A big ruling against Fox raises concerns of ‘self-dealing’ with Hulu

An arbitrator has awarded $179 million in damages to the stars and creative team behind the Fox show “Bones.”

As laid out in an in-depth Hollywood Reporter story, the ruling could have bigger implications for the streaming world, particularly as the major media companies are looking to launch their own streaming services, which will presumably take advantage of their existing content libraries.

Stars David Boreanaz and Emily Deschanel, along with executive producer Barry Josephson and Kathy Reichs (who wrote the novels that “Bones” was based on), sued 21st Century Fox in 2015. They alleged that the Fox studio licensed the show for below-market rates to Fox networks and later to Hulu, cheating them out of their rightful share of the profits.

The dispute ultimately went into arbitration. Now arbitrator Peter Lichtman has ordered Fox (which currently owns a 30 percent stake in Hulu, and is in the process of being acquired by Disney) to pay one of the largest profit-sharing awards in Hollywood history.

As part of his ruling (embedded below), Lichtman examines Fox’s deal to stream “Bones” reruns on Hulu. These kinds of deals — where studios sell content to a corporate sibling — aren’t unusual, but the company is still expected to pay fair market value.

It seems, in this case, that Hulu was only giving Fox a share of ad revenues, something that Lichtman describes skeptically: “So, when Fox contends that there is no evidence of a better deal struck by another studio in terms of the percentage of ad revenue, this is true because no other studio would make such a deal based on the percentage of ad revenue” (emphasis in the original).

Lichtman then moves on to what he calls “perhaps the most shocking piece of evidence related to the Hulu issues,” namely the fact that executive Dan Fawcett signed the licensing agreement on behalf of both Fox and Hulu.

“As stated above, Mr. Fawcett literally signed the agreement for both parties in his representative capacity for both sides,” Lichtman writes. “The obvious inferences of self-dealing, conflict of interest and the lack of any arm’s length negotiations leap off the page.”

Ultimately, Lichtman concludes that there’s one obvious reason why Hulu got such a good deal.

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

Fox, meanwhile, is challenging the ruling and arguing that most of the damages should be avoided.

“The ruling by this private arbitrator is categorically wrong on the merits and exceeded his arbitration powers,” the company said in a statement. “Fox will not allow this flagrant injustice, riddled with errors and gratuitous character attacks, to stand and will vigorously challenge the ruling in a court of law.”

Regardless of how this case plays out, it probably won’t be the last time Hollywood talent challenges the studios over streaming profits.

Update: Disney has provided the following statement from CEO Bob Iger:

[Fox executives] Peter Rice and Dana Walden are highly respected leaders in this industry, and we have complete confidence in their character and integrity. Disney had no involvement in the arbitration, and we understand the decision is being challenged and will leave it to the courts to decide the matter.

Bones arbitrarion ruling by TechCrunch on Scribd