Los Angeles Lawyer May 2012 May 2012 Master.Qxp 4/12/12 12:49 PM Page 5 May 2012 Master.Qxp 4/12/12 12:49 PM Page 6

May 2012 Master.qxp 4/16/12 12:47 PM Page c1

28th Annual Entertainment Law Issue

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EARN MCLE CREDIT PLUS FTC Endorsement Libel in Guidelines Fiction page 35 page 40

Taxation of Entertainment Assets page 12 Regulation of Finders page 20 Talent Getting Agencies Act page 48 Real Los Angeles lawyer William Archer analyzes recent litigation over reality television shows page 28 May 2012 Master.qxp 4/12/12 12:47 PM Page c2

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entertainment law issue

FEATURES 28 Getting Real BY WILLIAM ARCHER The most common legal disputes involving reality TV productions are state law claims related to invasion of privacy and the misappropriation of ideas 35 Rules of Endorsement BY NICHOLAS A. PERSKY Although the FTC’s updated Guides Concerning the Use of Endorsements and Testimonials in Advertising threaten harsh penalities for misleading celebrity endorsements, enforcement has been minimal

Plus: Earn MCLE credit. MCLE Test No. 214 appears on page 37. 40 Real Characters BY LEE S. BRENNER, EDWARD E. WEIMAN, AND ANDREW W. DEFRANCIS While courts commonly reject claims of libel in ﬁction, lessons can also be learned from those cases involving a ﬁctional character “of and concerning” a real person that survive judicial review

Los Angeles Lawyer DEPARTMENTS the magazine of the Los Angeles County 10 Barristers Tips 48 Closing Argument Mastering the art of trial preparation Is the California Legislature listening? Bar Association BY EMILY L. ALDRICH BY EDWIN F. MCPHERSON May 2012 Volume 35, No. 3 12 Tax Tips 47 CLE Preview Income, estate, and gift taxation of entertainment assets COVER PHOTO: TOM KELLER BY BRADFORD S. COHEN, ELIZABETH R. GLASGOW, AND ERIC S. JONES

20 Practice Tips The danger of using ﬁnders to ﬁnance entertainment projects BY JOSEPH C. CANE JR. LOS ANGELES LAWYER (ISSN 0162-2900) is published monthly, except for a combined issue in July/August, by the Los Angeles County Bar Association, 1055 West 7th Street, Suite 2700, Los Angeles, CA 90017 (213) 896-6503. Periodicals postage paid at Los Angeles, CA and additional mailing offices. Annual sub- scription price of $14 included in the Association membership dues. Nonmember subscriptions: $28 annually; single copy price: $4 plus handling. Address changes must be submitted six weeks in advance of next issue date. POSTMASTER: Address Service Requested. Send address changes to Los Angeles Lawyer, P. O. Box 55020, Los Angeles CA 90055. 05.12 May 2012 Master.qxp 4/12/12 12:49 PM Page 4

HELPING CLIENTS AND LAWYERS FOR 40 YEARS VISIT US ON THE INTERNET AT www.lacba.org/lalawyer Civil Litigation and Appeals, Intellectual Property, E-MAIL CAN BE SENT TO [email protected] Defamation, Invasion of Privacy, Anti-SLAPP Motions, EDITORIAL BOARD Entertainment Disputes, Civil Rights, First Amendment, Chair Constitutional, Tenure and Academic Freedom Issues KENNETH W. SWENSON Articles Coordinator Experienced at co-counseling and consulting with attorneys DENNIS PEREZ JERROLD ABELES (PAST CHAIR) STEPHEN F. ROHDE ETHEL W. BENNETT ERIC BROWN ROHDE & VICTOROFF CAROLINE BUSSIN PATRICIA H. COMBS 310.277.1482 • [email protected] CHAD C. COOMBS (PAST CHAIR) MICHELLE WILLIAMS COURT ELIZABETH L. CROOKE BEN M. DAVIDSON ANGELA J. DAVIS (PAST CHAIR) GORDON ENG DONNA FORD STUART R. FRAENKEL MICHAEL A. GEIBELSON (PAST CHAIR) GABRIEL G. GREEN SHARON GLANCZ TED HANDEL JEFFREY A. HARTWICK STEVEN HECHT (PAST CHAIR) JOSHUA S. HODAS LAURENCE L. HUMMER AMY K. JENSEN GREGORY JONES MARY E. KELLY KENNETH K. LEE KATHERINE KINSEY KAREN LUONG PAUL MARKS AMY MESSIGIAN MICHELLE MICHAELS COMM. ELIZABETH MUNISOGLU RICHARD H. NAKAMURA JR. (PAST CHAIR) CARMELA PAGAY ADAM J. POST ARE YOUR CLIENTS ASSETS GARY RASKIN (PAST CHAIR) JACQUELINE M. REAL-SALAS (PAST CHAIR) DAVID A. SCHNIDER (PAST CHAIR) STEVEN SCHWARTZ LOUIS SHAPIRO MAYA SHULMAN REALLY SECURE HEATHER STERN DAMON THAYER THOMAS H. VIDAL

IN A BANK SAFE DEPOSIT BOX? STAFF Publisher and Editor SAMUEL LIPSMAN Senior Editor ERIC HOWARD THERE IS AN ALTERNATIVE: Art Director LES SECHLER Director of Design and Production BIOMETRIC IDENTIFICATION / NO NAME OR PHOTO ID REQUIRED PATRICE HUGHES Advertising Director HIGH SECURITY / ADT GUARDS ON-SITE / 7 DAYS A WEEK LINDA LONERO BEKAS Sales and Marketing Coordinator AARON J. ESTRADA Administrative Coordinator USPRIVATEVAULTS.com MATTY JALLOW BABY t: (888) 948-8778 Copyright © 2012 by the Los Angeles County Bar Association. All rights reserved. Reproduction in whole or in part without permission is pro- 9182 West Olympic Blvd hibited. Printed by R. R. Donnelley, Liberty, MO. Member Business U.S.PRIVATEVAULTS Publications Audit of Circulation (BPA). Beverly Hills, CA. 90212 The opinions and positions stated in signed material are those of the authors and not by the fact of publication necessarily those of the Association or its members. All manuscripts are carefully considered by the Editorial Board. Letters to the editor are subject to editing.

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LOS ANGELES LAWYER IS THE OFFICIAL PUBLICATION OF THE LOS ANGELES COUNTY BAR ASSOCIATION 1055 West 7th Street, Suite 2700, Los Angeles CA 90017-2548 Telephone 213.627.2727 / www.lacba.org ASSOCIATION OFFICERS President ERIC A. WEBBER President-Elect RICHARD J. BURDGE JR. supnik.com Senior Vice President PATRICIA EGAN DAEHNKE Vice President LINDA L. CURTIS Treasurer MARGARET P. STEVENS Assistant Vice President copyright, trademark and entertainment law PAUL R. KIESEL Assistant Vice President HELEN B. KIM Assistant Vice President ELLEN A. PANSKY Immediate Past President ALAN K. STEINBRECHER Executive Director SALLY SUCHIL Associate Executive Director/Chief Financial Officer BRUCE BERRA Associate Executive Director/General Counsel W. CLARK BROWN BOARD OF TRUSTEES SEYMOUR I. AMSTER P. PATRICK ASHOURI ROBERTA B. BENNETT ORI S. BLUMENFELD MARRIAN S. CHANG KENNETH CHIU BRIAN K. CONDON DUNCAN W. CRABTREE-IRELAND BRIAN S. CURREY JEFFERY J. DAAR ANDREW S. DHADWAL ANTHONY PAUL DIAZ LOUIS R. DIENES DAVID C. EISMAN CHRISTINE C. GOODMAN JACQUELINE J. HARDING ANGELA S. HASKINS HARUMI HATA LAWRENCE C. HINKLE II BRIAN D. HUBEN LILLIAN VEGA JACOBS EVAN A. JENNESS RUTH D. KAHN SAJAN KASHYAP MICHAEL K. LINDSEY SARAH E. LUPPEN HON. RICHARD C. NEAL (RET.) ANNALUISA PADILLA DEBORAH C. SAXE LINDA E. SPIEGEL BRUCE IRA SULTAN AFFILIATED BAR ASSOCIATIONS BEVERLY HILLS BAR ASSOCIATION CENTURY CITY BAR ASSOCIATION CULVER-MARINA BAR ASSOCIATION GLENDALE BAR ASSOCIATION IRANIAN AMERICAN LAWYERS ASSOCIATION ITALIAN AMERICAN LAWYERS ASSOCIATION JAPANESE AMERICAN BAR ASSOCIATION OF GREATER LOS ANGELES JOHN M. LANGSTON BAR ASSOCIATION KOREAN AMERICAN BAR ASSOCIATION OF SOUTHERN CALIFORNIA LESBIAN AND GAY LAWYERS ASSOCIATION OF LOS ANGELES MEXICAN AMERICAN BAR ASSOCIATION PASADENA BAR ASSOCIATION SAN FERNANDO VALLEY BAR ASSOCIATION SAN GABRIEL VALLEY BAR ASSOCIATION SANTA CLARITA BAR ASSOCIATION SANTA MONICA BAR ASSOCIATION SOUTH BAY BAR ASSOCIATION OF LOS ANGELES COUNTY, INC. SOUTHEAST DISTRICT BAR ASSOCIATION SOUTHERN CALIFORNIA CHINESE LAWYERS ASSOCIATION WHITTIER BAR ASSOCIATION WOMEN LAWYERS ASSOCIATION OF LOS ANGELES

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hen Irving Berlin wrote the song “There’s No Business Like Show Business” for the musical WAnnie Get Your Gun, he probably could not have imagined the enduring resonance of his lyrics. When the musical was created in 1946, this Broadway song-and-dance

highlighted the perceived glamour and wonders of show business in an effort to lure Annie into the business. If anything, that lure appears stronger now than it was 66 years ago, as “show business” has expanded to forms and genres that were not then imaginable. Equally important, the song-and-dance routines used by those in show business today are frequently for purposes that lay far beyond luring in new talent. For many, the dreams of stardom are unrelated to singing, dancing, or acting. Instead, as a result of the proliferation of reality television programs and the almost endless opportunities that exist in show business to exploit one’s personality, those who dream of stardom may believe they can reach their goal based upon little more than their personalities. And, for those who have reached stardom, it is hardly new to cash in on fame through means such as advertisements and endorsements. In a time when personalities are deemed to have great value, it is not surprising that people go to great lengths to tap into and protect those values. Nor is it surprising that many legal claims have been asserted concerning rights of personality and publicity. In this 28th Annual Entertainment Law special issue, we explore the exploitation of personality through several different lenses. Our cover article, written by William Archer, examines the state of the law concerning claims asserted by those who appear or are depicted on reality television programs as well as those who claim that their idea for a reality television program was stolen. As Archer explains, when it comes to reality television programs, the law provides producers with substantial latitude concerning the depiction of people, the use of their names and likeness, and even their ideas. Ever watch a commercial with a celebrity spokesperson and wonder whether the celebrity is subject to liability if the product or services are not as represented? Nicholas Persky tackles that issue in his article. In fact, celebrities are not immune from liability when they pitch products and, in some circumstances, may be required to conduct a certain level of due diligence to support the bona fides of the pitch they give— even if the pitch was scripted for them. Caveat venditor, indeed. Reality television programs do not have a monopoly on entertainment content based upon real events. To the contrary, long before reality television shows filled programming hours, there were numerous entertainment works “based upon” or “inspired by” true events, typically including disclaimers that they are purely fictional. Nevertheless, parties have asserted claims that certain works, although presented as fiction, were libelous. Lee S. Brenner, Edward E. Weiman, and Andrew W. DeFrancis survey the leading libel-in-fiction cases that have been litigated in state and federal courts in California and New York. As the authors explain, although there is no bright- line test, the claimant has a high burden of proof, and most of the cases have been disposed of against the claimant at the pleading or summary judgment stages. Now, without further ado, on with the show. ■

Caroline Y. Bussin is an attorney with Keats, McFarland & Wilson LLP, where she focuses her practice on all forms of intellectual property enforcement, protection, counseling, and litigation. Gary S. Raskin is the principal of Raskin Law, LLP, where his practice involves entertainment transactions with an emphasis on motion pictures and ﬁnance. Thomas H. Vidal is an entertainment litigator and transactional attorney with Abrams Garﬁnkel Margolis Bergson, LLP. Bussin, Raskin, and Vidal are the coordinating editors of this special issue.

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barristers tips BY EMILY L. ALDRICH

Mastering the Art of Trial Preparation

TRIAL IS THE HOLY GRAIL for many civil and criminal litigators. When can alert more senior attorneys to any changes that may affect your we were law students, many of us dreamed of the day when we could case. A supplemental brief to support any pending motions can leave have a courtroom moment like the one Tom Cruise’s character has in a favorable impression on senior attorneys. A Few Good Men. Now that we are practicing young lawyers, how- Developing a thorough understanding of the facts and the law, par- ever, many of us realize that we will wait years to enter a courtroom ticularly for a complex case, may appear to be overwhelming. One and even longer to present a case. This, in part, is due to the small per- way to maintain a complete picture of the case is to compile a case centage of cases that actually go to trial. Firms with large corporate notebook. Add important pleadings, documents, and notes as the case clients also encounter the requirement that only the most experienced develops to maintain a comprehensive understanding of the impor- attorneys appear in court. However, when the opportunity for trial arises, tant issues, facts, and witnesses. A notebook also will allow you to young lawyers can be instrumental in a trial team’s success. remain organized as you draft pleadings and respond to partner Preparation is the key factor in a party’s success at trial. Facts and the law influence the outcome at trial. Master them, and you can make yourself an indispensable asset. Mastering the facts requires a comprehensive understanding of all Mastering the facts requires a comprehensive understanding of all of them—helpful and harmful. As a junior attorney, you typically of them—helpful and harmful. will be responsible for conducting the initial investigation, drafting discovery, and assisting in the preparation for depositions. Use these tasks to your advantage inquiries as the case progresses. As a case approaches trial, you will and become the authority on the facts. Take a step back and analyze then want to transition your case notebook to a trial notebook. the case as a juror may see it, and you may identify the problems that Things commonly included in a trial notebook are an up-to-date con- the opposition may exploit at trial. Identifying these early not only tact list (including witnesses, attorneys, court reporters, and clerks), allows your team time to prepare an effective response but also key pleadings, a chronology, relevant discovery materials, and court solidifies your value to those more senior. Experienced civil litigator orders. Closer to trial, exhibit lists, witness lists, proposed jury and trial attorney Michael J. Mueller emphasizes that as a “master instructions (and objections), motions in limine, and any dispositive of the facts, young attorneys can be most helpful in a trial. The part- motions should be added. ner in charge of the case constantly needs someone to turn to in order Lastly, if a case on which you are working goes to trial, make every to fill in gaps in his or her knowledge of the facts. That includes both effort to attend. There is no better training than watching lawyers in witness testimony and the potential exhibits. If you make yourself that the courtroom, and if you have worked on the case, you will see the person, you will become invaluable to the trial team.” direct effects of your work on the course of the trial. Similarly, when Similarly, it is important to understand the entire legal landscape as your turn comes to try a case, it can be invaluable to visit the court- it relates to the issues involved in your case. It is easy to focus only on room in which you will be trying the case and observe a trial before the favorable precedent supporting your client’s position when draft- your assigned judge. By observing, you will find out how that judge ing a particular motion or research project. What will make you stand runs the courtroom. You will be able to tell if the judge is punctual, out, however, is your ability also to understand the weaknesses of your low-key, no-nonsense, laid back, or a stickler for the rules. Further, client’s position and anticipate and defuse opposing counsel’s arguments. attending a trial in front of the judge before whom you will try a case This understanding enables you to draft effective discovery requests, will allow you the opportunity to speak with people involved in tailor witness lists, and suggest motions that can favorably shape the other cases before the judge and gain information on the judge’s pet trial. Furthermore, if your firm is litigating more than one case in a par- peeves. This can give your trial team an edge. You and your team do ticular area, or multiple cases for a particular client, be mindful not to not want to find out the hard way what behavior particularly upsets set forth an argument inconsistent with a position taken in another case. your judge. If you scout a court, you will show a proactive approach Additionally, while your case is pending, make an effort to stay to senior attorneys, who will appreciate your efforts. apprised of other decisions in your jurisdiction and any developments By focusing on the facts and details of a case that is approaching in the law. You may be surprised to discover how often the law is mod- the courtroom, you can position yourself as a resource for senior attor- ified in the time it takes to litigate a case. Online research resources neys as they prepare for trial, and you may become the next in line often provide the option to set up alerts for a particular client, area for courtroom experience. ■ of law, or case. The Los Angeles County Bar Association offers several tools to assist lawyers in this area. (See http://www.lacba.org Emily L. Aldrich practices labor and employment law as an associate at /courtnavigator.) By staying up-to-date on these developments, you Hunton & Williams LLP in Los Angeles.

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tax tips BY BRADFORD S. COHEN, ELIZABETH R. GLASGOW, AND ERIC S. JONES

Income, Estate, and Gift Taxation of Entertainment Assets

IN THE ENTERTAINMENT INDUSTRY, complex deals are often the result of opaque contracts that use terms interchangeably. It is not unusual for these contracts to imply a preferential income, estate, or gift taxation treatment for entertainment assets that is simply not applicable. The Internal Revenue Code does not make it any easier to deci- pher the treatment of entertainment-related assets. Attorneys thus need to be aware of some of the benefits and burdens inherent in entertainment assets and other income streams—such as participations, residuals, and royalties—as they relate to income, estate, and gift taxation, and especially as they bear on various tax planning techniques.1 Participations, residuals, and music royalties are sometimes con- fused with copyright royalties. The main difference is that the former are simply a right to share in a future payment stream generated by the recipient’s participation in a movie or television show.2 Copyright royalties, on the other hand, are income resulting from the exploitation of an ownership in part or all of the underlying copyrights. Copyrights are now created by federal statute and not through common or state law. The duration of a copyright for works created after January 1, 1978, is governed by the 1976 Copyright Act. The term of a copyright begins from the work’s fixation in a tangible form and depends on who created the copyright.3 The term is life plus 70 years for an individual and is the shorter of 95 years from publication or 120 years from creation if the work is created by an employee in the scope of employment or in a work-for-hire capacity.4 The foundational issue of which form of business entity to use or hold copyrights has an impact on the terms of the copyright as well as important tax implications. Among a C corporation, an S corporation, or a limited liability company, the LLC is generally the preferred entity for owning entertainment assets because it is largely subject to a single level of tax, capital gains flow through to its members, and it provides the ability to separate management from ownership. Upon the death of a shareholder of a C corporation, the heirs C corporations should almost never be used to own entertainment receive a step-up in the basis of the stock to its fair market value for assets5—except as loan-out corporations6—because of the risk of the income tax purposes. However, the C corporation itself does not double taxation of nondeductible distributions (such as reasonable receive a step-up in the basis of the assets it holds. Therefore, all appre- salary expenses). Currently, the maximum federal corporate tax rate ciation in the assets and any subsequent appreciation in the stock is is 35 percent while the California corporate tax rate is 8.84 percent. generally taxable on a later sale. C corporations will frequently pay significant compensation to share- While S corporations generally avoid significant entity level tax- holders to reduce the double level of tax. However, when C corpo- ation (although California does impose a 1.5 percent corporate level rations distribute part or all of their after-tax income to their share- tax, with an $800 minimum payment), they have other drawbacks. holders as a nondeductible dividend, the dividend is currently taxed First, an S corporation may not include any foreign or entity share- at the shareholder level at the preferential federal dividend tax rate of 15 percent and at the California state rate of 10.3 percent. Due to Bradford S. Cohen is a partner at Venable LLP in Los Angeles. His practice the current fiscal crisis in federal and state budgets, these rates have focuses on business and tax matters for clients in the motion picture, tele- become the subject of intense debate and may increase. In addition, vision, music, emerging media, and sports industries. Elizabeth R. Glasgow long-term capital gains incurred by a C corporation are taxed at the is an associate at Venable LLP in Los Angeles. Her practice focuses on trusts higher, regular ordinary income rates and not the reduced capital gains and estates and wealth management. Eric S. Jones is an associate at Venable rates available to individuals. Finally, C corporations are subject to LLP in Los Angeles. His practice focuses on a wide range of federal and state an additional corporate level tax in the case of personal holding issues in the areas of corporate, partnership, international, and individual 7 RICHARD EWING companies. income tax and transactional matters.

