3:12pm PT by Eriq Gardner
'Walking Dead' Hearing Has AMC on the Defensive in Massive Profits Lawsuit
On Friday in a New York courtroom, the first step was taken toward a possible trial that could amount to the most significant profits case in television history. In a $280 million lawsuit, Walking Dead creator Frank Darabont and his agents at Creative Artists Agency are claiming that AMC has cheated them by imputing an artificially low license fee for the highest-rated cable television series ever. If a trial is to occur, it won’t happen for another couple years — and probably before a different judge — but first comes summary judgment oral arguments, where New York Supreme Court Justice Eileen Bransten, a veteran of the circuit nearing retirement, didn't do much to mask her anger and frustration with AMC.
Before addressing what was discussed, it is important to appreciate what was not. Foremost, the exact worth of The Walking Dead is still to be determined at a later date. In court documents, the plaintiffs suggest that the zombie — sorry, "walker" — show, which regularly garners primetime NFL-level ratings, should be commanding as much as $30 million an episode in imputed license fees. Instead, on profit participation statements, Walking Dead now books $2.4 million an episode, less than what former AMC hit dramas Mad Men and Breaking Bad got and what current Emmy nominee Better Call Saul now commands despite inferior ratings for all three shows. At trial — should Bransten agree one is appropriate, the decision is then upheld on appeal and the parties don’t settle — a jury might look to other shows in TV history (like E.R., which once commanded a license fee of $13 million an episode) and resolve the question of worth. That is, if a recently filed lawsuit filed in California by some of Walking Dead’s other profit participants — Walking Dead comic book creator Robert Kirkman and producers Gale Anne Hurd, Glen Mazzara and David Alpert — doesn’t get there first.
Another thing getting short shrift at the summary judgment phase is Darabont’s profane emails to colleagues — where he said stuff like, "Fuck you all for giving me chest pains because of the staggering fucking incompetence" — that got ample attention in the press when court filings became public in mid-July, but that only plays a small role in the secondary if lucrative issue of Darabont’s contractual rights after he was fired in the middle of the second season. Also, the probative value of those emails is probably nil given Bransten’s dismissive comment to AMC on Friday: “That is an an artiste you are dealing with.”
No, instead, the main event pertains to whether AMC, as both the show’s producer and the show’s distributor, must impute a license fee akin to what it would pay out if the company conducted an arm's-length transaction with a third party. Given that talent — actors, directors, executive producers — are increasingly confronting vertically integrated media conglomerates at a regulatory moment when mergers are getting the benefit of the doubt, the dispute and coming decision figures to have an outsized influence on Hollywood deal-making. In the meantime, the parties are fighting over what standards apply to this license fee.
Darabont’s lawyers contend that the imputed license fee is controlled by a provision in the contract completed at the dawn of Walking Dead, wherein AMC agreed that transactions with affiliated companies will be on monetary terms comparable to transactions with nonaffiliated companies. According to the plaintiff, that means looking at what Lionsgate got from AMC for Mad Men and what Sony got for Breaking Bad and Better Call Saul, while also taking into account how Walking Dead has made AMC a powerhouse in the television industry, and computing a fair and reasonable licensing amount.
Collectively, Darabont and CAA are entitled to about 20 percent of the profits on Walking Dead, and as Blank Rome attorney Jerry Bernstein put it, "The imputed license fee is the principal source of profits."
At the hearing, Bernstein argued that the current imputed license fee is "unconscionably low," and that AMC's position amounts to the proposition that it could impute just $100 if it wanted on a "just trust us" basis. "That defies logic and common sense," he added.
Darabont's team must convince the judge that there is certainly a transaction happening even if AMC Network isn't really wiring AMC Studios any money. Bernstein presented Bransten with various pieces of evidence including profit-participation statements and the way that AMC attorney Marc Kasowitz used the word "transaction" in previous motion papers.
While Darabont and CAA argue the standard should be AMC's deals with the Lionsgates and Sonys of the industry, attorneys representing AMC contend the affiliate transaction provision doesn't apply to the imputed license fee and, instead, the proper standard should be what other executive producers get from AMC.
That's primarily for two reasons.
