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HOLLYWOOD ACCOUNTING:
PROFIT PARTICIPATION AND THE USE
OF MEDIATION AS A MODE OF
RESOLVING THESE DISPUTES
Eric Strum *
I. INTRODUCTION
Every actor hopes to star in a great movie that makes substan- tial profits. But if you’re hoping to earn profits based on the success of your film and you want to be paid on a timely basis, then one company you certainly do not want to do business with is Defendant Morgan Creek Productions. 1
In 2012, actor Kevin Costner accused the film company, Mor- gan Creek Productions, of diverting money by assigning the foreign distribution rights on Robin Hood from Morgan Creek to a com- pany owned by Morgan Creek CEO James Robinson.^2 Costner claimed that he did not accrue his profit participation statements in 2010 and 2011 and late financial statements from 2004 to 2009, to which he was owed from his initial agreements to act in the movie.^3 This is just one of many examples of profit participation claims that end up in litigation.
Profit participation agreements, otherwise known as contin- gent compensation agreements, have engendered much debate
- Notes Editor, Cardozo Journal of Conflict Resolution ; B.A., 2012, University of Southern California; J.D. Candidate, 2017, Benjamin N. Cardozo School of Law. The author would like to thank his family for their support, love, and encouragement. (^1) Eriq Gardner, Kevin Costner Settles Lawsuit Over ‘Robin Hood’ Profits , H OLLYWOOD REP. (Aug. 11, 2014, 11:28 AM), http://www.hollywoodreporter.com/thr-esq/kevin-costner-set tles-lawsuit-robin-724616 (quoting a statement from Costner’s complaint). The actor sued in July 2012, taking a bold shot against the independent studio.... The participation rights were sold as a package, and Costner objected to the alloca- tion of fees for every movie in this package, regardless of performance. The lawsuit included other accounting claims on behalf of Costner, who was entitled to 15 per- cent of the adjusted gross receipts of the picture in excess of $100 million, plus fur- ther participation on home distribution.... The parties told the judge on Friday that the case has been settled. An attorney for Morgan Creek confirms the settlement, adding that he couldn’t discuss the terms. (^2) Id. (^3) Id.
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since they were first introduced.^4 These agreements were created as ways to decrease risk of production for studios, whereby talent would agree to receive less “up front” fees in consideration of more lucrative proceeds from the gross receipts of the production.^5 Lawsuits over profit participation agreements occur when the par- ticipants^6 do not accrue their fair share of the profits according to their contracts agreed to prior to their film or television work. Re- cent lawsuits that demonstrate this include: the producers of The Black Dahlia (2006) sued the production company Nu Image for failing to pay them according to their profit participation agree- ment; 7 actor Richard Dreyfuss sued Disney for profits owed from starring in What About Bob (1991);^8 and producer Irwin Winkler sued Warner Bros. for fifty percent of net profits he claimed to have been cheated out of from producing Goodfellas (1990).^9 Most profit participation claims blame the questionable nature of “Hollywood Accounting”^10 practices.^11 Although, there are a vari-
(^4) Adam J. Marcus, Buchwald v. Paramount Pictures Corp. and the Future of Net Profit , 9 C ARDOZO ARTS & ENT. L.J. 545, 545–46 (1991) (discussing the ambiguity of the term “net prof- its” and its definition within contracts in the entertainment industry). (^5) Doron Eghbali, What Are Gross Participation and Net Profits in Motion Pictures? , A VVO (Dec. 15, 2010), http://www.avvo.com/legal-guides/ugc/what-are-gross-participation-and-net- profits-in-motion-pictures. (^6) Hereinafter, “participant” will be used interchangeably with “actors” and “talent.” (^7) Austin Siegemund-Broka, ‘The Black Dahlia’ Producers Sue Nu Image Claiming Unpaid Profits , HOLLYWOOD REP. (July 22, 2015, 12:48 AM), http://www.hollywoodreporter.com/thr- esq/black-dahlia-producers-sue-nu-810502. (^8) Dominic Patten, Disney Slammed by Richard Dreyfuss over ‘What About Bob?’ Profits , D EADLINE HOLLYWOOD (Apr. 9, 2015, 6:37 PM), http://deadline.com/2015/04/richard-dreyfuss- sues-disney-what-about-bob-profits-lawsuit-1201407598/. (^9) Eriq Gardner, ‘Goodfellas’ Producer Sues Warner Bros. over Lack of Any Profits , H OLLYWOOD REP. (Sept. 22, 2015, 3:30 PM), http://www.hollywoodreporter.com/thr-esq/good- fellas-producer-sues-warner-bros-826413. (^10) Renee Howdeshell, Hollywood Accounting: Another Good Reason to Read (and Audit) Your Contracts , BETWEEN NUMBERS (Mar. 24, 2011), http://betweenthenumbers.net/2011/03/ hollywood-accounting-another-good-reason-to-read-and-audit-your-contracts/. Hollywood accounting (or Hollywood bookkeeping) is the term used to describe how studios report profits on movies and television series. It often carries a derogatory connotation because of various common practices, which don’t follow Generally Ac- cepted Accounting Principles (GAAP) or necessarily reflect market realities. These contractually-based practices often serve to reduce revenues, inflate costs, and elimi- nate the profits upon which royalties or participations are paid to actors, writers, etc. (^11) E.g. , Dustin Rowles, 10 Movies that Made Hundreds of Millions in Box-Office Dollars and yet Somehow Showed No Profit , PAJIBA (Aug. 19, 2013), http://www.pajiba.com/box_office_ round-ups/10-movies-that-made-hundreds-of-millions-in-boxoffice-dollars-and-yet-somehow- showed-no-profit.php. “Hollywood accounting” is a neat trick the studios use to avoid paying back-end profits to those contractually obligated to them... Here are 10 films that you would think showed a huge profit, but according to the Hollywood accountants, they all
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gram, Who Wants to Be a Millionaire? “The jury agreed with the argument of British production company, Celador, that Disney subsidiaries, including the ABC network and the Buena Vista Tele- vision Studio, structured agreements so that ABC would reap huge profits, but Celador would receive little or nothing from its 50 per- cent participation.”^18 As past civil litigation would suggest,^19 juries tend to side with the smaller participants over large corporate studios.
Although anecdotal evidence suggests that studios have been much more successful in private arbitration, it is generally per- ceived that arbitrators are more friendly to studios than are ju- ries. 20 “Participants usually attribute this to ‘repeat player bias’ by the big arbitrator providers, such as JAMS—The Resolution Ex- perts, which the studios generally designate in the arbitration clauses of their contracts with participants.”^21 There appears to be a perceived bias on both ends of jury tri- als and arbitration. However, one might consider whether there are any alternatives to these approaches, where profit participation agreement disputes can be resolved in a way without perceived bi- ases. This Note will explore the background and issues that arise with participation agreements along with alternative means of solv- ing these disputes.
This Note proposes that the entertainment industry employ mediation to resolve profit participation disputes. Section II of this Note focuses on profit participation agreements through their his- tory and their legal context. Section III provides a discussion of
(^18) Id. (^19) Id. (noting an example in 2007 where the jury sided with the participant where the cre- ators of the television series, Will & Grace , brought profit participation claims to trial. “Al- though, the case settled after the jury finished deliberations and no verdict was entered, the press reported that the jury voted to return $49.5 million verdict in favor of the participants on their contract claims.”); Jean-Luc Renault, ‘Hollywood Accounting’ Exposed: Verdicts Forcing Studios to Re-examine Profit-Participation Contracts , DAILY J. ENT. & SPORTS (Oct. 15, 2010), http:// www.kwikalaw.com/links/Fitzgerald/Hollywood%20Accounting%20Exposed%20-%20Chad% 20quote.pdf (providing an example of a successful participant agreement in which “a $3.2 million verdict in favor of Ladd, in 2010, in his dispute against Warner Bros., which the producer accused of selling television licenses for his movies in bundles with others for a blanket fee, regardless of the films’ individual values—cutting him out of potential profits under his revenue-sharing agreement.”); Ladd v. Warner Bros. Entm’t, Inc., 110 Cal. Rptr. 3d 74 (Cal. App. 2d Dist. 2010). On the same day as the Celador decision, a jury awarded Don Johnson $23 million for Johnson’s role on the television show, Nash Bridges. “Johnson, whose contract stipulated that he owned half the copyrights to the show, sued Rysher Entertainment, which claimed that it never made a profit from the show and had nothing to share with Johnson.” Jean-Lu Renalt supra. (^20) Nessim, supra note 12, at 408. (^21) Id.
