'Smallville' producers claim Warner Bros. self-dealing cost them millions

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'Smallville' producers claim Warner Bros. self-dealing cost them millions

Fri Mar 26, 2010 @ 10:10PM PST

By Nellie Andreeva and Matthew Belloni

65177-Smallville_341x182 "Smallville" just became the latest battleground in the war over vertical integration in Hollywood.  

Creators/executive producers Miles Miller and Alfred Gough and series co-producer Tollin/Robbins Prods. today sued Warner Bros. TV, the studio behind the long-running sci-fi series, and the CW, the network that recently renewed the show for a 10th season. 

Causes of action for breach of contract and breach of fiduciary duty are alleged against Time Warner and its divisions -- WBTV, Warner Bros. Domestic TV Distribution, the now-defunct WB network, where the show started -- and the CW, a co-venture with CBS. The complaint says WBTV made license fee deals with the WB and then the CW that "were not arms-length." The complaint does not specify damages but, given the allegations and the longevity of the series, they could total in the tens of millions of dollars.

"Warner Bros.' practices of unfair self-dealing include licensing the series for broadcast on its own affiliated WB and CW networks for unreasonably low, below-market license fees, resulting in lower gross revenues for the series and less compensation for plaintiffs, and failing to renegotiate the series' license fee to cover its production cost," the suit claims.

Sound familiar?

It should. So-called "vertical integration" cases were all the rage at the beginning of the decade, thanks to the consolidation of TV production and distribution following the lifting of "fin-syn" rules. That resulted in a wave of lawsuits brought by profit participants on shows whose owners were licensing content to sister-company distributors. Participants on "Home Improvement" and "The X-Files" reportedly received massive settlements after claiming in lawsuits against Disney and Fox, respectively, that vertical integration cost them millions. A trial over profits from NBC's hit comedy "Will & Grace" actually reached a jury, but the case was settled before the verdict was read.

The frequency of vertical integration lawsuits has slowed in recent years, thanks to increased studio efforts to negotiate at arms length and new deal language that has kept many disputes in private arbitration rather than public litigation. But there is still a widespread belief in the creative community that "Hollywood accounting" systematically shortchanges talent, especially when studios are making deals with affiliated entities or licensing product on which a percentage-based participation is owed in large packages with other participant-free content. 

The "Smallville" producers also claim that Warner Bros. sold the show in foreign markets and "lumped it in with several other, less successful shows" in a package. In allocating individual license fees to the series afterwards, "several series that are less popular than 'Smallville' were allocated a higher per-episode fee than 'Smallville' " and "Smallville's" allocation was "well below the value of the series in the foreign markets."

The misallocation theory mirrors claims in a lawsuit filed in 2004 against Warner Bros. by Alan Ladd Jr., a profit participant on several Warners films from the 1980s who argued that his movies were lumped into packages and undervalued when Warners allocated license fees across hundreds of films. That case ended in a $3 million-plus jury verdict for Ladd in 2007, which is still on appeal.

Additionally the "Smallville" suit claims that Warner Bros. improperly withheld foreign taxes to the tune of $3.3 million, improperly reported production costs that resulted in $4 million in withheld revenue, didn't pursue or did not report savings from the Canadian tax credit stemming from the fact that "Smallville" is produced in Canada and thwarted plaintiffs' audit attempts.

As a whole, the producers accuse the Time Warner divisions of "depriving them of compensation to which they are entitled ... by failing to maximize profits from the series, all to the benefit of the vertically-integrated conglomerate Time Warner," and are looking to recover "millions of dollars" of unpaid compensation.

Warner Bros. had no comment on the lawsuit, which was filed by attorney Michael Kump.

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