1. More and more ADR institutions have specialty panels of neutrals specialising in creative industries
One major trend which erupted since 2018 is that ADR institutions (i.e. bodies which have sprung up over the years, specialising in providing either mediation and/or arbitration services) have understood the need to provide a pool of arbitrators and mediators (i.e. neutrals) who are deeply cognisant of the inner workings of a particular industrial sector.
For the information technology sector, the Silicon Valley Arbitration & Mediation Center (‟SVAMC”) really took off, since 2018. While SVAMC is not an ADR institution providing mediation or arbitration services per se, it publishes the Tech List each year, which it brands as ‟the list of the world’s leading technology neutrals, peer-vetted and limited to exceptionally qualified arbitrators and mediators known globally for their experience and skill in crafting business-practical legal solutions in the technology sector” (sic). While this list is still very US-centric, as well as male-centric, it may prove useful for parties who want to ensure that the arbitrators appointed to resolve their disputes are tech-specialised and understand the international tech business world.
2. More and more disputes taking place in the creative industries are resolved through arbitration
While my 2018 ADR article was a bit of wishful thinking, ADR has since really found its place, as the tool of choice for the creative industries to resolve their disputes, in a confidential, efficient and technology-savvy way.
With the management of the COVID 19 pandemic causing a vast backlog of court cases, on the dockets of almost all courts in the world, for the last two years, and with an inability from public courts to adopt virtual hearings and electronic case management methods, creatives around the world have really started to appreciate using mediation and arbitration services to decisively and efficiently sort out their civil and commercial conflicts.
As highlighted during the first edition of the California International Arbitration Week, California-based ADR institutions, such as JAMS and AAA/ICDR, and California-located neutrals, have everything to win from this newly-found interest in ADR, from the entertainment, music, information technology and media industries, which stakeholders are majorly based in Los Angeles and Silicon Valley. It is therefore possible that California may become a prominent arbitration location, in the future, on a par with Paris or London.
using electronic signatures to sign arbitral awards and other official documents;
making the most of proprietary electronic case management platforms that are simultaneously used by neutrals, parties and ADR case managers during arbitrations or mediations, and
putting robust data privacy terms & conditions, and cyber-attack firewalls, in place, to protect all stakeholders’ data which is disclosed online, during the resolution of such disputes,
so that parties and neutrals alike may virtually meet, despite the lockdowns and travel restrictions, to get on with the arbitration or mediation processes and issue some timely arbitral awards or mediation decisions.
In this context, which is unlikely to change until the UK enters into bilateral agreements with the EU on the enforcement and recognition of court judgments, it is high time for the creative industries to ensure that any dispute arising out of their new contractual agreements are resolved through arbitration.
IPRs (i.e. patents, trademarks, designs and copyright) exist to incentivise innovation and creation of new technology, products or creative works. However, these IPRs need to be balanced against enabling competitive markets, consumer choice and fair access to IPRs-protected goods for the benefit of society.
Enters the concept of exhaustion of IPRs, also sometimes referred to as the ‟first sale doctrine” (‟Exhaustion of rights”).
It is one of the mechanisms to strike this balance, between incentivising creativity and innovation, and enabling more competition, consumers’ choice and access to goods. While owners of IPRs can control distribution of their creation in terms of the first sale of their product, the principle of exhaustion of rights puts some limits on how far that control extends.
So the principle of exhaustion of rights essentially provides that, once goods have been placed on the market by a rights holder or with their consent, this rights holder cannot then assert their IPRs to prevent the onward sale of those goods into the territory. For example, once you have bought a book, the owner of the copyright in that book cannot then stop you from selling this book to another person, in the same territory.
Exhaustion of rights underpins parallel trade. Parallel trade is the cross-border movement of genuine (i.e. not counterfeited) physical goods that have already been put on the market. This is the import and export of IPRs-protected goods that have already been first sold in a specific market. As a result to exhaustion of rights, where the IPRs relating to goods have been exhausted, there will be an opportunity for others to engage in the parallel trade of those goods. For example, a distributor moves a good that had been sold in Germany, to import that good into the UK.
Prior to Brexit, when the UK was one of the 28 member-states of the European Union (‟EU”), the regime of exhaustion of rights applying in the UK had been organised by Brussels’ technocrats, via the European commission’s and European parliament’s legislative processes.
But post-Brexit, the UK is a free agent (allegedly), empowered to decide its own fate, and stance, on its future exhaustion regime and rules relating to the parallel trade of goods into the UK.
2. What was the deal, pre-Brexit, on exhaustion of rights?
Indeed, once goods have been put on the market, anywhere in the EU single market, these goods can flow freely in the then 28 (now 27) member-states of the EU, as well as in the European Economic Area (‟EEA”) (which, in addition to all EU member-states, is constituted by Iceland, Liechtenstein and Norway). Right holders cannot assert their IPRs to prevent this free movement of goods anywhere in the EEA. So, for example, a German right holder could not complain that his or her goods were being imported in the UK, pre-Brexit.
All this means that IPRs in goods first placed on the market anywhere in the EEA, by or with the right owners’ consent, would be considered exhausted in the rest of the EEA. As a result, goods could be both parallel imported in the UK from the EEA, and parallel exported out of the UK to the EEA.
However, IPRs can be asserted to prevent goods from outside of the EEA entering the European market, without the rights holder’s consent. This is because, for non-EEA goods, the IPRs are not considered ‟exhausted” when the goods are first put on the EEA market. Therefore, goods can move around within the EEA market, but not in respect of those goods put on the market by rights holders in non-EEA markets. So, for example, a US right holder could, and still can, complain that his or her goods were being imported in the UK, from Italy, without his or her consent.
On 31 December 2020, the UK left the EU, via its Brexit, therefore also leaving the EU’s regional exhaustion of rights regime. Or did they?
3. What is the current deal, post-Brexit, on exhaustion of rights?
On 31 December 2020, the UK ceased to be part of the EEA and therefore, since then, IPRs relating to goods put on the UK market are not considered ‟exhausted” from the perspective of EEA countries.
Consequently, right holders can prevent the flow of goods they put on the UK market, into any EEA country.
However, the UK and the EU decided to maintain, for now, the ‟status quo”. This means that, although the UK is no longer part of the EEA, the rights in goods put on the EEA market are considered exhausted in the UK. So, if a product protected by an IPR in the EEA is sold with the permission of the IPR owner anywhere in the UK or EEA, then the exclusive right of the IPR owner to control sale or commercial use of the product can no longer be asserted. For example, rights holders cannot prevent the flow of goods they put on the EEA market, into the UK. Additionally, UK rights holders cannot prevent the flow of goods from the EEA, into the UK.
Although parallel imports from the EEA to the UK remain freely importable (with the UK unilaterally participating in the EEA regional exhaustion regime for now), the same is not true of parallel imports from the UK into the EEA. IPRs in goods first placed on the market in the UK are not considered exhausted in the EEA. Consequently, right owners can stop the parallel export of these goods into the EEA, and UK businesses exporting IPRs-protected goods to the EEA need to ensure that they have requisite permission.
This is called the ‟UK+” EEA-wide exhaustion of rights regime.
As far as goods from outside the EEA are concerned, the case law of the Court of Justice of the European Union (‟CJEU”) which determined that, save for patents, international exhaustion of rights cannot apply in respect of goods put on the market outside of the EEA, still applies in the UK as retained EU law. Although the court of appeal in England & Wales and the UK supreme court may decide to diverge from such CJEU case law, it is likely that, in respect of goods put on the UK market both outside the EEA and within, the position on exhaustion of rights in the UK will remain as it is until the UK government directs a change of approach.
4. How may exhaustion of rights change, in the UK, post-Brexit?
Such moment for a new approach to exhaustion of rights is looming on the horizon.
The current UK+ exhaustion of rights regime may be a temporary solution until, following a consultation, a more permanent regime may be fixed by the UK government.
Therefore, further to a feasibility study commissioned to EY, the UK intellectual property office (‟UKIPO”) – the official UK government body responsible for IPRs – launched a consultation, which concluded on 31 August 2021, asking respondents whether the UK should keep the current exhaustion of rights regime on genuine (i.e. legitimate, not counterfeited) goods and materials (i.e. not services or digital goods), or change it (the ‟Consultation”).
