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.
I hope Funi gets out of this one....