After a four year wait, as of May 16, 2016, crowdfunding portals can finally begin to operate and raise investment funds for film and other enterprises.  For the first time, producers will be able to offer funders a share of the profits of a project, including low budget films. Until today, internet platforms like Kickstarter were limited to seeking donations and could only offer T-shirts and other swag to those who donated funds. The new rules make crowdfunding cheaper and easier but there is a $1 million cap on the amount that can be raised in a 12-month period.

Crowdfunding refers to the process of raising money to fund a project or business through numerous small donors, often using an online platform or funding portal to solicit their investment. Because film investments are so risky, the ability to allocate that risk among many investors should increase the amount of financing available for indie films.

Anyone can invest in crowdfund offerings subject to limits on the amounts invested. The entity raising funds must be American and cannot be an investment company.
Funding portals are platforms that provide investors with information about investments being offered.  These portals are designed to allow internet-based platforms or intermediaries to facilitate the offer and sale of securities.  Portals are required to register with the Securities and Exchange Commission and become a member of the Financial Industry Regulatory Authority (FINRA). FINRA’s standards can be reviewed here.

Under FINRA rules, funding portals communication cannot include in their communications any false, exaggerated, unwarranted, promissory or misleading statement or claim; nor omit any material fact or qualification which would cause the communication to be misleading.

The SEC has issued an investor bulletin on Crowdfunding, portions of which are reproduced below:

Can I make a crowdfunding investment?

Anyone can invest in a crowdfunding securities offering.  Because of the risks involved with this type of investing, however, you are limited in how much you can invest during any 12-month period in these transactions.  The limitation on how much you can invest depends on your net worth and annual income.
If either your annual income or your net worth is less than $100,000, then during any 12-month period, you can invest up to the greater of either $2,000 or 5% of the lesser of your annual income or net worth.
If both your annual income and your net worth are equal to or more than $100,000, then during any 12-month period, you can invest up to 10% of annual income or net worth, whichever is lesser, but not to exceed $100,000. 










Joint calculation.  You can calculate your annual income or net worth by jointly including your spouse’s income or assets.  It is not necessary that property be held jointly.  However, if you do calculate your income or assets jointly with your spouse, each of your crowdfunding investments together cannot exceed the limit that would apply to an individual investor at that annual income or net worth level.

How do I calculate my net worth?

Calculating net worth involves adding up all your assets and subtracting all your liabilities.  The resulting sum is your net worth.
For purposes of crowdfunding, the value of your primary residence is not included in your net worth calculation.  In addition, any mortgage or other loan on your home does not count as a liability up to the fair market value of your home.  If the loan is for more than the fair market value of your home (i.e., if your mortgage is underwater), then the loan amount that is over the fair market value counts as a liability under the net worth test.

Further, any increase in the loan amount in the 60 days prior to your purchase of the securities (even if the loan amount doesn’t exceed the value of the residence) will count as a liability as well.  The reason for this is to prevent net worth from being artificially inflated through converting home equity into cash or other assets.

How do I make a crowdfunding investment?

You can only invest in a crowdfunding offering through the online platform, such as a website or a mobile app, of a broker-dealer or a funding portal.  Companies may not offer crowdfunding investments to you directly—they must use a broker-dealer or funding portal.   

The broker-dealer or funding portal—a crowdfunding intermediary—must be registered with the SEC and be a member of the Financial Industry Regulatory Authority (FINRA).  You can obtain information about a broker by visiting FINRA’s BrokerCheck or calling FINRA’s toll-free BrokerCheck hotline at (800) 289-9999.  You can obtain information about a funding portal by visiting the SEC’s EDGAR website.
Keep in mind that you will have to open an account with the crowdfunding intermediary—the broker-dealer or funding portal—in order to make an investment and all written communications relating to your crowdfunding investment will be electronic.

What should I keep in mind?

Crowdfunding offers investors an opportunity to participate in an early-stage venture.  However, you should be aware that early-stage investments may involve very high risks and you should research thoroughly any offering before making an investment decision.  You should read and fully understand the information about the company and the risks that are disclosed to you before making any investment.
The following are some risks to consider before making a crowdfunding investment:

