Film/TV Distribution Agreements

FILM/TV DISTRIBUTION AGREEMENTS

FILM/TV DISTRIBUTION AGREEMENTS By Daniel M. Satorius, Esq. -------------------------------------------------Representation of film and television producers in the negotiation of their distribution agreements, like representation of clients in other aspects of the entertainment industry, calls for a special relationship between attorney and client. Attorneys are often more familiar with the business aspect of the film and television industry than the producers who, although very sophisticated in the business of producing works, are often less sophisticated about the business of distributing those works and the problems that arise in that regard. Attorneys working in this area are valuable to their clients because of their knowledge of the value of the distribution rights of their clients’ works and the standards, customs and special terms of distribution agreements. It is not unusual for negotiations of distribution agreements to begin with a “term sheet” or “deal memo.” This is a document, often in letter form, signed by the parties, setting out the essential terms of the agreement in an abbreviated, perhaps “bullet point” format. The deal points generally include at least the following: consideration, term, territory and grant of rights (including media). These deal memos or term sheets may contain enough detail so the parties can rely on them indefinitely. Sometimes these deal memos are replaced by a full agreement, other times they are not. It is important for the attorney to be involved in the negotiations at the deal memo stage because the attorney often has a good sense of the market value of the work and the important terms and safeguards that need to be in the deal memo to protect the producer’s interest. Matching the right distributor to the producer’s work is essential. The producer should extensively research potential distributors. Distributors often specialize in the types of works they distribute and the markets in which they distribute. Experienced attorneys can help the producer evaluate distributors, recommend distributors and, in some cases, introduce the work to distributors. We begin our outline of distribution agreements with the rights granted to the distributor. A. RIGHTS GRANTED TO THE DISTRIBUTOR. Below is a list of common distribution rights. The producer may wish to narrow the scope of these rights. This can be accomplished in four ways: limiting the media and markets

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(discussed in this section A), the duration (section C below) and the territory (section G below.) 1. Theatrical Distribution Rights. These rights include the right to exhibit the work in theaters and cinemas open to the general public for which admission fees are charged. Note that rental to college campuses may be either theatrical or non-theatrical. 2. Non-Theatrical Distribution Rights. theatrical markets include the following four markets:

Generally, non-

2.1. Educational A/V. This includes the sale, lease and rental of works on film or videograms to universities, schools, libraries, museums or similar institutions for exhibition directly to audiences or close-circuit exhibition. 2.2. Institutional or industrial markets. This is the sale, lease or rental of the work, film or videograms to corporations, businesses, prisons, or hospitals for exhibition to people in those institutions. 2.3. In-flight and other transportation. This category includes in-flight exhibition, ships at sea, oil rigs and the like. 2.4. Military. This is the sale, lease and rental of the work on film or videograms to military bases for exhibition to military audiences.

Usually, non-theatrical distribution rights include the exhibition of the work to audiences by organizations who are not primarily engaged in the business of exhibiting films to the public and whose purpose is generally educational, cultural, religious, charitable and the like. Commonly, the purchase price or rental fee for copies of works sold or rented to the non-theatrical market are higher than video distribution (discussed below) because the fee includes the right to show the work to groups of people in classrooms, auditoriums, etc. 3. Pay Television Distribution Rights. This is the right to exhibit/cablecast the work via pay/cable over-the-air pay/cable, master antenna, community antenna, closed circuit, multi-point distribution services and similar means where viewers pay for the right to review the work. This category includes hotel, motel, hospital and the like, but excludes free

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television distribution, video-on-demand, distribution rights discussed below.

