Flagler Flap Exposes Well-Worn Business Lessons (Touch Points)

There are at least a couple lessons to be learned from the recent revelation that the video production company Wal-Mart Stores Inc. used for 30 years to film its annual meetings and closed-door executive confabs is now peddling access to the 15,000 tapes for $250 per hour on the open market:

No. 1, get agreements in writing.

No. 2, diversify.

Wal-Mart, already no stranger to criticism from environmental watchdogs to union activists, has found itself the butt of innumerable jokes since the news broke.

That a company known as much for closely guarding its in-house operations as its low prices and relentless expansion could be caught in such a compromising position is naturally humorous.

There’s no doubt the Bentonville retailer isn’t happy that the phrase “Wal-Mart managers in drag” now generates 908,000 hits on a Google search.

By now, you probably know that Flagler Productions, a Kansas company whose founder began working for Sam Walton on a handshake agreement in the 1970s, has been making the tapes available for every class action attorney or media type willing to fork over some cash.

Some embarrassing but candid moments have surfaced, including one that Democratic presidential candidate Sen. Hillary Clinton probably didn’t want her union allies to see when Walton called her “one of us” at a 1991 meeting.

Though it didn’t gain much traction at the time, rival Sen. Barack Obama used Clinton’s time on the Wal-Mart board of directors from 1986-1992 to bludgeon her in a debate earlier this year after she brought up his “slum landlord” political booster Tony Rezko.

So far, though, there hasn’t been any word of any “smoking gun” type evidence that could prove Wal-Mart discriminates against women or deliberately imports lead-laced toys from China.

At this point, the closest its foes have come is tying the infamous sketch by Wal-Mart managers in drag to an alleged corporate culture that denigrates women, a stretch that would make any yoga instructor proud.

But there’s no question they are looking, and Wal-Mart is rightly investigating its legal possibilities to stop them.

Flagler Fulminations Follow 2006 Firing

Wal-Mart terminated Flagler’s services in 2006 after hiring another company to produce the ever-expanding concert/pep rally that is its annual shareholders convention.

Mary Lyn Villaneuva, who along with fellow Flagler employee Gregory Pierce purchased the company from Mike Flagler nine days before Wal-Mart ended the arrangement, has asked Wal-Mart for $150 million to purchase the entire video library.

Wal-Mart, which has never responded well to threats even though it has certainly sat down with its critics more in recent years, countered with an offer of $500,000.

Low prices indeed.

Which brings us to Lesson No. 2.

Even after 30 years, the Wal-Mart agreement represented 95 percent of Flagler’s income.

You don’t have to be a former employee of Enron or Bear Stearns to know that’s a business model built for disaster.

Nor do you have to be Alanis Morissette to find it ironic that two employees who should have known there was no guarantee of future income from Wal-Mart before they bought the company would use that same lack of a formal agreement to offer the tapes up to any and all takers.

Instead of using the prestige of being an exclusive vendor to Wal-Mart to build its business, Flagler complacently failed to expand its customer base. In doing so, it exposed itself to the financial ruin it now apparently expects Wal-Mart to bail it out of, notwithstanding all the money the company paid Flagler during the past 30 years.

Bloggers Weigh In on Options

The Harvard University law blog featured a debate on the subject, with the focus on copyright law. Specifically, whether or not Wal-Mart owns the rights to what’s on the tapes.

Via the blog, Section 201(b) of the Copyright Act states that: “In the case of a work made for hire, the employer or other person for whom the work was prepared is considered the author for purposes of this title, and, unless the parties have expressly agreed otherwise in a written instrument signed by them, owns all of the rights comprised in the copyright.”

The fact Flagler was an independent contractor, not an employee, and there was no formal agreement could make it difficult for Wal-Mart to prove ownership.

The statute requires a written instrument classifying whatever work is commissioned as a “work made for hire” in order to fall under copyright protection.

However, as one blogger posted, Wal-Mart could seek relief in trade secret law, arguing that “these meetings were secret, have value to the company that can be exploited to its detriment if generally known, etc.

“The film company was an agent, and even on a handshake the 30-year relationship without any divulgence shows that the reasonable expectations were that these films would not be made public.”

In the few comments Wal-Mart has made so far, that is the company’s position.

“Needless to say, we did not pay Flagler Productions to tape internal meetings with this aftermarket in mind,” Wal-Mart spokeswoman Daphne Moore said.

In light of the circumstances, “needless to say” was probably the wrong choice of words. See Lesson No. 1.