• Speculative.  Investments in startups and early-stage ventures are speculative and these enterprises often fail.  Unlike an investment in a mature business where there is a track record of revenue and income, the success of a startup or early-stage venture often relies on the development of a new product or service that may or may not find a market.  You should be able to afford and be prepared to lose your entire investment.
• Illiquidity.  You will be limited in your ability to resell your investment for the first year and may need to hold your investment for an indefinite period of time.  Unlike investing in companies listed on a stock exchange where you can quickly and easily trade securities on a market, you may have to locate an interested buyer when you do seek to resell your crowdfunded investment. 
• Cancellation restrictions.  Once you make an investment commitment for a crowdfunding offering, you will be committed to make that investment (unless you cancel your commitment within a specified period of time).  As detailed in the box below for Changing your mind, the ability to cancel your commitment is limited.
• Valuation and capitalization.  Your crowdfunding investment may purchase an equity stake in a startup.  Unlike listed companies that are valued publicly through market-driven stock prices, the valuation of private companies, especially startups, is difficult and you may risk overpaying for the equity stake you receive.  In addition, there may be additional classes of equity with rights that are superior to the class of equity being sold through crowdfunding.
• Limited disclosure.  The company must disclose information about the company, its business plan, the offering, and its anticipated use of proceeds, among other things.  An early-stage company may be able to provide only limited information about its business plan and operations because it does not have fully developed operations or a long history to provide more disclosure.  The company is also only obligated to file information annually regarding its business, including financial statements.  A publicly listed company, in contrast, is required to file annual and quarterly reports and promptly disclose certain events—continuing disclosure that you can use to evaluate the status of your investment.  In contrast, you may have only limited continuing disclosure about your crowdfunding investment.
• Investment in personnel.  An early-stage investment is also an investment in the entrepreneur or management of the company.  Being able to execute on the business plan is often an important factor in whether the business is viable and successful.  You should also be aware that a portion of your investment may fund the compensation of the company’s employees, including its management.  You should carefully review any disclosure regarding the company’s use of proceeds.
• Possibility of fraud.  In light of the relative ease with which early-stage companies can raise funds through crowdfunding, it may be the case that certain opportunities turn out to be money-losing fraudulent schemes.  As with other investments, there is no guarantee that crowdfunding investments will be immune from fraud.
• Lack of professional guidance.  Many successful companies partially attribute their early success to the guidance of professional early-stage investors (e.g., angel investors and venture capital firms).  These investors often negotiate for seats on the company’s board of directors and play an important role through their resources, contacts and experience in assisting early-stage companies in executing on their business plans.  An early-stage company primarily financed through crowdfunding may not have the benefit of such professional investors.

​How do I get informed?

Broker-dealers and funding portals that operate crowdfunding platforms are required to offer educational materials to help investors understand this type of investing.  These materials further detail the risks involved when making a crowdfunding investment.  You should take advantage of this resource to educate yourself and understand the risks of making crowdfunding investments.  Remember, this is your money that you are putting at risk, and you should only invest after careful consideration of the risks.
Read the full Investor Bulletin.
​
About Mark Litwak: Mark Litwak is a veteran entertainment attorney and producer’s rep based in Los Angeles, California. He is the author of six books including: Dealmaking in the Film and Television Industry, Contracts for the Film and Television Industry, and Risky Business: Financing and Distributing Independent Film. He is an adjunct professor at USC Gould School of Law and the creator of the Entertainment Law Resources (www.marklitwak.com). He can be reached at law2@marklitwak.com

While the United States Constitution does not contain a single mention of a right to privacy, the United States Supreme Court has held that such a right is implicit in the Constitution and Bill of Rights. The right of privacy has been defined as the right to live one’s life in seclusion, without being subjected to unwarranted and undesired publicity. In short, it is the right to be left alone. However, the Bill of Rights also protects the right to free speech under the First Amendment.  Consequently, it is not always evident which of these rights prevails when they come in conflict.  Journalists and filmmakers often wonder how much they can reveal without infringing a subject’s right of privacy.

This issue was recently illustrated when a Florida jury awarded Hulk Hogan $140
million in damages for invasion of his privacy after Gawker Media published a tape that was almost two minutes in length of him having sex with the wife of a friend. Hulk Hogan is a well-known professional wrestler and celebrity. Gawker Media is an online media publisher with 64 million monthly US readers.

Courts have found that a person who publicizes a matter concerning the private life of another can be liable for invasion of privacy if the matter is of a kind that would be highly offensive to a reasonable person, and is not of legitimate concern to the public. In other words, the publication is offensive and not newsworthy.

Clearly, most people would find the unauthorized publication of a private sex tape to be highly offensive. Just a few weeks ago, a jury awarded Fox Sports broadcaster Erin Andrews $55 million in damages against a voyeur and the operators of a Nashville Marriott when the hotel let a stalker book a room next door to her, which he used to surreptitiously videotape her in the nude and then uploaded the clip to the Internet.
​
However, the term “newsworthy” is an imprecise term of art that the courts have struggled to define. The Hulk Hogan case was a clash between Gawker’s free speech rights under the First Amendment and Hogan’s right to maintain his privacy. While Gawker often deals in salacious news and gossip, it has the same First Amendment rights as more esteemed publications like the New York Times. Hogan is a celebrity, and courts have found that celebrities by thrusting themselves into the limelight have less of a right to privacy than those who closely guard their privacy. However, some individuals who have not sought publicity or consented to it have through their own conduct, such as committing a crime, become a legitimate subject of public interest. These involuntary public figures are treated the same as those who have sought publicity. Here, Hogan publicly disclosed to radio jock Howard Stern that he slept with his friend’s wife with the blessing of her husband although he claimed that he was not aware that his activities were being filmed by security cameras in the home.

