Brains, Blood, Sweat, and Tears: Derivative Works and the Walking Dead Licensing Controversy

Regardless of how you feel about character development and innovative plot progression, AMC’s The Walking Dead (TWD) is an undeniable hit. Based upon the comic book of the same name by Robert Kirkman, TWD, for the past five years has consistently been one of the top rated TV shows on television, even outperforming Sunday Night Football. It averages 13 million viewers per episode, and about two-thirds of those viewers are in the coveted 18-49 demographic. Three-time Oscar nominee Frank Darabont (The Green Mile; The Shawshank Redemption) brought the TV show to life. He wrote, directed, and produced the pilot episode, and served as the showrunner and executive producer (often-synonymous positions) for its smash-hit first season. It was surprising then, when AMC suddenly fired Darabont while Season 2 was in production, and after sending him to promote the series at Comic-Con. Darabont sued in New York State Court in December of 2013, and recently amended his complaint to include the lack of accreditation and profits allegedly owed him from AMC’s “companion series,” Fear the Walking Dead.

The thirty-page complaint gives a lot of information about Darabont and AMC, but everything generally comes down to the following: Instead of having an unaffiliated company produce TWD, per the original negotiations, AMC produces the show itself. Because AMC both owns and produces TWD, it does not have to negotiate any licensing fees. Thus, when AMC decided to produce TWD in-house, Darabont required AMC, by contract, to use an “imputed” license fee with its production affiliate priced at fair market value. AMC, however, allegedly used a drastically low license fee, forcing production of TWD at a considerable deficit. Thus, although TWD is a hit show, it has unusually low profits and Darabont has not been properly paid. Furthermore, Darabont claims that AMC breached its contract by terminating him during the production of Season 2 so that AMC could avoid triggering other contractual clauses that would allow Darabont to receive a greater share of profits and get a right of “first-refusal” on producing more seasons of TWD. Lastly, Darabont’s contract requires that AMC credit him on any derivative works of the TWD and give him a share of the profits, which AMC has neglected to do for both Talking Dead and Fear the Walking Dead. There is a lot going on here, let’s break it down.

Television Licensing

According to the complaint, normal television licensing, where the production company is unaffiliated with the owner, works like this: a typical license runs for four years, and then the parties renegotiate. Typical negotiations render (1) prospective licensing fees equal or greater to the cost of show production, which ensures there’s no deficit going into future seasons; (2) repayment of any production deficit from the first few seasons under the previous license; and (3) other bonuses based on the success of the show, number of seasons produced, ratings, and the general value of the show to the network. However, because AMC is producing the TWD in?house, it does not have to renegotiate, hence the imputed licensing fee. Essentially, an imputed license is supposed to be what AMC would pay if it did have to negotiate. Instead of using the fair market value, AMC came up with a “perpetual license formula” which has one low fee for the life of the series, regardless of its success or cost of production. Supposedly, a “perpetual license” is unheard of in the television industry; and AMC’s second and third most popular shows (Breaking Bad and Mad Men, respectively), which unaffiliated third parties produced, did not have perpetual licenses.

AMC’s imputed perpetual license fee is about 65% of the cost of production, so TWD is always made at a deficit. The formula only allows for a maximum increase of 5%, regardless of the show’s success. Typically, hit series show growth well above 5%, and this growth is generally necessary to keep the successful team of actors, writers, directors, and production crew together. For example, in its fifth season, Mad Men’s negotiated license provided for at least $3,000,000 per episode. Mad Men has less than 25% of TWD’s viewership, yet under AMC’s imputed licensing scheme, TWD Season 5’s cap per episode is only $1,762,483.

Under these facts, it is probable that AMC’s imputed licensing fee is severely under fair market value and shortchanges TWD’s profits pool by its forced deficit. Thus, the complaint alleges that AMC is self-dealing to maximize its own profits while avoiding a payout to others. Self-dealing is an action taken by a fiduciary (someone owing a duty to another), that is done for that entity’s gain, rather than for the benefit of the person to whom the duty is owed. In this situation, AMC owed a duty, imposed by contract, to Darabont that it would impute a licensing fee based on fair market value. Fair market value is the general worth of a commodity based on the average of its price, looking to the price of similar objects and services with similar value. Because AMC’s licensing scheme severely undervalues TWD when compared to AMC’s other top programming, AMC breached its duty and instead maximized its own gain at the expense of others.

Darabont’s Contracts with AMC

Here is how payment usually works for showrunners and producers, according to the complaint. Darabont, as executive producer, should have been paid out of the “Modified Adjusted Gross Receipts” pool of profits. The Modified Adjusted Gross Receipts are supposed to consist of the gross profits from the show, less production costs, less other contractually specified deductions. However, because of AMC’s artificially low imputed licensing fee, production costs were not sufficiently covered and those who are supposed to be paid out of the Modified Adjusted Gross Receipts pool, such as Darabont, do not receive their fair share of profits. In fact, according to the complaint, Darabont did not receive any information about the profits pool until after Season 2 began, despite frequent requests. Darabont’s profit share was supposed to vest in four stages, fully vesting at the end of Season 2 if he rendered executive producing services on all Season 2 episodes, which Darabont alleges he did. According to the complaint, AMC subsidiaries provided documents to the Writers Guild of America listing him as an executive producer on every Season 2 episode.

Regardless, Darabont did not receive any actual payment from the “profits” until after this litigation began, and even then, AMC is treating his portion of the profits as only 75% vested, costing him millions of dollars. Allegedly, AMC has unilaterally modified its vesting language from “rendering services” to the stricter “render and complete all material Executive Producer services,” and imposed those requirements on Darabont. Thus, Darabont claims that AMC has improperly reduced his profits by changing his profit share from fully vested to 75% vested, based on him allegedly not providing “material” executive producer services for the entirety of Season 2.

