Landmark “Self-Dealing” Arbitration Found Netflix In “Violation” Of WGA Contracts

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The landmark “self-dealing” arbitration between the WGA and Netflix, which awarded more than $450,000 in underpaid residuals to Bird Box screenwriter Eric Heisserer, took place over seven days and featured multiple witnesses and dozens of voluminous exhibits, according to the arbitrator’s ruling, which has been obtained by Deadline.

The guild, which won the arbitration, says that “as a direct result of this ruling, 216 writers on 139 other Netflix theatrical films are receiving an additional $42 million in unpaid residuals.” The guild says that it’s now pursuing “approximately $13.5 million in interest Netflix also owes writers for late payment of these residuals.”

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In his 34-page ruling in the Bird Box case, impartial arbitrator Kenneth A. Perea found Netflix to be in “violation” of the WGA’s contract, because Netflix had used the wrong formula in determining residuals owed to Heisserer. The guild says that’s the same “improper” formula that Netflix has applied to the other 139 “self-produced” films that were produced by Storybuilders LLC – the streaming giant’s affiliated production arm – and distributed exclusively on the Netflix platform.

See the arbitrator’s findings and award here.

At issue was whether Netflix had given itself better terms on Bird Box’s writer residuals – and by extension, for its other “self-produced” feature films – than the arms-length deals it made with producers of outside theatrical films that were licensed and marketed as “Netflix Originals” for “first-window” exhibition on its platform. Bird Box, which starred Sandra Bullock as a mother protecting her children from unseen forces, had a limited seven-day release in 18 theaters before transitioning to the Netflix site in December 2018.

But instead of relying on the WGA’s own contract provision, Perea found that Netflix had used SAG-AFTRA’s contract with Netflix – to which the WGA is not a party – as the basis for determining Heisserer’s residuals. According to the WGA, Netflix applied SAG-AFTRA’s formula to the 139 other films as well.

The dispute centered on the “imputed” licensing fee – on which residuals are based – that Netflix pays itself for its “self-produced” films. Under the WGA’s contract, the typical residual for the credited writer is 1.2% of the license fee paid to the producer for the right to exhibit that film.

The WGA told its members last week that under its contract, Netflix must pay residuals on its “self-produced” films based on the licensing fees it pays to comparable theatrical films from third party producers – which it says “almost always” exceed the films’ budgets, in what’s known as a “cost-plus” model.

Bird Box was budgeted at approximately $71 million. But the WGA West, as part of its own investigation, said that it found that Netflix, over the past 10 years, has been paying residuals on all self-produced “Netflix Original” theatrical motion pictures, including Bird Box, “based on a flat $6 million, across-the-board, imputed license fee, regardless of a theatrical motion picture’s actual production cost.”

Netflix, however, said that the imputed license fee that it eventually arrived at in calculating the writer’s residuals for Bird Box was for a budget that exceeded $54 million – a figure that the WGA says Netflix reached only after the guild had filed its complaint and the arbitration hearings had already begun last year.

Netflix also acknowledged that it had been paying writers’ residuals based on the sliding licensing fee scale contained in SAG-AFTRA’s deal with Netflix, in which actors share 3.6% of the licensing fee in the form of residuals. Arbitrator Perea noted that for Netflix’ self-produced features, the SAG-AFTRA agreement with Netflix provides for:

• An imputed license fee consisting of 100% of the production budget up to $30 million and a declining percentage of the production budget above $30 million thereafter.
• Residuals calculated based on 90% of the imputed license fee figure with 10% allocated to the residuals-free theatrical release for the first $30 million of imputed license fee.
• Additional $10 million increments of the imputed license fee subject to theatrical allocations smaller than 10%.
• Residuals payment covering all exhibition on Netflix for 20 years.

