BY:Michael I. Rudell and Neil J. Rosini
Originally published in the Entertainment Law column in the New York Law Journal on June 3, 2019.
A long-simmering dispute between the Writers Guild of America East and West Coast branches (the Guilds) and the talent agencies that represent writers (among other talent) in the television and motion picture industries became much more public in recent months and boiled over with the filing of a lawsuit by the Guilds and several individual writers against the four largest talent agencies (the Agencies). Writers Guild of America West v. WME Entertainment, No. 19SMCV00725, Superior Court, Los Angeles County. At issue are the packaging fees charged by the Agencies in connection with almost 90% of television series as well as some independent feature films not financed or produced by a major studio.
The Guilds filed their complaint in April and an amended complaint in late May (the Complaint). It alleges that agency packaging fees, which over decades have become entrenched in the business model of agencies, hurt writers by giving agents incentives to place their interests above those of their clients, whose incomes have suffered. More than 7,000 writers—about 80% of those with agency representation—are said to have fired their agents at the direction of the Guilds to underscore their point. Meanwhile, the Agencies, whose representatives have called the suit “meritless” and a “publicity stunt,” assert that packaging fees paid to them have no negative effect on writers’ livelihoods and, to the contrary, are beneficial.
There are high stakes for both sides and the ultimate resolution reached through litigation or negotiation could make fundamental changes in how compensation is determined for writers and agents alike.
Although the Guilds serve as the exclusive collective bargaining representative for thousands of professionals who write for television series, movies and other productions, the writers are permitted to negotiate directly with production companies for overscale compensation, profit participations, and other terms of employment.
Over 100 agencies are represented by a collective called the Association of Talent Agents (ATA). It was party to an agreement with the Guilds referred to as the Artists’ Manager Basic Agreement (AMBA), which had not been renegotiated since 1976. Concerned about a number of developments, such as agencies entering the production business by means of partnerships or acquisitions, the acquisition by private equity firms of substantial interests in the agencies, and packaging fees in particular, the Guilds terminated the 1976 agreement, effective in April of this year. After initial negotiations for a new agreement were unsuccessful, the Guilds directed their members to fire agents who refused to sign the Guilds’ new Code of Conduct. The Code includes a provision that agencies may represent writers for a 10% commission and may not receive packaging fees or be affiliated with a company producing or distributing motion pictures. Although dozens of agencies signed the Code before the end of May, no major agency has done so as of this writing.
Conventionally, agents who procured employment for creative professionals were compensated by a percentage (usually 10%) of the gross revenues earned from that employment. According to the Complaint: “This traditional arrangement aligned the economic interests of the writers and their agents, because any increase in the compensation received by the writers resulted in a corresponding increase in the agents’ compensation.”
Decades ago, talent agencies started bundling together the services of writers, directors and actors they represented to help launch the production of television series. For this, they received a packaging fee from the producer instead of the conventional percentage of income from the talent. Over time, the agency that controlled the major talent in a production, such as the showrunner, would attempt to claim the entire packaging fee (or at least a good portion), even if it didn’t actually “package” all of the talent for the production.
The typical packaging fee paid to an agency from a broadcast or cable television network series is computed on a “3%-3%-10%” formula. The network pays a license fee to the producer of a series for the delivery of each episode and the first portion of the agency packaging fee, collected from the producer, is based on 3% of that license fee. Because of the economics of the business, the agency and the production company often negotiate a flat fee in the neighborhood of $30,000 to $75,000 per episode (according to the Complaint) rather than precisely 3% of the license fee. The second 3% is determined in the same manner, but payment is deferred until the series achieves a profits benchmark. And the 10% is defined usually as a percentage of the program’s modified adjusted gross profits, payable to the Agency for the life of the series. (Because streaming services such as Netflix often acquire all or substantially all rights in a production from the licensor without offering a share of contingent compensation, agencies are negotiating different fee arrangements in those cases to compensate for the lack of a profits component.)
For a highly successful series, agents’ packaging fees can far exceed the amount received by major creative talent who rendered services for dozens of episodes. But television series rarely result in profit participants’ actually receiving payment of a percentage of contingent compensation, and in those events, an agency with multiple clients in the package might have done better with a conventional 10% of talent compensation.
