|
Many independent filmmakers
are surprised at the amount of effort and skill required to secure an
equitable distribution agreement. With the dramatic increase in
independent production, it is apparent that many filmmakers have
mastered the skills needed to secure the money and equipment needed to
produce a film. The major obstacle facing many filmmakers is how to
secure distribution for their motion picture. This article explores the
tactics and strategies that can be used to obtain a favorable
distribution deal for the indie filmmaker.
In
negotiating the distribution deal, the relative bargaining power of the
parties is determined by the perceived desirability of the film and how
much risk each party is willing to take. With a major studio project,
the studio has often borne most, if not all, the financial risk.
Typically, the studio pays for development, production and
distribution. The director/producer is employed by the studio, receives
a fee for his services, and may be entitled to a small share of net
profits. "Net Profits," however, are defined in a such manner
that there is little likelihood the employee will ever realize anything
from this "back-end" compensation.
On
the other hand, when a film is developed and produced by an independent
Filmmaker, as an entrepreneur the filmmaker bears the risk of failure.
Often the distributor will not have any involvement in the development
of the script, or the production of the film. Since the distributor
screens a completed work before deciding whether to acquire it, the
distributor assumes less risk. The distributor knows exactly what it is
obtaining. Consequently, if the Filmmaker has skillfully made a script
into an appealing film, the filmmaker may be able to obtain a better
deal. Under such a film acquisition agreement, the distributor may
agree to share revenue according to a formula that will actually
generate monies on the back end, assuming the distributor accounts
fairly. If the filmmaker stumbles and creates a film with little
appeal, however, no distributor may acquire it, and the loss will be
borne entirely by the filmmaker and his investors.
INCREASING
YOUR LEVERAGE
When
a distributor negotiates to acquire film rights, the distributor often
has more clout than the filmmaker. This is a vulnerable position for
the filmmaker. The filmmaker, or his representative, must know how to
orchestrate the release of the film into the marketplace to achieve
maximum leverage. This may entail generating competition through
positive word of mouth within the industry. Such "buzz" or
"heat" can be encouraged by filmmakers who work the festival
circuit and mount a campaign on behalf of their film.
From
the filmmaker's point of view, one will obtain a better deal if there
is more than one distributor competing for the film. It is not
difficult to alert acquisition executives to the existence of a film.
Once a start date has been announced, filmmakers begin receiving calls.
Acquisition executives track the progress of each film so that they can
try to view it as soon as it is completed, and before their competitors
see it.
To
ensure that acquisition executives are aware of a film, one can send a
press release announcing the project to the trade papers and magazines
(Hollywood Reporter: (213) 525-2000, Daily Variety: (213) 857-6600,
FILM MAKER: 213-932-6060, Moviemaker: 310-234-9234, The Independent:
212-807-1400). These publications will include your film in their
listings of motion pictures in development, pre-production and
production. Likewise, one should alert Film Finders at (310) 657-6397,
a company that tracks films for many distributors.
Here
are some other ways to create competition and maximize your leverage:
1)
NO SNEAK PREVIEWS: Do not show your film to distributors until it is
complete. Executives may ask to view a rough cut. They will assure the
filmmaker, "Do not worry. We are professionals, we can extrapolate
and envision what the film will look like with sound and titles."
Do not believe them. Most people cannot extrapolate. They will view an
unfinished film and think it amateurish. First impressions last. The
community of acquisition executives is small, and they frequently
mingle at screenings and festivals where they compare notes. One
acquisition executive bad-mouthing your film, can cause a lot of
damage.
The
only reason to show an unfinished is if one is desperate to raise funds
to complete it. The terms one can secure under these circumstances will
be less advantageous than what could obtain for a finished film. If you
must show a work-in-progress, exhibit it on a Moviola or flatbed
editing table. People have lower expectations watching a film on an
editing console than when it is projected in a theater. If you must
send out cassettes of an unfinished film, prominently label it so that
your viewers are reminded that they are seeing a work-in-progress.
2)
SCREEN IT BEFORE A CROWD: It is usually better to invite executives to
a screening than to send them a videocassette. If you send a tape to a
busy executive, he will pop it in his VCR. Ten minutes later the phone
rings and he hits the pause button. Then he watches another ten minutes
until his secretary interrupts. After numerous distractions, he passes
on the film because it is "too choppy."
You
want the executive to view the film in a dark room, away from distractions,
surrounded by a live audience enjoying the film. You can rent a
screening room at Paramount or other convenient locations, invite all
the acquisition executives you can, and pack the rest of the theater
with friends and relatives.
Perhaps
the best venue to exhibit a picture is at an important film festival.
If the film is warmly received, your bargaining position will be
enhanced. Another benefit of a festival showing is that it may generate
positive reviews. Most publications have a policy of only reviewing
films about to be released theatrically. Films seeking distribution are
not reviewed. But trade papers and selected publications review films
exhibited at major festivals. A positive review can influence
distributors.
When
you prepare an invitation list, include only those distributors
appropriate for the film. If foreign rights are taken, there is no
reason to invite foreign sales companies. You are being inconsiderate
by wasting their time. Likewise, do not invite an art house distributor
to view a beach blanket bingo movie. As soon as the acquisition
executive realizes that your film is not for him, he will depart. Do
you think a stream of people leaving might adversely affect the
perceptions of the rest of the audience?
3)
MAKE THE BUYERS COMPETE AGAINST EACH OTHER: Screen the film at the same
time for all distributors. Some executives will attempt to get an early
look -- that is their job. The filmmaker's goal is to keep potential
distributors intrigued. You can promise to let each see it "as
soon as it is finished." They may be annoyed to see their
competitors at the first screening. But this will get their competitive
juices flowing.
Some
diplomacy is required to orchestrate a bidding war and not alienate the
bidders. You want to firmly push each potential buyer to offer their
best terms while maintaining cordial relations with all. Remember, you
may want to produce your next project with one of the losers.