In his conclusions, however, Perea wrote that such terms are “clearly absent” from the WGA’s 2017 Minimum Basic Agreement (MBA) “and are furthermore not reflected in an industry-wide practice.” And the WGA’s contract, he wrote, provides him with “no power or jurisdiction to reform, amend or extend the express terms and provisions” of the WGA’s MBA, and that to “apply the substance” of the terms of the SAG-AFTRA deal with Netflix to the WGA “would effectively require” him “to amend the parties’ 2017 MBA in clear violation of its expressed terms.”

Based on that, Perea concluded that the SAG-AFTRA deal with Netflix “is not controlling” in determining residuals under the WGA’s contract, and that Heisserer should receive his 1.2% share of the film’s imputed $78,644,740 imputed licensing fee – a figure he arrived at by multiplying the film’s actual budget by 1.11%, which was the percentage he arrived at by computing the average licensing fee that Netflix paid to 43 “comparable pictures” that were marketed by Netflix as “Netflix Originals” and were licensed by Netflix in arm’s length transactions with producers and released globally within a similar time period as Bird Box.

SAG-AFTRA’s national board, meanwhile, voted overwhelmingly on Monday to approve a new contract with Netflix, which will now go to the union’s members for ratification. In that deal, Netflix and SAG-AFTRA agreed that the company will join the multi-employer bargaining unit represented by the Alliance of Motion Picture & Television Producers, and that future agreements with Netflix will be conducted concurrently with AMPTP negotiations. “Certain issues are covered by industry-wide agreements with the AMPTP and will be addressed in upcoming negotiations, including wage rate (scale) increases and the streaming residuals structure, among others,” the guild said.

Summarizing the WGA West’s contentions, Perea wrote:

“Despite the unequivocal language in the (WGA’s) 2017 Minimum Basic Agreement requiring Netflix to impute a license fee for Bird Box based on its ‘payments in arm’s length transactions for comparable pictures,’ Netflix’s main witness and former in-house labor counsel conceded at arbitration that ‘Netflix has not argued that we should look at comparable pictures’ in imputing a license fee for Bird Box. Yet, that is expressly what the 2017 MBA instructs Netflix to do.

“Instead, like the principal characters in Bird Box, who must blindfold themselves to escape from seeing an unpleasant reality, Netflix disregarded its 2017 MBA obligations and wove a residuals formula out of whole cloth. Using an arbitrary ‘one size fits all’ approach for all its self-produced theatrical content, Netflix initially imputed the license fee for Bird Box at only $6 million for purposes of calculating residuals and altogether ignored the 2017 MBA requirement of allocating the license fee across reuse markets in a ‘fair and reasonable manner.’ Bird Box’s budget was approximately $71 million, so the imputed license fee for Netflix’s valuable exclusive global reuse rights in the film was capped at just 9% of its budget, as if Bird Box was a total failure and financial loss, rather than the global sensation it is.

“Realizing it could not mount a good faith argument that its ‘one size fits all’ residuals formula complied with the 2017 MBA, Netflix decided to revalue the license fee for Bird Box in the middle of the arbitration proceedings. Netflix now argues that the license fee for Bird Box should be set at the film’s net budget, and that it should be permitted to allocate 21% of the ‘net budget’ imputed license fee to the theatrical market where no residuals are due, and only pay residuals on 79% of the film’s net budget, consistent with its special deal with SAG-AFTRA. Netflix’s own witnesses, however, admit the Netflix/SAG-AFTRA Special Deal is not binding on WGAW; is not being used industry-wide; and is not based on comparable pictures. Most importantly, the Netflix/SAG-AFTRA Special Deal is out-of-line with budget-to-license-fee ratios Netflix typically pays for comparable pictures in arm’s length transactions.

“WGAW examined the budgets and license fees Netflix paid for all ‘Netflix Original’ theatrical motion pictures in which Netflix licensed and/or acquired global distribution rights – or distribution rights in most of the world – from unrelated and unaffiliated third parties in arm’s length transactions like the rights Netflix has in Bird Box. As WGAW’s Exhibit 33C shows, it is unequivocal that when Netflix licenses global distribution rights in theatrical motion picture content, Netflix consistently pays a license fee which exceeds the feature film’s budget. Out of 41 comparable pictures with a known budget in which Netflix licensed global exploitation rights in arm’s length transactions, on average Netflix paid a license fee that was 132% of the films’ gross budget or 143% of its net budget.”

