film/tv distribution agreements

7/21/2019 Film/TV Distribution Agreements

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FILM/TV DISTRIBUTION AGREEMENTS

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FILM/TV

DISTRIBUTION

AGREEMENTS

By Daniel M. Satorius, Esq.

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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 thebusiness 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 sheetor 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 partiescan 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


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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 collegecampuses may be either theatrical or non-theatrical.

2. Non-Theatrical Distribution Rights. Generally, non-

theatrical markets include the following four markets:

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 businessof exhibiting films to the public and whose purpose isgenerally 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 higherthan 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-airpay/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 categoryincludes hotel, motel, hospital and the like, but excludes free


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

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. Theproducer will also want to

consider the producers own ability to find other distributors for the rights retainedby the producer.


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Whatever the results of the negotiations as to rights granted, itserves the producers 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 producers

right to exploit reserved rights. For example, a home videodistributor may seek to limit the producers right to exploit audio-

visual or video-on-demand rights (if retained by the producer). The

distributor may seek to limit the producer use of reserved rights via aholdback 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 longerperiod.

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 producers 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 worksare 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 sub-

distributors 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 sub-

distributor. 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 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 theterm 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. Cross-

collateralization 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 off-

set 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 andaffordably 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 insection 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 methodis 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 asubstantial 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 producers bargaining

power is strengthened if there are numerous distributors vying for the right

to distribute the work. Competition can sometimes be created in festivalsand 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. Forthese 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.


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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 mayhave 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 distributors possession until the units are

sold.

L. REPRESENTATIONS AND WARRANTIES. It is important forthe producer to carefully check the representations and warranties in the agreement

to make sure they are factually correct and reasonable. It is common for audio-

visual works to incorporate the works of third parties (e.g. music, book rights, life-

story rights). Distribution agreements require the producer to represent and warrant

that the producer controls all rights in the work so the distributors 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 producers 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 producers

knowledge as a modifier to the representations and warranties clause.

Because acquiring rights for the works of third parties for use in the

producers 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 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 promotionsmay 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, thedistributor may seek the right to modify the work by the addition of subtitles and/or

dubbing.


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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 distributorsstandard 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.

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Copyright, 2003 Daniel M. Satorius

DANIEL M. SATORIUSSatorius Law Firm. PC.Dans practicefocuses 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. Theinvitation 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 atwww.satoriuslawfirm.com.

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