Oral arguments heard last month in an anti-packaging case before the U.S. Ninth District Court of Appeals are drawing parallels to allegations made by the WGA, which has accused the major Hollywood talent agencies of monopolizing the packaging of scripted TV shows.
The WGA East and WGA West claim the packaging profits reaped by the top agencies pose an inherent “conflict of interest” to their fiduciary duty to represent the best interests of writers, and are preparing to reopen negotiations with the Association of Talent Agents to rewrite a packaging agreement that hasn’t been updated in 42 years.
As Deadline reported Thursday, the WGA has been giving its members a report that claims “packaging is dominated” by two of the agencies – WME and CAA – which the guilds say are involved in 79% of all packaged series, with UTA and ICM Partners coming in third and fourth, respectively. According to the WGA’s data, 87% of the more than 300 TV series that aired last season were packaged, and only eight talent agencies did all the packaging.
As the WGA is gearing up for a potential battle against the big agencies, another one is being played out in the Ninth Circuit against the backdrop of an anti-trust lawsuit filed against UTA and ICM in 2015 by the boutique agency Lenhoff & Lenhoff over the practice of TV packaging.
The lawsuit was dismissed last May, but an appeal was heard February 16 before the appeals court, whose decision is pending. Here’s a video of the proceedings:
During the hearing, Gretchen Nelson, the attorney for Lenhoff, told the three-judge panel that a “price-fixing scheme” carried out by the four big agencies – WME, CAA and defendants UTA and ICM Partners – has led to “the demise” of “approximately 71% of the smaller agencies” since 2001 due to “the limitations in the numbers of times that the defendants will co-package with small talent agencies.”
She added that “these four agencies” have “a stranglehold…over these studios as a result of the volume of these package deals.” The existence of such a “scheme,” she argued, is proven by the fact that all the agencies charge the same packaging fee – known as “3-3-10,” in which they receive “3% at the beginning, 3% at the end, and 10% on the back-end” – and that they’ve all used the same fee structure for nearly 20 years.
Nelson argued that it “belies belief” that this fee was merely a “business decision” made by the defendants and by each of the major agencies. “It is not, and it makes no colorable sense,” she argued. “This is not a case involving a product that is standard in the industry. It’s not a widget that one competitor can make and another competitor can make. We’re talking about packaged scripted television series.”
“And it is alleged in the complaint,” she continued, “that that is what all four of these agencies charge for every scripted television series.”
To make her point, she offered the judges a hypothetical situation involving the packaging of a project about a newspaper. “And I will bring to you Tom Hanks, and I will bring to you Meryl Streep, and I will present this to you. It defies belief that they would accept 3-3-10 for that series when they are accepting 3-3-10 for a series by young artists, not developed, and a program that has no basis in reality, as my hypothetical of the Washington Post would be.”
The alleged conspiracy to corner the market by the four biggest packagers, she argued, started with the falling out SAG had with the ATA in 2002, when they couldn’t come to terms on a new franchise agreement – known as Rule 16g. The main sticking point was that the big talent agencies wanted the right to invest in or be invested in by ad agencies, advertisers and independent producers. SAG viewed such financial interests as an irreconcilable conflict of interest, putting the actor in the position of being represented by an agency that could also be his or her employer.
SAG-AFTRA and the ATA have yet to replace that franchise agreement, and its demise, Nelson argued, “Allowed for the extraordinary growth of the defendants and the other two entities in a manner that was unparalleled. And after having that infusion of money, you can then engage in the balance of the activities you are intending to do which is to concentrate the market on packaging of scripted television series, as opposed to what the talent agencies were doing before which was providing essentially a service industry at a 10% commission. As a result of the infusion of money, the defendants as we’ve alleged it, have the ability to grow exponentially…to essentially be able to develop what we say to be a conspiracy to ultimately eliminate smaller talent agencies so that they can concentrate on the 3-3-10 packaging.”
Defense attorney Kathleen O’Sullivan argued that the plaintiff’s own third amended complaint proves that there was no conspiracy by the agencies to sabotage the SAG agreement so they could corner the packaging market. Pulling a quote from the complaint, she told the court that “ ‘dysfunctional leadership at SAG’ is what was the cause of the demise of that rule. So it was not some kind of conspiracy by the large talent agencies that ended that.”
