Here is the full text of both Mr. Wilson and Mr. Bowers attorney’s letter to SAG! And the 11 page response of SAG’s “Outside” Council Bredhoff & Kaiser of Washington, D.C! (Read the Article in the preceding post that questions how “Outside” B&K really are)
February 12, 2004
BY FACSIMILE TO (323) 549-6095 & U.S. MAIL
Mr. David P. White
Screen Actors Guild.
5757 Wilshire Blvd.
Los Angeles, CA 90036-3600
Dear Mr. White:
Thank you for your letter of February 9, 2004 regarding my clients’ concerns as to Mr. Pisano’s apparent conflict of interest arising from his position as a director of Netflix and your statement that the Guild is reviewing the situation.
In connection with this review, certain additional matters appear significant to us.
First, the Prospectus for Netflix’s initial public offering and its most recent annual report (2003 SEC Form 10-K) represent that labor relations with the studios could materially affect Netflix’s business. In the part of the Prospectus and the 2003 10-K that discusses risk factors, in the subsections entitled “We depend on studios to release titles on DVD for an exclusive time period following theatrical release,” Netflix states (Prospectus at pp. 10-11; 2003 10-K at p. 27) (emphasis supplied):
“In addition, any conditions that adversely affect the movie industry, including * * * strikes, work stoppages or other disruptions involving writers, actors or other personnel, could adversely affect the availability of new titles, consumer demand for filmed entertainment and our business.”
We believe that this is a candid admission of the conflict of interest we have noted. Mr. Pisano’s duty to Netflix would include a duty to avoid the occurrence of the adverse risk factors Netflix notesincluding the adverse effect of a strike, work stoppage or other disruption by actors. In negotiating on behalf of the Guild, however, Mr. Pisano must consider whether a strike, work stoppage or other disruptive tactic would be in the members’ best interest in securing favorable contract terms with the studios. Mr. Pisano cannot, obviously, serve two masters with contrary interests on this central and important matter.
Second, as you know, section 5.2 of the Basic Agreement with the studios governs actors’ right to residual payments on DVD sales. Residual payments are based on either 20% of the gross receipts if the producer is the distributor or the distributor is owned or affiliated with the producer (section 5.2.E(3)(a)) or 100% of the fees received by the producer from licensing the right to distribute the picture (section 5.2.E(3)(b)).
According to Netflix’s annual report (2003 SEC Form 10-K), Netflix acquires DVD’s from the studios under revenue sharing agreements that provide for an up-front payment and a percentage of net revenues generated by each particular title over the following 12-month period. See 2003 10-K, pp. 7, 12, and 13. Netflix has described this arrangement as a “license fee.” 2003 10-K p. 12. In addition, in 2000 and 2001, in connection with the signing of revenue sharing agreements with major studios, Netflix issued these studios convertible preferred stock that, when Netflix went public, converted into 1,596,415 common shares. 2003 10-K p. 13. Since that conversion, Netflix stock has split two-for-one as of early February 2004, increasing this holding to 3,138,830 shares. This represents approximately $220,000,000 at Netflix’s current stock price.
My clients are concerned whether the Guild has collected all residuals due actors from the arrangements between the studios and Netflix and whether Mr. Pisano’s relationship with Netflix may have compromised the collection of residuals. In particular:
(a) Is the Guild collecting residuals on the basis of the 20% gross revenue applicable where producers are distributors or owners of distributors, or the 100% gross revenue where the revenue is derived from a license fee?
(b) Is the Guild collecting residuals on the subsequent payments or just the initial up-front payment under the revenue sharing agreements?
(c) Has the Guild collected any residuals on the stock transaction, as this transaction appears to be part of or related to the revenue sharing agreements with Netflix and therefore includable in the producers’ gross receipts from the DVD sales? Under the residual formula in the Basic agreement, the residual payment on the current value of this stock would be over $2 million under the formula based on 20% of gross receipts where the distributor is owned or affiliated with the studio and almost $12 million under the formula based on 100% of gross receipts applicable to licensing arrangements.
