Contract negotiations in the entertainment industry often occur in settings riddled with unequal bargaining power. This archetypal inequality is regularly represented in popular culture by the record label or film studio mogul who dominates a new artist’s career. These stereotypes are based in truth and the reality of the industry is that creatives are handicapped at the negotiating table when dealing with their more established and better financed counterparts. Consequently, transactional attorneys for emerging creatives in the entertainment industry face the challenge of compensating for such disparities in bargaining power by anticipating unknown conditions to safeguard their clients’ present and future interests.
Unfortunately for the plaintiffs in Kirkman v. AMC Film Holdings LLC, this foresight is precisely what was lacking when inking key compensation provisions.1[1] Kirkman v. AMC Film Holdings LLC., No. BC672124, 2020 WL 4364279 (Cal. Super. Jul. 22, 2020). In Kirkman, a July 22, 2020 decision by the Superior Court of California for Los Angeles County, Judge Daniel J. Buckley made waves in the entertainment community when he ruled against the popular creator of The Walking Dead franchise, Robert Kirkman, and in favor of the major network, AMC.
The decision exposed the tension that exists between contract drafting and contract interpretation, further emphasizing the critical role transactional attorneys play. The controlling issue before the court centered around AMC’s application of the term “modified adjusted gross receipts” (“MAGR”), which would govern the calculation and payment of the creators’ contingent compensation.2[2]Id. at *4. In a thorough opinion, the court found that the plain language of the heavily negotiated contracts governed, despite the creators’ objections concerning their contracts’ contingent compensation provisions and AMC’s supplied MAGR definition. Ultimately, this case serves as a warning for both creatives and their attorneys to avoid finalizing a contract with ambiguous terms, and offers helpful guidance on how courts will interpret contingent compensation provisions in industry contracts.
Background
In Kirkman, plaintiffs Robert Kirkman, David Alpert, and Gale Anne Hurd (collectively, “the creators” or “Plaintiffs”) sued AMC Film Holdings, LLC, AMC Network Entertainment, LLC, and AMC Networks Inc. (collectively, “AMC” or “Defendants”). In addition to being the creator of The Walking Dead graphic novels, Kirkman created The Walking Dead comic books, and, with Alpert and Hurd, is executive producer of the television shows The Walking Dead and Fear the Walking Dead and consulting producer of Talking Dead.3[3]Id. at *1. All three shows in The Walking Dead franchise (“TWD”) are produced by AMC’s studio for broadcast on the AMC channel.4[4] Id.
Plaintiffs alleged that AMC breached their contracts pertaining to TWD shows. The allegations stemmed from AMC’s calculation and payment of the creators’ contingent compensation. Contingent compensation (a.k.a. “profit participation”) is a common provision in television contracts that pays out additional money when a show becomes sufficiently profitable, surpasses a ratings benchmark, or wins an industry award. TWD contracts calculated contingent compensation as a percentage of a show’s profits, based on AMC’s standard MAGR definition and subject to certain terms that were specified in the parties’ contracts.5[5] Id. at *2. MAGR is a collection of certain revenues or receipts associated with a show, minus certain expenses associated with that show. The amounts included in and deducted from MAGR are generally provided in a separate MAGR “definition.”6[6] Kirkman, 2020 WL 4364279, at *1.
At the time the contracts were finalized, however, AMC did not have a working MAGR definition in place. The Walking Dead was AMC’s first in-house production and, consequently, was also the network’s first show to employ its standard MAGR definition.7[7] Id. at *5. So, when the creators agreed that “MAGR shall be defined” using AMC’s standard MAGR definition, they did not know all the terms to which they would be bound because no definition yet existed.8[8] Id. at *2. After the contracts were signed, AMC provided a definition that calculated MAGR based in part on an “imputed license fee” representing the amount of money AMC would have paid an outside studio for the right to broadcast each episode on its own channel.9[9] Id. AMC’s imputed license fee for TWD was far lower than many similarly successful television series, thereby lowering the MAGR pool out of which the creators were paid a percentage.
