The Coronavirus Aid, Relief and Economic Security Act (the CARES Act) created the Paycheck Protection Program (PPP), pursuant to which certain taxpayers are eligible to obtain low-interest loans to enable continued operations during the coronavirus pandemic. If a taxpayer spends the PPP loan on certain enumerated expenses, including, among other things, payroll costs and rent, all or a substantial portion of the PPP loan will be forgiven. Participation in the PPP, however, has some critical tax impacts that should be considered. Below is a summary of some of such tax impacts:
The Circuit Court for the City of Richmond, Virginia, recently quashed plaintiff Marathon Resource Group, LLC’s subpoena to a journalist regarding a voicemail she received during the course of an investigation into Marathon’s business practices. See Marathon Resource Group Management, LLC v. Fresh Cuts Lawncare, Inc. et al., Richmond City Circuit Court, Case No. CL 19-5973 (the Order)
In the underlying litigation, Marathon had sued Fresh Cuts Lawncare, Inc. and its owners (collectively “Fresh Cuts”) regarding, among other things, statements made by Fresh Cuts in news reports and via a Facebook page that Marathon had engaged in unfair business practices and failed to pay invoices. Marathon claimed that the purported defamatory statements were harming its business and subpoenaed journalist Kerri O’Brien, of the Richmond affiliate of ABC News, who had obtained statements from Fresh Cuts and others in the course of her investigative report about Marathon’s business practices. Marathon’s subpoena specifically sought to obtain a voicemail recording from O’Brien, which Marathon claimed would substantiate the publication element of its defamation claim against Fresh Cuts. See Order at 2. Continue Reading Court Quashes Subpoena to Investigative Journalist
A California federal court recently dismissed the majority of the counterclaims asserted by the Writers Guild of America (the Guild) against William Morris Endeavor Entertainment, Creative Artists Agency, and United Talent Agency (the Agencies) in a highly publicized suit over the Agencies’ right to receive “packaging” fees.
The case arose from the Guild’s decision last year to prohibit talent agents from earning packaging fees on film and television projects. For decades, it was common practice for studios to pay talent agents “packaging” fees for acquiring and pooling talent (e.g., assembling writers, actors, and directors, as talent agencies have a substantial roster of such talent) for a given project. These fees frequently consist of a combination of license fees paid by studios for a project and a percentage of the project’s gross receipts. The Guild banned this practice last year, claiming that packaging fees create conflicts of interest between talent agents and the writers they represent. In the Guild’s view, enabling talent agents to participate in the profits of a film or television project through packaging (1) lowers production budgets (thereby reducing writer compensation) and (2) lowers the agents’ incentive to increase their writer-clients’ compensation. The Guild favors a commission-based system, where a talent agent takes a percentage of their clients’ earnings, which it believes better incentivizes talent agents to maximize their writer-clients’ compensation. Following the Guild’s ban, the Agencies filed suit, alleging the packaging prohibition amounts to an illegal group boycott in violation of the Sherman Act. Continue Reading Counterclaims on the Cutting-Room Floor: How a Central District Court Cut Down the Writers Guild’s Countersuit Against Hollywood’s Talent Agencies
Fortnite: Battle Royale (Fortnite), the highest-earning game in 2019 at $1.8 billion, continues to drive the world of esports.1 Epic Games, its development company, provided $100 million in cash winnings for its summer World Cup, the finals for which took place at Arthur Ashe Stadium in July. The Sunday finale of the event was, according to Epic, the most-watched competitive gaming event (excluding China) of all time. 2 Part of the Fortnite game’s success is due to its creative and memorable celebratory dances known as emotes. Many of these emotes, often inspired by real-world examples from movies, TV series, and social media, enjoy a life beyond the game, as celebrities perform them and athletes use them to celebrate goals and victories.
This high level of success and popularity has inevitably also made the game an inviting target for litigation. In the past eighteen months, several cases have been brought against the company regarding some of the game’s most popular emotes. These cases provide insight for gamers and game developers into potential claims they may face and how to appropriately clear rights and avoid claims.
The Los Angeles County Superior Court recently granted an anti-SLAPP motion brought by the defendant, MBC Broadcasting, Inc. (MBC), in a defamation suit based on news broadcasts by MBC. MBC broadcast four news stories regarding allegations of improper corporal punishment and child abuse at Young Youth Core Academia (YYCA), an after-school academic program for children owned and operated by Helen Byon in the Koreatown area of Los Angeles. Following the broadcasts, Ms. Byon and her son (Plaintiffs) sued MBC for alleged defamatory statements. MBC subsequently filed a special motion to strike Plaintiffs’ claims pursuant to California Civil Procedure Code section 425.16, California’s anti-SLAPP statute.
Courts engage in a two-step process when considering an anti-SLAPP motion. On prong one, the defendant is required to make a “prima facie showing” that the plaintiff’s causes of action arise from a protected activity, which includes the defendant’s right of petition or free speech in connection with a public issue. Once the defendant makes a prima facie showing, the court proceeds to prong two. There, the burden shifts to the plaintiff to demonstrate a reasonable probability of prevailing on the merits of the complaint.
The Court first held that MBC satisfied prong one because “news reporting on the serious topic of child abuse is an exercise of speech concerning an issue of public interest.” Therefore, MBC’s broadcasts constituted protected activity under section 425.16.