and

optical

4. Free Television Distribution Rights. This is the right to broadcast the work usually via VHF or UHF television broadcast methods. It includes, for example, network and syndication television broadcasts, transmissions by satellite, and similar methods. It can be standard or high definition television broadcasts. Generally speaking, the viewer receives the work via standard home antenna or disk. Free television distribution excludes pay television, video-on-demand and optical distribution discussed below. 5. Video Distribution Rights. This category includes home video rental and sales. Here the consumer purchases or rents videogram copies for use on home television sets, that is, playback devices directly connected to or forming an integral part of a television receiver or device. Note: Videograms are tangible copies of a work in formats such as videocassettes, DVDs, CDs, videodisks and laser disks, or other electronic storage devices. 6. Video-On-Demand. This allows the viewer to request, for home or other non-theatrical viewing, a program on a television or viewing screen that is sent via some signal directly to the consumer and not to the general public. Thus, it is distinguished from pay-for-view where the consumer does not request a particular signal at a particular time. 7. Optical Distribution Rights. This is a new and mostly unexploited right involving the right to use the work in a manner permitting interactivity between the user and the device from which the work is accessed, including, for example, personal computers, CD-ROMs, Nintendo, Sega, arcade games, and the like. Distribution agreements vary greatly in terms of the scope of the rights granted. The scope of rights may be narrow and limited to one medium and market such as home video distribution, or broad, such as a general grant of all distribution rights to the work. It is important for the producer to carefully think through which rights should be granted to the distributor. The producer’s ability to narrow the scope of rights granted is based upon the comparative bargaining powers of the parties. The producer wishes to limit the rights granted to only those that will be effectively exploited by the distributor. The distributor often wants the broadest possible grant of rights so it can exploit as many rights as possible, either directly or via sub-distributors. The producer should research the distributor’s track record and expertise. The producer will also want to consider the producer’s own ability to find other distributors for the rights retained by the producer.

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Whatever the results of the negotiations as to rights granted, it serves the producer’s interest to include a clause specifying that any rights not expressly granted to the distributor are expressly reserved to the producer. The distributor may seek to limit the producer’s right to exploit reserved rights. For example, a home video distributor may seek to limit the producer’s right to exploit audiovisual or video-on-demand rights (if retained by the producer). The distributor may seek to limit the producer use of reserved rights via a holdback period or a right-of-first refusal as to those rights. B. EXCLUSIVITY. In most cases, distributors seek exclusive rights. And, in most cases, it is advisable and practical to grant the distributor exclusivity for the markets and mediums granted. C. TERM. The term of the distribution agreement is usually between 3 and 5 years for non-theatrical, 5 to 20 years for theatrical (often 12 years), 2 to 5 years (or longer) for television, and 5 to 10 years for home video distribution. Renewal options may give the distributor the right to extend the term for an even longer period. Producers are often worried about what happens if the distributor fails to adequately perform on the distribution of the work. One solution to this concern is to negotiate a performance requirement in the agreement. A performance clause might, for example, allow the producer to terminate the agreement if the distributor fails to generate specified sales levels within a specified period of time. The distributor may seek to limit the producer’s right to terminate until distributor has recouped its advance (assuming it has given the producer an advance.) Another way to work this performance clause is to specify that those markets in which the distributor has failed to distribute the work revert to the producer after a period of time. This may or may not be an adequate remedy to a producer whose distributor has failed to perform adequately. Often the work is time sensitive. Some works are timely because the subject matter is topical and current or the work is ripe because of marketing efforts by the producer. In those cases, the producer may find that reversion means that the work comes back to them after the useful life of the work has expired. D. SUB-DISTRIBUTION AGREEMENTS. It is common for distributors to use sub-distributors to exploit the work in some markets. This is particularly true of U.S. distributors who engage foreign distributors to handle foreign territories. This can be advantageous for a producer in that the distributor may have developed more favorable relationships with the sub-distributors and can better exploit the work than if the producer made an effort to work with the subdistributors directly. There are two issues that the distribution agreement should address as to sub-distributors. The first is the multiple fee. It is likely that the distributor will wish to charge his or her full distribution fee on the amount received from the subdistributor. The sub-distributor may charge 20-30% on the license fees and then

