The Walking Dead Lawsuit: Vertical Integration is Still Alive in the Entertainment Industry

Another vertical integration lawsuit has risen to life. Frank Darabont, the writer-director-producer of the most watched show on all of television, The Walking Dead, is in court, facing off against American Movie Classics (AMC), the network that broadcasts the hit zombie apocalypse show. The Walking Dead lawsuit is the latest in a long line  of “vertical integration” cases in Hollywood that arise when a TV show broadcaster also produces the show via an affiliated entity. The broadcaster pays a license fee to the production studio, which is then shared with talent. The license fees are supposed to be negotiated between broadcasters and producers to reflect the fair market value of a given series.

United States v. Paramount Pictures, Inc. is often considered the landmark case for vertical integration, though in the context of anti-trust issues. The case decided that vertical integration of producing and distributing is not per se illegal, but rather depends (in part) on the purpose or intent with which it was conceived. As another more recent example, the producers of the hit series Smallville filed a claim against Warner Brothers (WB), alleging lost profits due to manipulated license fees. The producers alleged that artificial manipulation of license fees between vertically-integrated companies minimized or eliminated payments owed to talent. The WB eventually settled for more than $100 million, but Smallville was coincidentally canceled one year later.

Here, Darabont and Creative Artists Agency’s December 2013 lawsuit alleges a similar claim: that AMC negotiated its licensing agreements in bad faith and engaged in “self-dealing,” allegedly paying a low licensing rate to the AMC affiliate studio that produced the show in order to keep the show running at a deficit, thereby precluding Darabont and the CAA from profit participation money. The intent issue, however, is at the heart of the current case. Darabont and CAA hoped to evidence AMC “self-dealing” by showing that the licensing agreement for the affiliate produced Walking Dead show does not withstand the “custom and practice” that AMC made with unaffiliated studios.In June 2014, AMC was ordered to hand over licensing agreements for two of its most successful shows, Mad Men and Breaking Bad, which were produced by studios unaffiliated with AMC.

AMC claims that it negotiated its license agreement in good faith and according to industry custom. To evidence this claim, AMC fired back in July 2014 and argued for disclosure of contingent compensation agreements from all of CAA’s client files. AMC sought to show that it’s interpretation of Plaintiff’s agreements were similar to other television studio’s agreements, and were not in “blatant disregard . . . for industry custom and practice.” However, to AMC’s dismay, New York Supreme Court Justice Eileen Bransten denied AMC’s request on the grounds that the request was overly broad. AMC revived its discovery request against CAA, but the Court shot it down again, finding that the requests served no other purpose but to harass the Plaintiffs.

What Does This Lawsuit Mean for the Entertainment Industry, Artists, and Fans?

The information sought by Darabont regarding Mad Men and Breaking Bad has been enough to cause speculation about the fairness of the AMC vertical integration agreement. This lawsuit could likely bring a greater degree of scrutiny to future shows produced using vertical integration, and force the entertainment industry to consider twice about entering into “sweetheart deals.” Stricter scrutiny could have serious financial implications for major broadcast networks if the current agreements really are saving them more money than the small change they report. In order to combat future bad faith deals, artists such as Darabont might think twice about entering into agreements with media conglomerates. Artists need to ensure that all license fees, even those fees paid to affiliated entities, should be based on market rates. One solution is that broadcasters should be required to solicit competitive bids before they grant production rights to an affiliate.

While AMC’s discovery request may have been short lived, the ultimate outcome in this case may have apocalyptic consequences for the future of The Walking Dead. In the end, remembering that Smallville was canceled one year after its lawsuit began, perhaps The Walking Dead will face similar consequences. The real victims in this lawsuit might be the millions of fans in the event Darabont and AMC do not reach a truce.