Wednesday, February 20, 2008

Talent Managers and Two Sets of Supremes

The U.S. Supreme Court hears a tiny number of cases per year. Ditto the California Supreme Court. So, when someone feels wronged, and wants to take a case "all the way to the top," the hardest part of their job is just getting a Supreme Court - of either flavor - to even take the case. Actually winning the case is almost an afterthought.

Looked at in that light, Hollywood's talent managers have scored a double that actually amounts to two home runs. A U.S. Supreme Court case decided yesterday, joined with a California Supreme Court decision that's just a few weeks old, create a new world for managers.

The source of the managers' discontent has been the California Talent Agencies Act, which bars managers from procuring employment for their clients. That function is reserved by law to licensed talent agents -- but, in reality, managers do it every day as well.

That's what the client usually wants. But when disputes arise between manager and client, the manager would be caught in a vice: the California Labor Commissioner, which enforces the act, has frequently allowed the aggrieved client to recover all fees ever paid to the manager (or, at least, paid within the applicable statute of limitations), including fees that were unrelated to any procurement of employment. That gave the client enormous leverage.

Three weeks ago, the balance shifted: In Marathon v. Blasi, the California Supreme Court decided that a near-reflexive policy of disgorgement of all fees was not supportable. Instead, the Court stated that the doctrine of severability could be applied -- the prohibited aspects of the management agreement (procurement) could be severed from the permitted (advice, counseling and the like). Thus, the Court said, "For the personal manager who truly acts as a personal manager, however, an isolated instance of procurement does not automatically bar recovery for services that could lawfully be provided without a license."

That's not an unadulterated victory for managers, but it's pretty close. In practical terms, the client's nuclear weapon has been reduced to a mere handgun.

And now the U.S. Supreme Court has weighed in. In Preston v. Ferrer, decided yesterday by an 8-1 vote, the Court examined a management contract between a TV judge and his manager. The TV judge - who was formerly a real judge - alleged that the manager - who is also a lawyer - acted as an unlicensed talent agent (i.e., procured employment).

It goes almost without saying that both the entertainer-judge and manager-lawyer had lawyers of their own to argue the case before the Supremes -- judges who once were lawyers, and who are aided by law clerks, which is to say, elite law school graduates who are not yet practicing lawyers.

With all these lawyers in the mix, you might expect there'd be something interesting in the management contract, and there was: an arbitration clause, which provided that disputes regarding the contract would be heard by a mutually-selected private arbitrator, which implies that such disputes would not be heard by the Labor Commissioner. This provision favors the manager, since the Labor Commissioner tends to be pro-talent (as noted above), whereas a private arbitrator is usually an attorney (again!) and thus has a more corporate and "pay your fees" mindset.

So, on the one hand, we have a state law (the Talent Agencies Act) that provides that the Labor Commissioner handles disputes alleging that managers have acted as unlicensed talent agents, and on the other hand, we have a contract provision that says an arbitrator should decide. State law trumps contract, right?

Wrong. That's because there's a little-known federal law called the Federal Arbitration Act that establishes a national policy favoring enforcement of arbitration provisions in contracts. And, say the (federal) Supremes, that policy means that a contract can displace not only a court, but also an administrative agency (such as the Labor Commissioner) from jurisdiction over a dispute. In other words, federal law enables a contract to effectively trump state law.

The take-away for managers: include an arbitration clause in your management agreement. A severability clause is important as well. The take-away for talent: be sure your manager-to-be is reputable, and get the agreement reviewed by a lawyer before you sign.

The take-away for everyone else: what a tangled web arbitration has become! And btw, it's not clear to me whether yesterday's ruling undermines the California state court rulings I blogged a few months ago, which limited the enforceability of arbitration clauses against consumers, employees and other just plain folk. For more on this subject, take a look at the client alerts listed in the first paragraph of this item:

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