This is one Heck of a Story

[tfc3rid]

Check this out:

http://famulus.msnbc.com/famuluscom/bizjournal08-04-010309.asp?bizj=PHI

 

[DancingBear]

This does sound like a garden variety contract dispute, but, if it continues, it will be a very interesting glimpse into the development of the ride. What did that initial contract look like? What circumstances led to the alleged modification from fixed price to cost plus? What changes occurred in the ride development process?

I agree with the Disney spokesman that the safety inspection issue is probably designed to grab some attention. If the relationship between the parties had deterioriated, Disney wouldn't want ETC to be able to come in and hold the ride opening hostage to some alleged safety issue.

 

[DoeWDW]

Very interesting!! Thanks for the link! It's interesting that ETC is filing this close to the "official soft opening" date of Aug. 15th.

 

[KNWVIKING]

I find it odd that Disney would rewrite a contract where the original build price was fixed and the 2nd contract was time and material.

 

[DisneyKidds]

Originally posted by KNWVIKING
I find it odd that Disney would rewrite a contract where the original build price was fixed and the 2nd contract was time and material.

Not so odd if Disney had better contract lawyers and a better handle on the scope of the project and knew they would be able to keep some effort in house or sub it out to cheaper firms. A T&M contrat probably gave Disney a lot more control over the effort and the price.................and we know how Mikey likes his control.

The fact that the revised contract is T&M makes the $15 mil contract claim part of the suit look a possible loser for ETC. They agreed to reform the contract. The should have known that a T&M contract could possibly result in decreased scope (unless there were any quarantees or minimum hours set forth in the contract). If Disney reduced the scope on the T&M contract before the hours/expenses were incurred, it looks like ETC might not have much of a leg to stand on contract-wise. Of course I don't know any of the details and there could be a lot more under the surface, but I'd bet this suit is much more about future use of the ride technology than it is about a contract claim or safety inspection issues.

 

[crusader]

Hopefully they will reach a consensus. ETC is a reputable company and very beneficial to have in Disney's back pocket. It is essential that Disney retain exclusivity to the proprietary technology invested in Mission Space. Problem is: how does that impact the future of the company who designed it? That's what I see going on here. The legal ramblings are typical. ETC's longetivity is not secure enough.

 

[KNWVIKING]

The way I'm reading the article, the first contract had a firm build price of 25 mil, the 2nd went to T&M and the price tag escalated to 44 mil and now Disney doesn't want to pay the extra. The article gives no clue as to why Disney would expect the T&M version to be cheaper. It doesn't sound as though Disney had control of material purchase,labor force,etc where they could basically become the general contractor and keep expenses down.

 

[DisneyKidds]

Originally posted by KNWVIKING
The way I'm reading the article, the first contract had a firm build price of 25 mil, the 2nd went to T&M and the price tag escalated to 44 mil and now Disney doesn't want to pay the extra. The article gives no clue as to why Disney would expect the T&M version to be cheaper. It doesn't sound as though Disney had control of material purchase,labor force,etc where they could basically become the general contractor and keep expenses down.

Viking.............there is probably way to much going on for us to figure anything out in this forum. However, it doesn't look like Disney expected the price to be less under the T&M contract (ETC is suing for approx $15 mil, take that off the $44 mil and Disney has probably already paid more than the original FFP amount), but it also looks like they didn't expect the cost on the T&M contract to go up by as much as ETC proposed. Who knows what ETC built into the $44 mil, and what "design changes" were things that only ETC could have done or might possibly have been able to be performed otherwise. It is interesting that the reformed contract was T&M. Those types of contracts are usually used when you want to fix rates but the scope is uncertain. Sounds like ETC thought that their scope was a little more definitive than Disney did. I wonder whose idea the T&M arrangement was?

I really have no idea who was playing the games on this one.................I guess we'll have to follow it through the media, unless they come quietly to an amicable settlement - which is probably in everyone's best interest.

A sort of related question..................I forget what all the numbers were exactly, but I seem to remember AV and others saying that Disney spent over $150 mil on this attraction, the knock being that Disney paid over $100 mil to vendors as opposed to developing anything of value in house. If ETC is the vendor for the proprietary ride technology and Disney only paid the $29 mil, where did the rest of that $100 mil go?

 

[DancingBear]

I'm actually surprised that something of this nature was a fixed price contract to start with---seems like given the creative angles, and the "never been done before" aspect, that would be hard to do.

Reading between the lines, here's my guess of the chronology:

--Disney and ETC enter into a fixed price contract for certain elements of the attraction.

--As the attraction develops, it becomes clear that (1) ETC's role should be expanded beyond what the fixed price contract says, and (2) the original fixed price isn't feasible due to changes, etc.

