In December 2017, Rupert Murdoch surprised Hollywood by announcing the sale of most of 21st Century Fox to Disney. "A momentous opportunity," Murdoch said in the $ 71.3 billion transaction, as digital streamers upset the status quo in entertainment. Netflix and Amazon Prime could now be as important as TV broadcasting. Meanwhile, the studio's former vanguard has slowly embraced digital water – rubbing their feet with Hulu before planning the launch of Netflix's competitors such as Disney + and WarnerMedia. The coming era of vertically integrated companies that were delivering content directly to consumers online was not an option for Murdoch. And that may be for the best, given the astounding new decision of $ 179 million from an arbitrator.
The decision, made earlier this month but so far secret, concerns the series produced by Fox Bones, which starred David Boreanaz and Emily Deschanel and was part of the Fox Network between 2005 and 2017. But the 66-page decision of referee Peter Lichtman, which concludes that Fox executives have lied, cheated and committed a fraud at the expense of the stars of the show and executive producer Barry Josephson is a lot more. This award, worth nearly $ 200 million, is the television industry's second-largest story, following the 2011 jury verdict that sentenced Disney to $ 319 million in equity stake. profits for Who Wants to Be a Millionaire. This will not only give Murdoch's sale a new perspective in the Fox, but could also raise questions about the future viability of Hulu, as well as about any platform benefiting from what is so perniciously called the "Hollywood accounting". supported another mega fusion between AT & T and Time Warner, an example of vertical integration between a content distributor and a producer.
In his decision, Lichtman describes how some Fox executives, including Peter Rice, president of 21st Century Fox, and Dana Walden, CEO of Fox TV (soon Disney executives), as well as Gary Newman, president of Fox TV, "seem have made false testimonies in an attempt to conceal their unlawful acts. According to the decision, Fox has adopted a "cavalier attitude toward his wrongdoing" and presents a "corporate culture and an accepted climate that envelops aversion to the truth." "
Claiming the company a $ 128 million fine, five times the amount of the compensatory damages, Mr. Lichtman points out that the compensation is 0.6% of the net worth stipulated by 21st Century Fox.
He wonders if that's enough.
"In fact, one might wonder whether a ratio of five to one, given Fox's financial situation and his lack of contrition, serves to deter the unlawful conduct at issue here, or whether he will be considered part of of the cost of commercial transactions ", wrote the arbitrator.
"What we have exposed in this case will profoundly change the way Hollywood will do business for many years," said John Berlinski, who represented the players in the case.
Dale Kinsella, on behalf of Josephson, today filed a motion to confirm the arbitration award.
Fox disagrees vehemently with the decision. The company has now hired leading litigator Daniel Petrocelli, recently out of a victory to defend the AT & T / TW merger, with the goal of overthrowing it.
"The decision of this private arbitrator is categorically wrong on the merits and exceeds his powers of arbitration," reads a 21st Century Fox statement. "Fox will not let this flagrant injustice, fraught with mistakes and gratuitous attacks of character, defend itself and vigorously challenge the decision in court."
Genesis of the dispute
Back in 2015, those involved in obtaining Bones Josephson, Boreanaz, Deschanel, and Kathy Reichs (a forensic anthropologist who is the author of the Temperance Brennan novels that formed the basis of the series) have sued the California state court, claiming that they are not guilty of a crime. they had been scammed by Fox for their legitimate profit sharing. The complaints denounced Fox's "leading role in the well-documented history of accounting scandals in Hollywood", referring to earlier disputes over MASH POTATOES*, The X-Files, NYPD Blue and The cops, and challenged the "my heart" operation between Fox and Hulu's studio and network arm, in which Fox owned 30% of the capital. The procedural drama cost nearly half a billion dollars in its first seven seasons – Josephson even says that James Murdoch once told him that Bones was "perhaps the most profitable show in Fox's history" – but the series was calculated to be a loser of money. This meant that no profit could be shared with Josephson and others.
When the lawsuits were filed, immediate concerns were expressed by Bones fans that the series would be quickly canceled, but the show has survived two other seasons. At the same time, the executive producers and the main actors were forced to arbitrate the case and the case quickly faded.
