Call it insider trading, Hollywood style.

A distributor (20th Century Fox) syndicates the reruns for a hit show (“NYPD Blue”) to a cable company (FX) with which it shares a common owner (News Corp.). The distributor allegedly undervalues the distribution rights to give its cable cousin a sweetheart deal that benefits the bottom line of the corporate parent.

Fox vehemently denies that’s the way it played out, but “NYPD Blue” producer and creator Steven Bochco insists the studio subverted the marketplace and burned him in the latest example of “vertical integration” run amok in the entertainment industry.

Next month, Bochco and his attorneys will try to convince a Los Angeles Superior Court jury that 20th Century Fox cheated him out nearly $50 million in profits by charging below-market value for the cable rights to the long-running and critically acclaimed ABC cop show.

“Fox was the seller and Fox was the buyer. They both answer to the same person: (News Corp. co-COO) Chase Carey,” said Bochco attorney Brian Lysaght of the Santa Monica law firm O’Neill Lysaght & Sun LLP. “He (Carey) said the number should be $400,000 (per episode) and that was that. That’s not a negotiation process, it’s an order down from above.”

But Fox insists that FX paid more than anyone else was offering for “NYPD Blue” reruns in 1995, when the deal was signed, and that Bochco, miffed by the demise of a development relationship with Fox, is suffering from an acute case of “sour grapes.”

“They agreed to the price and in fact expressed happiness at the time,” said Fox attorney Anthony Basich, of the Los Angeles office of New York-based Squadron Ellenoff Pleasent & Sheinfeld. “When you pay a record price for a show, which this was at the time, and then you’re accused of shortchanging someone, there’s a disconnect.”

However it sorts out, complaints such as Bochco’s are becoming increasingly common in Hollywood, spurred by the concentration of entertainment content within a handful of companies that distribute and broadcast programs, as well as own secondary channels that can vie for the rights to the reruns.

“We’re hearing about these kind of cases more and more,” said Bert Fields, an attorney who represented Jeffrey Katzenberg in his lawsuit against the Walt Disney Co. and has been on both sides of the aisle in vertical-integration suits. “There is no question that a studio can deal with an affiliate if it deals fairly and pays market value. But if you sell below market, you’re going to get into trouble with your profit participants.”

Vertical litigation

In Bochco’s case, the producer alleges that Fox failed to undertake a legitimate bidding process for the cable rights to “NYPD Blue.” After receiving an opening bid of $375,000 per episode from Lifetime Television, Fox rushed into a deal with FX for $400,000 without taking other offers, Lysaght said.

According to Bochco, open bidding would have garnered up to $700,000 for “NYPD Blue,” a difference of $300,000 per episode and a total of $60 million for the entire package. Under the terms of Bochco’s original contract as a profit participant entitled to a hefty percentage of the cable rights he says he was shortchanged $48 million.

“Whether it was a record is not the question,” Lysaght said. “The question is, did they do everything to get fair market value for the program.”

But Basich called Bochco’s claims “20-20 hindsight.”

“No one has come forward and said they would have paid more for the show,” Basich said. “They waited five years and now they want to make people forget what the market (value) was at the time.”

Bochco’s suit is not exactly virgin territory for Fox. In recent years, Rupert Murdoch’s network has been forced to fend off similar suits by David Duchovny, former star of “The X-Files,” and Alan Alda, who claimed he was being cheated out of profits from “M*A*S*H.”

And Fox is by no means alone. Last year, the producers of NBC’s “Homicide: Life on the Streets” sued that network for driving down its syndicated price by packaging it with Danielle Steele movies. The deal made sense for NBC and its corporate parent, General Electric Co., the producers argued, but shortchanged them. And Disney was sued by the producers of “Home Improvement” for allegedly not getting a fair market price from Disney-owned ABC for that show.

“When you’ve got affiliated entities sitting at both ends of the table deciding how much money should be paid, well, the average person is going to find that highly suspect,” said Larry Stein, who represented Duchovny in his suit against Fox and served as a plaintiff’s consultant during an earlier phase of the Bochco case. “The studios want to keep these programs because they are valuable, but they can’t have it both ways. The entire system is being put in jeopardy by these vertically integrated companies that have mixed loyalties.”

Inside look

While the earlier vertical-integration suits settled before trial, the Bochco case, which was filed more than a year ago, could be destined to make its way to a jury. Stein said that a judge’s dismissal of Bochco’s fraud allegations and with them the potential for punitive damages earlier in the case may make Fox more apt to risk a trial.

“All these cases have been settled, with confidentiality agreements, because the studios don’t want people to know about these contracts,” Stein said. “Without punitive damages, they might be a little more willing to try cases in the hope of establishing a favorable precedent.”

That there haven’t been more suits like Bochco’s, as more and more entertainment and media companies partner up, speaks to the small number of producers, actors and writers who are in a position to negotiate their way into being a “profit participant.” Bochco, with a two-decade resume of highly rated and well-regarded television programs, has earned the clout necessary to command a share of profits on his projects, but he is a rare exception.

Nevertheless, with a slow evolution underway to spread the risks and potential windfalls of new programming with top talent through profit participant arrangements, a proliferation of lawsuits related to vertical integration is all but inevitable, Stein said.

“Fair market value means you put it out on the market and see what the value is. It’s like a piece of art or property. You can get it appraised, but you don’t know what it’s worth until it’s sold,” Stein said. “When artists agree to take a percentage rather than receiving an up-front payment, they do so with the understanding that their partner is going to obtain the highest possible return. If their loyalties lie elsewhere, there is going to be a problem.”