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holders,8 may not have more than 100 share- basis of his or her share of the assets of the more than 12 months. For self-created prop- holders, and can have only one class of stock. partnership can be stepped up to their fair erty, such as musical copyrights, the holding Second, if the S corporation is created by a market value on the date of the partner’s period begins when the work is created. conversion from a C corporation, any built- death. Short-term capital gains earned by individu- in gains of the C corporation9 may be taxed An important concept to keep in mind als are subject to tax at the regular ordinary at the corporate level if the underlying assets when dealing with entertainment assets are income tax rates, while long-term capital are sold within 10 years of the conversion. the income in respect of decedent (IRD) rules. gains earned by individuals are subject to Third, for S corporations that were formerly Generally, when a person dies, his or her tax at more favorable rates, usually 15 per- C corporations, S corporation status will ter- heirs receive a fair-market value basis in the cent for federal income tax purposes. minate if the S corporation has accumulated decedent’s assets. This tax basis can then typ- However, capital gains earned by C corpo- C corporation earnings and profits and has ically be used to offset part or all of any rations are subject to tax at the higher cor- passive income exceeding 25 percent of gross potential gain arising from the sale of the porate rates and not the more favorable long- receipts.10 The death of a shareholder of an assets. Therefore, absent a special rule, cer- term capital gains rates applicable to S corporation generally has the same results tain assets, such as participations in movies individuals. As a result, copyrights that are as for a C corporation. or television shows, would escape taxation capital assets should not be held by C cor- Two other issues should also be kept in completely. The IRD rules apply differently porations, since a sale of the copyrights would mind. First, shareholders generally do not to sales of copyrights as opposed to licenses result in a corporate level tax plus an addi- receive basis in their stock for their share of of copyrights, even though the payments tional tax at the shareholder level. If the the S corporation’s liabilities, which can streams may be the same. copyrights had been held by an individual or increase the overall amount of taxes paid. Congress’s answer to this potential tax pass-through entity, the gain would be taxed And, second, when assets are sold by the S avoidance is the concept of IRD. For indi- only once and only at the favorable long- corporation the gain may constitute ordi- viduals, IRD includes income to which the term capital gains rates. nary income while the liquidation of the S cor- decedent had a contingent claim at the time In many cases, transfers of copyrights can poration may result in a capital loss. Having of his or her death.12 For S corporations, be structured as either a sale or a license. ordinary income and a capital loss can be par- IRD includes income received by the S cor- That choice can have significant differences ticularly troublesome because an individual poration that would be IRD if received by an for income tax, IRD, and estate tax pur- can only deduct $3,000 of capital losses individual or estate directly.13 The IRD rules poses. In the case of a sale of a copyright that against ordinary income in any given year. also apply to certain payments to deceased qualifies as a long-term capital asset by an Moreover, stock of an S corporation is sub- partners in the context of LLCs or partner- individual, an LLC or partnership with indi- ject to the “income in respect of decedent” ships.14 vidual members, or an S corporation, the rules. The fair-market value of the remaining gains will be taxed at the lower capital gains The disadvantages of both corporate expected future income that would constitute rates.15 This will be true even if the sale pro- entity forms leaves limited liability compa- IRD will be included in the decedent’s estate ceeds are payable over a number of years.16 nies that elect to be treated as a partnership for estate tax purposes, and the basis of the However, the income to be received after the as the preferred choice. These entities are assets that generate IRD are not stepped up death of the creator constitutes IRD, which pass-through in nature for federal and state to their fair-market value in the hands of the would be included in the creator’s estate. As tax purposes, meaning they are not subject estate or the beneficiaries. In addition, there IRD property, the basis of the expected future to income tax at the entity level. (California, is no basis step-up for the portion of S cor- income17 would not be stepped up to its fair does, however, impose an entity-level gross poration stock, LLC, or partnership inter- market value on the date of death. This will receipts tax on LLCs of up to approximately ests attributable to IRD property held by result in higher taxes if the income stream is $12,000.) There are no limitations on the such entities. When part or all of the remain- later sold. Conversely, in the case of a license types of eligible owners. Unlike S corpora- ing IRD is received by the beneficiaries of of a copyright, the royalty or license pay- tions, partnerships may have foreign investors the estate, those beneficiaries will have to ments will be taxed at the higher, ordinary and entities as owners. In addition, special tax include the amounts as income for income tax income rates. Unlike a sale, however, the allocations are generally allowed, except for purposes. Thus, IRD is effectively subject to future income payments will not constitute family limited partnerships. The ability to both estate and income tax. However, the IRD and the basis of the copyrights will be provide for special allocations of income beneficiaries may claim an income tax deduc- stepped up to their fair-market value, thereby and expenses often makes it easier for LLCs tion for the portion of the estate tax that is reducing the taxes to be paid in a future sale and partnerships to attract needed capital. attributable to this income. of the copyrights. Thus, the owner of copy- LLCs and partnerships are not typically used rights is faced with a choice of having the pay- as loan-out entities since entertainment com- Capital Gains and Ordinary Income ments from the exploitation of the copyrights panies will generally withhold income and Capital assets are generally property other taxed at the lower capital gains rates, but at employment taxes from payments to them. than inventory or property held for sale in the the expense of having the remaining pay- Contributions and distributions of prop- ordinary course of business or trade, business ments fall within the unfavorable IRD rules erty to LLCs and partnerships are generally property subject to depreciation, and speci- with no basis step-up upon the creator’s tax-free. The ability to move property into fied self-created assets. There is an exception death. and out of these entities in a tax efficient to the self-created asset exclusion for musical manner is a key strength as business circum- compositions or copyrights in musical works Copyright Terminations stances change and members/partners come that allows the creator to elect to have them Copyrights are unusual assets because, under and go.11 It is important to note that some treated as capital assets. This election is avail- the 1976 Copyright Act, the creator enjoys an entertainment assets (e.g. participations and able to individuals, LLCs, partnerships, and absolute, nonwaivable right to terminate a residuals) may not constitute property for S corporations. transfer.18 The right to terminate a previous purposes of these nonrecognition provisions. Long-term capital gains are gains from the copyright assignment or license can be a valu- Finally, when a partner dies, the income tax sale of a capital asset held by a taxpayer for able right for the creator (especially since the

14 Los Angeles Lawyer May 2012 May 2012 Master.qxp 4/12/12 12:50 PM Page 15

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right of termination does not require any ficient ownership in the termination right to they transfer assets at death. Unlike a will, a repayment of the consideration originally exercise it alone if there is a surviving child court need not be involved in the transfer of received in exchange for the assignment or or grandchild of the creator.25 assets held by a trust, avoiding both the delay license of the copyright). Terminating the After a successful exercise, the holder(s) of and expense as well as the publicity that prior assignment or license can allow the cre- the termination right (the creator or the statu- occurs when an individual dies and the assets ator to relicense the copyright at potentially tory heirs) can exploit the copyright for the are probated through a will. higher and better terms than the first assign- remainder of the copyright term. In practice, Under California state law, a living trust ment. It can also be a source of frustration this often includes selling or licensing the is a will substitute for all purposes of testa- when implementing the creator’s transfer copyright back to the assignee from whom the mentary transfers.26 However, there does not taxes plan, since the post-mortem termination copyright was reacquired—presumably at a appear to be any authority under the 1976 right is available to the creator’s “statutory higher price than the original contract to Copyright Act to extend the benefit of waiv- heirs,” who may circumvent the creator’s take into account the increased value and ing termination rights for testamentary trans- intended disposition of the copyright. recognition of the copyright since the origi- fers by will to revocable living trusts or other Copyright termination rights generally nal acquisition. As an absolute owner, how- state-recognized will substitutes. Accordingly, are available during a five-year window that ever, the holders are free to assign or license a creator has to choose between disposing of begins 35 years after the assignment or license the copyright to a new third party or chose the copyrights either by will involving a pub- of the copyright.19 While the termination to allow the copyright to be unused. lic probate, or by a living trust without a right cannot be waived by the creator or The presence of the copyright termina- public probate but risking that the statutory statutory heirs, the creator may be able to tion right can be problematic for a creator heirs will unwind the transfer. transfer a copyright not subject to the ter- who wishes to gift, sell, or transfer a copyright mination right of the creator’s statutory heirs to an individual other than the creator’s statu- Transfer Tax Planning Opportunities by transferring the copyright through the tory heirs. It is probably wise to assume that Although the termination rights of statutory creator’s last will and testament.20 This is a any lifetime transfer of a copyright provides heirs create practical limitations on gift and narrow exception and significantly limits the no protection from the termination right of estate planning with copyrights, a copyright creator’s ability to transfer a copyright in statutory heirs. Even a lifetime gift to a mem- creator or the owner of other entertainment accordance with his or her wishes. ber of the statutory heirs, such as the creator’s assets should consider several transfer plan- For copyright termination purposes, the spouse or children, does not protect the trans- ning techniques. Generally, the same gift creator’s statutory heirs include the creator’s feree, as the identity of the creator’s statutory planning techniques that are available for surviving spouse (if any), the creator’s sur- heirs (including the surviving spouse) may any asset (such as outright gifts, gifts in trust, viving children, and the children of a prede- not be determinable until after both the cre- sales of partial interests that take advantage ceased child of the creator (the creator’s ator’s death and the exercise period for the ter- of lack of marketability and control dis- grandchildren), if any.21 If there are surviving mination right begins. counts, etc.) are available for entertainment children or grandchildren, the surviving While the termination rights are not waiv- assets.27 It should be noted that many of the spouse receives 50 percent of the termination able, creators and their legal advisers who do normal transfer tax planning techniques right and any subsequent sale or relicensing not wish to use a limited-purpose will, may become more challenging in the case of copy- proceeds that are produced as a result of the instead use an incentive structure that encour- rights because of their limited life, which has exercise of the termination right. If there are ages statutory heirs to decline to exercise an impact on their valuation. no surviving children or grandchildren, the their termination rights. It is not uncommon One common vehicle for the lifetime trans- surviving spouse receives 100 percent of the for lifetime gifts in trust or testamentary fer of an asset is the charitable remainder termination right and resulting proceeds. The bequests to be conditioned on certain events, trust. However, since the charitable income creator’s surviving children and grandchil- such as surviving the decedent or attaining a tax deduction is limited to the tax basis in the dren receive the other 50 percent (or 100 certain age. Similarly, gifts in trust or bequests asset rather than the full fair market value of percent if there is no surviving spouse) to be to statutory heirs of other assets could be the asset, entertainment assets are generally divided among them in per stirpital shares.22 conditioned upon the statutory heirs not a poor choice for funding a charitable remain- If the creator is deceased, the termination exercising their termination rights with respect der trust. right must be exercised by a majority of the to the previously transferred copyrights (i.e., For holders of entertainment assets who statutory heirs holding the termination right through the use of a no-contest clause). would prefer to benefit individuals rather as determined by their percentage of owner- However, there is a possibility that a court than charitable organizations, there are two ship.23 The exact procedure for the termina- might conclude that the use of a no-contest common transfer tax planning techniques to tion is cumbersome, so creators or their statu- clause is void as being contrary to the pub- consider: a sale to an intentionally defective tory heirs should consult with competent lic policy established in the 1976 Copyright grantor trust and a grantor retained annuity intellectual property law and estate counsel Act. trust. to ensure that the termination right is suc- The one limited statutory exception per- A sale to an intentionally defective grantor cessfully exercised. mitted by the Copyright act to waive the ter- trust28 involves 1) the creation of a trust for The creator’s surviving spouse, referred to mination right and thereby circumvent the the intended beneficiaries, 2) an initial gift of in the 1976 Copyright Act as the “widow” or exercise of a termination right by statutory cash by the donor to the trust, and 3) a sale “widower,” is defined as “the author’s sur- heirs, is to transfer the copyright by last will of the entertainment asset from the donor to viving spouse under the law of the author’s and testament. In California, however, tes- the trust. The purpose of this transfer is to domicile at the time of his or her death, tamentary transfers by will are generally not remove the future appreciation and income whether or not the [surviving] spouse has recommended because of the requirements for stream of the entertainment asset from the later remarried.”24 The continuation of the probating the will, which involve a lengthy donor’s estate for estate tax, but not income surviving spouse’s rights after remarriage and expensive court process. To avoid pro- tax, purposes.29 The gift and subsequent sale increases the potential for conflict among the bate, many individuals in California choose may be structured so that the donor either heirs, as the surviving spouse will not hold suf- to create revocable living trusts through which gifts the entire purchase price, which is then

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returned to the donor in the sale, or gifts a smaller amount as a down payment with the balance of the sales price satisfied by a promissory note issued from the trust to the donor. The use of a promissory note allows the donor to receive some ongoing payments in the form of interest income payable from the income stream generated by the entertainment asset. Current, historically low interest rates allow the donor to transfer more value to the trust than would otherwise be feasible. Like a charitable remainder trust, a grantor retained annuity trust involves a transfer by a donor to a trust that retains a current income stream, in this case for the benefit of the donor, with the remainder of the assets in trust passing to or for the benefit of individuals selected by the donor at the end of a set term. Many favor the grantor retained annuity trust for transfer tax planning because it allows them to retain a current income stream from the entertainment asset that is generally larger than the interest income payable from the intentionally defective grantor trust sale. However, valuing copyrights and other entertainment assets can Fast & Affordable often be more difficult than valuing other assets. Real Estate For lifetime gifts to a qualified charitable organization,30 the donor of an entertainment asset generally receives an income tax Title Searches deduction for contributions of the entertainment asset. The amount of the charitable For over 20 years California Title Search Co. has provided Real income tax deduction is generally equal to the fair market value of the donated entertain- Estate Title Information to Law Firms, Property Management ment asset at the time of the contribution. Companies and Governmental Agencies. We supply Deed Searches, However, in the case of self-created copy- Lot Book Reports, Chain of Title Information and Transactional rights (other than self-created musical copy- History throughout most of California and Arizona. rights), patents, trademarks, and certain other property, the amount of the income tax deduc- Ownership Vesting Pending Action tion is reduced by the amount of any long- term capital gain.31 Legal Descriptions Abstracts of Judgment Notwithstanding the above, donors of Deeds of Trust Tax Liens qualified intellectual property, such as self- Assignments Notices of Completion created musical copyrights, to a qualified Notices of Default & Sale Property Tax Status charitable organization can claim significant income tax deductions under IRC HOA Liens Property Characteristics Section 170(m). Annual charitable income tax deductions are available for a 120-month period in an amount equal to the income generated by the charity from the exploitation of the musical copyright, multiplied by a decreasing factor.32 This annual charitable income tax deduction can be extremely ben- California Title Search Co. eficial to the donor, especially if significant Real Estate Title Searches income is generated by the musical copyrights during the 120-month period. Note that certain record keeping requirements must be satisfied by the charitable organization in order for the donor to qualify for the deductions under Section 170(m).33 In addition, to qualify under Section 170(m), the donor may have to transfer his or her

Los Angeles Lawyer May 2012 17 May 2012 Master.qxp 4/12/12 12:50 PM Page 18

entire interest in the musical copyright to the JUDGE qualified charitable organization; a transfer of a partial interest in a musical copyright LAWRENCE W. CRISPO would generally not qualify. (RETIRED) While entertainment assets and income streams can present unique challenges for income and transfer tax planning purposes, many strategies are available to minimize adverse income, gift, and estate tax consequences and maximize preferential treatment. They require, however, careful planning that integrates corporate law, estate and gift planning, and income tax planning to achieve the desired objectives. A team approach by the advisers is required to make sure the best results are obtained for the client. ■

1 California also recognizes an entertainment asset referred to as the “right of publicity,” which protects an individual’s right to control the commercial use of his or her name, likeness, or personal characteristics. CIV. CODE §3344. As an entertainment asset, the right of publicity has similar income, gift, and estate tax planning issues, but along with trademarks and service Mediator Arbitrator marks are beyond the scope of this article. 2 These payment streams are deferred compensation payments that are subject to I.R.C. §409A. A discussion of the taxation of deferred compensation under Referee §409A is beyond the scope of this article, but suffice it to say that when deferred compensation is present 213.926.6665 there are very technical and complex rules that must www.judgecrispo.com be complied with, lest the service provider be sub- jected to severe income tax penalties at both the federal and state levels. 3 Different rules and terms apply to copyrights created before January 1, 1978, which are governed by the 1909 Copyright Act. The differences between the 1909 and 1976 Copyright Acts are signiﬁcant, especially concerning the terms of the copyrights, and creators should carefully review the creation date of their copyright to conﬁrm which copyright act applies. This article focuses on copyrights created after January 1, 1978. 4 I.R.C. §302. 5 This would apply to assets such as copyrights, trademarks, service marks, and other assets that may appreciate in value during the time they are held by a C corporation. 6 In tax planning for participations and residuals, C corporations or S corporations are commonly used as loan-out corporations to reduce the risk that entertainment companies will withhold income and employment taxes from payments for services rendered. 7 I.R.C. §541. 8 Certain trusts or single-member LLCs may be shareholders of an S corporation. 9 A built-in-gain will arise if the fair market value of the C corporation’s assets are higher than their tax bases GREG DAVID DERIN - MEDIATOR & ARBITRATOR on the date the C corporation converts to an S corporation. HONESTY • FAIRNESS • COMMITMENT • CREATIVITY • EXCELLENCE 10 I.R.C. §1362(d)(3). 11 See generally I.R.C. §§721, 731. 12 AREAS OF EXPERTISE: See generally I.R.C. §691 and Treas. Reg. §1.691(a)- 1(b)(3). • Entertainment and • Contract and Business Torts 13 I.R.C. §1367(b)(4). Intellectual Property • Real Property 14 I.R.C. §753. • Employment • Corporate and Partnership 15 The current long-term capital gains tax rate for individuals is 15%. Barring legislative action, the 15% pref- “POWER MEDIATOR”, The Hollywood Reporter, ADR SuperLawyerTM erential rate will expire on December 31, 2012. The FACULTY, Harvard Negotiation Institute resulting rate would be 20%. 16 Note that if payments are received over a number of different tax years, a portion of the capital gain will be 310.552.1062 ■ www.derin.com recharacterized as interest income and taxed at the 1925 CENTURY PARK EAST, LOS ANGELES, CALIFORNIA 90067 higher ordinary income tax rates. I.R.C. §453A(c).