Third, your February 9, 2004 letter states the conflict of interest issues “were fully disclosed and examined by the National Board of Directors when Mr. Pisano was first considered for his position at the Guild and when his contract was recently renewed.” However, as you are aware, my clients have attempted to obtain the minutes of the Board meetings where this disclosure and examination supposedly occurred. They have been told that there are no minutes for any meeting and that no minutes will be available for them to review until the Board approves the minutes sometime in the future, even though it is now several years since the Board’s actions occurred. They have been provided only with a document entitled “Summary of Actions” for the September 10, 2001 meeting that refers to an executive session in which there apparently was a discussion of a proposed contract for the NED/CEO. Although my clients have also requested the tape recordings made of the Board meetings, the Guild has declined to provide the tape recordings as well.
The California Corporations Code requires corporations to maintain written minutes (Corp. Code 8320(a)(2), (b)) and to make written minutes available to members upon written request. Corp. Code 8333. If minutes are not maintained in written form, a corporation does not comply with an inspection request until a written document is prepared and provided. Corp. Code 8310.
Under these provisions of law, the Guild cannot frustrate my clients’ interests in this matter, including verification of the representations made in your letter of February 9, 2004, simply by failing to create the written minutes the Guild is required to maintain. A delay of years in producing these minutes is patently unreasonable and obvious non-compliance with the statutory requirements.
Given the lack of any written records, your statement that the issues were disclosed and examined would appear unsupportable. The “Summary of Actions” that the Guild suppliedapparently its only written record on this issuedoes not support your statement that the conflict of interest issues were disclosed and examined. This document contains no record of any action on Mr. Pisano’s proposed contract, no record of any disclosures or examination of conflict of interest issues and no record of any vote to approve any contract or to retain Mr. Pisano notwithstanding potential conflicts of interests. There is also no record that the Board obtained or considered any legal advice on this issuealthough I understand that President Gilbert has asserted publicly that the Guild did receive a legal opinion on this issue before hiring Mr. Pisano.
Accordingly, please consider this letter a renewed demand for the minutes of any meeting at which Mr. Pisano’s role in Netflix was disclosed and examined by the Board. To the extent that the only record of Board meetings are the tape recordings, then this request includes these recordings as they are apparently the only documents that exist and could constitute the relevant “minutes.” Given your assurance that this disclosure and examination occurred, I trust that you can provide appropriate written or recorded documentation supporting the Guild’s assertions.
I look forward to your prompt response to the foregoing questions and concerns.
Very truly yours,
KATZENBACH AND KHTIKIAN
Christopher W. Katzenbach
And here’s the response:
Screen Actors Guild
5757 Wilshire Blvd.
Los Angeles, CA 90036-3600
Dear President Gilbert:
You asked for our opinion on the question whether Title V of the Labor Management Reporting and Disclosure Act (“LMRDA”) prohibits Robert Pisano (“Pisano”), SAG’s National Executive Director, from representing SAG in collective bargaining with the AMPTP because he currently serves on the Board of Directors of Netflix, Inc. (“Netflix”) and on the Advisory Board of Cinema Entertainment Group (“CEG”). In reaching our opinion, we have reviewed the original 2001 Employment Agreement between SAG and Pisano, the 2004 Successor Agreement, SAG’s Constitution, SAG’s collective bargaining agreement with the AMPTP, various SEC filings by Netflix and the January 30 and February 12, 2004 letters from the law firm of Katzenbach and Khtikian, attorneys for SAG members Scott Wilson and Tom Bower “demand[ing” that the SAG Board of Directors take immediate action to prohibit Robert Pisano from representing the SAG members in the upcoming collective bargaining agreement [sic] and take all necessary action to ensure that he has no further involvement in those negotiations.” We have also interviewed Pisano concerning the facts related to his corporate relationships and various SAG staff members and retained professionals. Finally, of course, we have reviewed the law developed under Title V and other labor “conflict” statutes as well as law related to the fiduciary duty of corporate directors. Based on this review of the relevant facts and the law, it is our opinion that Title V does not disqualify Pisano from representing SAG in this capacity. We explain our reasoning below.
I. Pisano’s Employment by SAG
Pisano’s relationship to Netflix was never a hidden one; to the contrary, it was fully disclosed and the implications of that relationship fully considered by SAG from the outset of his employment.