It can be difficult to define exactly what is newsworthy, which is often described as that which is of legitimate public concern.  However, just because the public might be interested in scandalous details of a celebrity’s personal life, does not by itself make an item newsworthy. Courts have mentioned several factors including the value to society of the information published, the details and nature of the information disclosed, and whether the party voluntarily placed them in the public eye.

In one case, a newspaper revealed that a college student running for student body president was a transsexual. The court found that this disclosure was not newsworthy.[1] The court saw little connection between the information disclosed and the student’s fitness for this office. Likewise, a mother’s private words spoken over the body of her slain son as he lay in a hospital room were held to be not newsworthy although it was undisputed that the public has a legitimate public interest in gang violence.[2]

So, while the legitimate public interest extends beyond hard news to information provided for educational and amusement entertainment purposes, it does not include sensational prying into private lives for its own sake.” Gawker argued that the facts were not private at the time the Gawker story was posted, but had been widely disseminated before in both news reports and photographs. It bears noting that Hogan was upset not only by the sexual revelations in the tape, but because he admitted to being a racist and used some extremely offensive language. After the World Wrestling Entertainment Inc. (“WWE”) learned that the tape contained such racist remarks, they terminated their contract with him.

In the end, the jury was obviously sympathetic to Hogan. He asked for $100 million in damages, yet the jury awarded him $140 million. The award was comprised of $55 million for economic injuries, $60 million for emotional distress, and another $25 million in punitive damages.

In order to avoid liability, filmmakers should follow these guidelines:

1. Be especially careful if you disclose information about private living individuals who are not public figures or public officials.
2. Obtain written releases from people on-camera that might be identifiable to an audience whenever possible.
3. Purchase Errors & Omissions Insurance (E & O Insurance) for your company and add yourself as a named insured.
4. Avoid the use of hidden cameras and microphones.
5. To the extent possible, base the information in your film on matters of public record, such as court transcripts. Revealing matters of public record cannot be the basis for an invasion of privacy action because they are already public.
6. Have an experienced attorney review your completed film before it is released.

[1] Diaz v. Oakland Tribune, Inc. 139 Cal.App.3d 118, 126 (1983).

[2] Green v. Chicago Tribune Co., 296 Ill. App.3d 1, 675 NE 2nd 249 (1996).

This comprehensive seminar —for new attorneys, attorneys transitioning to entertainment law, and filmmakers— explores how independent films are financed and distributed.
Topics include financing via pre-sales, debt and equity investors, negotiating tactics, typical contract terms, cross-collateralization, creative accounting, and ethical concerns. Particular attention will be paid to how producers and filmmakers can protect themselves by: investigating distributors; watering down warranties; adding contract provisions covering performance, termination, and alternative dispute resolution; getting errors and omissions (E&O) insurance; and using lab access letters and schedules of minimums. Other topics will include: criteria for selecting a distributor; new media distribution; which contract terms are negotiable; compliance with state and federal laws regarding investors; retaining an attorney, producer reps and publicists; and confirming awards and enforcing judgments. Extensive handouts will be distributed via email in advance of the program, including a distribution contract, articles, and a self-defense checklist. Finally, the lunch hour will provide a great opportunity for networking.

Mark Litwak is a veteran entertainment attorney with offices in Beverly Hills, California. His practice includes work in the areas of copyright, trademark, contract, multimedia law, intellectual property, and book publishing. Litwak is an adjunct professor at USC Law School, and functions as a Producer’s Rep, assisting filmmakers in the financing, marketing and distribution of their films. Litwak is the author of many books including: Reel Power, Dealmaking in the Film and Television Industry (winner of the 1995 Krazna-Kranz Moving Image Book Award), Contracts for the Film and Television Industry, Litwak’s Multimedia Producer’s Handbook, and his latest book, Risky Business, Financing and Distributing Independent Film.
*CLE with VLA: Seven (7) New York CLE credits awarded for attorneys: 4 Areas of Professional Practice credits, 2 Skills credits, and 1 Ethics credit. This program qualifies as “transitional” for newly admitted attorneys.
When:
Friday, April 29, 2016, 9:30 AM – 5 PM – CLE*
Space is limited! Please register early.
Where:  Manhattan 

​More Info and to register

Buckle your seat belts because there may soon be a wave of new indie films produced under relaxed government regulations. The Securities and Exchange Commission (“SEC”) after a long delay has finally adopted rules to permit companies to offer and sell securities through crowdfunding. Several years overdue, the new Regulations for Crowdfunding are to implement the requirements of the Jumpstart Our Business Startups Act (“JOBS Act”), enacted on April 5, 2012.
 
