On March 24, TV Tokyo and Nihon Ad Systems filed a joint lawsuit against North American media distributor 4Kids Entertainment, accusing the company of "underpayments, wrongful deductions, and unmet obligations" and stating that 4Kids now owes the companies US$4,792,460.36. The Hollywood Reporter website also states that the two companies have terminated their deal with 4Kids.
According to the documents filed by the plaintiffs, the companies conducted an audit on 4Kids' Yu-Gi-Oh! business per their licensing agreement. This audit allegedly uncovered the aforementioned underpayments, as well as a "secret" agreement with Funimation, allowing them to "exploit" the Yu-Gi-Oh! franchise via home video and hide the added income from the plaintiffs. By hiding this income, TV Tokyo and Nihon Ad Systems allege that 4Kids was able to pay them a smaller share than would otherwise have been owed to them. The complaint further alleges that 4Kids attempted to hide the secret deal rather than disclosing it as required by their licensing agreement.
Funimation is not listed as a defendant in the complaint.
Update: According to TV Tokyo and Nihon Ad Systems, the terms of their agreement with 4Kids were such that they would be paid 50% of 4Kids' gross income derived from the Yu-Gi-Oh! franchise. The agreement also allowed 4Kids to enter into licensing agreements for the home video rights for the franchise, provided that they use "customary forms of license agreements."
The plaintiffs allege that 4Kids entered into an agreement with Funimation on March 1, 2002, which granted Funimation "broad right to exploit" the franchise and would pay 4Kids a royalty of 20% of its gross receipts. The plaintiffs then allege that on the same day, the two North American companies entered into a "secret" second agreement for Yu-Gi-Oh! and other titles, under which Funimation undertook the majority of the work releasing home video products and paid 4Kids a US$1.3 million advance and a "service fee" for each sale.
According to the complaint, this service fee added up to US$3.934 million and was not reported as income in 4Kids' quarterly reports. As such, the Japanese companies were not paid royalties from this "kick back."
The complaint further alleges that 4Kids entered into a similar deal with Majesco Entertainment to create Yu-Gi-Oh! videos to be played on Nintendo's Gameboy Advanced portable videogame console. Under this deal, 4Kids paid royalties on the US$366,667 advance paid by Majesco, but reported its $1 kick back per video sold as a service fee, not as income, and did not pay royalties on it.
On Wednesday, the North American media distributor 4Kids Entertainment filed a Form 8-K report to the United States Securities and Exchange Commission (SEC) to address TV Tokyo and Nihon Ad Systems' (NAS') recent lawsuit against 4Kids and their letter of termination for 4Kids' Yu-Gi-Oh! licensing. The two Japanese licensors accused 4Kids of underpaying them and of conspiring with anime distributor Funimation to defraud them. The lawsuit cited information from a recent audit conducted on 4Kids' Yu-Gi-Oh! business. As a publicly traded company, 4Kids is required to file a Form 8-K to inform its shareholders of major events.
In the report, 4Kids stated that on March 27, it informed the two licensors that their letter of termination "did not comply with the 10 business day notice and cure provision" written in the agreement, and states that it has rejected the termination letter "as wrongful and devoid of any factual and legal basis." 4Kids further reported that the licensors reiterated their intent to terminate on March 30, and that the American company intends to "vigorously oppose" said termination.
The report also said that 4Kids received a request for payment from TV Tokyo and NAS on March 4. 4Kids said that it made a US$1 million payment "as a show of good faith" in order to earn a March 18 meeting to resolve the claims in the audit. However, the licensors moved forward with the lawsuit filed on March 24.
While 4Kids maintained throughout the document that the termination of its Yu-Gi-Oh! license is invalid, it acknowledges that should the lawsuit move forward and the termination be found valid, the American company will do whatever is necessary to maintain its business, "including the potential filing" of a Chapter 11 bankruptcy petition, and that it will seek to recover damages to its business caused by the licensors' actions.
The federal government's court document system shows no new filings on the case since ANN's previous report.
4Kids Files to Prevent Yu-Gi-Oh! Zexal Licensing Requests stay order until court determines if 4Kids' own license is still valid
The North American media distributor 4Kids, which is filing for bankruptcy in the Southern District of New York, filed a motion on Friday requesting that the bankruptcy case's judge, Shelley C. Chapman, issue an order to stay (suspend) co-licensor Asatsu DK's (ADK's) attempts to exercise control over the 'Yu-Gi-Oh!' anime franchise in the United States.
ADK's Nihon Ad Systems (NAS) and co-licensor TV Tokyo announced in March that they were terminating 4Kids' license due to the North American company's allegedly fraudulent underpayment of royalties. 4Kids also requested that the hearing for this motion be rushed, and Judge Chapman scheduled the hearing for May 25 rather than granting the standard 21 days. After TV Tokyo and NAS filed a motion for reconsideration, Judge Chapman rescheduled the hearing for May 31.
