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Fox Rocked by $ 179M 'Bones' Ruling: Lying, Cheating and Reprehensible Studio Fraud

In December 2017, Rupert Murdoch stunned Hollywood by announcing the sale of most of the 21st Century Fox to Disney. "A momentous occasion," Murdoch called the $ 71.3 billion deal, which came as digital streamers, disrupting the entertainment status quo. Netflix and Amazon Prime can now be just as important as broadcast television ever was. Meanwhile, the old studio vanguard has slowly embraced digital waters – dipping their toes in the first with Hulu before making plans to launch Netflix competitors such as Disney + and WarnerMedia. This coming era of vertically integrated businesses delivering content directly to consumers online was not in the cards for the elderly of Murdoch. And maybe that's for the best, given a stunning new $ 1

79 million award handed down by an arbitrator.

The decision made earlier this month but until now is a secret related to the Fox-produced series Bones , which starred David Boreanaz and Emily Deschanel and ran on the Fox network between 2005 and 2017. But the 66-page ruling by the arbitrator Peter Lichtman, who concludes Fox executives, lied, cheated and committed fraud at the expense of the show's stars and executive producer Barry Josephson, is about a whole lot more. The nearly $ 200 million award amounts to the second-largest in the television industry history, after a 2011 jury verdict punishing Disney to the tune of $ 319 million over profit-sharing for Who Wants to Be a Millionaire . It will not only put Murdoch's Fox sale in a whole new light, but may also raise questions about the future viability of Hulu, plus any platform enjoying what is pejoratively known as "Hollywood accounting." The ruling also comes as D.C. The Circuit Court of Appeals has allowed it to stand as another "mega-merger" between AT & T and Time Warner, an example of vertical integration between a content distributor and a producer.

In the coming to a decision, Lichtman describes how some of Fox's top executives, including 21st Century Fox president Peter Rice and Fox TV CEO Dana Walden, plus Fox TV chairman Gary Newman (leaving Fox) "appear to have given false testimony in an attempt to conceal their wrongdoing." According to To the decision, Fox has taken a "cavalier attitude toward its wrongdoing" and exhibits a "company-wide culture and an accepted climate that enveloped an aversion for the truth."

Slamming the company with a penalty of $ 128 million in Lichtman points out that the award is 0.6 percent of the 21st Century Fox's stipulated net worth

He whines if it's really enough. [19659002] "In fact, one could question whether the five to one ratio given by Fox's financial condition and the lack of contrition serves to deter the wrong conduct at issue here, or whether it will be considered part of the cost of doing business," writes the Arbitrator

"What we have exposed in this case is going to profoundly change the way Hollywood has been doing business for many years to come," says John Berlinski, who represented the actors in the case.

Dale Kinsella, of Josephson, has filed a petition today to confirm the arbitration award.

Fox has vehemently disagrees with the decision. The company has now tapped Star litigator Daniel Petrocelli, a fresh-off defender of the AT & T / TW merger, in an attempt to overturn it.

"The decision by this private arbitrator is categorically wrong in the merits and exceeded his arbitral powers, "reads a statement from the 21st Century Fox. "Fox will not allow this flagrant injustice, riddled with errors and gratuitous character attacks, stand and will vigorously challenge the ruling in a court of law."

Genesis of the Dispute

Back in 2015, those involved in getting Bones off the ground including Josephson, Boreanaz, Deschanel and Kathy Reichs (a forensic anthropologist who authored the Temperance Brennan novels that formed the basis for the series) filed lawsuits in California state court claiming They were defrauded by Fox of their legitimate profit participation. The complaints call Fox's "leading role in the well-documented history of Hollywood accounting scandals," referencing past litigation over M * A * S * H ​​* The X-Files NYPD Blue and Cops and took issue with "sweetheart" self-dealing between Fox's studio and network arms as well as Hulu, in which Fox had a 30 percent stake. The procedural drama took almost half a billion dollars in its first seven seasons – Josephson even says James Murdoch once told him that Bones was "perhaps the most profitable show on Fox's history" – but the series was calculated to Without a money loser, that meant no profit to share with Josephson and others.

Upon the filing of the lawsuits, there were immediate worries by Bones fans that the series would be quickly canceled, but the show Meanwhile, the executive producers and leading actors were forced to arbitrate the matter, and the case quickly fade from the focus of attention.

