A 'Supernatural' Profits Fight, and the AT&T-TW Merger Issue That Few Are Discussing

Supernatural - POSTER

Since AT&T announced in October 2016 that it would be acquiring Time Warner for $85 billion, there has been hardly any talk about how the deal will impact creative talent. When the issue of vertical integration comes up, it's often a discussion on whether distributors including Comcast, Dish and Verizon will get fair terms to license networks like HBO or TBS, or whether AT&T might try to unfairly compete for telecom customers by holding exclusives on a would-be owned show like Game of Thrones or a franchise like that of Batman. AT&T executives insist this would make no business sense, that receiving money for content is the name of the game and that antitrust history prevents government officials blocking a merger between a supplier and a distributor. But virtually ignored is how this deal will impact those who create, write, star and direct in popular entertainment.

If the question hasn't provoked more examination, there could be a reason for that beyond the complexity of the topic. Almost all contracts in entertainment include arbitration provisions. As a result, most of the disputes that arise from vertical integration are kept hushed. But The Hollywood Reporter has learned about one pending fight in arbitration — and it's a battle that not only involves Warner Bros. and the very lawyer now tasked with fighting the Justice Department, but it also addresses the fairness of media consolidation and the mechanism to resolve disputes from those who feel shortchanged by studios selling to their affiliated distributors.

The arbitration is over The CW's Supernatural, a show that is now in its thirteenth season. It's obviously a successful program, given its longevity, but few appreciate the economics underpinning the series. According to a 2013 profit participation statement sent out by Warners, the total gross receipts for the show's first eight seasons amounted to $570 million. But after expenses, distribution fees, interest payments and money to the talent agency that packaged the series, Warners reported that Supernatural had a deficit of nearly $23 million, meaning nothing in the pool for those entitled to a percentage of net profits. 

Eric Kripke, the creator of the fantasy horror series as well as a profit participant, objects to the studio's accounting. In particular, he points to what Warners has been booking in license fees from its affiliated broadcast network. (In fairness to Warners, it must be noted that The CW is only half-owned by the studio, with the other half enjoyed by CBS, which presumably had a say, too.)

"The show is one of The CW's most successful series," states an audit claim. "It is customary in the television industry for studios to obtain license fees from networks that, starting in Season 5, equal or exceed the cost of producing the show. ... If Warners had merely received a full cost license fee from The CW for Season 5 through 8, the gross receipts would be increased by $104,005,323."

This is what actually occurred:

Kripke, through his loan-out, also raises other issues including transactions with affiliated on-demand services and insufficient documentation to determine whether the license fees from Netflix and Hulu represent fair market value.

In response, Warners has invoked arbitration by filing a demand at JAMS, a leading arbitration forum.

Represented by a team at O'Melveny & Myers which includes Daniel Petrocelli (recently tapped by AT&T to defend that Time Warner merger, in case the government sues to block it), the studio retorts, "Under the parties' agreements, Kripke granted WBTV absolute discretion and control over how and whether to distribute and exploit the Series, including by authorizing WBTV to license the show to an affiliated company."

Warners knocks at Supernatural in its arbitration demand letter and says Kripke has gotten the benefit of the bargain with millions of dollars in fixed fees. The studio says the reduction in license fees was necessary. According to its lawyers, "As a result of these deals, Kripke has continued to obtain greater total compensation, because the Series, which otherwise would have been cancelled during its early years based on its performance, has remained on the air."

Now that the case is in arbitration, Kripke's attorney is mounting what might best be characterized as a fight priming the bigger fight. It's something that Warners probably didn't expect.

Kripke is represented by Ron Nessim, an attorney at Bird, Marella, who recently sued AMC on behalf of various Walking Dead executive producers including Robert Kirkman and Gale Anne Hurd. Along with the Frank Darabont litigation, the Walking Dead profits cases represent more exploration over the issue of whether creatives are being treated fairly when studios producing content share a parent company with the outlet distributing the content.

Nessim is also the author of a 2015 article in the UCLA Entertainment Law Review titled "Mandatory Arbitration Provisions Involving Talent and Studios and Proposed Areas for Improvement." In that article, Nessim makes the argument that studios may be advantaged in arbitration thanks to a phenonomenon that critics call "repeat player bias." Meaning, if an arbitration vendor like JAMS wishes to maximize its revenue, that vendor may have financial motives — unconscious or otherwise — to favor parties who arbitrate repeatedly.

Nessim's concerns have now impacted how he's handling the Supernatural case.

After Warners submitted its demand for arbitration, the parties began volleying letters to each other and to a case manager at JAMS. Correspondence began last month and has continued through this week.

Among other things, Nessim is demanding information about financial and professional relationships between JAMS and those involved in the present case. He also is insisting upon disclosures about potential arbitrators. He wants to know all about Warner Bros.' prior and pending cases, the amount of the claims, the prevailing parties and so forth. Last and not least, Nessim is pushing JAMS to classify this clash as a "consumer arbitration," which would mean that JAMS would have to publish information about this Supernatural case on its website.

Warners has attacked Kripke's endeavor as a "sideshow," while Nessim writes in his most recent letter, "[I]n a 'company town' like Los Angeles, we believe that members of the talent community are justifiably concerned about the danger of arbitration providers and their neutrals being influenced in favor of the entertainment conglomerates that draft the contracts that direct the business to them."

The matter remains unresolved.

If the Justice Department does move forward with a courtroom effort to stop AT&T's $85 billion acquisition, the issues faced by creatives might not be overtly discussed in a complaint spelling out the competitive harms of vertical integration. But as the government's case continues, it just well might.

In an important speech Thursday before the American Bar Association, the Justice Department's antitrust chief Makan Delrahim addressed vertical mergers. He expressed skepticism of behavioral remedies or divestitures that may only partially remedy the harms of consolidation of suppliers and distributors. He also said, "If a merger is illegal, we should only accept a clean and complete solution, but if the merger is legal we should not impose behavioral conditions just because we can do so to expand our power and because the merging parties are willing to agree to get their merger through."

Led by Petrocelli, AT&T may probe any undue influence that CNN-hating President Donald Trump has had on the Justice Department, which is supposed to operate independently. At the same time, there's potential skeletons in Hollywood's closet to probe and put before a judge if prosecutors dare. After all, if any problems from a merger of this type aren't dealt with on the front end, how many creatives in Hollywood have confidence such issues will be fairly resolved later on in private forums?