EXCLUSIVE: Digital media company Studio71 is suing a San Francisco startup that sought its content to power a mobile application to teach English to Chinese millennials, but never paid the $1 million deposit. The suit (read it here), filed this week in Los Angeles Superior Court, maintains that the startup, Say Say K, delivered two months worth of “stories, lies and excuses,” but not the seven-figure deposit it promised Studio71.
Studio 71, a firm co-founded by YouTube star manager Reza Izad, is seeking damages of $5.5 million.
“Intentionally breaching an agreement is not only morally reprehensible but legally actionable,” said Bryan Freedman, the attorney representing Studio71. “Say Say K had no intention to pay under the agreement with Studio71 and for that, it will endure a painful legal result.”
According to the suit, SSK’s chief content officer Shaun Newcomer approached Studio71 last fall to talk about licensing content for the mobile learning app Lyngo. The premise was to show users Western content and ask questions related to the programming.
Over the course of negotiations, which continued through last December, SSK sought exclusive rights to distribute and license Studio71’s content in China. They reached a deal on December 22 that granted Say Say K exclusive rights to Studio71’s content on Lyngo, and the right to license it to other platforms in China.
Say Say K agreed to pay $5.5 million, with a $1.1 million upfront deposit and the remainder due in eight installments to be paid beginning on April 1.
But signs of trouble were apparent at the start. Newcomer asked Studio71 to delay the initial payment until January 1 — but the money didn’t arrive. Initially, Say Say K blamed the lag in payment on a traveling board member whose approval was required. It promised payment by January 17.
Say Say K’s head of operations, Jeff Zhang, flew to the Consumer Electronics Show in Las Vegas on January 9 to celebrate the agreement at a dinner with Studio71.
On January 18, a day after the promised payment, Say Say K informed Studio71 it would be sending money via wire transfer — but that Wells Fargo had frozen the cash while it conducted “some kind of audit.” Say Say K said the issue could take days to resolve.
Days passed and Studio71 was growing increasingly concerned about payment, making frequent inquiries and receiving assurances that all was well.
On Jan. 26, Studio71 arranged a call with Say Say K’s head of operations and other executives to discuss payment. Minutes before the scheduled call, the studio received a letter advising “the Chinese government has promulgated certain permitting regulations, requirements and procedures on streaming video content in China.”
Say Say K didn’t say how, precisely, the rules had changed. But it said these unanticipated regulatory hurdles would allow it to invoke a clause in its agreement with Studio71 to suspend the arrangement for 90 days, because an unanticipated change in government rules prevented it from exploiting the licensed content. After that period, the agreement could be terminated.
In a follow-up call, Say Say K’s CCO claimed Chinese regulators had a problem with Studio71’s content. “This seemed odd, seeing that Studio71 has a myriad of content, representing numerous genres, which had not been delivered to SSK,” the studio observed in its suit.
Studio71 pressed for details, requesting the names of the Chinese regulators that had qualms about the content and and asking for more information about the new permitting requirements. Say Say K said it was awaiting a letter with regulatory details, which it agreed to forward.
The letter, like the check, never arrived — prompting Studio 71 to file suit for breach of contract and good faith dealing and fraud.
The Los Angeles studio argues that, because of SSK’s false promises, it extended offers to its creators to incorporate their content in Lyngo and altered distribution deals it was negotiating to exclude China and stopped negotiating with other platforms in China.