In connection with his application for employment, and as required by Section 4 of his Employment Agreement, Pisano provided a disclosure of the financial interests he held in companies involved in the entertainment industry. Included in that disclosure was the following description of his holdings in, and relationship to, Netflix and CEG:
NetFlix.com (privately held). Executive holds 100,000 incentive stock options as compensation for his service as a member of the Board of Directors. The options expire June 2010. NetFlix is in the business of online rental of DVD’s. There is no market for the shares and the value is indeterminable.
Cinema Entertainment Group (Scene TV) (privately held). Executive holds 35,000 shares of Common Stock acquired (in 2000) at a cost of $25,000. He also holds options to acquire 7,000 shares (as compensation for his service as a member of the Board of Advisors), which expire in August 2005. Scene TV is a start-up in the business of delivering digitally tiered programming services on cable, satellite, and the internet featuring scenes from movies for promotional purposes. There is no market for the shares and the value is indeterminable, and the total number of shares represented by the interest is less than 1% of the total outstanding stock issued by Cinema Entertainment Group.
That disclosure statement was provided to William Daniels, SAG’s President, and to SAG’s regular outside labor counsel who under the terms of the Agreement was to opine whether Pisano’s relationships described in the disclosure constituted a conflict of interest with his responsibilities as Executive Director. Counsel reviewed that matter, concluded that there was no conflict and so advised the SAG Board of Directors and the Agreement was approved by the Board at a meeting held on September 10.
SAG hired Pisano effective on September 11, 2001. His responsibilities to SAG (which we describe as appropriate below) were to be “exclusive” except that he was permitted to serve on boards of both non-profit and for-profit entities and to hold and manage investments in certain defined circumstance. Specifically Section 2.(i) of his employment agreement provides:
Executive’s services shall be exclusive to the Guild. Executive shall devote his best efforts and substantially his full business time to the services to be performed hereunder. Executive may serve on the boards of non-profit organizations and, with the approval of the National Board, on boards of directors of for-profit companies. The Executive may manage the investment of his personal assets, and may make new investments of his personal assets so long as such activities do not materially interfere with Executive’s duties hereunder.
Between 1999 and 2004, Pisano’s relationship with Netflix became more publicly known through articles in various trade press.
On January 17, 2004, Pisano and SAG entered into a Successor Employment Agreement to become effective from September 10, 2004 through September 10, 2007. In all material respects, the Successor Agreement was identical to the original Agreement As was the case in connection with the original Agreement, Pisano provided a financial disclosure which described his holdings in Netflix and CEG as follows:
Netflix Inc. (NASDAQ: NFLX). Executive holds 66,660 options to acquire common stock of Netflix. The options expire June 2010. Netflix is in the business of online rental of DVD’s. Executive is a member of the Board of Directors of Netflix.
Investments in Cinema Entertainment Group and Creative Planet (previously reported in the prior Section 4 Disclosure) are valueless and both entities are defunct.
The contents of this disclosure statement were provided to the entire Board together with a presentation by SAG’s regular outside labor counsel who again explained that in his opinion there was no conflict occasioned by Pisano’s corporate and financial relationships.
II. Pisano’s Collective Bargaining Responsibilities
Both Employment Agreements specify that “subject to the policies established by the National Board,” Pisano will serve as the “the chief negotiator of all collective bargaining agreements.” It also provides that he has the “full rights and privileges of participation [in all SAG Committees], except the right to vote.”
The SAG Constitution establishes a comprehensive system for bargaining with the AMPTP. In sum, negotiations are the responsibility of a Joint Negotiating Committee, composed of persons selected by SAG’s (and AFTRA’s) Joint Board of Directors. Bargaining proposals are developed by the Joint Wages and Working Conditions Committee and must be submitted to the Joint Board for its consideration. While the chief negotiator(s) “conduct” the negotiations, they do so “with the advice and consent of the Joint Negotiating Committee.” If there is a disagreement between the Joint Negotiating Committee and the chief negotiators, it is resolved by the Joint Board of Directors. Strike authorization and contract ratification is accomplished by the Joint Negotiating Committee, the Joint Board and the membership by referendum, seriatim.
