Protecting Your Clients in the Film Industry

New York State Bar Association - Entertainment, Arts and Sports Law Journal

Summer 2017

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 common issues arising in the industry which all transactional attorneys need to consider and advise their clients before they make that deal at Cannes, the American Film Market or elsewhere. 

Get All Agreements in Writing

Film legend Samuel Goldwyn once said that: “A verbal contract isn't worth the paper it's written on.” Although technically that is not true—oral contracts are just as enforceable—they are much more difficult to prove. It is important to get it in writing as best as possible, as soon as possible. We have had many cases based on handshake agreements that would not have arisen had there not been this barrier, 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.

“We have seen situations where producers worked on a project but could not get it going and they stopped working on it.”

A sound recording of the parties agreeing on an iPhone constitutes a writing. Voicemail can provide salient confirmation. One should always confirm details and understandings of any deal with relevant parties so there is a record. Sending follow-up emails and letters that state the deal agreed upon is prudent, as this can be relevant and important evidence that there was an agreement. As soon as possible, the parties should establish what the terms of the deal are: i.e., what will be the respective roles and credits of the parties? How will deci- sions be made? It is most important to lay a paper trail, by email and in writing. A contract will not be found if the essential terms of the contract have not been agreed upon. The more evidence in writing as to what these terms are, the better for the complaining person. 

We have seen situations where producers worked on a project but could not get it going and they stopped working on it. What happens to the intellectual property of the same? Can one producer make the project without the other and if so, does the other producer get compensated? What if it is a similar project but brought separately and subsequently to one of the producers? Is a fiduciary duty implicated in such cases? It is good to make clear who will control rights and what the terms will be if a project dies or is abandoned but comes back to life.

“Under California and New York laws, there is no fiduciary duty violation for a failure to pay net profits, and the damages are purely contractual.”

Establish a Fiduciary Duty

Owing a fiduciary duty means having a relationship that requires full disclosure and no secret dealings. Attorneys, doctors, and accountants owe this duty to their clients. Partners and those in a joint venture (which is a partnership for a particular purpose, such as to make a movie) thus owe a fiduciary duty to each other. Whether a fiduciary duty is owed is a question of fact if it is not clear from the paperwork or other evidence. If there is a fiduciary duty owed and a breach occurs, punitive damages can be paid, and individuals can also obtain emotional distress damages (for example, for anger, dismay, or frustration). 

Under California and New York laws, there is no fiduciary duty violation for a failure to pay net profits, and the damages are purely contractual.1

Thus, the 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, he or she may agree to this term. This will be tough to get for producers, but should be sought.

Define Terms and Penalties 

There is much litigation with producer's 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? Should the producer authorize and approve any deals? There are situations where the producer's sales agent does not comply, and makes deals below the standard. What are the penalties? Does the film revert to the producer? Is there a cure period, say 30 days?2

”In international agreements, contracting parties must consider in which country the dispute will be adjudicated.”

A common complaint of producers is that the pro- ducer sales agents unfairly bill-up and charge costs for attending festivals and promotions for the film. The accounting usually does not delineate in detail the charges. Producers will want this to happen, as well to establish a cap on expenses and the ability to challenge the same, and 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 for the same. Unfair allocation is a common claim in disputes. A producer will want to be informed, comment and participate in negotiations if this occurs. 

What happens if there is a bankruptcy? The producer will want an immediate end to any agreement. This should apply to foreign distributors as well which go bankrupt. Furthermore, when the deal is over, it is important to ensure that the “materials”—everything needed for the delivery of the film—are promptly returned to the producers.

Establish the Venue

Another term that must be considered in the event of a dispute is venue, which means where the dispute will be adjudicated. It is always thought that the city or “home court” of the contracting party is best. Otherwise, there are travel costs associated, and the possibility of being “hometowned,” that is, that the other side and its attorneys are more wired into the legal process. The parties need to specify where the venue will be, or else
it will be in one of the jurisdictions where the parties reside—probably the jurisdiction of the party with greater leverage. In international agreements, contracting parties must consider in which country the dispute will be adjudicated. The smart attorney and businessperson has the contract delineate the venue for jurisdiction, the country, and the city. 

