The landmark “self-dealing” arbitration between the WGA and Netflix, which awarded more than $450,000 in underpaid back wages to Bird Box screenwriter Eric Heisserer, took place over seven days and featured several witnesses and dozens of voluminous exhibits, according to the ruling by Arbiter. which was received by Deadline.
The guild, which won the arbitration, says that “as a direct result of this ruling, 216 writers on 139 other Netflix theatrical films will receive an additional $42 million in unpaid residuals.” The guild says it is now “pursuing approximately $13.5 million in interest Netflix also owes writers for late payment of these residuals.”
In his 34-page ruling in the Bird Box case, impartial arbitrator Kenneth A. Perea found that Netflix was in “breach” of the WGA contract because Netflix used the wrong formula to determine the residuals owed to Heisserer. The guild says this is the same “inappropriate” formula that Netflix applied to the other 139 “self-produced” films produced by Storybuilders LLC – the streaming giant’s affiliated production arm – and distributed exclusively on the Netflix platform.
See the referee’s results and the award here.
The question was whether Netflix gave itself better terms for Bird Box writer’s residuals – and by extension, for its other “self-produced” feature films – than the arms-length deals it made with producers of outside theatrical films that were licensed and marketed. as “Netflix Originals” for “first window” exhibition on its platform. Bird Box, which starred Sandra Bullock as a mother protecting her children from unseen forces, had a limited seven-day release in 18 theaters before transferring to the Netflix site in December 2018.
But instead of relying on the WGA’s own contract provision, Perea noted that Netflix used the SAG-AFTRA contract with Netflix — to which the WGA is not a party — as the basis for determining Heisserer’s residency. After the WGA, Netflix applied the SAG-AFTRA formula to the 139 other films as well.
The dispute centers on the “imputed” license fee – on which the residuals are based – that Netflix pays itself for its “self-produced” films. Under the WGA contract, the typical residual for the credited writer is 1.2% of the license fee paid to the producer for the right to exhibit that film.
The WGA told its members last week that under its contract Netflix must pay restrictions on its “self-produced” films based on the licensing fees it pays for comparable theatrical films from third-party producers – which it says “almost always” d ‘Films transcend. ‘ budgets, and what is known as a “cost-plus” model.
Bird Box was budgeted at around $71 million. But WGA West, as part of its own investigation, said it found Netflix paid residuals over the past 10 years on all self-produced “Netflix Original” theatrical films, including Bird Box, “based on a flat $6 million, across the board, imputed license fee, regardless of the actual production cost of a theatrical film.
Netflix, however, said that the imputed license fee it ultimately arrived at in the writer’s calculation for Bird Box was for a budget that exceeded $54 million — a figure that the WGA says Netflix reached only after the guild His complaint was filed and arbitration proceedings began last year.
Netflix also acknowledged that it paid writers’ residuals based on the sliding scale of royalties in the SAG-AFTRA deal with Netflix, in which actors share 3.6% of the royalties in the form of residuals. Arbitrator Perea noted that for Netflix’ self-produced features, the SAG-AFTRA agreement with Netflix for:
• An imputed license fee consists of 100% of the production budget up to $30 million and a reduction of the production budget above $30 million thereafter.
• Residuals calculated based on 90% of the imputed royalty figure with 10% allocated to residual-free theatrical release for the first $30 million of the imputed royalty.
• Additional $10 million increments of the imputed license fee are subject to theatrical allocations smaller than 10%.
• Residual payment that covers every show on Netflix for 20 years.
In his conclusions, however, Perea wrote that such terms are “clearly absent” from the WGA’s 2017 Minimum Basic Agreement (MBA) “nor are they reflected in industry-wide practice.” And the WGA’s contract, he wrote, gives him “no power or jurisdiction to reform, amend or extend the express terms and conditions” of the WGA’s MBA, and that for “the substance” of the terms of the SAG-AFTRA deal to apply. with Netflix joining the WGA “would effectively require” him “to amend the parties’ 2017 MBA in clear violation of its express terms.”
Based on that, Perea concluded that the SAG-AFTRA deal with Netflix “is not controlling” in determining residuals under the WGA contract, and that Heisserer should receive his 1.2% share of the film’s imputed $78,644,740 in royalties – a figure he approached. by multiplying the actual budget of the film by 1.11%, which was the percentage he arrived at by calculating the average license fee that Netflix paid to 43 “comparable pictures” that Netflix called “Netflix Originals ” were marketed and licensed by Netflix at arm’s length. Transactions with producers and releases worldwide within a similar time period as Bird Box.