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the arbitration and litigation of participation claims, as well as their weaknesses. In Section IV, this Note proposes the use of media- tion in handling claims in the entertainment industry and a new model of mediation that would best serve profit participation dis- putes. With the engagement of mediation, profit participation law- suits can be handled in the most effective and fair way for both the studio and participant.
II. BACKGROUND
A. The Profit Participation Agreement
Profit participation agreements are a common contractual practice often seen within film and television transactions between studios, talent, and producers. Within the motion picture and tele- vision industry, profit participation agreements are used to negoti- ate a percentage of the film’s profits to lessen the amount a studio or production company will pay upfront before production be- gins.^22 Once a producer finalizes a distribution deal with a major studio or production company, the producer is generally paid a fixed producer’s fee as well as a percentage of the film or television show’s profits.^23 Talent attached to any particular production can anticipate being compensated a salary in accordance with the pro- visions of the various collective bargaining agreements that govern the relationships between signatory production companies and ac- tors, writers, and directors.^24 Moreover, talent will contract for a pre-determined salary in film or television, but, occasionally, talent who have sufficient clout to negotiate might be able to get a pack- age deal that includes various forms of compensation contingent upon the financial success of the films to which they are attached.^25 Put more simply, profit participation is a right to participate in the profits of a film or television show.^26 These agreements are tre- mendously appealing to talent, because depending on the success
(^22) Hillary Bibicoff, Net Profit Participations in the Motion Picture Industry , 11 L OY. L.A. ENT. L. REV. 23, 23 (1991) (“In addition to a salary, actors often contract to receive a percentage of ‘net profits’ from a movie in which they are involved. Investors also agree to receive a per- centage of net profits from the movie as a way of receiving a return on their investments.”). (^23) Joe Sisto, Profit Participation in the Motion Picture Industry , 21 E NT. & SPORTS LAW 1, 21 (2003). (^24) Id. (^25) Id. (^26) Id.
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audiences, and as a result, produced fewer films.^36 These factors ultimately led to talent not needing to attach themselves to the stu- dio system, and the “star system” collapsed.^37 “In the 1980s and 1990s, as major directors and stars such as Paul Newman, Robert Redford, Barbra Streisand, Jack Nicholson, Dustin Hoffman, Har- rison Ford, and Steven Spielberg rose to international fame, they insisted that their profit participation be based on a percentage of gross receipts only.”^38 Because talent, such as the aforementioned, had significant leverage in the entertainment industry at that time (and for the most part still do), the studios were forced to reluc- tantly grant them gross participation, thereby netting participants huge sums of profit.^39 Nevertheless, the windfall for talent was short-lived and the vast majority of profit participants were subject to studio net profit definitions.^40 In most cases, the net profit re- ported was less than zero.^41
Studios began to develop accounting methods and contractual definitions designed in such a way that, once all deductions were made from the gross profits earned by a film, there was not much left to distribute to the profit participants.^42 “The bigger names in Hollywood occasionally muscled gross profit participations into their contracts, yet at times, still ran into issues of receiving their profit participation.”^43 For example in 1996, Jeffery Katzenberg in- itiated a lawsuit against Disney, claiming that Disney deprived him of his fair share of net profits as stated in his employment contract while he was an executive there.^44 After this long feud over the valuation of a two percent bonus based on past and future profits of all films and television shows produced while he was at Disney, Katzenberg was awarded a settlement of about $275,000,000. Nonetheless, the vast majority of profit participants remain subject
(^36) Sisto, supra note 23, at 22. (^37) Id. (^38) History , supra note 32. (^39) Id. (^40) Id. (^41) Id. (^42) Sisto, supra note 23, at 22. (^43) Id. (^44) History , supra note 32. See, e.g. , Kim Masters, The Epic Disney Blow-Up of 1994: Eisner, Katzenberg and Ovitz 20 Years Later , H OLLYWOOD REP. (Apr. 9, 2014, 10:00 AM), http://www .hollywoodreporter.com/features/epic-disney-blow-up-1994-694476. See also James Bates & Claudia Eller, Katzenberg Settles Lawsuit Against Disney , L.A. T IMES (Nov. 11, 1997), http://arti cles.latimes.com/1997/nov/11/news/mn-52593.