4)
DO NOT GIVE AWAY YOUR FESTIVAL PREMIER LIGHTLY: Carefully plan a
festival strategy. I have seen filmmakers give away their premier to
minor festivals and thereby disqualify themselves from participating in
major ones. You can participate in lesser festivals later. There is
little reason not to apply to a festival if you think you have a chance
to participate. If you are not accepted, the buyers will not know
unless you tell them.
5)
SELL YOUR FILM WHEN BUYERS ARE HUNGRY FOR PRODUCT: Distributors that
acquire films for foreign distribution plan their activities around a
market calendar. The major film markets are 1) AFM in late February in
Santa Monica, 2)Cannes in May in Cannes, France, and 3) MIFED in late
October in Milan, Italy. Some distributors sell at the Berlin market
which has a reputation for showing art films. In addition there are a
number of important television markets including NATPE in the U.S., and
MIP and MIP-COM in France.
Distributors
are hungriest for product before a rapidly approaching market when they
do not have enough new inventory. A distributor may spend $90,000 or
more to attend Cannes, and if it appears the company will have nothing
new to sell, panic sets in.. This is the best time to approach a
distributor. Do not wait until a week before a market, however, because
you need to give distributors enough time to prepare for it. They may
need to create a trailer, one-sheet, poster, screeners and advertising.
The bumper editions of the trade papers have an ad deadline that is 3-4
weeks before a market. These expanded editions contain product listings
by distributor, as well as extensive advertising. The best time to
approach distributors is 60-90 days before a market. Assuming a
distributor wants your film, it may take a month or more to
negotiate the deal.
PROTECTING
YOUR INTERESTS
Investigate
the Distributor
Always
check the track record and experience of potential distributors.
Industry insiders know the reputations of executives and their
companies. It is newcomers who are most likely to be taken advantage
of.
Ask
a prospective distributor to send you their press kit. It will likely
contain one-sheets from the films they have distributed. Examine the
credits. Track down the filmmakers. If you cannot find them, simply ask
the distributor for a list of all the filmmakers they have done
business with over the past two years. Call the filmmakers. Ask them
specific questions: Did they receive timely producer reports? Have they
been paid what they are due? Did the distributor spend the promotional
dollars promised?
I
recently established the Filmmaker's Clearinghouse, a web site devoted
to disseminating information about distributors. The Clearinghouse
provides filmmakers with information on distributors similar to what
the Better Business Bureau reports on merchants.
PRINCIPAL
TERMS OF A DISTRIBUTION AGREEMENT
Territory
The
territory is the country or region where the distributor may exploit
the film. Worldwide rights mean that the distributor has the right to
distribute the film in any country in the world. Some distributors go
further and seek rights throughout the "Universe." To my
knowledge, no sales have been made to moviegoers on other planets. I
once kidded a distribution executive that it was silly to ask for such
rights. He conceded that it was unlikely his company would ever need
rights beyond Earth. Several weeks later, however, he showed me a fax
he had received from NASA asking for permission to exhibit one of his
films on the Space Shuttle.
Independent
filmmakers frequently enter into more than one distribution deal.
Rights are typically divided into two territories: Domestic and
Foreign. Domestic is the United States and English-speaking Canada.
Sometimes it may include all of Canada. It may include U.S.
territories, possession's & military bases. Foreign rights are
usually defined as the rest of the world.
As
a general rule, filmmakers should only grant a distributor rights to
territories they directly service. Few distributors, other than major
studios, serve both the foreign and domestic market. Even the majors
use sub distributors in smaller territories. Nevertheless, distributors
often try to acquire as much territory and media as they can. They will
lay off rights on sub distributors, and take a fee for serving as the
middle man.
Most
companies that distribute domestically do not participate in international
film markets. If you grant such a distributor worldwide rights, they
will make a deal with a foreign distributor to handle international
sales. This foreign sales company will deduct a distribution fee for
its services, and from the remaining amount, the domestic distributor
may take a fee as well.
This
is not to say that you should never allow a distributor to use
sub-distributors. But one needs to understand the kind of distributor
you are dealing with, and how it plans to exploit your film. Filmmakers
should always determine which media and territories a distributor
handles itself, and which it lays off on other companies. Labels can be
confusing. Some distributors who sell films internationally call
themselves "foreign sales agents." Others prefer to be known
as "international distributors." The problem of
double-distribution fees can be ameliorated by placing caps on the
total fees the distributor and sub-distributors may take.
Most
indie filmmakers contract with a foreign sales agent, or international
distributor, to take their film to the major international markets. The
filmmaker will also contract with one or more domestic companies. If
the film does not have any name-actors in the cast, the filmmaker may
not be able to obtain a domestic theatrical release. In such a
situation, the filmmaker will contract with companies that serve the
television and home video markets. Care must be taken in structuring
these deals so that their terms do not conflict.
Filmmakers
may benefit by contracting with more than one distributor. First, the
filmmaker is not putting all his eggs in one basket. If he has one
distributor, and it goes bankrupt, all potential revenue is affected.
Second, by using different distributors, expenses in one territory will
not be cross-collateralized against revenues from another.
When
expenses are cross-collateralized, expenses and revenue from different
territories are pooled. For example, suppose a film generates revenue
of one million dollars abroad. The distributor has incurred $100,000 in
recoupable expenses. The distributor is entitled to retain 20% of gross
revenues, or $200,000, as a distribution fee. The remaining $700,000 is
the filmmaker's share of revenue.
But
suppose that in the domestic territory, this film generated 1 million
dollars in revenue, and incurred expenses and distribution fees of $1.5
million. So on the domestic side of the ledger, the distributor has a
net loss. If the filmmaker has a single distributor for foreign and
domestic territories, the distributor can recoup its $500,000 domestic
loss from the foreign profit.
Not
only can expenses from one territory be crossed against others, but
expenses in one media can be crossed against revenues from another. In
many instances, a distributor will lose money on a picture's theatrical
release and will want to recoup those losses from revenue generated
from home video and television.
Media
Media
is the means of exploitation. Many motion pictures are meant for
initial exhibition in theaters, the theatrical media. The time period,
or "window," during which the movie will play in theaters
will be short for a flop, while a blockbuster can play for many months.