The SAG-AFTRA National Council, meanwhile, voted overwhelmingly on Monday to approve a new contract with Netflix, which now goes to union members for ratification. In that deal, Netflix and SAG-AFTRA agreed that the company will join the multi-employer bargaining unit represented by the Alliance of Motion Picture & Television producers, and that future agreements with Netflix will be conducted simultaneously with AMPTP negotiations. “Some issues are covered by the industry-wide agreements with the AMPTP and will be addressed in the upcoming negotiations, including the increase in the wage (scale) and the streaming rest structure, among others,” the guild said.
Summarizing WGA West’s objections, Perea wrote:
“Despite the unambiguous language in the (WGA’s) 2017 minimum base agreement requiring Netflix to impute a license fee to Bird Box based on its ‘payments in arm’s-length transactions for comparable images,’ Netflix’s chief witness and former internal labor counsel admitted. Arbitrator that ‘ Netflix did not argue that we should watch comparable images’ in order to impute a license fee for Bird Box. However, this is expressly what the 2017 MBA instructs Netflix to do.
“Instead, like the main characters in the Bird Box, who have to blind themselves to escape from an unpleasant reality, Netflix has ignored his 2017 MBA obligations and woven a residual formula out of whole cloth. With an arbitrary “one size fits all ” Approach to all of its self-produced theatrical content, Netflix initially imputed the license fee for Bird Box to only $6 million in the calculation of residuals and ignored the 2017 MBA requirement to distribute the license fee everywhere. Markets reuse on a “fair and reasonable manner.” The budget of Bird Box was about $71 million, so the imputed license fee for Netflix’s valuable exclusive global reuse rights in the film was limited to just 9% of its budget, as if Bird Box was a total failure and financial loss, rather than the global sensation it is.
“Realizing that it could not build a good faith argument that its ‘one size fits all’ residual formula is consistent with the 2017 MBA, Netflix decided to reevaluate the license fee for Bird Box in the middle of the arbitration. Netflix now argues that the license fee for Bird Box on the net budget of the film should be determined, and that it is allowed to allocate 21% of the “net budget” imputed license fee to the theater market, where no residuals are payable, and only pay residuals on 79% of the net budget of the film, consistent with its special deal with SAG-AFTRA. Netflix’s own witnesses, however, admit that the Netflix/SAG-AFTRA special deal is not binding on WGAW; is not used industry-wide; and is not based on comparable images. Above all, the Netflix / SAG-AFTRA Special Deal out-of-line with budget-to-license-fee ratios Netflix typically pays for comparable images in arm’s-length transactions.
“WGAW reviewed the budgets and licensing fees Netflix paid for all ‘Netflix Original’ theatrical films in which Netflix licensed and/or obtained global distribution rights – or distribution rights to most of the world – from unrelated and unrelated third parties Parties in arm’s-length transactions such as the rights Netflix has in Bird Box. As WGAW Exhibit 33C shows, it is clear that when Netflix licenses the global distribution rights in theatrical film content, Netflix consistently pays a license fee that exceeds the budget of the feature film. 41 comparable pictures with a known budget in which Netflix licensed worldwide exploitation rights in arm’s-length transactions, Netflix paid an average licensing fee that was 132% of the films’ gross budget or 143% of the net budget.
Summarizing Netflix’s contentions, the arbitrator noted that Netflix took the WGA’s allegation that Netflix engaged in “self-dealing” — a term the arbitrator did not use, other than to express the WGA’s own view of the case describe
He wrote that Netflix claims:
“WGAW’s counsel and witnesses in this case have frequently referred to Netflix’s calculation of imputed license fees for self-produced films as a form of ‘self-dealing.'” as in a breach of fiduciary duty to a legal beneficiary.
“This insinuation is prejudicial and completely unjustified. The parties have collectively negotiated the valuation of royalties produced and issued by related entities. Companies are instructed by the 2017 MBA to objectively impute royalty for self-produced films to be calculated by reference to their payment of licensing fees to third parties for the new media exhibition of comparable motion picture images.This is exactly what Netflix did in this case and this provides a compelling reason to reject WGAW’s grievance.
