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When a Competitor Pays Kickbacks

I own a theatrical rigging company in the entertainment business. A competitor is giving grips kickbacks to use only that company for rentals. We have never done this but are having a hard time competing now. Is there a way for us to give grips a commission or finder’s fee—not under the table, but through a contract saying that if they bring us work we would give them a commission of 5 percent? If they have to claim taxes for it and if we state in the contract with the grip that they have to disclose this commission to the production company, would that make it legal? —K.F., Los Angeles

Your question raises some interesting legal and ethical issues that are not unique to the entertainment industry but often surface there.

First, some definitions: Key grips supervise and may procure the technical equipment used in a film or video production, including theatrical rigging, which includes the long arms, cables, and pulleys used to dangle cameras and lighting equipment over sets. Some grips work for certain studios or production companies and others may be independent contractors who are hired for particular projects and then move on to other jobs.

If your competitor is routinely paying secret kickbacks so that its equipment gets rented when yours is just as good and you could beat their price, that behavior is likely illegal and definitely unethical. It also probably violates union rules, which may be applicable because most technical jobs in Hollywood are unionized.

It all depends on a couple of facts: Are the grips independent operators or do they work directly for movie or TV production companies? And are they disclosing the payments and reporting them as income?

Contractors Must Disclose Fees

If a grip is an independent operator working as a kind of intermediary between the entertainment production and the rental company to procure the needed equipment and supervise its use on set, paying him a commission is not a problem as long as he discloses the payment and reports the extra compensation, says Dan Eaton, a San Diego employment attorney and lecturer in business ethics at San Diego State University.

“If the relationship between the grip and the purchaser includes some component of advice about the best rigging company, he should disclose the fact that his opinion is influenced by the money he is getting. Otherwise, it’s a classic conflict of interest,” Eaton says. “But if the company paying for the equipment is aware of the arrangement and approves of it, that kind of payment becomes part of the rules of the marketplace. Transparency matters a lot.”

If you wanted to follow suit, and establish a referral fee agreement that pays a commission or referral fee for independent grips who provide you with business opportunities, that would be taking the high road, says Stuart B. Blake, chief executive officer of The General Counsel in Irvine, Calif. “It should provide for full disclosure and notice to the production company that the referral fee is being paid,” he says. “This type of agreement may not help you compete on a level playing field, but it may help you to be somewhat more competitive.”

Of course, the danger here is that a kind of arms race develops: Commissions keep increasing. Pretty soon, gifts, sporting tickets, and other sweeteners get mixed in. Before long, smaller companies get priced out of the market because they can’t afford to keep up.

Don’t Go Under The Table

Where the practice becomes even more dangerous is if grips working directly for entertainment corporations make procurement decisions based on which rental companies pay them the most money under the table.

“That behavior is not only unethical, it’s blatantly illegal,” says Scott J. Witlin, a labor and employment attorney in the Los Angeles office of Barnes & Thornburg who works frequently in the entertainment business. “The major studios all have corporate-compliance departments whose job it is to enforce their code of business conduct. This [taking kickbacks] would be harming everyone involved so one individual could profit,” he says.

Even if a commission were disclosed, it would likely be prohibited in the case of a grip who works for a studio, he says. “Most business codes have very low thresholds—as low as $50—for taking gifts from someone the company is doing business with,” Witlin says. “It’s unfortunate, but there are always going to be employees who try to take advantage of the system. That’s what the compliance division is there for: to root out this kind of breach of duty and divided loyalty.”

Witlin recommends that if you know your competitor is secretly greasing palms to get business, blow the whistle. Ronald Jacobi, a business attorney at Bryan Cave and former executive vice-president and general counsel at Sony Pictures (SNE), agrees: “Kickbacks in general are theft and a firing offense,” he says. “In 17 years at Sony, we didn’t hear about this kind of thing very often—but any time we did, the person was fired immediately.”

Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.

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