Professional Documents
Culture Documents
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 producers interest.
Matching the right distributor to the producers 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
(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.
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 producers 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 distributors track record and expertise. The producer will also want to
consider the producers own ability to find other distributors for the rights retained
by the producer.
the distributor may charge an additional 20-40% on the same licensing fees. It is to
the producers advantage to negotiate a reduced fee or an inclusive fee arrangement
when revenues are subject to sub-distributors 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 distributors 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
producers 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 producers
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 producers 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 producers 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 producers 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.
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 distributors
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
seeing and approving the work (which is uncommon these days), that
would also justify a larger distribution fee.
iii.
Competition for the work. The producers 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
distributors 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 producers 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.
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 producers
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
producers 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 celebritys 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 producers 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 distributors 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.
N.
PRODUCERS 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 producers
advantage to purchase those copies at a favorable discount from the distributors
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
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