Taken together, these provisions establish that while Pisano is the chief spokesperson in contract negotiations (along with AFTRA’s co-chief negotiator), the decision about what proposals the union should make, what employer proposals the union should accept and reject and what agreements should be reached with employers rests exclusively with elected representatives (and ultimately with the membership) and not at all with Pisano. We have been advised that this has, in fact, been the role of SAG’s Executive Director as regards negotiations and was so pre-dating Pisano’s employment by SAG.
III. Relevant Provisions of the SAG/AMPTP Collective Bargaining Agreement
The collective bargaining agreement between SAG and the AMPTP establishes the basic wages, hours and terms and conditions of employment for persons represented by SAG. As it relates to the issue raised by Wilson and Bower, the agreement creates a residual obligation on the part of the signatory employers. In summary, the agreement requires that signatory employers pay either 4.5%, 5.4% or 6% of the “Distributor’s gross receipts,” as defined in Sections 5.1 and 5.2 and Side Letter 10 of the SAG/AMPTP collective bargaining agreement, from the exhibition of covered films in “supplemental markets;” in this case the sale or rental of DVDs. Residual payments can form a significant portion of an actors’ compensation if a covered film is widely distributed in secondary markets.
IV. Pisano’s Role as a Netflix Director
Netflix is in the business of distributing DVD’s to its subscribers by mail. It does not employ actors nor does it have any collective bargaining relationship with SAG. As we understand the business model, Netflix is in essence a virtual DVD rental store; the only difference being that subscribers pay a monthly fee and are entitled to receive by mail as many DVDs as they wish with a limit that they may have only three outstanding at any one time. There are no additional rental fees or late fees. Netflix also provides certain editorial content to its subscribers and tailored DVD recommendations based on the collected reviews of its members and individual members’ rental patterns.
Netflix obtains its DVD inventory from Distributors either by purchasing the right to provide DVDs to its subscribers for a period of time or, more typically, by entering into revenue sharing arrangements with Distributors under which the Distributors receive a payment each time one of their DVDs is sent to a subscriber. The sale or revenue share payment is an event that produces a residual payment to actors under the AMPTP collective bargaining agreement.
Pisano has been and is one of seven directors of Netflix. As is true in most companies, Netflix directors do not manage the day-to-day operations of the company but rather focus on broad policy decisions for the company. Consistent with the foregoing, the Netflix directors neither negotiate nor approve transactions with the DVD distributors. Representative of the decisions the directors are called upon to make are approval of the annual business plan and executive compensation, review of financial statements, overseeing the work of outside auditors, and decisions regarding capitalization policies of the company. In making those decisions, Pisano (and all the directors) acts as a fiduciary; that is, he owes a duty of prudence and loyalty exclusively to Netflix shareholders with respect to the decisions he is called upon to make in that capacity.
V. Applicable Legal Principles
1. Title V of the LMRDA provides, in pertinent part, as follows:
The officers, agents, shop stewards, and other representatives of a labor organization occupy positions of trust in relation to such organization and its members as a group. It is, therefore, the duty of each such person, taking into account the special problems and functions of a labor organization, to hold its money and property solely for the benefit of the organization and its members, to refrain from dealing with such organization as an adverse party or in behalf of an adverse party in any matter connected with his duties and from holding or acquiring any pecuniary or personal interest which conflicts with the interests of such organization . A general exculpatory provision in the constitution and bylaws of such a labor organization or a general exculpatory resolution of a governing body purporting to relieve any such person of liability for breach of the duties declared by this section shall be void as against public policy.
29 U.S.C. 501(a) (2003). In Regulations issued by the U.S Department of Labor the agency charged with interpreting the LMRDA the Department has further explained that this section means that an “officer or agent of a labor organization shall [not], directly or indirectly through his spouse, minor child, or otherwise (1) have or acquire any pecuniary or personal interest which would conflict with his fiduciary obligation to such labor organization, or (2) engage in any business or financial transaction which conflicts with his fiduciary obligation.” 29 C.F.R. 458.33(a) (2003). The regulations further provide that these prohibited conflicts of interest include “buying from, selling, or leasing directly or indirectly to, or otherwise dealing with the labor organization, its affiliates, subsidiaries, or trusts in which the labor organization is interested, or having an interest in a business any part of which consists of such dealings.” 29 C.F.R. 458.33(b).