In the Consultation, four possible options were under consideration, as follows:
option one: UK+ to maintain the status quo. This would be a continuation of the current unilateral application of an EEA-wide regional exhaustion regime, in the UK;
option two: national exhaustion. This national exhaustion regime would imply that only goods put on the market in the UK can flow around the UK. Goods put on the market in any other country, European or otherwise, could be stopped from entering the UK market by relying upon UK IPRs;
option three: international exhaustion. In an international exhaustion regime, goods put on the market in any country, anywhere in the world, could be automatically parallel imported in the UK, and IPRs could not be asserted to prevent the first sale of that product in the UK; or
option four: mixed regime. Under a mixed regime, certain IPRs, or certain types of goods, may have a different exhaustion regime applied to them. Switzerland, for example, which is neither part of the EU nor of the EEA, but is part of the European single market via bilateral agreements, has a mixed regime. Switzerland has adopted a unilateral EEA-wide regional exhaustion regime, with the exception of fixed price goods, primarily medicines, for which national exhaustion applies.
While the UKIPO sought views on the four above-mentioned regimes, in the Consultation, it also made it clear that it considered a national regime incompatible with the Northern Ireland protocol and, as such, ruled out adopting that option.
Hang on, what? The Northern Ireland protocol?
As with the rest of the UK, Northern Ireland adopted the same UK+ EEA-wide regional exhaustion of rights regime, from 31 December 2020 onwards. Goods can therefore flow freely from the EU member-state Ireland, or from anywhere else in the EEA for that matter, into Northern Ireland without IPRs holders being able to enforce their rights. This is one of the principles of the Northern Ireland protocol, along with the provision that certain EU legislation must be adopted in Northern Ireland to enable goods to flow around the geographical territory that is the island of Ireland; both in and out of Northern Ireland. However, as part of the EEA, the EU member-state Ireland cannot adopt a different exhaustion of rights regime to the other EEA territories. Therefore, notwithstanding the Northern Ireland protocol, rights holders in Ireland can still enforce their IPRs to stop their goods from being put on the market in Northern Ireland, flowing in the EU member-state Ireland.
So, what was the outcome of the Consultation which, despite mentioning the national exhaustion regime, as one of the four options, ruled out from the outset that such national exhaustion regime could ever be implemented in the UK, going forward?
Inconclusive, to say the least.
There were only 150 respondents to the Consultation, the majority of which came from the life sciences sector and creative industries.
most respondents stated that there was parallel trade of goods (materials and products) in their respective sector;
however, responses on the impact of parallel imports from the EEA on organisations, varied between those respondents whose livelihoods were dependent on commercialising parallel traded goods, and those who represent, or are, rights holders:
those respondents dependents on commercialising parallel traded goods, such as pharmaceutical distributors, commented that parallel imports from the EEA benefitted their organisation by contributing to (a) a greater choice of suppliers to source goods from that could in turn be made available to customers at different price points, (b) the availability, flexibility, and security of supply of goods to support market demand and alleviate supply shortages, (c) a competitive market especially intra-brand competition amongst suppliers of the same branded product (or substitutable products) encouraging price convergence;
those respondents representing, or being, rights holders, such as brand owners, replied that parallel imports (a) did not increase choice by providing a greater number of different goods because parallel imports tended to be products already available or approved in the UK, especially licenced branded goods such as branded toys and branded medicines, (b) weakened supply chain resilience due to fluctuations in supply and costs, making demand forecasting particularly difficult for brand owners, and (c) did not always drive competition for the benefit of the consumer but mainly benefitted distributors (through arbitrage opportunities) and resellers (incentivised to purchase lower priced parallel imports, rather than domestically sourced products to achieve higher profit margins).
The most favoured option by respondents was a continuation of the current UK+ regime, because of the difficulties with the national regime and the Northern Ireland protocol. So, if Northern Ireland was out of the picture, most respondents favoured the national exhaustion regime. But because the Northern Ireland protocol is a reality we all have to live with, they favoured the current UK+ EEA-wide regional exhaustion regime.
This is exactly what the two illustrious speakers at the BLACA seminar, Catriona Stevenson, general counsel of the trade body for the UK publishing industry Publishers Association, and David Harmsworth, general counsel of UK music neighbouring rights collecting society PPL, concluded, on 10 March 2022: let’s stick with the UK+ exhaustion regime because it is the least-damaging necessary evil.
More than 50 percent of the respondents to the Consultation opposed an international regime, citing concerns about stifling innovation, the environmental impact, domestic revenue losses, goods of inferior quality or different standards hitting the UK market and the distortion of retail competition in favour of multinationals. Brand owners, manufacturers and those in the creative industries were most opposed to the international exhaustion regime.
More than 20 percent of respondents expressed opposition to a national exhaustion regime, with their primary concerns being isolating the UK market and prices being driven up. Distributors and those who depend upon the supply of goods from Europe – in particular, UK pharmaceutical stakeholders and the National Health Service (‟NHS”) – were most opposed to the national exhaustion regime.
A mixed regime, such as the one in place in Switzerland, was not favoured by respondents to the Consultation.
Whilst an option on exhaustion of rights, which would reconcile the views of those whose livelihoods depend on commercialising parallel traded goods, and right holders, is nonexistent, the UKIPO invoked the lack of data available to understand the economic impact of any of the alternatives to the current UK+ regime, in order to shelve the Consultation for now.
Consequently, the UK will continue with the current regional UK+ regime for the time being, since ‟further development of the policy framework must take place before the issue is reconsidered” (sic).
5. Why something’s gotta give, in order for the UK to keep its rank as a trade-friendly, competitive and exports-focused nation
The UK government’s decision to stay with the current UK+ EEA-wide exhaustion regime continues the strange asymmetry for IPRs holders in which a first sale in the EEA exhausts their rights in the UK, while a first sale in the UK does not exhaust their IPRs in the EEA.
This may provide continued opportunities for IPRs holders in the EEA to assert those IPRs against parallel importers from the UK. So, anyone engaging in parallel importation of goods from the UK to the EEA must carefully considers whether those goods are protected by unexhausted IPRs in the EEA.
More concerning is that Brexit has left the UK with all the disadvantages of being tied to EU laws, but none of the advantages, as far as parallel imports, parallel exports and exhaustion of rights are concerned. EEA-based companies can easily export their goods to the UK, but UK businesses cannot reciprocate. Why is the UK accepting such unilateral deal? Because it is heavily dependant on exports coming from Europe, being a nation which manufacturing sector is weak. Moreover, a lot of UK businesses, and UK consumers, are reliant on the EEA for the supply of goods and raw materials.
As a consumer, can you imagine living in London and only having access to UK-produced and manufactured goods, if a national exhaustion of rights regime was ever implemented in the UK? Not only would retail prices for non-UK manufactured products go through the roof, but basic necessities goods would be in scarce supply. The UK could kiss goodbye to all its rich London-based expatriates, unwilling to return to a 1970s’ style shortage-stricken era.
Moreover, UK’s borders controls are structurally weak and mismanaged, at best, and have been so for years. Indeed, the UK was recently sentenced by the CJEU to a potentially very heavy fine, after being found negligent in allowing criminal gangs to flood European markets with cheap Chinese-made clothes and shoes, while not collecting the correct amount of custom duties and VAT on these imported Chinese goods, from 2011 to 2017. In this context, how do, exactly, proponents of the national exhaustion of rights regime in the UK, such as the Publishers Association and PPL, intend to implement rigorous controls over IPRs-protected goods entering the UK, at UK borders, especially in respect of copyright which are not registered in any IPRs’ database?
As far as goods from outside the EEA are concerned, IPRs owners have probably decided to forego the UK market as the place of first sale altogether, focusing their European sales on the EEA territory, which is a much more attractive proposition in terms of potential number of sales and diversity of customer-base. Then, these goods might enter the UK market via parallel imports, from the EEA, later on. But such convoluted distribution strategy has a cost, since all goods imported in the UK from the EEA are now subjected to trade tariffs and custom charges, as well as import duties.
