'Napoleon Dynamite' Creator Sues Fox

     SANTA MONICA, Calif. (CN) - The company that made the comedy hit "Napoleon Dynamite" on a $400,000 budget says Fox Searchlight Pictures used Hollywood accounting to cheat it of $10 million in royalties for home video sales and TV licensing of the oddball cult hit.
     "Napoleon Dynamite" grossed more than $46 million since its 2004 release - an 11,500 percent return.
     Napoleon Pictures says it had its pick of distributors when the comedy broke out at the Sundance Festival in 2004, and that it chose Fox because it promised high royalties for home video sales.
     "One of the major focal points of the negotiations was the royalty that Napoleon would receive for home video sales of the Pictures. Fox agreed to pay Napoleon a 'High Price Product Royalty' of 31.66 percent of net profits, which is reflected in paragraph 6(f) of the Term Sheet," according to the Superior Court complaint.
     It continues: "During the course of the negotiations, [Fox senior executive Joseph] De Marco stated that the 31.66 percent 'High Price Product Royalty' was the highest royalty rate that Fox would agree to pay its licensor under any motion picture distribution agreement. On behalf of Fox, De Marco represented to that after Fox's deduction of a 25 percent distribution fee, Napoleon would receive a net overall royalty of approximately 25 percent of the net profits from home video sales. ... Had Fox offered a royalty on home video sales that was significantly less than 25 percent, Napoleon would not have agreed to grant distribution rights to the picture to Fox."
     Napoleon says that a November 2008 audit showed that Fox underreported television license fees, failed to report all revenue and deducted costs it had no right to deduct.
     "The audit revealed that, contrary to Fox's representations during the negotiation of the Term Sheet that Napoleon's overall net royalty on home video sales would be 25 percent of Net Profits/Defined Proceeds, the net overall royalty Fox paid Napoleon for home video sales was only 9.66 percent, less than half of the net overall rate Fox assured Napoleon it would receive from home video sales and far less than the industry standard minimum royalty rate of 20 percent for home video sales."
     Napoleon adds: "In addition to understating Napoleon's home video royalties, the audit also revealed that Fox has breached the agreement in multiple other respects, including without limitation by underreporting pay television license fees, failing to report electronic sell-through revenue, charging residuals on home video sales, as well as overcharging residuals on home video sales, deducting a number of costs and charges it has no right to deduct and/or for which there is no supporting documentation."
     Napoleon Pictures says that had it received the 25 percent net overall royalty rate it was promised, it would be $10 million richer.
     It seeks an accounting and damages for breach of contract, promissory estoppel, negligent misrepresentation, and reformation of a written instrument.
     It is represented by Martin Singer with Lavely & Singer.