Many of us will remember 2020 as the year that the theatrical exhibition business irrevocably changed. Our last blog covered the landmark agreement between Universal Pictures and AMC, the world’s largest theater chain, to reduce the theatrical exhibition window from three months to just over three weeks. Now a New York federal judge has granted a motion by the Department of Justice to terminate the Paramount Consent Decrees—antitrust rules that have governed the relationship of studios and theater owners since 1949.

Background

Following an adverse Supreme Court decision in 1948, the studios consented to divest their theaters, which they then owned. The Consent Decrees also prohibited the studios from certain business practices. These included block booking, under which theaters were required to license a package including less desirable movies in order to get the ones they wanted, and circuit dealing, in which studios demanded a single license to cover all of the theaters in a chain. The ban on both of these will expire after a sunset period.

Rationale

The District Judge, Analisa Torres, agreed with the Justice Department’s arguments that the original rationale for the Decrees had no place in a time of technological change. She noted that “seventy years of technological innovation, new competitors and business models, and shifting consumer demand have fundamentally changed the industry.” Many of the studios that were subject to the original Decrees no longer exist as independent entities, while new entities such as Netflix and Amazon are potential major competitors not subject to the Decrees.

As for continued antitrust concerns, the judge was confident that existing antitrust law would be sufficient to address them. “Antitrust laws, and their faithful enforcement, weigh in favor of the Court’s finding that there is a low likelihood of a potential future violation absent the Decrees.”

Objections

Theater owners were not as sanguine as the court. The National Association of Theater Owners and a spokesperson for independent theaters both issued statements warning of the threat to competition from vertical integration of distribution and exhibition of theatrical features. The Directors Guild of America also weighed in on the subject on behalf of the creative community. The DGA expressed concern that the opportunities for independent cinema in the marketplace, already under threat, would become more imperiled still.

What’s Next?

There may be at least one bright spot for consumers in this ruling. More than one theater chain is presently in or near bankruptcy. A studio buyout could keep local movie houses open, though possibly limited to showing only product in which its owner has an interest.

It’s likely that the changes in the theatrical exhibition model as a result of the termination of the Decrees will take some time to play out, but changes there will certainly be. We can look to the television business for a historical precedent. The Financial Interest and Syndication Rules promulgated by the FCC in 1970 prohibited networks from owning a stake in their programming or in syndication revenues. When those rules were eliminated in 1993, the networks and major studios quickly merged into vertically integrated entities. The result was a radical shift in the television business. Something similar is happening here.

We are not going to see a quite a return to pre-Decrees practices in these days of multiplexes and online streamers, but the elimination of the Decrees combined with the inevitable end of the 90-day theatrical window will shift bargaining power decisively in favor of the major studios. It remains to be seen what they will do with that leverage.

Movie theaterThese have been hard times for the movie theater business. Attendance peaked in 2002 at approximately 1.6 billion tickets sold. In 2019, that number had dropped by 25%, to around 1.2 billion. The proliferation of subscription streaming services is not the only force driving this trend, but it is certainly a substantial one. Against this challenging backdrop, the COVID pandemic has caused the studios to cut off theatrical release of new movies since March, so that theaters not affected by local shut down orders don’t have product to show even if they could induce audiences to come out to watch them.

Exhibitors have historically been able to maintain a 90-day exclusive theatrical exhibition window before a title is available to be viewed at home. This once meant home video; now the window includes release on streaming platforms. The studios have been pushing to shorten this window for years. They reason that as theatrical releases have become dominated by blockbusters that make most of their money in the first few weeks, there is less value to be gained from an extended theatrical run. They hope to reduce marketing costs by piggybacking marketing for the digital release on the initial theatrical marketing push and grab audiences while their attention is still keen. The exhibitors’ objection to this is simple–the sooner that consumers can expect a movie will be available for home viewing, the less likely they will be to watch it at a movie theater.

In some cases, the pandemic provided the studios with an opportunity and an excuse to make the moves they had long been angling for. Although they are willing to postpone release of potential blockbusters until theaters reopen, more modestly budgeted, genre and family fare are heading directly to streaming platforms on a pay-per-view model. For example, Universal achieved notable success with the animated feature Trolls World Tour, which earned nearly $100 million in rentals without a theatrical release.