Already, the film industry – which used to be very monolithic itself – is finally forced to evolve towards global rights packages and more digital streaming, with COVID decimating the audience of local cinemas, and with the likes of Netflix and Amazon Prime only agreeing to ‟digital licenses”, where they acquire all worldwide rights in perpetuity to a motion picture prior to production, for a fixed ‟buyout” payment with no additional net profits, royalties or other accountings, before billing it as a ‟Netflix Original” or ‟Amazon Prime Video Original”.
The UK, and in particular its government, needs to master the ability to keep on looking inward, while, at the same time, adopting a much more realistic and pragmatic view and assessment of its own trade bargaining power, as well as strengths and weaknesses, vis-à-vis its main trading partners, worldwide. In particular, the UK government must push UK businesses towards leaner, more digitised and better streamlined worldwide distribution rights of their products and services, in order to keep their competitive edge. It is only at this cost of uncompromising realism and self-awareness, that the UK will keep a seat at the table of the most trade-friendly, competitive and exports-focused nations in the world.
Actor agreements: how power is shifting back to movies studios and streaming platforms
The movie industry’s balance of power is strongly impacting actor agreements and how actors and actresses are treated by movie studios, film production companies and streaming platforms. While the current pendulum is shifting back to movie studios, streamers and film producers, actors still have many cards to play, in the new streaming era, to get the best deals.
1. The star system: how stars were ‟owned” by film studios, from the creation of the movie business at the beginning of the 20th century, up to the mid 1940s
The film industry was invented at the end of the 19th century, when the Lumière brothers organised the first ever commercial and public screening, of their short films in Paris, on 28 December 1895.
Then, the movie business blossomed in a more mature industry in the 1900s, with the 1920s being the golden years of German cinema and seeing Hollywood overtake, and triumph over, European film industries (French and Italian, in particular), which had been devastatingly interrupted by the first world war.
The American industry, or ‟Hollywood” as it was becoming known after its new geographical center in California, then gained the position it has held, ever since: that of the film factory for the world and major exporter of its movie products to most countries on earth.
Therefore, the Hollywood microcosm, based on its two pillars – the studio system and star system respectively – became the world’s epicenter of the movie industry, from the 1920s onwards.
While in the early years of cinema (1890s to 1900s), performers were not identified in films, the star system (a method of creating, promoting and exploiting movie stars in Hollywood films) was majorly used from the 1920s until the early 1960s, by the above-mentioned studios. However, from the mid-1940s onwards, the star system started showing some serious cracks, which aggressive and forward-thinking talent quickly infiltrated to regain control over their careers and, ultimately, their lives. More on that later.
Under the star system, actors were literally ‟owned” by the majors, as properties locked into employment contracts with a standard term of seven years, through which they owned a weekly wage, like any other employee of the movie studios. They were asked to work six days a week, for long hours. Their contracts required the actors to participate in every movie, and all publicity, the studio desired.
Morality clauses were integral to actors’ studio contracts. They curtailed, restrained or prohibited certain behaviours of, and from, the talent. This was justified not only by the fact that the star system put an emphasis on the image rather than the acting skills of its talent, but also by the studios’ reaction to the Roscoe ‟Fatty” Arbucklecriminal case in 1921. One of Hollywood’s most popular silent stars and highest-paid actors of the 1910s, Arbuckle suffered a serious setback when his reputation was irrevocably tarnished by becoming the defendant in three widely publicised trials, between November 1921 and April 1922, for the alleged rape and manslaughter of actress Virginia Rappe. Subsequent to media outcry, Universal Studios decided to add a morals clause to its contracts, which 1921 version read as follows: ‟The actor (actress) agrees to conduct himself (herself) with due regard to public conventions and morals and agrees that he (she) will not do or commit anything tending to degrade him (her) in society or bring him (her) into public hatred, contempt, scorn or ridicule, or tending to shock, insult or offend the community or outrage public morals or decency, or tending to the prejudice of the Universal Film Manufacturing Company or the motion picture industry. In the event that the actor (actress) violates any term or provision of this paragraph, then the Universal Film Manufacturing Company has the right to cancel and annul this contract by giving five (5) days’ notice to the actor (actress) of its intention to do so”.
Constantly under pressure to ‟behave”, actors and actresses worked together with studio executives, public relations staffs and their agents, to create their star persona … and keep it at all costs, covering up incidents or lifestyles (in particular, homosexuality) that would damage their public image.
From the 1930s to the 1960s, it was common practice for film studios to arrange the contractual exchange of talent (i.e. actors and directors) for prestige pictures. For example, film director Alfred Hitchcock, who had a difficult working relationship with the head of the film studio to which he was contractually bound via a seven year contract, David O. Selznick, was often lent to larger film studios.
Things started to unravel when James Cagney, the top billing actor at Warner Bros., sued Jack Warner and his corporation for breach of contract. There had already been some early warning signs that things were heating up, between Cagney and Warner, with the former repeatedly asking for a higher salary for his successful films, at USD4,000 a week, on a par with Edward G. Robinson, Douglas Fairbanks Jr. and Kay Francis. Warner Bros ultimately refused to cave in and suspended Cagney. He then announced that he would do his next three pictures for free if Warner Bros. canceled the five years remaining on his contract. After six months of suspension, film director Frank Capra, acting as a mediator, negotiated a deal that increased Cagney’s salary to around USD3,000 a week, and guaranteed him top billing as well as no more than four films to shoot per year. Things eased off for a while and Cagney went on to make many more hits for Warner Bros. However, when Jack Warner forced Cagney into making five movies in 1934, and denied him top billing on the fifth title, ‟Ceiling zero”, Cagney’s third film with co-star Pat O’Brien, Cagney brought legal proceedings against Warner Bros. for breach of contract. Represented by his brother William Cagney in court, Cagney won. He had done what many thought unthinkable: taking on the studios and winning. Not only did he win, but Warner Bros., knowing that he was still their foremost box office draw, invited him back for a five-year, USD150,000-a-film deal, with no more than two pictures a year. Cagney also had full say over what films he did and did not make with Warner Bros.
Cagney’s acts of rebellion did not fall on deaf ears, with Bette Davis slamming the door behind her, when Jack Warner asked her to act as a lumberjack in her next feature film. While Davis accepted a film studio competitor’s offer in 1936 to appear in two films in Britain, she was served with court papers in England, for breach of contract, by Warner’s lawyers. The Warner Brothers Pictures Inc v Nelson lawsuit that ensued took place in the English courts, with Davis (who was sued under her married name) invoking slavery, as a result of her 52 weeks’ contract allegedly only being fulfilled when she had – effectively – worked for exactly 52 weeks for Warner Bros. (as opposed to after 52 weeks’ from the starting date of such contract). Warner Bros.’s barrister astutely counterattacked by retorting that, if he received USD1,350 per week, like Davis allegedly did, during the term of her contract with Warner Bros., he, too, would like to be tied up in slavery. The English court found in favour of Warner Bros., deciding that this was a breach of contract on Davis’ part. After the case, Davis returned to Hollywood, in debt and without income, resumed working for Warner Bros. in what became one of the most successful periods of her career.
A very different legal fate happened to Olivia de Havilland, when she, too, sued Jack Warner and Warner Bros. after walking out, refusing to have the time during which she was absent added onto the end of an already long contract. Indeed, in 1943, de Havilland’s seven-year contract ended, but Warner Bros. announced that she was not yet free to move on. The studio claimed that she owed them an additional six months for the time she was under suspension for refusing to perform in certain films. De Havilland argued, in her lawsuit, that the contract was for seven years, suspension or not, and that Warner Bros. was violating labour law. While de Havilland acknowledged that the suspension had taken place, she argued that under California state law, employment contracts were only enforceable for up to seven calendar years. She won the first trial, but Warner Bros. appealed. Yet, the studio lost its case in a decision considered to be such a landmark that it has been dubbed the ‟de Havilland law”, the California court saying that the actress’ contract was a form of ‟peonage”, or illegal servitude. In a big, splashy headline, Variety, noting the ruling, declared on 15 March 1944, ‟De Havilland Free Agent”.
After that, the floodgates started to open, and the movie business had to change, letting actors and filmmakers strike out on their own and control their own destiny.
2. The contemporary system: how actors regained power and took control of their professional destiny
In the long term, the ‟de Havilland law” killed the star system, the publicity accompanying the Davis and de Havilland incidents fostering a growing suspicion among actors that a system more like being a free agent would be most personally beneficial to them, rather than the suffocating and hyper-controlling star system.
