JAMS ARBITRATION No. 1220050580 JILLIAN .M. ATHLETICS, and EMPOWERED MEDIA, LLC, Claimants, LIONS GATE FILMS, INC., a Delaware corporation; EXERCISE TV, LLC, a Delaware limited liability company, Respondents. Counsel: Richard S. Busch, Esq. Mark E. Hunt, Esq. Jeremy D. Ray, Esq. KING BALLOW 315 Union Street, Suite 1100 Nashville, TN 37201 Telephone: (615) 259-3456 Fax: (888) 688-0482 Counsel for Claimants David Halberstadter, Esq. Gloria Franke Shaw, Esq. Joanna M. Hall, Esq. KATTEN MUCHIN ROSENMAN LLP 2029 Century Park East, Suite 2600 Los Angeles, CA 90067-3012 Telephone: (310) 788-4400 Fax: (310) 788-4471 Counsel for Respondents -1- INTERIM AWARD INTERIM AWARD Arbitrator: Bruce A. Friedman, Esq. JAMS 1925 Century Park East The Watt Plaza - Suite 1400 Los Angeles, CA 90067 Telephone: (310) 392-3044 Fax: (310) 396-7576 Email: bfriedmanGDiamsadrcom Parties: Claimants Jillian Michaels .M. Athletics, LLC Empowered Media, LLC Respondents Lions Gate Films, Inc. Exercise TV, LLC Place of Arbitration: Los Angeles, California Date of Award: May 10, 2017 THE UNDERSIGNED ARBITRATOR, having been designated in accordance with Section 17 of the Jillian Michaels Fitness Line Agreement, dated August 2, 2007 (?Agreement?), and having examined the submissions, documentary and testimonial proof and arguments and allegations of the parties, ?nds, concludes and issues this Award as follows: I. Introduction and Procedural Statement The dispute between the parties centers around the free distribution by Lions Gate Films, Inc. or ?Respondent?) of ?tness content featuring Jillian Michaels (?Michaels?). This matter consists of claims by Michaels and her companies, .M. Athletics LLC (now known as .M. Athletics, Inc.) and Empowered Media,1 for breach of the Agreement and breach of the covenant of good faith and fair dealing. Claimants? Second Amended Commencement Letter and Demand for Arbitration was ?led on April 15, 2015. Respondent?s Response was ?led on April 29, 2015, which asserted an af?rmative defense based upon the Settlement Agreement and 1 The Arbitrator will refer to Michaels and her companies as either Claimants or Michaels, unless otherwise described. -2- INTERIM AWARD Mutual Release between the parties, dated July 1, 2014, that related to an accounting audit arising from the Agreement. On September 9, 2016, each side ?led its respective Motion for Summary Judgment in this matter, arguing that the Arbitrator could decide the case as a matter of law in his interpretation of the Agreement. The Arbitrator heard oral arguments on October 25, 2016 by telephone, following the issuance of a tentative ruling on October 24, 2016. In line with his tentative ruling, on November 4, 2016, the Arbitrator issued his ?nal ruling, ?nding that both Motions raised a number of triable issues of fact and therefore, denying both Motions. The First Phase Evidentiary Hearing. The Hearing was conducted on November 7?1 1, 2016 and January 18-20, 2017. In addition to the pro-hearing briefs submitted by the parties, each side offered documentary evidence at the hearing, and all such evidence was admitted (Exs. 1-167). Each side called witnesses and cross-examined opposing witnesses: Jillian Michaels, Jason Pinyan, Giancarlo Chersich, Nicholas Gladden, Raymond Cole, Kasja Vikman, Anne Parducci, David Shenkwiler and Robert Mason. The parties submitted excerpts of the deposition testimony of Teena Munroe. Expert opinions were offered through expert reports and testimony at the Hearing, with Claimants presenting the opinions of Greg Drobnick, Richard Marks, David Stewart and Sidney Blum and Respondents presenting the opinions of Ben Sheppard and Marshall Forster. The hearing was reported by Susan Nelson, CSR 3202 and Anna Horton, CSR 6950. At the conclusion of the presentation of evidence, the parties con?rmed that they had no further evidence to offer. Closing briefs were ?led on March 17, 2017, the cause was argued orally on March 28, 2017 and the matter was submitted for decision on that date. The Arbitrator notes that, although Exercise TV is named as a party in this matter, both parties agreed at the hearing on the parties? Motions for Summary Judgment any claims that might have been raised against Exercise TV would be time-barred by the statute of limitations. As a result, the Arbitrator did not hear claims against Exercise TV at the arbitration hearing. 11. Facts The factual ?ndings that follow are necessary to the Award. They are derived from admissions in the pleadings and the testimony and evidentiary exhibits presented at the hearing. To the extent that these ?ndings differ from any party?s position, that is the result of determinations by the Arbitrator as to credibility and relevance, burden of proof considerations, legal principles, and the weighing of the evidence, both oral and written. By all accounts, Michaels is one of the world?s leading ?tness experts and global brand leaders in the ?tness industry today and certainly one of the most success?al. In fact, each of the testifying witnesses, including those from LGF, stated that Michaels is an anomaly in the ?tness world, managing to stay prominent, popular and relevant despite the plethora of established brands and new personalities entering the market every day. As an example, her ?tness video 30 Day Shred, created in March 2008 with LGF, has become the best-selling ?tness Video of the last decade, if not of all time, and remains at or near the top of the list of best-selling workout Videos. INTERIM AWARD In addition to her ?tness videos, in which she creates and writes the content for the vast majority of those videos, she was a celebrity trainer on The Biggest Loser for 10 years beginning in 2004 until her last season in 2013 (Seasons 1-2, 4-10, 14), has frequently appeared on a number of talk, news and entertainment shows and networks over the years, including The Today Show, Dr. 02, Extra, The Insider, CNN and CBS Sunday Morning, has been featured on the cover of major magazines throughout her career, including Women ?s Health, Shape, Self and Good Housekeeping, and has become a social media celebrity with a signi?cant number of followers on Twitter, Facebook and Instagram. She has appeared on two other television shows, Just Jillian on Entertainment and Sweat Inc. on Spike TV, and has over 1 million subscribers to her podcast, The Jillian Michaels Show. She has also written a number of books relating to ?tness and weight loss, seven of which have been New York Times best sellers, as well as her most recent book released in 2016 relating to pregnancy health. Because of her popularity, in February 2008, Michaels partnered with her friend Giancarlo Chersich (?Chersich?) to form Empowered Media (?Empowered?). Chersich has served and continues to serve as CEO of Empowered and, at times, as Michaels? personal manager. Raymond Cole currently C00 and CFO of Empowered, handles the ?nancial reporting for the company. In May 2007, LGF expressed interest in doing a deal with Michaels. At the time, LGF had been producing and distributing ?tness Videos related to The Biggest Loser and Michaels had seen massive success on the show. In July 2007, after months of negotiations, LGF presented Michaels and her agent, Jason Pinyan (?Pinyan?), with a proposal laying out the potential parameters of the parties? future relationship. The proposal suggested that the Michaels? ?tness content with LGF would be created for both DVDs to be sold in stores and for Video-On- Demand offered in an on-site/online store, which would be speci?cally for Exercise TV and its website. The proposal also described the VOD content for ETV as ?exclusive video tips, mini?workouts and promo reads (10 total, 30 sec.