But with other profits, we are fighting for long-standing, successful shows – among them AMC The dead who walk, Disney's Improvement of the habitat and Warner Bros. ' Supernatural – the dispute has raised a big question as to whether profits could be expected when one arm of a company enters into agreements with another arm. This is because the studio is responsible for selling the show in the open market and, after collecting that money and deducting the cost of production, sends checks to those who are entitled to a share of the profits. If the expenses exceed the revenues, the show is deficit. But that does not necessarily mean that the series does not bring in money, at least for someone else. The studio may not charge enough for the exhibition rights to be broadcast, whether they are broadcast online or on a television. Hawk streaming subscription platforms. Television networks sell advertising and receive additional revenues from cable and satellite television companies. This money does not go directly to the benefit of the participants. So, if a studio is in the same corporate structure as a streamer or broadcaster, a sneaky way for the parent company to profit from a show (to the detriment of executive producers and directors). stars) may be to underpay the license fees to its sister companies.
This is what the Bones For-profit participants allege that it was happening.
"An accomplice of fraud"
In arbitration, Fox tried to justify the low license fees that Fox Broadcasting, Hulu's and Fox's foreign affiliates were paying to its studio division for broadcasting rights to the series.
"Bones was a mediocre show with mediocre ratings, "Fox's lawyers wrote in an opening statement, adding that higher fees of $ 2 million per episode paid would have resulted in the cancellation of the show.
As Lichtman discovered during the refereeing, Fox's studio executives never really sought to know the fair market value of the series.
"We did not have the right to get this information from the network," said Walden, who at the time was managing the Fox studio, but not Fox Broadcasting, when asked if it was possible to know what the network was paying for similar shows in mid-season.
Given that the contracts of the participants benefiting from protection against the transactions by their own salesmen stipulated that "the contracts must be as good as the markets", the arbitrator concluded that Walden's lack of knowledge was "shocking if true, or hypocritical so false," adding, "Interestingly, Mrs. Walden and Mr. Newman both stated that they had engaged in difficult negotiations and fought for the [Profit] Participants However, the evidence contradicts these claims. How could they fight if they were not properly armed with the required information? What negotiations did he have if the information requested by the contract was not examined, requested or even investigated? "
During arbitration, both parties threw out comparable data sets for Bones. Fox tried Fringe, the J.J. The series produced by Abrams was more appreciated than watched during its broadcast between 2008 and 2013, while Josephson's team fired for House M.D., one of the top-rated shows of this century. The referee finally agreed House At this point, the arbitrator stated that the studio directors had never even tried to lobby for information and arguments when negotiating license fees with their sister company.
"There is no doubt that the studio realized that it was not going to win the fight with its affiliate and that, therefore, it was not only giving in to the wishes of the network, but was also complicit in fraud regarding the desire of the network to limit both the working conditions of the studio. and the Network's exposure for its violation and its inability to negotiate in accordance with contractual standards in force ", continues the decision of the arbitrator. "A breach occurred, was known to have been attempted and was tempted to be the subject of a hard copy."
This enters the next area of fraud that Fox has been convicted of.
During the show, BonesFor-profit participants were continually closed in an attempt to claim more money. Josephson and Reichs have signed releases preventing them from challenging the license fees for Fox's fifth and sixth seasons, unless everyone signs these releases, Bones would be canceled. However, according to Rice, Fox had already contracted to keep the show live and knew that Boreanaz and Deschanel would never sign such a release. Nevertheless, Fox kept the impression that the stars would sign, even going so far as to include blank signature spaces for the actors in the communiqués sent to the producers.
Moreover, at the same time, Bones Showrunner Hart Hanson also signed a statement, which in itself would not be a problem, except that, unbeknownst to others at the time and contrary to Fox's statements at the time, he was signing a new, rich agreement to continue. the series. Hanson was represented by lawyer Jeanne Newman, wife of Gary Newman, then co-chair of Fox TV.
Why the charade?
Lichtman writes: "The answer is obvious: the show would not be canceled and there was never any intention to do it. The intention was to continue the series and at the same time prevent any lawsuit. "
As such, the arbitrator states that Josephson's and Reich's releases are void.
The simple threat of BonesCancellation is deemed to be part of the overall fraud. Peter Liguori, then president of Fox Entertainment, sent a note in 2009 to Fox Broadcasting President Peter Chernin, in which she described a "court action plan" to avoid paying license fees covering the entire the cost of producing emissions.
Shortly after sending this plan, Liguori would leave Fox to become the CEO of Tribune Media, before retiring in 2017. The decision reveals something new and surprising: after his move to Tribune and in the heat of this arbitration, Liguori signed a "Look Agreement" with FX, which provided him with a possible remuneration much higher than that of the principal executive producers in Hollywood. According to IMDb, Liguori's only credit is a 1996 film, Grand night. Nevertheless, and without any publicity, that he has now reached an agreement with FX, he apparently earns profit points surpassing the biggest players in the industry.