In 1959, Shirley MacLaine sued famed producer Hal Wallis over a contractual dispute, contributing further to the star system’s demise. By the 1960s, the star system was in decline.
In 1966, MacLaine sued Twentieth Century Fox for breach of contract when the studio reneged on its agreement to star MacLaine in a film version of the Broadway musical ‟Bloomer Girl”, based on the life of Amelia Bloomer, a mid-nineteenth century feminist, suffragette and abolitionist, that was to be filmed in Hollywood. Instead, Fox gave MacLaine one week to accept their offer of the female dramatic lead in the Western ‟Big Country, Big Man‟, to be filmed in Australia. The Shirley MacLaine Parker v Twentieth Century-Fox Film Corp. case was decided in MacLaine’s favor, ans affirmed on appeal by the California supreme court in 1970. This case is often cited in law-school textbooks as a major example of employment-contract law.
These female leads’ highly publicised and mostly successful litigation cases were instrumental in the push for more and more actors forming their own film production companies, or finding movie projects to champion, that suited their tastes and ambitions. Multi-hyphenates, such as Brad Pitt, Robert Redford, Reese Witherspoon, Clint Eastwood and Bradley Cooper, might not have enjoyed the same kinds of careers had Davis, de Havilland and MacLaine not weakened the control of the major studios.
By the mid-2000s, it had become increasingly clear that the tug-of-war between stars and studios was not supporting the profitability of movie studios. In her insightful book ‟Blockbusters: why big hits – and big risks – are the future of the entertainment business”, Anita Elberse cites her research, which suggests that whereas films that starred A-list actors typically had higher box-office revenues, the fees for those actors were so high that they wiped out the extra revenues the stars brought in – leaving studios with the same profits they would have made if they had relied on lesser-known creative talent. In other words, the stars themselves captured most of the surplus that resulted from their involvement. This is the ‟curse of the superstar”.
The most flamboyant example of an actor successfully branching out into film producing, and taking back control over his career, is Tom Cruise. After his breakthrough role in 1986 with ‟Top Gun”, he went on to star in many more commercially and critically successful films such as 1988’s ‟Rain Man” and 1989’s ‟Born on the Fourth of July”. However, Cruise really upped the ante when he partnered with his then CAA talent agent Paula Wagner (who had signed him, and represented him for eleven years), and co-founded the independent film production company Cruise/Wagner Productions in July 1992. For the next thirteen years, Cruise was able to make the most of his newly-found creative freedom over his film projects, and to produce and direct motion pictures. The first three ‟Mission: Impossible” movies were released by C/W Productions (as it was abbreviated), as well as 2001’s ‟Vanilla Sky” and 2002’s ‟Minority Report”. In October 1992, C/W Productions signed an exclusive three-year multi-picture financing and distribution deal with Paramount Pictures. The deal was renewed and expanded several times over the next thirteen years. However, in August 2006, Sumner Redstone, chairman of Viacom (the parent company of Paramount Pictures) terminated that contractual relationship citing Cruise’s ill advised comments in the media about psychiatry, antidepressants, etc. and his fascination with Scientology. While this is a typical example of ‟what to do when celebrities get it all wrong”, Cruise got a lucky break, when Metro-Goldwyn-Mayer (‟MGM”) came knocking at his, and Wagner’s, door, in November 2006. Harry Sloan, chairman and CEO of MGM, signed an agreement with Cruise/Wagner, for them to run United Artists, a dormant studio that was part of MGM’s portfolio and had been founded in 1919 by Charlie Chaplin, Douglas Fairbanks, Mary Pickford and D. W. Griffith, four of the biggest stars in Hollywood at the time. Sloan’s proposed partnership was notable because Cruise/Wagner were given a relatively free hand in determining a direction for ‟the company built by the stars”, United Artists. For instance they could greenlight movie projects costing less than USD60 million without MGM’s approval, and for a term of at least five years they could develop up to six films a year. All films would be distributed and, at least initially, financed by MGM, for which the studio would receive a distribution fee of between seven and fifteen percent of revenues. In exchange, MGM granted the pair a one-third equity stake in United Artists without asking them to invest a penny of their own money. Most remarkably, Cruise was not obligated to appear in any United Artists’ movies himself, and he remained free to star in, and produce, movies at other studios. This experiment, which ultimately did not work out, was viewed by industry experts as an attempt to solve the fundamental problem of the above-mentioned ‟curse of the superstar” – the growing ability of powerful stars to undermine the profits of the studios and other businesses that employ them. Instead of up-front money, Sloan offered Cruise the freedom to pursue the kinds of projects that he and Wagner were most excited about, and the promise of a bigger payday in the future, through an ownership stake in the studio United Artists.
3. How are actor agreements structured, in the contemporary film business?
In some ways, actor agreements are the most difficult to negotiate as almost everything is negotiable.
Assuming the film production is signatory to the Screen Actors Guild (‟SAG”), which is almost always the case, then the first question will be whether the actor is guaranteed USD65,000 or more in total compensation for acting services. If so, then the actor will fall under ‟Schedule F” of the SAG Basic Agreement and the film production company will be free to negotiate many employment provisions that would otherwise be set in stone by the guild (including overtime and meal breaks, scheduling, minimum daily or weekly compensation, etc.). For the rest of this section, we will refer to those above the USD65,000 threshold as ‟Schedule F actors”, and those below the threshold as ‟daily/weekly actors”.
The two most important deal points when hiring Schedule F actors are the compensations and scheduling.
With respect to the scheduling, it is often overlooked. However, an actor is someone selling his or her time. Actors will not make a binding commitment to block out time for a film production (and therefore pass on other opportunities) unless they are guaranteed payment even if you end up not using them. They also cannot make an indefinite commitment to a film production. Unless the studio is paying a sizable sum in guaranteed compensation, the actor will expect some kind of guaranteed date after which he or she can accept new work without having to get the studio’s approval first. So, an important negotiation point in an actor’s deal, revolves around the total number of days or weeks that the film production will need the actor to actually render services (rehearsal and shooting days, etc.) and the window of time in which the film company needs the actor to be available to them (e.g. three consecutive weeks of services, commencing within two weeks before or after a specific date, within which the services will be rendered). As production schedules change frequently, especially on independent productions and/or if the director is relatively inexperienced, the film production or movie studio needs to negotiate for some additional ‟free” days that can be used consecutively with principal photography, as well as some ‟free” days non-consecutive to principal photography where the film production company can bring the actor back for post-production work (e.g. dialogue replacement, dubbing). The actor’s representatives will probably require that, after the scheduled days and free days are exhausted, the actor be entitled to ‟overage” compensation at the same rate as the fixed compensation represents in relation to the originally scheduled period of services. In other words, if an actor was paid USD100,000 for ten days of scheduled work, and they agreed to two free days, but the production required five days beyond the originally scheduled ten, then the actor would be entitled to USD30,000 in overages. With respect to the window of time in which the film company needs the actor to be available, to render services to the production (which is sometimes referred to as the actor being in ‟first position” to the production), some negotiations also take place. Because an actor is selling time slots, he or she is not going to want to give the film production a large cushion in which to get its work done. Instead, he or she will try to collapse the window to what the schedule currently allows, so that he or she remains available for other projects outside of this narrowed window. Even if the film production is not able to negotiate for many ‟free” days, the production should still be able to require the actor to continue rendering services through the completion of principal photography of the picture – the overages may be expensive, but at least the film production will not lose the actor entirely. Agreeing to any kind of stop date for the actor (i.e. the production guarantees the actor will be released by a certain date, or agrees the production will be in ‟second position” to another production starting on a certain date) is problematic and should not be agreed unless approved by the line producer, the film production company, the cast insurance provider and the completion guarantor (if any).