18 Los Angeles Lawyer May 2012 May 2012 Master.qxp 4/12/12 3:12 PM Page 19

17 Note that the basis of the stock of an S corporation attributable to IRD assets held by the S corporation would also not be stepped up to fair market value. BUSINESS 18 17 U.S.C. §203(a). Under the 1976 Copyright Act, “Industry Specialists For Over 25 Years” termination rights are not extended to copyrights for tWitkin & Eisinger we specialize in the Non-Judicial OPPORTUNITY works made for hire. Trademarks, patents, participa- AForeclosure of obligations secured by real property tion rights, and other entertainment-related assets do or real and personal property (mixed collateral). not have a statutory termination right or comparable When your client needs a foreclosure done profession- Want to purchase interest. In practice, contracts or assignments for other ally and at the lowest possible cost, please call us at: entertainment-related assets rarely include termina- minerals and other tion rights, as such provisions would reduce the value oil/gas interests? of the assets to the assignor. 19 17 U.S.C. §203. If the assignment of the copyright Send details to: included the right of publication of the copyrighted materials, the window begins at the earlier of 35 years P.O. Box 13557 from publication of the copyrighted material or 40 years Denver, CO 80201 from execution or grant of license for the copyright. 20 17 U.S.C. §304(c). 21 17 U.S.C. §203(a)(2)(A). 22 Id.; 17 U.S.C. §203(a)(2)(B). If there are no statutory heirs, the termination right is exercised by the appropriate fiduciary of the creator’s estate. 17 U.S.C. §203(a)(2)(C). 23 17 U.S.C. §203(a)(2). 24 17 U.S.C. §101. 25 This is in addition to the conflict that may already exist if the surviving spouse is not related to the creator’s issue who hold the balance of the termination right. 26 A trust may be created for any purpose that is not illegal or against public policy, including the disposition of property at death. See PROB. CODE §15203. Property transferred to a trust is no longer owned by the transferor and is not distributable by the transfer- or’s will or as part of the transferor’s estate. See PROB. CODE §§6101 and 6400. 27 Note that transfers of participations, residuals, and royalties raise assignment of income and I.R.C. §409A issues that should be carefully considered before any transfers. In addition, they may not constitute “property” and thus may not qualify for certain tax-free transfers. I.R.C. §351, 721. 28 An intentionally defective grantor trust is an irrev- ocable trust that qualifies as a grantor trust for income tax purposes, which means that although the trust is a separate legal entity, the donor is responsible for all income tax burdens and benefits of the trust on the donor’s individual income tax return. A Solution 29 Note that in President Obama’s 2013 Fiscal Year Budget Proposal, released earlier this year, the administration proposed new tax treatment for grantor trusts, That Fits including that grantor trust assets would be included in the grantor’s estate for estate tax purposes and dis- You tributions from a grantor trust would be treated as a gift. This proposal would apply to grantor trusts created on or after the date of enactment. See General Explanations of the Administration’s Fiscal Year 2013 Revenue Proposals, Feb. 13, 2012, available at http: //www.treasury.gov/resource-center/tax-policy/pages /general_explanation.aspx. 30 An organization that is exempt from taxation under I.R.C. §501(c)(3). 31 I.R.C. §170(e)(1); I.R.C. §1221(a)(3). 32 For the first 2 years of the 12-year period, the donor may deduct an amount equal to 100% of the income * Commercial, Industrial & Residential generated by the qualified charitable organization from * Income Property & New Construction the musical entertainment asset. Thereafter, the per- Personal Property & Holding centage decreases by 10% each year, until years 11 and * 12, during which time the donor may deduct only * Refinance & Short Sale 10% of the income generated by the musical enter- * Bulk & Liquor Business tainment asset. I.R.C. §170(m). * Forward & Reverse 1031 Exchange 33 The donee charitable organization is required to file an annual information return (which includes the net 1545 Wilshire Boulevard, 6th Floor, Los Angeles, California 90017 income generated from the property received). See Contact: Mark R. Minsky, President | E-mail: [email protected] generally I.R.C. §6050L(b) and Internal Revenue Telephone: (888) 732-6723 | (213) 484-0855 | Web site: www.comescrow.com Service Form 8899, Notice of Income From Donated Intellectual Property.

Los Angeles Lawyer May 2012 19 May 2012 Master.qxp 4/12/12 12:59 PM Page 20

practice tips BY JOSEPH C. CANE JR.

The Danger of Using Finders to Finance Entertainment Projects

THE ENTERTAINMENT INDUSTRY HAS GLAMOUR, fame, sex appeal, a security issued by the investment vehicle, usually, a membership or scandal, power, riches and many other attributes that lure people to partnership interests or units. In return, the investor receives the it. What it does not have is an endless supply of capital. And some right to participate in certain profits of the investment vehicle—for of its products, such as motion pictures and television programs, example, a share of the profits (if any) from a motion picture after require significant capital to produce, market, and distribute. certain costs, fees, and expenses are paid. One might expect that the major studios, which command the vast In return for helping to arrange financing, finders ordinarily majority of North American revenue and a significant share of world- request fees (a percentage of the financing they source), screen cred- wide revenue from distribution of entertainment content, could its (such as an executive producer credit), and a share of the profits. underwrite most of their projects, especially since they are owned by Because the fee component of compensation, in most cases, is con- large conglomerates. Hollywood, however, is different. To diversify tingent upon the success of obtaining financing, it is referred to as trans- risk, the majors frequently shift the costs of production of film and action-based compensation. Transaction-based compensation, how- televisions projects to independent companies and producers. In ever, implicates a host of securities laws and regulations. One turn, these smaller players, which often lack sufficient capital reserves, exemption does not fit all finders. find themselves constantly in pursuit of capital to fund projects. A brief review of current securities law offers insight into why find- As a result of this never-ending need for capital, players in the enter- ers may fall afoul of regulations. During the Great Depression, the fed- tainment industry often turn to finders to assist them in raising cap- eral government decided to protect investors from unscrupulous sell- ital. In turn, this practice has yielded a proliferation of people now ers of securities and enacted various rules and regulations. One of the claiming expertise in finding capital for entertainment-related financ- principal mandates of these laws and regulations was to establish a ings. Unfortunately, many such finders operate very close to (or, in framework whereby persons involved in raising capital on behalf of some instances, over) the line between those who a required to be others would be required to adhere to certain standards and be prop- licensed to market and provide advice concerning financial transac- erly licensed. These regulations were adopted to minimize abuse and tions, and those who are not. In fact, some purported finders do not fraud.4 Since 1935, brokers and dealers in securities have been required seem to care about the requirements but instead shamelessly promote to register with the Securities Exchange Commission.5 California financing opportunities based largely upon the lure of the entertain- later adopted similar statutes and regulations.6 ment industry rather than true and accurate financial consideration Unless a finder is in compliance with applicable broker-dealer for what they are promoting. statutes, rules, and regulations, he or she may be acting without A leading factor (valid or not) among producers on the creative legal authority, which could have extremely adverse implications for side of the entertainment business is that finders can help free pro- all involved. Therefore, it is critical for those who represent finders ducers from the many burdens and distractions attendant to raising and parties who engage finders to know when a finder has exceeded capital, including endless meetings and other time-consuming under- any possible exemption and may instead be engaging in activities that takings. As a consequence, many finders have been able to craft a require licensure as a broker-dealer. unique and highly lucrative niche for themselves, and across the The Exchange Act provides that a broker is “any person engaged entertainment industry a pervading sentiment seems to be that there in the business of effecting transactions in securities for the account are few, if any, legal implications associated with employing finders. of others.”7 Similarly, Section 3(a)(5)(A) of the act provides that a That belief is ill-founded. “dealer” is “any person engaged in the business of buying and sell- Since virtually all financing transactions involve the sale of a ing securities for such person’s own account through a broker or oth- security (equity or a debt instrument), federal and state securities laws erwise.”8 Further, Section 15(a)(1) makes it unlawful for any broker are implicated. At the federal level, transactions in which securities or dealer to “effect any transactions in, or to induce or attempt to are sold must comply with the U.S. Securities Act of 19331 and the induce the purchase or sale of, any security (other than an exempted Securities Exchange Act of 1934 (Exchange Act).2 In California, security or commercial paper, bankers’ acceptances, or commercial similar transactions must comply with the Corporations Code and bills) unless such broker or dealer is registered.…”9 related regulations. The definition of a “broker-dealer” under California law is vir- For the most part, however, the securities that are included in enter- tually identical to the federal definitions.10 In addition, California law tainment financing transactions are not registered under federal or state provides that “no broker-dealer shall effect any transaction in, or law. Instead, parties who sell (i.e., issue) a security for the financing induce or attempt to induce the same of, any security in this state unless of entertainment projects typically rely upon exemptions, in partic- the broker-dealer has first…secured from the commissioner a certificate, ular an exemption from registration in accordance with Rule 506 of then in effect, authorizing that person to act in that capacity.”11 Regulation D of the Securities Act, which also preempts state blue- sky laws.3 In deals that fall under this exemption, third-party investors Joseph C. Cane Jr. is a corporate and entertainment transactional attorney with obtain an ownership stake in the investment vehicle by purchasing Business Law Professional Corporation in Beverly Hills.

20 Los Angeles Lawyer May 2012 May 2012 Master.qxp 4/12/12 12:59 PM Page 21

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In addition to SEC oversight, activities of registered securities. Therefore, SEC guid- the alternative, that the SEC cannot guaran- broker-dealers also are regulated at the fed- ance is particularly important to assist in the tee that it will not take action) against an eral level by the Financial Industry Regulatory analysis of whether a person is “engaging in issuer or interested party in potential violation Authority (FINRA) and, at the state level, by the business of effecting transactions in secu- of a statute or other regulation. In most cases, the various state securities commissioners. rities,” in which only registered broker-deal- “no-action” letters are issued by the SEC fol- In California, the commissioner of corpora- ers may engage.19 The SEC has advised that lowing a communication from an issuer or tions, acting on behalf of the California addressing certain questions can help inter- interested party seeking direction prior to Department of Corporations, possesses over- ested parties determine whether broker-dealer undertaking certain conduct viewed as poten- sight. Unless an exemption exists, broker- licensure is required. tially violative of federal securities laws. dealers must register with the SEC and The first question is: Does the finder par- An important “no-action” letter con- become members of a self-regulatory orga- ticipate in important parts of a securities cerning the federal finder exemption was nization, such as FINRA or any of the transaction, including solicitation, negotiation, issued to Paul Anka in 1991. In that matter, national securities exchanges, and the Sec- or execution of the transaction? As one attor- he sought relief from broker-dealer registra- urities Investor Protection Corporation.12 ney has noted, “[A] person loses his or her tion in connection with fundraising efforts on Broker-dealers operating in California also finder status by taking any role, however behalf of a professional hockey team, notwith- must obtain a license from the commissioner minor, in the ultimate sale of securities.”20 standing that he was to be paid a transaction- of corporations.13 Several California cases interpret the so-called based fee for his services. In issuing its favor- However, the Exchange Act, the rules and finder exception to licensure and the role a able determination, the commission gave regulations promulgated thereunder, and finder may play in a transaction. Initially, extraordinary weight to the fact that Anka did California’s comparable statutes do not define the finder exception was applied by California nothing more than provide names and phone the term “finder.” Nor do they define what is courts to real estate transactions for which a numbers of prospective investors to the meant by “engaging in the business of effect- person without a broker’s license sought a fee issuer.30 The same rationale for collection of ing transactions in securities.”14 from the sale of real estate. However, the finder’s fees without broker-dealer registration Finders often maintain that they are not finder exception has been considered in mat- was allowed in a recent bankruptcy pro- subject to broker-dealer registration require- ters concerning the sale of securities in cases ceeding, In re Foundation Group Systems, ments because they are not engaged in the such as Evans v. Riverside International Race- Inc.31 In that case, the court held that the business of effecting securities transactions. way21 and others.22 finder exemption applied, based largely upon They may argue that they merely “find” and In Evans, the plaintiff sought to recover the determination that the individual rely- place in contact potential buyers and sellers a commission after the defendant success- ing on the exception did not participate in any of securities who will then complete resulting fully implemented a complicated and detailed of the purchase-sale negotiations.32 transactions.15 Also, frequently it is asserted financing strategy originally advanced by the One way to summarize this guidance is that parties who provide “consulting” or plaintiff but with a financing source different that the finder’s “involvement must start and “advisory” services ancillary to the company’s from the one that the plaintiff had intro- stop with making introductions.”33 However, capital-raising efforts are not subject to reg- duced. The California Court of Appeal this exception is not found in any legisla- ulation. Guidance issued by the SEC and affirmed the grant of summary judgment for tion, and at the federal level the exception is related federal and state case law, however, do the defendant. In addition, the court pro- the product of no-action letters. The appli- not support these propositions in the abstract vided a detailed explanation of the finder’s cation of the exception has not always been or as a generally applicable exception to exemption, stating that the finder “merely consistent or clear. Practitioners must there- licensure. brings a buyer and seller together so that fore recognize that the SEC could reduce or At the federal level, whether a person is they make their own contract without aid.” eliminate the exception at any time.34 acting in the capacity of a finder or a broker- Furthermore, “[a]ny participation, however dealer typically is a factual determination. slight, in the negotiations” brings the finder Transaction-Based Compensation As one expert has explained: “[C]onducting within the definition of a broker, who must Another question for evaluating the likeli- sales efforts…participating in negotiations be licensed.23 The court also explained that hood of a finder’s exemption is whether the between buyers and sellers of securities…and a finder may not compel the parties to nego- finder receives transaction-based compensa- receiving transaction-based compensation tiate a contract.24 In Zalk v. General Explo- tion. Although a finder’s activities may be are hallmarks of the broker-dealer. Engaging ration Company,25 the appellate court vali- limited to introducing potential investors to in any one of these activities may be sufficient dated a finder’s fee agreement and determined the issuer, the manner in which the finder is to require registration if carried on with any that the role of a finder is limited to intro- compensated is equally important. As one degree of regularity.”16 SEC guidance similarly ducing the buyer and seller of a business to law journal article has noted: “Most private identifies “finders” as persons engaging in each other through an intermediary and not investment intermediaries will have an activities such as 1) finding investors for providing any other services.26 arrangement with the issuer to receive trans- issuers, even in a “consultant” capacity, 2) At the federal level, similarly limited action-based compensation rather than a flat finding investors for, working with, and split- exemptions to the necessity of broker-dealer finder’s fee. Therefore, although courts gen- ting commissions with broker-dealers, and 3) registration have been recognized for quali- erally do not find such compensation to be the finding investors for venture capital or fied finders27 and business brokers.28 sole determinant in holding a broker to be “angel” financings, including private place- However, this qualified finder exception unregistered, the SEC hints that such a com- ments.17 In California, determining “whether appears to be limited to narrow circum- pensation agreement may be enough to a person acted as a finder or broker, moreover, stances. A collection of SEC “no-action” let- require registration.”35 is a question of fact.”18 ters offers additional guidance.29 Relevant case law and SEC “no-action” letters recognize that success-based compen- Questions for Finders “No-Action” Letters sation is a primary characteristic of the bro- As noted, most independent film and televi- The SEC issues “no-action” letters to indicate ker-dealer role.36 When compensation is based sion financing transactions do not involve that the SEC will not take any action (or, in on the outcome of a transaction, it necessar-

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ily follows that that those entitled to the the plaintiff’s role was to negotiate the pur- Rothstein, and Allen Sanford. The high vis- compensation “have a powerful incentive to chase. The appellate court affirmed the grant ibility of the entertainment industry also do whatever is necessary to make this trans- of summary judgment in favor of the defen- makes it a target for investigations. action succeed.”37 This creates risk for the dant and rejected the plaintiff’s contention While entertainment industry finders may investor and a greater public interest in ensur- that those who represent purchasers of secu- find themselves under increased scrutiny, it is ing that the person who profits from the rities, rather than sellers, are not required to a safe bet that entertainment financing will transaction is licensed. be licensed. Instead, the court determined continue. Not all parties involved in a secu- For example, in a “no action” letter to that it did not matter which party the unli- rities transaction must be licensed. For exam- Brumberg, Mackey & Wall, P.L.C. dated censed person worked with on the transac- ple, issuers generally are not considered to be May 17, 2010, the SEC denied a law firm’s tion. Participation in negotiations for the brokers or dealers, because they are not sell- no-action request to receive transaction-based purchase or sale of securities, the court held, ing third-party securities.47 Similarly, certain compensation to help a client raise funds. is the role of a broker-dealer.42 It would be “associated persons” of an issuer—including The SEC determined that the transaction- unwise to expect that a court will view occa- employees, officers, and directors—may facil- based compensation, when coupled with the sional participation in such activity with itate capital-raising efforts of an issuer with- law firm’s intention to introduce the client to leniency. out running afoul of broker-dealer registra- persons who “may have an interest” in pro- Another inquiry asks whether the person tion requirements. At the time of viding financing to the client, is the “hallmark regularly handles securities or funds of oth- participation, however, these associated per- of broker-dealer activity.”38 The SEC noted ers in connection with securities transactions. sons must not be subject to statutory dis- that the firm’s proposed activities likely would Not surprisingly, the regular handling of secu- qualification under the Exchange Act, must involve prescreening potential investors and rities or the handling of client funds for secu- not receive commissions in connection with preselling its client’s securities to attract rities transactions require licensure. While it the raising of capital, cannot be an associated investor interest. The SEC further added that is true that in its “no action” letter to Anka, person of a broker-dealer, and must limit the firm’s contemplated “receipt of compen- the SEC gave considerable weight to the fact their sales activities as set forth in Rule 3a4- sation directly tied to successful investments” that he “had not previously been engaged in 1 of the General Rules and Regulations pro- in its client’s securities by investors intro- arranging financings and represented that he mulgated under the federal statute.48 duced by the firm would give the firm a would not do so in the future,”43 it is also true In California, Section 25200 of the Corpo- “salesman stake” in the proposed transaction that in Owen v. Off, the California Supreme rations Code similarly provides an exemption and would create heightened incentive for Court expressly rejected the position that to the requirement that broker-dealers be the firm to engage in sales.39 In short, if the parties who engage in only a single transac- licensed by the commissioner in situations finder’s compensation is transaction-based, tion concerning the sale of securities are in which the person 1) is registered as a bro- there is a significant risk that the finder excep- exempt from licensure.44 Under California ker-dealer with the SEC, 2) has not previously tion will not apply and a broker-dealer license securities law, there is no exception for par- had a certificate denied or revoked by the will be required under applicable securities ties who engage in broker-dealer activities commissioner, 3) has no place of business laws. for just one deal. within California, and 4) and does not direct Another reason that entertainment indus- offers to sell or buy in California to a) persons The Finder’s Regular Business try finders should not rely on the “no action” other than broker-dealers, banks, savings and A third question concerns the finder’s business letter to Anka is that the SEC is now con- loan associations, trust companies, insurance role. Is the finder in the business of effecting struing the terms “engaged in the business” companies, investment companies registered or facilitating securities transactions? The more narrowly and may conclude that trans- under the Investment Act of 1940, pension or more a person is in the business of raising cap- action-based compensation alone is sufficient profit-sharing trusts (other than self-employed ital, the more likely that person should have to trigger the broker-dealer registration individual retirement plans) or other institu- a broker-dealer license. The analysis is more requirement.45 As one law review article sum- tional investors or government agencies or difficult when a person occasionally, indi- marizes: “[A]rguments that referral activi- instrumentalities, or b) more than 15 cus- rectly, or on occasion participates in capital- ties were not the finder’s principal business tomers (whether or not self-employed indi- raising. However, certain activities generally have also been rejected. In effect, there is no vidual retirement plans) having an existing have been recognized to constitute effecting ‘de minimus’ exception from broker-dealer account with such broker-dealer prior to any transactions in securities. Among these activ- registration.”46 offer having been made to them during any ities are: 1) identifying potential purchasers period of 12 consecutive months.49 or sellers of securities, 2) soliciting or struc- Guidance for Issuers Frequently, those who act as entertain- turing transactions, 3) negotiating terms for Prospective issuers and finders must therefore ment industry finders elect not to become transactions, 4) performing due diligence, 5) proceed with care to limit the activities of any licensed because “registration as a broker- providing valuations, 6) preparing, convey- finder who is not a registered broker-dealer, dealer is burdensome and time-consuming ing, or collecting transaction-related docu- since even a single transaction may violate process that requires on-going reporting and ments, 7) handling funds or securities on state and federal securities law. Questions compliance throughout the year.”50 In addi- behalf of an issuer, and 8) otherwise acting as concerning the finder’s role, type of com- tion, “once registered, broker-dealers must an intermediary in a transaction.40 pensation, and regular business are important comply with a number of specific conduct, Nationwide Investment Corporation v. for entertainment industry players to con- financial responsibility and reporting require- California Funeral Services, Inc.,41 provides sider. The SEC and other regulators have ments, and are subject to periodic compliance a good example of the problems that pur- increased enforcement against finders who are examinations by the SEC, FINRA and state ported finders may face when they engage in performing broker-dealer activities without securities commissions. As such, broker-dealer these activities. In Nationwide, the plaintiff registration. Increased enforcement is likely registration is neither a simple, nor inexpen- sought to receive compensation for its services the result of a downturn in the economy and sive undertaking.”51 to the defendant in connection with the defen- the flood of scandals in the financial sector, Although a finder’s reluctance to become dant’s purchase of another company. Part of including Enron, Bernie Madoff, Scott licensed is understandable, significant adverse