After
the theatrical release, a picture may be distributed and exploited in
the so-called allied and ancillary markets, which includes home video,
non-theatrical (colleges, community groups), pay television (HBO),
network television (ABC) and television station syndication. The film
may also generate revenue from merchandising, publication of a movie
novelization and a sound track album. The nomenclature may be
misleading because the so-called "ancillary" media now
generate most of the revenue. In the United States, home video revenues
are about five times theatrical revenues.
A
theatrical release is still primary in one important respect. Although
the theatrical release may not generate net revenues - because of the
considerable cost of print duplication, advertising and shipping - the
theatrical release creates public awareness for the film. It is the
engine that pulls the train. When consumers visit video stores, the
cassettes they rent or buy first, are the movies they learned about
from the advertising and publicity accompanying their theatrical
release.
Ancillary
media tend to be much more profitable than theatrical media. When a
distributor releases a film to television, there are minimal expenses.
If you license a film to CBS, for example, the expenses incurred are
the manufacturing cost of one video sub-master and expense of shipping
it to CBS. The distributor does pay for advertising, as CBS will
promote the movie. Thus, most of the revenue from television licensing
flows to the bottom line.
Because
a theatrical release is often not profitable, and because the ancillary
media frequently are profitable, most domestic distributors will
decline to acquire only theatrical rights. They do not want to take the
risk of a theatrical loss, without the offsetting revenue that can be
obtained from the ancillaries. Consequently, filmmakers need to
exercise caution. If they license home video and television rights
first, they may find they cannot obtain a domestic theatrical release.
In
fashioning a grant of rights clause, filmmakers will want to retain
rights to media the distributor will not actively exploit. It has become
fashionable for distributors to ask for multimedia and interactive
rights although few exercise these rights. Indie filmmakers normally
grant a distributor three media: 1) theatrical, 2) television (all
forms including pay TV, cable TV and broadcast), and 3) home video
(distribution by videocassette, laser disc and DVD). Filmmakers should
expressly reserve all other rights including dramatic (play), radio,
electronic publishing, merchandising, music publishing, soundtrack and
print publication rights, although the distributor should be granted
limited radio and print publication rights in order to advertise the
film. Remake, sequel and television spin-off rights are usually
reserved to the filmmaker.
Term
Distributors
tend to ask for long terms, often 10 years or in perpetuity. It is not
in the filmmaker's interest to have an unduly long term. A
distributor's enthusiasm for a film wanes as the years pass. This can
be frustrating for the filmmaker, especially if he has the desire and
ability to promote the film. The filmmaker may need to negotiate a
reversion of rights from a distributor who has done an inept job of
marketing the film.
A
filmmaker is well advised to license his picture for a short term (one
to three years). One can appreciate, however, that distributors who
disburse large advances or spend a great deal on marketing, will want a
longer term to ensure that they can recoup these costs. A good
compromise is to give the distributor a short initial term followed by
a series of automatic extensions if performance milestones are met. For
a low-budget film, the contract might provide an initial term of two
years, and if the distributor returns X amount of dollars to the
filmmaker during this first period, the term would be extended. There
could be a series of such rollovers, with the total number of years
capped, perhaps at ten.
There
is another "term" that should be addressed. This is the term
of any license the distributor may grant to a third party. Unless the
contract restricts the distributor, it may license rights to territory
buyers for any length of time. A filmmaker is wise to limit third-party
licenses to 12 years, except for Germany, which often demands 15 years.
What a filmmaker wants to avoid, is discovering that a distributor near
the end of its term, enters into a series of long-term agreements with
third parties at fire sale prices. The distributor may figure that
since it will soon lose all distribution rights anyway, it might as
well take whatever it can get.
Distribution
Fee
Distributors
generally take a distribution fee based on a percentage of gross
revenues. This maximizes their fee as it will be a percentage of a
larger sum than if the fee was based on revenues after deduction of
expenses. In many instances, after the distributor takes a distribution
fee, and recoups its expenses, there may be nothing left for the
filmmaker.
Distribution
fees vary by territory and media. For a domestic theatrical release, a
distributor may ask for a fee of 35% of gross revenues. For domestic
home video, there are two basic approaches: either a 50/50 net deal, or
a royalty deal. The 50/50 net deal allows the distributor to deduct
distribution expenses from gross revenues, and then split the remaining
balance 50/50 with the filmmaker. The royalty approach pays the
filmmaker a royalty, often in the range of 20-25% of wholesale price
for each cassette sold. Thus, for every cassette sold to blockbuster
for $30.00, the filmmaker might receive six dollars. The distributor
bears all distribution expenses. Keep in mind that the price charged
retailers for some films are at a much lower, so-called sell-through
price (e.g., $9.00 per cassette) to encourage customers to buy a
cassette rather than rent it. The royalty rate may be lowered to 10-15%
for such sell-through product. At other times, tapes are sold to
retailers on a revenue-sharing basis. The retailer pays a nominal
amount (less than $5.00) for a tape and agrees to share revenue from it
with the distributor. Most of the major studios, and independent operators
like Rentrack, now supply video cassettes to retailers on this basis.
From
the filmmaker's point of view, the royalty approach has the advantage
of ensuring that the filmmaker shares in revenue even if sales are
modest. Moreover, since the filmmaker's royalty is calculated on the
number of units sold, less returns, there is much less room for
creative accounting. If sales are robust, however, the filmmaker might
receive more under a 50/50 net deal, assuming the distributor has
reasonable expenses and honestly accounts to the filmmaker.
The
distribution fee for arranging for a domestic television license is
often 25% of the license fee but can vary from 10-40%. Licensing a film
for television may entail little more than contacting HBO and offering
them the film. Delivery is accomplished by shipping a video sub-master,
accompanied by artwork and perhaps chain of title documents. More
effort is involved in selling to the numerous pay per view, pay cable,
basic cable and broadcast outlets. A distributor may be able to arrange
for a series of sales to different distributors, giving each a
"window" of time to exhibit the film. Care must be taken to
ensure that the windows are coordinated so that there are no conflicts,
and to ensure that maximum revenue is obtained. Once a film has been
exhibited on basic cable, for example, it may not be desirable to pay
cable buyers.
