Before You Sign That Deal At Cannes
Protecting Yourself Legally In The Film Industry
By Neville L. Johnson and Douglas L. Johnson
We litigate controversies on behalf of producers, distributors, writers, actors, directors, talent, and independent film companies. We frequently sue the major studios on behalf of talent and independent producers. Here are some common sense steps you can take to protect your interests in a competitive and sometimes unscrupulous marketplace.
Get all agreements in writing. Film legend Samuel Goldwyn once said, “A verbal contract isn't worth the paper it's written on.” That's not true. Oral contracts are just as enforceable; they're just much more difficult to prove. Get it in writing as best you can, as soon as you can. We have seen many cases based on handshake agreements that could have been avoided with a simple written contract. We have seen this especially in situations where one party is raising money for another, typically investment in a film. The investor is obtained, and thereafter, details of the deal become fuzzy between or among the parties because there is no clear documentation. But the truth is, a sound recording of the parties agreeing on an iPhone constitutes a writing. Voicemail can provide salient confirmation. Always confirm details and understandings of any deal with relevant parties so there is some kind of record. Send follow-up emails and letters that state the deal agreed upon, as this might later become relevant and important evidence that there was an agreement. As soon as possible, establish what the terms of the deal are: What will be the respective roles and credits of the parties? How will decisions be made? Most importantly, create a paper trail, by email and in writing. A contract will not be found binding if the essential terms of the contract have not been agreed upon. The more evidence in writing regarding these terms, the better for the individual bringing suit, often the producer.
Establish a fiduciary duty. We have seen situations where producers worked on a project, but couldn't get it going and ultimately stopped working on it. What happens to the underlying intellectual property? Can one producer make the project without the other and if so, does the other producer get compensated? What if there arises a similar project but brought separately and subsequently to one of the producers? Is a fiduciary duty implicated in such cases? Make clear who will have what rights in such situations.
Owing a fiduciary duty means having a relationship that requires full disclosure and no secret dealings. Attorneys, doctors, accountants owe them to their clients. For partners and those in a joint venture (such as to make a movie), whether a fiduciary duty is determined as owed is a question of fact, if it is not made clear from the paperwork or other evidence. In the event of a breach of fiduciary duty, punitive damages can be assessed, and individuals can also obtain damages for emotional distress (for example, for anger, dismay or frustration).
Under California and New York law, there is no fiduciary duty for a failure to pay net profits; the damages are purely contractual. Thus, a shrewd payee will seek to have a fiduciary duty established when monies are to be collected and paid from future sales. If the producer's sales agent or distributor wants the deal badly enough, they may agree to this term.
Define terms and penalties. We undertake a lot of litigation with producers' sales organizations and foreign distributors. Typically, claims are made for failure to account and pay. What are the terms/penalties in such situations? Producers should consider termination rights of the distributor who fails to comply with the contract, and the elimination of future charges and fees.
Will there be minimum guarantees in foreign territories? We've seen situations where the producer's sales agent did not comply, making deals below the standard. What are the penalties? Does the film revert to the producer? Is there a cure period, say 30 days? (These are typically found in agreements.)
A common complaint of producers is that a sales agent has unfairly billed up and charged costs for attending festivals and promotions for the film. Their accounting usually does not delineate the charges in detail. Producers should require that breakdown as well as determine a cap on expenses and a mechanism to challenge the same, preferably before they are incurred.
Likewise, if a slate of films is being sold in a package, a producer will want to ensure a fair allocation of the revenues and advance being paid. Unfair allocations is a common claim in disputes. A producer should make certain to be informed, comment on and participate in negotiations if this occurs.
What happens if there is a bankruptcy? In that event, the producer should require an immediate end to any agreement. This should apply to foreign distributors as well.
Establish the venue. In the event of a dispute, the venue where the dispute will be adjudicated needs to be defined in the agreement. We suggest that the city or “home court” of the contracting party is best. Otherwise, there are travel costs associated, as well as the possibility of being “hometowned,” a state of disadvantage that exists when one side and its attorneys are more wired into the local legal process than the other. The parties need to specify where the venue will be. Otherwise it will be in one of the jurisdictions where one of the parties resides—probably the one with more leverage. In international agreements, they must consider which country the dispute will be adjudicated in. The party fighting will surely argue for its country. A savvy producer will negotiate the venue for jurisdiction, including the country and the city.
