisputed that the producers first objected to
those statements on July 29, 2008, when they provided Disney
with the Audit 4 and 5 reports, which was more than 24 months
after the date on which the last statement was sent. Based on
this undisputed evidence, Disney met its burden of showing that
the 24-month limitations period in the parties’ agreement expired
21
prior to the producers objecting to the participation statements.
We therefore consider whether there are triable issues of fact as
to the timeliness of the producers’ claims based on the discovery
rule or the doctrines of waiver and estoppel.
IV. Applicability of the Discovery Rule
The producers contend that there are triable issues of fact
as to whether their claims are timely based on the discovery rule.
They specifically argue that, under the discovery rule, their
claims did not accrue on the date the participation statements
were sent, but rather on the date they discovered, or reasonably
should have discovered, that Disney was breaching the profit
participation agreement. They further assert that they could not
reasonably have discovered Disney’s breaches until they were
able to conduct Audits 4 and 5 and to receive final audit reports.
A. Relevant Law
“Generally, in both tort and contract actions, the statute of
limitations ‘begins to run upon the occurrence of the last element
essential to the cause of action.’ [Citation.] ‘The cause of action
ordinarily accrues when, under the substantive law, the wrongful
act is done and the obligation or liability arises. . . .’ [Citation.]”
(Brisbane Lodging, L.P. v. Webcor Builders, Inc. (2013) 216
Cal.App.4th 1249, 1257 (Brisbane).) “An important exception to
the general rule of accrual is the ‘discovery rule,’ which postpones
accrual of a cause of action until the plaintiff discovers, or has
reason to discover, the cause of action.” (Fox v. Ethicon Endo-
Surgery, Inc. (2005) 35 Cal.4th 797, 807.) As this court has
recognized, the discovery rule “may be applied to breaches [of
contract] which can be, and are, committed in secret and,
22
moreover, where the harm flowing from those breaches will not
be reasonably discoverable by plaintiffs until a future time.”
(April Enterprises, Inc. v. KTTV (1983) 147 Cal.App.3d 805, 832;
see Gryczman v. 4550 Pico Partners, Ltd. (2003) 107 Cal.App.4th
1, 5 [discovery rule applicable to breach of contract action where
defendant “not only breached the contract ‘within the privacy of
its own offices’ but the act which constituted the breach . . . was
the very act which prevented plaintiff from discovering the
breach”].) Under the discovery rule, the plaintiff must show that,
“despite diligent investigation of the circumstances of the injury,
he or she could not have reasonably discovered facts supporting
the cause of action within the applicable statute of limitations
period.” (Fox v. Ethicon Endo-Surgery, Inc., supra, at p. 809.)
It is also well-established that parties to a contract “may
agree to a provision shortening the statute of limitations,
‘qualified, however, by the requirement that the period fixed is
not in itself unreasonable or is not so unreasonable as to show
imposition or undue advantage. [Citations.]’ [Citations.]”
(Charnay v. Cobert (2006) 145 Cal.App.4th 170, 183.)
“‘Reasonable’ in this context means the shortened period
nevertheless provides sufficient time to effectively pursue a
judicial remedy.’” (Moreno v. Sanchez (2003) 106 Cal.App.4th
1415, 1430 (Moreno).) “‘A contractual period of limitation is
reasonable if the plaintiff has a sufficient opportunity to
investigate and file an action, the time is not so short as to work
a practical abrogation of the right of action, and the action is
not barred before the loss or damage can be ascertained. . . .’
[Citation.]” (Ellis v. U.S. Security Associates (2014) 224
Cal.App.4th 1213, 1223.) So long as the time allowed for filing an
action is not inherently unreasonable, California courts afford
23
“contracting parties considerable freedom to modify the length of
a statute of limitations.” (Moreno, supra, at p. 1430.)