The first, according to AMC attorney John Berlinski, is that during negotiations for the Walking Dead deal, Darabont's reps requested a fair-market standard, and AMC expressly rejected it.
"What you have to believe is that when AMC said no, they actually meant yes," Berlinski told the judge.
The second reason is that Darabont allegedly got something else of value instead — a most favored nations provision that entitled him to the best imputed license fee that any producer of similar or lesser stature had ever received. Until recently, according to AMC, only Steven Spielberg had gotten a higher fee.
Thanks to a recent deal with Walking Dead special makeup effects guru Greg Nicotero, the imputed license fee for the show has now been improved and, as a result, AMC has cut checks for about $6 million to Darabont and CAA per the MFN clause. (That's on top of another $6 million that Darabont got in fixed compensation for writing, directing and producing the first season.)
Bernstein characterized this as an "Alice in Wonderland, Hail Mary argument," saying it came late in the game after AMC got a chance to see the plaintiff's summary judgment brief.
That opens up an entirely separate controversy.
As explained here, both sides exchanged summary judgment papers last fall and then spent the next six months fighting over what should be in the public record and what should remain confidential. The parties came to a side deal, which was then signed into order by the judge, whereby the respective papers would not be amended unless by mutual consent. Just weeks before the public filing was to occur in July, meaning months after they were supposedly "locked," AMC informed Darabont's lawyers about the Nicotero arrangement and then modified their briefs to a fairly substantial degree.
Bernstein argues that the modification was a breach of the judge's order and a ploy to show the value of the MFN clause. "Besides a violation, it's instructive and shows they were so desperate, they did something so bold," said Bernstein, who then presented a slide showing that Mad Men got much more licensing money despite a tenth of Walking Dead's ratings. "Why'd they do it? Because this is what they knew they'd face."
Berlinski attempted to explain that the amendments to the court papers were proper because at an earlier hearing, the judge had agreed to changes once certain information was designated private. He also justified the move by arguing that Darabont's team had cooperated, and thus, consented. Dale Kinsella, another attorney for the plaintiff's side, stood up and responded, "We didn't consent."
"I'm very, very upset," said Bransten, expressing concern that Darabont's side didn't have enough time to properly respond. She suggested adjourning the hearing before Darabont's lawyers talked her out of it by saying there already had been too many delays in the case. Nevertheless, Bransten continued to express her displeasure with AMC for how it all played out.
During the hearing, Berlinski also attempted to downplay Darabont's achievements on Walking Dead. He acknowledged him as a talented screenwriter, but also said that the zombie story was Kirkman's idea and that every network had passed on it, thus Darabont didn't really have much leverage in negotiations. Berlinski also pointed to how subsequent showrunners on Walking Dead had signed off on the imputed license fee as fair. (It was later pointed out to the judge by the other side that Kirkman and others are suing, too.)
AMC's lawyer also argued vehemently that Darabont was contracting with the network, and that the network was the rights holder. He therefore maintained there really wasn't a transaction between studio and network.
This line of argument drew heavy skepticism from Bransten, who talked about the role that AMC Studios would eventually play in producing the series. She also talked about the "reality" regardless of the contracts, and, perhaps tipping her decision, she addressed what a jury would have to figure out. "Without a doubt, the mechanism included AMC Studios."
In fact, throughout the hearing, which lasted five hours (with an hour for lunch), the judge repeatedly rolled her eyes and shot a "What, are you kidding me?" look at defendants' counsel. Some of it was in reaction to nuanced arguments about the contractual interpretation, although she was especially annoyed at the time demanded by AMC for arguments.
As the hearing moved to the afternoon session, the discussion shifted to whether Darabont became vested for working on episodes throughout the second season even if he was fired in the middle, how his pay-or-play deal operated and whether he was wrongfully denied an opportunity to negotiate work and profits on aftershow Talking Dead and spinoff Fear the Walking Dead. Although these issues were interesting in and of themselves — Kinsella called the latter subject an issue of first impression that would be watched closely in the entertainment industry — the judge may have gotten a tad exhausted.
By the time Berlinski returned to address whether AMC had breached an implied covenant of good faith and fair dealing and attempted to once again talk about the most favored nations clause, the judge had had enough.
She shouted at him, "If I hear Mr. Spielberg's name one more time, I will hold you in contempt!"