Crowdfunding refers to the process of raising money to fund a project or business through numerous small donors often using an online platform or funding portal to solicit their investment. Because investing is film is such a risky endeavor, being able to spread that risk among many small investors may substantially increase the amount of financing available for indie films.
 
Essentially the new rules will allow companies like Kickstarter and Indiegogo to offer those who contribute funds to receive more than posters, T-shirts and the other swag they now get in return for a donation.  For the first time, promoters will also be able to offer a share of the profits in a project. Previously, Internet platforms were limited to donations unless they complied with complex and costly SEC regulations governing investments. Under the new rules, however, if an indie film is a hit, the backers can share in its profits. This will likely encourage small investors who want to participate in film or other start up businesses but can only afford to make a modest contribution.
 
The new rules limit the amount of individual investments to relatively small sums but collectively they will constitute  enough of an investment to make a big difference for many start-ups. Investors with annual incomes or a net worth of less than $100,000 can contribute up to  $2,000 or 5 percent of their net worth or income, whichever is greater. Wealthier investors can invest 10 percent of the lesser of their annual income or net worth in these transactions, with a cap of $100,000 over a 12-month period. The rules will allow a producer to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period.   While this cap limits investment to what amounts to the catering budget for major studio films, it will allow many indie filmmakers to raise enough to produce a film or pilot program.
 
Funding portals are platforms that provide investors with information about investments being offered.  These portals are designed to allow Internet-based platforms or intermediaries to facilitate the offer and sale of securities without having to register with the SEC as brokers.  Portals are required to register with the Commission and become a member of a national securities association (currently, FINRA).
 
The new crowdfunding rules and forms will be effective 180 days after they are published in the Federal Register. The forms enabling funding portals to register with the Commission will be effective Jan. 29, 2016.  Companies relying on the crowdfunding exemption are required to file an annual report with the SEC and provide it to investors.
 
The SEC press release can be read here.
 
You can download the complete rules here.  Warning they are 686 pages long.

Many filmmakers have a vague understanding of the term “Chain of Title.” Often they don’t focus on this phrase until production has been completed and a distributor expresses interest in their film. They quickly discover that they must secure E&O insurance in order to make delivery to the distributor, and they cannot obtain such insurance without having a clean chain of title. So, what exactly is chain of title?
 
One reason for the confusion about chain of title is that it is not a single document, but many documents. Moreover, the documents that comprise a satisfactory chain of title for one film are different for another. Chain of title is essentially all those documents needed to show that the filmmaker owns his or her film and has secured all the rights necessary to distribute it. If the filmmaker does not possess the necessary rights, they cannot grant those rights to a distributor. A distributor may be quite enthusiastic about a film; however, that enthusiasm will dissipate quickly if they think that distributing the film will subject them to a lawsuit because the filmmaker did not secure his/her rights. And, yes, distributors can be liable for a filmmaker’s negligence even if the distributor did nothing wrong.
 
It is often said that a copyright is “infinitely divisible.” That means that you can divide your copyright in any number of ways. For example, you could split the rights by time. One party could have the rights for one year followed by a different party having rights thereafter. You can also allocate rights geographically by giving one party rights to distribute a film in Belgium and another in Canada. Likewise, you could separate rights by media. One company could have the right to exhibit the film in theaters while another has the right to show the film on television. In other words, you can put your copyrighted work in the Veg-O-Matic and slice and dice it in an infinite number of different ways.
 
If a filmmaker wants to adapt a novel into a film, chain of title needs to include a document giving the filmmaker the motion picture adaptation rights to the novel. But, if the script is an original work not based on a book, such a document is irrelevant.
 
In examining chain of title, one has to determine exactly which rights are being granted and which are reserved. The grant of rights to adapt a book into a movie could be to make a single movie or it could be for an unlimited number of movies. It could include the right to make a television series based on the book, or not. Authors, who grant movie adaptation rights to their books, often reserve radio rights, live television rights, and dramatic rights, which is the right to turn the book into a play. They also may reserve author-written sequel rights, which would allow the author to write subsequent books using the same characters as the original book. At the same time, the producer may have the right to produce sequel motion pictures. Thus, allocating rights can get complicated. Moreover, if the paperwork does not precisely describe what rights are being granted, this ambiguity could cause problems later.
 
To obtain a clean chain of title, a filmmaker will also need to secure copyright ownership of any work performed by the cast and crew that make a creative contribution to the film. This is typically accomplished with employment agreements that producers, directors, screenwriters, actors, and other crew members sign. These agreements should have an explicit “work for hire” clause, which states that the production company owns the copyright to the work product created by the employee. Just because the filmmaker paid an actor, does not mean there is an enforceable agreement in place granting the producer the right to depict the actor in the movie or in related works such as trailers and advertising.
 