In Moreno, supra, 106 Cal.App.4th 1415, this court
considered the extent to which contracting parties may effectively
waive the discovery rule by agreeing to a shortened limitations
period that begins to run upon a specified event. The plaintiffs
in Moreno were two home buyers who filed suit against a home
inspector for breach of contract and negligence 14 months after
the inspector allegedly failed to competently inspect the buyers’
prospective home. The home inspection contract signed by the
parties provided that any lawsuit had to be filed within one year
of the date of the inspection. The trial court sustained the
inspector’s demurrer without leave to amend on the ground that
the one-year limitations period in the contract barred the buyers’
causes of action. (Id. at pp. 1419-1420.) This court reversed,
holding that a limitations period of one year from the date of the
inspection was unreasonable as a matter of law, and that the
buyers’ causes of action did not accrue under the limitations
period provided in the home inspection contract until they
discovered, or reasonably should have discovered, the inspector’s
breach. (Id. at p. 1419.) We explained that, while contracting
parties have considerable freedom to shorten the statute of
limitations, “situations involving home inspectors share many
characteristics with those involving other professionals in which
delayed accrual has been recognized as appropriate and
necessary. . . . As with other forms of professional malpractice,
specialized skill is required to analyze a residence’s structural
and component parts. Because of the hidden nature of these
systems and components a potential homeowner may not see or
recognize a home inspector’s negligence, and thus may not
24
understand he has been damaged until long after the inspection
date. This fact, coupled with the trust the potential homeowners
must necessarily place in the professional home inspector, compel
the conclusion causes of action for breach of a home inspector’s
duty of care should accrue in all cases, not on the date of the
inspection, but when the homeowner discovers, or with the
exercise of reasonable diligence should have discovered, the
inspector’s breach.”4 (Id. at pp. 1428-1429, fn. omitted.)
More recently, in Brisbane, supra, 216 Cal.App.4th 1249,
our colleagues in the First Appellate District considered whether
sophisticated contracting parties may abrogate the discovery
rule by agreeing to an accrual date for claims arising from the
contract. The parties in Brisbane were a commercial property
owner and a builder who entered into a contract for the design
and construction of a hotel. The contract included a provision
that all causes of action would accrue on the date of substantial
completion of the project. More than four years after the project
was completed, the owner sued the builder for latent construction
defects, and the trial court granted summary judgment for the
builder on the ground that the action was time-barred. (Id. at
pp. 1254-1256.) The court of appeal affirmed, holding that
4 In a dissent, Justice Perluss disagreed with the majority’s
conclusion that the limitations period in the parties’ contract was
unreasonable as a matter of law because it impliedly required the
buyers to waive the benefit of the discovery rule. Justice Perluss
noted that “California courts have uniformly enforced provisions
shortening the four-year statutory limitations period for breach
of a written contract [citation] to one year,” and that “[n]o statute
prohibits the parties to a home inspection contract from agreeing
to a shortened limitations period.” (Moreno, supra, 106
Cal.App.4th at p. 1440.)
25
“public policy principles applicable to the freedom to contract
afford sophisticated contracting parties the right to abrogate the
delayed discovery rule by agreement.” (Id. at pp. 1253-1254.)
The court reasoned that “[b]y tying the running of the applicable
statute of limitations to a date certain, the parties . . . negotiated
to avoid the uncertainty surrounding the discovery rule for the
security of knowing the date beyond which they would no longer
be exposed to potential liability.” (Id. at pp. 1260-1261.) The
court concluded that “sophisticated parties should be allowed to
strike their own bargains and knowingly and voluntarily contract
in a manner in which certain risks are eliminated and,
concomitantly, rights are relinquished.” (Id. at p. 1261.)
In enforcing the parties’ accrual provision, the Brisbane
court distinguished the decision in Moreno. The court noted that
the home buyers in Moreno were “persons unsophisticated in
construction matters,” and that the home inspector “was a
professional in possession of special skills and knowledge upon
whom the homeowners relied completely for counsel and advice.”
(Brisbane, supra, 216 Cal.App.4th at p. 1266.) In contrast, the
hotel owner and builder in Brisbane “occupied positions of equal
bargaining strength and both parties had the commercial and
technical expertise to appreciate fully the ramifications of
agreeing to a defined limitations period,” in addition to “the
participation and advice of legal counsel during contract
negotiations.” (Id. at p. 1267.) The Brisbane court made clear
that “‘“[w]hether a contract is illegal or contrary to public policy
is a question of law to be determined from the circumstances of
each particular case.” [Citation.]’ [Citation.]” (Id. at p. 1266.)
