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In a sequel to explosive litigation over The Walking Dead, the highest-rated drama in cable TV history, Frank Darabont and Creative Artists Agency are suing AMC a second time with new claims of being robbed of tens of millions of dollars in additional profits.
The 2013 lawsuit filed by Darabont, the show’s co-creator and first executive producer, is still very much active, and the parties are eagerly awaiting a judge’s summary judgment decision determining if that $280 million case goes to trial.
The judge is ruling on numerous issues, but none more financially impacting than the controversy over self-dealing. Since AMC is both the studio that produces the zombie hit as well as the cable network that shows it to audiences, the license fee shown in accounting statements to non-AMC profit participants like Darabont and CAA becomes crucial. Darabont claims he has contractual protection that essentially means AMC must pay a fair market fee (perhaps as much as $30 million an episode), one that would truly reflect arms’ length transactions between the company’s affiliates. AMC contends it can impute a license fee as it wishes (it’s currently $2.4 million per episode) as long as it is no less favorable than any other Walking Dead profit participant and that a distribution fee won’t be charged with respect to this.
In September, both sides argued at a hearing before New York State Supreme Court Justice Eileen Bransten. It’s too late to amend the original complaint. And so, having recently completed an audit of AMC’s accounting records, Darabont and CAA have launched their second case.
The plaintiffs, represented by the firms of Kinsella Weitzman and Blank Rome, state in the complaint (read in full here) that “it is now clear that AMC’s wrongful conduct extends well beyond artificially deflated license fees” and that “AMC has used a variety of shady accounting practices … to withhold tens of millions more.”
The audit allegedly revealed that AMC is only reporting 20 percent of the revenue it has received from Apple for iTunes sales of Walking Dead; that AMC is charging too much in distribution fees for Fox’s sub-distribution of Walking Dead in the international and home video markets; that AMC has failed to account for certain product integration fees from Gerber and Hyundai; that the Sundance International Channel, another AMC affiliate, is paying below-market license fees for Walking Dead; that distribution and administration fees are being charged with respect to the music in the show; that expenses include such things as a $37,600 Comic-Con banner with an invoice showing just half that amount; and much more.
For example, the application of Georgia tax credits has again become a point of contention. Also, AMC is said to be improperly deducting $1.5 million in advances to other profit participants.
Speaking of those other profit participants, Robert Kirkman, Gale Anne Hurd, Glen Mazzara and David Alpert filed their own suit against AMC in August. Kirkman created the graphic novel that Walking Dead is based on and, in a development that’s arguably even more important than the allegation of accounting shenanigans, the Darabont and Kirkman lawsuits are now intertwining.
“Plaintiffs recently learned that AMC attempted to hide evidence related to its self-dealing from Plaintiffs during discovery in the pending litigation,” states the new Darabont complaint. “It was not until additional TWD producers filed new lawsuits against AMC late last year that Plaintiffs learned that another TWD producer — Robert Kirkman — also has a profit definition on the Series that contains self-dealing protections. AMC produced Kirkman’s agreement to Plaintiffs in discovery in the underlying action but [redacted] the very self-dealing provision at issue, even after agreeing with Plaintiffs that AMC would not redact anything relevant to Kirkman’s profit definition. But the truth has now come out, exposing AMC’s bad faith accounting and its bad faith litigation tactics.”
Why Kirkman’s deal is relevant is that he had “an entirely different self-dealing provision than Darabont’s,” say plaintiffs. It’s one which “requires that AMC use an actual license fee, rather than an imputed license fee, for all its transactions with affiliates, and that this actual license fee is subject to self-dealing protection, requiring arms’ length, fair market license fees.”
But Darabont has a “most favored nation” clause in his own deal that entitles him to treatment no less favorable than any other Walking Dead profit participant. It’s been the crux of AMC’s argument about what Darabont was able to obtain for himself in negotiations for the series and why the licensing income showing up on his profit participation statements is fair.
“Upon the public filing of Kirkman’s TWD agreement, Darabont then learned that AMC improperly withheld the key terms of Kirkman’s agreement in the litigation to prevent Darabont from learning that Kirkman was entitled to an actual license fee, rather than an imputed license fee, and that this actual license fee is subject to protection against improper self-dealing,” continues the complaint.
As such, AMC is alleged to have breached the contract as well as the implied covenant of good faith and fair dealing. Darabont is also looking for a declaratory judgment that he is entitled to an actual license fee from AMC Network to AMC Studios.
What this means is that even if Darabont loses the argument on how to interpret the contract in the first case, he may get a second shot that turns on a read of Kirkman’s deal. That raises the stakes of the Kirkman case taking place in California and further complicates AMC’s defense as it must consider the implications of any action it takes in the respective lawsuits.
AMC attorney Orin Snyder on Thursday sent The Hollywood Reporter a statement in response to the complaint: “At the heart of this lawsuit — and all the litigation related to The Walking Dead — is the greed of CAA. Their goal is every dollar for themselves, with total disregard for contracts, clients, fairness or even basic decency. AMC was the only network willing to take a risk on The Walking Dead, after many others passed. AMC has been an honest steward of the series and has paid all of its creative partners handsomely and appropriately. This is just another opportunistic lawsuit orchestrated by the most powerful lawyers and Hollywood agents seeking an unjustified windfall and we are confident that it will be defeated in court.”
Jan. 18, 1:10 p.m. Updated with statement from AMC.
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