Some films are based on actual events, and for those people who are portrayed in the movie, it may be necessary to secure life story rights.  However, life story rights are not always needed because the First Amendment generally permits filmmakers, like journalists, to write or portray other people without their permission. And, for those persons who are not identifiable to moviegoers, it may not be necessary. On the other hand, when a filmmaker takes creative liberties with a true story and changes facts and scenarios for dramatic purposes, it is often advisable to obtain life story rights. Nevertheless, these may not be needed if the persons depicted are dead or are public figures.
 
Many films have music on their soundtrack. The right to use this music can be acquired in different ways. A producer could hire a composer to create an original soundtrack under a “work for hire” employment agreement vesting ownership in the producer. Or the producer could license pre-existing music from a record label or publisher. The rights needed for music used on a soundtrack include the right to synchronize the music to the filmed images and if an existing recording is used, master use rights to that recording.
 
Chain of title also includes other permission to use still photos, stock footage, or artwork included in a film. The title of a motion picture should also be cleared before it is locked. A trademark search should be performed to see if any other motion pictures have similar titles, although a similar title does not necessarily preclude the use of the title.
 
Even filmmakers who produce scripts that they have written will need certain documents.  If the filmmaker has set up a corporation or LLC to produce the film, the filmmaker will need to assign rights to their company, which is considered a separate legal entity from the filmmaker, even if the filmmaker is the sole owner.
There cannot be any gaps in the chain of title, and all documents should be signed.  One needs to show continuous uninterrupted assignment of rights from one to party to another. And all assignments of rights need to be in writing. Under American copyright law one cannot transfer exclusive rights in a copyrighted work orally. Transfer documents should be recorded at the U.S. Copyright Office.
 
There are a few items that you may not need to secure any rights to. Any material that is clearly in the public domain or considered a fair use under copyright law may be used without any permission. Then again, it is not always clear whether an item is in the public domain or whether an excerpt from a copyright work would be considered a fair use.
 
Filmmakers are well advised to pay attention to securing documents that will comprise their chain of title before production is complete. If you produce a wonderful film that wins all kinds of awards and accolades and numerous distributors are competing to acquire rights in your film, you might not be able to conclude a deal if critical paperwork is missing. And, if an actor who did not sign an employment agreement cannot be located, your film may never be released.
 
Watch this YouTube video of Mark explaining chain of title at a Volunteer Lawyers for the Arts seminar. 
​

A recent Ninth Circuit Court of Appeals decision is good news for filmmakers who want to rely on the fair use doctrine to include materials in their own work without obtaining permission. Stephanie Lenz is a mom who posted a 29-second amateur video onto YouTube of her children dancing in her kitchen while the Prince song Let’s Go Crazy played in the background. The song was audible for about twenty seconds. Lenz did not attempt to obtain a license for use of the music.

 After Prince’s publisher, Universal Music Group, became aware of the video, it sent YouTube a takedown notice under the Digital Millennium Copyright Act (DMCA) claiming that the video infringed Prince’s copyright. YouTube removed the video and notified Lenz of its removal and the alleged infringement of Prince’s song. Lenz then sent YouTube a counter-notification, which included a statement made under penalty of perjury that she had a good faith belief that the material was mistakenly taken down. She claimed that the inclusion of the song in her video was a fair use and requested that it be reloaded onto You Tube. Under the fair use doctrine, one can draw upon copyrighted works to produce new works such as comment and criticism, parody, news reporting, teaching, scholarship, and research. For example, a movie or literary critic does not need to seek permission to include a small quote from a film being reviewed.

 YouTube reposted Lenz’s dancing baby video six weeks later. Several months later, Prince issued a statement threatening to sue several Internet service providers for copyright infringement as part of an effort to “to reclaim his art on the internet.” Universal then released a statement to ABC News regarding the removal of Lenz’s video that “Prince believes it is wrong for YouTube, or any other user-generated site, to appropriate his music without his consent…legally, he has the right to have his music removed. We support him and this important principle. That’s why, over the last few months, we have asked YouTube to remove thousands of different videos that use Prince’s music without his permission.”

The Electronic Frontier Foundation (EFF) decided to contest the practice and filed suit against Universal arguing that takedown notices issued without considering whether a fair use exists is abusive and infringed Lenz’s rights of free speech. EFF argued that Universal acted in bad faith when they sent the takedown notice and they should have known that the video was not an infringing use.

