GPSOLO March 2010
ENTERTAINMENT & SPORTS LAW
Survival Tactics in Contracting Times
The rules for deal makers must change significantly in this impaired economy. This article suggests a new approach to deal making in a business in which television networks are paying 20 percent to 30 percent less for programs on average than in recent seasons, the number of features placed into the domestic theatrical marketplace has fallen by 14 percent and is heading for a 30 percent contraction; in turn, producers and production companies will take every opportunity to pay talent, rights holders, and everyone else for that matter significantly less, yet demand significantly more in return.
Television deals. When a client comes to you “with a great idea for a reality television series,” remember these two rules: (1) with rare exception, every conceivable format has been pitched to every conceivable network, and (2) networks like executive producers who can deliver on a long-term, sustainable basis in the genre being pitched.
If a program goes to series, the big payoff is volume, so tie your client to as many shows produced as you possibly can. But paranoid executives and revenue-impaired networks want shorter “locks” of executive producers and production companies, lower payments in the post-lock period, and more responsibility for the executive producers to bear unanticipated budget overruns, despite limitations on their ability to share in production savings often referred to as “underages.” The solutions for those with insufficient clout to get the “all shows ordered” lock may be to create as many objective performance criteria for extension as possible: performing at or above the average comparable time-period ratings within the same network for the specified target demographics on an average basis during the immediately preceding season or a rising trend line throughout the immediately preceding season that would sustain such ratings in the next season if continued at the same rate.
Where your clients are responsible for overages, cover the unexpected cost increases for which your client may be responsible and that might rear their ugly heads without fault or control. Make sure that the network is responsible for cost increases that result from their creative requests, any personnel they require to be part of the show, or any delays they may cause by not making underlying decisions on a timely basis.
And what happens to underages? Agreements that provide for flat license fees and/or budgets being paid on a flat basis after an extensive review and approval process are rare. Producers with established track records for having previously supplied shows to a given network will have some success negotiating the ability to control production but can only get paid on a reimbursement basis up to an agreed-upon budget. These producers are responsible for overages and are entitled to keep 50 percent of some small portion thereof, and in some circumstances can negotiate or flatten the amount after some agreed-upon period of time based on actual costs.
Theatrical features. Representing production companies. Unless you are dealing with the highest-profile theatrical film with a substantial budget, make sure that you have a domestic distributor locked in before you start principal photography. The overall reduction in theatrical distribution capacity in the United States is heading toward a 30 percent drop. The odds are 200 to 1 against finding meaningful domestic distribution if you wait until a film is finished, and the film festival is decreasingly valuable in finding distribution.
As filmmakers approach overwhelmed distributors with their precious “investment,” believing that they are providing a value proposition of a completed motion picture, the distributor’s perception is quite different. What the filmmaker sees as a revenue-generating opportunity, the distributor sees as a cost-generating obligation, which is a huge disconnect.
Filmmakers who believe that the availability of digital prints eliminates the cost of creating a physical print will be disappointed to know that to recoup the cost of expensive projection equipment, exhibitors are charging a virtual print fee to distributors who provide their product digitally. The “direct-to-video” fallback is no longer automatic, either, because video rentals/sales have dropped, and this form of distribution also requires marketing dollars to be spent.
One of the most troubling aspects of indie production is the solicitation of private passive investments that are not compliant with applicable laws, despite severe civil and criminal risks. And projections based on regression analysis, set out in private placement documentation that otherwise complies with Blue Sky and Securities and Exchange Commission requirements, may also be noncompliant if the changes in the marketplace are not properly disclosed as additional risk factors.
Representing talent. For practitioners making deals with indie production companies, the risks are numerous. Payroll services have actually gone bankrupt, resulting in films being shut down after production has commenced, stranding actors and other principals on location without transportation home. If your clients are members of any union or guild, it behooves you to make sure that the production company with whom you are dealing is in fact a signatory to the appropriate collective bargaining agreement in good standing. Your clients can get fined by their unions by not working for signatory companies, and the low-budget minimums from these labor organizations should be sufficiently low to permit the production company to accept a union.
Placing money in an escrow account in advance helps secure the money that will pay your client, but in the event of a formal bankruptcy of the production company, the escrow instructions could be rejected by a trustee, thus bringing the escrowed money back to pay all creditors. Getting an irrevocable letter of credit for the amount owed your client is a better solution than an escrow account for this reason.
Studio deals. Compensation, cash and contingent, is definitely on a cost-control downward spiral. It helps if you can disguise reductions in cash compensation by measuring cash payments as percentages of the final budget (with a floor and a ceiling), negotiating weekly payments with a minimum number of weeks guaranteed, or creating deferments at specific levels of reductions.
The so-called back end is, sadly, fairly simple. Net profits are almost always worth zero, no matter how much revenue the film generates. Make an effort, where appropriate and possible, to negotiate for a direct and separate participation in merchandising or music because payments deferred until net profits are generated are still basically worthless.
Box office bonuses are a useful tool to generate upside, if the studio will agree to pay them at all. Typically, you are trying to replicate a sum equivalent to the original salary (more is better, less may be “enough”) over installments that are based on either fixed break points or multiples of the final negative cost.
For lower-budget films, the levels at which domestic box office bonuses are paid tend to be based on negative cost multiples that are higher. As budgets rise, the multiples drop accordingly. If the film will not be budgeted for some time, you need to secure an estimate based on the average cost in the genre.
Increasingly, talent with signed contracts to receive eight figures against dollar-one gross are being required to amend those contracts to provide a “true gross after actual breakeven” as a condition to studios green-lighting their films. It is incumbent on talent representatives to find creative responses that layer in a level of box office bonuses against the new definition, which will at least improve the timing of upside receipts. Lawyers need to calculate what talent would have received under the pre-adjustment deal; what they might receive under the adjusted deal if the film, in fact, breaks even; and negotiate a series of box office bonuses, either to accelerate payments that would be generated based on box office numbers or, if possible, generate a taste of pre-breakeven as the film gets close to breakeven.
In our rapidly changing world, reliance on “precedent” is an outmoded negotiating style. Understand the trends and changes, make sure you are dealing with solvent companies (or get guarantees from solvent sources), and adapt to the times.
Peter J. Dekom is of counsel with the Beverly Hills, California, law firm of Weissmann Wolff Bergman Coleman Grodin & Evall.Copyright 2010