Talent Boutiques Challenged By Business Downturn

So much for a Hollywood ending. The economic recession has hit the most escapist of industries as deals for actors, musicians, directors and other talent in the entertainment sector have plummeted, according to attorneys who structure transactions. Fees and other compensation have declined as studios clamp down on costs, they report. The Motion Picture Association of America reported the release of 284 movies in the United States between Jan. 2 and July 21, compared with 336 films during the same period in 2008.

“Every entertainment lawyer will tell you the same thing about new deals: They have to do twice as many to stay afloat, which means working twice as hard, because the deals have been cut in half,” says Doug Mark, a partner at Mark Music & Media Law in Los Angeles who worked for several years at the boutique firm Morris Yorn Barnes & Levine.

The retrenchment has hit an entertainment law sector that has undergone considerable change during the past decade. Boutique law firms that represent most of the talent end of the entertainment business have multiplied amid the dissolution of some long-standing firms and the departure of top attorneys who struck out on their own. In 2004, for example, a court fight between the partners of Armstrong Hirsch Jackoway Tyerman & Wertheimer followed a split that created two new firms. Last year, another boutique, Nelson Felker Toczek Davis, split into two. New firms such as Sloane Offer Weber & Dern have spun off from existing boutiques.

More Consolidation Ahead?

The downturn in deals could hit boutiques especially hard because the lawyers at those firms feed off a single revenue stream: They get a percentage of the deals they draft. “I do think that in the next 24 months you are going to see more consolidation of law firms, whether it's in the form of boutiques getting together or individuals from boutiques joining larger firms,” says Craig Emanuel, chairman of Loeb & Loeb's Los Angeles entertainment department and talent practice group. “Like in any business in a depressed time, finding a way to share overhead with somebody else becomes a critical factor.”

The recession is recasting Hollywood in two ways: in the number of deals and the value of those deals. “The economy has really hit the independent sector hard,” says Lawrence Ulman, co-chairman of the media and entertainment practice group at Los Angeles-based Gibson, Dunn & Crutcher who specializes in movie financing. “That business is way down. Why is it down? There are a limited number of banks involved in this business now, so that makes it tough.”

In the good old days, he said, 10 or so banks actively financed independent films; only a couple are active at present. Meanwhile, the private equity firms and financiers active in the entertainment sector a few years ago have largely deserted the field. Ulman's firm was used to arranging financing for two or three independent films each month; nowadays, it's grateful to get three or four per year.

Shrinking on Both Ends

While the biggest stars continue to do well, those who might have received $10 million on a deal, for instance, are now being offered closer to $6 million or $8 million, says Fred Bernstein, a partner in the Los Angeles office of Chicago's Wildman, Harrold, Allen & Dixon and former president of Columbia TriStar Motion Picture Cos.

The structure of deals has changed, as well. In the past, Bernstein says, studios and TV networks could cut costs by reducing guaranteed upfront fees to talent but offering a bigger share on the back end, based on the film's success. That's not what's happening now, he says. “There's pressure to bring down the upfront fees. But they are not increasing the back end in order to compensate for that. They're trying to bring the back ends down as well.”

It's an unhappy development for boutique firms, whose lawyers get paid up to 5% of the value of a deal, according to lawyers for talent who agreed to speak anonymously. In good times, they say, senior partners at the top end of most of the pre-eminent boutiques could make upwards of $4 million each year; greener partners made annual salaries in the neighborhood of $500,000.

“Part of the problem is that many of the boutique firms do have percentage-driven practices, so they're not billing hourly and revenue is dependent on their clients working,” Emanuel says. “If they represent an actor who normally makes $10 million a picture, and that person is now making $2 million, this obviously impacts your bottom line.”