 Under the DMCA, service providers like YouTube are not liable if they inadvertently allow infringing material to be posted on their sites. YouTube has more than 1 billion users and every minute 300 hours of programming is uploaded. It would be impossible for it to carefully review all material before allowing it to be uploaded. To avoid liability, YouTube only has to comply with the DMCA requirements, which include responding timely to takedown notices. However, if copyright owners misrepresent that material is infringing when it is not, they can be liable for damages including attorney fees and costs.  

 The court held that the DCMA requires copyright holders to consider fair use before sending a takedown notification, and that the failure to do so raises a triable issue as to whether the copyright holder formed a subjective good faith belief that the use was not authorized by law. Universal can be liable for damages if it knowingly misrepresented in the takedown notification that it had formed a good faith belief the video was not authorized by the law. The decision “sends a strong message that copyright law does not authorize thoughtless censorship of lawful speech,” said Lenz’s lawyer, Corynne McSherry of the Electronic Frontier Foundation in San Francisco.

 This case follows several other recent decisions which gave an expansive view of fair use doctrine. In Faulkner Literary Rights, LLC v. Sony Pictures Classics, Inc., the court held that Woody Allen’s inclusion of a short quote (“The past is not dead! Actually, it’s not even past”) from William Faulkner’s Requiem for a Nun in the film Midnight in Paris was a fair use. In Seltzer v. Green Day, Inc., Nos. 11-56573, 11-57160, 2013 U.S. App. LEXIS 16322 (9th Cir. Aug. 7, 2013) the Ninth Circuit held that the popular band Green Day’s unauthorized use of street artists’ work, as a video backdrop for its stage show did not violate the artists’ rights. 

View the video 


Read the full case 

Errors and Omissions Insurance (also known as E&O Insurance) is malpractice insurance for filmmakers. These policies protect against claims of defamation, invasion of privacy, infringement of the right of publicity, idea and story theft, copyright infringement, plagiarism, piracy, and the unauthorized use of names and trademarks. Some policies cover unfair competition and failure to provide screen credit.

 Even cautious filmmakers may find themselves facing a lawsuit through no fault of their own. Liability can arise even if they did not knowingly violate another’s rights and were diligent in securing all the rights they believed were needed.  

 Suppose a producer inadvertently infringes a copyrighted song in the course of placing it on the soundtrack of a film. Although the producer did not intend to violate the songwriter’s rights, and licensed the song from what appeared to be a reputable publisher, she can nevertheless be liable for damages. Although the filmmaker honestly believed she was licensing music from the legitimate owner of those rights, if that company did not have the rights they purported to have, the filmmaker may be liable. While a judge could reduce the damages awarded against an innocent infringer, compared to those who intentionally infringe another’s work, the attorney fees and costs to defend such a suit can be astronomical.

 However, if the filmmaker has E&O insurance, it will cover potential liability as well as defense costs. Like other insurance policies, there is a deductible, which is usually $10,000 or more. A typical policy provides three years of coverage for $1 million per claim and $3 million for aggregate claims. E&O insurance does not cover intentional wrongdoing or any pre-existing claims. The insurance carrier will assume liability for negligent (careless) acts, but not for deliberate wrongdoing.

 Insurers have different concerns based on the type of film being considered for coverage.  Movies can be factual or fictional, original or derivative, or any possible combination. When a script is original, meaning it is not based on a pre-existing work, its origins must be determined to ensure that it is wholly original and nothing has been copied from another copyrighted work. If the script is derivative, then the filmmaker needs to secure rights from the owner of the original work it is based on.

 When a film is based on a true story, the screenplay should be derived from primary sources (e.g., court transcripts, interviews with witnesses), and not secondary sources (e.g., another author’s work product), unless permission has been obtained to use such secondary sources or the information is not protected under copyright.  

Some filmmakers tell fictional stories that are inspired by true events, such as the 1959 film Compulsion. In this case, an author wrote a book based on the real life kidnapping and murder of a young boy by Nathan Leopold. Although, Leopold's name did not appear in the movie based on the book, the promotional materials made it clear it was a work of fiction based on the crime. Then there are movies that are presented as factual, such as docudramas and biopics,that may not be entirely factual. Often dramatic liberties are taken, such as rearranging events in a different order or combining secondary characters into a composite character.

 With a fictional story, like Spiderman, it is important that the characters not infringe the copyright of another work. With a docudrama, the insurer may want to know if the filmmaker acquired life story rights of persons portrayed in the film and if a true story has been changed for dramatic reasons. Such changes could damage the reputations of living persons portrayed in the story.

 Because the issues are complex, insurance companies usually ask applicants for the name of their production attorney and will frequently contact the attorney to ensure that all necessary releases and licenses have been secured and that the work complies with the insurer’s clearance policies.It is best to employ an attorney before production starts, so that appropriate contracts are used from the outset. If paperwork needs to be re-done after production, it can be very expensive and maybe impossible, if the filmmaker is unable to locate actors, crew, and vendors to have them to sign revised agreements. In addition, if a film has to be re-edited because certain footage cannot be cleared, that can be very expensive.