In its motion, 4Kids complained that ADK will promote 'Yu-Gi-Oh! Zexal', the fourth television anime in the franchise, at the Licensing International Expo in June, and declared that this would cause irreparable harm should TV Tokyo and NAS grant North American 'Yu-Gi-Oh!' licenses previously held by them to new companies.
4Kids acknowledged that TV Tokyo and NAS' lawsuit is currently on hold due to its own bankruptcy filings, during which Judge Chapman filed a stay on the suit, but requested that TV Tokyo and NAS be prevented from "exercising control over 4Kids' rights under the 'Yu-Gi-Oh!' license" — for example, by selling those rights to another company — pending a court decision as to whether the Japanese licensors' termination of their contract was valid. According to 4Kids, both they and the licensors have agreed to transfer their dispute from civil court to Judge Chapman's.
4Kids further argued against the validity of the licensors' termination, stating that it was "procedurally invalid" and declaring that the company is "likely to establish" that ADK and TV Tokyo's accusations are "without merit". 4Kids purported that ADK was aware of the company's deal to split revenue with North American anime distributor Funimation — which the licensors' lawsuit alleged was in fact an attempt by 4Kids to evade paying royalties to the Japanese companies. Additionally, it claimed that several of ADK and TV Tokyo's audit findings "arose more than six years ago" and have therefore passed beyond the statute of limitations.
On Thursday, United States Bankruptcy Judge Shelley Chapman ordered TV Tokyo and Nihon Ad Systems (NAS), the owners of the Yu-Gi-Oh! anime franchise, to comply with an automatic stay on the anime's licensing. According to the order, the owners cannot re-license the franchise or otherwise exercise control over rights to the franchise. The rights were held by the North American distributor 4Kids under its 2001 and 2008 contracts with TV Tokyo and NAS.
TV Tokyo and NAS had announced in March that they would terminate 4Kids' Yu-Gi-Oh! license and sue the distributor. The owners claimed that 4Kids fraudulently hid income that should have been subject to royalties for the Japanese owners.
In her Thursday order, Judge Chapman also said that the trial on the franchise's licensing will proceed in two phases: the first will determine whether TV Tokyo and NAS' announced cancellation of 4Kids' license was valid, and the second will determine whether 4Kids owes the owners money and exactly how much. 4Kids must respond to the lawsuit on June 10, followed by discovery, objections, and witness lists. The first phase of the trial will begin on August 29.
4Kids filed for bankruptcy in April; the company had previously stated it might have to file after the Yu-Gi-Oh! lawsuit. The lawsuit judge then remanded, or sent, the lawsuit to the bankruptcy court due to the relation between the two cases. When 4Kids learned that ADK, the owner of Nihon Ad Systems, would promote the new Yu-Gi-Oh! Zexal anime series at the Licensing Expo International later this month, 4Kids filed a motion requesting enforcement of the automatic stay mentioned above.
The North American production company 4Kids Entertainment plans to promote the newest Yu-Gi-Oh! anime series, Yu-Gi-Oh! Zexal, in a Las Vegas event next week to attract potential merchandise producers. 4Kids plans to release Yu-Gi-Oh! Zexal this fall along with a 500th-episode special event on Toonzai. Further plans to promote the series will be revealed at the Licensing International Expo.
4Kids is involved in a court battle with the Japanese licensors of Yu-Gi-Oh!, ADK's Nihon Ad Systems (NAS) and TV Tokyo. Both Japanese companies intended to cancel their contract with 4Kids Entertainment due to allegedly fraudulent underpayment. 4Kids then filed for bankruptcy but it continues to operate in the meantime.
ADK and TV Tokyo then planned to pitch Yu-Gi-Oh! Zexal themselves at the Licensing International Expo, but 4Kids filed a legal motion against this. Last week, Judge Shelley C. Chapman of 4Kids' bankruptcy case ordered a stay, barring ADK and TV Tokyo from selling the license to another company until the case of fraudulent underpayment is resolved.
4Kids Entertainment will also be showing the CG anime series Meat or Die about dinosaurs, as well as the Asian project Max Adventures.
On Thursday, United States Bankruptcy Judge Shelley C. Chapman ruled that 4Kids Entertainment's licensing agreement for the Yu-Gi-Oh! anime franchise is still in effect. Judge Chapman found that the Japanese consortium that controls Yu-Gi-Oh! rights — Nihon Ad Systems (NAS), TV Tokyo, and ADK — did not effectively terminate the agreement with 4Kids Entertainment.
As written in the court's findings: "Like characters in the Yu-Gi-Oh! series itself, 4Kids and the Consortium were locked in a high stakes duel over the future of the series in the Western world and, by extension, the survival of 4Kids as a going concern. On March 24, 2011, the Consortium attempted to end the duel by issuing a letter that purports to terminate its licensing agreement with 4Kids."