Summarizing Netflix’s contentions, the arbitrator noted that Netflix had taken umbrage to the WGA’s allegation that Netflix had been engaged in “self-dealing” – a term the arbitrator did not use, other than to describe the WGA’s own view of the case.

He wrote that Netflix maintained:

“WGAW’s counsel and witnesses in this case frequently referred to Netflix’s calculation of imputed license fees for self-produced motion pictures as a form of ‘self-dealing.’ This pejorative phrase appears nowhere in the 2017 MBA and misleadingly implies Netflix has acted wrongfully, as in a breach of fiduciary duty owed to a legal beneficiary.

“This insinuation is prejudicial and completely unwarranted. The parties collectively bargained about the valuation of license fees produced and exhibited by affiliated entities. Companies are instructed by the 2017 MBA to objectively calculate an imputed license fee for self-produced motion pictures by reference to their payment of license fees to third parties for the new media exhibition of comparable motion pictures. That is exactly what Netflix did in this case and this provides a compelling reason to deny WGAW’s at issue grievance.”

That argument, however, didn’t prevail, nor did many of Netflix’s other contentions, which the arbitrator summarized as follows:

“The underlying issue in dispute is readily understood and not subject to the myriad tangents WGAW tried to incorporate into these proceedings. The question is simply stated as follows: what is the imputed license fee for the exhibition of the motion picture Bird Box on the Netflix streaming platform? And the answer to that question is governed by the express language of the 2017 MBA New Media Sideletter, which states: ‘When the “accountable receipts” derived from new media exploitation are received from a related or affiliated entity that acts as the exhibitor/retailer of Such Picture, then the accountable receipts received by the Company from the licensing of such rights shall be measured by the exhibitor/retailer’s payments to unrelated and unaffiliated entities in arm’s length transactions for comparable pictures or, if none, the amounts received by the Company from unrelated and unaffiliated exhibitors/retailers in arm’s length transactions for comparable pictures, or, if none, a comparable exhibitor/retailer’s payments to comparable unrelated and unaffiliated entities in arm’s length transactions for comparable pictures.’

“In this case, the motion picture Bird Box was both produced and exhibited by Netflix-affiliated companies. Hence, the producer and the exhibitor in this case are ‘affiliated entities’ and the exhibitor did not pay a specific arm’s length license fee to the producer for the right to exhibit the motion picture in new media. In order to ascertain the imputed license fee for the new media exhibition of the motion picture Bird Box, the 2017 MBA New Media Sideletter instructs the parties to examine how much money the exhibitor/retailer (here, Netflix) paid to unrelated and unaffiliated entities in arm’s length transactions for comparable pictures.

“In this case, Netflix showed that it calculated Bird Box’s imputed license fee according to the same formula it negotiated with SAG-AFTRA for ‘affiliated entity’ motion pictures. In other words, as the producer of Bird Box, Netflix paid residuals to Screenwriter Heisserer according to the same imputed license formula pursuant to which it paid SAG-AFTRA represented actors and other Guild talent. Pursuant to that negotiated formula, the imputed license fee for Bird Box was $54,372,407.

“Netflix acted more than reasonably in calculating Bird Box’s imputed license fee at this level. The Netflix/SAG-AFTRA Memorandum of Agreement addresses the exact same issue of calculating an imputed license fee that Netflix and WGAW contest in this case. Most significantly, the underlying SAG-AFTRA and WGAW New Media Agreements contain the same definition of imputed license fees. When Netflix and SAG-AFTRA negotiated an overall formula for imputed license fees, they agreed that imputed license fees for Netflix-produced motion pictures would consist of 100% of the net production budget until the production budget exceeded $30 million. At that threshold, any portion of the production budget that exceeded $30 million would not count 100% toward the imputed license fee, but would instead step down in specified increments.