-2 min)? in addition to the DVD workout content. (Ex. 31.) ETV would act as a partner with LGF in co-?nancing the production of Michaels? ?tness content. The proposal also established that ETV would work as a promoter for LGF, with the ultimate goal of collecting revenues on the ?tness content through DVD sales. Essentially, ETV was a free On Demand ?tness channel on an advertising supported platform that required viewers to purchase a cable subscription in order to access its content. ETV was carried in approximately 21 million homes through, among others, Comcast and Time Warner Cable and would provide promotional exposure for the Michaels/LGF ?tness content. To make the most of the promotional aspects of the partnership, when LGF released one of the Michaels? DVDs onto the market, ETV would concurrently release a promotional portion of the same content through its channel. Once the proposal?s terms were distilled into a formal agreement after extensive negotiations, again performed on Michaels? behalf by Pinyan, the parties, including ETV, entered into the Agreement on August 2, 2007. (Ex. 9.) To avoid any potential interference with Michaels? concurrent professional relationship with another media company, the Agreement was further amended and was signed by the parties in November 16, 2007. (Ex. 28.) -4- INTERIM AWARD The Agreement granted LGF the right to produce and distribute six ?tness workout ?lms, speci?cally two per year over the three-year term of the Agreement. The Agreement also granted LGF signi?cant distribution rights, which continued in perpetuity: Distributor, as author of all Pictures hereunder, shall own and control, on an exclusive basis, all distribution rights in and to the Pictures and the underlying material with respect thereto, under copyright and otherwise, in all languages and in all media, whether now known or hereafter devised, including, without limitation, all Theatrical, Non-Theatrical, Home Video, Television, and ancillary and derivative rights in and to the Pictures, by all methods of delivery, whether now know [sic] or hereafter devised, including without limitation, all Internet Delivery Mechanisms, all as such rights may be more speci?cally de?ned in Schedule which is attached hereto and incorporated herein by this reference (collectively, the ?Distribution Rights?) for the duration of the Distribution Term. Without limiting the generality of the foregoing, the Distribution Rights owned and controlled by Distributor hereunder during the Distribution Term shall include, without limitation, the exclusive right to market, advertise, promote and publicize the Pictures in all media, whether now known or hereafter devised. (Ex. 9, 113a.) Focusing on Home Video Rights, which are at issue in this matter, Schedule A to the Agreement further de?ned rights: Distributor is hereby granted the sole and exclusive right to produce and distribute the Pictures in all languages in all media, whether now known or hereafter devised including, but not limited to. . .Home Video Rights (including, without limitation, rental, sell? thru (including, but not limited to, Electronic Sell-Thru, including, but not limited to, Download-to?Own and Download-to-Burn), Video?On-Demand, and other pay-per-transaction methods of distribution). . .Without limiting the foregoing, Distributor is hereby granted the exclusive right to exploit the Picture in all manner and style including, without limitation, the right to sell, rent, give-away, exhibit, advertise and promote the Pictures in all media, whether now known or hereafter devised. (Ex. 9, Schedule A.) As for Michaels? bene?ts under the Agreement, aside from the advance ?minimum guarantees? she received per picture (totaling $250,000 for the six ?lms), she would be paid an escalating royalty rate per unit distribution from the ?tness workout ?lms based upon a percentage of the Home Video Gross Receipts: -5- INTERIM AWARD With reSpect to each Picture (and calculated on a per-Picture basis), Grantor?s Royalty shall equal the following percentages of Home Video Gross Receipts: Ten Percent of Home Video Gross Receipts with respect to the ?rst one hundred ?fty thousand (150,000) units of the Picture in question which are sold and not returned, (ii) Twelve and One Half Percent of Home Video Gross Receipts with respect to the next one hundred ?fty thousand (150,000) units of the Picture in question which are sold and not returned, and Fifteen Percent with respect to all subsequent units of the Picture in question which are sold and not returned. (Ex. 9, 116.) All of the royalty payments were subject to recoupment by LGF of the ?minimum guarantees? provided to Michaels per picture, plus interest. (Ex. 9, 115.) Home Video Gross Receipts were de?ned as ?all proceeds actually received by LGF or credited to the account of LGF, on a non- refundable basis, from the exploitation of the Pictures by means of Home Video Rights.? (Ex. 9, However, under the de?nition of Home Video Gross Receipts, Michaels would not receive any royalty payments ?from the exploitation of a Picture by means of Home Video Rights in which such Picture is distributed as free goods or for promotional purposes. . . The Agreement does not contemplate providing Michaels advertising revenue or any other compensation from the use of the ?tness workout ?lms. Because of Michaels? signi?cant work spent building her brand over the years, a meaningful consultation paragraph requiring advance consultation was a sticking point for her. After negotiations, the following was included in the Agreement: Artist?s Consultation; Marketing Rights: Artist shall be meaning?illy consulted in advance with respect to the concept and content of all Pictures produced by Distributor, as well as, all matters involving the Artist brand and Artist?s image. (Ex. 9, 113i) Ultimately, Michaels made six ?tness videos with LGF pursuant to the terms of the Agreement: 30 Day Shred (created in March 2008), Banish Fat Boost Metabolism (February 2009), No More Trouble Zones (February 2009), Yoga Meltdown (March 2010), Shred It With Weights (September 2010) and 6 Week 6 Pack Abs (November 2010) (the ?Fitness Videos?). 30 Day Shred, still one of the most popular ?tness videos on the market, is comprised of three complete workouts at approximately 20 minutes each, with a total running time of 60 minutes. Both Banish Fat Boost Metabolism and No More Trouble Zones are comprised of seven circuits, with a total running time of 60 minutes. The remaining Fitness Videos (6 Week 6 PaekAbs, Yoga Meltdown, Shred It With Weights) are comprised of two complete workouts at approximately 30 minutes each, with a total running time of 60 minutes. By the summer of 2009, LGF had fully distributed the ?rst three of the Fitness Videos and ETV had been featuring full-length videos (or separate segments/circuits of the Fitness Videos, either exhibiting full workouts or combined to ultimately equate to the full video) to subscribers of its channel without charge. At some point that summer, after Michaels had INTERIM AWARD formed Empowered with Chersich, Michaels? team discovered that ETV had begun featuring complete workouts from the Fitness Videos without charge. Chersich began expressing his concerns to LGF. Nevertheless, ETV continued to exhibit the Fitness Videos free of charge. Around this time, in September 2009, LGF was interested in extending Michaels? deal, as the Agreement was set to expire in mid-2010. LGF offered Michaels? plus a ?at-rate royalty for an additional 3-year, 6-picture deal. (Ex. 43.) However, Michaels and her team decided not to extend their relationship with LGF. Instead, Michaels made a deal with Gaiam, Inc. (?Gaiam?), another company that distributes ?tness videos. (Ex. 107.) With Gaiam, Michaels had a deal similar to that with LGF Gaiam released 2 to 3 videos per year over a 6-year term. Interestingly, a number of the videos created with Gaiam are similar to the Fitness Videos Michaels? created with LGF and also have very similar titles. However, Gaiam did not allow access to their titles without payment. By November 2009, Chersich had contacted both Kasja Vikman, Vice?President of Marketing, Home Entertainment and General Manager for Fitness (?Vikman?), and Anne Parducci, former Executive Vice President of Marketing, Home Entertainment and currently consulting with LGF on production of original content for children?s animated division (?Parducci?). Chersich wanted to discuss Michaels? concerns about her Fitness Videos and complete workouts being featured for free on ETV and request that the full-length Fitness Videos (and complete portions thereof) be removed. In one of Chersich?s emails, Michaels speci?cally asked whether ETV had the right to do what they were doing with the Fitness Videos. (Ex. 106.) Parducci indicated that she had spoken with ETV and con?rmed that the channel would be pulling down the ?ill?length videos in January 2010; however, Parducci never responded to Michaels? question. (Exs. 106.) Parducci later stated that ETV would exhibit only ?3 Free VOD segments (not complete