The
order of the windows for release of product is generally: theatrical,
home video, followed by television. Within the television window, the
order is pay-per-view, pay cable, network broadcast television, basic
cable and broadcast syndication. Note that most indie films are not
licensed for network broadcast. The aforementioned order can be varied.
Sometimes a network is willing to pay a premium to obtain an earlier
window. Likewise, HBO acquires a limited number of completed films and
distributes them as HBO premiers, meaning that these films premier on
HBO without a prior theatrical release.
For
foreign distribution, a filmmaker will typically contract with an
international distributor or foreign sales agent, who will receive a
distribution fee in the range of 20-25% of gross revenues. The sales
agent will be allowed to recoup certain distribution expenses after
deducting its fee. The balance will be paid to the filmmaker.
Note
that gross revenues are usually defined to be a sums less than true
gross. Gross is receipts actually received less any refunds, collection
costs, currency conversion, wire transfer and bank costs, withholding
taxes and any duplication or manufacturing expense incurred to deliver
materials to the foreign buyer.
Some
countries may not allow licensee fees to be transferred out of the
country. In this event, the filmmaker's share of the frozen funds are
deposited in a separate account in the foreign country in the name of
the filmmaker. If these funds cannot be repatriated, the filmmaker will
have to spend them in the foreign country. Sometimes these frozen funds
are spent for a foreign vacation, or to produce a film. Such a film is
a revenue-generating asset that can be removed from the country.
The
fee paid by a territory licensee usually does not include the cost of
manufacturing film prints, video sub-masters, key art or other
materials needed. Most of the time these expenses are paid separately.
Either the foreign buyer will pay the laboratory directly, or the sales
agent is paid for these items. Some sales agents may mark up costs in
order to earn additional revenue, a practice that is often not
disclosed to filmmakers. On the other hand, if duplication costs are
included within the license fee, this will inflate gross revenues,
increasing the distributor's commission.
Distribution
And Marketing Expenses
The
distribution agreement should clearly define the nature and extent of
expenses the distributor is allowed to recoup. Many filmmakers are
shocked to discover that much of the money generated from their film
will stay with the distributor in the form of distribution fees and
reimbursement of expenses. Some distributors will acquire films that
they expect will sell poorly, knowing that whatever revenue is
generated will help the distributor cover its operating overhead.
For
example, a foreign sales company participating in the Cannes film
market could incur costs of $90,000 or more. These expenses might
include the rental of a suite of rooms to serve as market headquarters,
airfare, local transportation, lodging and meals for staff, shipping,
duplication of video cassettes, and entertainment of foreign buyers. If
the foreign sales company is marketing 10 films, the cost might be
apportioned equally among the films. Thus, each filmmaker could be
allocated a $9,000 market expense plus whatever promotional expenses
were incurred to create posters, one-sheets, trailers and advertising.
These promotional expenses could easily total another $30,000. If the foreign
sales company is distributing an indie film which generates $40,000 in
license fees, the distributor would be entitled to retain all of this
revenue. Here's the math: $40,000 gross receipts, less a distribution
fee of 25% ($10,000), reduces the balance to $30,000. This sum is then
applied to the outstanding $39,000 in expenses, leaving the filmmaker
with less than $0.
In
this scenario the filmmaker's movie benefits the distributor while the
filmmaker receives little in return. The distributor gains in a number
of ways: first, it earns a distribution fee; second, the distributor
covers its overhead to attend markets. If the distributor has one or
two of its own films to license, that revenue will not be offset by
overhead expenses because these costs are covered by films acquired
from indie producers. Third, the distributor benefits from the
advertising paid for by the filmmakers. These ads often promote the
distributor as much as any film. Fourth, the distributor may earn fees
by marking up the cost of various deliverables and pocketing the
profit. Fifth, the distributor may secretly receive kickbacks from
poster designers, trailer makers and laboratories. Finally, the
distributor may profit from various accounting games played with
revenues and expenses. Expenses incurred on one film may be misapplied
to another, or applied doubly. Filmmakers may find themselves
"reimbursing" the distributor for more market expenses than
were actually incurred.
While
a filmmaker may not be able to control a distributor's expenses, the
filmmaker can restrict which expenses the distributor is allowed to
recoup. It is often useful to categorize expenses and restrict each
type. I like to divide expenses into 1) market expenses, 2) promotional
expenses, and 3) direct distribution expenses. Since these terms do not
have widely accepted meanings, the drafter must precisely define each.
Market
expenses include costs to attend film markets such as AFM, Cannes and
MIFED, and may include television markets such as MIP, MIP-COM and NATPE.
Market expenses include airfare, hotel, shipping, telephone and staff
expenses to attend a market. These expenses should be recoupable for
the first year of distribution only, and limited to those markets which
Distributor attends. For a low-budget indie film, a distributor should
be allowed to recoup between $2,500 - $10,000 per market with an
overall cap of $7,500 - $20,000. The distributor should agree to attend
no less than three (3) markets during the first year of distribution.
No market expenses should be charged for subsequent years.
Promotional
expenses include the cost of preparing posters, one-sheets, trailers
and advertising. The distributor should agree to spend a minimum amount
of money (the floor) and a maximum (the ceiling or cap). These expenses
are limited to direct out-of-pocket expenses actually spent on behalf
of the film. The agreement should provide that, at the producer's
request, the distributor will provide receipts for each and every
expense or forgo recoupment. Recoupable promotional expenses do not
include any of the distributor's general office, overhead, legal or
staff expenses, nor any of the aforementioned market expenses. The
filmmaker may want a provision that requires the distributor to spend
the minimum amount necessary to adequately promote the film, including
preparation of a trailer, poster, one-sheet, videocassette and
customary promotional material. If the filmmaker has created his own
poster and trailer, for example, the cap on expenses should be lower.