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consequences may arise when finders are the finder’s services involve more than mere Rees v. Department of Real Estate, 76 Cal. App. 3d 286, used improperly to raise capital for project introductions, the finder should be compen- 295, 142 Cal. Rptr. 789 (1977); Zappas v. King Williams Press, Inc., 10 Cal. App. 3d 768, 775, 89 Cal. financing. Finders engaging in activities sated on a fixed-fee basis, regardless of the Rptr. 789 (1970); Crofoot v. Spivak, 113 Cal. App. 2d reserved for registered broker-dealers can outcome of the capital-raising. If services 146, 147 (1952). subject themselves to regulatory action by involve more than mere introductions, or if 23 Evans, 237 Cal. App. 2d at 675 (quoting 9 the SEC, state regulators, and federal and transaction-based compensation is to be paid, CALIFORNIA JURISPRUDENCE 2d, Brokers, §§26 at 164). state courts. Potential consequences may or if the finder is frequently involved in secu- 24 Id. at 676 (citations omitted) (quoting Ames v. Idea range from “monetary damages and civil rities transactions, thorough diligence should Cement Co., 37 Misc. 2d 883, 886 (1962)). 25 Zalk v. General Exploration Co., 105 Cal. App. 3d injunctions to outright criminal prosecu- be performed to ascertain whether the find- 786 (1980). 52 tion.” Also, courts may “order the cancel- er’s conduct potentially qualifies as conduct 26 Id. at 792. See also Lyons v. Stevenson, 65 Cal. lation or repayment of commissions and fees, reserved for broker-dealers. If so, the finder App. 3d 595 (1977); Sullivan v. Hopkins, 435 F. 2d injunctions prohibiting future violations of probably is required to have a license. The 1128 (9th Cir. 1970). 27 securities laws, and payment of civil and entertainment industry may be different, but Paul Anka, SEC No-Action Letter, 1991 SEC No-Act. LEXIS 925 (July 24, 1991). 53 those who ignore the applicable securities criminal penalties.” 28 Country Business, Inc., SEC No-Action Letter (Nov. Section 25501.5 of the Corporations Code laws when engaging a finder may find that dif- 8, 2006). specifically “gives investors the right to rescind ference involves something other than a pain- 29 Legitimizing Private Placement Broker-Dealers, a transaction when an unregistered broker- less route to capital. ■ supra note 4, at 710. dealer procures the investment. If the investor 30 Paul Anka, SEC No-Action Letter, 1991 SEC No-Act. LEXIS 925 (July 24, 1991). no longer holds the securities, he or she may 1 Securities Act of 1933, 15 U.S.C. §77a-77aa (as 31 In re Foundation Group Sys., Inc., 141 B.R. 196, 200; amended). sue for damages as well as collect attorney’s 1992 Bank. LEXIS 951 (1992). 2 Securities Exchange Act of 1934, 15 U.S.C. 78a (as fees, costs, and treble damages amounting 32 Id. amended). to as much as $10,000.54 In addition, finders 33 Finders and Their Risks, supra note 20. 3 See generally 15 U.S.C. §§77a et seq.; 17 C.F.R. pt. 34 Risks Associated with Using or Acting as a Finder, may be unable to enforce their fee arrange- 230 (Regulation D: Rules Governing the Limited Offer supra note 14. ments with the issuer and, therefore, may and Sale of Securities Without Registration Under the 35 Legitimizing Private Placement Broker-Dealers, Securities Act of 1933); 47 Fed. Reg. 11,262 (Mar. 6, not be able to collect for services rendered. supra note 4, at 716. 1982), as amended at 54 Fed. Reg. 11,373 (Mar. 20, Finders may also be denied future registration 36 See Brumberg, Mackey & Wall, P.L.C, SEC No- 1989); CORP. CODE §§25000 et seq.; CAL. CODE REGS. with the SEC.55 Action Letter (May 17, 2010). See also Finders and tit. 10, ch. 3, subch. 2. Their Risks, supra note 20, at 7; id. On the issuer side, the potential conse- 4 Robert Connolly, Legitimizing Private Placement 37 The Finder’s Exception, supra note 5, at 810. quences may be even more debilitating, par- Broker-Dealers Who Deal with Private Investment 38 Brumberg, Mackey & Wall, P.L.C, SEC No-Action Funds: A Proposal for a New Regulatory Regime and ticularly as they may materially and adversely Letter (May 17, 2010). Limited Exception to Registration, 40 J. MARSHALL L. affect both the issuer’s current capital raising 39 Id. REV. 703 (Winter 2007) [hereinafter Legitimizing efforts as well as future financing. For exam- 40 Risks Associated with Using or Acting as a Finder, Private Placement Broker-Dealers]. supra note 14. ple, the involvement of a finder deemed to be 5 John Polanin, Jr., The Finder’s Exception from Federal 41 Nationwide Inv. Corp. v. California Funeral Serv., an unregistered broker-dealer could jeopar- Broker-Dealer Regulation, 40 CATH. U. L. REV. 787, Inc., 40 Cal. App. 3d 494 (1974). dize private placement exemptions relied 825 (1991) [hereinafter The Finder’s Exception]. 42 Id. at 501. 6 See generally CORP. CODE §§25000 et seq. upon by the issuer or void the investors’ sub- 43 Lee R. Petillon & Mark Hiraide, Private Offerings 7 Securities Exchange Act of 1934, §3(a)(4)(A), 15 scriptions, as agreements entered into in vio- Using Non-registered Broker/Dealers, BUSINESS LAW U.S.C. 78a. lation of the Exchange Act are void.56 In the UPDATE (LACBA, Spring 2005) (interpreting Paul Anka, 8 Id. at §3(a)(5)(A). SEC No-Action Letter, 1991 SEC No-Act. LEXIS 925 process, this may subject the issuer to adverse 9 Id. at §15(a)(1). (July 24, 1991)). regulatory action from the SEC and state 10 CORP. CODE §25004. 44 Owen v. Off, 36 Cal. 2d 751, 755-57 (1951). 11 Id. at §25210. regulators, including the imposition of fees 45 Lee R. Petillon & Mark Hiraide, Private Offerings 12 SEC Division of Market Regulation, Guide to Broker- and penalties. Using Non-registered Broker/Dealers, BUSINESS LAW Dealer Registration (Dec. 8, 2006), available at Investors may have the right to rescind UPDATE (LACBA, Spring 2005). http://www.sec.gov./divisions/marketreg/bdguide.htm 46 The Finder’s Exception, supra note 5, at 809 (citing their investments and demand the return of [hereinafter Guide to Broker-Dealer Registration]. EZRA WEISS, REGISTRATION AND REGULATION OF their capital, and the SEC has the right to 13 CORP. CODE §25210. BROKERS AND DEALERS xii (1965); SHELDON M. JAFFE, sanction the issuer by barring it from con- 14 Qashu & Schoenthaler LLP, Risks Associated with BROKER-DEALERS AND SECURITIES MARKETS: A GUIDE TO Using or Acting as a Finder, available at http://www.qsllp ducting future exempt offerings. The issuer THE REGULATORY PROCESS §2.04 at 20 n.32 (1977) .com/InsightIdeas/ArticleDetails/tabid/85/ArticleId/2/- may have potential liability as an “aider and (citing Boruski v. SEC, 289 F. 2d 738, 740 (2d. Cir. strong-Risks-Associated-with-Using-or-Acting-as-a- 1961)). abettor” of the finder’s securities law viola- Finder-strong.aspx [Hereinafter Risks Associated with 47 Guide to Broker-Dealer Registration, supra note tions. Lastly, the associated legal, accounting, Using or Acting as a Finder]. 12. and administrative burdens associated with 15 The Finder’s Exception, supra note 5, at 788. 48 Guide to Broker-Dealer Registration, supra note 12 16 Id. at 825. these consequences will undoubtedly be sig- (citing Rule 3a4-1 of the General Rules and Regulations 17 Guide to Broker-Dealer Registration, supra note nificant and time-consuming. promulgated under the Securities Exchange Act of 12. 1934 (as amended)). Given these potential outcomes, it is essen- 18 Moss v. Kroner, 197 Cal. App. 4th 860, 871 (2011) 49 CORP. CODE §25200. tial that entertainment companies and pro- (citing Preach v. Monter Rainbow, 12 Cal. App. 4th 50 Legitimizing Private Placement Broker-Dealers, ducers contemplating using the services of a 1441, 1452 (1993)). supra note 4, at 703. 19 Securities Exchange Act of 1934, §3(a)(4)(A), 15 finder to facilitate capital-raising efforts under- 51 Risks Associated with Using or Acting as a Finder, U.S.C. 78a, as amended. stand the applicable law and require that the supra note 14. 20 John P. Clearly, Finders and Their Risks, NORTH finders they engage to follow the law. Among 52 Id. COUNTY LAWYER MAGAZINE 6, 7 (Nov. 2009) [here- 53 Id. other things, thoughtful consideration should inafter Finders and Their Risks]. 54 Finders and Their Risks, supra note 20. be given to what services actually are needed 21 Evans v. Riverside Int’l Raceway, 237 Cal. App. 2d 55 Id. at 7; Risks Associated with Using or Acting as a 666, 676 (1965) (quoting 9 CALIFORNIA JURISPRUDENCE of the finder, the manner in which the finder Finder, supra note 14. 2d, Brokers, §§26 at 164). will be compensated, and what experience the 56 Risks Associated with Using or Acting as a Finder, 22 See, e.g., Preach, 12 Cal. App. 4th 1441; Tyrone v. finder has involving securities transactions. If supra note 14. Kelley, 9 Cal. 3d 1, 11-12, 106 Cal. Rptr. 761 (1973);

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entertainment law issue

by WILLIAM ARCHER

Getting REAL Reality TV shows continue to be sued by unwilling participants and wannabe producers

THE MOST COMMON LEGAL DISPUTES regarding reality tele- defense involves a balancing test that requires the court “to exam- vision shows concern 1) state law claims by a plaintiff appearing in ine and to compare the allegedly expressive work with the [use of or mentioned on a show against the producers and broadcaster of that the plaintiff’s identity] to discern if the defendant’s work con- show, and 2) idea submission claims made by would-be producers of tributes significantly distinctive and expressive content.”2 Under this a proposed show against the producers and broadcasters of an test, when the value of the work comes principally from some actual show. State law claims involving reality television shows source other than the celebrity’s fame “it may be presumed that suf- include common law and statutory right of publicity claims, defama- ficient transformative elements are present to warrant First Amend- tion, intentional inﬂiction of emotional distress, fraud, trademark ment protection,” whereas when an “artist’s skill and talent is infringement, and even violation of civil rights. Much of the recent manifestly subordinated to the overall goal of creating a conventional focus in these cases, however, has been on claims that producers and portrait of a celebrity so as to commercially exploit his or her broadcasters have violated the plaintiffs’ common law or statutory fame, then the artist’s right of free expression is outweighed by the rights of publicity.1 right of publicity.”3 Right of publicity and defamation claims are vulnerable to two Applying this test, a Central District of California court denied a First Amendment defenses: transformative use and public interest. The transformative use defense requires a defendant to show that William Archer is one of the two cochairs of the entertainment practice group the work is protected by the First Amendment by virtue of containing at Lewis Brisbois Bisgaard & Smith LLP, where he handles transactional, significant transformative elements or that the value of the work does intellectual property, and litigation matters for motion picture, television,

not derive primarily from the celebrity’s fame. Application of the music, and other entertainment industry clients. AMANE KANEKO

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motion that plaintiff Gilbert Arenas, a guard for the Memphis In another court decision issued last year, an Illinois federal judge Grizzlies, made for a preliminary injunction against the producers of granted summary judgment based on a First Amendment defense to the reality television show Basketball Wives and Arenas’s ex-fiancée. privacy claims brought against A&E Television Networks and sev- The motion sought to prevent them from 1) using the NBA player’s eral production companies in connection with the Biography Channel alleged trademarks in association with any reality television show, 2) show Female Forces. In Best v. Berard,10 Erin Best sued A&E, sev- using “basketball wives” or any other term that would suggest affil- eral production companies, and others on claims arising from the iation with basketball players in the title, promotional text, or the show broadcast of her arrest for driving under a suspended license, which itself, and 3) using any other means to suggest affiliation with bas- included display of her personal information on the computer screen ketball players, such as including more than two participants who are in a police officer’s squad car. Best sued for violation of the Illinois known to be affiliated with basketball players.4 Right of Publicity Act (IRPA), violation of the federal Drivers’ Privacy Arenas filed the action against Laura Govan and Shed Media Protection Act (DPPA), common law invasion of privacy, and inten- US, Inc., which at the time was the production company for the show tional infliction of emotional distress. and a spinoff, Basketball Wives: Los Angeles (BWLA). When the action Much like California’s right of publicity statute, the Illinois law was filed, a press release indicated that Govan would appear on prohibits the use of an individual’s identity for commercial purposes BWLA and described her as the sister of Gloria Govan, the fiancée without written consent.11 IRPA defines “commercial purpose” as the of Los Angeles Lakers player Matt Barnes, and referred to Laura “public use or holding out of an individual’s identity (i) on or in con- Govan’s four children with Arenas without specifically mentioning nection with the offering for sale or sale of a product, merchandise, Arenas. goods or services; (ii) for purposes of advertising or promoting prod- Arenas sought the preliminary injunction based upon claims for ucts, merchandise, goods or services; or (iii) for the purpose of common law misappropriation of likeness and trademark infringe- fundraising.”12 ment. In California, a claim for commercial misappropriation requires The defendants argued that the First Amendment constituted a the plaintiff to prove “(1) the defendant’s use of the plaintiff’s iden- defense to the counts of violation of IRPA, common law invasion of tity; (2) the appropriation of [the] plaintiff’s name or likeness to privacy, and intentional infliction of emotional distress. With respect [the] defendant’s advantage, commercially or otherwise; (3) lack of to the IRPA count, the defense argued that use of Best’s identity was consent; and (4) resulting injury.”5 for noncommercial purposes, therefore bringing the show within It was undisputed that Arenas had not consented to whatever use IRPA’s express exemption from liability for the “use of individual’s Shed Media and Govan might make of Arenas’s identity. The court identity for non-commercial purposes, including any news, public concluded that, given the subject matter of the show, it was likely that affairs, or sports broadcast or account, or any political campaign.”13 Govan would mention Arenas by name on the show in the contexts The court noted that when the government—either directly or of their former relationship and his status as a famous basketball player through a legal standard that imposes civil liability—imposes sanc- and that her likely on-air conversations about Arenas (and any tions on the publication of truthful information of public concern, “pri- related promotional materials) would constitute the use of Arenas’s vacy concerns give way when balanced against the interest in pub- identity as a celebrity. lishing matters of public importance.”14 While acknowledging that The court, however, concluded that Arenas was unlikely to suc- Best’s encounters with the police “involved conduct that was arguably ceed on his common law commercial misappropriation claim and toward the lower end of the spectrum of criminality,”15 the court therefore was not entitled to a preliminary injunction, because the claim nonetheless rejected Best’s argument that her arrest was too de min- was subject to the transformative use defense. Applying the balanc- imis to be a matter of public concern. The court held that the use of ing test, the court concluded that any references in BWLA to Arenas Best’s identity was a matter of public concern that fell within IRPA’s likely would be incidental to the show’s plot as a whole, since the show exemption from liability and that the First Amendment trumped is about the women who have or have had relationships with bas- Best’s common law privacy claim. ketball players rather than about the players themselves. Accordingly, The court also subsequently granted summary judgment in favor the court concluded that the transformative use defense probably of A&E and other defendants on Best’s claim that the defendants vio- would defeat Arenas’s misappropriation claim. lated her federal constitutional rights to privacy by broadcasting her The court also concluded that the public interest defense likely personal information. The court reasoned that Best’s date of birth, would defeat Arenas’s misappropriation claim. Under the public inter- height, weight, and driver’s license number were not sufficiently inti- est defense, “no cause of action will lie for the publication of matters mate or personal to be protected by a constitutional privacy interest, in the public interest, which rests on the right of the public to know and and that brief descriptions of Best’s previous arrests and traffic stops the freedom of the press to tell it.”6 This First Amendment defense applies and her driver’s license number were publicly available. to almost all reporting of recent events as well as to publications about The First Amendment, however, did not bar all of Best’s privacy “‘people who, by their accomplishments, mode of living, professional claims. The court declined to grant summary judgment in favor of standing or calling, create a legitimate and wide spread attention to their A&E and the production companies on her claim that the disclosure activities.’”7 The court rejected Arenas’s argument that any discussion of her information violated the DPPA, which creates a private cause of his family life would not be sufficiently related to his celebrity to make of action against a “person who knowingly obtains, discloses or BWLA’s use of his identity a matter of public concern, noting that uses personal information, from a motor vehicle record, for a pur- “[p]ublic interest attaches to people who by their accomplishments or pose not permitted under this chapter.”16 mode of living create a bona fide attention to their activities.”8 The court further concluded that Arenas had failed to sustain his burden of Nonbroadcast Conduct defeating defendants’ First Amendment defenses by providing clear and First Amendment defenses also can be lost if the plaintiff bases his convincing evidence that they had acted with actual malice. Since the or her claims on the nonbroadcast conduct of the defendants. In Tiwari court found that the conduct at issue was in furtherance of Shed v. NBC Universal, Inc.,17 a federal judge in the Northern District of Media and Govan’s free speech rights in connection with a matter of California refused to dismiss or strike federal civil rights claims and public concern, the court granted Shed Media’s motion to strike a state law intentional infliction of emotional distress claim brought Arenas’s right of publicity claims under California’s anti-SLAPP statute.9 against NBC Universal by Anurag Tiwari. The Ninth Circuit affirmed the decision. Producers of the NBC show To Catch a Predator used an adult