 Almost all distributors in North America will not distribute a picture without E & O insurance. Errors and Omissions insurance may also be referred to as Media Perils, media liability insurance or libel insurance. Some filmmakers do not even think about E & O insurance until a distribution deal for their film is being negotiated and they notice among the delivery items is a requirement for the producer to provide a certificate of insurance. They may be surprised to learn that distributors expect the filmmaker to secure and pay for E & O insurance, which costs thousands of dollars and it may take weeks for the insurer to process an application. Before issuing a policy, the insurer may want to review releases, permissions, and copyright and title reports. If the filmmaker is claiming fair use or public domain as the basis for certain materials incorporated in a film, she may need to secure a legal opinion to support the claim. If music is incorporated on the soundtrack, synchronization, performance and master use licenses may be needed. Filmmakers, who are missing essential contracts or information, will not be able to secure insurance or the insurance will exclude certain types of claims, which usually means most distributors will decline to distribute the picture. 

 In order to apply for insurance, filmmakers will need to complete a detailed application that asks for many details about the production and its clearance procedures and chain of title, including the identity of their production lawyer. The application requires the filmmaker to declare that all the information in the application is true, accurate, and not misleading. If the filmmaker misrepresents any facts, the insurance company will have an escape route to refuse to provide coverage against a lawsuit against the filmmaker. The insurance company can use this against the filmmaker and in the event of a claim, contend that the policy was procured by fraud and the policy can be rescinded.

 There are different types of policies. A “claims made” policy only covers lawsuits that arise during the policy period. An “occurrence” policy covers all claims arising out of occurrences during the policy period even if the suit is filed years after the policy has expired. If you purchase a “claims made” policy, you need to renew the policy to continue coverage after the initial period expires.

 Lawsuits are subject to different statutes of limitations. Defamation actions usually have short statutes, often one year from when the defamatory statement is first published. Copyright claims must be brought within three years from when a claim accrues, but there is a “separate-accrual rule” that treats each successive violation of a copyright as a new infringing act. Thus, each time a copy of the work is sold or distributed, the claim period could begin again. Copyright often endures for the lifetime of the author plus 70 years, so protection can last for many years. Moreover, some claims may not begin to run until the plaintiff discovers the infringement. While many claims that are covered under an E & O insurance policy often arise soon after a film’s initial public release, sometimes claims surface years later.

 When filmmakers purchase a policy, they are the Named Insured and typically they add the distributor as an additional insured. An “additional insured” is an individual or entity added to the coverage of the policy often for no extra cost. In many instances employment agreements or guild regulations require adding talent as additional insureds. For instance, the Writer’s Guild Minimum Basic Agreement provides that guild writers be added the producer’s policy. The coverage of an additional insured is generally limited to claims asserted against that additional insured rising out of the activities of the Named Insured. 

A checklist for applying for Errors and Omissions Insurance can be reviewed here.

What kind of income can a filmmaker expect to earn over his lifetime? A jury in San Diego recently considered that question and came up with a multi-million dollar award to a promising 26 year old filmmaker who suffered serious injuries in a car accident.

Russell Sheaffer was a 24 year old doctoral student at Indiana University who was in California working on a documentary film. He was driving a car on Interstate 15 when a large truck crashed into a line of vehicles, causing a chain-reaction.  Sheaffer’s Toyota was struck from behind, causing his driver’s seat to break and pushing his car into a large SUV in front of him. 

The case is tragic but also interesting because the amount of income a young filmmaker can expect to earn is difficult to calculate. It is certainly more speculative and uncertain what filmmaker might earn compared to many other occupations.   Those of us in the industry know of talented filmmakers who struggle to just support themselves, and many eventually leave the field if they are not able to succeed in this highly competitive and unpredictable business.  Even among those who succeed, the amount of income earned varies widely.

In such cases  evidence of the plaintiff's income prior to the injury is admissible to show the extent to which his earning capacity may have been impaired, but a jury cannot, in the absence of any evidence tending to show an actual impairment of earning capacity, compensate the victim  for an alleged loss. The harm to be compensated for is the loss actually sustained by the plaintiff, and not that which would result to the average person from a similar injury.

As a general rule, uncertain or speculative damages are not recoverable. Judges and juries cannot arbitrarily pick a number out of the air to compensate a victim for lost future income. A victim suing for damages is permitted to base his or her recovery on his or her prospective earnings for the balance of his or her life expectancy at the time of the injury, undiminished by any shortening of their life as a result of the injury. Recovery of such damages is consistent with the general rule permitting an award based on the loss of future earnings one is likely to suffer because of inability to work for as long a period of time in the future as the plaintiff could have done had he or she not sustained the injury.