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the distributor may charge an additional 20-40% on the same licensing fees. It is to the producer’s advantage to negotiate a reduced fee or an inclusive fee arrangement when revenues are subject to sub-distributor’s fees. Agents and their fees present the same concern. Second, the term of agreements with sub-distributors often exceed the term of the original agreement with the distributor. Commonly, the distribution agreement will provide that the distributor can enter into sub-distribution agreements whose terms may exceed the distribution agreement. Thus, the producer is “stuck” with these sub-distribution agreements for the life of those contracts even after the distribution agreement expires. This is not necessarily a bad deal for the producer. However, the producer should be aware of the situation. Producers may wish to limit the term of such sub-distribution agreements or limit the distributor’s right to receive a fee on those sub-distribution agreements after the expiration of the distribution agreement. E. CROSS-COLLATERALIZATION/PACKAGING. Crosscollateralization can occur when the distributor is distributing a number of the producer’s works and the revenues from one work is used by the distributor to offset the costs and advances on other works. Of course, it is to the producer’s advantage that such costs are not cross-collateralized. A similar problem can arise when distributors release groups of works in a single offering or package. It is important to make sure the distribution agreement includes language that specifies that the revenues on the producer’s title will not be subject to the obligations of other titles in the package (i.e., will not be cross-collateralized against). There is also a concern that the producer’s work may be sold in a package to support the sale of weaker titles. The producer may wish to approve any packaging that includes the producer’s work. F. DELIVERY. The agreement will specify that the producer must deliver the work and other specified materials as of a specific date. This is a part of the agreement that should be carefully scrutinized by the producer to make sure the materials to be delivered and the other delivery requirements can be reasonably and affordably accomplished by the producer. Frequently the delivery clause specifies that if the producer fails to deliver all of the materials in a manner acceptable to the distributor, then several consequences happen. First, the distributor can, through “self-help”, create those deliverable materials and charge the expense back to the producer. Secondly, the payment of the advance to the producer is generally dependent upon full delivery of materials to the distributor and acceptance by the distributor. The deliverables are usually specified in a separate schedule attached to the agreement. All delivery materials must be technically correct and usable for the purposes specified under the agreement, for example, meeting broadcast standards. G. TERRITORY. Many agreements express the scope of the territory as “worldwide” or “the universe”. For reasons similar to those discussed above in section A, the producer should determine the appropriate territory to be granted to the distributor. Most non-theatrical licenses and home video licenses are limited to the United States, its territories and possessions and Canada, and sometimes “all English-speaking countries” is added.

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H. CONSIDERATION. There are a variety of methods that can be used by the producer and the distributor to divvy up the revenues from the exploitation of the work. One method gives the producer a royalty from the sale of copies of the work. Another method gives the distributor a distribution fee and the right to recoup expenses prior to paying the balance to the producer. Still another method is a flat guaranteed fee. The royalty formula is used frequently in non-theatrical and home video distribution agreements where revenues are based on copies sold. The distributor fee formula is commonly used in television broadcast, cablecast, foreign distribution and in theatrical distribution. Customary ranges include the following: 1. Non-theatrical film distribution. The royalty paid to the producer on sales of copies range from 7.5% to 27.5% of gross sale and/or rental fees collected by the distributor with 20-25% being the most common. Some distributors offer 50/50 split of net receipts after the deduction of certain expenses, such as promotion, advertising, and the cost of making copies. 2. Off-Air Taping Licenses (Licenses to Institution to videotape a Television Work Off-Air and Use the Recorded Videotape within the Institution). 25-60% of distributors gross receipts. 3. Home Video. 15-30% but flat fee payments are also employed. Home video royalty of 20% is common – based on wholesale or distributor’s receipts. A producer with negotiating power might negotiate a 25% royalty or a sliding scale up to 25% with escalators based on quantity sales. Royalty calculations based on retail run from 10-15%, 4. Television Distribution. The common practice among television distributors is to charge a distribution fee of 20% to 40% of the license fees received by the distributor. Fees vary based on the territory and the difficulty in exploiting the markets and territories. Alternatively, the distributor may pay a guaranteed fixed license fee payable upon delivery or over time. 5. Theatrical Distribution. Distribution fees range from 15% to 40% (or more) of net receipts although other formulations based on adjusted gross may also be employed. Factors that go into determining the level of the consideration include: i. Market. Some markets are harder to exploit than others. If the perceived distribution efforts required in certain markets, such as, for example, foreign theatrical, are high, then a higher distribution fee to the distributor may be warranted. ii. The amount of the advance. If the distributor is paying a substantial advance to the producer, then the distributor is at greater risk and, therefore, can justify demanding a larger distribution fee. Also, if the advance is given during the production period prior to the distributor