The
category of direct distribution costs includes all reasonable and
verifiable costs incurred in connection with the distribution and sale
of the motion picture. Such expenses might include, long distance phone
charges, photocopying, fax, shipping and courier charges, clearance and
brokerage fees, warehouse and handling charges, insurance, bank
transfers, taxes and duties, and the cost of manufacturing any delivery
item that the filmmaker fails to deliver. Duplication of screening
cassettes and program master tapes, transfer to PAL format, dubbing,
creating a foreign language version, and manufacturing of promotional
material may be recoupable as well, provided that these expenses have
not been paid for by the territory buyer, and they have not been
recouped as a market or promotional expense. Direct distribution
expenses can be capped at a dollar amount or on a percentage basis
(e.g., 10% of Gross Receipts).
Advances
And Guarantees
There
are a number of reasons why filmmakers benefit from receiving an
advance payment toward their share of revenues. First, if the
distributor is dishonest or goes bankrupt, the advance may be the only
money the filmmaker ever collects. Second, the filmmaker can
immediately use the advance to pay outstanding production expenses,
debts or to repay investors. An advance is useful because there is
often a considerable delay from the onset of distribution to the
receipt of revenue from territory licensees. Moreover, revenues are
applied first to pay distributor fees and expenses. Third, if a
distributor has paid a significant advance to secure distribution
rights, it has a strong financial incentive to sell the film. Advances
are recoupable (the distributor can recoup this payment from revenues),
but they are not refundable (if the film generates insufficient revenue
for the distributor to recoup its advance, the filmmaker does not have
to return the advance).
Advances
are either paid on execution of the distribution agreement, or after
delivery, inspection and acceptance of the master materials. If the
filmmaker fails to make delivery, or if the materials are defective,
the distributor may refuse to pay the advance. It is best to give the
distributor a limited period to inspect materials and raise objections.
If materials have defects, the filmmaker should be allowed a reasonable
opportunity to correct them. I like to give distributors no more than
30 days to have the laboratory run a quality control test. The
distributor has a legitimate interest in ensuring that the film
materials are adequate to make copies that will be acceptable to
licensees. What a filmmaker wants to prevent, however, is giving the
distributor a loophole to wiggle out of paying an advance by taking an
unduly long time to approve deliverables, or by allowing the distributor
to falsely claim the materials are defective in order to avoid paying
the advance. If a distributor claims deliverables are defective, and
the filmmaker disagrees, or the filmmaker cannot fix the real or
purported defects, the filmmaker should be able to void the
distribution deal and regain all rights to the film.
If
the advance is paid in installments, then the arrangement is more
properly characterized as a guarantee. Of course, a guarantee is only
as good as the financial health and integrity of the guarantor. If the
distributor goes bankrupt, or if sales are less then expected, the
distributor may renege on its obligation to pay the guaranteed amount.
Distribution agreements should always specify the deadline by which
time the guarantee must be paid.
In
the current marketplace, many distributors decline to pay advances or
guarantees for low-budget films without name actors. Dealmakers need to
be creative in devising formulas that protects the filmmaker's
interests while not imposing an unacceptable burden on the distributor.
I have created such a formula which I call a "50/50
guarantee." Under such a guarantee the distributor agrees to delay
recoupment of its expenses and receipt of its distribution fee so that
at least 50 percent of gross revenues are paid to the filmmaker. In
other words, regardless of the amount of money due the distributor in
the form of recoupable expenses or distribution fee, at least 50 cents
of each dollar received will be remitted to the filmmaker. An
unrecouped distributor may recoup the balance owed from future
revenues, if there are any.
For
example, if $100,000 in gross revenue is received by the distributor,
and if the distributor is owed a total of $60,000 in recoupable
expenses and distribution fees, the distributor would only be permitted
to recoup $50,000 from the first $100,000 in revenues. The outstanding
$10,000 balance due the distributor, could be recouped from the next
$20,000 of revenue.
This
50/50 guarantee is advantageous to the filmmaker because it ensures
that at least 50% of all gross revenues flow down to the filmmaker.
This device will preclude the scenario where a distributor acquires a
film, makes minimal sales, and retains all the revenue. The 50/50
guarantee ensures that the distributor takes some financial risk (in
the form of recouped expenses and distribution fees), if the film under
performs.
Consultation
Rights
Distributors
often grant filmmakers consultation rights. This right may include
consulting the filmmaker about the artwork, selection of theaters, and
the amount and type of advertising purchased. Consultation rights
usually do not mean much because the distributor is only obliged to
consult the filmmaker, not follow his suggestions. Distributors
often insist on having the final say because: 1) they have more
expertise on distribution matters than the filmmaker, and 2) they are
advancing marketing costs.
In
those instances where filmmakers agree to pay for print and advertising
(P&A) costs, distributors will grant filmmakers decision-making
authority. These deals are often referred to as "service
deals," or "rent-a-distributor," deals. They permit the
filmmaker to use the distribution apparatus of a distributor for a fee,
often a percentage of the revenues generated. The distributor might
receive a distribution fee of 17.5% (compared to a customary
distribution fee of 35% for a theatrical release) with the filmmaker
bearing all costs of advertising and marketing.
In
those instances where filmmakers do not have control over marketing,
they may still be able to restrict the distributor from editing or
changing a film or title without the filmmaker's consent. The
distributor may be limited to editing for censorship purposes,
adaptations for television broadcast (e.g., by allowing insertion of
inserting commercials), and addition of sub-titles/dubbing for foreign
use.
Warranties
And Representations
Distributors
routinely require filmmakers to warrant certain facts, and indemnify
the distributor for any loses or legal fees incurred from a breach.
Since the distributor was not present when the script was written, or
the movie produced, the distributor doesn't know whether the filmmaker
secured all the rights needed to exploit the film. The distributor
wants to ensure that the filmmaker has a clean "chain of
title" to his work. To fully own a film, the filmmaker needs to
secure film rights to the script and any underlying literary property,
obtain depiction releases from the actors, and secure work-for-hire
agreements with the director, editor, cinematographer and anyone else
who makes a creative contribution. The distributor will also ask the
filmmaker to warrant that the film doesn't violate any third party
rights, including actions for copyright or trademark infringement,
invasion of rights of privacy and publicity, and defamation.