“Like an arm’s length deal between a third-party producer and Netflix, the Netflix/SAG-AFTRA Memorandum of Agreement has the objective hallmarks of a fully and fairly negotiated deal. And most significantly for our purposes, it is a deal that objectively reflects the ‘exhibitor/retailer’s payments to unrelated and unaffiliated entities in arm’s length transactions for comparable pictures.”

“Specifically, Dr. Paul White (‘Dr. White’) testified in detail that the weighted average of license fees as a percentage of production budget paid by Netflix to license third-party productions for exhibition on the New Media platform decreased as the production budget increased. In only one case — years after Bird Box was produced — did a motion picture with a production budget in excess of $30 million receive a license fee that was at least 130% of the production budget, which is the extreme result advocated by WGAW in this case. To the contrary, Netflix typically paid third-party license fees for such high-budget productions that roughly matched the Netflix/ SAG-AFTRA Memorandum of Agreement formula.

“In this case, WGAW appears to claim that Bird Box turned out to be very valuable to Netflix and accordingly the imputed license fee should be calculated at a higher rate than the other high-budget motion pictures Netflix licensed from third parties. For this reason, WGAW sought to introduce exhibits that commented on the overall popularity of Bird Box and the alleged contribution of Bird Box to Netflix’s bottom line. This, however, is an improper method of calculation that has no support in the 2017 MBA and would lead to untold practical mischief if placed into practice.

“Specifically, the 2017 MBA New Media Sideletter does not instruct the parties to determine how much ‘value’ the exhibitor derived from the motion picture with the benefit of hindsight. Hence, the 2017 MBA New Media Sideletter does not suggest that motion pictures which turn out to be successful over the long run result in larger imputed license fees than motion pictures that turn out to be less successful. Rather, as WGAW’s own residuals experts testified, the imputed license fee is determined at the time of initial release of the motion picture to theatres, not months or years later: (‘Q. In the case of Bird Box, when would the imputed licensing become part of the producer’s gross? A. On the date of the release to theatrical market.’); (‘Q. At what point in time would the license for Bird Box be imputed . . .? A. As I understand it, the Guild’s [WGAW’s] practice is to impute the license fee at the release date, and so that’s when, you know, the costs are known, so presumably the imputed license fee is known.’) At this point of initial release to theatres, without the benefit of hindsight and at least one week before the motion picture has even appeared on the Netflix platform, it is impossible to know whether the motion picture will be an SVOD ‘success,’ according to whatever unspecified criteria WGAW may posit.

“Moreover, any system that imputes a higher license fee for ‘successful’ motion pictures and a lower license fee for ‘unsuccessful’ ones will have one highly undesirable practical result: every self-produced motion picture could result in a Bird Box-type arbitration with multiple days of hearing, dueling expert witnesses and voluminous briefs from Company and WGAW counsel. Every screenwriter would insist on a higher imputed license fee if his or her motion picture was ‘successful’ according to one criterion or another. And every employer would insist on a lower imputed residual if the motion picture turned out to be less ‘successful.’ This would be an impossible system to administer and invite countless disputes between the parties Indeed, such an arguable system would run contrary to the residuals system set forth in the MBA, which requires reporting ‘accountable receipts’ at the end of the applicable quarter.

“By contrast, the system under which Netflix in this case calculated and paid the residuals for Bird Box treats all comparable motion pictures according to the same standards. It accurately reflects the license fees Netflix actually pays to third-party producers for motion pictures with comparable budgets. The company has implemented a fair and practical method of determining imputed license fees for self-produced motion pictures.”

The arbitrator, however, did not agree and awarded Heisserer an additional $457,882 in residuals above the $391,481 in residuals he’d already received – plus interest at 1.5% per month. And that decision, the WGA says, will generate an additional $42 million – plus interest – for 216 writers on 139 other Netflix original films, and untold millions of dollars going forward.

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