But along with other profits clashes over long running hit shows – among them AMC's The Walking Dead Disney's Home Improvement and Warner Bros. ' Supernatural – The dispute raised a big question about whether a profit could ever be expected when One arm of a corporation is making deals with another arm. That's because the studio is responsible for selling the show on the open market, and after collecting this money and deducting the production costs, the studio sends out checks to those who are entitled to a share of profit. If expenses outweigh income, the show runs a deficit. But that does not necessarily mean the show is not making good money – at least for someone elsewhere. It's possible that the studio just does not charge enough for rights to exhibit the show whether it's streamed online or broadcast on a television. Streaming platforms hawk subscriptions. Television networks sell advertisements and take additional revenue from cable and satellite companies. Such money does not go directly to profit participants. So if a studio is within the same corporate structure as a streamer or broadcaster, an under-way way for the parent company to derive the shots from the show (to the detriment of executive executives and stars) may be to reduce licensing fees to its sister companies

That's what the Bones profit participants were alleging was happening.

"An Accomplice to Fraud"

In an arbitration, Fox attempted to justify the low license fees Fox Broadcasting, Hulu and Fox's foreign affiliates were paying their studio for rights to the air the series.

" Bones was a middling show with middling ratings," wrote Fox's lawyers in an opening brief, adding that a higher fee from the $ 2 million paid per episode would have led to the show's cancellation.

As Lichtman discovered in the course of arbitration, though, Fox's studio executives were never really interested in finding o

"We were not allowed to get that information from the network," witnessed Walden, who at that time ran the Fox studio but not Fox Broadcasting, when asked about the possibility of knowing what The network paid for similar shows in their middle seasons.

Given that the profits of the participants had self-dealing protection in their contracts that "Deals must be as good as market deals," arbitrator found Walden's lack of knowledge "either shocking if true, or disingenuous if false, "adding," Interestingly, both Ms. Walden and Mr. Newman testified that they engaged in tough negotiations and fought for the [Profit] Participants. However, the evidence is belies these assertions. How could they fight if they were not properly equipped with the required information? What were the negotiations were if the information mandated by the contract was not examined, called for or even investigated? "

In the arbitration, both sides outscored the comparables series for Bones . Fox attempted Fringe the J.J. The Abrams produced a series that was more loved than watched during its run between 2008 and 2013, while Josephson's team shot for House M.D. one of the most highly rated shows this century. The arbitrator eventually accepted House as the yardstick, but the point here is that, according to the arbitrator, studio executives never even attempted to push for information and make arguments when negotiating license fees with its sister company. [19659002] "There is no doubt that the studio realized that it was not going to win the fight with its affiliate, and therefore not only capitulated to the network's wishes, but also became a co-committed to fraud in relation to Network's desire to limit both Studio's and Network's exposure for its breach and failure to negotiate in accordance with operative contractual standards, "continues the arbitrator's decision. "

That in the next area of ​​the fraud that Fox was found to have committed."

During the show's run, Bones 'profit participants were continually shut down in attempts to argue for more money. Josephson and Reichs signed the releases barring them from challenging license fees for the fifth and sixth seasons after Fox's word that if everyone signed these releases, Bones would be canceled. According to Rice, though, Fox had already contracted to keep the show on the air and knew that Boreanaz and Deschanel would never sign such a release. Nevertheless, Fox kept up the impression the stars would sign up, even going so far as to include blank signatures for actors in releases sent to producers.

What's more, at this exact same moment, Bones showrunner Hart Hanson also signed a release, which in itself would not be problematic but for the fact that unbeknownst to the others at the time and contrary to Fox's representations back then he was in the middle of signing a rich new deal to continue on the series. Hanson was represented by Attorney Jeanne Newman, the wife of Gary Newman, then co-president of Fox TV.

Why the charade?

Lichtman writes: "The answer is self-evident: The show was not going to be canceled and there was no intention at all to do so. "

As such, the arbitrator declares the release of Josephson and Reichs to be canceled.

The mere threat of Bones 'cancellation is considered to be part of the overall fraud. Fox Entertainment's then-chairman Peter Liguori sent a memo in 2009 to Fox Broadcasting's then-chairman Peter Chernin outlining a "legal action plan" to avoid licensing fees covering the full cost of show production. [19659002ShortlyaftersendingthisplanLiguoriwouldleaveFoxandwouldlaterbecometheCEOofTribuneMediasteppingdownin2017Therulingrevealssomethingnewandstartling:AfterhisstintatTribuneandintheheatofthisarbitrationLiguorisigneda"FirstLookAgreement"withFXwhichprovidedhimwithcontingentcompensationfarbeyondthetopexecutivesinHollywoodAccordingtoIMDbLiguori'ssolecreditisa1996movie Big Night . Nevertheless, and with absolutely no public fanfare whatsoever that he now has a deal with FX, he is apparently gaining profit points beyond the industry's top showrunners.