DVD) in the Jillian Michaels category rotated and refreshed every 1-3 months? and indicated that full-length titles would be provided only through (paid rentals)? (Ex. 47.) Not long after, in January 2010, Chersich met with the owners of ETV to again convey Michaels? concerns about exhibiting the Fitness Videos for free and con?rm that the full-length Fitness Videos and complete workouts would be removed from the channel. (Ex. 84.) As far as Chersich and Michaels were aware, the full-length content was removed from ETV in February 2010. Regardless, the issue became moot when ETV went out of business in December 2011. Michaels? team was pleased. (Ex. 51 ?Exercise TV will never return. . .In short, no more free distribution of JM DVD titles out there?) Following the closure of ETV, LGF entered into a partnership with Google to launch an exercise channel on YouTube that would be fully supported by advertising revenues. LGF believed that it could reach a new audience, gain more exposure for its content and maintain relevance in light of the shrinking retail market for DVDs. LGF branded the YouTube channel as BeFit and the channel was launched at the end of 201 1. With the launch of BeFit, LGF would collect 55% of Google?s advertising revenues from BeFit. (Ex. 82.) Unlike ETV, no subscriptions to access the content on BeFit were required. In addition, content placed on it -7- INTERIM AWARD was not pay?per-view. Furthermore, the content was accessible to anyone with Internet access. As mentioned, BeFit was strictly advertising?supported. In December 2011, BeFit began exhibiting the Fitness Videos on its YouTube channel. (Exs. 24-25.) LGF utilized a number of marketing/advertising techniques with Michaels? Fitness Videos, including ?open cards,? ?end cards, text annotations, spotlight annotations? and ?click-through links? to Amazon or iTunes to purchase the content. Still, visitors to BeFit are not required to pay a subscription or fee to access BeFit?s content, including the Fitness Videos. In early 2012, Michaels? team discovered that LGF was featuring the Fitness Videos on the BeFit YouTube channel at no charge. (Exs. 52-54.) By spring of 2014, almost all of the Fitness Videos (either full-length videos or complete workouts) had appeared or were appearing on BeFit at no charge. (Exs. 24-25.) 53 8G 99 ?8 It took some time for it to gain traction; from 2012 to 2013, views of BeFit content increased from 6.7 million to over 27.5 million. During that time, sales of Michaels? DVDs declined and continued to decline through 2015 as views on it continued to increase or stay steady. (Exs. 163-164.) In fact, though Michaels? content accounts for approximately 3% of BeFit?s total content, the views of Michaels? content have consistently accounted for 39-50% of BeFit?s total views. (Exs. 30, 74.) Michaels and her team complained to LGF about the BeFit model on a number of occasions. However, BeFit has continued to feature Michaels? Fitness Videos either in their entirety or broken down into segments or circuits, which collectively equate to exhibition of the full video, free of charge. By January 2012, LGF had begun receiving advertising revenues from Google related to it. Though impossible to discern on Michaels? participation statements from LGF ?s accounting department, LGF began accounting for these advertising revenues to Michaels in June 2012 by incorporating them under the DVD sales line item. By December 2013, LGF continued to account for the advertising revenues; however, they were incorporated under a newly created VOD line item. As of March 2016, LGF has paid Michaels approximately $85,000 ?'om BeFit advertising revenues. In January 2013, LGF solicited Michaels and her team about negotiating a new deal for a limited number of short ?tness videos. (Ex. 55.) Michaels? team made it clear that they wanted to understand digital strategy for the new deal, including BeFit?s connection. (Ex. 56.) Following negotiations between the parties, in the summer of that year, LGF offered Michaels for a 5 year deal to include 2 60? to 90-minute workout videos and 2 5-minute digital exclusives, as well as 10 5?minute mobile content pieces and 4 15-minute workout segments for BeFit. (Ex. 60.) However, there was no indication that LGF would cease its continuing distribution of the Fitness Videos for free on BeFit. (Ex. 58.) Instead, after Michaels? counter- offer, LGF agreed to increase the offer by an additional to solicit Michaels to take the deal but would not shorten the deal term from 5 to 3 years. (Ex. 80.) In December 2013, Michaels refused the deal. Around this time, in November 2013, Michaels and Empowered launched FitFusion, a subscription-based ?tness channel that also included pay?per-view for certain ?tness content. FitFusion includes a number of Michaels? ?tness videos, as well as content from -3- INTERIM AWARD approximately 27 other ?tness trainers. Michaels? content is only available to rent or buy. Michaels? manager attempted to obtain a handful of titles from LGF to exhibit on FitFusion but LGF ultimately decided against the deal. (Exs. 16, 21, 27.) In 2012, Michaels requested an audit under the terms of the Agreement to verify the accuracy of accounting from the beginning of their relationship through the quarter ending March 2012. The audit relating to Michaels? participation statements was conducted in October 2012, completed in mid-2013 and the formal audit report was issued in October 2013. Still, the parties were having dif?culty agreeing to the settlement of the audit terms, particularly after Michaels? lawyer, Nick Gladden (?Gladden?), raised an issue about revenues received by LGF from BeFit. Although the audit period undisputedly did not cover any accounting to Michaels of BeFit advertising revenues as no BeFit revenues had been reported to Michaels during the audit period, in response to Gladden, LGF allowed Michaels? accountants to subsequently review ?nancials relating to her BeFit revenues. While the BeFit materials were being reviewed, Michaels indicated that she would refuse to settle the audit unless all BeFit claims were carved out of any settlement agreement. In fact, Gladden attempted to carve out all potential BeFit claims in negotiations with LGF. However, LGF refused his language to include in the settlement agreement; according to its lawyers, audit agreements were typically form and non-negotiable. Nevertheless, the parties were able to come to an agreement. On March 5, 2014, Robert Mason, Senior Vice President, Legal Affairs in-house at LGF (?Mason?), indicated in an email that LGF had made the BeFit/YouTube materials available to Michaels? accountants as a courtesy, though not required to do so. He also con?rmed ?while the auditors may review the [BeFit] materials, no claims can be made on them per the current audit, because any such claims are not part of the audit period and that any claim to be made would have to be made pursuant to a subsequent and separate audit.? (Ex. 5.) Based on this, Michaels and her attorneys understood that no claims relating to BeFit would be subject to the 2012 audit. The parties entered into the Settlement Agreement and Mutual Release (?Audit Settlement?) in July 2014. In signing the Audit Settlement, Michaels agreed to the following: settlement in full of all claims, disputes, demands, liens, actions, suits, causes of action, obligations, controversies, debts, costs, expenses, damages, and liabilities of whatever kind or nature, in law, equity or otherwise, whether now known, suspected, or unknown and whether concealed or hidden, and any interest or penalties thereon or applicable thereto, relating to, arising out of, or concerning in any way the Audit Claims for the Audit Period (collectively, the ?Settled Claims?), except for those obligations of the parties hereto that arise out of or as a result of this Settlement Agreement. (Ex. 63, 12.) The Audit Claims are de?ned as ?the Audit Disputes and any and all other disputes and potential diSputes that arose or could have arisen during the Audit Period.? (Ex. 63, p. 1.) It was -9- INTERIM AWARD determined that Michaels had been underpaid approximately $428,000, which was ultimately paid to Michaels. Despite the parties? settlement of the audit issues, almost one year later, in April 2015, Michaels commenced this arbitration relating to the alleged exploitation of her Fitness Videos free of charge on the BeFit YouTube channel. All additional facts necessary to the Arbitrator?s analysis are addressed in the discussion that follows. 