Disney’s Fox Seeks to Quash $128 Million ‘Bones’ Punishment

(Bloomberg) -- Walt Disney Co.’s newly acquired 20th Century Fox studio is set to appeal a punitive arbitration award involving the “Bones” TV series that could prove costly for media companies that cheat show creators and actors out of their share of profits.

The industry has long used arbitration in such disputes to limit the risk of big jury verdicts, but that strategy was upended in February. An arbitrator ordered a group of affiliated Fox companies to pay $179 million, including $128 million in punitive damages, to four “Bones” actors and producers. They had accused 20th Century Fox of conniving with Fox Broadcasting, its sister network, to minimize their payments.

“The studio thought it had insulated itself against this possibility,” said Robert Schwartz, an attorney with Quinn Emanuel Urquhart & Sullivan LLP in Los Angeles. If such a big punitive award is allowed to stand, “it will have a deterrent effect” on the creative accounting big media companies sometimes use to keep a bigger share of any profits, he said.

On Monday, 20th Century Fox is scheduled to take its appeal of the punitive damages to a California state judge.

The “Bones” case illustrates the potential for self-dealing by vertically integrated entertainment companies that own the studio that produces a TV show and the network that broadcasts it. Studios often promise to share revenue or profit with those who create their programs. But if a show is licensed to an affiliated network at a low price, there’s less going to producers, writers and actors, leaving more for the company.

The majority of new shows are being produced and distributed by the same companies, after a wave of mergers that created conglomerates operating pay-TV providers, cable networks and studios.

Disney’s $71 billion acquisition of 20th Century Fox and other Fox properties last month was one of the most sweeping media-industry deals, which shrank the number of major Hollywood studios to five from six. And the success of Netflix Inc. has inspired Disney, Apple Inc. and AT&T Inc. to create streaming services that buy from their own studios.

Media companies are debating whether to continue to license shows to Netflix, or to instead keep them for their own services. But if they decline to accept millions from Netflix, they will have to pay as much as Netflix would offer -- or face legal action. Netflix paid AT&T $100 million for just one year of rights to reruns of the 1990s TV series “Friends.”

Lawsuits over alleged self-dealing against Hollywood powerhouses aren’t new, but the huge punitive damage award against Fox adds a new element of risk.

In 2009, Disney lost a $320 million jury trial brought by the U.K. creators of “Who Wants to Be a Millionaire.” They claimed that an arrangement between Disney’s Buena Vista Television and its ABC network meant that the profits from the quiz show stayed with ABC and not with Buena Vista, which was supposed to give the creators half of its profits.

Similarly, AMC Networks Inc. faces multiple lawsuits by creators and producers of “The Walking Dead” over allegations AMC used its position as both producer and distributor of the zombie TV show to shortchange them out of their share of the profits. One case, which claims more than $280 million in damages from the first seven seasons of the show, is scheduled for trial next year in New York.

In the Fox case, actors Emily Deschanel and David Boreanaz, producer Barry Josephson, and forensic anthropologist Kathleen Reichs, a producer whose crime novels provided the basis for the series, claimed that the Fox studio breached its agreements with them by licensing the series to the Fox network for less than what an unaffiliated network might have paid.

According to the arbitrator, retired judge Peter Lichtman, the network used bogus threats to cancel the show after the fourth season to secure a lower licensing fee. The studio not only failed to negotiate a better deal, but collaborated with the network in a fraudulent effort to make the producers agree to the new terms and sign away their right to legally challenge it, Lichtman said.

In addition, the arbitrator agreed with the actors and producers that the Fox studio allowed the parent company, Fox Entertainment Group, to give the streaming rights for “Bones” to Hulu, which was partially owned by the Fox parent company, at below-market rates. The revenue from streaming the current seasons on Hulu, as opposed to past seasons, went to the Fox network even though it didn’t own any streaming rights.

“It is undisputed that the Fox conglomerate had an equity stake in Hulu, and the evidence established that ‘Fox writ large’ essentially handed over the digital rights at a low cost to build up value of that enterprise,” Lichtman said.

While Fox can’t appeal the ruling that it underpaid actors and producers, and must fork over $33 million in compensatory damages, it is challenging the punitive award. The studio says the contracts it breached specifically preclude any punitive damages.

The arbitrator didn’t think so, instead concluding that punitive damages were only off the table for the studio’s breach of contract but not when it came to the network and the parent company’s intentional interference with the contracts. Lichtman particularly cited the “cavalier” attitude of the Fox executives who testified at the hearings.

“Arbitrators are as quick to see fraudulent and deceptive conduct as jurors,” said Dale Kinsella, an attorney representing Josephson. “The ‘Bones’ decision proves they will award punitive damages when warranted.”

The cases are: Wark Entertainment Inc. v. Twentieth Century Fox Film Corp., BC602287, and Temperance Brennan LP v. Twenty-First Century Fox Inc., BC602548, California Superior Court, Los Angeles County.

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