MGM's Netflix Deal Under Scrutiny in Profits Lawsuit Over Clint Eastwood Classics

The owner of 'The Good, the Bad and the Ugly' claims that MGM isn't properly allocating its fair share of money from film licensing packages.

A profits fight over Last Tango in Paris as well as two Clint Eastwood classics could be developing into a must-watch "Hollywood accounting" lawsuit that examines whether Metro-Goldwyn-Mayer is properly allocating money from Netflix and various television distributors.

In September 2014, P.E.A. Films, owner of The Good, the Bad and the Ugly and For a Few Dollars More, challenged more than $10 million in distribution expenses and brought legal action against MGM.

Since then, a dispute has erupted between the two sides about whether the lawsuit encompasses allocation claims. In Hollywood parlance, this means what MGM earns when licensing a package of films and how it accounts to the profit participants of specific films inside the package. In the past, Hollywood studios have been sued for allocating the same share of a blanket license fee to every movie in a package, regardless of whether the movie is an Oscar-winning hit or a stinker. But such claims are rare and throwing Netflix into the mix could take PEA's lawsuit onto new ground.

Represented by the same legal team behind ongoing profit lawsuits over The Walking Dead and Bones, PEA believes that its lawsuit against MGM already includes allocation claims and has accordingly demanded access to MGM's full license agreements with Netflix, HBO, Rainbow Media, Turner, Hallmark and Starz. Just to be safe, PEA also sought on Dec. 28 to amend its complaint to more explicitly spell out what it is after.

"Upon information and belief, MGM has assigned unfairly low values to PEA's films GBU, FFD and LTP in connection with various license agreements by which MGM licenses those films in packages with other films, to the detriment of PEA," states the proposed amended complaint being handled by Dale Kinsella and Chad Fitzgerald at Kinsella Weitzman.

MGM is crying foul.

On Monday, its lawyer Martin Katz (who previously defended Disney in a big profits case over Who Wants to Be a Millionaire) filed an opposition.

 "PEA’s proposed amendment would profoundly expand this case beyond MGM’s accounting for expenses and administrative fees in the home entertainment market, by including far more complex claims arising from business relationships between MGM and its customers in the television distribution market," states MGM's legal brief. "According to PEA, these claims potentially implicate 'hundreds of films' separate and apart from the three PEA films at issue in this case."

MGM doesn't believe the original lawsuit said anything about allocation claims, and that 16 months into the case with nothing more than what's now being asserted on "information and belief," it's improper to have the lawsuit begin to explore what it believes to be a new avenue that will delay a trial.

MGM also stresses what's at stake.

"If the proposed amendment were permitted, MGM would be forced to defend against a completely different and far more complicated liability and damages theory," states the company. "Such a sea change in direction of the case could ultimately require extensive transnational discovery, potentially including document discovery and depositions of non-party entities and individuals located in foreign territories. It could also vastly expand the scope of expert witness discovery."

MGM hasn't yet directly addressed the core charge of undervaluing a film like The Good, the Bad and the Ugly, nor does it offer any hint of how it allocates. The studio does, however, assert there are reasons why profit participants have often chosen in the past not to assert allocation claims ranging from the large amount of time and expense to get into "inherently fact intensive" analyses on the allocation front to an acceptance that accounting reports can seem "reasonable on its face" when dealing with complicated subjects like what an old library film being broadcast in the Middle East is worth.

If the case gets so far, the issue of a film being licensed to Netflix — which has data on what's being watched, but doesn't publicly share the information — could come up in the profit-sharing context.

For now, PEA insists that whether or not the lawsuit includes or will be expanded to cover allocation, it nevertheless has an absolute right to inspect unredacted versions of MGM's licensing agreements for all of its films. According to a motion to compel documents filed on Monday, "PEA’s allocation expert cannot form an opinion as to the propriety and fairness of the allocation of revenues and/or expenses to the Films pursuant to these agreements without, at least, the title and license fees/expenses for every film."