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Courts are very likely to find that packaging fee practices constitute breaches of fiduciary duty and unfair business practices in violation of California’s unfair competition law. I base this opinion on my 20 years of practice as a business litigation attorney. I am a partner in the AmLaw top 25 firm King & Spalding specializing in cases involving unfair competition, breach of fiduciary duty, copyright infringement, trademark infringement and false advertising. I have worked in business litigation my whole career, with the exception of three years at Paramount Pictures. I do not represent the WGA or any writers, nor do I represent any agencies, and I am not being paid by anyone to write this article.
Packaging Fee Practices
Agencies are alleged to have engaged in various combinations of the following practices: 1) not aggressively negotiating to improve their clients’ quote and profit participation; 2) encouraging clients to accept less than their quote on shows packaged by their agency; 3) negotiating deals for clients on projects where the agency’s packaging fee is being negotiated; 4) holding their clients’ deals hostage until the studio agrees to give the agency a packaging fee; 5) steering their clients exclusively to packaged shows, including lying to clients about the details of offers from studios where the deal would be less favorable to agents; 6) limiting the bidding market for their clients’ services by not shopping them to studios where the agency does not stand to receive a packaging fee; 7) failing to communicate offers extended to their clients to work on shows that are not packaged; and 8) not telling their clients important details about their packaging fees.
Packaging Fees Are a Breach of Fiduciary Duty
Under California law, a plaintiff needs to show the following to prevail on a case of breach of fiduciary duty: 1) existence of a fiduciary duty; 2) breach of that duty; and 3) damages proximately caused by the breach. It is hornbook law in California that “every agent owes his principal” fiduciary duties, including duties of undivided loyalty, care and good faith. (Daniel Orifice Fitting Co. v. Whalen, 198 Cal. App. 2d 791.) I am aware of no cases that exempt talent agents from this general rule. Talent agents are agents, and fiduciary duties accompany that agency relationship as a matter of law.
The packaging fee practices set forth above would constitute breaches of at least the duty of loyalty. Duties of loyalty forbid fiduciaries from standing on both sides of a transaction. (Sylla v. Long, 2013 WL 6064767.) If agents are accepting fees from studios and failing to aggressively negotiate to improve their clients’ episodic fees and profit participation, that is a clear-cut breach of the fiduciary duty of loyalty. If an agency’s compensation is being negotiated in the same transaction or set of transactions as their client’s compensation, that is a shocking breach of the duty of loyalty — shocking because of the obvious opportunities and incentives for the agency to improve their own position at the expense of their client’s. An agent who withholds material information from his or her principal is also in breach of fiduciary duty. (Sierra Pacific Indus. v. Carter 163 Cal. Rptr. 764.) In short, all the elements of breach of fiduciary duty are met.
Accepting Packaging Fees Is an Unfair Business Practice
California’s Unfair Competition Law (UCL) proscribes unlawful, unfair and fraudulent business practices. At a minimum, taking a packaging fee is an unfair business practice. Courts have intentionally defined the unfairness prong of the UCL as any business practice that is “immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers.” (Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co., 20 Cal. 4th 163) Packaging fee practices are unethical, oppressive, unscrupulous and substantially injurious to the consumers of talent agents’ services — the writers. Damages are not available under the UCL, but courts have broad powers to issue injunctions to stop companies from engaging in future unfair business practices.
Weaknesses in Writers’ Cases/Agency Defenses
California has a four-year statute of limitations on breach of fiduciary duty and UCL claims. Generally speaking, this means that writers need to file cases against agencies within four years of the later of (i) the breach of fiduciary duty or unfair business practice; or (ii) the date they knew or should reasonably have known about it. The agencies are almost certain to use the statute of limitations to challenge claims filed by writers who knew about packaging fees earlier than the date that was four years before the case was filed, and to argue that no damages should be awarded with respect to shows that were packaged more than four years ago. There is conflicting case law about whether an ongoing representation by an agent of a client, and/or ongoing payment of commissions, serves to continuously reset the statute of limitations, and that will be hotly contested in any litigation about these practices.
The agencies are certain to argue that writers knew about and consented to these breaches of fiduciary duty and unfair business practices, and that this constitutes a complete defense to those causes of action. After all, agents do not take their standard 10 percent commission from writer clients on shows packaged by their agency, and writers knew that their agents were being compensated in some other way — i.e., by the studios. This will be the lynchpin of the agencies’ defense. I am doubtful that courts and juries will find this defense persuasive, unless agencies can prove that they gave their clients a very detailed disclosure of all the consequences to the writer of the agency receiving a packaging fee. Unless a writer was told the following, I believe the agency’s “disclosure and consent” defense is likely to fail: 1) that the agency is receiving up-front fees, (deferred) episodic fees and gross profit participation from the studio; 2) that the agency is receiving these fees in order to secure talent at or under a certain per-episode budget (this is particularly important if a writer took a job for less than their quote, or should have been in a position to increase their quote but did not); 3) the salient details of the agency’s own profit participation definition; and 4) that the agency’s profit participation definition means that it stands to gain financially by ensuring that other participants’ definitions (including the writers’) are less favorable. Unless the agents disclosed these facts to their clients, I don’t think the “disclosure and consent” defense will be persuasive. Moreover, agencies have no “disclosure and consent” defense to failing to aggressively explore opportunities for non-packaged shows and failing to communicate offers received from non-packaged shows.
A defendant usually has two chances to get a case dismissed before trial. In order to win a business litigation case for a plaintiff, a lawyer has three primary responsibilities: 1) bring a complaint that survives initial motions to dismiss; 2) gather evidence to defeat the defendant’s motion for summary judgment; and 3) win at trial. I find it highly unlikely that an agency will be able to get this type of case dismissed on a “disclosure and consent” defense prior to trial. I predict most judges would not dismiss the case or grant summary judgment to the agency on this basis, because of disputed issues of fact as to what the agent actually told the writer. This is the type of fact pattern that screams out for a “let the jury decide” approach. I further predict that in a jury trial, with the writer having the substantial advantage of presenting his or her evidence and arguments first, the jury is much more likely to side with the writer than the agency on this issue (as well as, frankly, all of the other issues in the case).
The packaging fee practices described above constitute at least a breach of fiduciary duty and an unfair business practice. Writers (either individually or collectively) would have very strong cases to pursue both monetary damages and injunctive relief through litigation. The agencies should be expected to assert defenses of statute of limitations and consent/waiver via disclosure. Statute of limitations issues will affect different writers in different ways. The consent/waiver issues are unlikely to result in cases being dismissed before trial, but will nonetheless be the focus of agencies’ defense efforts.
This article is for informational purposes only and not for the purpose of providing legal advice.
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