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In a dispute centered on the way that YouTube streaming can cannibalize sales of videos and how contracts executed in one entertainment era transition to the next, Biggest Loser star trainer Jillian Michaels has scored an enormous legal victory against Lionsgate. On Wednesday, an arbitrator awarded the exercise guru almost $5.8 million for lost past and future profits and also determined that Lionsgate must fork over additional attorneys’ fees and arbitration costs.
Michaels brought her legal claim in April 2015, although she’s been fighting with Lionsgate for much longer.
She made a deal in 2007 at a time when Biggest Loser was experiencing massive success with Lionsgate taking advantage by producing and distributing fitness videos related to the reality competition show. The agreement had Michaels creating six workout videos for DVDs sold in stores as well as video-on-demand offered both online and for Exercise TV, carried to approximately 21 million homes through Comcast, Time Warner Cable and other cable providers. Lionsgate was granted significant distribution rights in perpetuity. Michaels got a $250,000 minimum guarantee and escalating royalties depending on the number of units distributed. She also gained the right to meaningfully consult with Lionsgate before content was distributed.
By 2010, the videos including 30 Day Shred, Yoga Meltdown and 6 Week 6 Pack Abs hit the market. They did well enough that Lionsgate wanted to extend her deal, offering $1 million plus a flat-rate royalty. Instead, Michaels made a deal with Gaiam, Inc., another company distributing fitness videos.
Around this time, trouble started brewing when Michaels began complaining how her videos were being featured for free on ETV, and later BeFit, Lionsgate’s fitness YouTube channel.
Lionsgate had a deal with Google that let it collect 55 percent of advertising revenue from BeFit, and unlike ETV (which went out of business), no subscriptions to access the content were required.
“It took some time for BeFit to gain traction,” writes the arbitrator in the decision. “From 2012 to 2013, views of BeFit content increased from 6.7 million to over 27.5 million. During that time, sales of Michaels’ DVDs declined and continued to decline through 2015 as views on BeFit continued to increase or stay steady.”
Lionsgate, according to the arbitrator’s findings of fact, began accounting for advertising revenues upon Michaels’ objection by incorporating them under the DVD sales line item. As of March 2016, Michaels had been paid $85,000 from BeFit. However, that wasn’t the focus of an initial 2012 audit related to her profit participation statement. The earlier accounting dispute settled in 2014.
In coming to a decision, arbitrator Bruce Friedman first determines that the audit settlement didn’t cover the claims over the BeFit videos. The arbitrator next looks to the “broad language” in the agreement to see whether Lionsgate was allowed to exhibit the fitness videos online through a VOD format without charging its viewers, thereby generating no royalties to Michaels in the process.
Friedman writes that Lionsgate’s actions were unreasonable.
“Interpreting the Agreement as [Lionsgate] suggests would confer no direct financial benefit on Michaels and in fact, potentially have a negative effect on her brand, in that offering content for free can lead consumers to believe that [her] brand no longer holds premium value and diminishes their willingness to pay for content, according to Michaels’ experts,” he writes. “It defies logic that she would agree to create content for [Lionsgate] that would ultimately be given away for free, preventing her from being compensated under the Agreement and potentially hurting her brand … [H]ad Michaels been an up-and-coming fitness personality, it may have made sense to offer certain content for free to build up interest in her brand. However, Michaels was already an established celebrity.”
The arbitrator then posits that it’s implausible that Michaels’ agents and lawyers, compensated through commissions, would accept a deal that would negatively affect their client and their bottom line. He rejects Lionsgate’s argument that the streaming served as promotion and that “click-throughs” contributed to sales on Amazon. He also points out that Lionsgate began paying her royalties on advertising revenue even though it arguably had no obligation to do so under the terms of the agreement.
“Based on the evidence and the Agreement itself, the Arbitrator finds that interpreting the Agreement to confer any right to [Lionsgate] to exploit the Fitness Videos in such a way as to remove the possibility that Michaels could collect payment under the Agreement does not reflect the intent of the parties and leads to a nonsensical result,” Friedman concludes, adding that the studio breached its obligation to meaningfully consult with her before putting the videos on YouTube.
Lionsgate not only is deemed as violating the contract, but also as breaching the covenant of good faith and fair dealing. Rather remarkably, Friedman not only awards Michaels past lost profits and orders Lionsgate to remove the fitness videos from BeFit, but the arbitrator also awards future profits, holding that “just as it took time for BeFit to become popular with consumers and begin to have a significant effect on the DVD sales of the Fitness Videos, it is logical that it would also take time to rebuild consumer interest in purchasing content that the market was once able to access for free.”
It’s likely there have been other decisions in arbitration like this one on how digital exploitation can cannibalize a market and undercut a royalty deal, but such disputes are often kept secret. The arbitration process also confers little precedential value, it should also be noted, though Lionsgate could attempt to bring the decision to an open court for review. In the meantime, the award (see here in full) should provide a shot of confidence to talent in digital accounting claims and invite discussion about the benefits and drawbacks of newer digital platforms.
Lionsgate was represented by a Katten Muchin team led by David Halberstadter, while Michaels was represented by a King & Ballow team led by Richard Busch.
About the victory, Busch comments, “We are thrilled for Jillian. This is an incredibly important decision for all artists in the YouTube era in which we live. This decision represents a firm pronouncement that placing work on YouTube for free devalues it, and damages artists, like Jillian, who created it. We argued throughout that Lion’s Gate tried to build a YouTube business, BeFit, on Jillian’s back and popularity, but did not care that it did not have the right to do so, or the damage it did to her. We are very happy with the Arbitrator’s decision, including the Order requiring the removal of Jillian’s content from YouTube.”
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