Astute
filmmakers will demand that the distributor make some warranties of its
own. Filmmakers may want the distributor to warrant that it will
diligently promote and license the film, that it is solvent and not in
danger of bankruptcy, and that there are no outstanding suits or
government investigations that would preclude the distributor from
fulfilling its contractual obligations. The distributor may be asked to
promise that it will obtain all rights needed to use artwork or
advertising materials created at the direction of the distributor, that
the distributor will not edit the film without prior written approval
from the filmmaker, and that the distributor will not accept any
undisclosed consideration or favors in return for licensing the film.
Finally, filmmakers may demand warranties to preclude such unsavory
distributor practices as the misallocation of revenue from package
sales, the receipt of hidden rebates, and the mark up of duplicating
costs so as to profit from the manufacture of deliverables.
Warranties
can be "absolute," or to "the best of one's knowledge
and belief." With an absolute warranty, one is warranting a fact
absolutely, and a good faith mistake is no defense. Conversely, if the
filmmaker warrants a fact to the best of his knowledge and belief, he
is making a lesser promise. He is only stating that as far as he knows
the statement is true. This difference can be important in a creative
enterprise such as movie making where the filmmaker is relying on facts
which he may not have any personal knowledge. For example, the
filmmaker may have purchased a script from a writer who purports to own
all underlying rights. The filmmaker makes a movie based on the script,
enters into a distribution deal, and now discovers that the script was
plagiarized from another work. If the filmmaker made an absolute
warranty, he will be liable to the distributor, irrespective of the
fact that the filmmaker reasonably believed he had secured the rights
and was lied to by writer. On the other hand, if the filmmaker believed
in good faith that he had obtained the necessary rights to the script,
and he only promised that he had such a good faith belief, he would not
be liable.
Accounting
When
a filmmaker receives up-front, complete payment of all monies he will
ever be due, there is little need for a right to inspect the
distributor's books and records. Under such a buy out deal, the
filmmaker may be selling his copyright outright for a flat fee. Most of
the time, however, filmmakers prefer to retain ownership and license
distribution rights for a term of years. Under such a license, the distributor
has a continuing duty to account to the filmmaker for a portion of the
revenues derived from the film. The filmmaker must have the ability to
review the distributor's records to ensure that he is receiving his
fair share of the receipts.
The
customary accounting clause requires the distributor to maintain books
and records with regard to all sales and rentals of the motion picture.
Monthly or quarterly accounting statements, accompanied by any amounts
due, are required to be sent to the filmmaker. The distributor should
be obliged to provide a detailed breakdown by territory and media of
all licenses made, with an indication of how much revenue has been
received and what remains to be collected. An itemized description of
all distribution expenses should be given. Sometimes the distributor is
required to supply the filmmaker with copies of all license agreements.
Some
agreements compel the distributor to establish a separate bank account
for revenues received from the filmmaker's motion picture. The account
may require the filmmaker's signature to make withdrawals. The
shortcoming of such an arrangement, is that an unethical distributor
may accept cash or refuse to deposit checks in the special account. It
is advisable for the distribution agreement to state that the
distributor is holding the filmmaker's share of funds in trust. If the
distributor runs off with the money, criminal liability may ensue.
It
is wise to provide for interest on any overdue amounts. The general
American rule is that prejudgement interest is not awarded the
prevailing party. Until the filmmaker wins an award, the interest clock
does not begin to run. If the distribution agreement provides for
interest on late payments, however, the courts will enforce such a
provision. Therefore, filmmakers should demand a proviso that the
distributor will pay interest on late payments from the date monies are
due, or after a short grace period. The interest rate should be
specified (e.g., 10% per annum), and should not violate state usury laws.
Without such a provision, the distributor has a financial incentive to
hold onto the filmmaker's money and earn interest on it while in sits
in the distributor's bank account.
The
filmmaker should have the right to examine the distributor's books and
records on reasonable notice, at least once a year. Records should be
kept in accordance with generally accepted accounting principles. On
completion of an audit, the filmmaker may be required to furnish the
distributor with a copy of the results. Some agreements provide that in
the event an audit discloses that the filmmaker has been underpaid a
certain amount (e.g., $1,000.00 or 5%), the distributor is obliged to
reimburse the filmmaker audit costs. Otherwise, audit expenses are
borne by the filmmaker.
Distributors
often try to restrict a filmmaker's right to raise objections. The
filmmaker may be deemed to have consented to the accuracy of reports
unless he objects, or initiates legal action, within a year or two of
his receipt of an accounting statement. Such a provision shortens the
otherwise applicable statute of limitations. The difficulty, from the
filmmaker's point of view, is that while he may suspect a report
contains errors, he may not be able to determine the facts without an
audit. Incurring the expense of an audit may not seem prudent if the
amount of money at stake is small. On the other hand, if the filmmaker
decides to wait, he may waive his right to object.
Rather
than force the filmmaker to object and conduct an audit in order to
preserve his rights, a better solution is simply to require the
filmmaker to inform the distributor of objections before initiating
legal proceedings. This gives the distributor an opportunity to review
records and resolve the dispute informally, while preserving the filmmaker's
right to remedy errors.
Arbitration
It
is important for filmmakers to demand an arbitration clause because
they invariably are the financially weaker party. The independent
filmmaker, if not poor when production begins, often is broke when the
film has been completed. He cannot afford to pay attorney and court
costs to enforce his rights. If the filmmaker doesn't a have a viable
means of protecting his interests, he may be forced to watch from the
sidelines as a distributor blatantly breaches the distribution
contract, and pockets all revenue.
The
arbitration clause should provide that the prevailing party is entitled
to reimbursement of costs and reasonable attorneys' fees. Without such
a provision, the prevailing party in litigation or arbitration may not
recoup these expenses.
Binding
arbitration awards are difficult to overturn. The grounds for vacation
are limited to such instances as when an award is procured by
corruption or fraud, or if the arbitrator lacked jurisdiction (Sec.
1268.2 California Code of Civil Procedure). A party cannot reverse an
arbitration award simply because the party does not like the outcome.
If
the losing party does not voluntarily comply with an arbitration award,
the prevailing party can have the award confirmed by the court after a
short hearing. Once confirmed, the award is no different from any court
judgment. A judgment creditor can have the Sheriff seize the judgment
debtor's assets to satisfy the award.
