PBS and Nesmith settle home-video dispute but are mum on price

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LOS ANGELES — The 63-month-old legal fight between public
TV and the former distributor of PBS Home Video, Michael Nesmith, was “resolved
amicably,” both sides told the U.S. District Court here July 7.

PBS–appealing damages of $47 million levied by a federal jury in February–agreed
not to reveal what it will end up paying, said spokesman Tom Epstein, but
he noted that all settlements are compromises.

“A happy finish for everyone,” said PBS’s lead attorney Jonathan D. Schiller,
as he left the courtroom. A grinning Nesmith sought out Schiller, his opponent,
and gave him an apparently gracious “thank you.”

PBS President Ervin Duggan later wrote in a memo to his staff that the network
will pay the settlement out of proceeds from its self-supporting, revenue-generating
businesses, and services to stations will be “unhindered,” according to Epstein.
Duggan said PBS will be able to meet its budget growth targets for 2000 and

Epstein would say only that the PBS settlement “was less than what Michael
Eisner had to pay Jeffrey Katzenberg”–referring to the just-settled court
struggle between the chairman of Walt Disney Co. and his former protege, who
won $250 million or more, by estimate of the Los Angeles Times.

By agreement among PBS, major producers and Nesmith, the details of their
settlement were ordered sealed for confidentiality by Magistrate Judge Brian
Q. Robbins, who presided over the trial and post-trial motions.

The PBS Home Video litigation began in 1994 when several producers and PBS
sued Nesmith for overdue rights payments; Nesmith responded with counterclaims
in 1995. The combined cases went to trial Jan. 6 this year. After 12 days
of oratory and testimony, the judge issued 181 jury instructions and gave
the jury a verdict form requiring decisions on 47 items.

The six plaintiffs included PBS, which had anointed Nesmith’s Pacific Arts
Inc. as its home video distributor in 1990, and several of the label’s major
producers–WGBH, Boston; WNET, New York; American Documentaries and Radio
Pioneers Film Project, production companies owned by producer Ken Burns; and
Children’s Television Workshop. They sought approximately $5 million in unpaid
royalties, advances, guarantees and license fees for programs and the PBS
logo. Though Pacific Arts had ceased operating, the plaintiffs were counting
on a personal financial guarantee Nesmith signed as part of the original PBS
deal in 1990.

Michael NesmithBy the end of the trial, however, the judge and jury were concentrating
on Nesmith’s counterclaims. Henry Gradstein, lead attorney for Nesmith, contended
in a brief that the company’s video rights were worth enough for it to have
paid off its overdue debts to the producers. But, he said, PBS had concocted
a “dastardly scheme, which was played out with military precision, to strip
Pacific Arts of its assets by inducing Pacific Arts not to file bankruptcy,
by lulling it into a sense of security while it organized a mass termination
of Pacific Arts’ licenses, i.e., the PBS library.”

After three days of deliberation, the jury resolved the overdue debts issue
by ordering Nesmith to pay debts to the producers–nearly $1.2 million to
Burns’ American Documentaries for The Civil War, about $230,000 to
WGBH, and $150,000 to WNET, but directed PBS to indemnify Pacific Arts for
these amounts.

On the counterclaims, the jury found PBS liable for breach of contract, intentional
misrepresentation (fraud), intentional concealment (fraud), negligent misrepresentation,
and interference with contract. It awarded Pacific Arts $14,625,000 for loss
of its rights library, plus $29,250,000 in punitive damages. The jury awarded
$3 million to Nesmith personally, including $2 million in punitive damages.

“If upheld,” PBS’s attorneys later observed, “the total award of $31.25 million
in punitive damages will stand in disrepute as the highest award of punitive
damages in California history.”

Armed with cartons of files

The court wanted a settlement instead of further trials. It had already fostered
a mediation attempt in early June by retired former California Supreme Court
Justice Edward Panelli.

The lawyers apparently did not reach a deal, so Judge Robbins scheduled a
two-day hearing July 7-8 to review PBS’s post-trial motions. PBS was asking
the judge to: grant a new trial as to liability and/or damages, or a partial
new trial; rule in its favor as a matter of law; or strike the jury’s award
of general and specific compensatory damages and punitive damages, or for
a reduction of damages on Nesmith’s counterclaims.

On the 7th, Schiller, the Washington attorney hired by PBS after its big
loss in February, arrived in court with a squadron of eight other attorneys,
plus two corporate overseers, along with numerous graphic blowups and a dozen
cartons of files.

On Nesmith’s side were two attorneys, three file cartons, Nesmith and his
companion, ex-model Victoria Kennedy. Last to arrive was Gradstein, Nesmith’s
lead attorney, who called the others into the hallway.

The battle, if any remained to be fought, was fought in secrecy. The lawyers
met privately for hours, and at day’s end they disappeared into the judge’s
chambers, where he blessed their settlement.

