The Writers Guild of America has come up with a new legal theory in its threat to sue the talent agencies over packaging fees – that they “represent illegal kickbacks to an employee representative under federal labor law.”

The guild threatened to sue the agencies last week, but this is the first time it’s alleged that the packaging fees agents receive for bringing together the creative and financial elements of shows are “illegal kickbacks.” Up until now, the guild has only said that packaging fees are conflicts of interest and a violation of agents’ fiduciary duty to their clients.

The guild has threatened legal action if it doesn’t get what it wants at the bargaining table from the Association of Talent Agents. Those negotiations, which got underway on Feb. 5, aim to reshape the agency business by banning agents from taking part in packaging and production deals. Their current agreement – known as the Artists Managers Basic Agreement – expires on April 6, and hasn’t been renegotiated in 43 years.

The WGA, however, has made it clear that there is little chance of reaching a negotiated settlement because guild leaders have insisted that there is no room for compromise on their key demands.

“Our goal,” guild leaders told their members today in response to a list of frequently asked questions, “is to renegotiate the 1976 AMBA, which is outdated and ineffective in protecting writers. The guild will be professional, as in any negotiation. While there are parts of our proposals that the agencies should be able to agree to without much discussion, our fundamental position is that there is no compromise on conflicts of interest.”

“Why is that?” they asked. “Because there are negotiating positions where there is no middle ground, where there are basic principles that are not subject to compromise. Your other representatives—lawyers, unions, or agencies—are either conflicted, or they are not.”

See the WGA’s 49 FAQs here.

Lawsuits, however, take time to run their course, and if no deal is reached, the guild has said it will ask its members to walk away from any agencies that refuse to sign its proposed new Code of Conduct, which members will be voting to adopt on March 25.

“If we cannot reach an agreement, the guild will bring legal challenges to the agencies’ conflicts of interest,” the WGA said. “However, the legal process is slow and can never take the place of the guild’s greatest strength: the ability of a united membership, through collective action, to enforce the guild’s right to regulate agencies. The best outcome is a solution that not only bans agency conflicts of interest, but also addresses other important problems with the current AMBA.”

WGA leaders insist that banning agents from packaging and production deals would not put the big agencies out of business.

“Eliminating packaging and producing is not an existential threat to the big agencies,” they said. “Since agencies are privately held, little financial information is publicly available, and packaging is not very transparent. However, there is information available from leaked financials, credit rating agency reports, lawsuits, episodic budgets, and profit participation statements.

“We do know that among the top agencies there are significant differences in the size of the business as well as in the importance of talent representation and packaging to total agency revenue. The information below is our current best estimate:
• WME is the largest agency, with $2.8 billion in annual revenue. Talent representation is a fraction of company revenues, and packaging is less than 5%.
• CAA is much smaller than WME, with $600–700 million in annual revenue. Packaging is around 10% of its revenue.
• UTA is even smaller—and is still mostly in the business of representing talent. Agency revenue is around $200 million and packaging is about 25–30% of the total.”

However, WME said the WGA’s data is all wrong. “Those numbers are not accurate,” a spokesperson told Deadline Saturday night.

“These differences mean the larger firms could more easily adapt to a new model of representation without much effect to their bottom line,” the guild said. “And the three largest agencies must answer to their private equity owners who may not be interested in a protracted struggle. The smaller agencies could also be motivated to adapt to a representation model free of conflicts of interest because of the importance of talent to their bottom line.

“There is some chatter within the industry that packaging is not lucrative for the agencies anymore because we aren’t seeing astronomical syndication deals like Seinfeld. But it’s worth remembering that the growth of foreign and SVOD licensing has made series television virtually risk-free and more profitable overall, and the agencies continue to package all the shows they can, including those on Netflix and Amazon.

“While the importance of packaging revenue varies across agencies, keep in mind that prohibiting packaging would be on a going forward basis. In the short-term, agencies would continue to earn profits from existing shows while earning 10% on new projects, meaning there may not be much of a short-term impact. And in the long run, when agent incentives are properly aligned with talent, they should negotiate to recapture revenue through commissions on increased client income.”

The ATA, however, has said that the WGA’s self-professed “power grab” and attempt to “divide and conquer” the agencies to kill off packaging deals and force them out of the production business is filled with “misinformation and myths.”

“Let’s be clear,” ATA executive director Karen Stuart told her members on Friday. “The WGA’s ‘Code’ is not about agents’ conduct. Their proposals are a sweeping attempt by the WGA to remake the entire industry, restraining not only the business of agencies and their affiliates but also interfering with the livelihoods and businesses of producers, actors, directors, and studios. The ATA will continue to advocate for all our clients, including writers, and will reject the guild’s self-described ‘power grab’ that will harm not only their own members but others throughout the entire industry.”