As the entertainment industry continues to adjust to a new normal, a largely forgotten provision of the Internal Revenue Code may provide welcome relief to both entertainment businesses and their employees during these uncertain times. The provision would allow individuals to receive tax-free payments from their employers while still giving employers the benefit of a deduction for such payments. The tax relief in question hearkens back to an earlier national crisis: following the September 11 terrorist attacks, Congress passed the Victims of Terrorism Tax Relief Act of 2001, which was intended to provide federal tax relief to victims of national disasters. Among the tax provisions to stem from this legislation was Internal Revenue Code Section 139 (Section 139).
Section 139 permits individuals to exclude from gross income for federal income tax purposes payments from any source (including an employer) that are qualified disaster relief payments. Qualified disaster relief payments include, among other things, payments and reimbursements for reasonable and necessary medical, personal, family, living, or funeral expenses that are incurred by an individual as a result of a qualified disaster and not otherwise compensated (e.g., by insurance). Significantly, employers are able to deduct such payments for federal income tax purposes. Section 139 payments are also not subject to any federal withholding obligations and, therefore, do not need to be reported on a Form W-2 or 1099.
Eric Wedgewood (creator of a once-popular meme account on social media) sued The Daily Beast Company LLC (Daily Beast) for defamation, false light, and intentional infliction of emotional distress (IIED). On March 11, 2020, the U.S. District Court for the Northern District of Illinois granted the Daily Beast’s motion to dismiss the complaint. See Wedgewood v. The Daily Beast Company LLC, No. 19 C 3470 (N.D. Ill. Mar. 11, 2020).
According to the Daily Beast article (see infra), Wedgewood has used many pseudonyms over the years, including the pen name Heiko Julien. On April 14, 2018, an anonymous user (not Wedgewood, but using the handle @HeikoJulien) began posting screenshots of direct messages that Wedgewood had allegedly sent to underage girls through a social media account. After eight days, the anonymous account was shut down.
Two weeks later, on April 25, 2018, the Daily Beast published an article titled “‘He Started Messaging Me When I Was 16’: Female Memers Slam ‘Content Zone’s’ Creator,” referring to Wedgewood. The article quoted two anonymous women who claimed that Wedgewood sent them inappropriate messages while they were underage, and it reported that Wedgewood had shut down his accounts after being accused of sending inappropriate messages to underage girls.
The Coronavirus, Aid, Relief, and Economic Security Act (the CARES Act) provided the largest economic stimulus in American history in hopes of combating the economic effects of COVID-19. $349 billion was set aside for the Paycheck Protection Program (PPP), which provides loans, sometimes forgivable, to eligible small businesses. As we noted earlier, many production companies and other businesses in the entertainment industry will likely qualify to receive funds under the PPP.
But what if a company does not qualify for a PPP loan? For example, larger entities ultimately might be ineligible because of the 500-employee cap for eligible businesses. For these companies that cannot access PPP funds (or choose not to), the CARES Act provides alternative potential payroll tax relief.
The CARES Act creates a fully refundable payroll tax credit, the Employee Retention Credit (ERC), for eligible employers that do not receive a PPP loan. Companies entitled to an ERC will be able to use federal employment taxes, including withholdings, that such companies should have otherwise remitted to the IRS to fund “qualified wages” (defined below). Notably, if a company determines that its ERC will exceed qualified wages, it can request an advance of the credit from the Internal Revenue Service (IRS) through IRS Form 7200.
On March 4, 2020, Arnold Schwarzenegger (through his company, Oak Productions, Inc.) filed a lawsuit in a California state court against ASAP Group, LLC (doing business as Promobot). See Oak Prods., Inc. v. ASAP Grp., LLC, No. 20SMCV00347 (Mar. 4, 2020). According to the complaint, Promobot manufactures customizable service robots that can be made to look like real people, and it has “made Schwarzenegger the unwilling ‘face’ of Promobot” by marketing a robot made in the former governor’s likeness without his permission.
Specifically, Schwarzenegger’s complaint lists four causes of action, based on (1) California Civil Code section 3344; (2) common law right of publicity; (3) unjust enrichment; and (4) unfair business practices (i.e., likelihood of confusion regarding whether Schwarzenegger has endorsed Promobot). And although the case is still in its infancy, it is worth noting that this is not the first time a celebrity has brought right of publicity claims against the use of a robot that resembles her or him.
On March 27, Congress passed H.R. 748 – the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act). The entertainment industry, like the rest of the country, now eagerly awaits the coming aid. As production companies and other entities wade through the provisions of the bill to discover their share of the benefits, they might notice that some of the stimulus will arrive in the form of favorable changes to tax laws.
For example, one major piece of the CARES Act named the Paycheck Protection Program (the PPP) involves federally backed loans for qualifying “small” businesses that certify that the loan is necessary to support ongoing operations and will be used to retain workers and/or make defined overhead payments. The PPP further provides loan forgiveness for borrowed funds used to pay eight weeks of payroll and other qualified expenses. While businesses in the entertainment industry often do not conjure the words “small business” in our minds, many production companies, and other entities such as talent management firms, might ultimately qualify for these federally backed loans and subsequent forgiveness. For a deeper dive into the PPP provisions and who qualifies, see our earlier post.
Normally, debt forgiveness gives rise to taxable income. However, any loans forgiven through the PPP will be excluded from taxable income. Essentially, for a production company that qualifies, the federal government is not only offering free money to pay for certain expenses – it is offering tax-free money. It is unclear whether taxpayers can receive a double benefit by deducting expenses funded by a PPP forgiven loan. And, on a related note, states have not yet conformed to this exclusion, so the question remains whether any PPP debt forgiveness will give rise to taxable income in states such as California or New York. Production companies should stay tuned for the resolution of these issues.