The legislative history of Section 501 makes clear that it was designed to curb abuses against rank and file members by union officials and representatives. Congress chose to protect against these violations of member rights and interests was by imposing fiduciary obligations on all union “officers, agents, shop stewards, and other representatives,” 29 U.S.C. 501(a), including union “elected officials and key administrative personnel, whether elected or appointed (such as business agents, heads of departments or major units, and organizers who exercise substantial independent authority),” 29 U.S.C. 402(q). As the House Report aptly explained, “Union officials occupy positions of trust. They hold property of the union and manage its affairs on behalf of the members. It is the duty of union officers just as it is the duty of all similar trustees to put their obligations to the union and its members ahead of any personal interest. The committee bill sets forth this principal unequivocally and declares that union officers and agents occupy positions of trust in relationship to labor organizations and their members.” H. Rep. No. 741, 86th Cong., 1st Sess. 81 (1959).
2. Notwithstanding the broad statutory language, the law is well-settled that “union officials are trustees ‘in the special labor context,’ which is to say that Congress intended ‘minimum interference in the internal affairs of unions.'” Brink v. DaLesio, 667 F.2d 420, 424 (4th Cir. 1981). Accordingly, every Title V case we have reviewed involves either theft or improper use of union funds or property for an officer’s personal benefit (see, e.g. Morrissey v. Curran, 482 F. Supp. 31 (S.D.N.Y. 1979)), use of a union officer’s position in dealing with a third party for an officers’ personal benefit (see, e.g. Brink v. DaLesio, supra.), or use of the power and authority of union office to help entrench incumbent officers (see, e.g. Chathas v. Local 134, Int’l Broth. of Elec. Workers, 233 F.3d 508 (7th Cir. 2000)), or to curb dissent (see, e.g. Guzman v. Bevona, 903 F.3d 641, 647 (2d Cir. 1996)). Moreover, in all of the reported cases, the courts were presented with actual, not theoretical, conflicts; that is, thefts, improper payments, third party transactions, or abuses of power had actually occurred. Here, in stark contrast, the “conflict” about which Wilson and Bower complain is purely theoretical. We are aware of no cases in which a court has found a Title V violation predicated on the theoretical possibility that a union officer may be in a conflict position by virtue of his overlapping relationships.
3. The absence of any reported Title V cases on the subject of union officers serving on corporate boards is not because no such relationships have ever existed. While it is not a common practice in American industry for a union officer to sit on the board of a company that has relationships with his union, it is not unprecedented. Indeed, the circumstances in which it occurs are often widely known. For example, since the 1970’s, the United Automobile Workers (“UAW”) has had a seat on the boards of one or more of the “Big Three” automobile companies. More recently, the Airline Pilots Association (“ALPA”), the International Association of Machinists and Aerospace Workers (“IAM”), and the International Brotherhood of Teamsters (“IBT”), have had seats on the boards of numerous major airline. No court has had occasion to conclude that Title V is implicated in any way by these relationships. And it bears repeating that in these circumstances the union officers serve on the boards of the very companies with which their unions bargain, unlike the Pisano/Netflix relationship involving a company with which SAG does not bargain.
