Inside the Matrix Lawsuit: AT&T Lights One Last Legal Fire

The Matrix
Courtesy of WarnerMedia
Matthew Belloni
February 10, 2022

When a particularly explosive lawsuit is filed, entertainment attorneys love to forward it around to friends and colleagues to discuss. Back in my own lawyering days, I remember the chatter when Metallica dropped a bomb on Napster, and when producer Bob Yari sued for a credit on the Oscar winner Crash. So many Hollywood disputes are hashed out confidentially that when a big one hits the public docket, everyone wants to see what creative punches were thrown and how they might land. It’s litigation as a spectator sport; the nerdiest possible version of sitting ringside at a UFC fight.

That’s happening this week over a blockbuster Monday filing against Warner Bros., which you don’t need to forward to me since I’ve now received it many, many times. That’s because the suit represents the dramatic implosion of a 25-year financial partnership between Village Roadshow—the production company that is backed by the private equity firm Vine Alternative Investments—and Warners, a legacy studio that has funded 91 movies (everything from The Matrix to Joker) with about $4.5 billion of Village Roadshow’s money. And it’s also because the dispute centers on Warners’ recent trashing of its traditional business practices to serve its HBO Max streaming service, and how that paradigm shift impacts powerful partners like Village Roadshow. 

In some ways, this lawsuit might be considered the culmination of AT&T’s brief, but impactful (many say disastrous) ownership of WarnerMedia. Like the chaos-inducing firing of Jeff Zucker at CNN in New York, the public airing of Village Roadshow’s grievances seems like a West Coast kiss-off to AT&T, just weeks before C.E.O. John Stankey hands off the company to Discovery. You’re welcome, David Zaslav.  

So let’s break it down. Most news headlines focused on the straightforward claim over The Matrix Resurrections, a Village Roadshow-backed title that Warners debuted both in theaters and on HBO Max in December to terrible box office. Adjusted for inflation, the first three Matrix movies grossed $783.2 million, $1.1 billion, and $645.7 million. Resurrections, on the other hand, did just $148.7 million on a nearly $200 million production budget. Ouch. Sure, Omicron played a role, but that’s an astounding drop-off—especially when Spider-Man: No Way Home, released the same weekend only in theaters, has done $1.8 billion. People were fine braving Covid for a big-budget franchise blockbuster, just not one they could watch at home.  

Warners argues that streaming wasn’t the culprit, that Resurrections flopped globally, not merely in the U.S., the only market where it was available on HBO Max. But that minimizes the huge impact of piracy. It’s become pretty clear to studio and theater executives what every Comic Book Guy in his adult Underoos already knew: Putting a pristine copy of a first-run movie online—especially a heavily marketed tentpole like Matrix—dramatically increases digital theft of that movie worldwide. As Alejandro Ramírez Magaña, C.E.O. of the Mexican theater chain Cinépolis, explained last summer, “Pirates are making a lot of money with day-and-date releases.” By contrast, Warners’ Dune was released theatrically in many territories before it appeared on HBO Max, and it did fine internationally.  

Village Roadshow argues that the HBO Max gambit essentially destroyed the value of its franchise, so it has refused to pay Warners its share of the budget—about $100 million, I’m told. Warner Bros. lawyer Dan Petrocelli calls that a clear breach of contract, which is why Warners actually filed an arbitration claim last week seeking the money (and attempting to keep the dispute private). But Village Roadshow says it’s refusing to pay because WarnerMedia C.E.O. Jason Kilar decided to dump the movie on Max to boost subscriber numbers without negotiating a fair buyout, or even telling its leaders in advance. Remember when Kilar said he’d atoned for that lack of communication by making his 2021 movie partners whole? Turns out, not all of them. 

