Many years ago I represented a filmmaker who entered into an agreement with a small home-video distributor. The company had a decent reputation, and since there were no other offers for this $80,000 movie, a deal was struck. The filmmaker was promised a $40,000 advance for U.S. home video rights. The advance was payable in four installments over the course of a year. After the second installment was received, the distributor was acquired.
The new owners stopped making payments to my client. There was no question that the company owed another $20,000, and that my client had fulfilled all of his contractual obligations. The only excuse offered was that the company was experiencing “financial difficulties.” We suggested small monthly payments to retire the balance due. Payments were promised but never made. We initiated arbitration, quickly won an award, confirmed it in court, and obtained a writ of execution directing the sheriff to seize the company’s film library. Miraculously, the distributor’s cash-flow problems immediately disappeared, and full payment was received. But that was not the end of the matter. When I negotiated the agreement, I included a clause enabling my client to demand accelerated payments on default, interest on late payments, and reversion of all distribution rights. So the distributor not only had to pay the balance due with interest, but it forfeited its right to distribute the film. We re-licensed the picture to another home video distributor and received another $40,000 advance, thereby enabling the filmmaker to repay his investors. The film is an example of a picture that performed poorly in exhibition but did great in litigation. Ironically, if the first distributor had not defaulted, the filmmaker would not have been able to re-license the film and repay his investors.
There are honest distributors, but there are also a fair number of disreputable distributors who will look for any real or imagined excuse to avoid paying a filmmaker his share of revenue. Distributors know that the relatively small amounts at stake may not be enough to justify legal proceedings. Most independent filmmakers have limited financial resources, and most, if not all, of that will be spent to complete the film. Attorneys are not inclined to take on such cases on a contingency fee basis (i.e., the attorney gets a percentage of the recovery rather than being paid an hourly rate). That’s why it is often wise to provide for arbitration. With arbitration, disputes can be settled without the expense and delays typical of litigation. The arbitration clause should provide that the prevailing party be reimbursed attorneys’ fees and costs.
Filmmakers need to exercise great caution when negotiating distribution agreements. Even if the filmmaker thoroughly trusts the executives at a distribution company, the contract is signed with a company, and companies can be sold. Your friend who manages the company today could be gone tomorrow. Therefore, filmmakers need ironclad protections no matter which individuals may be running the company.
One of my recent cases concerned a dispute with a home video distributor. The filmmaker made an oral agreement with the distributor and delivered his film. The distributor began to advertise and promote the picture. Six weeks later, before any paperwork had been signed, the company reneged on the deal and pressured the filmmaker to renegotiate its terms.
To protect yourself from such tactics, make sure all promises are in writing. Do not deliver any materials until you have received a fully executed copy of the contract. Always retain possession of your film negative and master elements by providing a lab access letter instead of the actual master elements.
SELECTING A DISTRIBUTOR
Filmmakers may not have the luxury of choosing a distributor to their liking. In many instances, only one or a handful of distributors express interest. The terms may range from bad to worse. But assuming one has a choice, here are some factors to consider:
1. Media: Which media (e.g., theatrical, television, home video) does the distributor serve? Is the distributor an unnecessary middleman, or does it provide valuable resources and expertise? Any company can call itself a distributor. What services does this entity provide? To what extent does it use subdistributors? If subdistributors are used, do they take an additional commission?
2. Territory: What geographical area does the distributor serve? American independent filmmakers often use multiple distributors: a foreign sales company for international sales and a domestic distributor(s) for release in North America.
3. Reputation: Has the distributor left a trail of unhappy filmmakers in its wake? Is the distributor known for distributing films of a similar genre, budget, and stature? Does the distributor have a good reputation among its licensees or exhibitors?
4. Advance/Minimum Guarantees: What is the amount of any advance? When is it payable, and what conditions need to be satisfied? When are minimum guarantees payable? Will the distributor pay this guarantee if the film is not successful?
5. Division of Proceeds: How will revenues be shared? How much does the distributor take in fees or commission? Can the distributor recoup any of its overhead or staff expenses? Are there caps on marketing and distribution expenses?
6. Marketing: Is there a guaranteed marketing commitment? What is the minimum amount the distributor will spend to advertise the film? On how many screens in how many venues will the picture open? What is the marketing strategy? What kind of audience does the distributor think will be attracted to the film? What grass¬roots promotion efforts are planned? Will the film be entered into festivals?
7. Consultation Rights/Final Cut: Does the producer have any input or approval over artwork? Can the title be changed or the film re-edited without the filmmaker’s approval?
8. Financial Health: Is the company in any danger of becoming insolvent or going bankrupt? How long has the company been in existence? How well capitalized is it?
9. Cross-collateralization: Are expenses from one media or territory cross-collateralized with other media or territories?
10. Accounting: How often does the distributor issue producer reports? How detailed are the reports? Will the distributor provide receipts to document its expenses and revenues? Is interest paid on late payments? What kind of audit rights does the filmmaker have?
11. Ability to Collect: How much leverage does the distributor have with exhibitors/licensees to collect revenue?
12. Conflicts of Interest: Does the distributor handle any competing films? Does the distributor produce its own films that might receive preferential treatment?
13. Term: For how long will the distributor have the right to distribute the film? What is the maximum license term that the distributor can grant to others? Are there performance milestones that must be met before the term is extended? Does the producer have the right to regain distribution rights if the distributor per¬forms poorly or breaches the agreement?
14. Personal Chemistry: Does the filmmaker have a good rapport with distribution executives?
Excerpt taken from Mark Litwak’s Risky Business, 2nd edition, 2009.