International Film Distribution:
Striking a Deal in the Global Market
By Brandon A. Blake,
Entertainment Lawyer
General Considerations
Contractual problems arise generally from the complex nature of the
distribution process and the difficulty of overseas transactions. American
distributors have a hard time ensuring that foreign exhibitors will report box
office revenues honestly, return films upon completion of the exhibition term,
render prompt payment and generally abide by the terms of the contract. These
problems are exacerbated by the use of foreign subdistributors which allow the
subdistributors greater opportunity to distort revenues and costs. Moreover,
American producers may not be able to insure that distributors do not
pre-release films on video before the theater market has peaked.
In order to guarantee payments and adherence to the producer’s or domestic
distributor’s expectations, the distribution contract must be clearly
specified. Explicit definitions of all rights and obligations of the
distributor, exhibitor, and other parties should be defined. In addition,
agreements should include specified delivery and payment procedures, and assign
all rights to censorship, artistic control, and promotion as clearly as
possible. The focus should be placed on collection of compensation by means of a
letter of credit or personal guarantees, protective currency clauses to allow
for adjustments to prevailing exchange rates, and automatic reversion of rights
in the event of a material breach by the foreign party.
There should also be some room for creative contracting to mold an agreement
in light of the local market trends and viewer preferences. For example,
producers should be knowledgeable about whether the territory’s audience
favors big action films or independent films, video or theatrical release, and
should tailor the contract to benefit from these sources of income. Moreover,
general cultural, political, and economic factors must also be considered in
contracting. For instance, in 1997, Chinese officials temporary halted dealing
with Sony Pictures and MGM after taking offense at their respective films
"Seven Years in Tibet," "Kundun," and "Red
Corner" due to their political content.
Tips for Negotiation: The Distribution Contract
Title. The feature length theatrical motion picture’s name should be
identified by its American title and any other title it had been given for
foreign distribution. If the agreement includes several pictures, some of which
have not been produced, then these unproduced pictures should be described as
specifically as possible with tentative titles or other properties.
Territory. The territory should be specified as clearly as possible to
avoid future disputes. For example, a French language license could not only
include France but other French speaking areas such as Monaco, the
French-speaking area of Andorra, Quebec and other French speaking former
colonies. Additionally, territories should be defined within political borders
and exclude foreign embassies, military and governmental installations, oil rigs
and marine installations, airlines-in-flight, and ships-at-sea. Sometimes
territories that are politically defined will be under a different territory in
a distribution contract due to language differences. For example, Puerto Rico is
a U.S. commonwealth but it is included under the Spanish speaking Caribbean islands for film distribution purposes. Therefore, territories in a foreign
distribution agreement must be specified not only by political borders, but by
the linguistic requirements of each territory.
Term. The term of a foreign distribution contract is similar to
domestic agreements. However, if a picture is
successful, the producer will require a shorter term to allow for re-licensing
or re-release. The producer will want a short term so that the rights can revert
back to the producer and become part of his or her film library. On the other
hand, if a large advance is paid, the distributor will want a longer period to
allow it to recoup its advance.
Rights Granted. Typical rights granted to the distributor in a
distribution agreement include the rights to distribute, advertise, and market
the film, using trailers, excerpts and clips. In the foreign distribution
context, distributors generally have the right to dub and subtitle the film.
Additional rights may be granted to the distributor for an effective
distribution campaign in the territory. Such rights include usage of any music
or composition in the film, publishing rights to the synopsis of the film, and,
in rare circumstances, editing rights, if the distributor can enhance the
prospects of the picture by editing it to local audience tastes. Foreign
independent distributors are more likely to have the knowledge and skill to edit
the film according to local tastes. Local distributors can give producers the
individualized attention and cater to the local audience. Thus, adding editing
rights to agreements with local distributors may be advantageous for producers.
The granting of editing rights depends on the relative bargaining power of
the producer and distributor. The distributor may only get editing rights
subject to a powerful producer’s approval. Another additional right that may
be granted is the distributor’s right to bring suit against third parties for
unauthorized use, copying, release, distribution, exhibition or performance of
the picture in the territory. Granting power of attorney rights to the
distributor will not only motivate the distributor to protect the rights of the
picture but is also more convenient for enforcement purposes because of the
distributor’s location and access to the territory.
