Incorporation By Reference Argument Fails
Freedom Films, LLC sued Nu Image, Inc., and M3 Media, Inc. for breach of contract, accounting, and fraud, adding doe defendants later as alleged alter egos. Defendants moved to compel arbitration under an arbitration provision. The trial court denied the motions on the ground that the parties had not agreed to arbitrate Freedom Film’s rights as to the picture entitled The Mechanic. The original named defendants and the doe defendants appealed. Freedom Films, LLC v. Nu Image, Inc., et al., Case Nos. B236216, B236765 (2nd Dist. Div. 1 August 30, 2012) (Rothschild, J., author) (unpublished.).
The problem for defendants was that there were three different agreements knocking about, rather than working smoothly together – and because an agreement to arbitrate the rights at issue could not be incorporated by reference, both the trial court and the Court of Appeal concluded that there was no agreement to arbitrate.
Freedom Films sued upon a January 23, 2009 letter agreement entered into with Nu Image and Home of the Brave Productions. But the letter agreement did not contain an arbitration provision.
A 2006 distribution agreement between MGM, and Nu Image did contain a dispute resolution provision. Furthermore, a February 10, 2009 settlement agreement entered into by MGM, Nu Image, Home of the Brave Productions, and Freedom Films, incorporated the dispute resolution provision in the distribution agreement. So why didn’t that result in a binding agreement to arbitrate? Two problems here.
First, Freedom Films sued on the letter agreement, not the settlement agreement, and the settlement agreement did not exist at the time of the letter agreement.
Second, though the letter agreement did refer back to audit rights in the 2006 distribution agreement, it failed to clearly incorporate the 2006 arbitration provision that was incorporated in the February 2009 settlement agreement. See Amtower v. Photon Dynamics, Inc., 158 Cal.App.4th 1582, 1608 (2008) (“subject document must contain some clear and unequivocal reference to the fact that the terms of the external document are incorporated”)..
Defendants made the additional argument that it was for the arbitrator to decide whether the dispute was subject to arbitration. Here the court distinguished between deciding whether there was an agreement to arbitrate (decision for the court) and whether the dispute was within the scope of the arbitration provision (maybe a decision for the arbitrator, but not at issue).
The orders denying motions to compel arbitration were affirmed.
Comment: the lesson for practitioners is that one must be very careful with incorporations by reference. The incorporation should be clear and unambiguous to be effective. A further problem arises when the document one would have liked to incorporate doesn’t yet exist.
Blawg Bonus: “Hollywood accounting (also known as Hollywood bookkeeping) refers to the opaque accounting methods used by the film, video and television industry to budget and record profits for film projects.” Wikipedia entry, “Hollywood accounting.”