But by pushing the envelope with Trolls, Universal also, to mix metaphors, stirred the pot. When Jeff Shell, the CEO of NBCUniversal, told the Wall Street Journal in late April that when theaters reopened Universal would be releasing films in both theatrical and pay VOD formats, AMC, the largest chain both in the US and worldwide, riposted that Universal pictures would henceforth be banned from its theaters.

It’s been a long summer, however. The pandemic shows no signs of abating and things have changed since April. In early July, AMC announced a major debt restructuring in order to avoid bankruptcy. And this week, the chain made peace with NBCU in a deal that could foreshadow a wholesale reshaping of the theatrical business model. The agreement, currently for the US only, collapses the 90-day exclusive theatrical window for Universal features to 17 days, including 3 weekends. After that window, Universal would have the option to release its pictures to premium VOD and pay AMC a share of its rental revenues, reportedly 10%.

It’s too soon tell what the immediate impact of this development will be. Reactions so far have been limited, although Cineworld, the parent of the number three US chain Regal Cinemas, has come out flatly in opposition to any shortening of the theatrical window. In the longer term, pandemics tend to accelerate trends already underway. The Black Death hastened the Renaissance and in a smaller way COVID-19 is likely to hasten the changes in theatrical exhibition that market forces have been driving for a decade or more.

UTA has just announced that it reached agreement with the Writers Guild to sign a franchise agreement that will permit it to resume representation of writers.

This will bring a partial end to a dispute that has lasted for over a year. The WGA had directed its members to fire their agents over their practice of receiving packaging fees directly from networks and studios, which the Guild regarded as a conflict of interest. The WGA also objected to the agencies’ moves into producing through their own affiliated production entities.

More than 80 other agencies, including many prominent ones, have signed a Code of Conduct promulgated by the WGA, but UTA is the first of the four largest agencies to reach agreement over these issues. The others are WME, CAA and ICM Partners.

According to a note from UTA co-president Jay Sures, the agency is not signing the Code of Conduct, but has reached a negotiated settlement. UTA agreed to eliminate package commissions in two years provided one of the other big four agencies also agrees to do so. It may continue to produce through affiliates, but only with a minority stake and subject to other limitations. It required the WGA to back off on its demand for the agency to send it copies of every writer’s contracts. The Guild and UTA also agreed to dismiss their pending lawsuits against each other.

First a collective bargaining agreement, and now this. It may have taken a pandemic, but progress is possible.

In a down to the wire bargaining session, the Writers Guild of America negotiating committee reached agreement with the studios on a new three-year deal. This was unanimously approved by the governing boards of the WGA West and East and will go to the membership for likely ratification later this month. The pact averts what was widely seen pre-COVID as the very real possibility of a writers strike.

The terms track gains previously won by the Directors Guild and the Screen Actors Guild, including substantial increases in residuals for high-budget streaming programs on subscription services like Netflix. The union negotiators were also able to obtain concessions that are of special concern to writers facing a world in which a typical series season is more likely to be eight or ten episodes than 22. The new contract will set limits on the length of time that a writer can be held under off the market under an exclusive option after completing work on a short season. It also sets a threshold minimum that writers must earn over the course of a season when they are paid on an episodic basis.

Hollywood is breathing a sigh of relief that these rocky negotiations are concluded. The town faces many challenges ahead as productions struggle to restart in the face of the pandemic.  Labor unrest is one less obstacle on that path.

 

A planned Netflix movie about Sherlock Holmes’s sister is the target of a lawsuit from the estate of Arthur Conan Doyle, the creator of the legendary detective. The estate has asserted both copyright and trademark claims.

The estate will have to walk a narrow path to prevail on its copyright claims. All but the last ten Sherlock Holmes stories have fallen into the public domain.  A 2014 Federal Circuit Court decision ruled that the attributes of the character had done so as well. The estate’s claim is that those ten stories still under copyright include “significant new character traits” that Netflix is using in its “Enola Holmes” spinoff. It cites as one example the “warm friendship” between Sherlock Holmes and Dr. Watson that it says was portrayed for the first time in the final Holmes stories.

