4Kids in a bit of hot water over Yu-Gi-Oh! deal. | The Irish Duelist

4Kids in a bit of hot water over Yu-Gi-Oh! deal.

Sources: Hollywood Reporter, Anime News Network

'Yu-Gi-Oh!' Creator Terminates U.S. Deal and Sues for Millions of Dollars

4Kids Entertainment has made quite a business out of taking Japanese anime programming like Pokemon and Yu-Gi-Oh! and dubbing it into English for the pleasure of U.S. children. Just how lucrative? The Yu-Gi-Oh! franchise, including a popular TV show and various merchandising, is said to have earned 4Kids over $152 million in income between 2001 and 2009.

But now, the Japanese animation studio that first created the anime hits is attacking, claiming that 4Kids owes it millions of dollars for making secret agreements with TV networks and home video distributors as well as making improper royalty deductions, including for the cost of the actual dubbing. As the result of alleged contractual breaches, the Japanese companies behind the show reveal they have just terminated their licensing agreements with 4Kids. They now want past money owed too.

TV Tokyo Corporation and Nihon Ad Systems filed the lawsuit last week in New York federal court.
According to the complaint, the plaintiffs exercised their right to audit 4Kids' financial books in 2010 to see whether they were getting paid 50% of gross income, minus pre-defined expenses, as agreed upon in the original licensing agreement.
The auditor allegedly turned up some questionable accounting concerning deals made by 4Kids with the Cartoon Network and other parties.

For example, 4Kids is said to have made an agreement with Funimation Productions, giving it the right to exploit the YGO series on home video. "4Kids conspired with Funimation to fraudulently hide from Plaintiffs more than 45% of the total income Funimation paid to 4Kids from the sale of the home videos," the complaint states.

Allegedly, 4Kids not only licensed YGO, but also several other Japanese animation series it didn't own. Under the terms of this supposedly secret deal, which allegedly included a strict confidentiality clause, 4Kids didn't have to do much besides perform certain marketing services. It was Funimation's job to produce and distribute the series, and for this right, Funimation paid a $1.3 million advance and gave over nearly $4 million in a service fee, which was allegedly then hidden from the plaintiffs.

4Kids is said to have made a similar "strictly confidential" deal with Majesco Sales Inc. to produce and distribute videos of the YGO episodes on Nintendo's Gameboy Advanced game system, and allegedly never turned over any royalties.

The complaint also details some improper deductions, including more than $2.5 million worth of international withholding taxes, bank charges, insurance coverage, YGO style guide art, the cost of the audit itself, and even the cost of the dubbing. TV Tokyo says 4Kids "expressly agreed to bear [such costs] under the agreement."

After the auditor's report, the parties met in February to discuss the situation. The plaintiffs are said to have made an offer, which was rejected. After further discussions, on March 17, 4Kids wired $1 million as a "good faith" initial payment. The next day, reps for the Japanese companies flew to the U.S. for a final meeting to see if they could resolve the mess.
"4Kids abruptly terminated this meeting without a resolution to any of the outstanding issues," says the complaint.

In response, TV Tokyo Corporation and Nihon Ad Systems have cancelled the agreement and filed a lawsuit, seeking more than $4 million in damages and other relief for breach of contract and fraud. The legal dispute also leaves the future of some of the most popular Japanese programming on U.S. television in some doubt.
Attempts to reach 4Kids for comment were unsuccessful.

News: TV Tokyo, Nihon Ad Terminate Yu-Gi-Oh! Deal, Sue 4Kids

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.