111. Analysis Claimants bear the burden of proof by a preponderance of the evidence. The substantive law of California, the California Arbitration Act and the JAMS Comprehensive Arbitration Rules applied in this proceeding as provided in Section 17 of the Agreement. (Ex. 9.) A. Standards Clear and explicit contract language should govern contract interpretation, so long as it does not ?involve an absurdity.? Cal. Civ. Code ?1638. Unless their use connotes a special meaning or the parties intended a technical interpretation, the words of a contract should be understood in their ?ordinary and popular sense? and in the context in which the agreement was made. Cal. Civ. Code ??1644, 1647. If there are any inconsistencies among provisions, particular provisions are paramount to general provisions. Cal. Code Civ. Proc. ?1859 Nevertheless, though the plain language of a contract may appear to be clear and unambiguous, courts must consider relevant extrinsic evidence to determine whether a disputed contract clause is ?reasonably susceptible? of another particular meaning. See, Wolfv. Walt Disney Pictures Television (2008) 162 Cal. App. 4th 1 107, 1 126, citing Paci?c Gas Electric Co. v. G. W. Thomas Drayage Rigging (1968) 69 Cal. 2d 33, 37. ?[R]ational interpretation requires at least a preliminary consideration of all credible evidence offered to prove the intention of the parties.? Paci?c Gas Electric, 69 Cal. 2d at 39-40. If that evidence does not present an ambiguity, the analysis is complete. If, however, the evidence does present an ambiguity, the evidence is admissible to assist the court in interpreting the contract and determining the parties? objective intent, even where con?icting inferences can be drawn from the evidence or the evidence can create more than one reasonable interpretation of the contract. Id. at 40; Wolf, 162 Cal. App. 4th at 1 126-1 127. See, Oceanside 84, Ltd. v. Fidelity Federal Bank (1997) 56 Cal. App. 4th 1441, 1449 conduct of the parties after the execution of the contract, and before any controversy arose, may be considered in order to attempt to ascertain the parties? intention?). As the fact-?nder, it is the Arbitrator?s role to determine the credibility of the evidence and any con?icting interpretations of that evidence. Finally, contracts must be interpreted as a whole, each section or clause helping to interpret another. Cal. Civ. Code ?1641. The Arbitrator cannot interpret the provisions of an agreement in isolation. -10- INTERIM AWARD B. The Audit Settlement Af?rmative Defense LGF contended that, on its face, the broad release language in the Audit Settlement bars any and all potential claims that arose during the audit period, including Michaels? claims in this arbitration. Speci?cally, LGF argued that the de?nition of ?Audit Claims? clearly encompasses any and all claims Michaels may have made relating to BeFit, not just those relating to the subject audit. On the other hand, Michaels argued that the language of the Audit Settlement is not clear in light of the context of the agreement. To settle this ambiguity, Michaels introduced an email from lawyer, Mason, to Michaels? lawyer, Gladden, relating speci?cally to the scope of the audit. In addition, Michaels testi?ed that she never would have signed the Audit Settlement if any of the BeFit claims were barred by the release. The question presented is whether the BeFit claims fall within the de?nition of Audit Claims for the Audit Period. In order to make that determination, the Arbitrator is obligated to consider extrinsic evidence to con?rm that the language could not be susceptible to any other reasonable meaning and to af?rm the objective intent of the parties in entering into the settlement. Upon review of the evidence proffered, the Arbitrator ?nds that the language is reasonably susceptible to a meaning other than that argued by LGF, that is, the Audit Settlement does not necessarily cover any and all claims relating to BeFit, particularly those unrelated to the entire purpose 0fthe Audit Settlement, which was to memorialize the terms of the October 2013 audit of Michaels? participation statements from August 2007 to March 31, 2012. Looking at the contract as a whole, the Audit Settlement related speci?cally to the audit performed by Michaels? accountants as a result of the underpayment of royalty rates, discovered after a review of her relevant participation statements. The Arbitrator notes that there is no speci?c mention of BeFit anywhere in the agreement. Yet, the parties have indisputably agreed that audit-related BeFit claims were not covered by the Audit Settlement, as LGF did not report any it revenues to Michaels during the audit period. Thus, no action related to the BeFit ?nancials could have accrued in Michaels? favor during the audit period. However, going a step further, it would be illogical if the Audit Settlement could preserve Michaels? claims related to BeFit ?nancials but bar any and all other claims she may have had related to BeFit, including those wholly unrelated to the Audit Settlement itself. It is true that Gladden attempted to insert limiting language concerning any and all BeFit claims into the Audit Settlement?s release, which was denied by LGF in light of its policy of refusing modi?cations to its form settlement agreement. However, the extrinsic evidence offered, namely the email from Mason to Gladden (?while the auditors may review the [BeFit] materials,no claims can be made on them per the current audit, because any such claims are not part of the audit period and that any claim to be made would have to be made pursuant to a subsequent and separate audit?), indicates that the negotiating parties were focused only on the audit of Michaels? participation statements from inception of the Agreement through March 31, 2012 and agreed to carve out any potential BeFit claims, whether audit-related or otherwise. (Ex. 5.) Had LGF intended otherwise, language speci?c to BeFit or language proposing to cover -11- INTERIM AWARD all claims unrelated to the subject audit could have been inserted. Moreover, even after this dispute arose, Teena Monroe, executive in charge of third party audits, testi?ed that the BeFit claims were not included in the Release. This deposition testimony was subsequently changed to state that the BeFit claims were included. Michaels? contract claims related to it are and remain Open-ended as long as the Fitness Videos are featured on BeFit free of charge. At the time of the Audit Settlement, Michaels could not have known the extent of her injuries under the Agreement. Until the determination of distribution rights has been made, LGF continues to violate the terms of the Agreement. To interpret the Audit Settlement as applying to any and all it claims unrelated to the audit undeniably would lead to an absurd result and clearly, one that was not contemplated by the parties based upon the evidence. C. Breach of Contract Claims 1. Distribution Rights This matter is based primarily upon a dispute between the parties over the breadth of the distribution rights granted to LGF under the Agreement. Michaels claimed that LGF has violated, and continues to violate, the terms of the Agreement by featuring the Fitness Videos on its YouTube channel, BeFit, free of charge to the millions of individuals with access to the Internet. LGF insisted that its broad distribution rights under Section 3a and Schedule A of the Agreement allow it to distribute the Fitness Videos in any medium and in any fashion, in perpetuity, whether or not free, at its sole discretion. According to Section 3a of the Agreement, Schedule A is meant to ?more speci?cally de?ne? distribution rights. The majority of Schedule A is very explicit in de?ning the distribution rights granted to LGF under the Agreement, pointedly listing certain types of distribution methods that LGF felt necessary to explain, including television, theatrical and non- theatn'cal. In fact, the plain language de?ning Home Video Rights (and VOD) limits those distribution methods to ?pay-per-transaction? methods only. (See, Ex. 9, Schedule A (?including, without limitation, rental, sell-thru (including, but not limited to, Electronic Sell- Thru, including, but not limited