What is the forum for dispute resolution—the courts of one of the parties or arbitration? Many contracts provide the forum, and this is an increasingly controversial problem. In foreign sales agreements governed by the Independent Film & Television Alliance (IFTA), an arbitration process is commonly required. This makes good sense for the parties, because arbitration is a relatively speedy process, inexpensive in comparison to full-blown court litigation, and 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, which has offices in the United States and London (JAMS), thus preventing the establishment of precedent or publication of unfavorable information. The major movie studios are all requiring JAMS arbitration clauses and refuse to negotiate on this. Most attorneys for claimants say that because of this, there is at least a perception of repeat player/provider bias in requiring mandatory arbitration before one provider.3

Add to the forgoing the cost of arbitration, which can be enormous. Few qualified contingency fee attorneys (and this is if one can legally be allowed to work on this basis, which can be a factor affecting lawyers outside the United States) will take such cases, and studios habitually do not provide attorney fees clauses in their agreements.

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 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, and they may be much less expensive. Further, if the trial court or jury “gets it wrong”, there is always the possibility of a winning appeal, which would otherwise be foreclosed in a binding arbitration. If the other side insists on arbitration, one should document the 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, a provision can be inserted that provides that the arbitrator will be selected by the parties. If they cannot agree, each shall designate a third person who would select the arbitrator. Finally, to be enforceable, the agreement must state that the arbitration is binding, final, and can be enforced by any court of competent jurisdiction.

Foreign Levy Monies and Music Publishing

Our firm brought class actions against the Writers Guild of America, the Dramatists Guild of America and the Screen Actors Guild for their failures to pay “foreign levies” to performers that had been collected and not paid out. Over $250 million has since been released. These are monies paid pursuant to the national laws in countries such as France, Germany, Brazil and many others. It is important to ensure that these monies will be collected. The major studios collect such monies, and independent producers are entitled to be paid them as well.4

A producer will want to seek to exclude these monies from any distribution deal; it's a point of negotiation.

“Producers will want the right to audit directly any licensee. Additionally, producers will want to see all relevant books of any producer sales agent relating to any transaction, as they may be relevant to monies due.”

Likewise, the producer will want to own the music publishing rights to the soundtrack. The performance rights (collected by the foreign affiliates of ASCAP, BMI and SESAC), which are 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, and they will not be collected by any foreign distributor.

Collection Agents

Many deals involve a neutral third party, a collection agent, who will collect and disburse the funds in accordance with any deal. It is always good to consider including this third party to ensure proper accounting and payments.

Auditing

In any contingent compensation or distribution agreement, there must be an accounting and audit provision. One should ensure the right to audit or suffer the consequences, namely, the inability to know if there has been an underpayment. An agreement should include regular accountings and the right to see all relevant documents relating to any income and costs. Indeed, producers should see all agreements relating to their films when and as they are negotiated. Producers will want the right to audit directly any licensee. Additionally, producers will want to see all relevant books of any producer sales agent relating to any transaction, as they may be relevant to monies due. This would include the general ledger of the producer.5 If the error discovered in any audit is more than, say, 10 percent of the amount paid, one should consider having 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 there is a requirement stating so in the contract. The rule in Europe is that attorneys' fees and costs are awarded to the prevailing party. The attorney fees can sometimes dwarf the amount at stake. Some lawyers work on contingency or partial contingency basis; they may be willing to do so when attorneys' fees are available, warranted, and collectable. It is a good suggestion to have an attorneys' fees provision, awarding them to the prevailing party, as part of the contract.

There is no substitute for conscientiousness in deal- making, and being aware and making the client aware of the legal pitfalls and strategies if the deal goes sour—un- fortunately, as so many do.

Endnotes

1. Nolan v. Sam Fox Publishing Company, Inc., 499 F.2d 1394 (2d Cir. 1974); Wolf v. Superior Court, 107 Cal.App.4th 25 (2003).

2. These are typically found in agreements.

3. We previously wrote about issues relating to JAMS in One Sided World, Volume 27, Number 2 of the Entertainment, Arts and Sports Law Journal (Summer, 2016), p. 32.

4. IFTA will collect these monies, as well as entities such as Fintage House.

5. We have seen contracts that prohibit this, which may thwart a meaningful audit.

Neville L. Johnson and Douglas L. Johnson are entertainment counsel at Johnson & Johnson LLP in Beverly Hills, California. Visit them at JJLLP.com.

Reprinted with permission from: Entertainment, Arts and Sports Law Journal, Summer 2017, Vol. 28, No. 2, published by the New York State Bar Association, One Elk Street, Albany, NY 12207.