When in Doubt, Express Language Governs
Looking past the technical jargon and complex payment scheme, the creators were concerned with the network’s vertically integrated compensation structures, which presumably offered greater cost benefits to AMC.10[10] See Blaine Roth, Tuning into the On-Demand Streaming Culture—Hollywood Guilds’ Evolution Imperative in Today’s Media Landscape, 27 UCLA Ent. L. Rev. 141, 165-167 (2020) (relatedly discussing the role of vertical integration in Kirkman and how guilds can approach the issue). The court, however, rejected the creators’ argument that AMC could not use its MAGR definition to calculate payments in connection with AMC’s airing of TWD shows on AMC’s own channel. The creators disputed the enforceability of the MAGR definition, including the imputed license fee, because it was provided to them after they signed the TWD contracts. While this timing may raise concerns for some, the court was wholly unsympathetic toward the creators’ request to impose a new MAGR definition based on industry custom.11[11] Kirkman, 2020 WL 4364279, at *2. The court found that the contractual provisions unambiguously established that the MAGR would be defined according to AMC’s standard definition of MAGR, irrespective of the fact that such standard definition was nonexistent when the creators signed their contracts.12[12] Id. at *3.
Here, the court reasoned that the creators specifically bargained for certain MAGR terms in exchange for AMC’s right to define the balance of MAGR.13[13] Id. The court rejected the creators’ argument that the parties had instead agreed to negotiate the balance of the MAGR definition at a future date, observing that controlling New York law would have rendered such an “agreement to agree” unenforceable.14[14] Id. The court focused on the contract’s express agreement that “MAGR shall be defined, computed, accounted for and paid in accordance” with AMC’s standard MAGR definition.15[15] Id. at *5. In interpreting this provision, the court reasoned that shall was mandatory language and synonymous with must.16[16] Kirkman, 2020 WL 4364279, at *5. Consequently, AMC’s MAGR definition and imputed license fee controlled the contingent compensation in the TWD agreements.
Despite the creators’ efforts to prove the contracts were unfair or unreasonable due to the absent MAGR definition, AMC explicitly agreed to create a “standard” definition, which would be used in future business with other profit participants.17[17] Id. at *6. Therefore, the creators’ concern that AMC would create an arbitrary and oppressive MAGR definition for the purpose of withholding profits was unfounded.18[18] Id. Additionally, the court considered the following factors in reaching its decision to leave the contracts intact: (i) the sophistication of the parties’ legal representation, (ii) the thorough negotiation process, and (iii) the parties’ post-agreement conduct.19[19] Kirkman, 2020 WL 4364279. Concerning the third factor, the court noted that the creators waited nearly four years to raise any objection to AMC’s MAGR definition while reaping the benefits guaranteed to them under the definition in the interim.20[20] Id. at * 11. The combined effect of the express language of the contracts and the parties’ subsequent course of conduct supported the enforceability of the network’s MAGR definition.
Fill in All the Blanks
Contingent compensation provisions are commonplace in agreements that span most entertainment industries, including music, television, and film. Creators, especially those new to an industry, should exercise caution when negotiating a contract. When Robert Kirkman signed his contract with AMC, he was primarily known for his graphic novels. Kirkman entered the television industry with limited experience, as The Walking Dead was his first major television project. As the Kirkman decision illustrates, however, courts, even those in California and New York with greater experience resolving entertainment disputes, place the burden on creatives to ensure they are diligent when contracting with their established counterparts. While parties with greater bargaining power, such as prominent studios, networks, and labels, should exercise similar caution, creators face heightened risk in forgoing profits.
Courts are historically reluctant to interfere with a standing contract and are unwilling to rewrite an ambiguous or unfavorable provision. Ultimately, a party to a contract is responsible for knowing all the terms that will govern. Although a term may be withheld as a negotiating tactic or, as in Kirkman, because it does not yet exist, entertainment attorneys should remove blatant ambiguity from their clients’ contracts to prevent future litigation and potentially significant profit losses from poorly drafted compensation provisions.
Written by: Chloe Sucato
Chloe Sucato is a 2022 J.D. Candidate at Brooklyn Law School
1 Kirkman v. AMC Film Holdings LLC., No. BC672124, 2020 WL 4364279 (Cal. Super. Jul. 22, 2020).
2 Id. at *4.
3 Id. at *1.
4 Id.
5 Id. at *2.
6 Kirkman, 2020 WL 4364279, at *1.
7 Id. at *5.
8 Id. at *2.
9 Id.
10 See Blaine Roth, Tuning into the On-Demand Streaming Culture—Hollywood Guilds’ Evolution Imperative in Today’s Media Landscape, 27 UCLA Ent. L. Rev. 141, 165-167 (2020) (relatedly discussing the role of vertical integration in Kirkman and how guilds can approach the issue).
11 Kirkman, 2020 WL 4364279, at *2.
12 Id. at *3.
13 Id.
14 Id.
15 Id. at *5.
16 Kirkman, 2020 WL 4364279, at *5.
17 Id. at *6.
18 Id.
19 Kirkman, 2020 WL 4364279.
20 Id. at * 11.
