Wednesday, February 27, 2008

THE STUFF DREAMS ARE MADE OF

A recent article published by the Associated Press, claims that the estate of J.R.R. Tolkien was promised 7.5% of the take in the Lord of the Rings movie trilogy. "New Line has not paid the plaintiffs even one penny of its contractual share of gross receipts despite the billions of dollars of gross revenue generated by these wildly successful motion pictures," according to Steven Maier, an attorney for the Tolkien estate. So, why has New Line only paid the author's estate $62,500 in an up front payment, according to the Associate Press article?

Without reading the agreement between the estate and New Line, this question cannot be answered with any certainty. Did New Line agree to pay 7.5% of the “gross,” reportedly $6 billion, worldwide? Or did New Line only agree to pay 7.5% of some net receipts? The terms of a deal and the basis for the royalty are issues to address with a clever and experienced attorney prior to accepting any advance or signing any agreement within the entertainment industry. Often, the definitions in an agreement are far more important than the license grant and royalty rate, combined. Unfortunately, a term like "gross receipts" can be defined within nested definitions to be anything but gross revenues.

Without a doubt, 7.5% of $6 billion is a lot more than $62,500. You don't need an accountant to calculate the zeroes left off the amount paid. However, the motion picture industry, the music business, the theatre and the publishing industry are well known for a history of creative accounting. It is no laughing matter when an artist or writer learns that he or she owes money to the producer or publisher, rather than the other way around. Box office receipts are only a fraction of the total take of a blockbuster movie. Often, box office receipts may barely cover production, talent, distribution and marketing costs. It is easy for a studio to show a net loss compared only to box office receipts. When it comes time to divvy up the profits, somehow, even the biggest blockbuster at the box office finds a way to fizzle on its balance sheets.

With a project like The Lord of The Rings, the estate of the copyright owner could have required minimum amounts paid annually for the exclusive rights (expecting production delays) in addition to any future royalties. The revenue basis should not have been limited to box office receipts. Licensor will want the basis to be gross revenues and to have gross revenues defined as broadly as possible to capture every source of revenue, including toys, games, broadcast rights, foreign rights, advertising rights and cross-marketing. In short, every source of revenue, whether cash or a cash equivalent, should be included as revenue. Audit rights should be included, which provides a look at the books without resorting to litigation, and a single entity should be required to maintain a single set of books. Likewise, deductions from the gross revenue should be as limited as possible, if any. This would put the copyright holder in first place ahead of talent, composers, investors, producers, directors, family and friends of the producers and "others who are owed money for past productions that failed to even cover production costs that the producers feel ethically or morally compelled to compensate using someone else's money." (The money must be going somewhere!) You get the picture. Payroll can swell in big budget production. Even better, agree to take a smaller share of the gross revenue and save some money on your auditor’s bill. Finally, is a lump sum payment, made in advance, an advance on royalties or is it an advance payment in addition to any royalties paid later? So long as the advance is nonrefundable, why not take the money up front, if offered. But, don't count on seeing royalties any time soon. If the estate of J.R.R. Tolkien is going to court to try to collect its share of $6 billion, you can be sure that many other authors with less cachet are still waiting for their royalty checks. Find a good agent and a good attorney before you sign any agreement in the entertainment industry.