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to studio definitions of net profits, which ultimately allow for a plethora of deductions from the gross proceeds.^45
C. A Vertical Integration of the Entertainment Industry
A reason why profit participation claims continue to persist is due to vertical integration within the entertainment industry.^46 In 1970, the Federal Communications Commission (“FCC”) adopted the financial syndication rules (“fin-syn rules”), which were en- acted to regulate competition in the television industry by restrict- ing television networks from engaging in the business of program syndication. 47 The fin-syn rules gained even more traction when legislation prohibited the networks from producing more than forty percent of their primetime programing within their own net- work.^48 In 1995, the fin-syn rules were repealed because of the emergence of a booming and more competitive marketplace for television networks.^49 After the rule was quashed, broadcast net- works were allowed to own their own primetime programing, which ultimately led to the widespread “vertical integration” of networks and studios, as well as the demise of almost all indepen- dent television studios.^50
A vertically integrated entertainment company transaction might own, among other things (1) studios that make and own television programs and feature movies; (2) distribution compa- nies that license and sell those programs to affiliated and unaffil-
(^45) History , supra note 32. (^46) Nessim, supra note 12, at 406. (^47) See Simon, infra note 104, at 438 (“The fin-syn rules were promulgated in response to the FCC’s determination that the only three national networks, ABC, NBC, and CBS (collectively, “the three networks”) had too much dominance over television programming.”). (^48) Id. The fin-syn rules were codified at 47 C.F.R. § 73.658(j). FCC adopted the proposals to ‘eliminate the networks from distribution and profit sharing in domestic syndica- tion and to restrict their activities in foreign markets’.... The Commission also prohibited networks from acquiring subsidiary program rights and profit shares, as little would be accomplished in expanding competitive opportunity in television pro- gram production if we were to exclude networks from active participation in the syndication market and then permit them to act as brokers in acquiring syndication rights and interest and reselling them to those actively engaged in syndication... the network has an advantage as a competitor in the syndication market because of its existing relations with affiliates. (^49) Id. at 439. (^50) Nessim, supra note 12, at 406; see also Stanton L. Stein & Marcia J. Harris, Vertically Challenged , 26 L.A. L AW. 30, 31 (2003).
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out of millions of dollars from the television series” and “because of corporate greed, Fox intentionally reduced revenues to profit participants by selling the show to its affiliates instead of seeking the most competitive and beneficial deal.”^61 The complaint also alleges that Fox paid the executive producer of the show four mil- lion dollars in “hush money” and a new deal for a thirteen episode show, for his silence as to Fox’s self-dealing. 62 The lawsuit was later settled out of court and Duchovny returned to acting in the show.^63 However, vertical integration plays a role as to why par- ticipants do not accrue profits according to the network’s true reve- nue streams. Although a clever way by the vertically integrated companies to both maximize and retain profits, some participants can generally sense when profits are being withheld from them, and this starts with the ambiguity of the definition of “profits” in- corporated into the terms of their contracts.
D. Defining Profit
In Hollywood, “profit” is an ambiguous term.^64 For example, if a film costs $50 million to make and another $50 million to mar- ket, and it then earns more than $300 million at the box office, the obvious assumption is that the participants will reap great profits.^65 However, the reality is the studios will often claim that the profits earned, by an otherwise box-office blockbuster, is less than zero.^66 Mark Weinstein, associate professor of Business and Law in the USC Gould School of Law, concisely lays out how the numbers are crunched by studios when determining profits:
First, there are the distribution fees and expenses. These in- clude (1) the distribution fee (30 percent United States and Ca- nada, 35 percent the United Kingdom, and 40 percent elsewhere), (2) direct advertising and publicity expenses, (3) the cost of prints, and (4) overhead charges of 10 percent of direct ad and publicity costs. Next are the costs of getting the master print created. These include (1) the direct costs of production (the “negative cost”), which includes all development and pro-
(^61) Id. (^62) Id. (^63) Maria Aspan, ‘X-Files’ Are Closed; A Lawsuit Opens , N.Y. T IMES (Jan. 23, 2006), http:// www.nytimes.com/2006/01/23/business/23carter.html?_r=0. (^64) Sisto, supra note 23, at 21. (^65) Id. (^66) Id.