Fixed compensation is usually the first deal point discussed. For Schedule F actors, it is usually a fixed amount payable in equal weekly installments over the scheduled period of the actor’s services, with overages payable at the same rate for any services required beyond the originally scheduled days and any agreed ‟free” days. The actor’s agent will often negotiate for the fixed compensation to be put in escrow with the agency’s or a law firm’s trust account before the actor even travels, to ensure the production actually has the ability to pay the agreed amount. If escrow is agreed by the film production company, then it will need to enter into an escrow agreement with the agency or law firm. Such escrow agreement must provide that the agency/law firm will suspend payments in the event the actor is suspended or terminated, pursuant to the terms of the actor agreement. It is best practice for the film production company to only deposit the actor’s fixed compensation in escrow once the acting and escrow agreements are fully executed.
Contingent compensation on a project is typically largely paid to actors, who get the lion’s share. As discussed above in paragraph 2., since actors are usually the driving factor in terms of distribution revenues on a picture, they have the bargaining power to negotiate for the most in up-front and contingent compensation. They are four different categories of contingent compensation, as follows. Box office bonuses, which are straightforward contingent bonuses based on the theatrical performance of the picture – if the picture reaches certain theatrical revenue thresholds, then certain bonuses become payable. Box office bonuses are appealing to talent, because box office numbers are widely reported and there are no complicated accounting calculations involved. Gross Participations are the second category of contingent compensation. As with box office bonuses, a participation in the gross revenues of the picture is appealing to talent, because it does not require the cost of production to be calculated or recouped. Instead, the actor is entitled to a percentage of every dollar that the producer receives (after the distributor and/or sales agents deduct their fees, costs and expenses ‟off the top”). However, the investors on an independent production may be unwilling to share the picture’s revenues until they have recouped their entire investment. Therefore, they are more likely to only going to approve a gross participation for a top-level star who is going to drive sales of the picture. Deferments are the third type of contingent compensation. They tend to be a fixed dollar amount payable out of a pool at a defined point in the revenue waterfall (with each stage in the waterfall representing a different level of fee or cost/expense recoupment or profitability of the picture). The most generic deferment pool would be paid at the time immediately prior to net profits – after the distributors, sales agents and collection account managers have taken their fees and expenses off the top, the production has recouped the negative cost of the picture (which may include interest on loans and/or a premium return on equity investments), and any gross participations and/or box office bonuses have been paid. Then, the fourth and final category of contingent compensation are net participations. It is simply the amount that remains after all of the production’s other costs, expenses and contingent participations (e.g. box office bonuses, gross participations and deferments) have been deducted, recouped and paid. This is the least likely form of contingent compensation to be paid to the talent. Typically, an independent producer will hire a collection account management company to collect and administer all of the revenues on the project, and so the collection account manager will be responsible for allocating and paying the applicable participations and deferments. The actor’s representatives will often try to require that the film production company make the actor a party to the collection account management agreement.
For daily/weekly actors, the film production can continue to employ them as long as it continues paying them at the negotiated daily/weekly rate, provided that the actor has not negotiated a specific stop date or something similar. The costs add up, but at least the film production will be able to keep the actor in first position to the production, if need be. Also, as far as fixed compensation of daily/weekly actors is concerned, it is set at a daily/weekly rate, and the actor is paid at that rate (plus overtime and other SAG-mandated amounts/penalties) for the duration of employment. In the case of a daily/weekly actor, his or her agent may negotiate for a guaranteed minimum number of weeks of employment, in which case the actor must be paid the full amount for the guaranteed period, unless they are terminated for cause.
The next issue when negotiating actor agreements is credit. The relative position of actor’s credits is determined by negotiation, but usually depends on the size of the role and the stature of the actors. So, if a film project has two main characters, the bigger ‟star” will often get first position credit and the other actor will be in second position. The distributor of the picture will have very specific opinions about who needs to be used for marketing purposes to help sell the picture, and the film production company needs to liaise efficiently with the distributor’s marketing department, in order to clarify what kind of credit can be given to the actors, while retaining top marketability and revenues maximizing.
It is customary to agree that an actor will have the right to approve the still photographs that will be used in the marketing of the picture (with the actor required to approve at least fifty percent of stills in which they appear alone, or seventy five percent of stills in which they appear with others who have approval rights).
It is also normal to agree that the actor has a right of approval over any blooper footage (SAG requires this anyway) or behind the scenes footage in which the actor appears that the production company is going to use in the marketing of the film or in the added value materials for the home video release of the picture (e.g. DVD extras).
Under SAG rules, actors have a right of prior written approval over any scenes that require them (or their double) to appear nude or as engaging in sexual conduct. The actors’ representatives will often ask that the contract sets this out explicitly (including specific descriptions of the scenes being filmed, and limitations on what can and cannot be shot).
‟Pay or play” is a concept created to protect above-the-line talent, and in particular actors, from being terminated without receiving their full fixed fee. The parties will agree that, at a certain point in the production process (often well before principal photography commences), the talent becomes ‟pay or play”. If they are subsequently terminated without cause, they will be entitled to their entire fixed fee, regardless of whether it has accrued at the moment of termination. Since the actors have blocked out their schedules for this production, they want to ensure that they will be compensated for that time even if the producer decides to go a different direction or the production does not move forward. The contract will set out that the talent can be terminated at any time, for any reason, with or without cause, but if the talent has become ‟pay or play” and is then terminated for any reason other than force majeure and/or the talent’s default or disability, the actor will be entitled to their full fee. Typically, a contract will say that talent becomes ‟pay or play” on the earlier of commencement of principal photography, or the hiring company electing to proceed to production of the picture with the actor in the specified role. While the ‟pay or play” provision does help protect the actors, it also provides a clear way for the producer to terminate the talent’s services, even without cause – the producer can merely pay the balance of compensation owed and send the talent packing (subject to any applicable guild rules). Contrast this with ‟pay and play”, where the talent – usually, the director – is not only guaranteed his or her compensation, but also the right to render services without being suspended or terminated (unless for cause) for a specified period of time.
4. How film streaming and streamers are disrupting the industry, shifting the balance of power away from the stars, and back to film production companies and studios
As film distribution evolved away from movie theatres and towards streaming platforms, the tectonic shift of power between various stakeholders has changed. Such change accelerated with the COVID 19 pandemic, when various lockdowns prevented movie goers to attend their local cinemas, for almost two years.
Netflix is the undisputed market leader in the video streaming sphere, having achieved world domination in 2018 (i.e. its streaming-only plan can be watched by Netflix members in over 190 countries, except in China, Crimea, North Korea and Syria).
From a mere mail-based rental business 20 years’ ago, Netflix successfully transitioned to streaming services from 2007 to 2012, then to its development of original programming, from 2013 to 2017, then to its expansion into international productions, from 2017 to 2020, and now to its emergence into the gaming space (since 2021).
Basically, Netflix rules, when it comes to streaming distribution (although Amazon Prime is a close second). And Netflix does not take any prisoners, when it comes to its distribution deals. Its distribution agreements, more properly characterised as ‟digital licenses”, are differentiated primarily by the fact that there is no division of revenues involved. Netflix does not share the subscription fees it receives. Thus, even when Netflix acquires all worldwide rights in perpetuity to a motion picture prior to production, and bills it as a ‟Netflix Original”, they agree to make a fixed ‟buyout” payment, with no additional net profits, royalties or other accountings.
Bye-bye, contingent compensation for actors, when their film projects are produced by, or distributed by, the likes of Netflix and Amazon! Only fixed compensation is up for grabs.
In fact, Netflix does not even disclose box offices results, even when their films have a theatrical run before, or simultaneously to, making the film available for streaming on Netflix’s online platform. Amazon followed suit on this policy. Both companies refuse to report their box office grosses to either internal industry compilers (including Comscore, which is built into ticket sites for the vast majority of North American theatres) or to the press. Since their distribution deals are free of any contingent compensation, why would they?
As this practice of releasing films in both theatres and streaming platforms has become the norm, in the United States, some talent have filed lawsuits against movie studios for breach of contract. For example, Scarlett Johansson sued Disney over what she claimed was a breach of contract, after Disney chose to release the Marvel superhero movie ‟Black Widow”, in which Johansson starred, simultaneously in cinemas and on its Disney+ streaming platform. In her July 2021 summons, Johansson claimed that her fees were based on the box-office performance of the film and that Disney’s change of release strategy, whilst refusing to renegotiate her actor agreement, deprived her of her fair share of income on this title. Disney retaliated by publicly disclosing Johansson’s upfront fee of USD20 million. The parties eventually settled, for a reported fixed sum of around USD40 million paid by Disney to Johansson.