To the extent that those relationship have been examined against other laws that prohibit conflicts, they have passed muster. For example, in International Union, UAW (Chrysler Corp.), No. 7-CB-4815, 8 A.M.R. 18,004 (Oct. 22, 1980) (NLRB Advice Mem.), the General Counsel of the National Labor Relations Board (“NLRB”) was asked to decide if the UAW committed an unfair labor practice by the election of its President to Chrysler’s board of directors where the UAW represents Chrysler’s employees and the employee’s of Chrysler’s direct competitors. Although the UAW’s President is the chief spokesman during contract negotiations with Chrysler and other major automotive manufacturers, is actively involved in establishing the union’s negotiation goals and strategy, and is active in deciding whether or not to accept contract proposals, the NLRB’s General Counsel concluded there was no violation. In so concluding, the General Counsel focused on whether or not there was an actual, as opposed to a theoretical or potential, conflict of interest. The General Counsel concluded there was no disabling conflict of interest because the UAW has no financial interest in competing with Chrysler and the Union only holds one position out of twenty on the board of directors. See also Anchorage Community Hospital, 225 NLRB 575 (1976) (no immediate danger of a conflict of interest where union had minority membership both on the company’s board of trustees and on the executive committee and where the union extended a construction loan to the employer). The Board has dealt with a number of similar conflicts of interest issues and “has never found unions to be disqualified, by virtue of a union officer’s serving as a trustee of the employer, from representing the employer’s employees absent evidence of actual involvement by the union trustee on both sides of contract negotiations, grievance matters, or day-to-day labor relations for those employees.” New York State Teamsters Counsel Health and Hospital Fund and Int’l Brotherhood of Teamsters, 3-CA-16438, 3-CB 5901, 1991 WL 276866 (Nov. 22, 1991) (General Counsel Advice Letter).
4. In sum, as we have explained in the previous paragraphs of this letter, there are no decided cases involving labor “conflicts” that could form the basis for a conclusion that Pisano’s relationship with Netflix is one prohibited by Title V. As a check on our conclusion that Title V principles do not prohibit this relationship, we have also reviewed principles of corporate fiduciary law, as the Court of Appeals for Ninth Circuit (the Circuit in which both SAG and Netflix “reside”) has analogized the fiduciary duties owed to union members by union officials to fiduciary duties in the context of corporate law and has recognized that “the analogy was strengthened by repeated reference throughout the Act’s history to the similarity between the duties of a union official and those of a corporate officer.” Phillips v. Osborne, 403 F.2d 826, 831 (9th Cir. 1968).
Like union officials, corporate fiduciaries generally have a duty of loyalty and a duty of care to the corporations on whose boards they sit. It is the duty of loyalty that mandates that when making a decision in his capacity as a corporate director, a director may not consider or represent interests other than the best interest of the corporation. In fleshing out the parameters of this duty of loyalty, corporate law provides that directors involved in corporate transactions must not be “interested” in the transaction. As a general rule, a director “interested” if he appears on both sides of a transaction or if he expects to derive personal financial benefit from the transaction (as opposed to a benefit which adheres to all stockholders generally or to the corporation).
Moreover, for a director to be “interested,” the conflict of interest must be real, imminent and direct. Thus, courts have held there is no conflict of interest where the conflict is theoretical and remote, and not actual and imminent. In addition, courts have required the interest to be direct before it is disqualifying. Even a transaction between corporations with common directors who have a real, imminent and direct relationship to a transaction may be permissible where a director acts solely for the benefit of the corporation. Finally, a director’s presence on both sides of a transaction is also permissible where the transaction is routine business in which the director is not involved.
One further nuance bears mentioning. Even if a director is found to be “interested” and the conflict is real, imminent and direct, statutory and common law protections have been developed to shield a transaction from claims that it was made in violation of a director’s fiduciary duties. “In the real world, corporations often have dealings, fair to the corporation, with interested directors. Voiding the vote of interested directors would unnecessarily inhibit otherwise fair transactions without any common sense reason.” Sobek v. Stonitsch, 995 F. Supp. 918, 921 (N.D. Ill. 1998). Thus, under state enacted “safe-haven” statutes, transactions approved by an interested directors are permissible so long as certain circumstances are met. For example, in California, an interested director transaction is not void if: (1) material facts as to director’s interest and the transaction are disclosed and transaction is approved by majority of disinterested shareholders; (2) disinterested board members approve the transaction after full disclosure and the transaction is just and reasonable to the corporation; or (3) where the transaction is just and reasonable to the corporation. Cal. Corp. code 310(a)(1)-(3); see also Del. Code Ann. 8-144(a)(1)-(3) (provisions similar to California code except that transactions approved by disinterested board members do not have to be just and reasonable to the corporation).
In sum, while we do not suggest that corporate law governing the fiduciary obligations of directors is directly applicable to a Title V analysis, we are satisfied that there is nothing in that body of law that in any way modifies our understanding of Title V’s reach as it would apply to the facts here.