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duction costs, including all gross participations, (2) the overhead charge, which is specified as 15 percent of the cost of production (including gross participations), and (3) interest expense. Para- mount subtracts from the revenues interest on the direct pro- duction and overhead at the rate of 125 percent of prime. While the interest is stated last, in fact it is recovered before any pro- duction costs are credited. That is, if any funds from gross reve- nues remain in an accounting period after paying of gross participations and the distribution-related expenses, those funds are first used to pay off the outstanding interest bill, and only after the interest is covered do they go to pay down the negative costs. Thus, the “net profit” is zero until the movie has recov- ered all the costs of distribution, the overhead and the direct negative cost, and interest charges on the negative costs and overhead. 67 The majority of profit participation lawsuits arise due to the lackluster definition of what constitutes “net profits.”^68 In effect, when profit participants remain subject to the studios’ conception of what “net profits” means, studios can make frivolous deductions from the gross proceeds.^69 “Such opaque profits definitions are used to manipulate and artificially depress participants’ reported “profits” while keeping the majority—if not all—of the profits for the studios.”^70 For instance, the contract of a producer of the tele- vision series Bones , who sued Fox Studios under a profit participa- tion claim, included the definition of “Modified Adjusted Gross Receipts,” which was forty-five pages long, the last eleven pages of which were glossary defined terms.^71 The general view is that when studios, networks, or production companies make such long and
(^67) Mark Weinstein, Profit Sharing Contracts in Hollywood: Evolution and Analysis , 27 J. LEGAL STUD. 67, 75 (1998). (^68) Marcus, supra note 4 (“Actors, producers, directors, and writers have criticized and de- rived the manner in which net profit is determined, claiming that the motion picture industry’s accounting system provides a profit participant little hope of ever recovering a share of a film’s net profit.”). (^69) Sisto, supra note 23, at 22. (^70) Complaint at ¶ 4, Wark Entm’t, Inc. v. Twentieth Century Fox Film Corp., No. BC602287, 2015 WL 7736879 (Cal. Super. Ct. Nov. 25, 2015). (^71) Id. ; Matthew Belloni, ‘Bones’ Producer Sues Fox for “Accounting Chicanery,” Claims Top Execs “Threatened” Him , HOLLYWOOD REP. (Nov. 25, 2015, 9:52 AM), http://www.hollywoodre- porter.com/thr-esq/bones-producer-sues-fox-accounting-843854. Bones executive producer Barry Josephson filed a bombshell lawsuit against the Fox network and the parent of studio 20th Century Fox Television, claiming he’s been shortchanged due to Fox’s “unrelenting efforts” to cheat him out of his share of prof- its from the longest-running hour long drama in Fox’s history. He also says he was “fraudulently threatened” by Rice and other executives into accepting a lower li- cense fees from Fox or else face immediate cancellation of the show.
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Additionally, filmmakers generally agree to either two types of participation agreements: gross proceeds participation or net proceeds participation, with each having their own accounting for- mulas.^79 Even when it would seem as though a studio has profited from a movie, the studio accountants may not attribute it a profit. For instance, if a film company or studio spent $25 million for pro- duction costs and another $25 million for distribution costs and the movie made $52 million, one would logically think that the profit of the film was $2 million. However, studio accountants might dis- agree because under accepted accounting standards, the studio’s large overhead expenses, such as salaries, office supplies, electric- ity, and other necessary expenses can be properly allocated to the film.^80 When these expenses are taken into account, they tend to reduce whatever profits the film made. Moreover, under prevail- ing law, an accountant has a lot of discretion as to whether a film has, for accounting purposes, become profitable. “Industry insid- ers joke that true creativity lies not with the talent, but with the accountants.”^81 Therefore, because large studios and talent have different definitions of what constitutes “net” or “gross” profits and different accounting practices, lawsuits persist.