--The parties enter into a modification changing the contract to T&M plus. At the same time, in exchange for ETC's greater role, and relief from the fixed price burden, Disney modifies the intellectual property provisions in Disney's favor, perhaps by adding the 100 mile limitation (which takes in both Universal locations, and probably Busch Gardens Florida), and perhaps also by loosening up their obligations to use ETC in future rides.

--ETC comes back with the T&M costs, and Disney decides that they should (and can, under the contract), use other vendors for portions of that work, and thereby trims ETC's involvement back again.

--[THIS PART REALLY REACHING] ETC realizes too late that the modification deal didn't really guarantee them extra work and profits, and they gave up the intellectual property stuff without getting very much back.

 

[crusader]

DancingBear it probably worked a bit differently with respect to the intellectual property.

ETC had developed the capability to design and engineer the initial specs with one exception: scale.

That means added tooling and new configurations which ultimately develops a proprietary mechanism thus introducing unprecedented capabilities of the intellectual property. I cannot believe Disney didn't secure full exclusive rights to the entire newly designed technology as a result of the initial multimillion dollar deal.

ETC is in need of fulfillment under the amendment which is a fancy way of saying they need to get paid. They also want a future association with their invention. If they could get a non-compete within a limited radius that would swing the utilization rights in their favor but it is highly doubtful they will be able to accomplish this.

 

[DancingBear]

Originally posted by crusader
That means added tooling and new configurations which ultimately develops a proprietary mechanism thus introducing unprecedented capabilities of the intellectual property. I cannot believe Disney didn't secure full exclusive rights to the entire newly designed technology as a result of the initial multimillion dollar deal.

Good point, ITA that Disney would have wanted to control any new technology resulting from the venture--if not exclusively, at least with some sort of worldwide royalty-free license to use. Query whether the nature of that new technology is such that Disney can reproduce this ride effect in Japan without ETC. Are there other vendors who can do what ETC does; perhaps not as well, but enough that Disney can hook up with them, or threaten to do so?

 

[KidDurango]

From experience, I can tell you that standard in most of Disney's Contracts with vendors such as these, there is a clause that says the vendor can not use the attraction/ work that they did in any marketing or promotional materials. They can say that they have worked with Disney, but can not say what they did. Now you have ETC who has a ride that looks like it could be a hit and they want to market themselves as the creator, but legally can't do the promotion. So what do you do? File a big splashy lawsuit just as buzz for the attraction is beginning to build. Then, hopefully, whenever the media talks about this great new attraction, the lawsuit will come up, and your name will be mentioned. ETC may even know that they really don't have the ability to win this one, but the increased media coverage and exposure for them may be the payoff.

 

[TiNkErBeLl51]

what ride are you talking about? I tried the link and it said that the article was no longer available.

 

[DisneyKidds]

Originally posted by TiNkErBeLl51
what ride are you talking about? I tried the link and it said that the article was no longer available.

Here is the text of one of the articles on the subject. Not sure if it was the same one, but it will fill you in.

BTW - welcome aboard!

Aug. 4 — SOUTHAMPTON -- Environmental Tectonics Corp. is biting the four-fingered, gloved hand that feeds it.
The Montgomery County developer of flight-training systems and theme-park rides has sued its largest customer, the Walt Disney Co., and three Disney subsidiaries, over a ride called "Mission: Space."