If this sounds familiar, it’s basically a better version of Scarlett Johansson’s claim against Disney over Black Widow. There, the studio was alleged to have interfered with Johansson’s contract by diverting the movie to Disney+ and sabotaging her box office bonuses. A good argument, and Disney—also repped by Petrocelli—quickly settled the case. Here, Village Roadshow C.E.O. Steve Mosko may not be a famous movie star, but he has a direct lawsuit because Village Roadshow co-owns the movie. Since the beginning of the partnership, Village Roadshow isn’t just a passive participant on these movies. It risks millions of dollars precisely in exchange for a pre-negotiated share of ownership. That’s much more favorable positioning.

The co-ownership is key here, and it makes Warners’ behavior potentially more problematic. It also brings us to the more interesting—and far-reaching—aspect of this lawsuit. Village Roadshow is claiming Warners has decided to systematically change how it treats its partners—to the detriment of those partners, of course. Specifically, it is denying Village Roadshow a chance to participate in HBO Max series adaptations of several movies the company co-owns.

Consider the example of Edge of Tomorrow, the 2014 sci-fi movie starring Tom Cruise that Village Roadshow backed. It was in development as a series—until Village Roadshow asserted its rights, and then it wasn’t. Thanks to its co-ownership, the company maintained so-called “derivative rights,” meaning that, with certain limitations, it would also be a co-owner of a series adaptation, a fact that Warners acknowledged—until it didn’t. Here’s studio V.P. Dave Brown in an email to Village Roadshow general counsel Kevin Berg:

“In our initial conversation I confirmed that we recognize Village Roadshow’s rights but are unable to proceed on any project with Village Roadshow as a co-financier. However, our desire is to develop this title (and others) and are hopeful that Village Roadshow is comfortable functioning as ‘producers’ on the project. If VR is unwilling to make any deal unless co-financing, please advise.”

Sure, you’re a co-owner, but not if you want this show to actually get made. Just be a “producer” (I love the air quotes here) and accept a much smaller fee without any ownership. Berg responded that Village Roadshow wasn’t willing to waive its rights, so Brown responded with a swift middle finger: “Given VR’s unwillingness to waive its right to co-finance, as discussed in our initial conversation, we will forgo further development on this title.” Translation, as alleged in the complaint: “If Village Roadshow won’t give up its rights, WB will make sure they are worth nothing.”

To be fair, Warners argues that the entire model for deals has changed in the streaming age, and thus the relationships with its partners need to change too. So when Warners proposed that new model for Edge of Tomorrow and Village Roadshow said no, it simply scrapped the project, as is its right. That’s the argument, at least.

This kind of aggressive strong-arming actually isn’t new, nor is it unique to WarnerMedia. In fact, on this front, Kilar is actually lagging behind Disney, which has been using its scale and leverage to squeeze partners into relinquishing rights. Talent lawyers constantly complain about existing deals that are “revisited” to worsen terms, especially when the company is raiding its library for titles to adapt for Disney+. Many of those titles come with expensive backends and other rights obligations, and Disney is sometimes leveraging the “streaming wars”—higher volume of production, fewer opportunities to recoup expenses through multiple platforms—as an excuse to change the terms. Not amenable? Disney has no problem using the threat of walking away like Thor’s hammer.

Similarly, Warners has been arguing that the economics of streaming are changing the value calculus and rendering deals like the Village Roadshow arrangement “antiquated.” Tough shit, you might say, but many people go along with requests like this because the alternative might be no project at all. After all, Warners makes the decision about whether to make or not make something. And it might just be that the studio would prefer not to have co-owners. Indeed, in talking to a couple people who have done deals with Kilar’s team, they say that’s been his stated preference. (Warners declined to comment on that.)

But again, in Village Roadshow, Kilar is up against an actual co-owner, not just a profit participant. And it clearly isn’t afraid to litigate to enforce its rights.  