Not only can actors seat on their box office bonuses, deferments and gross or net participations, when they get involved in a film project with Netflix or Amazon, or other competing streaming services, they are now held by film studios and streamers for anywhere from nine months to more than a year in some cases, per standard series agreement deals. Indeed, prestige film series are at the core of the film streaming universe and business model, with original shows like ‟Euphoria” (produced by HBO and distributed on its streaming platform HBO Max), ‟Squid Game” and ‟The Queen’s Gambit” (both produced by Netflix and distributed on its streaming platform) being massive draws for existing and new streaming subscribers. Actors who are involved in these streaming series are prevented from booking other jobs in that time, without a complicated process of approvals, hindering this talent’s ability to chase other job opportunities. Actors’ agents are complaining that their clients are losing work due to this exclusivity requirement under their actor agreements, exacerbated by multiple factors such as the year-round development cycle and short-order seasons of 13 episodes or less. Actors get paid less because they work on fewer episodes, but they still face long contract holds.
Another cause of concern, for agents and their actor clients, is the use of non-disclosure agreements (‟NDAs”) in casting, with many major producers, allegedly, overly sensitive about the secrecy of their projects. In an era of online file-sharing and sensitivity around plot spoilers, the increased use of NDAs in this context is unavoidable. However, actors and agents are concerned that NDAs are being overused when it comes to casting auditions, with sweeping and unreasonable terms. US streamers are blamed for starting the trend. Actors and agents say the use of NDAs si breaking the traditional relationship between them, with actors unable to discuss the upcoming audition, script and prospective role with their representatives, which is increasingly cutting out agents from the audition process altogether.
Finally, while the advent of streaming platforms means more opportunity for actors, in particular actors from minority backgrounds, the likes of Netflix, Amazon and HBO rely on mostly young, new or not yet discovered talent, to minimise actors’ labour costs incurred in the production of their prestige streaming series. There is no place for prima donna stars, dictating their terms and conditions, in the film streaming era. And with Netflix now pushing its limits beyond film and into gaming, actors could easily become replaced by animes, artificial intelligence and virtual actors, in the near future, further decreasing the costs of talent for streaming platforms.
Reforming UK music law: making the music streaming market economically viable for all stakeholders
There is a frenetic desire and attempt, displayed by several UK members of parliament, to overhaul the current legal framework applicable to the UK music streaming market. Why all the commotion? What is in the works? How do such lobbying endeavours compare to the recent legal changes implemented in the European Union music market? What’s going to happen now, in the UK and elsewhere, to put back music creators at the heart of the music streaming ecosystem and supply chain?
1. Why are UK MPs investigating the music streaming market?
Further to the digital revolution forced upon the global music industry by independent peer-to-peer file sharing service Napster, in the early noughties, music streaming has come out on top, as the most agile, flexible, user-friendly and wide-ranging music distribution channel.
Indeed, based on research conducted by the International Federation of the Phonographic Industry (‟IFPI”) across 21 of the world’s leading music markets, its 2021 ‟Engaging with music” report sets out that subscription audio streaming (e.g. Spotify, Apple Music, Deezer) represents 23 per cent of the ‟music engagement mix”, while ad-supported audio streaming (e.g. free tier of Spotify or Deezer) and video streaming (e.g. YouTube, DailyMotion) represents 9 per cent and 22 per cent, respectively. So, according to IFPI, total music streaming is 54 per cent, in the ‟music engagement mix”, while music on the radio (e.g. radio stations, broadcast live, catch-up) is 16 per cent and purchased music (e.g. CDs, vinyls, DVDs, downloads) 9 per cent. Live music (including livestreaming) is at a paltry 2 per cent.
The International Confederation of Societies of Authors and Composers (‟CISAC”), is prompt to underline, in its 2021 global collections report, that while music ‟streaming is fast heading towards being the most important source of creators’ earnings in the future”, ‟streaming revenues – however fast they grow – are currently simply not providing a fair reward when shared across millions of individual recipients”. Asking collecting societies to adapt to digital and re-invent themselves, CISAC’s main message conveyed through its 2021 report is better digital remunerations are needed for creators, via a fairer ‟digital split”.
The Standing Committee on Copyright and Related Rights of the World Intellectual Property Office (‟WIPO”) conveys a similar, if more subtle and rigorously facts-checked, message in its 2021 report entitled ‟Inside the global digital music market”: ‟there is an ongoing legal debate within the music industry (…) over the interpretation of certain legal rights as they are, or believe that they should be, applied to digital music services”. ‟The debate appears to boil down to who should control administering rights, pricing and certain revenue collections for recordings with digital music services, whether record companies (producers), which invest in featured artists and recordings and which typically secure exclusive rights in the recordings, or Collective Management Organisations (‟CMOs”), which are tasked to collectively manage certain rights of performers, which vary from region to region. (…) The argument by the groups for the CMOs’ position aligns with the beliefs that featured performers’ royalties should be greater than what they are receiving from the digital market, and background (and) session musicians should be entitled to ongoing royalties or other form of additional remuneration generated by recordings in the digital marketplace, regardless of the contractual provisions and transfer of exclusive rights to producers. (…) (Already some) statutory provisions granting remuneration to musicians are in place in many countries’ legislation for broadcasting and communication to the public uses. The record companies observe that streaming services are substituting physical sales as the main method of delivering recorded music to consumers, and revenue from these services has become the main revenue source for the industry. According to record companies, licensing of streaming services should be organised along similar lines to the distribution of physical products”.
This debate and tensions between pro-creators and pro-music labels have picked during the governments’ management of the COVID 19 pandemic, since multiple national lockdowns and statutory restrictions towards non-vaccinated citizens have grinded to a halt most live music events and concerts, all over the world. Music performers and songwriters therefore had even less revenues to sustain them, in the last two years, with many of them having to find additional side jobs in order to make rent.
The negative effects of the pandemic have been strongly compounded, in the United Kingdom (‟UK”), by Brexit, since not only does the EU-UK withdrawal agreement not provide for any specific music visa provision system, which would have allowed UK touring musicians to easily continue performing and touring in the 27 member-states of the European Union (‟EU”), but certain cross-border copyright mechanisms – especially those relating to CMOs and other rights management societies, as well as those relating to the EU digital single market (‟DSM”) – stopped applying in the UK on 1 January 2021.
In this context, it is no wonder that UK musicians – songwriters and performers alike – are getting increasingly concerned about getting a slice of the pie which would allow them to keep on creating, and performing, in the music industry. Their urgency and various acts of lobbying have not fallen on deaf ears, and many compassionate UK members of parliament (‟MPs”) have decided to take this matter in their own hands, so that UK music creators could benefit from a level playing field, in particular with respect to their EU peers, post Brexit.
2. What process is followed by UK MPs, to implement change in the music streaming market?
The main takeaways from the inquiry and Committee’s report are that:
the Committee recommends to classify music streaming as an income source subject to equitable remuneration. To implement this, the Committee’s report recommends that the UK government legislate so that performers enjoy the right to equitable remuneration for streaming, by amending the Copyright, Designs and Patents Act 1988 (‟CDPA”) ‟so that the making available right does not preclude the right to equitable remuneration, using the precedent set by the co-existence of the rental right and right to equitable remuneration in UK law”. The Committee’s report asks for the remuneration to be paid by the rightsholders (i.e. record labels) – rather than the streaming services – to the performers, through their CMOs.
since the music industry market, and in particular the UK music market, is dominated by a small number of large buyers of music rights (i.e. the major record labels Warner, Sony and Universal), the UK government should expand creator rights by setting out, in the CDPA, a right to recapture works, and a right to contract adjustment, where an artist’s royalties are disproportionately low compared to the success of their music. Such right to recapture should occur after a period of 20 years, so short enough to occur within an artist’s career.
concerns about the above-mentioned oligopoly currently in place in the music industry – in terms of overall market share in recording and publishing, but also through vertical integration, acquiring shares in streaming services and a cross-ownership system – should be escalated to the CMA, to undertake a full market study into the economic impact of the music majors’ dominance and assess whether any infringement of competition law may be taking place.
a renewed safe harbour protection should be put in place by the UK government, so that music rightsholders may be protected on a par, compared to EU rights owners who benefit from the provisions of the EU directive on copyright in the DSM 2019/790 (the ‟DSM directive”), when their music content is uploaded on user-generated content platforms such as YouTube (‟UGCs”). The Committee recommends that the UK government introduces robust and legally enforceable obligations to normalise licensing arrangements for UGCs, ensuring that these obligations are proportionate so as to apply to dominant players such as YouTube and Facebook, without discouraging new entrants to the UGCs’ market.
the Advertising Standards Authority (‟ASA”) should regulate music playlist curators, who have an important role in the discovery and consumption of digital music, and are therefore influential in how creators are remunerated. However, since the extent of their paid-for activity is currently undisclosed, and since the selection methods of platform editorial playlists are non transparent, music playlist curators should comply with a code of practice drafted by ASA, similar to the one focusing on social media influencers, to ensure that the curation decisions they make are transparent and ethical.