In the lawsuit, ETC seeks damages of more than $15 million for Disney's alleged failure to pay it all it is owed for its work on the ride, which is scheduled to open officially on Aug. 15 at Walt Disney World's Epcot Center.
ETC also seeks to have Disney include it in the safety testing of the ride.
Additionally, it wants a judgment affirming its right to be the designer and builder of similar rides for Disney. In the suit, ETC says it has heard that Disney is considering building a ride similar to Mission: Space in its Tokyo theme park.
ETC also wants a judgment affirming its rights to the technology that went into Mission: Space so it can build similar rides for others, provided they aren't placed within 100 miles of a Disney theme park.
The lawsuit was filed by Entertainment Technology Corp., ETC's ride-building subsidiary, in U.S. District Court for the Eastern District of Pennsylvania.
In an e-mail, John W. Spelich, a Disney vice president for corporate communications, said his company has complied fully with its obligations to ETC under their contracts. Additionally, he said, "ETC failed to perform under its contract with us and we therefore have substantial counterclaims against ETC for the expenses and delays we have incurred."
As for the safety testing, Spelich said, Mission: Space has "successfully passed all of Disney's state-of-the-art safety procedures as well as reviews by leading independent experts. ETC's attempt to play the safety card as means of trying to generate leverage for a simple, straightforward contract dispute is both cynical and nonsensical."
Cliff Russell, ETC's general counsel, refused to talk about the suit, saying ETC will let the documents it has filed and will file in connection with it "speak for themselves."
The lawsuit brings out into the open what had been a secretive relationship between ETC and Disney.
ETC has been required to say in its annual filings with the Securities and Exchange Commission that it does business with Disney because Disney has provided such a large part of its revenue. But it has never referred to Disney in its public statements, nor has Disney publicly acknowledged that ETC has done work for it.
The relationship between the two companies has been so close, however, that Disney "imagineers" designed the stylized "ETC" logo for ETC's Entertainment Technology Corp. subsidiary.
ETC's specialty has long been building flight simulators that use centrifuges, which work like a clothes driver that spins to remove moisture, to reproduce the effects of gravity on pilots and astronauts. It also makes hyperbaric chambers, which have various therapeutic applications, but are best known for being used to relieve deep-sea divers of the bends.
In the mid-1990s, ETC was approached about using its simulation technology to build rides that would provide a thrilling experience without making people sick. After it made a couple, it thought the field had potential and created Entertainment Technology to make rides.
Mission: Space, which uses a four-armed centrifuge and computer graphics to simulate a flight to Mars and back, is the latest of at least five rides that ETC has built for Disney. It has gotten good reviews on Web sites and from the media.
If, by filing the lawsuit, ETC has made Mission: Space the last ride it builds for Disney, it could regret the maneuver. Disney provided ETC with about $17.3 million, or 40 percent, of its revenue in its 2003 fiscal year, which ended Feb. 28.
According to ETC, however, Disney's breach of their Mission: Space contract hurt its results for the fourth quarter of its 2003 fiscal year and the first quarter of its 2004 fiscal year. The company only earned $70,000, or 1 cent per fully diluted share, on revenue of $6.1 million in its first quarter. Those figures are down from earnings of $585,000, or 8 cents per share, on revenue of $11.2 million in the comparable period a year earlier.
In its lawsuit, ETC alleges that in November 2001, it and Disney modified their original contract to try to resolve some disputes. Among other things, ETC contends that it and Disney changed the contract from a "firm fixed price" contract worth roughly $25.7 million to a "time and materials" contract under which ETC was to receive the costs of the purchases it made in designing and building Mission: Space, a 36 percent mark up on those costs for general and administrative expenses and a profit allocation. ETC and Disney also changed their exclusivity rights regarding the ride, according to the suit.
Last August, ETC says in the suit, it told Disney that the amount it would be due under the revised contract was $44.1 million, due mostly to design changes Disney made to the ride. Afterwards, ETC alleges, Disney changed the scope of the work ETC was to perform under the contract to cut how much Disney was required to pay it for profit and general-and-administrative expenses.
In another section of the suit, ETC alleges that Disney has refused both to allow it to participate in the safety testing of Mission: Space and to provide it with data to assure that the ride is safe. Its role in testing the safety of the ride, it states, was spelled out in its initial contract with Disney. In fact, ETC states, "the chief executive officer of The Walt Disney Co., Michael Eisner, informed ETC that, rather than have the work done 'in house' at Disney by its 'imagineers,' Disney specifically wanted ETC to build the ride due to its experience with centrifuge systems."
"If ETC is prevented from using its years of experience with human centrifuge systems to participate in the safety testing and analysis (of the ride) ... then there are increased risks of injury to the public at large, and the associated increased risk of irreparable damage to ETC's reputation," the company states in the suit.
The biggest beef ETC has with Disney, however, may be over the rights to the technology used in Mission: Space.
"Upon information and belief," ETC states in the suit, "Disney is considering building a ride system based on a multi-arm centrifuge for use in its Tokyo theme park without contracting with ETC to design, fabricate, construct and deliver such a ride system." That, ETC alleges, would violate the contract between it and Disney concerning Mission: Space.
ETC also alleges that Disney violated their contract by putting the following statement in its annual report: "In consultation with former NASA advisers, astronauts and scientists, Imagineers developed Mission: Space with next-generation technologies featuring high-resolution computer-generated imagery combined with advanced audio and optics and a proprietary ride system."
Disney, ETC says, is the proprietary owner only of the aspects of Mission: Space that ETC created specifically for the ride. ETC maintains it retains rights to all aspects of the ride it had before Disney contracted it to build the ride, including the technology to build multi-arm centrifuge rides.
As a result, ETC states, its contract with Disney concerning Mission: Space allows it to sell a ride based on a multi-arm centrifuge to anyone, provided the ride isn't installed within 100 miles of a Disney theme park. The contract also prohibits Disney from building any ride based on a multi-arm centrifuge.


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