Competition on the Rise

The entertainment boutiques are famously circumspect ' they tend not to operate anything as vulgar as a Web site and many of the boutique attorneys contacted for this article demurred from commenting or returning calls. Old-line boutiques still dominate, including Ziffren Brittenham, which is based in Los Angeles and Bloom Hergott Diemer Rosenthal LaViolette Feldman & Goodman and Hansen, Jacobson, Teller, Hoberman, Newman, Warren & Richman, both in Beverly Hills.

But that dominance is changing ' they aren't the only players anymore. “In the last 36 months, there has been considerable movement with regard to lateral musical chairs at the established boutiques, and the creation of new entities being spun off of existing ones,” says Jeff Shumway, who joined the Los Angeles office of New York's Stroock & Stroock & Lavan this year after being a talent agent for 12 years, most recently at the former William Morris Agency.

The Armstrong Hirsch split created Jackoway Tyerman Wertheimer Austen Mandelbaum Morris & Klein and Hirsch Wallerstein Hayum Matlof & Fishman. Peter Nelson, name partner at Nelson Davis Wetzstein, formed his firm last year after leaving Nelson Felker, which was founded in 1993. “It's best to be in business with people who are easy to be in business with,” he says of the split from his former partner Patti Felker, now at her new firm, Felker Toczek Gellman Suddleson. Felker attributes the split to differences in management style.

John Branca ' long a partner at the currently named Ziffren Brittenham ' who Michael Jackson originally retained in the 1980s and was recently named a co-administrator of Michael Jackson's estate, acknowledged the new players. “Sure, there are lots of solo practitioners at small firms, but if you're talking about major firms in Los Angeles there are probably 10 or 15,” he said. Back when we started, there were maybe two.”

Explanations vary for the emergence of new boutiques. One talent attorney, who spoke on condition of anonymity, says that they reflect the evolution of the entertainment industry, which has morphed from a handful of studios, networks and talent agencies into a myriad of independent producers and alternative sources of financing. The Internet and other forms of new media have opened additional possibilities for talent deals, the lawyer said.

During the 1990s, several upstart firms began making inroads into the market. One of them, Morris Yorn, snagged Bloom Hergott partner Deborah Klein in 2000. Her comedy clients include Will Ferrell and Jim Carrey, according to The Hollywood Reporter. In 2007, Klein, Doug Mark and a third name partner, Michael Barnes, left Morris Yorn. Mark says that the firm, which had grown to more than 15 attorneys, had incurred overhead costs that were not conducive to his music business.

Klein, now at Jackoway Tyerman, did not return a call for comment. Barnes, now at the Barnes Law Firm in Santa Monica, CA, confirmed that he left with three other attorneys but declined to comment further. Name partner P. Kevin Morris did not return a call for comment. According to The Hollywood Reporter, the firm continues to represent big clients, including Matthew McConaughey, Mike Judge and Ellen DeGeneres.

Another firm, Sloane Offer Weber & Dern, was founded about six years ago. Many of the firm's name partners came from Bloom Hergott and Hansen Jacobson. Jason Sloane, who joined the Beverly Hills firm two years after its founding, said that he and his new partners wanted an arrangement “where we felt more integrated in each other's practices, where we really shared revenues and our incentive was not to be internally competitive.”

Now with 10 lawyers, six of them partners, the firm's clients include younger stars, such as Jack Black, Will Smith and Angelina Jolie. Sloane's office remains busy despite the recession, but he acknowledges that deals are getting stickier. “The more the opposing sides feel economic pressures, the harder it is to get to a meeting of the minds,” Sloane says. “In terms of the deal-making, it's like everything in the economy: People want to drive harder bargains because they're feeling the pressure.”

Branca downplays any effect on his own firm, which, in addition to handling Jackson's estate, negotiated Sacha Baron Cohen's deal for the movie Bruno, according to The Hollywood Reporter, and represented the Rodgers & Hammerstein Organization in its sale to independent music publisher Imagem Music Group earlier this year. The recession, Branca says, “hasn't affected us as much because we have expertise in music publishing and the touring sectors of the music business, which remain unaffected.”