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posing as a teenager to lure Tiwari to a house where, Tiwari alleged, part of NBC, finding that if NBC did direct the police to arrest him he walked into a garage where approximately half a dozen police offi- in a dramatic fashion with guns raised when there was no legitimate cers shouted at him with their guns drawn and aimed at his head, law enforcement purpose, that act alone might be found outrageous. pushed him against a wall, yanked his arms behind his back, hand- The court did, however, grant NBC’s motion to strike with respect cuffed him, and transported him to the Petaluma airport. There, he to Tiwari’s defamation claim, finding that, viewing the 2010 broad- was filmed being interrogated in a holding area built by NBC and the cast in its entirety, the natural and probable effect on the viewer would police for the episode. According to Tiwari’s complaint, NBC directed be no different if the epilogue had reported Tiwari’s conviction cor- and controlled the timing, setting, and conditions under which the rectly. Since the epilogue, taken in context, was substantially true, the police arrested and interrogated him. court granted the motion to strike with respect to the defamation claim Although Tiwari was charged with two felony criminal charges, one was dismissed and Tiwari was arraigned on the other, which the district attorney subsequently dismissed and filed as a single misdemeanor. Tiwari was acquitted of the misdemeanor in 2009 and subsequently charged and convicted of a different misdemeanor. After he appealed, that charge was reduced to an infraction, to which Tiwari pled no contest and for which he paid a $30 court fee. A 2010 broadcast of the show, however, included an epilogue incorrectly stating that Tiwari had been convicted of attempted lewd and lascivious acts with a child. Tiwari sued NBC for violation of his civil rights, intentional infliction of emotional distress, and defamation. NBC moved to dismiss the civil rights claim and to strike the intentional infliction of emotional distress and defamation claims. In his civil rights claim, Tiwari alleged that his Fourth Amendment rights were violated because NBC’s actions amounted to a seizure that intruded on his privacy rights, and that the seizure was unreasonable because it was conducted in a manner designed to humiliate Tiwari and had no legitimate law enforcement purpose. NBC moved to dismiss the civil rights claim, contending that NBC’s actions were protected by the First Amendment. The court denied NBC’s motion to dismiss the Fourth Amendment claim, finding that NBC’s First Amendment defense was mistakenly based on the assumption based on the fair report privilege in Section 47(d) of California’s Civil that Tiwari was seeking “broadcast damages,” whereas Tiwari indi- Code, which explicitly protects as privileged media reports of official cated that he was seeking damages based on NBC’s nonbroadcast con- proceedings that are fair and true. In that respect, Tiwari is more like duct alone. The court found that it was plausible that Tiwari suffered the typical right of publicity and defamation claims in reality televi- damages from NBC’s alleged direction to law enforcement that it arrest sion cases, which often do not prevail against a First Amendment Tiwari in a sensational way. The court rejected NBC’s argument defense.19 that Tiwari could not have an objectively reasonable expectation of privacy at the house of a third party or in the Petaluma airport, find- Idea Submission Claims ing that, even if there were at best only a minimal privacy interest, Would-be producers of proposed reality television shows have sued Tiwari still could prevail if there were no legitimate purpose served the producers and broadcasters of actual shows, on theories of copy- by NBC’s actions. right infringement, breach of implied contract, breach of confidence, The court also denied the motion to dismiss with respect to the and unjust enrichment. Copyright infringement claims in these cases substantive due process claim, noting that the First Amendment are often dismissed at the pleading stage because the nature of real- privilege of the media “is not absolute…and as in other areas involv- ity television makes it particularly difficult for plaintiffs to establish ing the media, the right of the individual to keep information private copyright infringement.20 must be balanced against the right of the press to disseminate news- To state a claim for infringement, a plaintiff has to allege owner- worthy information to the public.”18 ship of a valid copyright and copying of constituent elements of the The court also denied NBC’s anti-SLAPP motion to strike with work that are original. The second prong requires the plaintiffs to allege respect to the claim of intentional infliction of emotional distress, find- that the defendant had access to the plaintiffs’ copyrighted work and ing that Tiwari established a probability of success. In so holding, the that the works at issue are substantially similar in their protected ele- court noted that Tiwari’s claim for intentional infliction, like his ments. To assess substantial similarity, the court must apply the civil rights claim, appeared to be based on NBC’s production conduct extrinsic test, which focuses on similarities between the plot, themes, and not on its broadcast of the show. The court also rejected NBC’s dialogue, mood, setting, pace, characters, and sequence of events of argument that Tiwari had failed to allege outrageous conduct on the the two works. When courts apply the extrinsic test, they must

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inquire as to whether the protectable elements, standing alone, are sive rights within the general scope of copyright…and come within substantially similar. The test requires courts to “filter out and dis- the subject matter of copyright.”28 Thus, there is a two-pronged test regard the non-protectable elements in making [the] substantial sim- pursuant to which the act preempts a particular state law claim ilarity determination.”21 Substantial similarity “must be measured at when 1) the work at issue comes within the subject matter of copy- the level of the concrete ‘elements’ of each work, rather than at the right, and 2) the rights granted under state law are equivalent to any level of the basic ‘idea,’ or ‘story’ that it conveys.”22 of the exclusive rights within the general scope of copyright set forth Given that reality shows are supposed to be unscripted, it is in the act.29 To avoid preemption under the latter prong, “the state unlikely, especially at the pitch phase, that anyone will present more claim must protect rights which are qualitatively different from the than the basic idea for the show, and in particular it is unlikely that copyright rights. The state claim must have an ‘extra element’ which any protectable, concrete elements such as plot, dialogue, or sequence changes the nature of the action.”30 The Copyright Act of 1976 of events will even exist. In other words, it is unlikely that any pro- requires courts to address whether it preempts Desny claims, and a tectable elements of a submitted reality show could be substantially series of federal court decisions hold that Desny claims are pre- similar to elements of an allegedly infringing work. empted.31 For example, in a case involving the Rachel Ray Show, Jeffrey Zella In 2004, however, the Ninth Circuit held in Grosso v. Miramax and Ross Crystal submitted a one-page treatment and a three-page Film Corporation that some idea submission claims are not pre- script to the Food Network for a show titled Showbiz Chefs. The Food empted by the U.S. Copyright Act.32 In that case, Jeff Grosso sued Network rejected the idea. Three years later, the network launched Miramax for breach of implied contract under California law and Inside Dish with host Ray. Zella and Crystal sued CBS and others alleg- copyright infringement, alleging that Miramax stole the ideas and ing infringement. The court granted a motion to dismiss the complaint themes of his poker screenplay The Shell Game when it made the poker on the ground that Showbiz Chefs contains no protectable elements movie Rounders. The Ninth Circuit held that the district court and is not substantially similar to Inside Dish. improperly dismissed Grosso’s state law claim for breach of implied The court held that “the individual generic elements of cooking contract. Relying primarily upon Desny, the Ninth Circuit explained shows and talk shows—i.e., a host, guests celebrities, and interview, that if a plaintiff furnished an idea to another person, a contract can and a cooking segment”—cannot be protectable elements because be implied in fact, even in the absence of an express promise to pay, “‘[g]eneral plot ideas are not protected by copyright law.’”23 The court if the plaintiff prepared the work, disclosed it to the other party for noted that the fact that the plaintiffs’ program was unscripted does sale, and did so under circumstances from which it could be concluded not alter this analysis, citing Bethea v. Burnett,24 in which the court that the other party voluntarily accepted the disclosure knowing the reviewed the two “plots” of the reality shows C.E.O. and The conditions on which it was disclosed and the reasonable value of the Apprentice. work. The court held that the plaintiff’s claim for breach of implied The court held that the stock elements of a host, guest celebrities, contract satisfied that test and therefore was not preempted by fed- an interview, and a cooking segment also can be characterized as eral copyright law.33 unprotected scenes a faire, i.e., “situations and incidents which flow Four years later, the same court decided Montz v. Pilgrim Films naturally from [the] basic plot premise” of a cooking talk show. & Television, Inc. (Montz I).34 In that case, Larry Montz conceived The court concluded that “the formats of Showbiz Chefs and Rachael an idea for a reality television show that would follow a team of para- Ray may look similar, but so does every talk show to some extent. normal investigators as they conducted field investigations. Montz Extending copyright protection over the generic format of a cook- alleged that, from 1996 to 2003, he and plaintiff Daena Smoller ing/talk show would stretch the bounds of copyright law beyond what pitched Montz’s idea to networks and producers, including NBC and it was intended to cover.”25 the Sci-Fi Channel, which passed on the project. (The channel has since The facts that ideas alone are not copyrightable and that most changed its name to Syfy.) According to the complaint, after meet- pitches and submissions for reality shows will contain few, if any, pro- ings with Montz and Smoller, NBC Universal partnered with Craig tectable elements that could support a finding of substantial similarity, Piligian and Pilgrim Films & Television, Inc., to produce Ghost combined with the scenes a faire doctrine, can make it almost impos- Hunters on the Sci-Fi Channel. sible to establish copyright infringement in the reality television idea Montz alleged copyright infringement as well as several state law submission context. This can make the viability of one or more state claims including breach of implied-in-fact contract and breach of con- law claims crucial for the plaintiff suing based on a reality television fidence. The complaint alleged that plaintiffs “communicated their submission. ideas and creative concepts for the ‘Ghost Hunters’ Concept” to the defendants. The complaint further alleged that the plaintiffs pre- Desny Claims sented their ideas to the defendants “for the express purpose of In California, the most promising candidate for state law claims in offering to partner with the Defendants in the production, broadcast idea submission cases is the Desny claim for breach of implied con- and distribution of the Concept” and that the plaintiffs, accord- tract. In Desny v. Wilder,26 actor Victor Desny sued director and pro- ingly, “expected to receive a share of any profits and credit.”35 ducer Billy Wilder and Paramount Pictures alleging that in 1949 The District Court dismissed the complaint and, in Montz I, the Desny had submitted an idea to Wilder for a movie that Wilder later Ninth Circuit affirmed the dismissal on preemption grounds viewing used for his film Ace in the Hole. The trial court granted summary Montz’s case as distinguishable from Grosso. In particular, the court judgment in favor of Wilder and Paramount, but the California viewed the breach in Grosso as violating the plaintiff’s right to pay- Supreme Court reversed, holding that if an “idea purveyor has clearly ment on a sale, whereas it viewed the breach of the alleged agreement conditioned his offer to convey the idea upon an obligation to pay in Montz as violating “the plaintiffs’ exclusive rights to use and to for it if it is used by the offeree and the offeree, knowing the condi- authorize use of their work—rights equivalent to those of copyright tion before he knows the idea, voluntarily accepts its disclosure…and owners under §106.”36 The court found that the plaintiffs’ expecta- finds it valuable and uses it, the law will either…hold that the par- tion of profits and credit “was premised on the fact that they would ties have made [a] contract, or…imply a promise to compensate.”27 retain control over their work, whether in partnership with the Twenty years after the California Supreme Court’s decision in defendants or not” and that their right to receive a share of the Desny, Congress passed the Copyright Act of 1976. The act preempts profits and credit was “thus merely derivative of the rights funda- “all legal or equitable rights that are equivalent to any of the exclu- mentally at issue: the plaintiffs’ exclusive rights to use and to autho-

32 Los Angeles Lawyer May 2012 May 2012 Master.qxp 4/12/12 12:52 PM Page 33

rize use of their work.” Thus, the court concluded that the rights asserted by the plaintiffs were equivalent to the exclusive rights VIGOROUS protected by copyright, and the claim was STATE BAR DEFENSE therefore preempted by the Copyright Act.37 Montz I appeared to signal the end of JAMES R. DIFRANK Desny claims in cases in which plaintiffs A PROFESSIONAL LAW CORP. ★★★ allege that they had sought not just to sell ★★★ WINNER OF THE TEL 562.789.7734 SERVICE AWARD ideas but to “partner” with the recipient in COMMUNITY www.BarDefense.net the production and receive a share of the Criminal Justice Panel of the Los Angeles City Attorney’s Office E-MAIL [email protected] proﬁts. As that virtually always will be the case when a producer is pitching ideas,38 Be an attorney • Disciplinary Defense Montz I was a signiﬁcant victory for studios who makes a • Reinstatements/Admissions and networks, as well as production compa- • Malpractice Defense nies that typically receive idea submissions difference rather than make them. Volunteer with the LACBA • Bankruptcy In Montz II, however, an en banc panel Domestic Violence Project • Criminal Defense found no meaningful difference between the We provide one-on-one legal assistance to our clients • Representation within the conditioning of use on payment (as occurred to enable them to obtain temporary (and ultimately State of California in Grosso) and conditioning use on the grant- permanent) Restraining Orders against their assailants. ing of a partnership interest in the proceeds This is a rewarding opportunity (with a minimal time commitment) to give valuable assistance to an under- FORMER: of the production (as alleged by Montz).39 represented population of our community who is in dire State Bar Sr. Prosecutor Accordingly, Montz II holds that the Desny need of help.The Project is located in both the Down- town Los Angeles and Pasadena Branches of the Sr. State Bar Court Counsel claim was not preempted by the Copyright Superior Court.

Act. In so holding, the court viewed itself as No prior experience is required. No ongoing represent- reaffirming the rule in Grosso that “copyright ation is required although volunteers have the option of law does not preempt an implied contractual representing their clients at the time of their hearing. claim to compensation for use of a submitted FOR INFORMATION CONTACT idea.” The court repeated its observation Deborah Kelly, Directing Attorney from an earlier case that “[c]ontract law, tel 213.896.6491 Home of Sir Winston whether through express or implied-in-fact e-mail [email protected] Pictured Above contract, is the most significant remaining state law protection for literary or artistic ideas.”40 Given the extreme difficulty of establishing copyright infringement in the context of submissions for reality television shows, one could argue that Desny claims are Anita Rae Shapiro virtually the only remaining protection for SUPERIOR COURT COMMISSIONER, RET. those submitting ideas. The industry, however, frequently makes PRIVATE DISPUTE RESOLUTION adjustments in response to new law. After PROBATE, CIVIL, FAMILY LAW Montz II, many screenwriters and independent producers are finding it even more dif- PROBATE EXPERT WITNESS ficult than before to submit ideas to studios, TEL/FAX: (714) 529-0415 CELL/PAGER: (714) 606-2649 networks, and production companies without E-MAIL: [email protected] being required to sign a submission release http://adr-shapiro.com agreement that effectively waives any right to assert Desny claims. Moreover, courts in other circuits do not always agree with Montz II regarding the preemption of an implied contract.41 This issue may ultimately be decided by the Supreme Court. Reality television idea submission issues sometimes hinge not on Desny implied contract claims but on express contracts that alter the common law rights and obligations of the parties. These contracts typically con- sist either of nondisclosure agreements intended to protect those submitting their ideas or submission release agreements intended to protect those who receive the A. J. Hazarabedian Glenn L. Block ideas. Absent significant leverage or an exist- Artin N. Shaverdian ing relationship, most would-be producers, particularly after Montz II, will find it diffi-

Los Angeles Lawyer May 2012 33 May 2012 Master.qxp 4/12/12 12:52 PM Page 34

cult to submit their projects to a network 13 765 ILL. COMP. STAT. 1075-35(b)(2). F. 2d 973, 976 (9th Cir. 1987). without signing a submission release agree- 14 Best v. Berard, 776 F. Supp. 2d 752, 757 (N.D. Ill. 30 Id. at 977. 31 See, e.g., Grosso v. Miramax Films Corp., 94 Fed. ment and will ﬁnd it virtually impossible to 2011) (quoting Bartnicki v. Vopper, 532 U.S. 514, 527-28 (2001)). Appx. 586, 2004 U.S. App. LEXIS 6833 (C.D. Cal. get a network or established production com- 15 Id. at 758. 2004); Selby v. New Line Cinema Corp., 96 F. Supp. pany to sign a nondisclosure agreement. ■ 16 See 18 U.S.C. §2724(a). 2d 1053, 1061-62 (C.D. Cal. 2000); Endemol Entm’t 17 Tiwari v. NBC Universal, Inc., 2011 U.S. Dist. v. Twentieth Television Inc., 48 U.S.P.Q. 2d 1524, 1 See, e.g., Arenas v. Shed Media US Inc., 2011 U.S. LEXIS 123362 (N.D. Cal. Oct. 25, 2011). 1528 (C.D. Cal. 1998); Worth v. Universal Pictures, 18 Dist. LEXIS 101915 (C.D. Cal. Aug. 22, 2011); Dieu Id. at *22 (quoting Gilbert v. Medical Econs. Co., Inc., 5 F. Supp. 2d 816, 822 (C.D. Cal. 1997). 32 v. McGraw, 2011 Cal. App. Unpub. LEXIS 87 (Cal. 665 F. 2d 305, 307 (10th Cir. 1981)). Grosso v. Miramax Film Corp., 383 F. 3d 965, 968 19 App. Jan. 6, 2011); Best v. Berard, 776 F. Supp. 2d 752 See, e.g., Arenas v. Shed Media US Inc., 2011 U.S. (9th Cir. 2004). 33 (N.D. Ill. 2011); Maher v. Staub, 2010 U.S. Dist. Dist. LEXIS 101915 (C.D. Cal. Aug. 22, 2011); Best Id. 34 LEXIS 8412 (C.D. Cal. Jan. 4, 2010); Greenstein v. The v. Berard, 776 F. Supp. 2d 752 (N.D. Ill. 2011); Montz v. Pilgrim Films & Television, Inc. (Montz I), Greif Co., 2009 Cal. App. Unpub. LEXIS 427 (Cal. Greenstein v. The Greif Co., 2009 Cal. App. Unpub. 606 F. 3d 1153 (9th Cir. 2010). 35 Id. App. Jan. 20, 2009); CIV. CODE §3344(a). LEXIS 427 (Cal. App. Jan. 20, 2009). at 1158. 20 36 2 Kirby v. Sega of Am., Inc., 144 Cal. App. 4th 47, 61 See, e.g., Rodriguez v. Heidi Klum Co., LLC, 2008 Id. 37 (2006). U.S. Dist. LEXIS 80805 (S.D. N.Y. Sept. 30, 2008); Id. 38 3 Comedy III Prods., Inc. v. Gary Saderup, Inc., 25 Cal. Milano v. NBC Universal, Inc., 584 F. Supp. 2d 1288 See Roman M. Silberfeld & Bernice Conn, The Red 4th 387, 407-08 (2001). (C.D. Cal. 2008); Zella v. E. W. Scripps Co., 529 F. and the Black, LOS ANGELES LAWYER, May 2011, at 36. 39 4 Arenas v. Shed Media US, Inc., 2011 U.S. Dist. LEXIS Supp. 2d 1124 (C.D. Cal. 2007). Montz v. Pilgrim Films & Television, Inc. (Montz II), 21 101915, at *4 (C.D. Cal. Aug. 22, 2011). Funky Films, Inc. v. Time Warner Entm’t Co., 462 649 F. 3d 975, 977 (9th Cir. 2011) (O’Scannlain, J., 5 Id. at *7 (quoting Stewart v. Rolling Stone LLC, 181 F. 3d 1072, 1077 (9th Cir. 2006). See also Cavalier v. dissenting at 983 n.2, 984). 40 Cal. App. 4th 664, 679 (2010) (quoting Eastwood v. Random House, 297 F. 3d 815, 822 (9th Cir. 2002); Id. (quoting Benay v. Warner Bros. Entm’t, Inc., 607 Superior Court, 149 Cal. App. 3d 409, 417 (1983))). Williams v. Crichton, 84 F. 3d 581, 588 (2d Cir. F. 3d 620, 629 (9th Cir. 2010)). 41 6 Id. at *16 (quoting Hilton v. Hallmark Cards, 599 F. 1996). See, e.g., Price v. Fox Entm’t Group, Inc., 473 F. 22 3d 894, 912 (9th Cir. 2010) (quoting Montana v. San Idema v. Dreamworks, Inc., 162 F. Supp. 2d 1129, Supp. 3d 446, 451, 460-61 (S.D. N.Y., 2008); Smith Jose Mercury News, Inc., 34 Cal. App. 4th 790, 793 1179 (C.D. Cal. 2001). See also Berkic v. Crichton, 761 v. New Line Cinema, 2004 U.S. Dist. LEXIS 18382, (1995))). F. 2d 1289, 1293 (9th Cir. 1985). WL 2049232 (S.D. N.Y. 2004); Arpaia v. Anheuser- 23 7 Id. (quoting Downing v. Abercrombie & Fitch, 265 Zella, 529 F. Supp. 2d at 1133-34 (quoting Berkic Busch Cos., Inc., 55 F. Supp. 2d 151, 162 (W.D. N.Y. F. 3d 994, 1001 (9th Cir. 2001) (quoting Eastwood, v. Crichton, 761 F. 2d 1289, 1293 (9th Cir. 1985)). 1999). See also Missy Chase Lapine v. Jerry Seinﬁeld, 24 149 Cal. App. 3d at 422)). Bethea v. Burnett, 2005 WL 1720631 (C.D. Cal. 918 N.Y.S. 2d 313, 323-25 (2011) (noting “consider- 8 Id. at *17 (quoting Hilton, 599 F. 3d at 912). 2005). able dispute among the federal courts” about whether 25 9 CODE CIVIL. PROC. §425.16. Zella, 529 F. Supp. 2d at 1135. and when breach of implied contract claims are pre- 26 10 Best v. Berard, 2011 U.S. Dist. LEXIS 131572 (M.D. See Desny v. Wilder, 46 Cal. 2d 715 (1956). empted and surveying decisions); Banx Corp. v. Costco 27 Ill. Nov. 15, 2011). Id. at 739. Wholesale Corp., 723 F. Supp. 2d 596, 614-16 (S.D. 28 11 765 ILL. COMP. STAT. 1075-30. 17 U.S.C. §301(a). N.Y. 2010) (surveying disagreement within Southern 29 12 765 ILL. COMP. STAT. 1075-5. Del Madera Props. v. Rhodes & Gardner, Inc., 820 District of New York on the issue).