That argument, however, did not prevail, nor did many of Netflix’s other objections, which the arbitrator summarized as follows:
“The underlying issue in the dispute is simply understood and not subject to the many tangents that WGAW tries to include in these proceedings. The question is simply this: what is the imputed license fee for the exhibition of the film Bird Box on Netflix Streaming platform? And the answer to this question is governed by the express language of the 2017 MBA New Media Sideletter, which states: ‘If the “responsible receipts” derived from the exploitation of new media are received by an affiliated or related entity that as an exhibitor/dealer of such image, then the responsible receipts received by the company from the license of such rights shall be measured by the payments of the exhibitor/dealer to unrelated and unrelated entities in arm’s length transactions for comparable images or, if none, the amounts received by the company from unrelated and unaffiliated exhibitors/traders in arm’s length transactions n for comparable images, or, if none, a comparable exhibitor / dealer’s payments to comparable unrelated and unaffiliated entities in arm’s length transactions for comparable images.’
“In this case, the film Bird Box is both produced and exhibited by Netflix-affiliated companies. Therefore, the producer and exhibitor in this case are ‘affiliated entities’ and the exhibitor has not paid a specific arm’s-length license fee to the producer for the rights to the film and exhibiting in new media. In order to recognize the imputed license fee for the new media exhibition of the film Bird Box, the 2017 MBA New Media Sideletter instructs the parties to examine how much money the exhibitor/retailer (here, Netflix) paid to unrelated and unrelated entities has paid Arm’s length transactions for comparable images.
“In this case, Netflix showed that it calculated Bird Box’s imputed license fee according to the same formula as it negotiated with SAG-AFTRA for ‘affiliated entity’ films. In other words, as a producer of Bird Box, Netflix paid residuals to Screenwriter Heisserer followed the same imputed license formula that paid SAG-AFTRA representing actors and other guild talent.According to that negotiated formula, the imputed license fee for Bird Box was $54,372,407.
“Netflix acted more than reasonably in calculating Bird Box’s imputed royalty at this level. The Netflix/SAG-AFTRA Memorandum of Agreement addresses the exact same issue of calculating an imputed royalty that Netflix and WGAW have in this case contest. Most significantly, the underlying SAG-AFTRA and WGAW New Media agreements share the same definition of imputed royalties. When Netflix and SAG-AFTRA negotiated a general formula for imputed royalties, they agreed that imputed royalties for Netflix-produced films out of 100 % of the net production budget would persist until the production budget exceeded $30 million.At that threshold, any portion of the production budget that exceeded $30 million would not count 100% toward the imputed license fee, but would instead decrease in specified increments.
“As an arm’s-length deal between a third-party producer and Netflix, the Netflix/SAG-AFTRA Memorandum of Agreement has the objective hallmarks of a fully and fairly negotiated deal. And most significantly for our purposes, it is a deal that objectively reflects the payments made by the exhibitor/dealer to unrelated and unaffiliated entities in arm’s length transactions for comparable images.
“In particular, Dr. Paul White (‘Dr. White’) demonstrated in detail that the weighted average of license fees as a percentage of the production budget paid by Netflix to license third-party productions for exhibition on the New Media Platform as the production decreased. Budget increased. In only one case – years after Bird Box was produced – did a film with a production budget of more than $30 million receive a license fee that was at least 130% of the production budget, which is the extreme result, provided by WGAW in this case. On the contrary, Netflix typically pays third-party licensing fees for such high-budget productions that roughly fit the Netflix/SAG-AFTRA Memorandum of Agreement formula.
“In this case, WGAW seems to be claiming that Bird Box was produced for Netflix very valuable and, accordingly, the imputed license fee should be calculated at a higher rate than the other high-budget films Netflix licensed from third parties. For this reason, WGAW tried exhibits to introduce, who commented on the general popularity of the Bird Box and the alleged contribution of the Bird Box to the bottom line of Netflix. However, this is an unfair calculation method that has no support in the 2017 MBA and would lead to unwanted practical abuse if put into practice.
“In particular, the 2017 MBA New Media Sideletter does not instruct the parties to determine how much ‘value’ the exhibitor derives from the motion picture with the benefit of hindsight. Therefore, the 2017 MBA New Media Sideletter does not suggest that motion pictures that will be successful in the long run , result in larger imputed royalties than films that are less successful. Rather, as WGAW’s own residual experts confirm, the imputed royalties are determined at the time of the film’s initial theatrical release, not months or years later: (‘Q . In the case of Bird Box, when would the imputed license become part of the producer’s gross? A. On the date of release to the theater market.’); (‘Q. At what time would the license for Bird Box be imputed . .. You know, the costs are known, so presumably the imputed license fee is known.’) At this point of the first theatrical release, without the benefit of the backbl back and at least a week before the film even appeared on the Netflix platform, it is impossible to know if the film will be an SVOD ‘success’ according to what unspecified criteria WGAW sets.