"Why and how did it come about?" ask the arbitrator. "LX's" legal action plan "is far from harmless. If one conjures the First Look Agreement with Mr. Liguori's testimony at the hearing (where he downplays the significance of the plan itself), it seems coincidental that Mr. Liguori disappears for nine years (from Fox's radar) and then magically reappears with a First Look agreement seven months before he is to testify in the present proceeding with deal in hand that most manufacturers in Hollywood have been striving to have their entire entertainment career. "

In other words: Did Fox buy off a key witness?

But it hardly ends there. The Fox (the studio) was paying Fox (the studio) for rights to the show and the company's efforts to do so without legal consequences.

The Hulu Swindle

Arguably, the most consequential aspect of the arbitrator's decision relates to Hulu, a video-on-demand service co-owned by Fox, Disney, Comcast and other studios. In his decision, Lichtman addresses the digital rights given to Hulu.

As far back as 2010, some TV creatives are suspected to be cheated by exploiting their shows on Hulu. For example, at a conference that year, Modern Family co-creator Steve Levitan was asked if he was seeing money from the estimated 2 million people watching the show every week on Hulu. His answer: "Nobody's crying for us, but not yet. It's very confusing because we can not get any answers." It's not me saying [networks and studios] are cheating us or stealing from us. But I question the ultimate wisdom [of having the show on Hulu]. "

With the success of platforms such as Netflix and Amazon Prime, there is now a healthy market for the old and current seasons of TV shows.

So in this context, the arbitrator finds it almost inexplicable that the Fox studio producing Bones allowed its parent company to exploit streaming rights and licenses for those rights to Hulu without much of anything in return. Lichtman finds this to be a clear breach of Fox's obligations to distribute the series in good faith.

One Fox executive testified that it was his understanding that Fox Broadcasting got full season "stacking rights" for Bones – meaning that it could distribute all of the episodes of the current season to the show at a given time. If so, then Fox Broadcasting could convey these rights to Hulu. But the arbitrator says this executive's testimony was "impeached" by others.

From 2008 to 2010, Fox Broadcasting began licensing the first season of the year for the first time of the season. Bones to Hulu. In return came what is described as a "share of speculative advertising revenue." Witnesses could not identify any previous time when a studio had granted rights based on future ad revenue, and one Fox executive states that in the negotiations Hulu, the possibility of Getting fixed episodic license fees, or any minimum guarantee, did not come up.

In his decision, Lichtman then addresses what he considers "perhaps the most shocking piece of evidence related to Hulu issues … Fox actually signed both sides of this agreement. Mr. Dan Fawcett signed the Fox Content License Agreement on behalf of both FEG [Fox Entertainment Group] and Hulu. "

Fox had to defend it on both sides of the same transaction.

Chernin, former head of Fox Broadcasting and now one of the most powerful producers in Hollywood, was asked how this was possible. He replied, "I have no idea."

The arbitrator concludes, "The obvious inferences of self-dealing, the conflict of interest, and the lack of any arm's length negotiations. Leap off the page."

Soon thereafter, Lichtman adds, "It is undisputed that the Fox conglomerate had a stake in Hulu, and the evidence found that" Fox writ large "essentially handed over digital rights at a low cost to build up the value of that enterprise."

The The ad revenue share to the studio was worth less than $ 1 million, while the Fox network generated more than $ 70 million in revenue for the current season.

It is highly unlikely that Bones was the only television series given to Hulu under potential fishy economics. The ruling amounts to the opening of a Pandora's Box for attorneys in the entertainment industry. It also raises the prospect that licensing content may suddenly become a lot more expensive for Hulu if other Hollywood-based profits make their own challenges.

Monetary Award

Despite the protest by Fox throughout years and in the arbitration that paying more for Bones would have resulted in its demise, the arbitrator finds there is no evidence that the broadcaster ever canceled the Top 20 hit like this show, and further word that Bones was driving significant profits for Fox's parent company, Lichtman finds, "Had Fox fulfilled its contractual obligations, it would have looked at [Universal-produced] House as a comparable program, negotiated fairly, and paid the license fee accordingly. "

He finds nearly $ 114 million would have been added to the gross receipts of Bones for its exploitation on network television, which would have resulted in abo ut $ 15.5 million in profit payments to the executive producers and stars. About $ 7 million in damages is then tacked for the way the series was undersold in the United Kingdom, Italy, and Spain.

