“The Walking Dead,” a top-rated show produced and aired by AMC (Law360), holds a grim message for the future. Not one of a zombie apocalypse, but one of upended compensation norms born out of a growing trend of vertical integration in the entertainment industry.
Robert Kirkman, a co-creator of the comic book on which “The Walking Dead” is based, and other series producers have sued AMC, alleging that the entertainment corporation breached their contracts (Kirkman v. AMC Film Holdings). This claim and other similar claims turn in large part on two widespread entertainment industry practices: the payment of backend proceeds based on modified adjusted gross receipts (referred to as “MAGR”), and the growing influence of vertical integration and self-dealing among entertainment conglomerates. Together, these two practices have the potential to undermine long-established compensation structures for writers, producers, and other creative talent.
MAGR is a profit participation structure under which parties like Kirkman are paid a percentage of a television show’s proceeds. However, this percentage is based on the amount of proceeds left over after various costs and fees have already been subtracted. As a result, how these costs and fees are calculated is often a key point of contention during negotiations between artists’ legal representation and studios like AMC (Law360). Parties may negotiate which income streams are included in proceeds, such as merchandising or streaming licenses, just as they may negotiate which costs may be subtracted, such as overhead or promotional costs. The percentage owed to the talent is then calculated based on the MAGR amount.
These highly variable definitions that result from the negotiating process are currently the subject of a “mini-trial” in Kirkman v. AMC Film Holdings, in which Judge Buckley will rule on the contract terms and definitions before proceeding with the issues of potential liability and damages (Id.). Kirkman’s representatives and AMC disagree over whether the terms of the MAGR initially submitted by AMC were binding, or whether Kirkman’s contract required the parties to later determine MAGR definitions in “good faith negotiations” (Law360).
Also at the heart of the lawsuit is Kirkman’s contention that AMC, in acting as both the production company of the series and the network that airs it, gave itself a “sweetheart deal,” leading to an inappropriately low imputed license fee for the rights to air “The Walking Dead” (Kirkman). The imputed license fee – which is necessary because AMC charged itself no licensing fee at all – acts as an important element in calculating MAGR compensation. According to Kirkman, it is inadequately set below fair market value for a successful show like “The Walking Dead” (Law360). Other AMC series like “Breaking Bad,” “Mad Men,” and “Better Call Saul,” none of which matched the success of “The Walking Dead,” nonetheless garnered higher licensing fees from AMC Network because each of these shows were produced by outside companies (Id.).
So-called “sweetheart deals” like the one under contention in the Kirkman case are a product of the self-dealing that comes with vertical integration of entertainment companies (Suarez). Although vertical integration was barred by FCC regulations in the past, those restrictions were overturned during the Clinton administration (Forbes). Still, entertainment companies have reason to be cautious about the outlook for self-dealing contracts – legal scholar Alfred Suarez anticipates that litigation following Kirkman’s suit could lead to higher license fees paid to talent and greater risk aversion on the part of studios (Suarez).
While the outcome of the Kirkman trial remains uncertain, as the entertainment industry continues to evolve, we can expect compensation norms to continue to change in response.