Yes, everyone, we’re finally here. It’s the Yu-Gi-Oh! lawsuit – the thing that finally killed 4Kids…..Kinda.
On March 24, 2011, TV Tokyo and NAS terminated their licensing agreement with 4Kids after an audit reportedly showed that 4Kids was making several millions of dollars in secret on their properties by making agreements with Cartoon Network, Majesco and Funimation and hiding much of the money they got from the “kickbacks.” (It should be noted that none of the mentioned companies are being accused in this lawsuit) TV Tokyo and NAS had a clear-cut 50/50 split for any revenue involving Yu-Gi-Oh!, and their audit allegedly revealed that they weren’t being given their full share as a result of these under the table dealings. 4Kids also reportedly improperly claimed numerous deductions amounting to over approximately $3mil including insurance coverage, the cost of the audit and the cost of dubbing the series, when they had a contract that stated 4Kids would accept the responsibility of all of those costs.
In the lawsuit, TV Tokyo and NAS requested $4,792,460.36 in damages.
According to the abstract of the legal proceedings, the audit occurred sometime in Q1 of 2010. A letter outlining the accused offenses was delivered to 4Kids on June 25, 2010. 4Kids would respond with their own letter disputing the allegations on June 29.
On December 20, ADK sent another letter finalizing the audit’s findings, claiming 4Kids owed them $4,819,000 in total. Again, 4Kids sent a letter back disputing the allegations.
On March 24, 2011, 4Kids received a letter from NAS on behalf of its parent company, ADK, to terminate their agreement from July 1, 2008 to claim the rights to Yu-Gi-Oh!. 4Kids disputed the termination, calling it “wrongful and devoid of any legal basis” because the termination notification did not meet the ten business day notice agreement made in their initial contract. TV Tokyo and ADK didn’t agree and sent another letter asserting that their termination was legal and final. That same day, they’d file a lawsuit for the alleged owed amount.
They had tried to settle this issue outside of court immediately following the audit. TV Tokyo and ADK made an undisclosed offer to settle the matter. 4Kids refused. At the request of ADK and TV Tokyo, 4Kids wired $1mil as a gesture of good faith in order to get negotiations started to settle the matter entirely. In response, TV Tokyo and ADK reps met with 4Kids in the US to work things out, but “4Kids abruptly terminated this meeting without a resolution to any of the outstanding issues.” Less than two weeks later, the lawsuit would be filed.
And Al Kahn would respond by…….
Not being there.
Mysteriously, on January 11, 2011, Al Kahn would retire from his role as chairman and CEO of 4Kids Entertainment one year after the audit and two months before the termination and lawsuit would go down, handing down the reins temporarily to Director Michael Goldstein.
“After almost 25 years, I have reached the point in my career where I want to relinquish my responsibilities at 4Kids. The last several years have been particularly difficult and demanding with the business of 4Kids being buffeted by the financial crisis. After helping steer the company through challenging times, I have decided that it is the right moment for me to retire. I believe that going forward, Michael Goldstein and the team of experienced 4Kids executives will do an excellent job for our clients and for our shareholders.”
Of course Al Kahn had to pat himself on the back for getting them through the financial crisis, when, ya know….they didn’t. They survived it, but they didn’t “steer through (it).”
Poor Michael Goldstein. Kahn just made him conductor of the train a few seconds after they passed a “Bridge Out Ahead” sign. What I find especially funny is that Michael Goldstein was actually older than Al Kahn was at this point – Goldstein was 69 while Kahn was 64. This will only get even funnier once I cover where Al went once he ‘retired’.
I know I can’t prove it, and I know anyone who went through the recession leading any company would probably want to retire, but you can’t tell me this is a coincidence. This is way too close to when all this shit went down for me to believe that Kahn didn’t know a storm was coming and he needed to grab a lifeboat and dip out of there before the situation got even worse for them.
On April 1, 2011, 4Kids made a statement claiming they would do whatever it took to retain Yu-Gi-Oh! and their business, including filing for chapter 11 bankruptcy. Five days later, after an unsuccessful settlement proposal to TV Tokyo and ADK, they would do just that. 4Kids Entertainment and 11 affiliated companies went bankrupt, listing $23,372,000 in assets and $16,526,000 in liabilities, and they would list several creditors to whom they owed money, such as The CW ($1,987,000) ADK ($4,221,626 – I would imagine this is an unrelated debt as it wouldn’t make sense to be the same money being requested from the audit.), the previously mentioned TPC ($4,700,000), and, strangely, figurehead of Chaotic, Bryan Gannon to whom they owed $80,000 for some reason.
In previous reports, they did keep owing Gannon, CUSA and Apex money for expenses involving Chaotic’s productions, so maybe that was due to some leftover outstanding payments, but they don’t note exactly what it was for. From a note in the 2010 annual financial report, it’s also possible they still owed Gannon a little bit of severance pay or some other fees in regards to shutting down TC Digital Games and TC Websites and subsequently laying him off.
