The Writers Guild of America (“WGA”) and the Association of Talent Agents (“ATA”), the latter of which is primarily represented by the Big Four or “Uber Agencies,” have sparred over packaging fees since the mid-1990s. The WGA has considered these fees, which agents extract from production studios, to represent an inherent conflict of interest. The April 2019 expiration of the franchise agreement between the WGA and the ATA prompted the WGA to take a firm stand prohibiting packaging fees. This action has prompted a flurry of litigation, into which the U.S. Department of Justice has recently waded by issuing a statement of interest in clear favor of the talent agencies. This article argues that the DOJ’s position is misguided from an economic perspective, and that the WGA’s actions are protected by the labor antitrust exemption.
Hal Singer, Ted Tatos1
The long-simmering dispute between the Writers’ Guild of America (“WGA”) and the Association of Talent Agents (“ATA”) rose to a crescendo in 2019. The conflict raises complex economic questions of relative bargaining power and coordination rights — namely, when can workers coordinate on wages, and when can firms coordinate on prices, in ways that do not run afoul of the antitrust laws?
The parties had been operating under the Artists’ Manager Basic Agreement of 1976,2 which was due to expire at midnight on April 13, 2019. Negotiations between the two sides on a new agreement stalled after the top talent agencies, WME Entertainment (“WME”), Creative Artists Agency (“CAA”), International Creative Management Partners (“ICM”), and United Talent Agency (“UTA”) (together, the “Big Four”) refused to abandon the practice of charging packaging fees charged to production companies. Packaging fees occur when the talent agency requests payment from the production company that hires the writer instead of a commission on the writer’s salary.
The WGA contends that the packaging fees represent a significant conflict of interest for the Big Four and thus violate California law, which holds that talent agents owe a fiduciary duty to conflict-free representation to the writers they represent. The new WGA Code of Conduct3 prohibited talent agents from deriving “any revenue or other benefit from a Writer’s involvement in or employment on a motion picture project, other than a percentage commission based on the Writer’s compensation or fee.” Given the financial windfall the Big Four obtained for decades from packaging fees, the prohibition on securing such fees precipitated the impasse between the WGA and the Big Four.
On April 12, 2019 sensing a deadlock, the WGA announced that “we are about to enter uncharted waters” and called on its members to fire any talent agent who refused to abide by the newly-implemented code of conduct.4 In a show of solidarity, mass firings ensued, as writers — including celebrities such as Stephen King, David Simon, and Patton Oswalt — fired their agents.5 The WGA quickly followed by filing suit against the Big Four in California state court on April 17, 2019, alleging breach of fiduciary duty and unfair competition.
In June, the talent agencies fired back. WME, CAA, and UTA, the two former of which are responsible for over 79 percent of packaging,6 filed antitrust claims alleging that the WGA’s actions constituted a group boycott that violated the labor antitrust exemption. As such, the talent agencies alleged that the concerted firing of talent agents represented a per se violation of Section 1 of the Sherman Act, which prohibits combinations that unreasonably restrain trade. WME’s complaint, for example, contends that WGA solicited the assistance of third parties, such as smaller talent agencies, directors, producers, managers, and lawyers, as well as studios, in buttressing its position against the Big Four’s insistence on packaging fees.7
In August, the WGA dismissed its state court claim and filed suit in federal court alleging similar conduct as well as claims of racketeering and antitrust violations against the Big Four talent agencies.8
II. DOJ WEIGHS IN ON BEHALF OF THE AGENCIES
On November 26, 2019, the U.S. Department of Justice (“DOJ”) issued a statement of interest in this matter. The Antitrust Division asserted that several main factual disputes exist and, in the DOJ’s opinion, should be adjudicated at trial, including whether the WGA used nontraditional means in coordinating their dealing, and whether such coordination “serve only legitimate labor law objectives or also further any illegitimate goals such as abusing monopsony power over agents or eliminating competition in a business market.”9
It is impossible to miss that the tenor of the DOJ’s statement is consistent with stances it has recently taken against workers in other matters, including against Uber drivers in Seattle.10 The DOJ’s statement is also consistent with what some have dubbed the Trump administration’s overarching anti-worker agenda.11 By focusing exclusively on the coordination of the writers, the DOJ’s statement places the probative onus on WGA, and entirely ignores the potentially anticompetitive coordination among the Big Four in setting packaging fees. Whether the current trend in antitrust law – by authorizing large, powerful firms as the primary mechanisms of economic coordination – allocates coordination rights appropriately has been the subject of scholarship by law professor Sanjukta Paul.12
Was the DOJ’s intervention misguided? To answer that question, one has to understand the bargaining strength of the two sides in this dispute. In its complaint, the WGA alleged that “Agency compensation via packaging fees is possible because, after substantial consolidation within the industry, the Agencies now control access to all of the key talent necessary to create a new television show or feature film, including not only writers but also actors and directors.” Put differently, the Big Four’s dominant position in the key labor (input) markets for producing movies and television shows enables them to secure hundreds of millions of dollars in annual packaging fees from production companies. Such fees, at best, are often unrelated to talent compensation; at worst, they are inversely related.