26
B. The Producers Waived the Discovery Rule by
Agreeing to the Incontestability Clause
The parties dispute whether the discovery rule applies to
the producers’ causes of action against Disney. The producers
contend that the discovery rule applies because their claims are
based on Disney’s secret breaches of the profit participation
agreement, which the producers could not reasonably have
discovered until they conducted an audit of the participation
statements. Disney counters that the producers expressly waived
the discovery rule by agreeing to the incontestability clause, and
even if the discovery rule was not waived, it does not apply here
because the producers could have discovered any alleged breach
by exercising their audit rights. We conclude that the producers
waived the benefit of the discovery rule by contractually agreeing
to a shortened limitations period with a specified date of accrual.
The incontestability clause in the parties’ agreement states
that a participant must object to a participation statement within
“24 months after the date sent,” and must file a legal action
within “6 months after the expiration of said 24 month period.”
The clause accordingly provides that a claim arising from a
participation statement accrues on the date the statement is
sent, irrespective of whether the participant knows, or has reason
to know, the facts supporting the claim. Like the accrual
provision in Brisbane, the incontestability clause effectively
abrogates the discovery rule by setting forth a “date certain”
on which a cause of action accrues. (Brisbane, supra, 216
Cal.App.4th at p. 1260.) The clause also shortens the applicable
statute of limitations to 24 months for serving objections to a
contested participation statement, plus an additional six months
for filing suit. On its face, the 24-months limitations period
27
agreed to by the parties is not unreasonable. Indeed, California
courts routinely have enforced contractual provisions shortening
the four-year statute of limitations for breach of a written
contract to periods of one year or less. (See Hambrecht & Quist
Venture Partners v. American Medical Internat., Inc. (1995) 38
Cal.App.4th 1532, 1548 [citing cases upholding provisions
shortening the four-year statute of limitations for breach of a
written contract to one year, six months, or three months].) This
is consistent with the “long-standing established public policy in
California which respects and promotes the freedom of private
parties to contract.” (Brisbane, supra, at p. 1262.)
In assessing the enforceability of a contractual limitations
period, we also consider the respective bargaining positions of the
parties. Here, it is undisputed that the producers are well-known
and successful individuals in the entertainment industry, who
had worked on other popular television shows prior to developing
the Home Improvement series. During the parties’ negotiations
over the profit participation agreement, the producers were
represented by highly regarded attorneys, agents, and production
companies. The provisions in the agreement regarding Disney’s
accounting of the series’ profits, including the incontestability
clause, contain numerous interlineations reflecting the extent of
the parties’ contract negotiations. The producers are therefore
more akin to the experienced commercial property owner in
Brisbane who was represented by legal counsel in negotiating a
large-scale construction project, than the home buyers in Moreno
who relied on the home inspector for specialized counsel and
advice about their prospective purchase. Given the equal
bargaining strength of the parties, the producers were not
28
precluded from waiving the discovery rule by expressly agreeing
to a shortened limitations period with a fixed accrual date.
The producers nonetheless assert that a 24-month
limitations period without the benefit of the discovery rule is per
se unreasonable and unenforceable because it does not afford
them a sufficient opportunity to investigate and file an action.
The producers note that they can only conduct an audit once
every 12 months, and that Disney’s delays cause each audit to
take several years. As previously noted, Disney’s alleged conduct
in delaying the audit process is relevant to whether it may be
estopped from asserting the incontestability clause as a defense
in this case. However, such evidence does not demonstrate that
the 24-month limitations period is “in itself, unreasonable” so
as to render the provision unenforceable as a matter of law.
(William L. Lyon & Associates, Inc. v. Superior Court (2012) 204
Cal.App.4th 1294, 1307; see also Charnay v. Cobert, supra, 145
Cal.App.4th at p. 183 [provision shortening statute of limitations
is unenforceable if it is “inherently unreasonable”].)