The bankruptcy hearings would put the lawsuit on hold until the bankruptcy court allowed them to proceed. The judge also ordered a hold on the Yu-Gi-Oh! termination, meaning 4Kids could still use the license until the lawsuit proceedings restarted and they made a decision about the validity of the termination. This was done as a means to prevent Yu-Gi-Oh! ZEXAL from being sold to any other companies in the meantime, considering 4Kids had already started working on the series and teasing its release and would suffer financially if TV Tokyo and NAS sold it during the litigation.
On June 10, 4Kids filed countersuit against TV Tokyo and ADK for wrongful termination of Yu-Gi-Oh!’s license citing the aforementioned failure to notify them at least ten business days in advance of the termination.
No one really had any faith that 4Kids would win this lawsuit, mostly because a lot of people either just really wanted 4Kids to die as a result of the litigation because of their disdain for the company and its practices or no one believed that they didn’t deal under the table and steal from the Japanese companies because 4Kids bad.
However….4Kids believed in the heart of the cards.
Yes, 4Kids won this lawsuit. On December 29, 2011, the bankruptcy court (to which the suit had been moved as per the agreement of both parties) ruled in favor of 4Kids, agreeing that TV Tokyo and NAS did not give at least ten business days of notice before termination of the contract, so the termination was void and the rights to Yu-Gi-Oh! belonged with 4Kids.
Many people believe that 4Kids purely lucked out and weaseled their way out of punishment for shady business practices on technicality, myself included when I first started writing this article, but it seems that’s not true either. The judge ruled that, in response to the claims that 4Kids owed TV Tokyo and ADK/NAS money as per the audit, the findings were “99% meritless.”
According to the judge in the lawsuit,
“Even if it were the case that Licensor had properly complied with the formal notice of breach and termination requirements in the 2008 Agreement, the termination was nonetheless ineffective because the notice sent by Licensor was substantively defective. Plaintiffs’ purported basis for termination – 4Kids’ failure to promptly pay the royalty underpayment reflected in the audit – was improper because the amount owed to Plaintiffs, if any, was nowhere near the $4.819 million amount asserted in the termination letter and the purported notices of breach.”
As for that 1% that was given merit, one that 4Kids did not dispute, they only owed $48,000, which was largely offset by the $800,000 credit that they got on March 24, 2011. The court was so firmly in favor of 4Kids, that they criticized the Japanese companies’ mention of “good faith”, claiming that “If anyone is the victim of a breach of trust, it is 4Kids.”
On February 29, 2012, 4Kids, TV Tokyo and ADK/NAS settled 4Kids’ countersuit. TV Tokyo and ADK/NAS would pay $8,000,000 to 4Kids as a result on March 27, 2012. 4Kids would continue to hold the license for three months until they had a bidding war between 4K Acquisition Corp, a subsidiary of Konami, and Kidsco Media Ventures LLC, an affiliate of Saban, for a variety of 4Kids’ assets including the coveted Yu-Gi-Oh! license. On June 26, 2012, Konami won big.
While Kidsco got some of 4Kids’ assets, like broadcast rights to Dragon Ball Z and Kai, under a new agreement with Toei and Funimation, Cubix, Sonic X and the CW block, Toonzai, which Saban would rename to Vortexx, Konami acquired the full rights and assets to Yu-Gi-Oh! and other titles. This basically made 4Kids ‘victory’ in the lawsuit pretty much moot. They were even able to acquire 4Kids’ production materials such as domain names, music, sound recording rights, any production or recording/editing equipment, office supplies, furniture, computers and more from 4Kids’ offices.
Oh and they would also be taking 4Kids’ offices.
As of the acquisition, Konami would create 4K Media, made in place of 4Kids Productions, which would officially shut down on August 14, 2012. According to an interview with Yumi Hoashi, Konami Digital Entertainment Vice President of Card Business, “Some” of the employees from 4Kids Productions would be retained in order to maintain the same branding and “messaging” but it’s unknown how many of their employees they retained.
As a final note to 2011, 4Kids acquired the South Korean/Japanese series, Tai Chi Chasers on March 22, 2010 and released it on September 17, 2011. It was the first new anime 4Kids had dubbed since Dinosaur King in 2008. According to Al Kahn in his conference call for Q4 of 2009,
“4Kids needs to return to its roots as a licensing and merchandising company [that] specializes in bringing wonderful Japanese programming and merchandising to the rest of the world.”
Quite the turnaround from claiming anime and manga were dying and that profitable shows and franchises for the US couldn’t be found in Japan.
4Kids stopped producing it on June 2, 2012 due to the bankruptcy and loss of 4Kids Productions. Tai Chi Chasers was not acquired by any other licensing company, even with so many of their assets being sold off. 4Kids would retain the rights as 4Licensing until 2017 when the rights expired/4Licensing died, but no one to date has picked up the North American or international rights. It’s now only in the hands of Toei and Iconix Entertainment.
At the end of the year, 4Kids had a net revenue of $12,346,000, down from $14,478,000 in 2010. They had a net loss of $17,084,000.
Next – Part 22: Time 4 Change
Previous – Part 20: It’s Time to Get Your Game Revved Up!
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