III. HOW PACKAGING FEES CREATE A CONFLICT OF INTEREST
Generally, agents acting as representatives for talent receive compensation in the form of commissions equal to a percentage of the talent’s pay. Traditional commissions in the talent agent market equal ten percent of the talent’s pay. However, packaging fees can be far more lucrative, as evidenced by the talent agencies’ collective unwillingness to forgo them, even at the risk of alienating their own writer clients. Notably, the Big Four all use the same “3-3-10” packaging fee structure in their dealings with production companies.13 Under this format, the production company pays the talent agency via three revenue streams:
- Three percent (3%) of the base network license fee per episode;
- Three percent (3%) of the base network license fee, deferred and payable out of 50 percent of the net profits on the show; and
- Ten percent (10%) of the “back-end” or Modified Adjusted Gross Receipts (“MAGR”) when the show is sold into syndication, which can occur multiple times for popular shows.
A key point worth noting is that the talent agencies obtain their fees “off the top” — that is, out of the gross profits. Writers also receive a percentage of the back-end syndication deal, but their fees are based on the remaining adjusted gross receipts after talent agency fees.
A hypothetical case makes the conflict clear. Suppose a packaged show has reached syndication (and the first two “3s” out of the 3-310 have been paid), and the production company sells the show into first round of syndication for $50 million. The final “10” represents the ten percent out of the syndication deal that the talent agency receives as part of the “packaging fee.” Suppose the writer’s contract with the production company also calls for the exact same percentage as the agency — namely, a ten percent cut out of syndication. One would be tempted to assume that both the agency and the writer would get the same amount, $5 million, because they get the same percentage. But that is not the case. The talent agency is paid “off-the top,” ten percent of $50 million, or $5 million. The writer’s percentage is applied to the remaining $45 million after the agency’s $5 million has been paid. Thus, the writer gets ten percent of $45 million, or $500,000 less than the agency. The talent’s pay is subordinate to that of the agent representing her/him.
In contrast, under the traditional commission-based compensation, the agent would receive ten percent of the writer’s earnings. In the above example, absent packaging fees, assuming the same contract, the writer would receive ten percent of $50 million, or $5 million. The agent would receive a ten percent commission on the $5 million, or $500,000. Note that, in this case, the writer received $4.5 million in both cases, with or without packaging fees. The talent agent, however, receives $50 million with packaging fees, but only one-tenth of that, $500,000, without.
So, one might ask, how is the writer harmed? One should remember that studios know they must pay the talent agents a hefty packaging fee. Thus, the packaging fees that the talent agents receive reduces the pool of compensation from which the writers can be paid. In other words, the ten percent of the syndication that the writer received in this case would be likely affected by the existence of packaging fee. The production company could pay the writer fifteen percent instead of ten and both it and the writer would be better off. The writer would receive $7.5M, the production company would keep $42.5 million instead of only $40.5 million ($50 million less $5 million to agent less $4.5 million to writer) under the packaging fee scenario. The agent would receive $750,000.
The example shows how the agency can earn more than the talent itself on a packaged production. This agent-skewed distribution is anathema to more competitive labor markets, where not only are such arrangements non-existent, but agents’ percentage is limited by the labor union. For example, Tom Condon, head of CAA’s football sports agency, cannot earn more than the talent he represents on a contract, because the commission an agent can earn is capped by the NFL Players Association at three percent.14
Scripted television writers, who were subject to the packaging fees until the WGA’s April 2019 prohibition, have faced an altogether different scenario. In her 2015 statement as a candidate for the WGA Board, Meredith Stiehm, the acclaimed writer for Cold Case, ER, Homeland, and other hit shows, offered her situation as an example:
When I created Cold Case, my agents packaged it. It was my first show, and I was a rube – when they told me I would benefit too, since they wouldn’t take their 10% from my salary, I bought it. I just didn’t do the math. It wasn’t until year seven of my show when I was tasked with slashing the budget that I finally noticed that my agency was making $75,000 per episode – more than I was. I was stunned. And even worse, they had a percentage of the profits.15
That the agencies earn more than the writers suggests that the Big Four are charging supracompetitive commissions for their services.