E. The Accounting Process
A participant who has agreed to a contingent compensation agreement has the right to request an accounting from the studio based upon the express terms of the contract and on the notion of the implied covenant of good faith and fair dealing.^82 Without this, it would be nearly impossible for such a party entitled to profits to determine whether there were any profits at all.^83 Profit partici- pants, who enter into contingent compensation agreements with studios or film companies, catch these companies in the act of “Hollywood Accounting” practices through an audit.^84 Studios employ an army of accountants and contract administrators to “an- alyze contracts, profit definitions, and revenue streams.”^85 From
(^79) GREGORY BERNSTEIN, UNDERSTANDING THE BUSINESS OF ENTERTAINMENT: THE LEGAL AND BUSINESS ESSENTIALS ALL FILMMAKERS SHOULD KNOW 214 (2015). (^80) Id. (^81) Sisto, supra note 23, at 21. (^82) Nessim, supra note 12, at 434. (^83) Id. (^84) Complaint, supra note 70, at ¶ 5. (^85) Id.
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there, they generate accounting statements to the participants.^86 Conversely, profit participants typically will employ only a single accountant or business manager.^87 Further, the accounting state- ments issued by the studio will contain generic line entries for ex- penses and revenues, and they generally reveal little to nothing about how the studio is calculating the expenses and revenues of the film or television series.^88
Profit participants may also negotiate to have an outside ac- counting firm go to the studio or film company, with written notice and approval, to review necessary documents such as the studio’s books and records.^89 Studios will often make the auditing process as onerous as possible by imposing arduous terms that add to a participant’s financial burden.^90 For instance, often studios will im- pose a specified timeframe for participants to file audit report, and the participation statements are deemed incontestable and not an auditable unless they meet that timeframe.^91 However, between the time it takes for a participant to notice the audit and actually commence the audit usually spans a year or more. Moreover, the audit itself will usually take a year or more from the time it is com- menced to its conclusion, and that only depends on how accommo- dating the studio or film company is.^92 At the end of the accounting firm’s audit review, the firm provides the participant with an audit report detailing the findings.^93 The auditing of the studio’s books and records will typically range from $50,000 to well over $100,000, which demonstrates how much of a financial burden these claims can actually be.^94
After an audit report is finished, the participant must submit the report to the studio or film company as an official “objection” to the studio’s accounting methods and typically request to meet them to discuss the audit’s findings.^95 Without surprise, such meet- ings often take such a long time to transpire, so that, once they do take place, the studios or film companies will likely dispute the
(^86) Id. at ¶ 5. (^87) Id. (^88) Id. (^89) Id. at ¶ 6. (^90) Complaint, supra note 70, at ¶ 6. (^91) Id. (^92) Id. (^93) Id. (^94) Id. (^95) Id. at ¶ 7.
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matters such as the deal-making, production, and distribution of the film or television program, and information about covering the calculation of the participation (the revenue and deductions of a film or television show) created a fiduciary relationship between studio and participant.^105 Specifically, the fiduciary duties that par- ticipants hold studios accountable for are for proper accounting practices for revenues received and owing, and/or to maximize the total revenues for the participants.^106 Courts have determined that the existence of a fiduciary duty depends on whether one party has posited confidence and trust in another party and the latter party then exercises influence over the former by virtue of their relative positions.^107 This means that a fiduciary duty exists based on the extent of the relationships between both parties. The more reli- ance one party has on the other, the stronger the indication that a fiduciary duty exists.
