ContractsProf Blog

Editor: Myanna Dellinger
University of South Dakota School of Law

Saturday, April 1, 2017

"Discovery Rule" Doesn't Apply to Entertainment Company's Failure to Investigate a Known Breach

 

Here are the logos together, in happier times, from one of the movies at issue in this case, Henry Poole Is Here

A recent case out of California, Camelot Pictures LLC v. Lakeshore Entertainment Group, LLC, B269430, gives us a nice run-down on statute of limitations in contracts cases, in that state at least. The case involves breaches of "Equity Term Sheets" between two entertainment companies involved in making together the movies Pathology and Henry Poole Is Here. Unfortunately for Camelot in this case, it raised the issue of these breaches by Lakeshore too late. 

Camelot sued Lakeshore in November 2013 and eventually won an award in excess of $300,000. The problem, though, was, as Lakeshore argued on appeals, Camelot's claim was outside the four-year statute of limitations governing breaches of contract in California. And the appellate court agreed. 

The appellate court provided a summary of how the statute of limitations works for breaches of contract in California. Generally, the cause of action is considered to have accrued at the time of the breach, "regardless of whether any substantial damage is apparent or ascertainable." However, in "certain, limited circumstances," the accrual-on-breach rule can be replaced by the "discovery rule," which provides that breaches that are "committed in secret" and whose harm is not "reasonably discoverable" will be considered to have accrued on the date of the discovery of the breach, not the date the breach occurred. 

The trial court found that the discovery rule applied, and that Camelot had not discovered Lakeshore's breaches until the summer of 2011, within the statute of limitations period. That date was the date on which Camelot was advised by a consultant that Lakeshore's alternate accounting methodology was not beneficial to Camelot. However, Camelot had known that Lakeshore was using an alternate accounting methodology--in violation of the Equity Term Sheets--since December 2008. On that date, Camelot explicitly raised the fact that Lakeshore was not complying with the terms of the Equity Term Sheets. Camelot simply failed to pursue this lack of compliance for several years. Lakeshore's breach was therefore not "committed in secret" such that the discovery rule should apply. Indeed, Camelot admitted that it knew about the breach as soon as Lakeshore committed it; Lakeshore made no efforts to conceal it. Camelot did not know the impact of that breach until much later, but it could have discovered the impact much sooner, had it employed a consultant sooner than three years later to look into Lakeshore's conduct. Therefore, the trial court's judgment for Camelot was reversed. 

http://lawprofessors.typepad.com/contractsprof_blog/2017/04/discovery-rule-doesnt-apply-to-entertainment-companys-failure-to-investigate-a-known-breach.html

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Comments

Great stuff. This video is number one under government contracts on youtube https://www.youtube.com/watch?v=F8twhngGfCE&t=25s

Posted by: John Wayne | Apr 3, 2017 11:04:06 AM

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