BY:Steven C. Beer, Brittany A. Berckes
A large part of a film’s commercial success comes from international or “foreign” distribution (outside of the U.S. and Canada). Not only must film producers find the right foreign sales agent for their films, but they also need to negotiate a sales agency agreement authorizing the sales agent to secure licenses within the designated foreign territories on an exclusive basis. The sales agency agreement establishes the critical parameters of this relationship. Here are some key deal points that producers should understand when structuring these deals.
The length of time, or the “term” of the agreement, is a critical deal point in a sales agency agreement. Like the marriage in “The Heartbreak Kid,” the quality of the sales agency relationship often diminishes after the initial honeymoon period. Also similarly, it’s difficult to withdraw from a bad relationship with an unreliable, underperforming sales agent.
With this in mind, licensors will seek to negotiate a brief initial term (e.g., two years), which can be extended if realistic revenue milestones are satisfied. If the sales agent does not exceed these mutually established milestones, then all rights should revert to the filmmaker upon expiration of the initial term. Because the value of a film diminishes significantly following the first two years after its release, maximizing a film’s potential worth at the front end of the relationship with a foreign sales agent is paramount.
As compensation for their services, sales agents earn a commission-based sales fee from transactions secured during the term. The traditional sales fee for independent films ranges between 10%-30%, depending on the perceived market value of the film (cast, genre, etc.) and whether the sales agent is paying a minimum guarantee. In most instances, the sales fee is taken off the top from revenues generated by licenses secured by the sales agent.
In addition to the size of the sales fee, a licensor must consider the marketing and distribution expenses incurred by the agent when selling a film. The out of pocket cost of attending major film markets like Cannes Marche du Film, Berlin’s European Film Market or the American Film Market are considerable – including expenses related to lodging, travel, market accreditation, film booth rental, film posters, sales one-sheets, trailer production, screenings, trade advertisements and hospitality. Most sales agents deduct these costs after collecting the sales commission off the top. Needless to say, these costs can have a substantial impact on the producers’ participation. To protect the bottom line, it is highly recommended that producers negotiate a right to approve the final marketing budget along with an expense cap. The agent should be required to secure the producer’s written consent before exceeding the agreed cap.
Most international sales deals exclude North America (the U.S. and Canada), reserving that territory for domestic sales agents. The increasing number of transactions involving subscription video on demand (SVOD) platforms, such as Netflix, Hulu and Amazon Prime, are disrupting the conventional order. These deals often license worldwide rights, which impacts the authority and media rights of both domestic and international sales agents. These issues should be addressed at the outset of negotiating a foreign sales agreement. One common approach is to solidify the traditionally more valuable domestic distributor deal first and then reserve the domestic distributor’s rights in any foreign deals that are secured afterwards.
Two reporting elements must also be addressed within a foreign sales agreement: 1) the producer’s right to regular accountings reflecting all of the agent’s sales and expenses associated with the film and 2) the right to audit the sales agent’s books and records upon reasonable advance notice. Regarding the right to review activity reports, the sales agent may be required to prepare and forward sales/expense statements on a quarterly basis for at least two years. After that, the accounting should be no less than twice annually for the balance of the term. If an audit reveals a discrepancy of at least 5%, the agent should be compelled to pay for the cost of the audit.
If that discrepancy signals a bigger problem in the sales agency relationship, or if any other sort of dispute requires adjudication, arbitration usually makes more sense for producers than litigation. To ensure this option, an arbitration clause need to be included in the parties’ agreement. The Independent Film & Television Alliance (IFTA) arbitration clause is often used. IFTA is the governing body for most international sales agents and its arbitration process is relatively streamlined. It’s also tailored to address matters that are most often in dispute and less expensive than litigating disputes in courts of general jurisdiction.
While this discussion addresses important legal and business issues to keep in mind when negotiating a sales agency deal, it is by no means exhaustive. Other matters, such as insurance, indemnities and delivery, should also be considered. We look forward to addressing these matters in future articles.