to, Download-to-Own and Download-to-Bum), Video-On- Demand, and other pay-per-transaction methods of distribution?) (emphasis added).). Yet, Schedule A (in conjunction with Section 3a) also prescribes seemingly boundless distribution rights to LGF, granting LGF the ?exclusive right to exploit? the Fitness Videos in every possible fashion ever created and never foreseen, in any way it so chooses. Despite the ?including, but not limited to? language pervading the Agreement, it seems to the Arbitrator that the Agreement is inconsistent in its approach to de?ning distribution rights is it meant to confer every single distribution right known to man (or unknown, for that matter) throughout time to LGF in order to exploit the Fitness Videos, as argued by LGF, or is it meant to delineate those distribution rights that are speci?ed, where the entire purpose of Schedule A of the Agreement is to ?more speci?cally de?ne? the distribution rights generally stated in Section 3a, as argued by Michaels? More precisely, does the broad language in the Agreement contemplate allowing LGF to exhibit the complete or virtually complete Fitness -12- INTERIM AWARD Videos online through a VOD format without charging its viewers, thereby generating no royalties to Michaels in the process? The Arbitrator must look to the evidence to interpret the contract and determine the parties? intent. Though there had originally been a disagreement between the parties as to whether the BeFit channel should be characterized as television or VOD under the Agreement?s terms, the evidence was clear that LGF internally de?nes BeFit as VOD. In fact, when LGF began accounting to Michaels with advertising revenues from BeFit, David Shankwiler, Executive Vice-President of Participations and Residuals (?Shankwiler?), included a separate line item on Michaels? participation statements entitled speci?cally to account for the BeFit royalties. Both Vikman and legal department approved the addition of the line item. In addition, both Shankwiler and Vikman testi?ed that BeFit is a VOD service. Based on the evidence, the Arbitrator will interpret the Agreement with BeFit?s characterization as VOD in mind. As mentioned, the language of the Agreement is clear in the de?nition of Home Video Rights those methods of distribution (including VOD) are de?ned as ?pay-per-transaction.? Under Section 6 of the Agreement, Michaels? royalties were earned from the Fitness Videos on the basis of Home Video Gross Receipts, per unit sold per picture}2 This was in line with what LGF had proposed to Michaels at their meeting regarding the Fitness Videos in July 2007, which was to focus on collecting revenues from DVD sales of the Fitness Videos and use ETV as a promoter exhibiting portions of the content on VOD on its channel to promote DVD sales. (Ex. 31.) There were no other opportunities contemplated in the Agreement for Michaels to earn income from the Fitness Videos. As a result, exhibition of the complete or virtually complete Fitness Videos on BeFit for free essentially removed Michaels? method of compensation under the Agreement. This result of actions is unreasonable for a number of reasons. Interpreting the Agreement as LGF suggests would confer no direct ?nancial bene?t on Michaels and in fact, potentially have a negative effect on her brand, in that offering content for free can lead consumers to believe that that brand no longer holds premium value and diminishes their willingness to pay for content, according to Michaels? experts. (See, Ex. 71, pp. 4~5; Ex. 74, pp. 18, 20.) Michaels is an astute businesswoman who has worked hard to create a long-standing, extremely successful brand as a ?tness celebrity. She testi?ed that she believed offering her content for free diminished the value of her brand and that she has never offered any of her content for free, aside from short portions of content as promotions. It de?es logic that she 2 The concept of ?free goods? is mentioned in Section 63 of the Agreement. (Ex. 9 (?No Royalty payments shall be payable from the exploitation of a Picture by means of Home Video Rights in which such Picture is distributed as free goods or for promotional purposes, or to Artist or However, according to Michaels? expert, it is custom and practice that the term ?free goods? typically refers to ?limited samples of product used in a limited manner to market and support a product,? not the complete or virtually complete product offered on the market for free. (Ex. 77, p. 8.) The Arbitrator ?nds this evidence to be logical and applicable here, particularly in light of representations made by LGF in its July 2007 meeting with Michaels regarding the Fitness Video deal, speci?cally that free VOD content to be created for ETV was to include ?exclusive video tips, mini?workouts and promo reads (10 total, 30 see-2 (Ex. 31.) -13- INTERIM AWARD would agree to create content for LGF that would ultimately be given away for free, preventing her from being compensated under the Agreement and potentially hurting her brand. As Chersich testi?ed, had Michaels been an up-and-coming ?tness personality, it may have made sense to offer certain content for free to build up interest in her brand. However, Michaels was already an established celebrity. Further, because the Agreement undisputedly did not account for any sort of advertising revenue to Michaels, it would be implausible that Michaels? agents/lawyers, all of whom were compensated based on a percentage of her compensation under the Agreement, would accept any contract terms that would negatively affect Michaels? and their bottom line. Though the Agreement was meant to create income from the Fitness Videos for both parties through DVD sales, LGF distributed the complete Fitness Videos on BeFit free of charge. There was no tangible bene?t conferred to Michaels (until the point that LGF unilaterally began paying Michaels a small percentage of advertising royalties) and in fact, Michaels argued that the exhibition of the Fitness Videos on BeFit actually hurt her brand and the sales of her ?tness DVDs, both with LGF and with Gaiam. By exhibiting the Fitness Videos (whether whole or in complete segments) on an advertising supported platform free of charge, LGF removed Michaels? ability to earn any compensation for that exploitation pursuant to the Agreement. Even more important, position that it is able to exhibit the Fitness Videos in any way it deems on BeFit for free, gives LGF carte blanche to essentially render meaningless the only sections of the Agreement granting Michaels compensation for per unit DVD sales, a result not intended under the rules of contract interpretation. See, City of Atascadero v. Merrill Pierce, Fenner Smith, Inc. (1998) 68 Cal. App. 4th 445, 473 (?Courts must interpret contractual language in a manner which gives force and effect to every provision, and not in a way which renders some clauses nugatory, inoperative or meaningless?). The evidence does not indicate that the parties at the time the Agreement was signed intended to or agreed to exhibit the Fitness Videos for free in any manner, other than using portions of the Fitness Videos for promotional purposes to promote DVD sales. Though the Agreement clearly does not account for compensation to Michaels in any form outside of per unit DVD sales, LGF still argued that providing the content for free on BeFit actually bene?tted Michaels? brand, acting to promote the Fitness Videos online by reaching a widespread global audience, unlike ETV, and having a positive effect on DVD sales of the Fitness Videos. LGF presented evidence that a number of the Fitness Videos exhibited on it contained click-through advertising prompts, including open and end cards, text and spotlight annotations and/or in-video graphic overlays, to direct the viewer to Amazon to purchase the full video, while others were offered piecemeal by level or by workout instead of as a whole. (Ex. 18.) According to LGF, the Fitness Videos exhibited on BeFit were not the best quality and were full of advertisements, making it dif?cult for viewers to comfortably follow along and workout to the Fitness Videos. For these reasons, LGF argues that these tools were simply acting as promotions, ultimately pushing viewers to purchase the complete DVD rather than navigating through the low streaming quality and consistent advertisements. However, other than