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seeing and approving the work (which is uncommon these days), that would also justify a larger distribution fee. iii. Competition for the work. The producer’s bargaining power is strengthened if there are numerous distributors vying for the right to distribute the work. Competition can sometimes be created in festivals and markets where the work is exposed at roughly the same time to many potential buyers. iv. The work itself. Advances and fees increase (or distribution fees decrease) for works with more episodes, higher production values, well-know talent, good performances, large audiences in other markets, successful sequels or popular works such as best-selling novels, and works on topics that are timely. v. Precedent. The advances paid by distributors for similar works may influence the advances the producer can get. In recent years, advances for independent features sold during festivals such as Sundance have trended downward. The advances paid for non-fiction works have also greatly diminished. Formulas for the calculation of royalties or distribution formulas can be complex. This is especially true in determining what can be deducted from gross before calculations are made on a net formulation. For example, definitions of distributor’s costs can be extensive and must be scrutinized to make certain the formulation is fair and customary. vi. Advances. The producer may come to the negotiations with the distributor with debts owed to third parties for the production for the work. Also, in order to meet the delivery requirements under the distribution agreement, the producer may need to incur substantial expense. For example, the producer may have music in the work that needs to be cleared for the markets in the distribution agreement. For these reasons, the producer may need to negotiate an advance. Advances are a pre-payment of the producer’s royalties. The producer will not be paid any royalties until the advance is recouped from royalties earned by the producer. Customarily, advances are not repayable to the distributor if the royalties prove insufficient to pay back the advance. Often the timing of the payment of the advance is based on the delivery of the materials specified in the delivery schedule. There are many reasons why a producer may need an advance. The producer needs to make a living, pay off debts, get started on the next work. The advance also invests the distributor in the work and demonstrates its commitment. vii. Expenses for “Agent” Distributors. Some “distributors” are really agents or sales-people. They do not actually manufacture and sell copies, book the work into theaters, or broadcast the work themselves. They sublicense rights to other distributors who distribute the work.

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These distributors/agents often wish to deduct their expenses out of the first proceeds from the sale of the work to other distributors. The producer should consider specifying a cap of such marketing expenses and/or approve large expenses. I. THIRD PARTY PAYMENTS BASED ON USAGE. The producer may have obligations to pay third parties based on exploitation of the work. This can happen where the producer negotiates agreements that include payments based on sales. This is a common arrangement when music rights are acquired for home videogram sales. Other instances in which producers may be obligated to make payments based on exploitation include residuals due to union members under collective bargaining agreement with unions such as AF of M, AFTRA, SAG, and WGA. When the work is subject to such residual payments based on exploitation, the producer will want to negotiate payment of those residuals by the distributor or provide for sufficient minimum royalty payments to the producer so such residuals can be paid. J. ACCOUNTING. Issues regarding the accounting clause are similar to other agreements in the entertainment industry. However, it is worth noting that, in recent years, distributors, especially independent distributors, are notorious for failing to pay in a timely fashion. Also, frequently independent distributors come into and go out of business. Because of this situation, it behooves the producer to negotiate terms in the contract that specify if the distributor fails to make a payment to the producer within a relatively short period of time after it is due, the producer shall have the right to terminate the agreement and all third party sub-licenses will be assigned to the producer automatically and immediately. K. BANKRUPTCY. To avoid problems that arise in situations where the distributor files for bankruptcy, it is helpful to specify that the producer shall maintain title to the inventory in distributor’s possession until the units are sold. L. REPRESENTATIONS AND WARRANTIES. It is important for the producer to carefully check the representations and warranties in the agreement to make sure they are factually correct and reasonable. It is common for audiovisual works to incorporate the works of third parties (e.g. music, book rights, lifestory rights). Distribution agreements require the producer to represent and warrant that the producer controls all rights in the work so the distributor’s exploitation does not breach third parties’ rights. The producer should check its agreements with third parties who contribute to the work, including, for example, releases, agreements with talent, music rights agreements, and work-for-hire agreements to make sure the producer can make the representations and warranties specified in the distribution agreement. If the producer’s agreements with third parties contain restrictions, the distribution agreement should contain those same restrictions. The producer may be served by including language such as “to the best of producer’s knowledge” as a modifier to the representations and warranties clause. Because acquiring rights for the works of third parties for use in the producer’s work is often expensive, those rights are often cleared for a limited period of time, limited territory and/or limited media/markets. This is especially

