Carat is sued by IMS

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A $50 million lawsuit alleging breach of contract and unfair competition has been filed against Carat USA, Carat North America and London-based Aegis Group, the holding company for the two media-communications companies.

The suit by Independent Media Services (IMS), a midsize New York-based media planning and buying company, alleges that Carat, after engaging in merger talks with IMS-during which it was told in confidence about IMS's clients, employees and business practices-wooed away IMS's biggest client, New Line Cinema, "in violation of a written confidentiality and nonsolicitation agreement."

"These allegations are false," said Daniel Freedman, Carat North America's general counsel. "We will defend against them vigorously. ... I am confident of a successful outcome in court."

Though New Line is now represented by Carat USA, Mr. Freedman declined to comment about the merger talks outlined in the suit. He also declined to comment on whether a written confidentiality agreement between IMS and Carat, which was signed by a Carat North America official, applied to Carat USA as well.

The IMS complaint-which refers to Aegis, Carat USA and Carat N.A. collectively as "Carat"-further alleges that Carat USA's subsequent hiring of IMS's chief financial officer and five of the seven employees in IMS's Los Angeles office, which existed primarily to service the New Line account, was "tortious conduct damaging Independent Media."

"The resulting damage to Independent Media," the suit claims, "is staggering: the loss of millions of dollars of revenue and profits." The complaint asks the court to award IMS "in excess of $25 million" in compensatory damages and "not less than $25 million" in punitive damages.

IMS's business relationship with New Line, the once scrappy independent film company that is now a part of AOL Time Warner, goes back to the mid-1980s, when New Line placed "less than $1 million in advertising" through IMS, according to the complaint.

Beginning in 1986, when New Line released the first of the lucrative "Nightmare on Elm Street" feature films, IMS's business from New Line increased, so that by 1998 IMS had placed nearly $100 million in advertising for New Line. By 2000, "that amount had been significantly exceeded," according to the complaint.

During those years, New Line went from being known as the indie that produced "Critters" and many other B-pictures to being known as a studio with an eye for talent, including Jim Carrey; for film franchises, including the "Austin Powers" and "House Party" pictures; and for edgy, auteur-driven pictures, including "Boogie Nights," "American History X" and "Seven."

The first of New Line's "Lord of the Rings" trilogy, due out in December, is one of the most eagerly awaited films of the fourth quarter, and its advertising budget is expected to soar.

According to the complaint, IMS's fee over the years was a fixed percentage of New Line's advertising expenditure; what that percentage was or what the annual revenue derived from New Line was the complaint does not specify.

Similarly, IMS Co-Chief Executive Officer Richard Blumenthal, who also is the company's outside general counsel, declined to specify that percentage, saying only that it was "under" the going industry rate.

The complaint does specify that from the time Carat pitched the New Line business until Carat actually got the business in May, IMS lost precisely $537,549.83 in fees from New Line. That's because, the suit states, IMS had to lower its rate "in an unsuccessful effort to meet Carat's improper and unfair competition."

One of the central issues at any future trial is certain to be the precise meaning and scope of a written Mutual Nondisclosure Agreement, a two-page form signed by the parties on Oct. 13, 1999, that memorializes the confidentiality and nonsolicitation agreement between Carat and IMS.

That agreement, per the complaint, called for nondisclosure of confidential information and, according to IMS, pledged the parties to "not solicit or engage any of the other party's customers" for a "period of 12 months from the date of this agreement." Carat maintains, however, that the words "or engage" were stricken from the agreement.

In its complaint, IMS alleges that Carat was soliciting the New Line business during the nonsolicitation period. On Aug. 30, 2000, with approximately 1 1/2 months left in the nonsolicitation period, IMS sent Carat a cease-and-desist letter.

According to the IMS complaint, Carat, in its Sept. 8, 2000, response to that letter, maintained it hadn't "solicited" New Line, rather, it had simply responded to a request for a proposal from a media consultant on behalf of an unnamed national consumer-entertainment company, which turned out to be New Line.

Moreover, according to the IMS complaint's characterization of the defendants' counter-argument, Carat USA claimed it was not a signatory to the nondisclosure agreement, which had been signed by Paul Greenhalgh, Carat North America's chief financial officer, and that a crucial phrase-"or engage"-had been stricken from the agreement, allowing Carat to "engage" IMS's customers even though the agreement prohibited soliciting them. That phrase is not, however, struck from the signed copy of the agreement that is appended to the IMS complaint.

On Feb. 23, 2001, according to the complaint, New Line terminated its relationship with IMS, having earlier signed on with Carat. Less than two weeks later, the complaint alleges, Carat hired away IMS's chief financial officer, the executive with "intimate knowledge" of New Line's billing and payment procedures. When Carat subsequently hired away the L.A. IMS staffers, they were put to work on the New Line account, according to the complaint.

Both Matthew Bryant, chairman of Carat USA, and David Verklin, CEO of Carat USA, declined to comment. Mr. Greenhalgh of Carat N.A. had not responded to requests for comment.

Mr. Chunovic is a senior editor at Electronic Media.

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