Early on in the 41-minute hearing, Judge Jay Bybee said he didn’t see that the demise of SAG’s Rule 16g as proof of any conspiracy by the agencies to fix prices.
“You need to look at the entirety of this whole package of allegations in the complaint,” Nelson later argued. “It is not simply 16g. That was the start of it. That allowed the money to flow. Next, the packaging of these scripted television products began to be overwhelmingly the business model, if you will.”
She also urged the court to look at the “entirety” of the alleged conspiracy – not just at the separate elements of who, when, where and why. “This was not a claim where the plaintiffs were alleging that there was a discreet little conspiracy here; there was a discreet little conspiracy there. That was the argument that the defendants attempted, and I think successfully did, in the District Court – make the point so that you were essentially looking at little buckets as distinct from one entire conspiracy in its whole form.”
O’Sullivan, however, argued that the plaintiff’s last amended complaint, which was rejected by the lower court, “failed at the most fundamental levels. It failed to sufficiently plead a conspiracy or any antitrust injury flowing from that conspiracy and its state law claims were equally deficient.” The lower court, she said, did look at the entirety of the alleged conspiracy and found that “zero plus zero plus zero is still zero. It was simply not plausible whether in its component parts or viewed as a whole. And secondly, a major part of the conspiracy argument argued on appeal, the 3-3-10, was not pleaded in the third amended.”
Later in the proceedings, however, Judge Bybee appeared to side with the plaintiff’s circumstantial theory of the case – at least as far as inferring that, in a hypothetical case, there had been communication between conspirators to fix prices, even if there was no outright evidence of it. “But there are circumstances which we could say, ‘OK, it’s clear that somebody got together and conspired to do this because the result of this is just so utterly implausible,’” he told O’Sullivan hypothetically. “Let’s suppose that the Uber-Agency, that each one of them demanded, but also the studio saw the same provision coming up in every contract, that said all funds are to be paid into an account number – some long account number in the Bahamas – and everybody had the same account number. We could go, ‘OK, not sure who got together when, but it’s pretty clear somebody’s been talking.’”
But for plaintiff Lenhoff to prevail if remanded back to District Court for trial, its lawyers will have to climb a high legal mountain known as the Twombly Decision – the 2007 U.S. Supreme Court ruling in Bell Atlantic v. Twombly in which the court ruled that parallel conduct, absent evidence of agreement, is insufficient to sustain a claim under the Sherman Anti-trust Act.
Even so, Judge Marsha Berson mused that the appeal may yet be decided on the fact that for nearly 20 years, all the major agencies, without exception, have been using the same 3-3-10 packaging fee formula.
“The argument here,” she said, “would be something along the lines of there was a complete change and it was a change to a specific set of numbers, not just the general notion that you’re going to have a scheme of upfront and back compensation from the studios, but specific numbers. Those specific numbers never changed and have never been undercut by any of these four people – and why wouldn’t someone start fooling around with the numbers, if they were trying to get a better deal, and so then, they must have agreed.”
O’Sullivan, however, argued that even if that were true, “That’s not what they (the plaintiffs) alleged here,” but rather, only inserted it “at the last minute” for this appeal. “Well, putting aside that none of that has been alleged, it can be a perfectly lawful industry practice to charge the same base fee.”
“But, see what’s odd about this,” Berzon told her, “is it’s not just everybody’s charging $1.99. It’s that it’s a very specific scheme with specific numbers at different stages.”
“Well none of that was alleged,” O’Sullivan answered. “They admit that. They actually acknowledge in their opening brief, that plaintiff did not plead the 1990s price fixing agreement. So to get up here and say that this is somehow what they have pleaded is simply not consistent with the third amended…”
“You still haven’t answered my question,” Berzon interrupted.
“I think it would be a different case, is the answer, your honor,” the defense lawyer replied. “It would be an entirely different case. The District Court was extremely patient here, gave the plaintiffs four chances. They were deficient at every stage and the notice of appeal was the final deficiency. It’s not a case where they asked for limited discovery to do anything more to support their complaint until it had been dismissed three times. So the District Court was well in its discretion and ruling that they should not get a fifth shot.”
At the end of the hearing, Judge Berzon concluded: “That was a difficult case, so thank you very much. The case of Lenhoff Enterprises and United Talent Agency is submitted.”