Studios keep tight grip on talent pay

Highly desirable producers, directors, writers and actors can often negotiate for back-end profit participation on entertainment projects. They get either a share in the gross or net receipts of a project, or a lump sum payment when film receipts reach a pre-negotiated level. Deals based on gross revenues - traditionally reserved for highly desirable talent - are increasingly uncommon. Most profit participants receive adjusted gross or net receipts, which include many deductions. Estimates suggest, however, that less than 5 percent of productions "earn out" and go into profits - i.e., earn enough for such "contingent compensation" to kick in.

The fact is, major studios wield enormous power in these contract negotiations. And for those fortunate enough to obtain contingent compensation, the studios have created serious impediments to hinder profit participants from being paid for the fruits of their labor.

The Problems

While contingent compensation contracts often include accounting and audit provisions, the studios make auditing very difficult. Studios always require forensic auditors to sign confidentiality agreements. The studios claim they do this because the business is competitive, but some believe it is to ensure others will not discover any unfair practices. Indeed, when "errors" are discovered or adjustments are made, studios rarely make corrections retroactively or going forward, and surely not for other profit participants on the same film. Confidentiality allows this to happen. An auditor may represent two clients on the same property, but cannot tell either what he has learned from each respective audit.

Studios have a reputation for refusing to provide documents to auditors. Contracts often restrict access to audit records for an incontestable period and incorporate artificial statutes of limitations to make objections and file litigation. One studio even has a policy of refusing to provide talent with copies of their own contract where the talent has lost the original. Contracts also may contain clauses waiving punitive damages or injunctive relief. While these limitations are often upheld, some courts have found these provisions unenforceable if held to be unreasonable.

Sometimes, studios prevent auditors from doing more than one audit at the same time or from working on a contingency basis. And some agreements require the auditor to be approved by the studio, which usually means the auditor must work for a "nationally recognized firm." But there are only four major profit participation auditing companies, all based in Los Angeles. Why shouldn't one be able to pick one's forensic accountant, just as one should be able to pick any other professional, like a lawyer?

Auditors complain that studios understaff the audit departments so audits can take several years just to be scheduled and even longer to settle. Most audits settle because still working talent is afraid of being blackballed. Aging talent and heirs of talent are not so intimidated, except by the cost. It is not uncommon for audits to cost talent tens of thousands of dollars, and talent-imposed attempts to limit the costs can expose talent to risks associated with failing to conduct a diligent audit.

Perhaps the biggest issue facing talent is mandatory arbitration. Contacts frequently require disputes to be heard in a confidential, binding arbitration before one provider (JAMS), preventing the establishment of precedent or publication of unfavorable information about the studios. These arbitration agreements are invariably non-negotiable.

A recent law review article by Ronald Nessim and Scott Goldman of Bird, Marella, Boxer, Wolpert, Nessim, Drooks, Lincenberg & Rhow PC in Los Angeles, "Mandatory Arbitration Provisions Involving Talent and Studios and Proposed Areas for Improvement" (22 UCLA Ent. L. Rev. 223 (2015)), suggests there is at least a perception of repeat player/provider bias in requiring mandatory arbitration before one provider. The article points out there are merely 14 entertainment arbitrators working for JAMS in Los Angeles and six studios that employ them. In 26 contracts the authors reviewed from the six studios, 22 mandated arbitration and 21 required JAMS. Rule once for serious damages against studios, so the argument goes, and that arbitrator won't adjudicate another case.

JAMS refused to provide Nessim and Goldman with any information about arbitrations of talent-versus-studio disputes. Thus, they could not ascertain how frequently a particular studio is involved in a dispute, the nature of the claims, how often studios won, and what if any monetary damages were awarded. The article notes other worrisome issues, including how neutrals are selected and that many of the neutrals have an ownership interest in JAMS and thus an economic incentive to keep studios satisfied.

Add to the forgoing the cost of arbitration itself. If a small amount is owed, talent is easily priced out of the market on a risk/reward basis given the administrative costs and the hourly fees charged by arbitrators - often up to $900 per hour. There is no realistic way to challenge the fees of arbitrators either. Few qualified contingency fee attorneys will take such cases, and studios habitually do not provide attorney fees clauses in their agreements.

Additionally, discovery is usually limited in arbitrations, sometimes with only one deposition per side permitted. This disfavors talent, who may need to depose several witnesses from the studio to create a clear picture of events.

What to do?

In light of what is at least a perceived bias, ADR providers should promote greater transparency than the minimum legal requirements. To begin, neutrals should be selected randomly, and not just from JAMS, to ensure a large enough pool of arbitrators who are less likely to be subject to repeat player bias.

Nessim and Goldman, the authors of the law review article, say the California consumer arbitration rules, which require increased disclosures by the providers and all arbitrators affiliated with them, should apply. Providers should be required to furnish information about how neutrals are selected, whether neutrals have heard disputes involving the studios, and how often neutrals have ruled in favor of studios.

Without greater transparency, talent selecting a neutral for arbitration has little idea how the neutral has ruled in prior cases, or of any history of rulings in profit participation cases. The arbitration tribunal should be required to disclose information regarding all prior talent-versus-studio cases. Talent-side counsel should maintain a database to share information about arbitrations and arbitrators. Confidentiality requirement would have to be navigated as to what information could be disclosed, but a good start would be to identify the participants.

The inadequate training of the arbitrators, the "repeat player" effect, the restrictive discovery limitations, the refusal to make full disclosure by the provider and the arbitrator, and the confidentiality requirements, collectively mandate a courtroom proceeding. One route to get there is to challenge arbitration agreements as procedurally unconscionable due to their non-negotiable nature, though recent state and federal Supreme Court decisions may foreclose this option.

Finally, although the traditional rule is that a court determines the enforceability of an arbitration agreement, today most agreements include a delegation clause that expressly ensures any disputes over the formation, existence, validity, interpretation or scope of the agreement will be decided by the arbitral institution. While several California courts have held such clauses create an inherent conflict of interest, case law suggests courts can only get involved when a party challenges the enforceability of the delegation clause itself and not the entire agreement.

For now, profit participants are unfortunately forced to play by the studios' rules in a one-sided game. We hope the system will soon change for the better.