In the past, studio executives were under the impression that they owed this type of fiduciary duty to profit participants.^108 This was only until two developments occurred, which made these types of fiduciary duty claims more difficult for participants.^109 The first development came from the decision of Wolf , which held that “fi- duciary obligations are not necessarily created when one party en- trusts valuable intellectual property to another for commercial development in exchange for the payment of compensation contin- gent on commercial success.”^110 The second development prima-
(^105) Nessim, supra note 12, at 431. (^106) Id. (^107) Id. ; see, e.g. , Lazin v. Pavilion Partners, No. 95-601, 1995 WL 614018, at *5 (E.D. Pa. Oct. 11, 1995) (holding that a reasonable fact-finder could conclude that plaintiff “reposed a special confidence” in defendant imposing a fiduciary duty on defendant to avoid exploiting that confi- dence); Giangrante v. QVC Network, Inc., No. 89-8535, 1990 WL 124944, at *2 (E.D. Pa. Aug. 23, 1990) (citing City of Harrisburg v. Bradford Trust Co., 621 F. Supp. 463, 473 (M.D. Pa. 1985)). (^108) Id. at 432. (^109) Id. (^110) Id. ; Wolf v. Superior Court (Disney), 107 Cal. App. 4th 25, 30–31 (2003). In this case the plaintiff was the author of the novel “Who Censored Roger Rabbit?” and Disney had entered into an agreement with the author to make a film based off the novel. Later, plaintiff brought a claim against Disney for breach of fiduciary duty for not providing him with owed profit partici- pation for gross receipts of the movie and merchandising. Plaintiff argued that that Disney was a fiduciary because Disney enjoyed “exclusive control over the books, records and information concerning the exploitation of the Roger Rabbit character and the revenue and Gross Receipts Royalties derived therefrom.” The court held that a factor of confidence and trust alone was not sufficient to create a fiduciary relationship between the parties. The court also rejected the plaintiff’s claim that a fiduciary duty existed because Disney had total control over the financial books and records of the franchise.
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rily stems from recent contracts that expressly disclaim any type of fiduciary duty owed to participants.^111 This is supported in Waverly Productions, Inc. v. RKO General, Inc. ,^112 where the Court of Ap- peal rejected the argument that a fiduciary relationship existed be- tween a film producer and a distributor, stating: “The distribution contract is an elaborate one which undertakes to define the respec- tive rights and duties of the parties.... A mere contract or a debt does not constitute a trust or create a fiduciary relationship.”^113 Formerly, participation contracts were typically silent on the nature of the relationship between studio and participant, but now con- tracts expressly disavow a fiduciary duty.^114 Thus, the fiduciary duty argument on behalf of participants against studios does not bode well for profit participation claims today.
III. DISCUSSION
A. The Litigation and Arbitration of Participation Disputes
Litigation involving profit participation claims occurs fre- quently and is commonly hard fought.^115 This is often so because a significant amount of money is usually at stake.^116 Additionally, studios feel it necessary to fight participation cases harder than some other cases dealing with the same amount of monetary value, in order to send a message to participants in general, that it will be financially costly and difficult to litigate with the studios.^117 There is an enormous shift to these types of cases being handled outside of the public courtroom nowadays.^118 This is due to the ever-in- creasing amount of mandatory arbitration clauses being incorpo- rated in studio contracts. Studios will also insist that their contracts with talent include a mandatory arbitration provision that requires arbitration to be held by the arbitration providers, such as JAMS
(^111) Nessim, supra note 12, at 431. (^112) Waverly Productions, Inc. v. RKO General, Inc., 217 Cal. App. 2d 721, 32 Cal. Rptr. 73 (1963). (^113) Recorded Picture Co. v. Nelson Entm’t, Inc., 53 Cal. App. 4th 350, 370, 61 Cal. Rptr. 2d 742, 754 (1997) (as modified on denial of reh’g) (Apr. 3, 1997). (^114) Nessim, supra note 12, at 432. (^115) Gardner, supra note 1, at 404. (^116) Id. (^117) Id. (^118) Ronald J. Nessim & Scott Goldman, Mandatory Arbitration Provisions Involving Talent and Studios and Proposed Areas for Improvement , 22 UCLA ENT. L. REV. 233 (2015).
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for wrongful termination against Warner Bros. and his former boss, producer Chuck Lorre.^129 Much of this lawsuit centered on whether the dispute should take place in private arbitration, rather than trial.^130 Sheen’s talent agreement included a mandatory arbi- tration clause.^131 Sheen wanted to void this provision and have this case to go to trial.^132 However, Los Angeles Superior Court Judge Alan Goodman ultimately decided to uphold the arbitration provi- sion in his agreement and the case was settled in binding arbitra- tion.^133 Goodman, in a twenty-one page ruling, came to the conclusion that Warner Bros. Television had a valid arbitration clause in Sheen’s contract, requiring him to handle the case through private arbitration rather than the public courtroom.^134 Even with high profile talent and cases such as this, it is difficult to avoid the arbitration clauses that studios lay out so carefully in their contracts.