evidence showing there were a small percentage of purchases of the Fitness Videos made through Amazon that might or might not have been attributable to ?click-throughs? from BeFit, there was no indication that this was the case. There was no evidence presented that the embedded advertising techniques used by LGF caused more viewers to actually click on the -14- INTERIM AWARD advertisements and purchase the Fitness Videos, rather than simply view them online for free. In fact, the evidence showed that, though DVD sales were declining overall across the market, DVD sales of the Fitness Videos actually declined at a faster rate after the launch of BeFit. (Ex. 45.) Interestingly, not long after Michaels began complaining about use of the Fitness Videos on it for free, LGF began paying her royalties on the advertising revenue collected by LGF from BeFit.3 LGF did so unilaterally, despite no obligation under the terms of the Agreement, as the Agreement only contemplated royalties to Michaels for per unit sales of DVDs. Though not necessarily an admission of wrongdoing, the Arbitrator ?nds it extremely unusual for a large corporate studio to compensate its talent in a way not contemplated by the Agreement. Based on the evidence and the Agreement itself, the Arbitrator ?nds that interpreting the Agreement to confer any right to LGF to exploit the Fitness Videos in such a way as to remove the possibility that Michaels could collect payment under the Agreement does not reflect the intent of the parties and leads to a nonsensical result. First, if LGF had intended to truly grant itself all future rights to the Fitness Videos irrespective of Michaels? compensatory rights, the drafters could have simply de?ned its distribution rights to include ?all? potential current and future methods of distribution, rather than relying on the verbose Schedule A to ?speci?cally de?ne? its rights. Had LGF done so, it would have secured absolutely unabridged distribution rights. Furthermore, LGF may have had a far greater rationale to act as it did, had LGF invested in the potential future success of the Fitness Videos in advance, 129., had LGF ?bought out? Michaels? potential future interest as consideration for exhibiting the Fitness Videos free of charge on BeFit, or offered her a percentage of future business that was unrelated to DVD sales. However, LGF did not. More than likely, LGF saw a signi?cant opportunity to use Michaels? celebrity in the form of the Fitness Videos to help build their BeFit channel and, regardless of the terms of the Agreement, took it. In so doing, LGF materially breached the Agreement. 2. Advance Meaningful Consultation Michaels also contends that LGF breached the Agreement by failing to meaningfully consult with her on issues that could affect her brand and image, namely, exhibiting the Fitness Videos on BeFit free of charge. LGF argues that it had no obligation under the Agreement to consult with Michaels on decisions relating to the production, distribution or marketing of the 3 Still, LGF argues that Michaels waived any claims for breach of contract by not complaining to LGF about both ETV and BeFit until long after LGF began exhibiting the Fitness Videos for free. The evidence does not support this position. As soon as they discovered what LGF was doing, either Chersich or Michaels (or both) began repeatedly reaching out to LGF with concerns about actions. In the same vein, LGF argues that Michaels may have breached her claims related to it because she had already accepted actions with ETV in exhibiting the Fitness Videos for free. Again, not so as mentioned, the evidence shows that Michaels and/or her team continued to complain about the pictures on ETV once they discovered the full and complete exhibitions. Also, ETV was a considerably different method of distribution a paid subscription channel with approximately 22 million paid subscribers versus the Internet/YouTube with billions of viewers In that light, the methods of distribution are not comparable. The Arbitrator ?nds that there was no waiver of any claims. -15- INTERIM AWARD Fitness Videos. If distribution decisions like that made regarding BeFit could be considered to affect Michaels? brand and image, according to LGF, it would have been required to consult with Michaels on every single distribution decision LGF might make, including choosing the retail stores and international territories in which LGF chose to work. This, LGF argues, would lead to an absurd result. Section 3f of the Agreement states that Michaels was to be ?meaningfully consulted in advance with respect to the concept and content of all Pictures produced by Distributor, as well as, all matters involving the Artist brand and Artist?s image.? (Ex. 9.) There is no indication in the plain language of the Agreement that further speci?es the types of decisions that might affect Michaels? brand and image, thereby triggering the consultation provision. Thus, the Arbitrator must determine whether distribution decisions, like that made relating to BeFit, should have triggered advance consultation obligation under the Agreement. During the negotiations of the Agreement, Michaels and her attorneys insisted that the ?in advance? language be added to the Agreement?s general consultation language. (Exs. 3, 6, 9.) LGF accepted the addition. Though the parties did not delineate the speci?c types of decisions that might trigger the clause in the Agreement, Michaels and her lawyer, Pinyan, testi?ed that they understood the obligation to consult would apply to decisions like, for example, giving the product away for free or distributing the product in a discount retailer or on a pornographic website. On the other hand, LGF offered no testimony as to its intended understanding of what circumstances might trigger the consultation clause other than the deposition testimony of Kajsa Vikman who testi?ed at her depositon that offering free video on BeFit could affect Michael?s brand or image. Like Teena Monroe?s deposition, this testimony was ?clari?ed? upon review to add that Vikrnan meant that it could have a positive effect on consumer awareness of the product line. LGF admits that it failed to consult with Michaels on this and other distribution decisions but contends that, because Michaels did not complain about other distribution decisions throughout the term of the Agreement retail stores and international territories), it is clear that the parties did not intend for the consultation clause to be triggered by the exhibition of the Fitness Videos on BeFit. The Arbitrator does not agree with position. Unlike a notice requirement, the language of the Agreement requires LGF to meaningfully consult in advance with Michaels on any issues that might have affected her brand and image. Unfortunately, the Agreement does not further de?ne what decisions could trigger the provision. Though point is well taken that consulting with Michaels on every single distribution decision to be made would lead to an absurd result, the Arbitrator ?nds that a distribution decision that purports to promote the sales of the Fitness Videos but instead works to signi?cantly limit Michaels? ability to be compensated under the terms of the Agreement and potentially harm her brand by devaluing her product would trigger the consultation clause. In fact, according to Michaels? experts, the triggering of the meaningful consultation provision would be only the ?rst step in this analysis. Both Richard Marks and Greg Drobnick opined that industry custom and practice would dictate that LGF be required to offer Michaels a compensation agreement to account for her potential losses based upon the distribution of the Fitness Videos for free, assuming Michaels would agree in the ?rst place. (Exs. 77, pp. 8-9; 71, -16- INTERIM AWARD pp. 3-4.) This type of compensation agreement would need to be in the form of an equity or ownership-sharing interest in deal with Google, commensurate with the popularity of her brand and image at the time. (153.) LGF admittedly failed to consult with Michaels before exhibiting the Fitness Videos on BeFit and, of course, did not offer Michaels any sort of compensation for doing so. Even if LGF could have exploited the Fitness Videos in any way it chose at its own discretion, LGF still had an obligation to meaningfully consult with Michaels before taking any action that could