"Why and how did this happen?" asks the referee. "FX apparently has not issued any press release stating its agreement with Liguori." Given its context, Liguori's "lawsuit plan" is far from trivial. it juxtaposes the agreement at first sight of Mr. Liguori's testimony at the hearing (where he downplayed the importance of the plan itself), it seems by chance that Mr. Liguori disappeared for nine years (from Fox's radar) then magically reappear with a First Look deal seven months before his appearance in this proceeding with an agreement in hand that most producers in Hollywood have strived to have their entire career in the entertainment. "
In other words: did Fox buy a key cookie?
But it just ends there. The problems go beyond, far beyond what Fox (the network) was paying Fox (the studio) to get the broadcast rights of the series and the company's efforts to do so without legal consequence.
The Hulu scam
It may be argued that the most important aspect of the arbitrator's decision concerns Hulu, the video-on-demand service co-owned by Fox, Disney, Comcast and other studios. In his decision, Lichtman addresses the digital rights granted to Hulu.
As early as 2010, TV creators suspected being cheated by the exploitation of their programs on Hulu. For example, at a conference that year, Modern family Co-creator Steve Levitan was asked when he saw some 2 million television viewers watching the show every week on Hulu. His answer: "Nobody cries for us, but not yet, it's very confusing because we can not get answers, it's not me who says [networks and studios] deceive us or rob us. But I question the ultimate wisdom [of having the show on Hulu]. "
With the success of platforms such as Netflix and Amazon Prime, there is now a healthy market for old and new TV shows. Nevertheless, Hulu persists and its content is broadcast recently.
So in this context, the referee finds it almost inexplicable that the Fox studio producing Bones authorized its parent company to exploit the streaming rights and license these rights to Hulu with little in return. Lichtman believes that it is a blatant violation of Fox's obligation to distribute the series in good faith.
A Fox executive said he thought he understood Fox Broadcasting had "overlay rights" throughout the season to Bones – meaning that he could distribute all episodes of the current season to the show at any given time. If this is the case, Fox Broadcasting could transfer these rights to Hulu. But the arbitrator declared that the testimony of this executive had been "attacked" by others. In addition, the referee reports how the studio was selling previous seasons of Bones Netflix as further evidence that some digital rights have been reserved.
From 2008 to 2010, Fox Broadcasting began licensing the first season of Bones in Hulu. In return, what is described as a "share of speculative advertising revenue". The witnesses could not identify a precedent where a studio had granted rights based on future advertising revenue, and a Fox executive said that in negotiations with Hulu, obtaining episodic license fees fixed, or any minimum guarantee, has not appeared.
In his decision, Lichtman then addresses what he considers to be "perhaps the most shocking piece of evidence related to Hulu's problems … Fox signed both sides of this deal. Mr. Dan Fawcett signed the Fox Content License Agreement on behalf of the FEG. [Fox Entertainment Group] and Hulu. "
Fox had to defend himself on both sides of the same transaction.
Chernin, former director of Fox Broadcasting and now one of Hollywood's most powerful producers, was asked about how this was possible. He replied, "I have no idea."
The arbitrator concludes: "The obvious inferences of transactions between oneself, conflicts of interest and the absence of any arm's length bargaining make a leap forward."
Shortly thereafter, Lichtman adds: "It is indisputable that the Fox conglomerate had a capital stake in Hulu, and the evidence showed that" Fox Written Large "had essentially surrendered the digital rights at a low cost to create value for this company. "
The advertising revenue of the studio amounted to less than $ 1 million. Yet the Fox Network has generated more than $ 70 million in revenue for the current season.
It is very unlikely that Bones was the only television series given to Hulu with what the umpire calls the fish economy. The decision equates to the opening of a Pandora's box for lawyers in the entertainment sector. It also fears that content licenses will suddenly become much more expensive for Hulu if other for-profit participants in Hollywood pose their own problems.
The monetary price
Despite Fox's protests over the years and at an arbitration, paying more for Bones the arbitrator concluded that there was no evidence that the broadcaster ever canceled a top 20 success like this, Bones Lichtman notes that Fox's parent company was making significant profits: "If Fox had fulfilled its contractual obligations, it would have sought to [Universal-produced] House comparable program, negotiated equitably and paid the license fees accordingly ".