The
arbitration clause may provide that the award is final, binding and
non-appealable. Otherwise, the filmmaker may avoid trial costs only to
incur large legal bills on appeal. The parties should specify the venue
for any arbitration. The parties may agree on the number of arbitrators
and their qualifications. It is common for the parties to have disputes
resolved by a single arbitrator who is an entertainment attorney.
Most
entertainment industry arbitrations are conducted under the auspices of
either the American Arbitration Association (AAA), or IFTA, a trade
organization representing international distributors. The AAA has a
well-defined system of procedural rules and numerous offices across the
nation and in many foreign countries. IFTA is the entity which
organizes the American Film Market (AFM). IFTA arbitrations usually
occur in Los Angeles,
but they can be held during an international film market or in a
foreign city. All IFTA arbitrators are experienced entertainment
attorneys.
Under
IFTA rules, if a filmmaker wins an award, and the distributor refuses
to comply with its terms, the filmmaker can have that distributor
barred from participation in future AFM's. This remedy is particularly
useful if the distributor's assets are abroad and difficult to reach
under the authority of U.S.
law. The threat of being barred from AFM, may persuade an otherwise
obstinate distributor to comply with an arbitration award. Some
disreputable individuals, however, have sought to avoid awards by
abandoning their distribution company, which may be a shell corporation
with no assets. Continuing their business under a new company, they
exploit another wave of filmmakers, fully expecting to abandon this
entity when the law catches up with them.
To
preclude such behavior, IFTA has created a personal binder that can be
enforced against distribution executives. If the filmmaker is able to
persuade an executive to sign such a binder, and his company fails to
comply with an arbitration award, the executive can be barred from
future AFM's.
Insurance
U.S.
distributors often include as a delivery item a policy of Errors and
Omissions (E&O) Insurance. Generally speaking, domestic licensees,
such as HBO, will insist on an E & O policy. Foreign buyers are not
as concerned about insurance as they operate in countries that are less
litigious than the U.S.
E&O
insurance is essentially malpractice coverage for filmmakers. It
protects the insured from liability arising from negligence in not
securing the rights, permissions and clearances needed to exploit the
film. Coverage includes liability arising from invasion of a third
party's rights, as might arise if the film defamed an individual. E
& O insurance does not protect against any intentional misconduct
by the filmmaker. Thus, the policy will not cover a lawsuit arising
from the filmmaker knowingly violating another's rights.
Errors
and omissions. insurance covers any liability as well as legal fees and
cost of a defense. There is often a deductible, which may be ten
thousand dollars or more. Before issuing a policy, insurers will
require applicants to secure all necessary licenses and permissions. A
copyright report and title report will be requested, and employment
agreements must be in writing. Insurers typically ask that the
producer's attorney to review the insurance company's clearance procedures,
clear the script, and review all chain of title documents.
Filmmakers
often cannot afford to purchase E & O insurance, which runs $7,000
to $10,000 for most indie films. The distributor may agree to purchase
a policy and recoup the cost from gross revenues. If the distributor
buys a policy, the filmmaker should be added as an additional named
insured. Some distributors have their own blanket E & O policies to
cover all the films they distribute.
Security
Interest
Filmmakers
may want to secure their right to revenues from their film by having
the distributor grant them a security interest. The collateral here is
often the proceeds derived from exploitation of the film. The
distribution agreement should have a clause granting the filmmaker a
security interest. Typically, a separate long and short form security
agreement is signed by the parties, and a UCC-1 form is signed and
recorded with the Secretary of State where the collateral or
distributor is located. The security interest should also be recorded with
the Copyright Office at the Library of Congress in Washington, D.C.
Distributors
that provide production financing, or pay advances to producers, may
want to protect their interests by securing and recording their own
security interests. Likewise, a bank that has made a production loan
will often insist on securing its interest, and unions as SAG and the
DGA desire security interest to ensure that their members receive any
residuals due them. In fashioning security interests care must be taken
to ensure that they do not conflict. Financiers often insist on a first
priority security interest. Unions may be willing to subordinate their
interests to the financier.
Termination
Filmmakers
like to have the right to terminate the distribution agreement if: 1)
the distributor does a inept job of distributing the film, 2) the
distributor doesn't pay the filmmaker his share of revenue, or 3) the
distributor loses enthusiasm for selling the picture. Distributors
resist giving filmmakers broad termination rights. Early termination
can harm the distributor's reputation and financial health. The
distributor may have contracted to deliver the film to territory
buyers. Moreover, the distributor may have expended significant
marketing expenses which have not yet been recouped.
Many
distribution agreements severely limit a filmmaker's termination
rights. Some agreements require that the filmmaker relinquish his right
to rescission of the contract and any injunctive relief. The filmmaker
is limited to an action for monetary damages. If the filmmaker has the
right to terminate the agreement, the right is often predicated on
giving the distributor prior notice of default and an opportunity to
cure. When a distribution agreement is terminated, the licenses entered
into by the distributor will remain in force. The distributor may have
a continuing right and obligation to service these deals, and is
usually permitted to take a distribution fee from fees received after
termination.
A
filmmaker may also have the right to terminate the agreement in the
event that the distributor files a petition in bankruptcy or consents
to an involuntary petition in bankruptcy or reorganization under
Chapter 11 of the Bankruptcy Act. Such a provision, however, might not
be upheld by a bankruptcy court.
Filmmakers
should carefully consider whether it is in their interest to discharge
a distributor. Switching distributors midstream may create confusion
among buyers, and it may inflate distribution expenses. Moreover, it
can be difficult to find a distributor willing to take a film
"second-hand." Distributors do not want a reputation for
handling other company's leftovers. Besides, the second distributor
knows that the easy sales have been made. The territories remaining may
not be remunerative.
Governing
Law
The
parties should specify which state's law will apply in the event of a
contractual dispute. Such a provision is especially important if the
parties reside in different states. A filmmaker will not want to engage
a protracted procedural dispute before reaching the merits of the case.