affect her brand or image. Based on the evidence, the Arbitrator ?nds that the decision to exhibit the Fitness Videos on BeFit for free would trigger obligation under the consultation clause in light of the action?s potential effect on Michaels? brand and image. As a result, LGF breached the terms of the Agreement for failing to meaningfully consult with Michaels relating to the distribution of the Fitness Videos on BeFit. retroactive unilateral decision to minimally compensate Michaels for advertising revenues from BeFit does not serve to mitigate the breach. D. Breach of the Covenant of Good Faith and Fair Dealing In addition to her breach of contract claims, Michaels argues that LGF violated the covenant of good faith and fair dealing by exhibiting the Fitness Videos for free on BeFit, speci?cally by engaging in self-dealing through the use of Michaels? pepularity to build it, frustrating the purpose of the Agreement and depriving Michaels of her bene?t e. compensation) from the exploitation of the Fitness Videos under the Agreement. In response, LGF argues that the covenant cannot work to vary or prohibit express terms of the Agreement, namely that LGF could distribute the Fitness Videos in any medium and in any fashion, in perpetuity, whether or not free, at its sole discretion. LGF contends that it did not build it on the ?back? of Michaels. According to LGF, the Fitness Videos only made up 0.8% of the value of the Google deal, as they comprised only a small portion of existing library that was to be exhibited on BeFit. In fact, LGF claims that BeFit turned out to be far less pro?table than anticipated. The covenant of good faith and fair dealing is an implied contract term in all California contracts. Ladd v. Warner Bros. Entertainment, Inc. (2010) 184 Cal. App. 4th 1298, 1306. It works to ensure that parties act in good faith when executing the express terms of a contract, such that ?neither party will do anything which will injure the right of the other to receive the bene?ts of the agreement? or act to frustrate the purpose of the contract. Id. However, in so doing, the covenant cannot be used to create new obligations or vary the express terms of the contract. Pasadena Live, LLC v. City of Pasadena (2004) 114 Cal. App. 4th 1089, 1094. At the time of BeFit?s launch in December 2011, Michaels? brand popularity was soaring. At the same time, there had been a disturbing (and continuing) trend of overall decline in DVD sales across all markets. With the creation of BeFit, it was obvious that LGF was seeking new ways to capitalize on its existing library of content, including the Fitness Videos, and had decided to use Michaels? content as a ?loss leader? in creating its new distribution platform. Taking advantage of consumers? new focus on VOD, LGF made its deal with Google to create the BeFit channel. To draw viewers to its site and expose them to its lesser?known trainers and -17- INTERIM AWARD new content created speci?cally for BeFit, LGF used Michaels and the Fitness Videos. (See, Exs. 30, 74.) In its vertically integrated business model, LGF with an ownership interest in BeFit could control both the production and distribution of content on the channel to its bene?t, but unfortunately also to Michaels? detriment. Despite the express terms of the Agreement de?ning VOD as pay?per-view, LGF distributed the Fitness Videos for free, with the certain knowledge that Michaels would be completely deprived of any royalty for this type of distribution under the Agreement. Nevertheless, Vikman testi?ed that BeFit was created to generate advertising revenue (for LGF and Google), as well as to drive consumers to purchase DVDs. With regard to BeFit?s advertising revenues, as it turns out, LGF argued that those revenues were not ultimately pro?table for LGF. (Ex. 148.) As a result, LGF has insisted that BeFit?s disappointing showing negated any motive for relying on Michaels? popularity to build BeFit?s success. This argument is, of course, inapposite. LGF surely went into the deal with Google to make money, despite the uncertainty of whether advertising revenue would be a big driver. That BeFit advertising revenues turned out not to be as lucrative as hoped does not relate in any way to LGF ?s reasons for using the Fitness Videos in the ?rst place. Clearly, LGF knew the value of the Fitness Videos and used them accordingly. Though LGF argued that Michaels? personality was not nearly as popular or valuable at the time of the Agreement in 2007 as it is now, certainly by late 2011 when BeFit was launched, Michaels had created a signi?cant ?tness brand in the industry and was at the top of the list of ?tness celebrities. It would make ?nancial sense for LGF to leverage Michaels? continued success and make additional income in the form of advertising revenue from the Fitness Videos on BeFit, particularly in light of the signi?cant decline in DVD sales across the market generally, as testi?ed to by both parties and their experts. LGF wanted to capitalize on the fact that consumers were looking to VOD to experience content rather than buying hard copy DVDs at stores. Undoubtedly a smart business decision, the covenant of good faith and fair dealing does not allow LGF to do so at Michaels? expense. Though there was a clear bene?t to LGF as a result of BeFit, there was no tangible bene?t to Michaels in return pursuant to the Agreement. With regard to argument regarding BeFit?s intent to drive consumers to purchase BeFit acting in a promotional capacity), as discussed above, there was no evidence offered to show that the embedded advertising techniques used by LGF caused more viewers to actually click on the advertisements and purchase the Fitness Videos, rather than simply view them online for free. Rather, the evidence showed that, though DVD sales were declining overall across the market, the sales of the Fitness Video DVDs actually declined at a faster rate after the launch of BeFit. (Ex. 45.) Providing the Fitness Videos online for free created direct competition with DVD sales. Interestingly, according to Michaels? expert Richard Marks, in his 40 years of experience as an entertainment lawyer representing both studios and talent, he has never seen a similar situation, where a distributor gives away signi?cant content for free to consumers. Finally, and perhaps the most interesting evidence on this issue, remains decision to compensate Michaels pursuant to the Agreement despite no express requirement to do so under the Agreement ?3 terms. Approximately six months after beginning to receive advertising revenue from BeFit, and unbeknownst to Michaels, LGF began including a percentage of -13- INTERIM AWARD advertising revenues from it on Michaels? participation statements. It strikes the Arbitrator as odd that LGF would unilaterally provide compensation to Michaels from its BeFit revenues, despite its insistence that it was under no express obligation to do so pursuant to the terms of the Agreement. Though not de?nitive evidence of any violation, actions certainly are indicative of a lack of con?dence in its ability to exploit the Fitness Videos for free as it did on BeFit. For the reasons stated above, the Arbitrator ?nds that LGF violated the implied covenant of good faith and fair dealing. E. Damages Michaels is claiming the following damages as a direct result of Respondents? breach of contract: 1) $3,578,223 past lost pro?ts (January 2012-April 2016) due to lost DVD and digital distribution sales; 2) $2,213,189 ?iture lost pro?ts (April 2016-December 2019) due to lost DVD and digital distribution sales; 3) $2,908,416 past lost pro?ts (January 2014-July 2016) due to lost FitFusion subscription revenue; 4) $9,742,287 future lost pro?ts (July 2016?December 2023) due to lost FitFusion subscription revenue. As stated above, the Arbitrator has found that Respondents breached the terms of the Agreement, as well as the covenant of good faith and fair dealing. Michaels? claim for breach of the covenant is super?uous to her breach of contract claims. breaches of contract are ?adequately remedied by ordinary contract damages.? Careau Co. v. Security Pacific Bus. Credit, Inc. (1990) 222 Cal. App. 3d 1371, 1400. The question then remains as to the foreseeability of Claimants? damages under the contract. Lewis Jorge Const. Management, Inc. v. Pomona Unified (2004) 34 Cal. 4th 960, 968- 970; Ash v. North