The Responses, from the UK government and the CMA, were, circonspect and measured, yet pragmatic and ‟enthusiastic”.
In particular, the UK government set out three main pillars, in its Responses:
Establishing a music industry contact group with senior representatives from across the music industry to drive action and examine stakeholders’ view on the key issues, including equitable remuneration, contract transparency and platform liability rules introduced by the EU;
Launching a research programme, alongside stakeholders’ engagement;
Establishing two technical stakeholders’ working groups, the first focused on creating standards for contract transparency and establishing a code of practice for the music sector, and the second addressing data issues and developing minimum data standards for the music industry.
With respect to equitable remuneration, the Responses set out that the UK government will launch work to better understand issues of fairness in songwriters’ and performers’ remuneration. As part of this work, the UK government will assess different models, including equitable remuneration, to explore how likely they are to affect different parts of the music industry and how that might be achieved, including through potential legislation. It will also explore these issues through the above-mentioned music industry contact group.
As far as safe harbour is concerned, the UK government agreed that righsholders should be properly remunerated when their works are shared on UGCs, and that the UK had a unique opportunity to learn lessons from EU member-states that have implemented the DSM directive, as well as from approaches taken by other countries. Therefore, the UK government will analyse how EU member-states are implementing the DSM directive, to understand its impact on different parts of the music industry, other creative sectors, and UGCs alike.
In relation to the recommendation of expanding creators’ rights by restricting contract freedom, the UK government will commission research on these issues, particularly by looking into countries that have implemented similar measures.
With respect to launching a CMA investigation into the economic impact of the music majors’ dominance, the UK government pointed out that the CMA is an independent regulator, which should therefore decide autonomously how best to allocate its resources to protect fair competition. However, the Responses also include the CMA’s initial response, which stated that a new digital markets framework was being finalised, before its implementation, by the UK government and the CMA’s own ‟Digital Markets Unit”. Upon implementation of this new digital markets framework, the CMA’s ‟Digital Markets Unit” will assess the pertinence of launching an investigation into the majors’ oligopoly in the UK music industry.
Finally, the UK government agreed with the Committee’s recommendation to subject music playlist curators to a code of practice developed by ASA. It is also in contact with Ofcom, the UK’s communication regulator for TV, radio and video on demand sectors, with respect to this issue.
3. When are reforms to UK music law likely to take place?
While the ‟enthusiastic” above-mentioned plans, set out in the Responses by the UK government, may be currently implemented, a member of the Committee, Kevin Brennan MP, erred on the side of caution, with respect to the follow-through abilities of the UK government, by introducing a bill to make provision about the rights and remuneration of musicians, on 24 November 2021 (the ‟Bill”).
The timeline of the Bill, currently on its 2nd reading in the House of Commons, is now firmly on hand by the UK parliament.
This will put adequate pressure on the UK government, as well as the CMA and Ofcom, to deliver on all the exciting measures and goals that they had set out in the Responses.
The Bill proposes to introduce legislation giving effect to some of the recommendations made by the Committee, in the Committee’s report, in particular with respect to equitable remuneration for streaming, contract adjustment, right of revocation and transparency.
Using similar wording as the equitable remuneration already provided for under section 93B of the CDPA, the Bill proposes to amend the CDPA and introduce a right to equitable remuneration for performers, where they have transferred their making available right, in relation to a sound recording, to the producer of the sound recording (usually, their record label). This new right to equitable remuneration cannot be assigned, except to be administered by a CMO, or via testamentary disposition. Equitable remuneration is payable by the person to whom the right was transferred, or any successor in title of that person. Therefore, where performers have transferred their making available right to their record company, the record company pays the equitable remuneration. How much is paid can be negotiated by the performer and producer, or the Copyright Tribunal where no agreement is met.
The Bill also provides for contract adjustment: it sets out a right for performers and composers of musical works to receive additional and fair remuneration for their works, where their arrangement provides them with a disproportionately low level of remuneration, compared to the overall revenue generated from their work. The remuneration is paid by the person exploiting the work.
The Bill sets out a right for performers and composers, who have transferred their rights, to revoke the transfer of their rights after 20 years. The right is not automatic, notice must be provided within two years.
The Bill finally provides for a right for performers and authors of musical works (or literary works accompanying a musical work) to receive ‟up to date, comprehensible, relevant and complete information on the exploitation of such work or works”. This will enable music creators to determine whether the remuneration they are receiving is accurate and fair, or whether they may seek to renegotiate via the Bill’s contract adjustment rights.
While the Bill is following its course in the UK parliament, the UKIPO is commissioning further research on equitable remuneration, contract adjustment and right of revocation.
4. How do the UK music streaming suggested changes compare to EU policies and, in particular, the Digital Single Market directive?
The Bill’s provisions are in line with existing EU rules on transparency, safe harbour protection, a right to appropriate and proportionate remuneration for music streaming income, as well as a right to revocation and contract adjustment.
In the EU, two directives include transparency provisions:
article 19 of the DSM directive which provides that authors and performers receive on a regular basis, at least once a year, up to date, relevant and comprehensive information on the exploitation of their works and performances from the parties to whom they have licensed or transferred their rights, or their successors in title, in particular in relation to modes of exploitation, all revenues generated and remuneration due.
In addition, chapter 3 of the DSM directive establishes:
a so-called appropriate and proportionate remuneration principle (article 18). EU member-states can choose to implement the fair remuneration principles set out in the DSM directive by relying on different or already existing mechanisms such as collective bargaining;
a contract adjustment mechanism (also referred to as a ‟best-seller”clause) (article 20). Armed with information obtained through the transparency obligations, authors and performers can seek ‟additional, appropriate and fair remuneration” where the original remuneration is ‟disproportionately low compared to the relevant revenues derived from the subsequent exploitation”. If a re-negotiation is unsuccessful, creators have the option to bring a claim with a voluntary alternative dispute resolution body to be set up in each EU member-state for this purpose;
an alternative dispute resolution (‟ADR”) mechanism (article 21). EU member-states are required to establish a voluntary ADR body to deal with disputes arising from the transparency obligations and the contract adjustment mechanism (without prejudice to the right to take court proceedings);
a revocation right. It can be used when a copyright work licensed exclusively is not being exploited by the licensee. The parameters of this right are to be set out in domestic legislation (article 22);
a specific ban on contractual overrides such that certain of these provisions (articles 19, 20 and 21) are considered to be of a mandatory nature (article 23).
Loan-out companies and loan-out agreements: how to use them in the new IR35 landscape, in the UK?
Perhaps surprisingly in a Conservative government, the IR35 rules have been tightened, in order to ensure that the taxman gets its fair share of revenues, when creators and their clients enter into entertainment, film, media and professional sports contractual arrangements. What is at stake for the creative industries in the UK? How to make the most of loan-out companies and loan-out agreements, while ensuring compliance with the revised IR35 rules?
1. What are loan-out companies?
In the entertainment industry, accountants often advise their clients, who work as key talent and crew in the film, TV, sports and media sectors, to set up a personal service company (‟PSC”) with Companies House, the United Kingdom (‟UK”) registrar of limited companies.
Such personal service companies are also called ‟loan-out” corporations because this is the jargon term they are referred by, which comes from the USA. Indeed, the US, as a global leader in the entertainment industry, was the first country where creators used this form of US business entities to loan-out their services, via the corporate body, to their end-clients.