Since
most entertainment industry disputes arise in New York or California,
the law in those states is the most settled. Note that if the agreement
has an arbitration clause, the arbitrator can make a decision without
reference to any body of law.
Territory
Minimums
Distribution
agreements with foreign sales companies frequently restrict the
distributor from licensing the film for unreasonably low amounts. The
contract will have an attached Schedule of Minimums listing all the
film-licensing territories of the world with the minimum amounts that
the distributor can accept to license the film in each territory. The
distributor cannot license the film for less than these amounts without
the filmmaker's approval.
There
are several reasons why a filmmaker should insist on territory
minimums. The schedule establishes prices that the parties agree are
reasonable to accept. If the distributor licenses a package of films,
the distributor will have to allocate that fee among the films in the
package. There may be some disagreement as to the relative commercial
worth of each picture. Obviously, an acclaimed film with a star should
be worth more than a badly-made B movie. If the B movie is owned
outright by the distributor, however, the distributor does not share
its revenue with others. Thus the distributor has a financial incentive
to allocate as much of the license fee as possible to its own film, and
allocate as little as possible to outside-acquired product. A Schedule
of Minimums limits the distributor's discretion.
Another
reason for stating minimum prices is to prevent the distributor from
licensing the film at fire-sale prices. If the term of the distribution
agreement is about to expire, the distributor may want to unload the
film at whatever price can be secured.
Schedules
may have separate columns for "asking" and "accept"
prices. Some schedules are divided by media, listing minimums for a
video only sale, a television only sale and an "all rights"
deal.
Return
of Materials
Upon
expiration of the term, all film materials in the possession of the
distributor should be returned to the filmmaker. Whatever artwork,
cassettes, posters and other promotional items, have been created by
the distributor should be turned over the filmmaker. Besides physical
possession of these materials, the filmmaker may want the right to use
these items after the term, and perhaps during the term outside the
territory. For instance, if the foreign sales company has designed a
wonderful poster, the filmmaker may want to have the right to let his
domestic distributor use it. Since the cost of creating this material
is a recoupable expense, the filmmaker is essentially paying for it.
Filmmakers
should specifically provide that any advertising materials created by
the distributor to promote the film, should be created pursuant to a
written work-for-hire contract with the filmmaker named as the owner of
all rights. Thus, if a photo shoot is commissioned to create a poster,
the filmmaker will own the copyright to the photos, not the distributor
or photographer.
Delivery
Distribution
agreements often have an extensive schedule setting forth the technical
specifications for the master materials that need to be delivered.
These schedules should be carefully reviewed by the filmmaker to ensure
that all the items are available, or can be manufactured for a
reasonable cost. Some filmmakers may only have a completed version of
their film on videotape. The cost of conforming their film negative,
and the cost of manufacturing such items as an Internegative, can be
substantial. Many times distributors will agree to advance the cost of
needed deliverables, and recoup the expense from revenues.
Filmmakers
should retain possession of their master elements. They should not give
the distributor any original film negatives, video masters or sound
masters. Instead, distributors should be supplied with a lab access
letter which enables them to order copies of the motion picture.
Likewise, the filmmaker should retain possession of all original
artwork, photos and chain of title documents. The distributor receives
copies.
There
are a number of good reasons for filmmakers to retain possession of
their masters:
1)
Masters may be irreplaceable. If lost or damaged, the filmmaker will
incur a substantial expense to replace these materials, if they can be
replaced.
2)
In the event of a dispute, it is best for the filmmaker to control his
materials. If the distributor has defaulted, the filmmaker may want to
terminate the agreement and arrange for alternative distribution. The
filmmaker will need access to his materials in order to make delivery
to the new distributor.
3)
If the initial distributor goes bankrupt, one do not want to have to go
to court to extricate materials from bankruptcy proceedings.
4)
Several distributors may need access to the materials. Typically,
independent filmmakers enter into multiple distribution deals. Often,
one deal is with an international distributor (a.k.a. foreign sales
agent) to distribute the film outside North America, and one or more
deals may be made with a domestic distributor for distribution in the
United States and Canada. The best solution, when dealing with multiple
distributors is to place the materials in a professional laboratory.
Each distributor is then granted a lab access letter.
5)
One can discourage cheating by keeping masters in a laboratory and
having the lab report how many copies have been duplicated. Suppose
that at the end of one year, the lab reports that ten film prints have
been made. You review the producer reports and notice only eight sales
noted. This is a red flag alerting you that some sales were not
reported. Distributors do not order copies of films unless they have an
order in hand. Typically, they receive full payment for the film before
they manufacture a duplicate and ship it.
Another
means that can be used to discover which countries have licensed the
film, is to place the music on the soundtrack with a music publisher
(which could be a publishing company established by the filmmaker), and
have the publisher enter into an agreement with ASCAP, BMI or one of
the other music collection agencies. These agencies collect public
performance royalties when the film is exhibited on television in the
United States, and in theaters and television abroad. If the music was
registered with such an agency, and royalties from Thailand, for
example, are remitted, this alerts you that a sale was made to this country.
In
selecting a laboratory to deposit materials, choose one that charges
competitive rates and has experience duplicating films for
international distribution. Buyers in certain countries, such as
Germany, often reject films on the grounds of poor technical quality.
It is also a good idea to select a lab that is not the lab normally
used by the distributor. A lab in the habit of fulfilling orders for a
distributor who is a regular client may not bother checking to see if
the distributor has authority to order copies. Moreover, such a lab
might inadvertently release the master to the distributor. The
filmmaker should always deliver the master directly to the laboratory,
after the laboratory and distributor have signed a lab access letter.
If the filmmaker deliver materials to the distributor, and the
distributor in turn deposits the materials with the lab, the laboratory
may treat the distributor as the owner of the film.
The
lab access letter should include language permitting the filmmaker to
receive copies of orders or obtain a lab report disclosing the nature
and amount of duplication performed. Some filmmakers insist that the
laboratory ship all copies directly to the territory buyers. The
distributor will likely insist that the lab access letter be irrevocable
for the term of the distribution deal.
Copyright
1999 Mark Litwak
|