The complaint also raises trademark claims. From the estate’s standpoint, a trademark has the benefit of never expiring as long as it remains in use. In order to prevail on this claim, the Conan Doyle estate will need to make the typical factual showings for trademark infringement: that the Holmes character signifies a source or origin of goods or services and that the Netflix movie would be likely to cause consumers to be confused as to its source or origin.

The performers union, SAG-AFTRA, has reached a deal with the studios for a new three-year contract covering theatrical, television and new media production. The proposal will still need to be approved by the national board and the membership before taking effect.

The proposed contract is patterned on the agreement struck by the Directors Guild earlier this year. It includes wage increases and increased pension and health contributions. The most critical improvement, however, is improved residuals for high-budget streaming productions on services such as Amazon and Hulu.

This leaves only the Writers Guild of America without a deal among the above-the-line unions.  The WGA Agreement was schedule to expire on April 30, but the parties agreed to extend until June 30 in light of the COVID pandemic. There was widespread apprehension of a writers’ strike at the beginning of the year, and the negotiations have not been smooth. At one point, the WGA called the studios group “despicable.” The WGA is also engaged in a battle, in and out of court, with the major talent agencies over package commissions. The pandemic has dampened strike talk somewhat. Attention has turned to establishing protocols for reopening production as writers  look forward to an uncertain job market.

Another blow was struck in the litigation between the Writers Guild of America (WGA) and the top three talent agencies.

In April, the agencies prevailed in their motion to dismiss eight of the nine claims asserted against them by the WGA in the pending US District Court case.  They have now moved to dismiss the remaining claim.

The underlying issue in the case has been the WGA’s contention that the agencies’ practice of collecting packaging commissions is an illegal conflict of interest. Packages are commissions collected directly from networks or studios out of production budgets rather than directly from the clients of the agencies. In April, 2019, it directed its members to fire their agents unless they renounced the practice. This prompted WME, CAA and UTA, the three biggest agencies, to sue the WGA.

The WGA promptly counterclaimed, alleging violations of federal antitrust and racketeering law, of the California antitrust statute (Cartwright Act), fraud and breach of fiduciary duty. Individual writers also joined in each one of these claims. The April ruling by Judge  Andre Birotte dismissed the federal price fixing and racketeering claims for lack of standing, because the alleged harm suffered by the union and its members does not fall under the statute. The court also held that the Guild lacked standing to assert fraud and fiduciary duty claims on behalf of its members.

The agencies have now moved to dismiss the WGA’s Cartwright Act claim. Judge Birotte had let this claim stand because that statute has more expansive standing requirements than the federal statutes. The agencies are asking the judge to reconsider that conclusion. They argue that if writers are given standing to sue, it would open a floodgate of potential plaintiffs resulting in duplicative recoveries and impossible problems of allocation and proof of damages. If the alleged harm of a package commission is that by being paid out of production budgets, the agents are pocketing money that would otherwise be going to writers, the same would apply to directors and performers, and not only them but also to cinematographers, make-up artists and everyone else involved in a production. “The risk of exponential and duplicative claims,” they say, “is precisely why the Cartwright Act does not permit standing in this case.”

The US Copyright Office issued a lengthy report concluding that the Digital Millennium Copyright Act (DMCA) has “tilted askew” in favor of tech companies.  It called on Congress to make changes in the act that will favor copyright owners.

Background

Congress passed the DMCA in 1998. One goal of the Act was to accommodate the growth of websites and internet service providers that host user-generated content. Some of this content infringes third-party copyrights, which presented Congress with the question of allocating the risk of liability for such infringements.

Under the law as it then stood, websites that publish infringing content could be held liable under a theory of contributory infringement. The tech companies argued successfully at the time that they could not realistically be expected to police each one of the millions of posts on their sites. The DMCA resolved this by means of a safe harbor provision. This shifted the burden to copyright owners to police the internet for infringements and send takedown notices in each particular case.

Studios and music companies, the chief victims of online infringement, have long complained about this solution. They say it is expensive and time-consuming to have to send an individual notice for each infringing upload. With no reliable mechanism to shut down repeat infringers, they compare the entire process  to a game of “whack-a-mole.”

