No Mickey Mouse Lawsuit

"I think I hate the little midget." --From unpublished notes for Disney chairman Michael Eisner's 1998 autobiography, Work in Progress

Michael Eisner, sitting on the witness stand 43 stories above Century City's Avenue of the Stars, flushed red when he heard the words read aloud. Anger, with a touch of embarrassment, crossed his face. The "midget," Jeffrey Katzenberg--Eisner's one-time protege at Walt Disney Co.--stared icily at his former boss. It was the moment Hollywood had been waiting for since Katzenberg sued Disney three years ago, claiming Mouseco had ripped him off to the tune of some $250 million in bonus money.

Katzenberg's lawyer, Bert Fields, counsel to such stars as Dustin Hoffman and Elle MacPherson, was drilling Eisner about comments made to Tony Schwartz, co-author of his autobiography. "Did you tell Schwartz, 'I think I hate the little midget'?" Eisner's response was testy. "If you pursue this line of questioning, you will put in the public record something that should not...I really didn't mean it." Eisner said he was angry, yes, but "I did not hate Jeffrey Katzenberg. I still do not hate Jeffrey Katzenberg." Fields persisted. "Didn't you say you were not going to pay Katzenberg any more money?" Eisner, resigned to playing the heavy, owned up. "Again, in anger, I said that."

Finally it was out in the open, the bad blood between two of Hollywood's most influential executives, men who worked together to create such Disney classics as The Lion King and The Little Mermaid. Now they are locked in a multimillion-dollar battle about profit participation in such things as Pooh-n-You games at Club Disney and the upcoming film Toy Story 2. Katzenberg claims that as head of the studio from 1984 to 1994, he is due 2% of all income from films and TV shows made during that period--in perpetuity. (Think sequels, videos, Broadway shows and merchandising.) Disney says that by leaving in 1994, two years before his contract was up, Katzenberg forfeited that booty. He was, however, paid a final package of $7.5 million.

The dispute has long since turned personal for both men. Eisner's book relates how they grew up near each other on Manhattan's Park Avenue and rose through Hollywood's ranks together, with Eisner bringing in the decade-younger Katzenberg, first at Paramount, then at Disney. For two decades they worked in tandem, churning out blockbusters (Aladdin), star-making hits (Sister Act) and plenty of duds (Billy Bathgate). When Eisner wouldn't make Katzenberg his No. 2 after the death of president Frank Wells in a 1994 helicopter crash, the team went down as well.

Disney, which paid Katzenberg $100 million in salary, stock options and bonuses over a decade at the company, has already conceded much of the case. In a November 1997 agreement that is still partly secret, the company admitted it owed Katzenberg more bonus money, with the figure to be decided by a private judge. Sources tell TIME that Disney subsequently cut two checks totaling $117 million. Katzenberg, however, is still pushing for upwards of $200 million more on everything from Disney's online business to T shirts, saying it is "an annuity for my children." His lawyers almost danced with excitement when a Disney memo was introduced that purportedly shows the company may have underpaid him for things like burger tie-ins and stage plays.

Eisner testified that he considered Katzenberg "greedy" and the 2% contractual bonus "overgenerous." Yet the $7.5 million final package he gave Katzenberg included a $400,000 discretionary bonus to prove hard feelings were forgotten. Said Eisner, shrugging: "It's like the dentist. You forget the pain."

Not soon, however. Eisner knows he faces an angry board of directors, and angry shareholders, if Katzenberg wins too much in this suit, especially in the wake of the debacle of paying Katzenberg's successor Michael Ovitz in excess of $100 million to leave after only 14 months in the job. The case has ripped open Disney's accounting books--much to the delight of merchandisers, who can now check their cut against the "real" books. Add to that Disney's other financial woes, with second-quarter earnings down 41%. Wall Street still rates the company a buy, which must be some consolation to Eisner, whose own bonus was whacked in half last year--to a mere $5 million.