He notes that nearly $ 114 million would have been added to the gross receipts of Bones for its operation on the network television, which would have generated about 15,5 million dollars of profits for the executive producers and the stars. About $ 7 million in damages is then added for the sale of the series in the United Kingdom, Italy and Spain.
But that's all that is comparable to the huge reward given to Fox, giving Hulu the rights to Bones.
The arbitrator conducts expert analysis – for example, based on comparable criteria of what CAS has achieved for Elementary, Blue blood and CSIhe concludes that Bones should have now collected an episodic fee of $ 685,000 on Hulu – and in the end he would get $ 10.1 million in real damages.
Then there is punitive damage for the Hulu scheme.
False promises, fraudulently induced releases, the cavalier attitude of Fox executives and even a hint of perjury in this case "warrant a finding of blameworthiness," writes Lichtman before responding to Fox's claim that which the high number of compensatory damages and the wealth of the stars involved do not guarantee any punitive damage. "It is bold and frankly surprising to suggest that respondents should be grateful for what they have received instead of focusing on what has been cheated and deceived."
Finally, he comes to judgment that will remain in the annals of Hollywood history.
He writes: "In light of Fox's financial situation, a punitive award of $ 128,455,730 is reasonable and necessary to punish Fox for his reprehensible behavior and to deter him from further unlawful conduct."
By adding actual damages, prejudgment interest, attorney fees and fees, as well as referee fees, the total amount of the benefit amounts to 178,695,778, $ 90.
On Wednesday, lawyers representing executive producers and stars – including Dale Kinsella, Chad Fitzgerald and Aaron Liskin at Kinsella Weitzman, and John Berlinski, Daniel Saunders and Candace Frazier at Kasowitz Benson Torres – went to the Los Angeles Superior Court with a request for confirmation. the reward.
"It's a tremendous victory for the Bones The for-profit attendees who created and played in the oldest drama series broadcast on the Fox network, "said Kinsella. Fox's fraudulent behavior against the creators and stars of the series, perpetrated for many years, was finally revealed, and Fox was held responsible for his actions. "
He adds, "This award, which exposes Fox's crimes and the wrongs he causes against profit-making participants, is a victory for not only the Bones for-profit participants, but for all the creative talents of the television industry. "
Fox's game – refereed by Munger, Tolles & Olson, but now headed by Petrocelli of O & # 39; Melveny – seeks an explanation of the punitive aspect of the award in his own motion. In other words, Fox does not intend to dispute the $ 50.2 million compensation, but only $ 128.5 million.
Reversing an arbitration decision is a difficult chore, something that has only been accomplished infrequently. Usually, the narrow motives for doing so require a flawed process, a clear disregard for the law, an arbitration that goes beyond the scope of authority, or an obvious bias or misconduct on the part of an arbitrator. (Lichtman is a former judge of the Atlanta Superior Court and, during his 35 years of experience, has overseen the mandatory court settlement program, which has resulted in notable resolutions including with regard to clergy abuse.)
Fox focuses on the scope of the arbitrator's powers, asserting that the Hulu issue was out of reach and attacking the award of punitive damages.
As the next step of the Bones happens, the industry will have to deal with the fallout from this arbitration decision and what constitutes an undeniable warning to others. This includes Comcast, which can strengthen its position in Hulu's business now that the terms of its merger with NBCUniversal in 2011 have expired. That includes AT & T, which can finalize its acquisition of Time Warner after the Department of Justice tried unsuccessfully to block the $ 85 billion antitrust contract. (In this important case, the government has focused on the potential damage caused by the merger to consumers, virtually ignoring the possibility that future internal transactions would hurt creative professionals.) This includes AMC, which produces and distributes at a time The dead who walk and is now facing a lawsuit the next year with a claim of $ 280 million in damages for allegedly cheating for-profit participants who say they have clauses in their contracts to protect themselves unfair bargaining of affiliates.
Finally, Disney, owner of ABC, owner of a future competitor of Netflix in streaming, and soon owner of Fox's studio assets, will add to its formidable store of content already produced. In fact, last October, Disney announced that many Fox veterans, including Rice, Walden, and FX CEO John Landgraf, have both been on the list. Bones arbitration – would direct television production for the merged company.
"The strength of 21st century Fox's first-class management talent has always been a defining element of this opportunity for us," said Disney General Manager Bob Iger at the announcement of the event. commitment from Rice, Walden and Landgraf. "As a result of the acquisition, this new structure positions these recognized leaders to take full advantage of a significantly enhanced portfolio of incredible brands and activities."