But that's all the peanuts compared to the whopping award for Fox giving Hulu the rights to Bones

The arbitrator runs through expert analysis – for example, based on the comparable benchmarks of what CBS got for Elementary Blue Bloods and CSI He concludes that Bones should have received the current episodic fee of $ 685,000 in Hulu – and ultimately he gets $ 10.1 million in actual damages.

Then there's a punitive damages for the arrangement of Hulu.

False promises, fraudulently induced releases, the cavalier attitude of Fox executives and even a hint of perjury in this case, "supporting a finding of reprehensibility," writes Lichtman before addressing Fox's argument that the large amount of compensatory damages and th The wealth of the stars involved warrants no punitive damages. "It suggests that the Respondent should be somehow grateful for what they received instead of focusing on what they were deceived and cheated out of being audacious and frankly astonishing."

Eventually, he gets to the judgment that goes down in the Annals of Hollywood history.

He writes, "As such, in the light of Fox's financial condition, a punitive damages award in the amount of $ 128,455,730 is reasonable and necessary to punish Fox for its reprehensible conduct and deter it from future misconduct. "

Adding actual damages, pre-judgment interest, attorneys' fees and expenses, and arbitrator costs brings the total award to $ 178,695,778.90.

The Aftermath

On Wednesday, attorneys representing the executive producers and stars – including Dale Kinsella, Chad Fitzgerald and Aaron Liskin at Kinsella Weitzman, and John Berlinski, Daniel Saunders, and Candace Frazier at Kasowitz Benson Torres – went to Los Angele s Superior Court with a petition to confirm the award.

"This is a tremendous victory for the Bones profit participants who created and starred in the longest running drama series to air on the Fox network," says Kinsella. "Fox's fraudulent behavior toward the series," creators and stars, have been overtaken over many years, has finally been brought to light, and Fox has been held accountable for its actions. "

He adds," This award-exposing Fox's self-dealing and the harm they visit on profit participants represent a victory for not only the Bones profit participants, but for all creative talent in the television industry. "

Fox's side handled in arbitration by Munger, Tolles & Olson, but now being led by O'Melveny's Petrocelli – is seeking a vacatur of the punitive damages aspect of the award in its own petition. In other words, Fox does not intend to contest the $ 50.2 million in actual damages award The $ 128.5 million tacked on.

Overturning a decision from arbitration is a tough chore, something that has only been accomplished in a rare occasion. Usually the narrow grounds for doing so require a faulty process, a manifest disregard of law, an arbitral tribunal that exceeds the scope of authority, or an apparent bias or misconduct on the part of an arbitrator. (Lichtman is a former LA Superior Court judge himself, and in his 35 years of experience he supervised the judicial circuit's mandatory settlement scheme where he achieved notable resolutions, including over clergy abuse.)

Fox is focused on the scope of the The arbitrator's authority, contending that the Hulu issue was out of bounds and attacking the awarding of punitive damages.

As the next stage of the Bones is fighting, the industry will have to come to grips with the fallout from this arbitration decision and what amounts to an unmistakable warning to others. That includes Comcast, which can assert a stronger hand in Hulu's affairs now that the conditions for its 2011 merger with NBCUniversal have expired. That includes AT & T, which can complete its acquisition of Time Warner after the Justice Department has unsuccessfully sought to block the $ 85 billion deal on anti-trust grounds. (In the big case, the government focused on prospective harm to consumers from the merger, virtually ignoring the possibility that future self-dealing would harm those in the creative community.) That includes AMC, which both produces and distributes The Walking Dead and now facing a trial next year with claimed $ 280 million in damages for allegedly cheating profit participants who say they have provisions in their contracts to guard against unfair affiliate dealmaking.

Finally, there's Disney, the owner of ABC , the owner of a future streaming competitor to Netflix, and soon the owner of Fox's studio assets, which will be added to its already imminent stable of produced content. In fact, this past October, Disney announced that many Fox veterans, including Rice, Walden and FX CEO John Landgraf – each flagged in the Bones arbitration -would have been leading television production for the combined company.

"The strength of 21st Century Fox's first-class management talent has always been a compelling part of this opportunity for us," said Bob Iger, CEO of Disney, on the announcement of bringing Rice, Walden and Landgraf aboard. "Upon completion of the acquisition, this new structure places these proven leaders to help drive the maximum value from a greatly enhanced portfolio of incredible brands and businesses."

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