Since rights granted to the distributor are broadly defined, the producer’s
rights must be expressly granted. The producer’s rights include, among others,
television, pay TV, home video, soundtrack album, music publishing,
merchandising, and novelization. The rights for television, pay TV, and video
are usually restricted by holdback periods, which require producers to wait a
period of time before distribution in these forms, in order to protect the
distributor against competition.
Cross-collateralization. Another important clause in a foreign
distribution contract is the no cross-collateralization clause. In a
multi-territory or multi-film distribution agreement, cross-collateralization is
usually prohibited, meaning that each picture must stand on its own and the
distributor may not offset gains and losses from different territories or
pictures. One exception to this clause applies to unselected pictures and is
explained below.
Unselected Pictures. In multiple film deals, the distributor may have
the right to select which picture to distribute and its time of release. Once
the distributor has chosen which films to release, the parties should provide
for a period in which the film must be released after it is properly delivered
according to the contract. Usually theatrical release is required as soon as
possible, or no later than six months, to capitalize on the publicity and
"word of mouth" from the film’s release in the United States.
Unselected films can be released if there is a provision in the agreement for
the producer to compel distribution of unselected films. In that case, the
distributor would negotiate for the producer to reimburse him for expenses not
recouped by the release of the unselected film. In addition, distributors could
exempt unselected films from the no cross-collateralization clause, and offset
selected film revenues from unselected film expenses that were not recouped.
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Gross Receipts. The most important term of a distribution agreement is
the definition of "gross receipts." "Gross receipts" or
"film rentals" are described as all monies received by the distributor
from exhibition and distribution. There are certain exclusions from gross
receipts. Such exclusions are distributor-owned exhibitor receipts, rebates,
refunds, adjustments that the distributor received from an exhibitor, guarantees
or advances, and any amount collected as payment for taxes from a distributor.
The "gross receipts" of each film are used to calculate net profits
and distribution fees. Fee percentages are specified for every film and
territory. The distribution fee is calculated from "adjusted gross
receipts," or gross receipts after deduction of sales taxes and other
similar taxes. The net deal acquisition agreement allows for the distributor to
deduct a distribution fee, a percentage of the adjusted gross receipts, before
its expenses are deducted.
Expenses. After the distribution fee is collected, distribution
expenses are then deducted from the adjusted gross receipts. Typical expenses
for all distribution agreements include collection of monies costs, print and
advertising costs, trade association fees, and insurance costs for coverage of
risk of loss. In a foreign distribution contract, expenses such as the
conversion cost of currency to American dollars, foreign version costs of
dubbing and subtitling, transportation costs, and quota losses for distributing
foreign movies required by a foreign government in order to distribute a
producer’s film are standard.
Delivery of Film. Payment of the guarantee is triggered by the
"delivery of the film." What constitutes "delivery of the
film" is a frequently contested issue. The producer will argue that
delivery to an agreed upon film laboratory of a completed film that meets the
distributor’s specified terms will trigger payment of the minimum guarantee.
On the other hand, the distributor will want the right to inspect all materials
delivered to confirm that the material is technically acceptable or meet
subjective standards of acceptability. If and when the distributor makes the
determination of technical or subjective acceptability, the minimum guarantee
will be paid.
The producer’s position is not acceptable for the distributor because the
distributor will have to pay for defective, non-exploitable film material. In
contrast, the distributor’s position will be unacceptable to the producer
because it allows the distributor to unilaterally reject material as technically
unacceptable or worse to reject it for subjective reasons. The producer is then
left with a completed film and no foreign exploitation in the distributor’s
territory.
The ability of a producer to get a technical or subjective acceptability
standard for delivery depends largely on his or her bargaining power. The
independent producer may need the income from a certain territory regardless of
the possibility of rejection from a distributor’s subjective standard. On the
other hand, foreign distributors may compete to distribute a Hollywood
blockbuster and have more lenient terms for delivery and payment of advances in
order to get the contract.