On its face, the profit participation agreement provides the
producers with sufficient time to audit the quarterly participation
statements and to serve objections to those statements within a
period of 24 months. The agreement allows the producers to
conduct an audit once every year, and provides that the audit
must be completed within 60 days after it is commenced. Like
any other contract, the parties’ agreement also includes an
implied covenant of good faith and fair dealing that imposes on
each party “not only a duty to refrain from acting in a manner
that frustrates performance of the contract ‘“but also the duty to
do everything that the contract presupposes that he will do to
accomplish its purpose.”’” (Brehm v. 21st Century Ins. Co. (2008)
29
166 Cal.App.4th 1225, 1242.) Disney thus has a duty under the
contract to ensure the producers are able to exercise their audit
rights in a manner that gives them a reasonable opportunity to
conduct an audit within 60 days and to serve objections to the
participation statements within 24 months. An alleged breach of
such duty by Disney could give rise to legal liability or estop it
from asserting a contractual limitations defense in a particular
case. It does not, however, establish that a 24-month limitations
period which begins to run on the date a participation statement
is sent is unenforceable as a matter of law.
V. Applicability of the Waiver and Estoppel Doctrines
to the Incontestability Clause
The producers argue that there are also triable issues of
fact as to whether Disney is precluded from asserting the
incontestability clause as a defense in this case under the
doctrines of waiver and estoppel. In particular, the producers
contend that Disney orally agreed to toll the limitations period
for their Audit 4 and 5 claims, and engaged in other conduct
which induced them to refrain from serving objections and filing
suit within the deadlines set forth in the agreement. Disney
counters that the doctrines of waiver and estoppel do not apply
because the agreement precludes any oral modifications, and the
producers could not reasonably have relied on Disney’s alleged
conduct in failing to comply with the incontestability clause.
A. Relevant Law
The modification of a written contract is governed by Civil
Code section 1698, which states in pertinent part: “(a) A contract
in writing may be modified by a contract in writing. [¶] (b) A
30
contract in writing may be modified by an oral agreement to the
extent that the oral agreement is executed by the parties. [¶] (c)
Unless the contract otherwise expressly provides, a contract in
writing may be modified by an oral agreement supported by new
consideration. . . . [¶] (d) Nothing in this section precludes in an
appropriate case the application of rules of law concerning
estoppel, . . . [or] waiver of a provision of a written contract. . . .”
Accordingly, notwithstanding a provision in a written
agreement that precludes oral modification, the parties may, by
their words or conduct, waive contractual rights. (Galdjie v.
Darwish (2003) 113 Cal.App.4th 1331, 1339 [“[l]ike any other
contractual terms, timeliness provisions are subject to waiver by
the party for whose benefit they are made”]; Biren v. Equality
Emergency Medical Group, Inc. (2002) 102 Cal.App.4th 125, 141
[“‘parties may, by their conduct, waive [a no oral modification]
provision’ where evidence shows that was their intent”].) “‘[T]he
pivotal issue in a claim of waiver is the intention of the party who
allegedly relinquished the known legal right.’ [Citation.]” (Old
Republic Ins. Co. v. FSR Brokerage, Inc. (2000) 80 Cal.App.4th
666, 678.) “‘The waiver may be either express, based on the
words of the waiving party, or implied, based on conduct
indicating an intent to relinquish the right. [Citation.]’
[Citation.] Thus, ‘“California courts will find waiver when a
party intentionally relinquishes a right or when that party’s acts
are so inconsistent with an intent to enforce the right as to induce
a reasonable belief that such right has been relinquished.”
[Citation.]’ [Citation.]” (Ibid.) Waiver is ordinarily a question of
fact unless “there are no disputed facts and only one reasonable
inference may be drawn.” (DuBeck v. California Physicians’
Service (2015) 234 Cal.App.4th 1254, 1265.)
31
In addition to waiving contractual rights, the parties may,
by their words or conduct, be estopped from enforcing a written
contract provision. Under the doctrine of estoppel, “[a] defendant
may be equitably estopped from asserting a statutory or
contractual limitations period as a defense if the defendant’s act
or omission caused the plaintiff to refrain from filing a timely
suit and the plaintiff’s reliance on the defendant’s conduct was
reasonable.” (Superior Dispatch, Inc. v. Insurance Corp. of New
York (2010) 181 Cal.App.4th 175, 186.) “‘It is not necessary that
the defendant acted in bad faith or intended to mislead the
plaintiff. [Citations.] It is sufficient that the defendant’s conduct
in fact induced the plaintiff to refrain from instituting legal
proceedings. [Citation.]’” (Holdgrafer v. Unocal Corp. (2008) 160
Cal.App.4th 907, 925.) As our Supreme Court has explained,
“‘“[a]n estoppel may arise although there was no designed fraud
on the part of the person sought to be estopped. [Citation.] To
create an equitable estoppel, ‘it is enough if the party has been
induced to refrain from using such means or taking such action
as lay in his power, by which he might have retrieved his position
and saved himself from loss. . . .’”’ [Citations.]” (Lantzy v. Centex
Homes (2003) 31 Cal.4th 363, 384.) “‘[W]hether an estoppel
exists – whether the acts, representations or conduct lulled a
party into a sense of security preventing him from instituting
proceedings before the running of the statute, and whether the
party relied thereon to his prejudice – is a question of fact and
not of law.’” (Holdgrafer v. Unocal Corp., supra, at pp. 925-926.)