For the reasons discussed above (and summarized in the following paragraphs), including our survey of all the directly applicable and related law, we are satisfied that Pisano’s corporate and financial relationships to Netflix do not constitute a Title V violation, contrary to the assertions made by Wilson and Bower’s lawyers.
First, all of the case law we have described involves relationships that are direct relationships, i.e. a union president serving on the board of a company with which the union bargains or a director of one company serving on the board of anther with which the first does business. Pisano’s relationship to Netflix is one major layer removed. SAG has no bargaining relationship with Netflix, would have no occasion to seek one and does no business with it. In the absence of a body of law finding per se conflicts in direct relationships, it would be entirely improper, in our judgment, to posit a legal regime under which indirect relationships are per se violations of Title V’s conflict provisions.
Second, even if the relationship between SAG and Netflix were a direct one (i.e. SAG bargained with or did business with Netflix), the premise on which the alleged conflict rests is incorrect. As we understand it, Wilson and Bower have asserted that Netflix as a company (and Pisano as a director or shareholder of the company) stand to gain if SAG negotiated motion picture production costs (including residual payments) are kept low and stands to lose if those costs increase or if the SAG membership were to engage in a lawful economic strike against the studios following unsuccessful contract negotiations. But that assertion misapprehends Netflix’s market position. To the extent increases in signatory employer production costs effect the prices of DVDs (and our understanding is that they have very little impact on those prices), those costs would impact Netflix’s competitors as well the increased price of a DVD will impact Blockbuster (one of Netflix principle competitors) in precisely the same way it impacts Netflix. Stated another way, the marginal increase in the cost of obtaining product is the same for every entity with which Netflix competes. Thus, Netflix will succeed or fail in its ability to reach a market not served by Blockbuster, rather than its ability to underprice Blockbuster. That said, the premise of Wilson and Bower’s assertion is simply wrong.
Third, even if the relationship was a direct relationship and the incorrect premise described above was correct, the possibility that Pisano could actually use his SAG position to disadvantage SAG because of his Netflix position is far too remote to constitute a Title V violation. On the Netflix side of the equation, Pisano is a director (and, indeed, only one out of seven whose decisions must be made by majority vote), not a manager. He does not participate in the business transactions between the company and the studios or their distributors from whom Netflix buys (or revenue shares) DVDs. On the SAG side of the equation, while there is no denying the importance of the position of chief negotiator, Pisano is decidedly not the decision-maker when it comes to the critical question of what Union proposals to make, what industry proposals to accept or reject or whether to agree on a contract or strike. As we have described earlier, by constitution and long-established practice, those powers are left to the SAG membership acting through its Negotiating Committee, its Board of Directors and its membership. Pisano does not even have a vote at any of these levels.
Fourth, even if we were to assume contrary to all the facts that Pisano was in a position to adversely effect SAG and that his position with Netflix created a theoretical incentive for him to do so, the “conflict” presented would be just that theoretical. No one has even hinted that there is any evidence suggesting that he has improperly compromised or sought to compromise SAG’s bargaining position with industry at all, let alone that he has done so because of his Netflix relationship.
Finally, it bears repeating that Pisano has had no “hidden agendas” on this subject. From the outset of his employment by SAG, he fully disclosed his Netflix relationship. He did so when he was first hired in 2001 and that disclosure resulted in legal advice to the Board that there was no conflict that would disable him from serving as SAG’s chief negotiator. During the period covered by his first Employment Agreement, his Netflix relationship was the subject of industry news articles and when his Agreement was renewed in 2003 his Netflix relationship was part of a comprehensive presentation made to the SAG Board accompanied by another legal analysis that there was no disabling conflict of interest. The SAG Board, following that presentation, overwhelmingly voted to renew his contract.
* * *
All of the facts and all of the law applicable to those facts have lead us to the firm conclusion that Title V of the LMRDA does not prohibit Pisano from serving as SAG’s chief negotiator with AMPTP as a result of his status as a director and shareholder in Netflix. We are, of course, prepared to answer any additional specific questions you may have on this subject.
cc: David White