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34 Los Angeles Lawyer May 2012 May 2012 Master.qxp 4/12/12 12:52 PM Page 35

entertainment law issue

MCLE ARTICLE AND SELF-ASSESSMENT TEST By reading this article and answering the accompanying test questions, you can earn one MCLE credit. To apply for credit, please follow the instructions on the test answer sheet on page 37.

by Nicholas A. Persky

Rules of ENDORSEMENT Attorneys can use case law and the FTC guides to steer celebrity clients toward a safe harbor for endorsements made on social media

AS ADVERTISERS, marketers, and celebrity directly affect celebrity endorsers. tising without being deemed endorsers.”7 endorsers find new ways to spread their For example, while it has always been the Thus, to determine liability, the threshold commercial messages via social and new law that advertisers can be held responsible question becomes: Is the celebrity an endorser media, legal advisers must be cognizant of for false and misleading advertising, the or a paid actor?8 The revised guides define an how the Federal Trade Commission has revised guides expressly place celebrities on endorsement as “any advertising message applied its revised Guides Concerning the notice that they also may be liable for state- (including verbal statements, demonstrations, Use of Endorsements and Testimonials in ments made in their endorsements.4 En- or depictions of the name, signature, like- Advertising.1 These guides provide instruc- forcement actions have been brought against ness, or other identifying personal charac- tion to advertisers and endorsers for volun- celebrities in the past,5 and the FTC has teristics of an individual or the name or seal tarily compliance with Section 5 of the FTC alerted paid endorsers and their counselors of an organization) that consumers are likely Act2 as it applies to endorsements and tes- to this potential risk in the revised guides. to believe reflects the opinions, beliefs, find- timonials. The FTC originally published a The warning particularly applies in situations ings, or experiences of a party other than proposed set of guides in 1972. In 1980 the in which the connection between the adver- commission finalized the guides,3 and it tiser and celebrity may be unclear to con- Nicholas A. Persky is an attorney at Manhattan updated them in 2009 to address the grow- sumers.6 Advertising & Media Law, Inc., specializing in ing use of social media as a vehicle for com- The FTC has acknowledged, however, that advertising, entertainment, and direct response mercial speech. A number of the changes “well-known persons can appear in adver- marketing law.

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the sponsoring advertiser, even if the views what they do not say. The guides state that that the celebrity has been engaged as a expressed by that party are identical to those “when there exists a connection between the spokesperson, this endorsement is likely of the sponsoring advertiser.”9 endorser and the seller of the advertised prod- deceptive,22 and the same idea would apply Whether the celebrity is an endorser or uct that might materially affect the weight or when a celebrity endorses a product in other paid actor depends upon the probable beliefs credibility of the endorsement (i.e., the con- nontraditional outlets (such as in a talk show of consumers as determined on a case-by-case nection is not reasonably expected by the television interview or on a personal or guest basis. For example, as illustrated in the audience), such connection must be fully dis- blog). guides, if a celebrity suggests he or she is a closed.”16 Material connections include, for satisfied customer of a product in an infomer- example, situations in which the endorser Enforcement before 2009 cial, a significant percentage of consumers has been paid or given something of value to Venerable singer and actor Pat Boone made will likely believe that those statements rep- tout the marketer’s product, or where the history as a celebrity endorser. In the 1970s, resent the celebrity’s own views, even if the endorser is simply a relative or employee of Boone appeared in a number of advertise- celebrity is reading from a script.10 On the the marketer.17 In an exception to this rule, ments on behalf of an acne product called other hand, consumers would likely under- material connections need not be disclosed Acne-Statin. In one typical commercial, Boone stand that an athlete performing voice-overs when consumers would ordinarily under- can be seen sitting next to his daughter Debbie in an insurance commercial is merely a paid stand that the celebrity is a paid endorser proclaiming, “With four daughters, we’ve Once an endorsement is secured, the advertiser should consider periodically checking that the celebrity’s opinions remain the same, as an “advertiser may continue to run the advertisement only so long as it has good reason to believe that the endorser remains a bona fide user of the product.”

actor, not an endorser, as there is no nexus (e.g., a film star endorsing a food product in tried the leading acne medications at our between the athlete’s profession and the a television commercial or a football player house, and nothing ever seemed to work until product and no suggestion that the athlete is in an interview wearing the clothes of an our girls met a Beverly Hills doctor and got a user of the product. athletic wear company).18 some real help through a product she devel- When a celebrity is in fact an endorser, the It is important to realize that when the cur- oped called Acne-Statin.”23 The ads made endorsement must “reflect the honest opin- rent guides were originally adopted in 1980, claims such as “use of Acne-Statin will cure ions, findings, beliefs, or experience of the the advertising landscape was very different. acne regardless of the severity of the condi- endorser.”11 While not required to become Advertisements were typically disseminated tion” and “Acne-Statin is superior to all other experts on a product or industry, the celebrity, through traditional media outlets such as acne preparations in the antibacterial treat- if reading from a script, may have an oblig- television and radio commercials, billboards, ment of acne.”24 ation to make reasonable inquiries of the and print. In such instances, if the connection In 1978, the FTC accused the manufac- advertiser to confirm that there is an ade- is not obvious to the consumer, the duty to turer, the advertising agency, and Boone of quate basis for assertions the script has them disclose falls on the advertisers.19 Today, participating in false and misleading adver- making.12 This may include requesting sub- however, the “recent creation of consumer tising, charging that the product would not stantiation for product claims made in the generated media means that in many cure acne as the ad implied and that the par- advertising campaign and requesting sam- instances, endorsements are now dissemi- ties lacked substantiation to support any such ples of the product for personal use. In nated by the endorser, rather than the spon- claims.25 The FTC noted that Boone, in return essence, the celebrity should not ignore signs soring advertiser.”20 It is increasingly common for his endorsement, received a share of the that claims made about a product appear to to see celebrities tout products directly to product’s sales. Boone eventually signed a be false or misleading.13 potential consumers through Twitter, Face- consent order, agreeing to stop appearing in In the event an advertisement represents book, blogs, and other social media. It may the ads and pay up to $5,000 in restitution that the celebrity uses the endorsed product, be unclear whether the celebrities are acting into a fund to compensate customers who the endorser must be or have been a bona fide as paid endorsers or are merely enthusiastic were misled. Commenting on the order, the user at the time the endorsement was given.14 customers willing to share their preferences FTC stated that celebrities must “verify the For example, it would be misleading for Kobe with the general public. claims made in any commercial before it Bryant to regularly wear Reeboks on the bas- The revised guides were updated to appears, hiring reliable independent analysts ketball court but appear in a Nike commer- directly address these situations, providing a to study them if the star has no expertise in cial as an endorser. Once an endorsement is number of new examples to illustrate when the subject.”26 secured, the advertiser should consider peri- the endorser needs to disclose material con- This action, the first to hold a celebrity odically checking that the celebrity’s opinions nections. For example, when a celebrity touts accountable for a misleading endorsement, remain the same, as an “advertiser may con- a product on Twitter, consumers may not was a major shock to other celebrities who tinue to run the advertisement only so long realize the celebrity is being paid for doing so, endorsed products, prompting many to as it has good reason to believe that the “and knowledge of such payments would demand indemnification clauses in their endorser remains a bona fide user of the likely affect the weight or credibility con- endorsement contracts.27 At the time, many product.”15 sumers give to the celebrity’s endorsement.”21 felt that the FTC was out to establish a gen- Celebrity endorsers may also be liable for Without a clear and conspicuous disclosure eral rule of enforcement against celebrities.28

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MCLE Test No. 214 MCLE Answer Sheet #214 RULES OF ENDORSEMENT

The Los Angeles County Bar Association certifies that this activity has been approved for Minimum Continuing Legal Education credit by the State Bar of California in the amount of 1 hour. Name Law Firm/Organization 1. The Guides Concerning the Use of Endorsements 12. The 2009 guides clarify that all well-known persons and Testimonials in Advertising were first finalized by in advertising are liable for statements made during the Address the FTC in 1972. course of advertisements. City True. True. State/Zip False. False. E-mail 2. The guides are binding law. 13. Whether a celebrity is an endorser or merely a Phone True. paid actor depends upon the compensation and indem- State Bar # False. nification provisions in the celebrity’s contract with the advertiser. INSTRUCTIONS FOR OBTAINING MCLE CREDITS 3. Celebrities may be directly liable for statements True. 1. Study the MCLE article in this issue. they make in advertising. False. 2. Answer the test questions opposite by marking True. the appropriate boxes below. Each question False. 14. The Ninth Circuit held that Steve Garvey was not has only one answer. Photocopies of this liable for statements he made as a paid endorser for answer sheet may be submitted; however, this 4. Celebrities may be directly liable for their state- the product Enforma, in part because the FTC failed to form should not be enlarged or reduced. ments made in advertising, even if they are simply prove that Garvey lacked substantiation for his claims. 3. Mail the answer sheet and the $20 testing fee reading from a script. True. ($25 for non-LACBA members) to: True. False. Los Angeles Lawyer False. MCLE Test 15. The rapper 50 Cent and the actor Ashton Kutcher P.O. Box 55020 5. Celebrities are not required to research or make were charged by the SEC and FTC for allegedly failing to Los Angeles, CA 90055 inquiries regarding claims they make in advertising. disclose material connections to advertisers in state- Make checks payable to Los Angeles Lawyer. True. ments they made via Twitter. 4. Within six weeks, Los Angeles Lawyer will False. True. return your test with the correct answers, a False. rationale for the correct answers, and a 6. The guides were revised by the FTC in 2009, in part certificate verifying the MCLE credit you earned to address the rising use of social media. 16. The FTC’s recent enforcement action against Dannon through this self-assessment activity. True. for allegedly exaggerating the health benefits of its 5. For future reference, please retain the MCLE False. products, also named its spokesperson, Jamie Lee test materials returned to you. Curtis, as a defendant for her on-camera statements. ANSWERS Celebrities never have an obligation to use the prod- 7. True. Mark your answers to the test by checking the ucts they endorse. False. appropriate boxes below. Each question has only True. one answer. False. 17. Celebrity endorsers may be liable for what they do not say. 1. ■ True ■ False 8. The FTC’s enforcement activities focus on advertis- True. 2. ■ True ■ False ers, not endorsers. False. True. 3. ■ True ■ False False. 18. An NFL football player participating in an inter- 4. ■ True ■ False view is not required to disclose to the audience that he 5. ■ True ■ False 9. Beginning in 2009, the FTC increased its enforcement is being paid to wear the clothes of an athletic wear com- 6. ■ True ■ False activity against celebrities, particularly in the area of pany. social media. True. 7. ■ True ■ False True. False. 8. ■ True ■ False False. 9. ■ True ■ False 19. Once an endorsement is secured, the advertiser 10. ■ True ■ False 10. It is the advertiser’s responsibility to advise a should consider periodically checking that the opinions ■ ■ celebrity in advance about the need to disclose their of the celebrity about the product remain the same. 11. True False material relationship in the course of an interview or True. 12. ■ True ■ False on social media. False. 13. ■ True ■ False True. 14. ■ True ■ False False. 20. An actor performing a voice-over in a commercial ■ ■ is always required to disclose that he or she is an 15. True False 11. Pat Boone was acquitted for statements he made endorser of the product. 16. ■ True ■ False endorsing the Acne-Statin product because the FTC True. 17. ■ True ■ False could not prove he was a direct participant under the False. 18. ■ True ■ False principles of endorser liability. ■ ■ True. 19. True False False. 20. ■ True ■ False

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After obtaining a consent order from requirement for celebrity endorsers.”38 $3.3 million in debt, two days after his tweet Boone, however, the FTC withheld from Five years after the Garvey defeat, the promising “BIG MONEY,” 9.24 million bringing another action against a celebrity FTC published the revised guides.39 Not sur- shares in the company were traded, causing until 2000, when it filed suit against Steve prisingly, in its notice announcing adoption its share value to soar.47 50 Cent later deleted Garvey, a former first baseman for the Dod- of the revised guides, the FTC made clear his original tweets and wrote: “I own HNHI gers, in connection with his appearance as a that Garvey did not foreclose “participant” stock. Thoughts on it are my opinion. Talk to paid spokesperson in infomercials for weight liability for celebrities.40 Perhaps with Garvey financial advisor about it.”48 Many predicted loss supplements sold as the Enforma in mind, the FTC specifically noted that a that 50 Cent would soon be facing an inves- System.29 During the infomercial, Garvey celebrity reading a script should not be tigation from the FTC for violating the guides told the audience that “with Enforma you granted immunity from liability for misrep- or from the SEC for improperly manipulat- trap the fat from food before it can go to your resentations made in the course of that ing the stock price.49 waistline,” that “it’s all natural, safe, and it endorsement. The FTC wrote: “The celebrity The FTC has yet to penalize Kutcher or 50 works,” and that it enables users “to enjoy all has decided to earn money by providing an Cent. David Vladeck, the director of the those delicious foods that you crave without endorsement. With that opportunity comes FTC’s bureau of consumer protection, backed the guilt while losing weight.”30 the responsibility for the celebrity or his or her away from Cleland’s interpretation of The FTC’s complaint alleged that Garvey, legal representative to ensure in advance that Kutcher’s magazine and tweeted that “the serving as a paid endorser for the Enforma the celebrity does not say something that FTC is not and has no plans to investigate System, undertook deceptive acts or prac- does not ‘reflect [his or her] honest opinions, Ashton Kutcher.”50 Further, Peter Kaplan, tices in violation of Sections 5(a) and 12 of findings, beliefs, or experience.’”41 deputy public affairs director at the FTC, the Federal Trade Commission Act.31 In said in an interview, “Rich Cleland mis- affirming the decision of the district court, Current Enforcement spoke.”51 however, the Ninth Circuit in 2004 held that Actor, comedian, and entrepreneur Ashton Garvey was not personally liable or liable as Kutcher was the first person to reach one Focus on Advertisers an endorser. In its decision, the court million followers on Twitter in 2009. Since Why has the FTC been reluctant to penalize explained that Garvey theoretically could be that time, he has used his Twitter handle celebrities who fail to disclose to consumers held liable either as a “direct participant” in (which now has nearly nine million follow- their material connections with the adver- the making of false advertising claims or ers) to promote causes. Among celebrities tiser? The answer may be found in its notice under the principles of endorser liability. To employing new media, he may be the savvi- of adoption of the revised guides.52 In hold Garvey liable for restitution as a direct est, yet he recently drew criticism in the media responding to commenters who were con- participant, the FTC had to prove that he had and the attention of the FTC after he guest- cerned with the ramifications the revised actual knowledge of the material misrepre- edited an online version of Details magazine guides would have on advertisers who use sentations, was recklessly indifferent to the that was initially released through Facebook, celebrities, the FTC (referring to itself as the truth or falsity of a representation, or had an Twitter, Flipboard, and Tumblr.42 Of the 12 Commission) stated: awareness of a high probability of fraud technology companies that were profiled in The commenters are correct…that an along with an intentional avoidance of the the magazine as recommended products, it advertiser does not have control over truth.32 was later revealed that eight are his invest- what a celebrity says in an interview. The court found that the FTC did not ments and at least two others have business Nor can the advertiser prevent the meet its burden in showing that any of the entanglements with the actor.43 The only dis- producers of that program from edit- three elements were met, noting that Garvey closure of such material connection could be ing out of the final version of the and his wife used the system and lost 8 and found in the introduction on the first page, interview a disclosure that would have 27 pounds respectively, Garvey reviewed two which read, “And as an investor, he puts his been sufficient to inform viewers of booklets containing substantiation materi- money where his mouth is, backing many of the celebrity’s contractual relation- als for the product, and he spoke with several the companies he champions here.”44 ship with the advertiser. However, if individuals who had experienced positive After the magazine’s release, Richard the advertiser has decided that it is results using the product.33 The court held Cleland, assistant director of the division of advantageous to have the celebrity that this substantiation “was sufficient—at advertising practices at the FTC, said in a speak publicly about its product or least for someone in Garvey’s position—to phone interview that with respect to Kutcher’s service, the Commission believes that avoid participant liability.”34 actions, “[I]t’s certainly a possibility that a the advertiser has the concomitant With respect to the endorser liability case like this could be investigated….[I]f responsibility to advise the celebrity prong, the FTC premised its theory of liabil- you’re out there promoting individual prod- in advance about what he or she ity on the guides.35 The Ninth Court observed ucts that you have a specific investment in, it should (and should not) say about that the guides were not binding law, but needs to be disclosed. If you have a significant that product or service, and about even if they were, Garvey would not be liable economic investment that is not otherwise the need to disclose their relationship under them.36 For one thing, the FTC failed apparent, that may potentially affect the cred- in the course of the interview. Evi- to prove that Garvey provided a true ibility of your endorsement, and I see that as dence that the advertiser did so would “endorsement” as defined in the guides; i.e., a potential problem.”45 provide a strong argument for the an advertising message that consumers were Kutcher is not the only celebrity to engage exercise of the commission’s prose- likely to believe reflected the opinions, beliefs, in questionable tweeting. In 2011, rapper 50 cutorial discretion in the event the or findings of a party other than Enforma.37 Cent found himself in the news after encour- celebrity failed to disclose his or her The court also held that the FTC failed to aging his nearly four million Twitter follow- relationship with the advertiser or prove that Garvey’s statements lacked sub- ers to purchase a penny stock without dis- made unauthorized claims about the stantiation, explaining that his claims “that closing that he was a major investor in the advertiser’s product, or if the celebrity he and his wife lost a certain number of company.46 Although the company (which properly disclosed the relationship pounds clearly pass any substantiation sells 50 Cent’s line of headphones) was nearly but that disclosure was ultimately