32
B. There Are Triable Issues of Fact as to Whether
Disney Waived or Is Estopped from Asserting a
Contractual Limitations Defense
In granting summary adjudication in favor of Disney, the
trial court concluded that the producers’ evidence of oral tolling
agreements did not demonstrate the existence of a triable issue
because the profit participation agreement states that it can only
be modified by a writing signed by the parties. The trial court
also concluded that the evidence of Disney’s course of conduct in
the audits did not give rise to estoppel as a matter of law because
Disney was merely fulfilling its obligations under the agreement
when it allowed the producers to audit participation statements
that had already become incontestable by the time the audits
commenced. We conclude, however, that summary adjudication
was improper because there are triable issues of material fact as
to whether Disney, by its words or conduct, either waived or is
estopped from asserting the contractual limitations period in the
incontestability clause as a defense to the producers’ claims.
1. Waiver
In their complaint, the producers alleged that the parties
had “entered into a series of tolling agreements, both oral and
written, express and implied,” under which the time for objecting
to the Audit 4 and 5 participation statements and filing suit for
claims arising from such statements was tolled through March 1,
2013. In its motion for summary adjudication, Disney did not
present any evidence to negate the existence of the oral tolling
agreements alleged in the producers’ complaint. Instead, Disney
argued that the profit participation agreement expressly stated
that it could not be modified except by a writing signed by the
parties, and there was no signed, written tolling agreement that
33
preserved any of the producers’ claims. In opposing Disney’s
motion, the producers offered evidence of oral and written tolling
agreements that, if enforceable, tolled the limitations period for
the producers’ claims through the filing of this lawsuit.
Specifically, Marcia Harris, who represented the producers
in their business dealings with Disney, stated in a declaration
that she made oral agreements with Disney to toll the limitations
period for the participation statements covered by Audits 4 and 5.
She then sent unsigned, written agreements to Disney, which
memorialized the parties’ oral tolling agreements. The tolling
agreements provided that the limitations period for the Audit 4
statements would be tolled from November 18, 2003 until 90 days
after the producers submitted the Audit 4 report, and that the
limitations period for the Audit 5 statements would be tolled
until either party cancelled the agreement in writing. At the
time the parties entered into these oral tolling agreements, the
24-month limitations period had expired for two of the 12 Audit
4 statements, but had not expired for any of the Audit 5
statements. It is undisputed that the producers submitted the
Audit 4 and 5 reports to Disney on July 29, 2008, and the parties
entered into a written tolling agreement that took effect fewer
than 90 days later on October 3, 2008. It is also undisputed that
the written tolling agreement was still in effect when the
producers filed this action on February 27, 2013. The producers
thus presented evidence of continuous tolling from November 18,
2003 through the filing of this action, which would encompass all
of the Audit 5 statements and 10 of the 12 Audit 4 statements.
In granting Disney’s motion for summary adjudication, the
trial court concluded that there could be no oral tolling because
the profit participation agreement includes a clause which states
34
that any modifications must be in a writing signed by the parties.
The law is clear, however, that notwithstanding a provision in a
written contract that expressly precludes oral modification, the
parties may, by their words or conduct, waive the enforcement of
a contract provision if the evidence shows that was their intent.
Accordingly, the no-oral-modification clause in the profit
participation agreement did not preclude Disney from waiving
other provisions in the agreement that were made for its benefit,
including the time limitations in the incontestability clause. It
also did not preclude Disney from orally agreeing to toll the
limitations period for the Audit 4 and 5 statements that are the
subject of this action while those audits were pending.