The creator is usually the sole shareholder and director of the loan-out company.
The loan-out entity is engaged by external third parties (i.e. the end-clients) to fulfil entertainment, media or professional sports services, which are going to be performed and executed solely by the creator. Consequently, it is the talent’s loan-out company that is referred to, and liable, in contracts to perform the services required.
Since the creator’s services are typically performed on individual contract bases, in exchange of large, irregular sums of income throughout the year, the loan-out business model is especially prominent in the entertainment, media and professional sports industries.
Article 17 of the OECD Model Income Tax treaty of 1930 appears to be the foundation by which loan-out corporation structures may be used, as it provides that athletes, celebrities, artists who operate across several countries, and who therefore earn income under several national taxation systems, may only be taxed in their home jurisdiction’s source of income (even without an established corporate body).
By the 1970s-1980s, loan-out companies, or PSCs as they are more commonly referred to by the UK taxman, HMRC, and UK lawmakers, were widely used by entertainers, top talent and crew, as well as professional sportspeople, in the UK.
2. How to use PSCs and loan-out agreements?
Loan-out companies are used as a means to reduce the personal liability of the talent, as well as protect their personal assets.
Indeed, since the SPC is the sole party to any services agreement entered into with the end-customer, then, such end-client cannot go after the personal assets and liability of the creator, in case things go south during the execution phase of such services. The end-client – who is the counterparty to that loan-out agreement – will only be able to sue the SPC and trigger the limited liability of such loan-out company.
Moreover, in the UK, private companies limited by shares (which represent over 95 per cent of all companies in existence in that country), limit the liability of their shareholders to creditors of the company, to the capital originally invested, i.e. the nominal value of the shares and any premium paid in return for the issue of the shares by the company. Therefore, a shareholder’s personal assets are protected in the event of the company’s insolvency or increased liability to a third party.
Also, in the UK, the corporate veil is thick and not often, or easily, pierced: UK company directors incur no personal liability because all their acts are undertaken as agents of the SCP. While there are certain circumstances where personal liability may be imposed by the UK courts, particularly in respect of wrongful or fraudulent trading, it is rare that the corporate veil is pierced, and that the owners are held accountable, on their own assets, to pay off the limited company’s debts.
In a loan-out agreement, the party which is the loan-out company is typically responsible for dealing with the tax and/or any applicable national insurance contributions (‟NICs”) on any payments made under this agreement, by the counterparty.
This loan-out structure is therefore beneficial to, and flexible for, the end-client, who is unencumbered by HMRC’s rules on income tax and employer NICs payable on employees’ salaries, as well as protective employment law regulations applying to employees and self-employed people/freelancers relating, in particular, to a right to holiday, the national minimum wage, workplace pension and the maximum amount of 48 work hours per week.
There are also some tax advantages to this loan-out arrangement for the creator: first, the range of expenses which the PSC may set against its taxable profits will be much wider than that allowed to an employee to set against their taxable income. Second, there will be a cash-flow benefit in avoiding income tax being deducted at source each month. Third, the individual, as shareholder, may be in a position to be paid dividends by their loan-out company, which is a more tax-efficient alternative to only being paid earnings as the PSC’s employee, since this dividend form of income is not subject to NICs.
Therefore, loan-out agreements often lead to win-win situations, for the talent and their end-clients, provided that such services agreements are drafted correctly. In particular, the producing entity needs to ensure that all intellectual property created by the talent is assigned to the production.
Such loan-out agreements are typically called ‟producer agreement” or certificate of engagement (‟COE”). Indeed, a COE transfers to a studio or production company all rights in the results and proceeds of the services of an independent contractor (talent like an actor, producer, model, director or professional sportsperson) on an entertainment production, such as a television movie, theatrical motion picture film, TV or online series, social media content, or commercial. The COE includes work made for hire and assignment provisions. The parties negotiate and execute the COE promptly after agreeing to all deal terms before entering into a long-form agreement, such as a producer agreement, at a later stage.
As there can be some risks with the loan-out approach, in case the COE and/or long-form agreement are drafted incorrectly, it is best practice to seek expert legal advice when drafting, and reviewing as well as negotiating, a loan-out agreement.
3. What is the future of loan-out companies and agreements within the new IR35 landscape?
While I highlighted that loan-out agreements may be a win-win arrangement for the creator and their end-clients, there is one entity which has a lot to lose out of them: the taxman.
By the late 1990s, there were concerns that PSCs were being widely used, in the UK, to disguise the fact that, in many situations, individuals were working effectively as their client’s employee, while garnering the loan-out structure’s tax benefits.
To counter this type of tax avoidance in the March 1999 Budget, the Labour government announced it would introduce provisions to allow the tax authorities to look through a contractual relationship, where services were provided through an intermediary such as a PSC, but the underlying relationship between the worker and the client had the characteristics of employment. In those circumstances, the Labour proposals went, the engagement would be treated as employment for tax purposes.
Provision to this effect was included in the Finance act 2000, with effect from the 2000/01 tax year. The legislation is commonly called ‟IR35”, after the number of the Budget press notice which first announced this measure.
For the last 20 years, IR35 remained controversial, but were retained, even by the Conservative governments which succeeded the Labour one.
However, concerns escalated when it was discovered that the use of PSCs was common by senior staff in the public sector and by contractors working for the state-owned broadcaster BBC.
Since 2014, the various Tory governments went about cleaning the slate, by reforming the way the IR35 rules worked in the public sector. Following these reforms to the application of IR35 in the public sector, the government introduced legislation to make similar changes for the private sector to take effect from April 2021.
How do these changes affect creators in the entertainment, media and professional sports industries, since April 2021?
From 6 April 2021, IR35 rules applying to PSCs shift the responsibility from the PSC to the organisation receiving the talent’s services.
Before 6 April 2021, it was the loan-out company that was responsible for assessing and making payment of income tax and/or NICs for the services being provided by the creator/talent.
The government’s reforms for private sector companies are intended to improve compliance with the IR35 rules by moving the responsibility for tax assessment and payment from the contractor to the end-client. What this means, in the film, media and sports context, is that a producer engaging the services of a talent is now responsible for assessing whether that individual should be legally treated as an employee if they were being engaged directly by the producer, rather than through the loan-out company, and, if so, for accurately deducing income tax and NICs from the individual’s pay.
However, this change only affects large and medium size businesses, meaning that producers which fall into the category of a ‟small business” are not affected by the new IR35 provisions. It is not yet known how a ‟small business” will be defined by HMRC, and what criteria will be applied by HMRC to any assessment as to business size.
For example, our law firm Crefovi recently advised a client, whose producer services were retained by a production company working on behalf of the BBC, the commissioning broadcaster of an upcoming TV series, via his loan-out company. When I asked this client how much the budget of these TV series was, since such information was not disclosed in the draft producer agreement he had asked us to review and analyse on his behalf, he replied ‟GBP10 million”. I would argue that this budget size definitely places the BBC- commissioned production company into the category of ‟medium to large business”. Yet, the production company’s solicitor had drafted the loan-out agreement in such a way that the onus of paying any income tax and NICs liabilities, on the producer’s payments, layed solely with our client’s loan-out company, not with the production company.
Even if HMRC has confirmed, in its guidance on the new IR35 rules, that ‟customers will not have to pay penalties for inaccuracies in the first 12 months relating to the off-payroll working rules, regardless of when the inaccuracies are identified, unless there’s evidence of deliberate non-compliance”, and that HRMC ‟will not use information acquired as a result of the changes to the off-payroll working rules to open a new compliance enquiry into returns for tax years before 2021 to 2022, unless there is reason to suspect fraud or criminal behaviour”, it seems that UK production companies and their accountants and lawyers still turn a blind eye on their new responsibilities, post April 2021. This will trigger quite a few compliance enquiries with HMRC and, no doubt, tax litigation in the coming years.
Watch that space and, if you are a responsible creator, or production company owner, do reach out to us, at Crefovi, so that we may advise you on how to still reap the benefits of loan-out companies and structures, while minimising heightened legal and tax risks caused by this more stringent IR35 framework.
Crefovi’s live webinar: How to use loan-out companies & agreements in in the new IR35 landscape, in the UK? – 3 December 2021