Knowledge Requirements

The Copyright Office report recommends that Congress modify the DMCA to strengthen the hands of copyright owners in several respects. Court decisions based on the current statute had made it too easy for websites to deny “knowledge” of infringing content. The report called for changes to make it harder for them to turn a blind eye to systemic infringements.

Repeat Infringers

The Copyright Office also addressed the issue of repeat infringers. The DMCA currently permits providers to terminate the accounts of repeat infringers but does not set clear standards. The report offered two proposals.

First, the report recommended that the statute codify a Fourth Circuit ruling that it is not necessary for a repeat infringer to have been found liable in court. As the Copyright Office put it: “If only those infringers who had repeatedly been adjudged by a court to be liable for copyright infringement — and thereby were already potentially liable for monetary damages — had to worry about having their access … terminated, it is unlikely that such a threat would serve as a deterrent where monetary damages already had not.” It recommended that the appropriate standard should be repeat alleged infringement instead.

The Copyright Office also asked Congress to require all content providers to have a written policy governing repeat infringement. This would effectively overturn a recent Ninth Circuit decision upholding an unwritten policy. The office’s position is that an unwritten policy is an inadequate deterrent to online infringement, saying, “What benefit is it to users if they know only that a policy exists, but are not informed of the code of conduct by which they are expected to govern themselves?”

A Timely New Look

The DMCA went a long way to facilitate the growth of the web that is so much a part of our lives. It reflected a particular balance of interests at the time. As the web has evolved and the statute has been interpreted by the courts, a second look at that balance of interests is certainly timely. The Copyright Office has been issuing a series of reports suggesting updates to copyright law, one of which led to the Music Modernization Act, which was widely praised. Congress should give serious consideration to the recommendations in this latest report.

After something of a war of words, the Writers Guild of America (WGA) and Association of Motion Picture and Television Producers (AMPTP) have resumed negotiations for a new collective bargaining agreement. This agreement will cover writers for film, TV and digital productions.

Residuals for series and feature-length productions made for streaming services are expected to be among the most critical issues under negotiation. The Directors Guild was able to reach agreement with the studios including an increase of up to 50% on residuals for such shows. The DGA is traditionally the first of the above-the-line guilds to complete its three-year deal with the studios. Most of the time, the DGA terms serve as a benchmark in negotiations for the WGA and for SAG-AFTRA, the performers union, both of whose agreements also expire in the same year. COVID-19 has disrupted business as usual, however, and that precedent may not apply this year.

The parties will also be discussing another issue, unique to the pandemic. The WGA asked the AMPTP to agree to extend the period during which union members could earn the threshold amount to qualify for health coverage, since many were out of work. It appeared for a moment that this might derail negotiations entirely. When AMPTP President Carol Lombardini responded to the WGA’s request that she would need to take it back to the AMPTP member studios, chief WGA negotiator David Young fired back with an email saying, “You people are despicable.”

Fortunately for labor peace, both sides have expressed a willingness to address the extension as part of the overall contract negotiations. Lombardini has asked the WGA to tell her how many writers have actually been affected by shutdowns due to the pandemic. Many writers are working in remote writers rooms, while pilot development and screenwriting has always been solitary work well suited to sheltering in place.

The current expiration date of the WGA Agreement is June 30. An objective observer might say that this is not an opportune moment for either writers or studios to want a writers strike. Before the lockdown, there was widespread speculation that a strike was coming; less so now. I will not predict but I can hope.

The organizers of a Salt Lake City comic convention suffered another blow in their long-running trademark battle with the organizers of the San Diego Comic-Con.

The Salt Lake event styled itself as “Salt Lake Comic Con.” The owners of the registered trademark “San Diego Comic-Con” sued for infringement. Nearly six years of litigation culminated in a jury verdict in favor of the San Diego plaintiff.

The defendant appealed to the Ninth Circuit on the ground that “Comic Con” had always been used as an abbreviated term for comic conventions. It was therefore “generic ab initio” and never entitled to trademark protection.  The Circuit Court brushed this argument aside. It simply affirmed the trial court’s findings that there were insufficient facts to support an argument that the mark was generic. It also upheld an award of $3.7 million in attorney’s fees to San Diego Comic-Con’s attorneys, saying that the litigation conduct of the defendant’s attorneys met the standard of an “exceptional” case warranting such a remedy.