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edited out of the program. Because the immoral behavior that reflects poorly on the PRINCIPLES IN MEDIA LAW 584 (Wadsworth Cengage commission considers each adver- company. But this traditional morals clause, Learning 2012). 28 Show Business: Let the Stellar Seller Beware, TIME, tisement on a case-by-case basis, the by itself, may be insufficient to protect the May 22, 1978. particular facts of each situation advertiser in light of today’s emerging social 29 FTC v. Garvey, 383 F. 3d 891 (9th Cir. 2004). would be considered in determining media industry (and the troubles it can get 30 Id. at 895. whether law enforcement action celebrities into with the FTC and the revised 31 Id. at 896; 15 U.S.C. §§45(a), 52. would be appropriate.53 guides). As recommended in the guides, mar- 32 Garvey, 383 F. 3d at 900. 33 Further guidance is found in the FTC’s keters and their legal representatives should Id. at 901. 34 Id. at 902. FAQ for the guides, titled The FTC’s Revised monitor celebrity client endorsements and 35 Id. at 903. Endorsement Guides: What People Are advise a celebrity client in advance about 36 Id. at 904. Asking.54 In response to the question, “Are what he or she should (or should not) say 37 Id.; See also D. John Hendrickson, Garvey Prevails you monitoring bloggers?” the FTC’s reply about the product or service. They should also over FTC in False Advertising Case, Oct. 1, 2004, states: “We’re not monitoring bloggers and we consider including expanded indemnification http://www.admedialaw.com/index.php?mact=News ,cntnt01,detail,0&cntnt01articleid=14&cntnt01returnid have no plans to. If concerns about possible and representation and warranty clauses in =43. violations of the FTC Act come to our atten- celebrity contracts. Novel contractual pro- 38 Garvey, 383 F. 3d at 905. tion, we’ll evaluate them case by case. If law tections, such as a so-called social media eti- 39 Jim Edwards, New FTC Rules for Bloggers and enforcement becomes necessary, our focus quette clause governing the use of social Celebrities are all Steve Garvey’s Fault, Oct. 4, 2009, will be the advertisers, not endorsers—just as media, may also be appropriate. ■ available at http://www.cbsnews.com/8301 -505123_162-42743159/new-ftc-rules-for-bloggers it’s always been.”55 -and-celebrities-are-all-steve-garveys-fault. 1 In short, despite the FTC’s bold procla- 16 C.F.R. §255 (2009). 40 See Guides Concerning the Use of Endorsements 2 mation that “endorsers also may be liable for 15 U.S.C. 45. and Testimonials in Advertising, 74 Fed. Reg. 53124, 3 statements made in the course of their Guides Concerning the Use of Endorsements and 53129 (Oct. 15, 2009). Testimonials in Advertising, 73 Fed. Reg. 72734, 41 endorsements,”56 the brunt of the burden Id. at 53128 (citing 16 C.F.R. 255.1(a)). 72376 (Nov. 28, 2008). 42 Nick Bilton, Ashton Kutcher Could Face Questions appears to remain with the advertiser to 4 16 C.F.R. §255.1(d). about Disclosure, N.Y. Times, Aug. 18, 2011 (updated 5 ensure compliance with the guides. To illus- E.g., Cooga Mooga, Inc., 92 F.T.C. 310 (1978) (con- Aug. 19, 2011), available at http://bits.blogs.nytimes trate this approach, consider the recent FTC sent order); FTC v. Garvey, 383 F. 3d 891 (9th Cir. .com/2011/08/18/ashton-kutcher-could-face-questions enforcement action against Dannon for claims 2004). -about-disclosure/. See also http://www.details 6 that allegedly exaggerated the health benefits Guides Concerning the Use of Endorsements and .com/social/201109/best-new-generation-next. Testimonials in Advertising, 73 Fed. Reg. 72734, 43 of its Activia yogurt and DanActive dairy Ryan Tate, Ashton Kutcher Is a Massive Whore, Aug. 72376 (Nov. 28, 2008). 17, 2011, Gawker.com, http://gawker.com/5831935. 7 drink in a marketing campaign featuring Id. 44 See Bilton, supra note 42. 57 8 actress Jamie Lee Curtis. According to the Michael Mallow, Why Celebrity Endorsers Should 45 Id. FTC’s complaint, Dannon claimed that Watch What They Say, ADVERTISING AGE MAGAZINE, 46 50 Cent’s Twitter Penny Stock Scheme: Makes $8.7 May 25, 2009. Million on H&H Importing by Encouraging Fans to DanActive prevents colds and the flu, and that 9 16 C.F.R. §255.0(b) (2009). Invest, Huffington Post, first posted Jan. 11, 2011, one daily serving of Activia relieves temporary 10 Id. at §255.1 (Example 4). updated May 25, 2011, http://www.huffingtonpost irregularity and helps with “slow intestinal 11 Id. at §255.1(a). .com/2011/01/11/50-cent-makes-87-million-on-twitter 58 12 transit time.” Featured in the television Guides Concerning the Use of Endorsements and -encourages-fans-to-invest-inscheme_n_807327.html. advertisements for Activia, Jamie Lee Curtis Testimonials in Advertising, 74 Fed. Reg. 53124, 47 Id. tells viewers that many people suffer from 53128 (Oct. 15, 2009). 48 Kathy Kristof, What 50 Cent Co. Is Really Selling, 13 Lesley Fair, When You Wish Upon a Star: Celebrity irregularity, that “our busy lives sometimes CBSnews.com, Jan. 18, 2011, http://www.cbsnews Endorsements & the FTC’s Revised Endorsement .com/8301-505144_162-36943845/what-50-cent-co force us to eat the wrong things at the wrong Guides, available at http://business.ftc.gov/documents -is-really-selling/. time,” and she reassures viewers that Activia /when-you-wish-upon-star-celebrity-endorsements 49 Kathy Kristof, 50 Cent: Penny Stock Pump & Dump?, can help. -ftcs-revised-endorsement-guides. CBSnews.com, Jan. 11, 2011, http://www.cbsnews 14 Dannon eventually settled with the FTC 16 C.F.R. §255.1(c) (2009). .com/8301-505144_162-36943822/50-cent-penny 15 Id. -stock-pump—dump/. agreeing to modify their advertising cam- 16 Id. at §255.5. 50 Nick Bilton, F.T.C. Says It Will Not Investigate paigns and pay $21 million to 39 states to 17 FTC Facts for Business: The FTC’s Revised Ashton Kutcher, N.Y. TIMES, Aug., 19, 2011, http://bits resolve their respective state attorney gen- Endorsement Guides: What People are Asking, avail- .blogs.nytimes.com/2011/08/19/f-t-c-says-it-will-not 59 eral investigations. Curtis’s name, however, able at http://business.ftc.gov/documents/bus71-ftcs -investigate-ashton-kutcher/. was conspicuously absent from the FTC’s -revised-endorsement-guideswhat-people-are-asking. 51 Id. Ashton Kutcher has since turned over his Twitter 18 complaint, and no liability was extended to 16 C.F.R. §255.5 (2009) (Examples 2 and 3). account to his publicist. See Alexandra Cheney, Ashton 19 Guides Concerning the Use of Endorsements and her for the statements she made in Dannon’s Kutcher Takes a Twitter Vow of Silence, WALL STREET Testimonials in Advertising, 74 Fed. Reg. 53124, J., Nov. 10, 2011, http://blogs.wsj.com/speakeasy advertisements. Did Curtis use the product 53133 (Oct. 15, 2009). /2011/11/10/ashton-kutcher-takes-a%20twitter-vow 20 and experience the purported benefits herself? Id. at 53134. -of-silence/. 21 Did she inquire as to Dannon’s substantiation 16 C.F.R. §255.1.5 (2009) (Example 3). 52 Guides Concerning the Use of Endorsements and 22 materials for the product? It is not clear and Id.; On Twitter, the FTC has indicated that a sim- Testimonials in Advertising, 74 Fed. Reg. 53124 (Oct. ple hashtag following the tweet, such as #paid ad or it does not appear that the FTC ever asked 15, 2009). #ad, will likely suffice. See FTC Facts for Business: The 53 Id. at 53135. these questions. FTC Revised Endorsement Guides: What People are 54 FTC Facts for Business: The FTC Revised Endorse- Asking, available at http://business.ftc.gov/documents ment Guides: What People are Asking, http://business The Future of Celebrity Endorsement /bus71-ftcs-revised-endorsement-guideswhat-people .ftc.gov/documents/bus71-ftcs-revised-endorsement Enforcement -are-asking. guideswhat-people-are-asking.pdf. 23 Cooga Mooga, Inc., 92 F.T.C. 310, 312 (1978). 55 Id. Marketers certainly know how important it 24 Id. at 316. 56 16 C.F.R. §255.1.d (2009). is to include a morals clause in their celebrity 25 Id. at 319. 57 In the Matter of Dannon Co., Inc., F.T.C. File No. 26 contracts, which permits the advertiser to Show Business: Let the Stellar Seller Beware, TIME, 0823158 (Feb. 4, 2011). terminate the relationship when the celebrity May 22, 1978. 58 Id. commits a crime or engages in offensive or 27 GENELLE BELMAS & WAYNE OVERBECK, MAJOR 59 Id.

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entertainment law issue

by LEE S. BRENNER, EDWARD E. WEIMAN and ANDREW W. DEFRANCIS Real CHARACTERS Lawsuits claiming libel in ﬁction are decided on the basis of whether the work is “of and concerning” the plaintiff

THE CREATORS OF FICTION—includ- him or her by falsely describing the individ- ported cases. In the process, courts have ing the writers of novels, television shows, and ual in a negative manner. rejected most libel-in-fiction claims either at movies—often are inspired by real-life people To date, most of the reported libel-in-fic- the pleading stage or on summary judgment. and events. Current events present some of the tion cases have been filed in California and Even in the absence of a bright-line rule, the most fertile ground for fictional works of New York courts. Those courts use the same cases in which claims have been rejected, entertainment, and pretending that our teach- general approach to these claims, one that first along with those few in which the claimants ers, neighbors, and acquaintances are nefar- focuses on the question of whether the work have proceeded to trial and prevailed, provide ious villains often leads to some of the best at issue is “of and concerning” the plaintiff.1 certain guideposts for practitioners to assist works. Whether the plaintiff was the model or inspi- in advising their clients who create, produce, However, as entertainers as diverse as ration for a character is not the test. Rather, or distribute entertainment content that is Sacha Baron Cohen and the producers of the plaintiff must demonstrate that, although Law & Order can attest, the label of “fiction” the work is fictional, people who know the Lee S. Brenner and Edward E. Weiman are partners, on a work does not guarantee that a libel-in- plaintiff understand that the character depicts and Andrew W. DeFrancis is an associate, in the Los fiction claim will not be brought. They, as well him or her.2 Angeles Office of Kelley Drye & Warren LLP. Brenner, as a host of others, have been sued when a Not surprisingly, the question of whether Weiman, and DeFrancis represent film and televi- plaintiff alleges that a fictional character con- a work is of and concerning a real individual sion companies and individual clients in enter- tained in a “fictional” work is really him or is not a bright-line rule but, instead, the appli- tainment, intellectual property, and general busi- her and that the character really defames cation of the test has varied across the re- ness litigation. KEN CORRAL

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based upon or inspired by true events or real claim. First, the court held that no reasonable ences in the synopses (such as birthplace, people. person could believe that the fictional char- parents, or schools) that would have sug- As with many entertainment lawsuits in acter in the movie, named Will James, gested to a reasonable person that the fictional recent years, a claim against actor Sacha depicted the real Jeffrey Sarver. Second, the characters were, in fact, the Tamkins. In the Baron Cohen leads the way. In Doe v. Chan- court emphasized the difference between absence of any uniquely identifiable traits nel Four Television Corporation,3 a child- Sarver’s and the character’s names, as well as that were shared by both the fictional char- hood friend of Cohen sued after being iden- the disclaimer at the opening of the film acters and the real Tamkins, the court held tified by name during an episode of Da Ali G which declared it a work of fiction.8 that the Tamkins could not meet their burden Show, a satirical television show in which In the same year as the Sarver case, the of establishing a probability that they would Cohen portrays Ali G, a wannabe gangsta California Court of Appeal directed the trial prevail on the merits of their claims and dis- rapper who stages spoof interviews with court to dismiss a defamation claim brought missed the case.13 unsuspecting guests. In one episode, Ali G by two individuals whose real names were interviewed Gore Vidal, during which Ali G used in a draft script and casting synopses for New York Cases went off on a tangent about the plaintiff, an episode of CSI. The plaintiffs in Tamkin Like the Cohen, Hurt Locker, and Tamkin calling her a “bitch” and a “minger” (British v. CBS Broadcasting Inc.,9 Scott and Melinda cases, a majority of the libel-in-fiction cases slang for an unattractive woman) and claim- Tamkin, were Los Angeles real estate agents filed in New York have been unsuccessful. In ing that he broke up with her after getting her who had represented the seller of a home for 1982, for example, the New York Supreme pregnant. The statements were made amidst which one of the writers for CSI had made an Court, Appellate Division, dismissed a case on a host of other overtly absurd remarks, includ- offer. The casting synopses for the episode summary judgment even though the author ing that Denzel Washington “lived in George referred to Scott Tamkin as a “hard-drinking of the novel State of Grace had told the plain- Washington’s former Mount Vernon home,” extensive bondage/porn-watching man who’s tiff that some of the characteristics of his that “the world is running out of gravity,” and been a mortgage broker since college.” Scott’s book’s character were “loosely patterned” that Ali G’s face had been added to Mount wife, Melinda, was described as an “attrac- on her. In Springer v. Viking Press,14 not Rushmore. tive, athletic real estate agent” who suppos- only were the plaintiff and the author well The woman sued Cohen, HBO, and edly dies during an episode of kinky sex. acquainted, but the plaintiff and the charac- Channel Four Television for libel, among The Tamkins sued CBS for defamation ter also had the same first name (Lisa), both other things. The trial court granted the after the casting synopses were leaked and had graduated from college, and both had defendants’ motion for summary judgment, posted on several Internet sites—although lived on the same street. The dispute arose finding that: the names of the characters were changed to because the book also referred to the character No reasonable person could consider Scott and Melinda Tucker before the episode as a “whore” who engaged in various types the statements made by Ali G on the aired. The Tamkins claimed that a number of of abnormal sexual activity. Program to be factual. To the con- the statements that appeared in the casting Notwithstanding these similarities, the trary, it is obvious that the Ali G char- synopses and the episode itself were defam- court dismissed the defamation claims as a acter is absurd and all his statements atory, including those that concerned Scott matter of law.15 The court found that the are gibberish and intended as comedy. Tamkin’s sex life and Melinda Tamkin’s fic- alleged similarities were “in large part super- The actor, Sacha Baron Cohen, never tional death.10 ficial,” and that the “dissimilarities” between strays from the Ali G character, who is CBS filed an anti-SLAPP motion, arguing the plaintiff and the fictional character dressed in a ridiculous outfit and that the creation of CSI was protected under “negate[d] any suggestion” that the plaintiff speaks in an exaggerated manner of a the First Amendment and that the Tamkins was the person identified in the work. In par- rap artist. Ali G’s statements are sim- could not prove that a reasonable viewer ticular, the court noted that the plaintiff was ilarly absurd. Altogether, the Program would believe that the CSI characters were, a college tutor, while the character in the is obviously a spoof of a serious inter- in fact, an actual portrayal of the Tamkins. book was a wealthy prostitute. The court view program. No reasonable person The trial court denied the motion, holding explained that “the dissimilarities both in could think otherwise.4 that the creation of entertainment program- manner of living and in outlook are so pro- The California Court of Appeal agreed, ming was not protected by the First Amend- found that it is virtually impossible to see finding that, under the totality of the cir- ment, and thus never addressed whether a rea- how one who has read the book and who cumstances surrounding the statements, they sonable viewer would believe that the Tuckers knew [plaintiff] could attribute to [plaintiff] could not be defamatory.5 were the Tamkins. CBS appealed. the life-style of [the character in the book].”16 Just a year after the Cohen case was The California Court of Appeal reversed, The court also noted, in dicta, that if the decided, the U.S. District Court for the Central finding that the creation of entertainment work clearly states that it is a work of fiction, District of California rejected a defamation programming was a protected First Amend- such a disclaimer can assist in showing that claim brought by Jeffrey Sarver, who alleged ment activity. It then went on to hold that no the fictional work is not libelous. that his personal experiences in the military reasonable person who read the casting syn- The same fate greeted the plaintiff in a were the bases for the movie The Hurt opses or viewed the CSI episode could have 1991 case involving the novel Disappearing Locker. In Sarver v. The Hurt Locker LLC,6 understood the characters portrayed in the Acts, in which the New York Supreme Court Sarver alleged that he was defamed by several episode to be the plaintiffs.11 In other words, granted a motion to dismiss the libel-in-fiction statements in the film that “falsely portrayed the statements were not “of and concern- action. In Welch v. Penguin Books USA, [him] as a bad father, a man who had no ing” the plaintiffs.12 Although the names of Inc.,17 the plaintiff sued the publishers of the respect or compassion for human life who was the fictional characters matched those of the novel, claiming that its fictional character fascinated with the thrill of war and death, plaintiffs (at least in the synopses), the real resembled him. The plaintiff and defendant and a soldier who violated military rules and Scott Tamkin was not a mortgage broker, author knew each other, and the plaintiff regulations.”7 the real Tamkins shared only the most gen- and defendant were physically similar (both The district court held that there were eral physical similarities to the fictional cou- were six feet, four inches tall, 225 pounds, two principal defects in Sarver’s defamation ple, and there were no biographical refer- with dark complexions and dark hair), both

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had dropped out of high school but had works in part on people and experiences a recognizable trait of the plaintiff’s prac- obtained equivalency diplomas, both enjoyed from their own lives, the essence of what tice.25 As a result, the appellate court affirmed carpentry and Scrabble, both had been they write is fictional.22 the jury verdict against the author and pub- employed as construction workers, both lisher on the libel count as well as an award owned a fish tank, both liked the same break- Plaintiff Decisions of punitive damages against the publisher.26 fast food, both drip dried after a morning Notwithstanding the outcomes in most libel- In 1966, the Second Circuit Court of shower, both had a trick knee, both were the in-fiction cases filed in California and New Appeals reversed a grant of summary judg- only son in a family with three kids, and York, a handful of cases have survived the ment in a libel-in-fiction case. In Fetler v. both met their girlfriends while rendering pleading and summary judgment stages. These Houghton Mifflin Company,27 the plaintiff carpentry services at their respective apart- cases provide additional guidance. alleged that the main character in a novel ments. Moreover, the defendants did not A California case, Bindrim v. Mitchell,23 contained a libelous portrayal of him. The deny that the “plaintiff might have served as is particularly interesting since it proceeded only issue on appeal was whether or not the an inspiration or model for the character.”18 to trial, the plaintiff prevailed on his defama- plaintiff could show sufficient evidence that Notwithstanding these similarities, the tion-by-fiction claim, and the appellate court the statements in the book were “of and con- court dismissed the defamation claims, stating that, when dealing with a fictional work, the plaintiff must overcome “a fictional work’s presumption that all the material is untrue”— that is, “the presumption of invention must be overcome.”19 As such, the court held that “the identity of the real and fictional per- sonae must be so complete that the defamatory material becomes a plausible aspect of the real life plaintiff or suggestive of the plaintiff in significant ways.” Although the court recognized the similarities between the plaintiff and the fictional character, it found that the emotionally unbalanced character in the novel bore little resemblance to the plaintiff. The court also found that, even though the plaintiff may have been the model or inspiration for the fictional character, the defamatory statements created such a profound “char- acterological alteration of plaintiff” that no reasonable reader could possibly attribute the defamatory aspects of the character to the plaintiff.20 In 2003, the Supreme Court of New York, New York County, dismissed a libel-in-fiction affirmed the jury verdict. Paul Bindrim, a cerning him” sufficient to withstand sum- case on summary judgment concerning a psychologist who conducted so-called nude mary judgment—that is, whether the plain- character in Primary Colors, a fictional book marathons as part of group therapy for his tiff had submitted sufficient evidence to create admittedly based on Bill Clinton’s first pres- patients, sued the author of a novel whom he a triable issue of fact that a reasonable jury idential campaign. In Carter-Clark v. Random claimed defamed him. The author attended could conclude that the character in the book House, Inc.,21 the plaintiff claimed that peo- one of Bindrim’s sessions under an agree- is a portrayal of the plaintiff. The appellate ple she knew who read the book believed ment with Bindrim not to write about her court held that the plaintiff met this burden that one of the characters in the book was experiences, but later wrote a novel called by showing, among other things, both the based upon her, and that the character had Touching, which included a character based character and the plaintiff had the exact apparently engaged in sexual activity with the upon Bindrim and his sessions. Bindrim same unusual number of family members (10 Clinton character while he was running for claimed that, among other things, the book boys and 3 girls, in the same birth order), president. attributed a number of obscene remarks to were the eldest child, were the exact same In harmony with the Springer and Welch him and otherwise inaccurately depicted the age, were Latvian, had fathers who were cases, the court held that the similarities nude marathon sessions.24 Russian Protestant ministers, had families between the plaintiff and the character in Although the character in the novel and who performed as a band and toured in an the book were inadequate for the reader, the plaintiff differed in physical appearance, old bus, and had family homes in Stock- even one who knew the plaintiff, to reason- and the character “was a psychiatrist rather holm.28 Notably, the court explained that the ably believe that the character in the book was than a psychologist,” the appellate court con- plaintiff’s claim was buttressed by the affi- “of and concerning” the plaintiff. The court cluded, “There is overwhelming evidence davits of four readers of the novel who rec- also seemed persuaded by the disclaimer on that plaintiff and [the character] were one” ognized plaintiff in the novel, as well as the the book, stating that, “[t]hough not neces- because, among other things, the “[p]laintiff plaintiff’s own affidavit that at least 12 peo- sarily determinative, ‘Primary Colors’ styled was identified [as the character] by several wit- ple asked him if the book was about his itself as a work of fiction,” and the author’s nesses and plaintiff’s own tape recordings of family.29 note stated, “None of these events ever hap- the marathon sessions show that the novel More than a decade later, the Second pened.” The court acknowledged that was based substantially on plaintiff’s con- Circuit Court of Appeals also allowed a claim although fiction writers often ground their duct in the nude marathon,” which itself was for libel-in-fiction to survive a motion to dis-