Most likely, neither side wanted to risk a worse outcome than they had already,
and they didn’t want the case to remain unresolved for years. If the judge
had upheld the jury’s verdict, according to court sources, parties would have
waited at least two years for a hearing in the Ninth Circuit U.S. Court of

An expedient course became remittitur, or reduction of damages, which the
parties apparently negotiated and Judge Robbins approved. How much of a reduction?
Some indication may appear in the footnotes of PBS’s future annual reports.

The scene in January

The parade of trial witnesses in January included, of course, several PBS
executives. Beth Wolfe, the senior v.p. of finance and administration (since
elevated to executive v.p.), was on the stand for most of three days. Senior
Vice President Eric L. Sass was grilled, as were former President Bruce Christensen
and former Senior Vice President William Reed. Andrew S. Griffiths of WGBH,
Marjorie Kalins of CTW, and former WNET executive Alice Kossoff took turns
in the chair. So did Ken Burns and his attorney, former WNET legal counsel
Robert Gold.

Nesmith took the stand for three days. Gradstein first had his client describe
his “reversal of fortune”–events that reportedly drained his bank accounts.
By all accounts, Pacific Arts built the PBS Home Video line faster than revenues
came in, and he was soon behind on rights payments to producers.

When Nesmith met with Christensen in 1992 to discuss Pacific Arts’ financial
problems, he recalled, “I felt like the guy at a great party who has to say,
‘Excuse me, I think we hit an iceberg. Put down your soup spoons, please.'”

As Nesmith’s relationships soured with key people at PBS, he nevertheless
assured Christensen that he would not take Pacific Arts into bankruptcy if
he could get PBS’s help with his “wish list.” On Jan. 13, 1992, his main PBS
contact, Eric Sass, sent him a supportive letter and confirmed plans to fulfill
the “wish list” for economic restructuring, specifically a “wind down” that
would enable a sale of the assets and paying of the bills “so I [Nesmith]
can go home.” Progress, however, became slow.

Eric SassIn return for signing a short extension of his financial guarantee
in February 1993, Nesmith sought promises from PBS that his business wouldn’t
be “blown up.” Sass responded with another encouraging letter, Feb. 12. Sass
wrote: “PBS shares your desire to avoid a cataclysmic disruption of distribution
under the PBS Home Video Label. … [In the event of termination] we would
support some prudent and flexible approach to properly winding down activities.”
Christensen, Nesmith’s strongest supporter at PBS, retired that summer.

At PBS there was genuine concern about what a Pacific Arts bankruptcy could
do to the video line. The network had repeatedly sent notices to Nesmith that
he was overdue with his payments, but its executives had also repeatedly reassured

In October 1993 the network moved to protect its interests by systematically
phoning all rights-holders and recommendeding that they cancel their Pacific
Arts agreements on Monday, Oct. 11, the same day PBS would be ending its “label”
agreement. It was a federal holiday, Columbus Day, when courts would be closed
and no bankruptcies could be filed. Nesmith’s attorneys called it “The Columbus
Day Massacre.”

Nesmith himself remembered: “It just rained, it rained cancellations all
that day.”

“PBS induced Nesmith not to file bankruptcy,” Nesmith’s attorneys charged
in post-trial papers, “and then it successfully executed a contingency plan
to take the core assets out of Pacific Arts so that it could not file bankruptcy
until it was too late.”

Without the program rights, Pacific Arts soon collapsed, and PBS moved its
retail cassette distribution to Turner Home Entertainment, now part of Time

Would Nesmith have filed for bankruptcy if he had known of the coming Columbus
Day scheme? “In a minute,” he testified. “In a New York minute.”

But PBS has since argued that Pacific Arts could not have saved itself by
selling off its program rights, because the licenses did not expressly permit
assignment of those rights. And so Nesmith is entitled to no damages for losing
the opportunity to go bankrupt, PBS said. It was the network that was the
“truly injured party.”

“The ‘sad story’ of Nesmith’s personal financial collapse, wholly irrelevant
to PBS or this trial, was orchestrated to kindle the jury’s sympathy for Nesmith,”
PBS said this year in a post-trial motion.

When Pacific Arts asserted, “PBS is a quarter-billion-dollar corporation
with nearly $370 million in gross revenues,” PBS countered: “PBS has annual
net revenues of less than $15 million and a net worth, excluding illiquid
assets … of $67 million.” The jury verdict would “cripple” PBS, depriving
it of “more than two years of available net income.”

At one point in the trial, Ken Burns recalled in his testimony a dinner at
Nesmith’s home, describing candles, silverware and “efficient servants.”

Gradstein interjected to the judge: “Your honor, let the record show that
they were not servants. They were caterers.”

The author, Robert N. Wold, is a writer based in Los Angeles and was founder of the pioneer satellite firm Wold Communications. He can be reached at robertnwold@home.com.

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