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true in agreements relating to music. These agreements are negotiated with an eye to what is needed (i.e., how long, which market/media) and how much is affordable for the producer. Therefore, the language of the distribution agreement should not exceed the scope of these underlying rights. Alternatively, the producer’s agreement with third-party rights holders must be expanded to acquire the additional rights (hopefully paid from distribution fees or advances.) Distributor agreements, particularly those for broadcast rights, often grant the distributor music performing rights. Sometimes these clauses contain an exception if the performing rights are controlled by ASCAP, BMI, SESAC or other performing rights organizations. Producers often do not acquire performing rights in music and get surprised by these clauses in the distribution agreement. Sophisticated composers negotiate aggressively to retain public performance rights in order to earn additional compensation when the work is broadcast. It is in the producer’s interest to shift those performing rights royalties away from the producer. This can be accomplished by either acquiring a license in the performing rights from the composer, or shifting the responsibility to the broadcaster to pay performing rights royalties to ASCAP, BMI or SESAC. Of course, many broadcasters want their broadcast licenses to specifically include a license of the performing rights in music so that they do not have to pay for those fees. In fact the trend among cable broadcasters (e.g. HGTV, The History Channel) is to require that music performing rights be licensed under their agreements so that they are not required to pay ASCAP, BMI, or SESAC. Note that in foreign jurisdictions, particularly European countries, other rules apply and must be taken into consideration if distribution in those territories is within the scope of the distribution agreement. The producer will want to be aware that additional liabilities or financial obligations may arise out of the use of selections from the work in the marketing and promotion of the work. For example, the use of a scene in which music plays or a person appears, may require additional payments to those third parties or such use may even be prohibited. Music rights licenses may limit the use of the music to “in-context” use and using the music out-of-context, for example, in promotions may require additional payments. Also, the use of the image of a celebrity, for example, within a documentary, may be fair use or free speech, but if used to promote the work, the celebrity’s right of publicity may be called into play. For these reasons, the producer will want to include a clause in the distribution agreement giving the producer the right to approve the use of scenes and images from the work in promotion and marketing materials. M. MODIFICATION TO THE WORK. Producers may wish to specify that the distributor will not have the right to make any modification, edits, deletions or changes to the work without the producer’s consent, including, for example, the addition, alteration or removal of credits. Distributors often seek to modify the work at least to the extent of adding the distributor’s credits to the work. In those cases where the work is distributed to non-English speaking countries, the distributor may seek the right to modify the work by the addition of subtitles and/or dubbing.

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N. PRODUCER’S RIGHT TO SELL COPIES OF THE WORK. Producers may wish to retain the right to sell copies of the work. This may arise where the producer is a subject matter expert and/or will be traveling and speaking on topics related to the work and could sell copies to audiences. Where the distributor is manufacturing the copies of the work, it may be to the producer’s advantage to purchase those copies at a favorable discount from the distributor’s standard wholesale price. These terms may be negotiated in the contract and may be very important to producers. SUMMARY. The scope of this article does not permit an exhaustive discussion of all clauses or issues that may arise in a distribution agreement. Rather, this article is an attempt to shed light on common issues and recent trends especially those relating to distribution agreements for non-fiction works. ------------------------------------------------------------------ Copyright, 2003 Daniel M. Satorius

DANIEL M. SATORIUS – Satorius Law Firm. PC. Dan’s practice focuses on transactions, intellectual property, financing, and the representation of business and individuals. His clients include Academy Award, Emmy Award, and Peabody Award winning independent producers, directors, writers, and television stations in the film and television industry; Grammy award winning songwriters, recording and performing artists, producers, publishers, record companies, and studios in the music industry; and authors and publishers in the literary and electronic publishing industry. Contact Dan at IDS Center, Suite 2000, 80 South Eighth Street, Minneapolis, MN 55402. Phone: (612) 336-9332. Email: [email protected]. The information contained in this article is not intended as legal advice or as an opinion on specific facts. For more information about issues raised in this article, please contact Daniel M. Satorius. The invitation to contact us is not to be construed as a solicitation for legal work, does not create an attorney /client relationship, and is not to be construed as an offer of representation in any jurisdiction in which the attorneys are not admitted to practice. Any attorney/client relationship will be confirmed in writing. You can also contact us through our Website at www.satoriuslawfirm.com. Copyright laws and treaties protect this article. You may make a single copy of materials on this site for personal use. You may make copies for others, but not for commercial purposes. If you give a copy to anyone else, it must be in its original, unmodified form, and must include all attributions of authorship, copyright notices, republication notices and disclaimers. Except as described above, it is unlawful to copy, republish, redistribute and/or alter this article without prior written consent of the copyright owner. For reprint and redistribution requests, please email [email protected].

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