Am. itle C0. (2014) 223 Cal. App. 4th 1258, 1268 (?Contract damages are generally limited to those within the contemplation of the parties when the contract was entered into or at least reasonably foreseeable by them at that time?) (citations omitted). Clearly, it would be ?within the contemplation of the parties? at the time of contracting that distributing the Fitness Videos for free online to millions of viewers might have an effect on the physical DVD sales contemplated as Michaels? compensation under the Agreement. Id. The Arbitrator found Michaels? expert, Sidney Blum, to be credible on this issue.4 First, he followed the American 4 The Arbitrator notes that he found both parties? damages experts to be quali?ed, experienced and knowledgeable in their ?elds. However, the Arbitrator did not ?nd damages expert, Forster, to be credible in his assessment of the role actions played in Michaels? damages, as he completely failed to account for the effects of BeFit on the DVD sales of the Fitness Videos. Instead, he testi?ed that BeFit had a neutral or net positive effect on those sales, a conclusion that was in direct contradiction to the evidence. Though he may have disagreed on the degree to which BeFit may have affected the sales of the Fitness Videos, the evidence was clear that there was at least some negative effect. There was also evidence that, though retail shelf-Space for physical DVDs was decreasing across the market, downloads and digital distribution sales had increased, another fact that Mr. Forster failed to take into account. -19- INTERIM AWARD Institute of Certi?ed Public Accountants (AICPA) guidelines and professional standards. (Ex. 136.) Because of the unique factual circumstances in this case, he then developed an acceptable and conservative methodology (a modi?ed yardstick-approach) for a damages analysis, after performing a number of different types of AICPA recommended testing methods that yielded unreasonable results. (Id. at pp. 25-27.) In this modi?ed approach, he used the best data available to him along with industry averages. (161.) Finally, he factored in other potential explanations for the decrease in the sales of the Fitness Videos and determined that actions relating to BeFit were a signi?cant and material factor in causing Michaels? lost pro?ts in physical DVD sales of $5,791,412.5 Though LGF argues that these numerous other factors were much more heavily involved in the decline of Michaels? DVD sales from the time of BeFit?s launch, including the overall decline in DVD sales across the market, the decrease in retail shelf?space for physical DVDs across the market and the competition from Michaels? other similarly titled DVDs made and distributed through Gaiam, the evidence shows a clear correlation between the timing of the launch/increase in popularity of BeFit (and the free exhibition of the Fitness Videos on BeFit) and the decrease in the sales of the physical DVDs of the Fitness Videos. (Exs. 131, 141, 163- 165.) This correlation is particularly interesting in light of the amount of views of Michaels? content on BeFit. Though Michaels? content accounts for approximately 3% of BeFit?s total content, the views of Michaels? content have consistently accounted for 39-50% of BeFit?s total views. (Exs. 30, 74.) The Arbitrator notes that experts were not able to reasonably attribute the correlation to anything other than DVD market decline and damages rebuttal expert, Mr. Sheppard, failed to perform his own independent analysis of damages and testi?ed that Michaels was not damaged. Still, LGF argues that, should the Arbitrator require it to remove the Fitness Videos from BeFit, Michaels would suffer no future lost pro?ts. The Arbitrator does not agree with argument that the removal eliminates future damages. Just as it took time for BeFit to become popular with consumers and begin to have a signi?cant effect on the DVD sales of the Fitness Videos, it is logical that it would also take time to rebuild consumer interest in purchasing content that the market was once able to access for free. As Blum conservatively forecast 10st future pro?ts out only two years into 2019, the Arbitrator ?nds that his analysis of future lost pro?ts was reasonable. On the other hand, foreseeability becomes far less obvious or reasonable at the time of contracting when it comes to Claimants? damages relating to her subscription service FitFusion. When the Agreement was signed, the Internet was not the all-encompassing method of distribution that it is today. Even though pay-per?view VOD was delineated in the Agreement, both parties agreed that online/digital VOD at the time of the Agreement in 2007 was still an up- and-coming method of distribution that companies were only starting to consider, particularly in 5 In determining damages, Blum considered only unique cookie views of the full?length Fitness Videos on BeFit from the single highest month to avoid double counting and then allocated lost unit sales based on the history of units sold by LGF and Michaels? company Empowered. For future pro?ts, Blum forecasted losses through 2019, discounting future cash ?ow projections back to 2016 at a conservative rate of 19.5%. -20- INTERIM AWARD the context of subscription VOD like BeFit and FitFusion. In arguing that LGF breached the Agreement, Michaels maintained that she and her team never contemplated that LGF would employ a method of distribution along the lines of BeFit when the Agreement was signed. Therefore, it is unreasonable to assume that LGF could have foreseen that Michaels would do exactly the same with FitFusion. The Arbitrator ?nds that Michaels? alleged damages related to FitFusion were not reasonably foreseeable when the Agreement was signed. The Arbitrator also has some concerns about the timing of FitFusion?s launch compared to that of BeFit. Essentially, Michaels knowingly created her own damages here by launching a virtually identical subscription service only two years after the launch of BeFit, even though she had been complaining about BeFit to LGF for at least a year prior. The only difference between the services is that FitFusion required a paid subscription unlike BeFit. Had she launched FitFusion prior to BeFit, her damages might hold merit, as there would be a ?nancial history of revenue generation to which to compare the two services, as there is with the DVD sales, e. g, did her subscriber base signi?cantly decrease after the launch of BeFit. Instead, in a vacuum, Michaels attempts to compare her FitFusion ?lost revenues? to an already existing and successful service that does not require a paid subscription. Despite the lack of a comparable business track record prior to BeFit, Michaels and her expert nevertheless argue that FitFusion would have performed better but for launch of BeFit. Though Mr. Blum was very creative, logical and meticulous in determining the potential damages to FitFusion as a result of BeFit, the Arbitrator simply cannot agree with Michaels on this point. IV. Findings and Award Based on the evidence presented at the hearing, the Arbitrator concludes that LGF did in fact breach the Agreement by exhibiting the Fitness Videos on BeFit free of charge and by failing to meaningfully consult with Michaels prior to doing so. LGF is ordered to pay damages in the amount of $5,791,412 for lost past and future pro?ts from DVD and digital distribution sales. LGF is also ordered to remove the Fitness Videos from BeFit to avoid a continuing breach of the Agreement. As stated above, though the Arbitrator ?nds that LGF did breach the covenant of good faith and fair dealing, the breach is adequately remedied by the damages sought for the breach of contract. With regard to the damages sought for lost FitFusion subscription revenue, the Arbitrator ?nds that they were not reasonably foreseeable contract damages at the time the Agreement was signed. As to attorneys? fees and arbitration costs, pursuant to Section 17f of the Agreement, the Arbitrator will hear applications from the parties. The fee and cost applications should be ?led on or before May 31, 2017. The parties will have until June 14, 2017 to oppose the applications and Claimants will have until June 21, 2017 to reply. A telephonic hearing will be scheduled for argument of the fee and cost applications. . DATED: May10,2017 r?a.u_ 4. Bruce A. Friedmanj?Esq. Arbitrator -21- INTERIM AWARD