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miss. In Geisler v. Petrocelli,30 the appellate other. Indeed, whether or not the plaintiff work as fictional and, therefore, the less likely court explained that, in libel-in-fiction law- was the “model,” “inspiration for,” or even the plaintiff can prevail. Thus, creators of suits, the “plaintiff must demonstrate that the admitted “basis for” the fictional character fictional works are well served by making third parties apprehend the similarity between is not the test in libel-in-fiction cases. the fictional characters outlandish, ridicu- the real person and her literary cognate as Instead, the plaintiff is required to prove lous, and patently absurd. Indeed, when the something more than amusing coincidence or that the fictional character is “of and con- fictional character is particularly awful or even conscious parallelism on a superficial cerning” him or her. In undertaking the analy- disgusting and the plaintiff tends to the oppo- plane. Rather, it is required that the reason- sis of this question, the court will search both site of those traits, the plaintiff will have a dif- able reader must rationally suspect that the for similarities and dissimilarities between ficult time establishing that anyone would [character] is in fact the plaintiff, notwith- the plaintiff and the fictional character to confuse him or her with the terrible fictional standing the author’s…assurances that the determine whether a person who knows the character. If the character’s attributes are not work is fictional.”31 plaintiff and who has seen the fictional work plausibly attributable to the plaintiff, then the The appellate court held that the plaintiff could reasonably conclude that the plaintiff plaintiff cannot succeed. had met the standard, at least in a manner suf- is, in fact, the fictional character. Notably, Thus, the submission of affidavits from ficient to survive a motion to dismiss. The courts have shown no reticence in making this third parties who know the plaintiff either can defendant was acquainted with the plaintiff, determination as a matter of law, often stat- help or hurt the plaintiff’s libel-in-fiction the book’s character and the plaintiff had ing that this is a question for the court itself claim. If the third parties attest that they rec- exactly the same first and last name (Melanie to decide. ognize the fictional character as the plaintiff, Geisler), and both were young, petite, and Equally notable, the courts have held that but also state that they do not believe that the attractive. In the book, the character engaged even when there are a number of similarities defamatory elements of the character are in “tennis fraud” and “untoward sexual con- between the character and the plaintiff, the attributable to the plaintiff or are otherwise duct.” The court was not persuaded by the dissimilarities between them can—and often not a plausible aspect of the real-life plaintiff, disclaimer on the front of a fictional book, do—outweigh those similarities so that the the evidence will serve to show that the libel- which the court described as “the standard dissimilarities alone refute any claim that the in-fiction case is meritless. However, third- disclaimer of intentional resemblance between fictional character really identifies the plain- party affidavits can be used to show, at a its characters or episodes and real persons or tiff. This means that authors would be wise minimum, that people identified the charac- actual events.”32 to change as many characteristics as possible ter as the plaintiff. While identification alone Most recently, in 2008, the Supreme Court from any living person who may serve as an certainly is not sufficient to prove liability in of New York permitted a libel-in-fiction claim inspiration for fiction—including name, hair a libel-in-fiction action, it is at least one ele- arising out of an episode of the television color, build, and occupation, among other ment in doing so. series Law & Order to survive a motion to minor identifying characteristics. It can be important for the work to include dismiss. The television series features stories Although no bright-line test has emerged, a disclaimer that the work is fictional. and characters based upon current events, certain elements and watermarks have Although use of a disclaimer is not disposi- and evokes the phrase “ripped from the head- emerged as significant to the analysis. tive, many courts have found it to be a fac- lines.” In Batra v. Wolf,33 the plaintiff (New Generally, courts have not viewed the shar- tor in the overall analysis. Indeed, the absence York attorney Ravi Batra) complained that ing of a common first name, such as Lisa or of disclaimers could give rise to the argu- the series’ character (New York attorney Ravi Bill, as significant similarities. However, if ment that the creator of the work intended its Patel) was shown bribing a judge.34 the shared first name is perceived as unique audience to believe that the work was based The Batra court found sufficient similar- or unusual (such as Ravi), or if the character in fact rather than fiction. ity to survive a motion to dismiss. The court and the plaintiff share the same first and last Some makers of fictional works have noted that the character and the plaintiff had name (such as Melanie Geisler), courts have employed the creative practice of putting an the same unusual first name, were the same viewed the similarity as significant. additional disclaimer within the body of the ethnicity (Indian-American), had the same Even when the character and the plaintiff work itself. For example, one of the charac- job (attorney in New York), and the same gen- share common or general characteristics or ters in the television show could remark that eral appearance. Moreover, the court noted backgrounds—such as both graduated from they are not the plaintiff (e.g., “Wow, people that the plaintiff had been the subject of college, enjoyed the same hobbies, had the might think that I am Donald Trump, but I’m much news reporting, and so any person same general job, were attractive and mar- certainly not him,” or “Wow, I wonder if who knew him or heard of him would iden- ried—the similarities are not particularly people would think I’m Lindsay Lohan, even tify him with the fictional character. The strong evidence for the plaintiff. However, though I’m not her”). Such a practice can be court also found that the differences between when the similarities are of an unusual or a way of avoiding liability on a libel-in-fiction them (e.g., that they were different types of unique nature—for example, both came from claim. lawyers and had offices in different loca- a family of 13 children who toured as a music Finally, it is noteworthy that there is yet tions) failed to outweigh the similarities.35 group—the plaintiff has a stronger claim. Of another, higher obstacle for plaintiffs to suc- Although courts have failed to carve out course, if the plaintiff can establish a large ceed on a libel-in-fiction claim when the plain- a clear standard for how similar a fictional number of shared, unique similarities, the tiff is a public figure, such as a celebrity or character needs to be in order for a plaintiff plaintiff’s claim will be particularly strong. At other well-known person. Such cases may to succeed on a libel-in-fiction claim, the case the other end of the spectrum, claims that are frequently arise within the context of docu- law provides some genuine guidance for prac- based upon superficial similarities only— dramas, which employ creative fictionaliza- titioners. Initially, and perhaps surprisingly, even a large quantity of them—likely will tions of real events and well-known people. whether or not the plaintiff and defendant not survive the pleading or summary judg- (For more on this topic, see William Archer’s were acquainted with each other does not ment stages. “Getting Real” on page 28.) Public figures appear to be material. Courts have dismissed In addition, the more outrageous the also will need to demonstrate in court that the libel-in-fiction cases even when the defen- description of the fictional character, the more defendant acted with actual malice—i.e., that dant and the plaintiff had strong ties to each likely a reasonable person will perceive the he or she made a statement with knowledge

44 Los Angeles Lawyer May 2012 May 2012 Master.qxp 4/12/12 12:52 PM Page 45

that it was false or with reckless disregard of whether it was false or not.36 Courts have recognized that authors of fiction and docudra- EMPLOYMENT LAW REFERRALS mas have “literary license” under the First Amendment to alter true events. Accordingly, Paying Highest Referral Fees (Per State Bar Rules) courts have expressly stated that engaging in the dramatization of real events does not, Honored to receive regular employment referrals from in and of itself, constitute evidence of actual over 100 of Californiaʼs fi nest attorneys malice.37 While people may be insulted when they Stephen Danz think a fictional character is based upon 877.789.9707 them, more likely than not, they will face an & Associates Main offi ce located in Los Angeles and nearby offi ces in Orange County & Inland Empire uphill battle if they seek to sue the creators 11661 San Vicente Boulevard, Suite 500, Los Angeles, CA 90049 of the fictional work for libel. Although Stephen Danz, Senior Partner www.employmentattorneyca.com plaintiffs likely will be successful in only the most exceptional cases, the creators of fictional novels, television shows, and movies should be mindful of the litigation pitfalls EDIATION ERVICES that exist. ■ ROSS M S Integrity Commitment Success 1 Aguilar v. Universal City Studios, Inc., 174 Cal. App. SPECIALTY AREAS 3d 384, 386-87 (1985); Cerasani v. Sony Corp., 991 F. Supp. 343, 355 (S.D. N.Y. 1998) (citation omitted). • Real Estate • Business/Commercial 2 Springer v. Viking Press, 90 A.D. 315, 320 (N.Y. App. • Mortgage & Lending • Escrow/Title/Agency Div. 1982). • Trusts & Estates • Workplace 3 Doe v. Channel Four Television Corp., 2010 Cal. App. • Construction • Multi-Party Unpub. LEXIS 2468, at *8, 16-18 (2010). • Personal Injury • Professional Liability 4 Id. at *8. 5 Id. at *15-18. 6 Sarver v. The Hurt Locker LLC, Case No. 2:10-cv- BARRY ROSS, ESQ., MBA 09034 (C.D. Cal. Oct. 13, 2011), Order on Motion to (818) 840-0950 Strike at *1. www.ROSSmediation.com 7 Id. at *15. 8 Id. at *15-18. 9 Tamkin v. CBS Broadcasting, Inc., 193 Cal. App. 4th 133, 137-38 (2011). EXPERT WITNESS CONSTRUCTION 10 Id. at 137-40. 11 Id. at 148. 12 Id. at 146. ERISA 13 YEARS Id. at 147-49. CONSTRUCTION 14 Springer v. Viking Press, 90 A.D. 2d 315, 316 (N.Y. LAWYERS 41 EXPERIENCE App. Div. 1982). 15 Id. at 319-20. LONG TERM DISABILITY, LONG 16 Id. TERM CARE, HEALTH, SPECIALTIES: 17 Welch v. Penguin Books USA, Inc., 1991 N.Y. Misc. EATING DISORDER, AND LIFE • Lawsuit Preparation/Residential LEXIS 225 (1991). INSURANCE CLAIMS Construction • Single and Multi-family, 18 Id. at *1-3. Hillside Construction • Foundations 19 Id. at *9. • Vibration Trespass • Concrete • Floors 20 Id. at *10. ERISA & BAD FAITH • Tile • Stone • Retaining Walls • 21 Carter-Clark v. Random House, Inc., 196 Misc. 2d MATTERS Waterproofing • Water Damages • Roofing 1011, 1012 (N.Y. Mis. 2003). • Sheet Metal • Carpentry/Rough Framing 22 Id. at 1014. • Stairs • Materials/Costs • Building Codes ✔ California state and federal courts 23 Bindrim v. Mitchell, 92 Cal. App. 3d 61, 69 (1979). • Construction Contracts 24 ✔ More than 20 years experience Id. at 70-71. CIVIL EXPERIENCE: 25 Id. at 72, 76. ✔ Settlements, trials and appeals Construction defect cases for insurance 26 Id. at 82. companies and attorneys since 1992 27 Fetler v. Houghton Mifflin Co., 364 F. 2d 650, 650 Referral fees as allowed by (2d Cir. 1966). State Bar of California 28 Id. at 650-51. 29 Id. at 653-54 & n.8. 30 Geisler v. Petrocelli, 616 F. 2d 636, 637-38 (2d Cir. Kantor & Kantor LLP COOK 1980). CONSTRUCTION 31 818.886.2525 TOLL FREE Id. at 639. COMPANY Stephen M. Cook 32 Id. at 638. 877.783.8686 33 Batra v. Wolf, 2008 N.Y. Misc. LEXIS 1933, at *1 California Contractors License B431852 (2008). www.kantorlaw.net Graduate study in Construction 34 Id. at *4-5. L.A. Business College, 1972 35 Id. at *6-9. TEL 818.438.4535 FAX 818.595.0028 36 New York Times Co. v. Sullivan, 376 U.S. 254, EMAIL [email protected] 285-86 (1964). www.expertwitnessconstructiondefects.com 37 Davis v. Costa-Gavras, 654 F. Supp. 653, 658 (S.D. N.Y. 1987). 7131 Owensmouth Ave., Canoga Park, CA 91303

Los Angeles Lawyer May 2012 45 May 2012 Master.qxp 4/12/12 3:06 PM Page 46

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Settling, Mediating, and Arbitrating Complex Cases Employment-Based Immigration ON WEDNESDAY, MAY 9, the Antitrust and Unfair Business Practices Section will host a program on how to successfully settle, mediate, or On Saturday, May 19, the Immigration arbitrate complex litigation. Resolving complicated litigation through trial Law Section will host a program—led or dispositive motion is time consuming and expensive. Too often, efforts by speakers Paul D. Cass, Eileen S. to engage in productive settlement negotiations stall. Joseph W. Cotchett, Chun-Fruto, Pamela Forster, Catherine Judge Philip S. Gutierrez, Judge Stephen G. Larson (retired), Magistrate L. Haight, Blake G. Miller, and Judge Margaret A. Nagle, Kenneth R. O’Rourke, and Judge Dickran Tevrizian Matthew F. Spaulding—on the current (retired) will discuss ways to break the logjam. The program will take place state of employment-based at O’Melveny & Myers LLP, 400 South Hope Street, 18th floor, Downtown. nonimmigrant categories (TN, H-1B, Entrances to parking lot are off Grand, Hope, and 4th Street. On-site H-2B, E-1, E-2, E-3, L-1, Os, Ps, and R- registration will be available at 5 P.M., with the meal and reception at 5:30, and the program continuing from 6:00 to 7:30 P.M. The registration code 1) and employment-based immigrant number is 011642. The prices below include the meal. categories (special immigrant $22—CLE+ member religious workers, EB-1, EB-2, EB-3, $45—Antitrust Section and LACBA members and labor certifications), with an $80—all others emphasis on potential pitfalls and 1.5 CLE hours strategic lawyering. There will be 15 minutes for questions and answers at the conclusion of each panel Personal Injury Damages discussion. The program will take place at the Los Angeles County Bar ON THURSDAY, MAY 17, the Barristers Section will host a program featuring Association, 1055 West 7th Street, experienced trial attorneys Phillip A. Baker and Brian J. Panish, who will 27th floor, Downtown. Parking is discuss their top strategies for maximizing and minimizing damages awards available at 1055 West 7th and nearby in personal injury cases. They will identify the key elements that shape the value of a personal injury case and how to develop and present the evidence lots. The registration code number is needed to effectively demonstrate or rebut damages at trial. This program will 011649. On-site registration and the be moderated by Los Angeles Superior Court Presiding Judge Lee Edmon. meal will begin at 8 A.M., with the Seating is limited. The meal and reception will follow the program, which will program continuing from 9 A.M.to take place at Panish Shea & Boyle LLP, 11111 Santa Monica Boulevard, Suite 1:30 P.M. The prices below include 700, in Los Angeles. On-site registration will be available at 6 P.M., with the the meal. program continuing from 6:30 to 7:30 P.M. The registration code number is $50—CLE+ member 011579. The prices below include the meal. $75—Immigration Law Section $20—CLE+ member members $65—Barristers Section member $100—LACBA member $75—LACBA member $135—all others $95—all others 1 CLE hour 4 CLE hours

The Los Angeles County Bar Association is a State Bar of California MCLE approved provider. To register for the programs listed on this page, please call the Member Service Department at (213) 896-6560, or visit the Association Web site at http://calendar.lacba.org, where you will ﬁnd a full listing of this month’s Association programs.

Los Angeles Lawyer May 2012 47 May 2012 Master.qxp 4/12/12 12:53 PM Page 48

closing argument BY EDWIN F. MCPHERSON

Is the California Legislature Listening?

FOR 30 YEARS, CALIFORNIA’S TALENT AGENCIES ACT has been a taining the act in its present form—the act should be renamed the Full hotbed of litigation. The act prohibits anyone who is not a licensed Employment Act for Agents. The ATA even challenged an amendment talent agent from procuring employment for artists, which include proposed by the Beverly Hills Bar Association a few years ago to actors, directors, recording artists, songwriters, models, and a vast exempt lawyers from the act. Clearly, talent agents love the act as it number of other types of entertainers. stands. Over the years, the labor commissioner and the courts have However, it is difficult to imagine why the Screen Actors Guild con- grossly expanded the term “procuring,” as used in the act, to include sistently would support the act. There is no question that the act does any form of negotiation whatsoever, which of course is not consis- not protect artists, as it was intended to do. When an artist decides tent with anyone else’s definition of “procuring.” In theory, if a tal- that he or she wants to fire his or her manager, the act is a very con- ent agreement already has been negotiated, but an actor wants an extra venient sword to use in exit negotiations (which was certainly not its pillow for the trailer, the actor’s manager cannot ask for that pillow without violating the act—unless the manager is asked to do so by a licensed talent agent. I have written numer- It is very difficult to dispute that the Talent Agencies Act is terrific ous articles on the act, and almost every one of them criticizes it on the same theme: The act is completely out of touch with the reality of for agents and absolutely horrible for artists. the entertainment industry and must be amended. Courts finally seem to be getting the message. intended use). But the act’s general impact on artists is fairly devas- In 2008, the U.S. Supreme Court decided Preston v. Ferrer, deter- tating. mining that an arbitration clause in a management agreement, like Many A-list artists feel that having a manager is much more every other agreement, is binding. In the past, the labor commissioner important to them than having an agent, and they understandably do had taken the bootstrap position that, if the commissioner found a not want to pay two commissions. However, the act essentially man- violation of the act, and the management agreement was therefore dates that they pay an agent whether they want to or not. unenforceable, so too were any arbitration provisions. Now, if there Granted, nobody is going to feel too much sympathy for the is an arbitration clause in a management agreement, it is up to the superstars, but what about the novice artist? There are fledgling arbitrator, and not the labor commissioner (notwithstanding Styne actors all over the city that no agent will touch, but they often are able v. Stevens), to determine whether or not the act was violated, and the to find ethical, experienced managers who are willing to invest time labor commissioner never gets to review the matter. and money to create some momentum in the actors’ careers. Is it likely Also in 2008, the California Supreme Court decided Marathon v. that managers will invest time and money developing an artist while Blasi, holding that management agreements, like all other agree- knowing that they will never be paid for it? ments, are severable. In the context of the act, that means that one Similarly, more than ever, bands need to tour to develop a signif- violation of the act by a personal manager will most likely no longer icant following in order to attract record label interest. Without a solid result in the loss of a lifetime of commissions. Each violation now will record deal or at least a large following, it is highly unlikely that a be reviewed as a single instance that may be viewed in conjunction band will ever secure an agent. How is a band going to survive if its with lawful activities by the manager, and only if the unlawful activ- manager cannot help book a tour? ities pervade the entire relationship will a manager lose all of his or It is very difficult to dispute that the Talent Agencies Act is ter- her commissions. rific for agents and absolutely horrible for artists. It is beyond com- Although the U.S. Supreme Court and the California Supreme prehension that union leadership has never figured that out. As the Court finally have listened, the California Legislature has not listened late Gerry Margolis, a fellow outspoken opponent of the act, once to anyone since 1986. In the Marathon decision, the California asked, In an industry in which many actors cannot even get into the Supreme Court suggested that, because the act leads to unfair results Screen Actors Guild, and 95 percent of SAG members are unemployed, that are incompatible with the realities of today’s entertainment how is it conceivable that a law that actually reduces the number of industry, the California Legislature could consider revisiting the act. people who are allowed to find work for those actors can actually be However, the legislature has made no review and no statutory good for actors? ■ changes. More disturbing than the legislature’s failure to listen, however, Edwin F. McPherson is a partner at McPherson Rane LLP, a Century City enter- is that artists never have listened either. It is not difficult to understand tainment litigation firm. He has written numerous articles and has acted as why the Association of Talent Agents (ATA) is so vocal about main- an expert witness regarding the Talent Agencies Act.

48 Los Angeles Lawyer May 2012 May 2012 Master.qxp 4/12/12 12:53 PM Page 49

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