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August
12 , 2004 Volume II, Issue
7
Negotiating
the Distribution Deal:
Clauses the Filmmaker MUST Have!
The hardest part
of filmmaking - harder than raising the money, or producing
the film or selling it - is collecting a single dime
from the distributor that buys and distributes the film.
In fact, without the two clauses discussed below, collecting
money from a distributor is virtually impossible.
Before covering
the two clauses, a little clarification on how, in general,
distribution deals work.
When a distributor
buys a film, they present the filmmakers/producers with
a distribution agreement that outlines the terms of
the deal. Broadly, the terms fall into three categories:
deliverables, up-front cash payments and profits.
Deliverables
"Deliverables"
are a detailed list of things the filmmakers/producers
must deliver to the distributor before the distributor
will make any payments to the filmmakers/producers.
Deliverables include things like the print of the film,
an optical soundtrack, a digi-beta master of the film,
all releases, errors and omission insurance, textless
titles (so non-English speaking countries can replace
the titles and credits with words in their own language),
a dialogue-free copy of the soundtrack (so non-English
speaking countries can dub in their own language) and
a slew of other things too long to describe here.
It's crucial to
review the deliverables list carefully, and negotiate
any changes to this list before signing off on the distribution
agreement. It's also crucial to note, and be prepared
to handle, a Catch-22 implicit in most distribution
deals: many of these deliverables will cost a lot of
money to fulfill, money the filmmaker won't receive
from the distributor until and if he is able to deliver
them.
Payments and
Profit Splits
Once the deliverables
are handed over to the distributor, the distributor
is obligated to pay (if agreed upon in the distribution
deal) the up-front cash payment to the filmmakers/producers.
Here now is where the tricky part begins.
After the up-front
cash payment is made, the filmmakers/producers will
generally only see any additional cash as a percentage
of profits earned by the distributor in exploiting the
film. In other words, as the distributor sells (exploits)
the film to TV channels and video outlets and airlines
and theaters all over the world and earns profits from
those sales, he is generally obligated to split those
profits (as he earns them) with the filmmakers/producers.
(The profit split is negotiable but usually runs from
50/50 to 60/40, in favor of the filmmaker). But - in
virtually all distribution deals - the distributor is
only obligated to share profits after recouping any
money he has spent advertising, promoting, handling,
selling and/or distributing the film.
The problem is,
the distributor now has an incentive to inflate costs
associated with the distribution of the film and understate
earnings, which in turn reduces profits and the financial
payouts the distributor is obligated to make to the
filmmakers/producers. For the filmmakers/producers to
protect themselves against this problem, they need to
have the following two clauses in the distribution agreement.
Without them, the agreement has limited value, at best.
Here they are:
Clause One -
An Audit Provision with Penalties
First, the filmmakers/producers
MUST insist on a provision in the distribution deal
that allows them to audit the distributor's financial
books on at least an annual basis. The audit provision
has to include penalties and interest the distributor
must pay - say 10% of any funds discovered through the
audit that weren't properly paid out - as well as an
agreement forcing the distributor to reimburse the filmmakers/producers
for the cost of the audit if mistakes are found that
amount to, say, greater than 5% of the money owed to
the filmmakers/producers.
Additionally,
for the audit provision to have any real value, the
filmmakers/producers must budget into their movie the
cost of performing an audit - generally $2,500 to $5,000
-- and then use that money to actually perform a year-one
audit. After all, what good is having the clause if
it's not enforced?
Clause Two -
An Attorney's Fees Clause
Second, the filmmakers/producers
MUST insist on an attorney's fees clause. Simply put,
this clause means that should there be litigation between
the filmmakers/producers and the distributor, the loser
of that litigation must pay the prevailing party's legal
costs. The reason this clause is so crucial is that,
in general, distributors have attorneys on-staff - that
is, they are paying attorneys year-round, no matter
if there's work for them to do or not. Thus, it costs
the distributor essentially nothing to battle the filmmakers/producers
in court. The filmmakers/producers, on the other hand,
will be forced to pay tens of thousand of dollars in
attorney fees out of their own pockets if they are ever
forced to pursue legal action against the distributor.
Without an attorney's
fee clause, the distributor knows that the costs for
filmmakers/producers to pursue litigation against him
are so onerous that it is unlikely they'll ever choose
that course of action, and the distributor thus has
little incentive to ever pay out profits on the film.
With an attorney's fees clause, the distributor knows
that should he lose litigation, he'd not only have to
pay the money he contractually owed to the filmmakers/producers,
but also all of their attorney's fees. Generally, with
an attorney's fees clause, distributors are apt to reach
reasonable settlements to avoid litigation. Without
an attorney's fees clause, the distribution deal is
barely worth the paper it's printed on. THE END
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