Determine the forum for dispute resolution. Will it be the courts of one of the parties, or arbitration? Many contracts provide the forum and this is becoming an increasingly controversial problem. In foreign sales agreements, the Independent Film & Television Alliance (IFTA) arbitration process is commonly required. This makes good sense for the parties because it is a relatively speedy process, inexpensive in comparison to full-blown court litigation, and its arbitrators are knowledgeable about industry practices. However in IFTA arbitration, punitive damages are not allowed. Therefore if one party defrauds another, the only claim, effectively, can be for contract damages.
Contracts frequently require disputes to be heard in a confidential, binding arbitration before one provider—Judicial Arbitration and Mediation Service (JAMS)— which has offices in the United States and London, thus preventing the establishment of precedent or publication of unfavorable information. The major movie studios currently are all requiring JAMS arbitration clauses and refusing to negotiate on this. Many attorneys for claimants have surmised that this creates at least a perception of repeat player/provider bias.
Add to the forgoing the cost of arbitration, which can be enormous. Few qualified contingency fee attorneys will take such cases, and studios habitually do not provide attorneys' fees clauses in their agreements. This assumes such an attorney is legally allowed to work on this basis. Many lawyers outside the United States may not be able to.
Additionally, discovery is usually limited in arbitrations, sometimes with only one deposition per side permitted. This disfavors claimants, who may need to depose several witnesses from the other side to create a clear picture of events.
For these reasons, having a case in a court of law may prove to be the best scenario if there is a dispute. Public trials provide unwanted “sunshine” on nefarious business practices and can intimidate wrongdoers and warn others by such exposure. They might even be less expensive. Further, if the trial court or jury “gets it wrong” there is always the possibility of a winning appeal, which is foreclosed in a binding arbitration. If the other side insists on arbitration, document their refusal to negotiate on this issue, as some courts of law may find this to be “unconscionable” and thus allow a court trial instead.
If it is not going to be an IFTA arbitration or in a court of law, and arbitration will be the forum, we recommend a provision that provides that the arbitrator will be selected by the parties and if they cannot agree, they shall each designate a third person who shall select the arbitrator.
Finally, remember that to be enforceable, the agreement must state that the arbitration is binding, final and can be enforced by any court of competent jurisdiction.
Don't forget foreign levy monies and music publishing. My firm brought class action suits against the WGA, DGA and SAG for their failure to pay foreign levies that had been collected and not paid out. These are monies paid pursuant to the national laws in countries such as France, Germany, Brazil and many others. Ensure that these monies will be collected. (From our suits, over $200 million has since been paid out.) A producer will want to seek to exclude these monies from any distribution deal, but it's a point of negotiation.
Likewise, the producer will want to own the music publishing rights to the soundtrack. The “performance rights”— monies paid for television usage and from movie theatres—can be substantial. The wise producer will have an “administration agreement” with a music publisher to collect these monies throughout the world, as they will not be collected by any foreign distributor.
Consider a collection agent. Many deals involve a neutral third party, a collection agent that will collect and disburse the funds in accordance with any deal. Consider utilizing the same to ensure proper accounting and payments.
Allow for auditing. In any contingent compensation or distribution agreement, there must be an accounting and audit provision. Ensure the right to audit or suffer the consequences, namely, the inability to know if there has been an underpayment. Get regular accountings and the right to see all relevant documents relating to any income and costs. Producers will want the right to audit directly any licensee. Additionally, producers will want to see all relevant books of any sales agent relating to any transaction, as they may be relevant to monies due. This would include the general ledger of the producer. If an error discovered in any audit is more than, say, 10% of the amount paid, consider negotiating that the other party be responsible for the cost of the audit.
Can attorneys' fees and costs of litigation be obtained? The general rule of the United States is that the prevailing party in litigation is not entitled to attorneys' fees and costs unless a requirement states as much in the contract. The rule in Europe is that attorneys' fees and costs are awarded to the prevailing party. Attorneys' fees can sometimes dwarf the amount at stake. Some lawyers work on a contingency or partial contingency basis; they may be willing to do so when attorneys' fees are available, warranted, and collectable. For this reason, we generally suggest that an attorneys' fees provision awarding them to the prevailing party be made in part of the contract.
There is no substitute in deal-making for conscientiousness and awareness of the legal terrain. If the deal goes sour, as so many sadly do, you'll be glad you looked out for your interests.