The Guilds’ Complaint
As part of the factual foundation for its claims, the Complaint recites the experiences of the eight individual plaintiffs in the action, most of whom were showrunners for packaged television series and all of whom have written for them. Those series include “Beverly Hills 90210,” “Magnum PI,” “Reba,” “Homeland,” “Homicide: Life on the Street,” “Judging Amy,” “Madam Secretary,” and others. In one example, an Agency allegedly was entitled to a packaging fee of $75,000 per episode, which for at least two years exceeded the per-episode pay of its client. In another instance, a showrunner received almost the same profit participation as her agent. In another, an Agency’s profit participation was based on gross receipts and the showrunner it represented had a participation based on net.
The Complaint alleges that the packaging fee model of compensation for the Agencies harms writers in several respects. First, because a component of the packaging fee is part of the budget for a television episode, the fee diverts financial resources away from the writers.
Second, because a component of the packaging fee is based on contingent compensation, it has the effect of reducing the writer’s share of profit points, and beyond that, Agencies “frequently” are given a higher priority participation and paid before their clients’ profits are calculated.
Third, the Complaint alleges that because the packaging fee is tied to the budget for and profits generated by a particular program rather than the amount paid to the Agencies’ clients working on that program, the Agencies’ financial incentive to protect and increase their clients’ compensation is eliminated.
Fourth, the plaintiffs allege that the packaging fee distorts the Agencies’ incentives when seeking employment opportunities for their clients, because in order to avoid splitting a package fee with other agencies, the Agencies pressure their clients to work exclusively on projects in which other key talent is represented by the clients’ agency. This pressure allegedly is exerted even when the client and agent know that the project will be served best by including someone represented by another agency.
The Complaint asserts that there have been profound consequences as a result of packaging fees taken by Agencies. It indicates that despite growing demand for television series, driven in part by the entry of streaming services, and despite unprecedented profitability of the entertainment industry as a whole, the overall compensation for writers has stagnated or decreased in recent years. Writers also allegedly bear the expense of engaging lawyers and personal managers to provide “conflict-free” services that agents once provided.
It also states that the Agencies routinely fail to disclose the conflicts of interest inherent in packaging. The arrangement is negotiated directly between the Agency and the production company with no notice or disclosure to the writer clients. In this regard, it states that “Agencies have never obtained their writer-clients’ valid consent to the Agencies’ flagrant conflicts of interest.”
The causes of action included in the initial filing were breach of fiduciary duty owed by the Agencies to the plaintiffs and unfair competition under the California Business and Professional Code (the UCL) (§17200 et seq.). This section prohibits unlawful, unfair or fraudulent business acts. Plaintiffs ask the court to declare that the packaging fee constitutes a breach of the Agencies’ fiduciary duty to their writer-clients and that it is an unfair and/or unlawful practice under the UCL. The amended filing added a claim for constructive fraud based on “failure of a fiduciary to disclose a material fact to his principal that might affect the fiduciary’s motives or the principal’s decision … regardless of whether the fiduciary acted with fraudulent intent.” The Complaint asks the court to enjoin the Agencies from entering into new packaging agreements and from receiving anything of value from a company that employs a writer-client of the Agency and to order the Agencies to provide accountings of monies they received in connection with projects in which Guilds’ members were employed, in addition to other financial remedies.
Although the defendants have not yet answered the Complaint, the executive director of the ATA defended packaging fees, observing that the conditions for the full 3-3-10 arrangement rarely are met because few shows achieve a level of profit that result in payment of contingent compensation. Further, the ATA observes that its approach allows writers to avoid the 10% agency commission that otherwise would be due.
And while many Guild members were firing agents, a group of writers have strongly supported their agent relationships and expressed confidence in their integrity. Although the Agencies reportedly plan to move for dismissal, the ATA in a statement criticized the Guilds for having opted “for a long and costly legal process that was completely avoidable.” In the interim, said the ATA, “it remains in the best interests of writers to be represented by licensed talent agencies.”
The parties have shown interest in resuming negotiations, as of this writing, while both the Hollywood community and Wall Street wait for developments.