Sheaffer sustained serious injuries including facial fractures to his jaw, an imploded sinus and a minor traumatic brain injury.  He underwent two major surgeries, and after a year of doctor’s visits, CT scans and 3-D modeling of his jaw revealed a traumatically induced, rapidly progressing, and degenerative joint disease.  After the crash he was hospitalized for three days and was discharged after surgery and his jaw was wired shut for eight weeks.  He required subsequent surgical interventions for pain.  Future surgical procedures and continued care and therapies will be required in the future for his jaw and chronic pain. 

Sheaffer certainly showed promise after he earned a degree in film and media studies from the University of California, Irvine, and a master’s degree in cinema studies from New York University. At NYU, he co-wrote and co-directed Masculinity and Me with actor and filmmaker James Franco. He was named one of Variety’s 110 Students to Watch in its annual Education Impact Report. At the time of his injury he was a doctoral student at Indiana University.

The jury awarded him $12,500,000 for past and future pain and suffering, $2,888,373 for past and future medical expenses, and $2,005,107 for past and future loss of earnings.

Last year, I wrote an article titled “Do Your Actors Own Your Film?” criticizing the decision of a three-judge panel of the Ninth Circuit that found an actress who performed a small role was likely to succeed in her copyright claim in the film. The Court accepted the premise that since the actress had never signed a document transferring her rights to the producer, she had an independent copyright interest in the film by virtue of her performance in it.  That decision caused uproar in the independent film community as well as among internet companies and copyright law professors because it reversed precedent and appeared to rewrite basic copyright law.  My article was cited in the amicus brief filed by the International Documentary Association and Film Independent urging the Court to reverse the earlier ruling. I am pleased to report that the Ninth Circuit Court has now reversed the prior holding.

Recall that the plaintiff, Cindy Lee Garcia, had agreed to act in an independent film with the working title “Desert Warrior.” She thought she was playing a part in an Arabian adventure story. She worked for three days and was paid $500.  However, her scene was never used in an Arabian adventure film.   Instead, a five-second clip of Garcia’s performance was used in a different video. Garcia spoke only two sentences: “Is George crazy? Our daughter is but a child?” But, her performance was later dubbed without her knowledge or consent, so that her character now said “Is your Mohammed a child molester?” In June 2012, the creator of the film uploaded a 13:51 minute trailer of the film to YouTube, the video-sharing website owned by Google, Inc.  This trailer was extremely offensive to Muslims.

Garcia then contacted Google and attempted to have the trailer taken down from YouTube. Google refused after concluding that she was not one of its owners.  The trial court denied her request for an injunction.  While she did not claim copyright ownership in the entire film, she asserted that her performance within the film was independently copyrightable and that she retained an interest in that copyright. She argued that her interest should be enough to force Google to take down the trailer from the Internet. A three-judge panel of the Ninth Circuit agreed and ordered the trailer removed from YouTube.

As you may remember, the release of this film caused massive protests and violence and the death of more than 50 people. An Egyptian cleric issued a fatwa, calling for the killing of all those involved with the film, and Garcia received numerous death threats.  She was forced to take security precautions and move her home and business.  This is the same film that the Obama administration mentioned as the possible cause for the 2012 attack on the U.S. Consulate in Benghazi, Libya.

Nonetheless, the initial Ninth Circuit decision set a terrible precedent because it appeared to grant actors a separate copyright interest in films in which they appeared.  Under this rationale, if a producer had not secured the rights to their actors’ performances, a single actor could claim copyright ownership in his or her performance, and halt distribution of a film thereby causing enormous losses to the producers. Moreover, anyone shooting an amateur video in a public place and then uploading it to the internet could be subject to a claim from any subject caught on camera.  Many documentaries and news crews shoot actual events and people. Could a subject portrayed in a negative light claim that because they had not signed a release they were a co-owner of the film?

In reversing the prior decision, the Ninth Circuit explained that one of the essential requirements to obtain a copyright in one’s work is that one must put their work into a fixed tangible medium of expression. That fixation must be done “by or under the authority of the author.” In other words, it has to be put in a fixed medium by the person claiming copyright ownership or someone under his or her direction. In this case, the producer fixed Garcia’s performance and it was not under her direction.  The Court explained “Garcia’s theory can be likened to ‘copyright cherry picking,’ which would enable any contributor from a costume designer down to an extra or best boy to claim copyright in random bits and pieces of a unitary motion picture without satisfying the requirements of the Copyright Act.”

The Court was sympathetic to Garcia’s plight and noted that she might have a remedy under other legal doctrines such as privacy laws or the right of publicity and defamation. But she does not have any interest in the copyright. The opinion and amicus briefs can be read here. https://www.eff.org/cases/garcia-v-google-inc