Disney argues that a “standing agreement” to toll the 24-
month limitations period for “all statements” until the audits are
completed “would not amount to a one-time waiver,” but would
instead “fundamentally modify” the incontestability clause.
However, Harris did not assert in her declaration that the parties
had a standing tolling agreement for all participation statements
issued by Disney. Rather, she stated that there were times when
the parties orally agreed to toll the limitations period for the
statements that were the subject of a certain audit while that
audit was pending. The oral tolling agreements for the Audits 4
and 5 statements therefore did not serve to modify the 24-month
limitations period for all past or future participation statements
issued by Disney. Rather, these tolling agreements temporarily
suspended the running of the limitations period only for the
statements covered by Audits 4 and 5 and only for a specified
period of time while the audits were pending.5 Therefore, based
5 Disney also asserts that the producers’ evidence of tolling
shows that they understood a written agreement was required
35
on the evidence offered by the producers, there are triable issues
of material fact as to whether Disney waived the contractual
limitations period in this particular instance by entering into
oral tolling agreements that preserved the producers’ claims.
2. Estoppel
In addition to the oral tolling agreements, the producers
presented evidence that Disney engaged in other conduct over the
course of the parties’ relationship which caused the producers to
refrain from objecting to the participation statements within the
24-month limitations period. Specifically, the producers showed
that, at various times in the parties’ dealings, Disney could have
asserted that the producers’ audit claims were time-barred under
the incontestability clause, but did not do so. Disney did not
raise the incontestability clause as a defense when the producers
filed suit in 1997 based, in part, on Audit 1 statements that dated
back to 1991, or when the parties negotiated from 2002 to 2008
over Audit 2 and 3 statements that dated back to 1996. Disney
also did not invoke the incontestability clause in January 2004,
when the producers sent written notice of their intent to conduct
Audit 4, even though three of the Audit 4 statements were more
than 24 months old at the time of the notice. Disney again failed
because Harris sent Disney proposed written tolling agreements
for both Audits 4 and 5, which were never signed by Disney.
This argument, however, goes to the weight of the evidence,
and does not demonstrate the absence of an enforceable oral
tolling agreement. Whether the unsigned writings were a
memorialization of the parties’ oral tolling agreements, as
asserted by Harris in her declaration, or were proposed drafts
of written tolling agreements that were never finalized, as
argued by Disney, is a question of fact for the jury.
36
to invoke the incontestability clause in November 2004, when it
sent the auditors a confidentiality agreement to sign to begin the
Audit 4 field work. By that point, half of the Audit 4 statements
were more than 24 months old, but Disney nevertheless allowed
the audit of those statements to proceed. It was not until August
2008, more than four years after the producers requested Audit 4
and more than two years after they requested Audit 5, that
Disney asserted for the first time that the producers’ audit
claims were time-barred under the incontestability clause.
The producers also presented evidence that Disney had a
practice of delaying audits such that they were unable to timely
object to the participation statements within the 24-month
limitations period. In particular, the producers submitted
evidence showing that Disney did not allow the audits, including
Audits 4 and 5, to commence within a reasonable time upon
receiving the producers’ requests. Instead, Disney had a practice
of permitting only one audit at a time. Disney also had a practice
of making the producers wait for long periods of time in an audit
queue before taking the steps required on its part to allow the
auditors to begin their field work. For example, the evidence
showed that Disney did not send the auditors the confidentiality
agreement required for Audit 4 until 10 months after the
producers formally requested that audit. The producers also
presented evidence that, once the audits were allowed to begin,
they took years to complete because Disney failed to timely
respond to the auditors’ requests for information and documents
that were needed to assess potential claims. As a result of these
delays, the producers did not receive a report from the auditors
until 25 months after they requested Audit 4, and 19 months
after they requested Audit 5. By that point, more than 24
37
months had passed since most of the Audit 4 and 5 statements
had been sent, and objecting to those statements at that time
would have been untimely under the incontestability clause.
Disney contends that it was merely fulfilling its contractual
obligations under the agreement by allowing the producers to
conduct Audits 4 and 5, even though the limitations period had
already expired for some of the covered statements by the time
those audits commenced. The audit provision in the parties’
agreement clearly states, however, that the producers only have
a right to audit the participation statements “to the extent they
have not become incontestable.” The producers’ right to conduct
audits therefore would not extend to statements that were time-
barred under the incontestability clause.