That clash is also leading to absurd legal posturing. On that front, congrats to Wayne Smith, Warners’ head of legal affairs, whose work I’m officially inducting into the Bullshit Lawyer Letter Hall of Fame. According to its contract, Village Roadshow’s “derivative” rights apply when a follow-up project is a “clear continuation of the story of the Prior Production, whether as a prequel or a sequel.” Simple, right? Yet Smith, in a June 14 missive to Village Roadshow, claimed that Wonka, the upcoming prequel to 2005’s Charlie and the Chocolate Factory starring Timothee Chalamet as young Willy Wonka, is somehow not a derivative work because, among other things, the origin story of the Oompa Loompas is different. Warning: extremely dumb spoilers ahead:

In Wonka…Willy picks cocoa beans owned by the Oompa Loompa tribe without knowing of the Oompa Loompas’ existence, believing the beans are free for the picking. A particular Oompa Loompa whose job is to guard the beans is asleep on the job. He is subsequently compelled by his tribe to stalk Willy and steal back enough chocolate such that the theft is compensated a thousand‐fold. In contrast, in Charlie, Willy does not meet the Oompa Loompas until after his factory is already established. Willy is traveling the world in search of exotic flavors/ingredients when he happens upon the Oompa Loompas. The Oompa Loompas crave cocoa beans to make their slimy green food taste better. Willy strikes a deal with the Oompa Loompa Chief to employ them in his factory in exchange for payment in beans. In addition to these narrative differences, in Wonka the Oompa Loompas will also be depicted very differently than they were in Charlie.

OK then, case closed! This would be funny if it weren’t so potentially damaging for any rightsholder that is partnered with Warner Bros. That’s a lot of co-financiers, everyone from Legendary Pictures to Bron. Kilar’s team has already angered some of those partners, including Village Roadshow, by licensing content to HBO Max on terms that they believe are below market. Berg, the Village Roadshow lawyer, wrote: “…Just as disconcerting is the fact that we believe that this Edge of Tomorrow television series, which is highly valuable content, will be distributed on the HBO Max platform for either no fee or at a significantly less than market value fee, which further de-values Village Roadshow’s interest in this property.”

HBO Max denies that it licenses content at below market rates, but what is the market? According to one executive who has done deals with Warners, the argument has been that HBO Max has many fewer subscribers than, say, Netflix or Amazon Prime, so it should pay less than those platforms. But, at least in the opinion of its partners, that means it should be paying more to build up those subs, especially when each quarterly subscriber gain helps lift the company’s stock price. That’s an important dispute that impacts everyone in the creative value chain: Financiers, talent profit participants, even residuals recipients. “Our agreements with Warner Bros. explicitly require them to provide us commercially reasonable compensation for their use of the copyrighted films we co-own,” Mark Holscher, the former U.S. Attorney who is representing Village Roadshow, told me today. 

Holscher has handled a bunch of movie slate financing disputes, but this one is potentially the most influential because it hinges on the evolving business of streaming. Oddly, he is a former partner at O’Melveny & Meyers with Petrocelli and Warner Bros. general counsel John Rogovin.

I asked Petrocelli about that argument, and he focused on the big picture. “We’re in the midst of a complete transformation of the industry,” he told me. “Studio agreements universally provide that studios have the absolute right to put content on affiliated platforms. The question is, are they being priced in conformity with the agreements? And here, they are.”

Back before the AT&T regime took over, I doubt Warners would have tried to nitpick a 25-year partner using strong-arm tactics and Oompa Loompa nuances, but the Old Hollywood days of handshakes and great business models are gone. Streaming is brutal, and that’s where we are. I’m told that Jim Moore, the finance veteran who runs Vine, had several conversations with Kilar about these issues and never found a solution. Kilar’s priority is to build HBO Max, plain and simple, and he’s succeeding. Partners be damned.

Plus, Kilar is on his way out the door, of course. This week, Discovery’s Zaslav won approval from the Department of Justice to take over WarnerMedia, and a shareholder vote is scheduled for March 11. Meanwhile, Zaz has been back on the Warners lot in Burbank, exchanging more information, as allowed, and learning more about what he will inherit from the AT&T guys. Zaslav knows he’s taking on a couple burning dumpster fires on both coasts—CNN in New York, and disgruntled talent in L.A.—including a whole lot of people who have made great work for Warner Bros. and helped produce some of its biggest hits, but are angry at how they are being treated. Will he change course and try to fix those relationships?