Lawyers who represent talent have become increasingly con- cerned about “repeat provider/player bias” in talent versus major studio arbitrations.^135 In fact, many lawyers who represent talent are under the impression that the “choice of arbitrating versus liti- gating in a public courtroom is the single most important factor— perhaps even more important than the merits—in determining the outcome.”^136 This concern is heightened by bigger monetary value arbitration cases, because there is smaller perceived risk that an arbitrator will side with the major studio in the smaller monetary value arbitration cases.^137 It is understandable why talent would be skeptical of going to arbitration with participation claims, when there is a perceived bias towards the studios. It is even more cum- bersome for talent, when profit participation disputes involve an enormous sum and are being arbitrated in a forum where studios are likely to hold favor. However, there are ways in which both
(^129) The Associated Press, Charlie Sheen Settles ‘Two and a Half Men’ Lawsuit with Warner Bros., Producer Chuck Lorre , NY DAILY NEWS (Sept. 27, 2015, 11:03 AM), http://www.nydaily news.com/entertainment/tv/charlie-sheen-settles-men-lawsuit-warner-bros-producer-chuck- lorre-article-1.955565. (^130) Id. (^131) Id. (^132) Id. (^133) Anthony McCartney, Judge Sends Sheen’s ‘Men’ Lawsuit to Arbitration , CNS NEWS (June 16, 2011, 1:30 AM), http://www.cnsnews.com/news/article/judge-sends-sheens-men-lawsuit- arbitration. (^134) Id. (^135) Nessim & Goldman, supra note 118, at 235. (^136) Id. (^137) Id.
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parties can come to a happy median in solving these profit partici- pation disputes.
IV. PROPOSAL
A. Using Mediation to Resolve Participation Disputes
As an alternative to jury trials or arbitration, mediation is a proper mode of solving profit participation disputes.^138 Mediations can eliminate the “repeat player bias” that the studios purportedly receive by initiating mandatory arbitration clauses and choosing JAMS as their most selected forum.^139 Further, mediation also takes away the perceived bias that studios feel talent receives in jury trials out of sympathy from jurors or judges. Therefore, medi- ation serves well as an opportunity for equilibrium for both parties. Mediation includes benefits such as discarding matters clog- ging the court dockets and overcoming the impression that propos- ing mediation might be perceived as a sign of weakness by the opposing side.^140 Additionally, mediation is much more time and cost effective than arbitration^141 and litigation.^142 A large percent-
(^138) Diane Wayne & Joel M. Grossman, Resolving Profit Participation Disputes Presents Unique Challenges , L.A. DAILY J. (June 21, 2012), https://www.jamsadr.com/files/uploads/docu- ments/articles/grossman-wayne-profit-participation-2012-06-21.pdf. (^139) Nessim & Goldman, supra note 118, at 235. (^140) MENKEL –MEADOW ET AL., DISPUTE RESOLUTION: BEYOND THE ADVERSARIAL MODEL 405 (2005). (^141) Is Mediation a Better Choice than Arbitration? , N EIMAN MEDIATION , http://www.neiman mediation.com/is-mediation-a-better-choice-than-arbitration/ (last visited Jan. 22, 2016). Resolving a dispute through arbitration is less time-consuming than going to court, but mediation is a significantly faster alternative... People are attracted to arbitra- tion in part because they needn’t wait for a trial date or work around a court’s calen- dar. However, arbitration resembles a mini-trial, which can make it a slow grind. Parties wait while their attorneys compile evidence, engage in pre-hearing discovery, perform legal research, draft briefs and prepare the case. During the proceeding itself, both sides go through a long, drawn out process of trying to convince the arbi- trator to rule in their favor. Once the hearing is over, parties wait while the arbitra- tor considers the evidence and legal arguments before issuing a ruling. Parties have no ability to speed things along. When people use mediation, their conflicts are re- solved in a fraction of the time. It is not unusual for cases to be completely settled in a short session, lasting less than a day. The parties schedule their mediation for a convenient time and there is little waiting; the process isn’t bogged down by arbitra- tion protocols and presentations of evidence, and everyone is focused on settlement and works at a fast pace. All of this translates into a more efficient, streamlined process for resolving disputes... Resolving a dispute through arbitration is more economical than going to court, but mediation is a less-expensive alternative. Parties using arbitration are required to hire attorneys, who generally bill by the hour, and