Disney also claims that its prior conduct in failing to
enforce the incontestability clause is irrelevant to the current
action because the parties’ agreement includes an anti-waiver
provision which states that a failure to enforce a contract term in
one instance shall not be deemed a waiver of that term in another
instance. However, the relevant inquiry in an estoppel analysis
is whether the defendant’s acts or omissions caused the plaintiff
to refrain from timely filing suit and whether the plaintiff’s
reliance on the defendant’s conduct was reasonable. The anti-
waiver provision does not establish that, as a matter of law, it
was unreasonable for the producers to rely on Disney’s course of
conduct when they decided to proceed with audits that had been
approved by Disney, rather than serve prophylactic objections to
the participation statements or pursue other legal remedies.
Disney further argues that its alleged conduct in causing
audit delays cannot give rise to equitable estoppel as a matter of
law. In support of this argument, Disney cites to federal district
38
court cases which applied New York law to hold that a defendant
was not estopped from asserting a contractual limitations defense
even where it purposefully delayed in providing information or
documents to the plaintiff during the audit process.6 We are not
bound by these district court cases, however, nor do we find their
reasoning persuasive in this case. The evidence submitted by the
producers showed that, in addition to failing to timely respond to
requests for information and documents, Disney had a practice of
allowing only one audit to proceed at a time, and of requiring the
producers to wait in an audit queue for long periods of time
before permitting their audits to begin. Yet the incontestability
clause requires the producers to object “in specific detail” to the
participation statements within 24 months after the date sent.
In the absence of a timely and thorough audit, the producers
could not submit detailed objections to the summary statements
issued by Disney, and thus, could not satisfy the time limitations
in the incontestability clause.7 The cumulative effect of Disney’s
6 See Allman v. UMG Recordings (S.D.N.Y. 2008) 530
F.Supp.2d 602; RSI Corp. v. International Business Machines
Corp. (N.D. Cal. Mar. 9, 2009) 2009 U.S. Dist. LEXIS 18212;
Toto, Inc. v. Sony Music Entertainment (S.D.N.Y. Dec. 11, 2012)
2012 U.S. Dist. LEXIS 175389.)
7 Indeed, after Disney asserted for the first time that the
Audit 4 and 5 claims were time-barred under the incontestability
clause, the producers submitted generalized objections to the
Audit 6 statements to preserve their rights while that audit
was pending. Disney rejected the objections as not sufficiently
detailed under the incontestability clause, and claimed that
the 24-month limitations period for objecting to the Audit 6
statements was continuing to run.
39
delays was that the producers were precluded from complying
with their obligations under the parties’ agreement.
Based on the totality of evidence presented about Disney’s
alleged conduct, including the oral tolling agreements, the prior
failure to enforce the incontestability clause, and the chronic
delays in the audit process, we conclude that there are triable
issues of material fact as to whether Disney may be estopped
from asserting the contractual limitations period as a defense
to the producers’ claims. The trial court accordingly erred in
granting summary adjudication in favor of Disney.
DISPOSITION
The judgment is reversed. The producers shall recover
their costs on appeal.
ZELON, J.
We concur:
PERLUSS, P. J.
SMALL, J.
Judge of the Los Angeles Superior Court, assigned by the
Chief Justice pursuant to article VI, section 6 of the California
Constitution.
40
Filed: 3/24/17
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION SEVEN
WIND DANCER PRODUCTION B262426
GROUP et al.,
(Los Angeles County
Plaintiffs and Appellants, Super. Ct. No. BC501953)
v. ORDER CERTIFIYING
OPINION FOR
WALT DISNEY PICTURES et al., PUBLICATION
Defendants and Respondents.
THE COURT:
The opinion in this case filed March 22, 2017 was not
certified for publication. On the court’s own motion the opinion
meets the standards for publication specified in California Rules
of Court, rule 8.1105(c); and
IT IS HEREBY ORDERED that the words “Not to be
Published in the Official Reports” appearing on page 1 of said
opinion be deleted and the opinion be published in the Official
Reports.
____________________________________________________________
PERLUSS, P. J., ZELON, J., SMALL, J. (Assigned)
41