An ideal compromise to this problem usually allows for the distributor to
inspect the film material and determine if it is technically acceptable and if
so pay the minimum guarantee. If it is not technically acceptable then there are
specified cure periods for the producer to cure all objections identified by the
distributor. Ultimately, if the parties cannot agree then the issue is submitted
to arbitration pursuant to the arbitration clause of the contract.
Even if the amount due to the producer is clearly specified in the contract,
collection of the producer’s compensation from foreign distributors or
subdistributors may be difficult. Collection of funds should be protected by a
letter of credit, or a personal guarantee, and a protective currency clause to
adjust for fluctuating exchange rates.
Blocked Funds. Blocked funds exist when foreign governments will not
allow theses funds to be removed from the territory. Thus, parties should
provide for this contingency through contract by having the distributor deposit
the funds in a bank account in the territory under the producer’s name. This
provision will remove the distributor from the blocked funds problem and leave
the producer to get his or her money out of the territory. Moreover, with this
provision, "gross receipts" cannot be manipulated to exclude blocked
funds because these funds cannot be remitted to the producer outside the
territory.
Censorship. Censorship is another typical issue included in foreign
distribution agreements. Usually, the distributor is responsible for censorship
clearing because the distributor is in the best position to acquire such
clearances. Because many producer warranties require that the film will not have
any censorable material, producers should aim for a "best or reasonable
efforts" standard than an absolute standard. Given the wide range of
censorship standards in foreign territories, producers do not want to guarantee
absolute non-censorable material for all territories. Usually if censorship is
seen as a problem to distribution, producers may grant editing rights to
distributors to cure the problem. In most agreements, if distribution is
interrupted because of censorship problems, the producer has to reimburse the
distributor for distribution costs up to that point.
Force Majeure. The force majeure clause protects against unforeseen
liability. This clause holds neither the distributor nor the producer liable for
each other’s breaches of the contract if there is an act of God, or war, or
strike, and other circumstances out of the control of both parties. This clause
is crucial for foreign distribution agreements, in light of the political and
economic instability of some countries. In the event of a material breach by the
foreign distributor, not caused by force majeure, the contract should provide
for automatic reversion of rights to the producer. This rights reversion will
allow the producer to continued exploitation of the film in the territory
without disruption from an incompetent or breaching distributor.
Conflict of Law. When dealing in foreign territories, resolutions for
conflict of law should be agreed upon in writing. Clauses usually state that if
there is a conflict of law between the territory’s government and the
provisions of the contract, the government’s law would prevail and the
agreement would be modified to remove such conflict but will continue in full
force once modified. This clause serves to allow uninterrupted distribution and
exploitation of a film in cases of conflicts of law.
Other Provisions. Other clauses that apply in foreign distribution
agreements are prohibition of licensing to the distributor’s affiliates
without producer approval to avoid sweetheart deals, audit rights, statute of
limitations on incontestability of financial records, choice of law and forum
clauses, and arbitration clauses.
Given the steady growth of the overseas film market and the growing
importance of the international box office, American producers and distributors
should welcome the global market. Regardless of whether a film is independent or
a major blockbuster, careful assessment of each film’s potential market in the
territory involves analysis of each territory’s social, economic and political
factors. Consideration of these factors should give you a guideline as to what
provisions to pay special attention to in the foreign distribution contract. If
the necessary assessments are made, American filmmakers should be able to reap
the benefits of the international motion pictures industry.
Author acknowledges the contributions of Donald C.
Farber; John W. Cones; David Nochimson; Jan
D’Alessandro; Howard M. Frumes; Thomas F.R. Garvin; and Matthew C. Thompson.
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The above provisions are not exhaustive nor strictly standard provisions,
because the relative bargaining power of distributors and producers can lead to
negotiations for more favorable clauses for the party with greater bargaining
power. These provisions do not constitute legal advice, they are given
merely for informational purposes, consultation with an entertainment attorney is
recommended before entering into any agreement.
© COPYRIGHT
2006 BLAKE & WANG, P.A. ENTERTAINMENT LAWYER SERVICES. ALL RIGHTS RESERVED.
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