Alleged Royalty Underpayments
The Consortium claimed in March that 4Kids hid income that should have been subject to US$4,819,354.63 in royalties for the Japanese owners:
1 Unreported Funimation Home Video Revenue US$1,967,000.00
2 Unreported Majesco Home Video Revenue US$91,666.50
3 Unsubstantiated International Withholding Taxes US$2,265,767.16
4 Unreported Post June 2008 Home Video Revenue US$26,894.27
5 Unauthorized Audit Fee Deduction US$105,111.20
6 Unauthorized E&O Insurance Cost US$67,328.45
7 Unauthorized Bank Charges US$4,270.58
8 Other Unauthorized Deductions US$43,554.59
9 Other Recovery – Material and Courier Cost US$247,771.88
However, Judge Chapman determined that seven of these audit findings (1, 2, 3, 4, 5, 6, and 9) were withdrawn by the consortium or were meritless. The court emphasized that "the invalidity of any single one of these Findings is sufficient to support the ultimate conclusion that termination was ineffective."
Judge Chapman further found that the consortium did not follow the proper procedure for terminating its agreement with 4Kids, under the terms listed in the agreement itself. The agreement dictated that 4Kids should have had a period of time to correct a claimed breach of contract, but the judge stated that "4Kids never received a proper and effective notice" of this.
4Kids filed for bankruptcy in April, but continued to operate in the meantime. The company had previously stated it might have to file for bankruptcy due to the consortium's Yu-Gi-Oh! lawsuit. The lawsuit judge then remanded, or sent, the lawsuit to the bankruptcy court due to the connection between the two cases.
Meanwhile, a new Yu-Gi-Oh! anime series, Yu-Gi-Oh! Zexal, premiered in Japan on April 11. ADK and TV Tokyo planned to pitch Yu-Gi-Oh! Zexal to international licensees at the Licensing International Expo, but 4Kids filed a legal motion against this.
In June, Judge Shelley C. Chapman of 4Kids' bankruptcy case ordered a stay, barring ADK and TV Tokyo from selling the license to another company until the case of alleged fraudulent underpayment was resolved. 4Kids then promoted Yu-Gi-Oh! Zexal in a Las Vegas event in June attract potential merchandise producers.
4Kids has since adapted Yu-Gi-Oh! Zexal into English, and it began airing the new anime in its CW4Kids Toonzai programming block on October 15.
Maybe I am missing something but did 4Kids have auto-rights to Zexal, they wanted to talk with other companies, however the court said that TV Tokyo and ADK could not until the case of alleged fraudulent underpayment was resolved. No where do I see that TV Tokyo and ADK had to negotiate with 4Kids, in fact I don't think they did and 4Kids marketed it and got the investors before the deal was done, isn't that illegal?
4Kids has first right of refusal on all Yugioh properties as long as their contract is in effect. According to the courts so far, their contract is still in effect and the Japanese had no right to terminate it. So they would have had no choice but to deal with 4Kids under the terms of their contract, at least until any final appeals are decided.
It appears that 4Kids had already agreed to market Zexal prior to the lawsuit, or else they would have never had the materials to do so. Not to mention they wouldn't have had the materials to produce the dubbed episodes. When ADK and TV Tokyo attempted to market the show on their own, they were found to have violated their contract with 4Kids.
American production company 4Kids Entertainment announced on Thursday that there is an amicable settlement of the lawsuit between 4Kids Entertainment and Asatsu-DK (ADK) and TV Tokyo over the license of the Yu-Gi-Oh! property. According to 4Kids, the licensing agreement between the three parties will continue to be "in full force and effect with 4Kids continuing to serve as the exclusive licensing agent for the merchandise licensing, television broadcast, and home video rights to the Yu-Gi-Oh! property throughout the world outside of Asia."
The lawsuit was filed by TV Tokyo and Nihon Ad Systems last March, accusing the North American media distributor of "underpayments, wrongful deductions, and unmet obligations" and stating that 4Kids owed the companies US$4,792,460.36. Last December, a bankruptcy judge ordered that 4Kids' license of the Yu-Gi-Oh! series was still in effect, after earlier ordering a stay that barred ADK and TV Tokyo from selling the international license of the new Yu-Gi-Oh! Zexal anime series to other companies.
A year after the once mighty kids entertainment powerhouse 4Kids filed for Chapter 11 bankruptcy (see “4Kids Files Chapter 11”), and just a month after settling a lawsuit over its rights to the Yu-Gi-Oh! anime property, 4Kids has sold its YGO rights to Kidsco, an affiliate of the Saban Capital Group (that rose to success in the world of children’s programming on the backs of the Power Rangers) for 10 million dollars.
Beast Keeper BOUGHT
Meanwhile 4Kids, having shed its most potent license, has signed a deal that will give it international rights to the 52-episode Beastkeeper cartoon series produced in Italy by Mondo TV, Starbright, and Ponpoko Productions.