The WGA says that it’s taking this hardline stance now, though packaging has been around for decades, because “At a time of peak demand, when compensation for writers at all levels should be substantially higher, writer compensation has declined. This defies the laws of supply and demand, unless something else, such as conflict of interest, is at work. The downturn for writers has coincided with unprecedented consolidation in the agency business, and the emergence of massive private equity investment in the three largest agencies. Agencies becoming producers (writer employers as well as writer representatives) increases the urgency of changing our agreement so writer interests once again align with writer representatives.”

The WGA West’s own records, however, show that its members’ earnings topped $1.4 billion in 2017 – an all-time record and up nearly 3% from 2016. Earnings from feature films broke through the $400 million barrier for the first time since 2010 – up more than 6% and topping out at nearly $421 million. TV earnings are fast approaching $1 billion a year, coming in at $976 million.

Here are some of the more interesting questions that the WGA asked and answered:

“Are we taking on yesterday’s battle by trying to take on packaging, since Netflix and other streaming platforms are changing the back-end game?

“No. The major agencies continue to package almost every scripted series made for Netflix, Amazon, and other streaming platforms. Netflix and Amazon are negotiating profit participation deals that impute license fees for the streaming usage, as well as revenue for home video and syndication usage if the series remains available only on the SVOD service. This makes back-end negotiations even more opaque and prone to abuse by agencies that use the power of writers to secure their own fees from these services.”

“Can’t the agencies just get a package fee with actors and directors?

“It is possible, but very unlikely. First, our proposal prohibits an agency or a related entity from having any financial interest in any series or film on which a writer-client works. That would include a financial interest even where a writer was not part of the package. While there are a few actors or directors who might be attractive enough to a studio for them to agree to the package fee without a script, writers and the intellectual property they create are at the heart of the current system. Writers often are the package. Why would studios pay a package fee if they don’t get writers and pilots as part of the deal? The big agencies know this, which is why they care so much about what writers decide to do in a new franchise agreement.”

“Isn’t packaging just about rich TV writers’ interests?

“No. Middle-class writers in television and screen are hurt as much by packaging as showrunners are. Showrunners have a better ability to defend their quotes, but are hurt by losing both part of their back-end and the budgetary resources to make shows as good as possible. Middle-class writers in both TV and screen are hurt because their quotes aren’t being defended. Our most recent survey shows a 19% decline in the median weekly pay of writer-producers between 2013 and 2018. But experienced TV writers know the decline began well before that. The survey also revealed a median of $150,000 for a screenplay, with 20% of screenwriters reporting working at minimum. Minimums are what the Guild negotiates, not the agent.

“The conflict of interest caused by packaging is the root cause of ineffective representation by agencies. In a booming business, agencies have not defended the quotes of working writers. They have been unable or unwilling to insist on increasing writer pay. Instead of making more when their clients make more, packaging agencies’ income is tied to studio profits. Realigning these incentives—so agents make more when their clients make more—will benefit writers in all work areas and at all levels.

“Why won’t the studios just keep the package money if the agencies no longer get it?

“They will try. But in a properly functioning market, with agents incentivized to negotiate increases, there will be leverage to get that money into writers’ pockets. Both writers and their agents will know going into the negotiation that the studios were previously willing to spend an extra $30,000 to $75,000 per episode, 10 points on the back-end in television, and 5% of the budget in film. With the agency’s incentive properly aligned with writers, they will fight harder to make the studio spend that money because it affects their 10%.

“Agencies may claim that if packaging goes away, all of the money would go to the studios, not writers. The argument defies logic. If an agency can successfully use writer power to negotiate packaging fees that take tens of thousands of dollars out of each episode’s budget and potentially millions on the back-end, why can’t it negotiate for this money to flow to writers in the form of higher episodic fees and better back-end? Packaging co-opts writers’ power to benefit the agency. We are simply asking agencies to exert that same power to benefit writers. Remember, that’s their job.”

“If we return agencies to a 10% commission model where writers’ earnings and market incentives are properly aligned, what is the guarantee that things will be better for writers?

“We can’t definitively answer the question ‘what happens afterward,’ because there is no guaranteed outcome of this or any other union struggle. However, it is common sense that a good bit should come back to writers when agents are properly incentivized to fight for higher writer compensation, since the studios are already paying that money for talent, but it is currently funneled to the agencies as talent gatekeepers.

“Ultimately the guild’s power depends on using our collective strength to better writers’ pay and working conditions. That requires the willingness to struggle. When we go into MBA negotiations or on strike, there is no guarantee of success. This guild has a history of making gains through our collective power, and we have to demonstrate that we can do it again now.”