Jillian Michaels (born Jillian Leigh McKarus) is a well-known face and personality on our television screens. The personal trainer is known for her workout DVDs, commercials selling fitness equipment and her best-selling health books. However, what the exercise guru is most known for is her star-making appearances on NBC’s reality show The Biggest Loser. Michaels was the original host of the television show starting in 2004 and remained a member of the cast in some capacity until 2014. Michaels even went on to star in a spin-off of the show entitled Losing It With Jillian on the same network.
According to Fox News, in 2013 Lionsgate, the media company which distributes videos for select NBC programs, created a BeFit channel on Youtube which featured clips and videos of Michaels on The Biggest Loser. Therefore, Michaels and Lionsgate came to an agreement in which Michaels would create six workout videos for both DVDs sold in stores as well as video-on-demand offered both online and on Exercise TV, carried to approximately 21 million homes through Comcast, Time Warner Cable, and other cable providers. Lionsgate was granted significant distribution rights in perpetuity. Michaels received a $250,000 minimum guarantee and escalating royalties depending on the number of units distributed. She also gained the right to meaningfully consult with Lionsgate before content was distributed.
However, around 2014, trouble started brewing when Michaels began complaining how her videos were being featured for free on Lionsgate’s fitness YouTube channel. Michaels claimed that the YouTube streaming cannibalized the sales of her videos. After an ongoing fight with Lionsgate, Michaels brought her legal claim in April 2015. Her complaint stated several instances of cannibalization of her sales. For example; Lionsgate had a deal with Google that let it collect 55 percent of advertising revenue from BeFit, and unlike Exercise TV (which went out of business), no subscriptions to access the content were required. Lionsgate, according to the arbitrator’s findings of fact, began accounting for advertising revenues upon Michaels’ objection by incorporating them under the DVD sales line item. As of March 2016, Jillian Michaels had been paid $85,000 from BeFit. However, that wasn’t the focus of an initial 2012 audit related to her profit participation statement. The earlier accounting dispute settled in 2014.
In coming to a decision, arbitrator Bruce Friedman first determines that the audit settlement didn’t cover the claims over the BeFit videos. The arbitrator next looks to the “broad language” in the agreement to see whether Lionsgate was allowed to exhibit the fitness videos online through a VOD format without charging its viewers, thereby generating no royalties to Michaels in the process. Friedman writes that Lionsgate’s action was unreasonable.“Interpreting the Agreement as [Lionsgate] suggests would confer no direct financial benefit on Michaels and in fact, potentially have a negative effect on her brand, in that offering content for free can lead consumers to believe that [her] brand no longer holds premium value and diminishes their willingness to pay for content, according to Michaels’ experts,” he writes. “It defies logic that she would agree to create content for [Lionsgate] that would ultimately be given away for free, preventing her from being compensated under the Agreement and potentially hurting her brand… [H]ad Michaels been an up-and-coming fitness personality, it may have made sense to offer certain content for free to build up interest in her brand. However, Michaels was already an established celebrity.” The arbitrator then posits that it’s implausible that Michaels’ agents and lawyers, compensated through commissions, would accept a deal that would negatively affect their client and their bottom line. He rejects Lionsgate’s argument that the streaming served as promotion and that “click-throughs” contributed to sales on Amazon. He also points out how Lionsgate began paying her royalties on advertising revenue even though it arguably had no obligation under the terms of the agreement.Lionsgate not only is deemed as violating the contract but also as breaching the covenant of good faith and fair dealing. Rather remarkably, Friedman not only awards Michaels past lost profits and orders Lionsgate to remove the fitness videos from BeFit, but the arbitrator also awards future profits, holding that “just as it took time for BeFit to become popular with consumers and begin to have a significant effect on the DVD sales of the Fitness Videos, it is logical that it would also take time to rebuild consumer interest in purchasing content that the market was once able to access for free.” It’s likely there have been other decisions in arbitration like this one on how digital exploitation can cannibalize a market and undercut a royalty deal, but such disputes are often kept secret. The arbitration process also confers little precedential value, it should also be noted, though Lionsgate could attempt to bring the decision to an open court for review. In the meantime, the award (see here in full) should provide a shot of confidence to talent in digital accounting claims and invite discussion about the benefits and drawbacks of newer digital platforms. Finally, it’s a reminder that solid legal counsel can mean a million dollar difference.