Further, the talent agencies continue to earn packaging fees in perpetuity. This is because agents’ compensation is tied not to the talent but to the show. For example, even if an agency no longer represents a certain writer, it would still continue to earn packaging fees from a show it had packaged.
Talent agencies have attempted to justify earning such fees by asserting that packaging involves putting together “comprehensive groups of key talent,” as UTA claimed in its Answering Brief in Lenhoff Enterprises v. UTA. However, the term “packaging fee” is a misnomer in the modern era of agencies. In the 1950s, agents such as Lew Wasserman of MCA would bring teams of talent to studios.16 That changed even as of 30 years ago, however, as noted in a 1989 New York Times article about Michael Ovitz.17 Agencies can command a packaging fee even if they represent a single creative element, as explained in Gross’ Programming for TV, Radio and the Internet.18
In its statement of interest, the DOJ cited the agencies’ First Consolidated Complaint in listing an array of “representative examples of work” that talent agencies may perform on packaged shows. Documentary evidence from Sony Pictures serves not only to undermine such claims, but also to show how packaging fees reduce output, a signature characteristic of anticompetitive conduct according to the consumer-welfare standard that undergirds antitrust law.
In 2015, Wikileaks released 173,132 emails and 30,287 documents leaked from a hack of Sony Pictures.19 These documents shine an unflattering light on the nature of packaging fees charged by the Big Four. For example, in a March 5, 2014 email, Tom Rothman, the chairman of Sony’s TriStar Production and now the chairman of Sony’s Motion Picture Group since February 2015, commented that:
Also, interesting and a significant development in the director driven project world, is the stuff about caa [CAA] internal packaging control. They are demanding and getting fees now on these from the financiers (they call it a ‘packaging fee’ and are keeping as many emerging high end filmmaker projects off the market until they have full control. (emphasis added)
Likewise, in a June 13, 2014 email, then Sony TV boss Steve Mosko responded to an agency’s request for a package fee:
No need to worry about package. I’ve killed the deal w tribune. Your email was ill timed. Its [sic] hard for us to create new business opportunities when you put your hand out looking for a check…when you have done nothing and we are trying to put money in your clients [sic] pocket. Your cost made the decision for us Unreal. (emphasis added)
As indicated by these quotes, the output effect of packaging fees is decidedly negative.
Moreover, the Big Four agencies seldom, if ever, compete on price; the 3-3-10 packaging fee has been the industry’s “standard” for many years. The logic that agencies, in the absence of any coordination, would be expected to compete on price finds support in the factual record. Prior to the mid-1990s, the standard industry package fee was 5-5-15.20 After starting CAA along with his former partners at William Morris, Michael Ovitz’s fledgling CAA undercut the industry standard by lowering its package fee to three percent, the standard that has existed since the demise of the franchise agreement known as Rule 16(g) in 2002 and continues today.
The price competition stopped at the now “standard” levels, which is particularly surprising given the current litigation. Indeed, one would expect that the agency that broke ranks by offering to forgo packaging fees would capture a significant infusion of talent, at the expense of the holdout agencies.
IV. THE BIG FOUR HAVE COME TO DOMINATE ACCESS TO THE PRODUCTION COMPANIES
Co-packaging occurs when more than one talent agency brings a talent element to a show, necessitating a split in the packaging fee. In the case of two talent agencies, each would get 1.5-1.5-5, or half the standard 3-3-10 fee. In such cases, the agencies that split the package effectively become horizontal shareholders. They now have common ownership in an anticipated future income stream.
Notably, both packaging and co-packaging are the province of the Big Four. The following table is excerpted from a declaration submitted in the Lenhoff v. UTA et al. litigation by Ted Tatos, one of the authors of this article, who was engaged by Plaintiff Lenhoff Enterprises, a boutique literary agency.