Darabont’s contract was renegotiated after the success of the first season. The new terms gave Darabont a right of first refusal to be the showrunner on Season 3, but only if he produced Season 2 on schedule and within budget. Furthermore, the terms stated that if Darabont was in breach, AMC had to give him notice and forty-eight hours to cure any deficiencies. After he was fired, Darabont claimed he received no notice or opportunity to cure, and furthermore, claims that he was on schedule and within budget for Season 2. Darabont claims that AMC fired him without cause and in breach of contract, simply to avoid having to work with and pay him for Season 3 and on.

Darabont’s contract also specified “first negotiation” rights for all derivative works based on TWD. Specifically, AMC was obligated to negotiate with Darabont for at least thirty days about whether he would direct, pilot, and executive produce the derivative works for at least the fair market value of his services. The complaint claims that this right to negotiate derivative works “rolls” to every derivative work based on TWD, and specifies that even if Darabont does not work on the new shows, he should still receive a credit and share of the profits. However, no one consulted Darabont and he received neither credit nor payment for Talking Dead nor Fear the Walking Dead. The complaint seeks a declaration that Talking Dead and Fear the Walking Dead are both derivative works of TWD; however, there is a hiccup.

Derivative Works

Allegedly, what constitutes a derivative work in this case is defined by contract as having characters from the original series, such as sequels or other ancillary offshoots. Thus, AMC’s marketing scheme carefully refers to Fear the Walking Dead as a “companion series,” operating somewhere in between a spinoff and a prequel. Both the comic and TWD never use the term zombie, preferring to use “walkers,” although new characters introduced in TWD always seem to have different slang, such as roamers, lurkers, or biters; regardless, “walkers” is by far the most common term used. Fear the Walking Dead, on the other hand, will not use “walkers,” and there are no plans for any type of crossover with the original TWD cast. Furthermore, it will not revisit any of TWD’s past plot points that could easily be told from a different perspective, for example, the well-known CDC arc from Season 1.

The Copyright Act of 1976 defines derivative works as “a work based upon one or more preexisting [copyrightable] works such as a translation, musical arrangement, dramatization . . . or any other form in which a work may be recast, transformed, or adapted. A work consisting of editorial revisions, annotations, elaborations or other modifications, which, as a whole, represent[s] an original work of authorship,” (emphasis added). The incentive structure for derivative works operates in two separate ways: (A) Sec. 106(2) grants the exclusive right to prepare derivative works to the copyright owner, and enables prospective owners to proportion their personal investment in a work to both the market returns from the original work and from the returns of derivative markets; and (B) Sec. 103, which extends copyright protection to the original elements of derivative works, gives them and their licensees an incentive to add original expression into the new derivative and qualify it for copyright protection in its own right.

Therefore, derivative rights affect both the level of investment in copyrighted works and the direction of investment. The level of investment is affected because the copyright owner can proportion his investment to the level of expected returns from all markets, and the direction is affected because by spreading the duty to pay over different markets. Sec. 106(2) tends to perfect the information available to the copyright owner regarding the value of his work to different demographics and enables choices in light of that information.

Darabont obviously appreciates the value of derivative works, and made a point to consider and negotiate for those rights in his contract. But are both Talking Dead and Fear the Walking Dead really derivate works? Talking Dead is a talk show where celebrity fans, cast members, and crew discuss episodes of the TWD, including trivia, behind-the-scenes footage, and questions from the fans. Almost certainly, Talking Dead is based upon TWD and is a derivative work. Fear the Walking Dead (Fear), on the other hand, may be a more complicated situation. Despite sharing the phrase “The Walking Dead,” that does not necessarily mean that Fear is actually a derivative work based on the TWD. Just as ideas cannot be copyrighted, nor can titles. 1-1 Melville B. Nimmer & David Nimmer, Nimmer On Copyrights § 1.08[D] (2015). So then, having similar titles is not the end-all, be-all. Derivative works must substantially incorporate protected material from a preexisting work. Micro Star v. FormGen Inc., 154 F.3d 1107 (9th Cir. 1998). And although Fear seems to take place in the same “world” as TWD, what parts of that world are protectable, and are those parts being used in Fear?

TWD is, at heart, a zombie series. What makes it protectable are its unique characters and story arcs. Without those distinguishing features, it is hard to pinpoint what exactly is protectable expression in TWD universe. After all, the “zombie apocalypse,” genre has been around since at least the 1960s, and unless there is a truly unique cause to the outbreak (something neither TWD comics nor TV show have ever touched on), there is not very much protectable expression in the concept in and of itself. Fear is only two episodes into its first season, and so far, it seems like any other zombie genre show. If Fear truly avoids any crossovers, characteristic slang from TWD, and previous story arcs, it may not be a derivative work despite its name. On the other hand, in promotion materials, Fear is discussed in terms of TWD, “loosely covering the period of time that Rick, [TWD’s main character], was in a coma in season one,” and operating as a “parallel story” that is “under the same mythological umbrella.” Fear, apparently, is one of “two parts of the larger story in this world that [Kirkman] has created.”

The Darabont vs. AMC litigation is still in its pre-trial stages, and it may still settle out of court. Whether AMC is liable is yet to be determined, and the same goes for whether Fear the Walking Dead is a derivative work of The Walking Dead. Regardless of the outcome, this author will be avoiding people shambling around demanding brains – or setting their own imputed licensing fees.