Trial court denies motion to dismiss claim by producers of AMC’s The Walking Dead that network breached implied covenant of good faith and fair dealing by crafting formula for modified adjusted gross receipts so as to deprive producers of profit participation income, and rules that plaintiffs adequately alleged punitive damages.
Producers of AMC’s The Walking Dead, Fear the Walking Dead and Talking Dead largely survived a new challenge to their third amended complaint in their years-long lawsuit against the cable network and other defendants in a contract dispute primarily related to the calculation and payment of contingent compensation. Plaintiffs filed their suit in 2017, alleging that AMC breached its contracts by not paying the producers their fair share of contingent compensation derived from the shows’ modified adjusted gross receipts (MAGR). The dispute centers around the fact that, at the time the producers and AMC entered into the agreements, the definition of MAGR had not been agreed upon and, plaintiffs allege, AMC later unilaterally imposed a definition that was unfavorable to the producers. In early 2020, prior to the COVID-19 pandemic, the court held a mini-trial on seven issues of contract interpretation, resulting in a July 2020 decision in favor of AMC on all seven issues, including a holding that AMC’s MAGR definition is binding. (Read our earlier coverage of this case here.) Plaintiffs filed their third amended complaint in May 2021, asserting new legal theories and causes of action for breach of the implied covenant of good faith and fair dealing and intentional interference with contractual relations, among other claims. AMC demurred to those two causes of action and moved to strike various aspects of the third amended complaint.
Addressing the demurrer to plaintiffs’ claim for breach of the implied covenant of good faith and fair dealing, the court construed the claim to allege two separate causes of action. The first was that AMC “knew they had a unilateral right to craft the MAGR term, waited until the success of The Walking Dead was well-established to develop the MAGR term, and specifically crafted a MAGR term to ensure [p]laintiffs did not recover under the known circumstances.” The court construed the second breach of implied covenant claim to be that AMC intentionally structured the arrangement between AMC Studios and AMC Network to broadcast the show in such a way as to deprive plaintiffs of the benefits of an affiliated transaction provision in the contracts. According to the court, under New York law, which governs the contracts, the implied covenant of good faith and fair dealing is breached when “a party to a contract acts in a manner that, although not expressly forbidden by any contractual provision, would deprive the other party of the right to receive the benefits under their agreement.”
Turning first to the breach of the implied covenant claim relating to AMC’s setting of the MAGR definition after The Walking Dead had proven to be a success, AMC argued that the contracts expressly gave it the right to define MAGR according to AMC’s “standard definition” of MAGR. The court was not persuaded, however, as it found that the MAGR definition did not exist at the time of contracting and was instead defined after the first successful season of the show aired in 2010. The court also rejected AMC’s argument that plaintiffs were attempting to alter the terms of the contract to make the MAGR definition more in line with industry standards, finding that plaintiffs had not made that claim. Rather, the court found plaintiffs’ allegations to be that AMC knew it had a unilateral right to determine the MAGR definition, and that it intentionally crafted a definition that would work to AMC’s benefit and plaintiffs’ detriment. Under New York law, a party holding a unilateral right under a contract can breach the implied covenant of good faith and fair dealing when it uses that power to impose excessive fees on the other party or when it exercises that right “malevolently, for its own gain as part of a purposeful scheme designed to deprive plaintiffs of the benefits of the contract.”
Finding that plaintiffs had properly alleged such conduct by AMC, the court overruled AMC’s demurrer on the breach of implied covenant claim relating to the MAGR definition. However, the court—being in the unique position of ruling on a pleadings-stage demurrer while having conducted a mini-trial in this matter—noted that even though plaintiffs won this battle on the demurrer, AMC would be able to challenge plaintiffs’ allegations on summary judgment or at trial and put forth evidence showing that AMC used the same MAGR definition in other contracts, potentially demonstrating that AMC did not craft the MAGR definition here to deprive plaintiffs of the benefits of their contracts.
On plaintiffs’ second cause of action for breach of the implied covenant, the court examined the sufficiency of plaintiffs’ allegations that AMC Studios and AMC Network never entered into any agreement regarding the airing of the shows, allowing AMC “to claim that there was no ‘transaction’ between AMC Studios and AMC Network with the result that the affiliated transaction provisions of those contracts would not apply.” AMC argued that it wasn’t trying to avoid the application of the affiliated transaction provisions in the contracts, because, as the court had previously ruled at the contract interpretation mini-trial, the affiliated transaction provisions would not be triggered by the transfer of rights from AMC Studios to AMC Network. Plaintiffs argued that New York recognizes breach of implied covenant claims where a party structures a transaction to avoid a contractual provision, but the court disagreed, relying on its prior holding that the affiliated transaction provisions would not govern the calculation of MAGR, and that plaintiffs were not therefore deprived of anything. Accordingly, the court sustained AMC’s demurrer to this cause of action.
AMC also demurred to plaintiffs’ cause of action for intentional interference with contractual relations. The parties disagreed whether New York or California law should apply; while the two states have similar elements for an intentional interference with contractual relations cause of action, New York is distinct in that it provides for a defense to the claim when there is a shared economic interest between a party to the contract and the alleged interferer with that contract, such as with a parent and subsidiary company. AMC argued that New York’s economic interest defense should apply because AMC is based in that state and because the contracts with plaintiffs are governed by New York law. However, the court undertook a choice of law analysis after stating that tort claims aren’t subject to contractual choice of law provisions, and determined that—because the alleged tortious conduct occurred in California, plaintiffs are California residents, the contracts were largely negotiated and performed in California, and AMC regularly does business in California—California law would apply. Because AMC could not therefore obtain the benefit of New York’s economic interest defense, the court held that plaintiffs sufficiently pleaded the intentional interference cause of action, and overruled AMC’s demurrer on that claim.
The court then turned to AMC’s motion to strike certain aspects of plaintiffs’ third amended complaint. AMC moved to strike a footnote from the complaint that it claimed to be improperly reserving appeal rights on dismissed claims. The court found the parties’ arguments to be misdirected, as the appellate court determines what is subject to appeal. In any case, the court granted the motion, because it determined the footnote to be “irrelevant matter” within the meaning of Code of Civil Procedure Section 436(a). AMC also moved to strike allegations regarding audits of distribution revenues, but the court denied the motion, finding that those allegations were not new to the third amended complaint and that AMC was barred from moving to strike what it could have moved to strike from an earlier version of the complaint. Finally, the court denied AMC’s motion to strike plaintiffs’ requests for punitive damages, finding that plaintiffs had sufficiently pleaded facts demonstrating that AMC acted with an intent to injure plaintiffs and in conscious disregard of their rights.
Summary prepared by Tal Dickstein and Kyle Petersen