BY:Neil J. Rosini, Michael I. Rudell
(Originally published in the Entertainment Law column of the New York Law Journal, December 26, 2008)
A goal of most not-for-profit theaters (“nonprofits”) is to assist in the support and development of new plays without regard to profit. Nonetheless, nonprofits must sustain themselves, which has become increasingly difficult in this turbulent economy.
Each nonprofit nurtures the hope that at least some productions will play to sold-out houses and cover the losses of those less successful, while also attracting favorable attention and higher donations. Over the years, some nonprofits have fulfilled those hopes by producing plays that achieved great critical and commercial success.
But as reported in a recent New York Times article1, the claims of nonprofits to a share of the revenues from subsequent productions of plays they initially produce is being challenged.
In addition to selling tickets and attracting donations, a highly successful new play may continue to fortify a nonprofit’s balance sheet years after the production has left its stage.
Many nonprofits accomplish this by negotiating for a continuing participation in the revenues generated by the play from subsequent productions and other dispositions of rights. These participations often include a percentage of box office receipts and a portion of net profits.
More controversially, some nonprofits obtain from the playwright whose play they produce, a continuing share of his or her subsidiary rights income subsequently derived from those plays. This income from subsidiary rights, as well as advances and royalties based on box office receipts for first class and second class productions, are usually all that playwrights receive from their plays after the first production. (Among the most important sources of subsidiary rights income are television and motion picture production rights as well as stock and amateur rights and foreign production rights. “Stock rights” refer to certain productions using professional or semi-professional performers and “amateur rights” refer to amateur productions by schools, churches and organizations.)
The New York Times Article
The recent New York Times article dealt with the financial participation claimed by nonprofit theaters in the subsidiary rights of playwrights as part of the nonprofit’s production deal. One point of disagreement between theaters and playwrights reported in the article was whether nonprofits should enjoy that participation at all in addition to the other forms of compensation derived from subsequent exploitation of the new plays they produce. The article also reported on the controversy over the size of the subsidiary rights share paid to nonprofits, and particularly whether it ever should be the same substantial slice usually claimed by commercial producers.
The New York Times article told of how playwright Craig Lucas took the Off-Broadway premiere of his play, “Prayer for My Enemy,” from the stage of the Roundabout Theater Company to that of Playwrights Horizons. Roundabout wanted 40% of the playwright’s proceeds from subsidiary rights. Playwrights Horizons took only 10% of the subsidiary rights stream – one-quarter as much. Both are nonprofits. As the article reported, the 40% rate is standard for commercial Off-Broadway theatrical producers, but some nonprofits, like Lincoln Center Theater, take no share at all of subsidiary rights from authors.
According to the article, the nonprofits that share in the playwright’s share of subsidiary rights income defend the practice by pointing toward the enormous contribution they make to a production. This includes raising money, hiring talent, furnishing a stage and supplying most everything else that brings a play to life. They ask why shouldn’t they get a return on that investment even after their production is done. And why should their share be any less than a commercial producer gets – especially when the play has real earning potential?
Playwrights and the Dramatists Guild of America, which represents many of them, see things differently. They note that many nonprofits primarily are in the business of producing new plays, and on that basis, support themselves primarily through fundraising. They argue that successful plays–those with the greatest upside–help support the nonprofits’ fundraising efforts already. And they ask what real difference is made, even by a substantial share of subsidiary rights from a relatively successful play, to a multi-million dollar operating budget of a high-caliber nonprofit theater; they say that those tens of thousands of dollars in extra subsidiary rights income from a highly successful play might allow a playwright to make ends meet while writing his or her next play.
To better understand the controversy, it is helpful to understand the typical playwright-nonprofit deal, the nonprofit-commercial producer deal, and the playwright-commercial producer deal, mentioned in the New York Times article.
Nonprofit theaters range from extremely small ones serving local or regional audiences to much larger Off-Broadway and Broadway-type institutions. Although the terms of their deals with playwrights vary based on negotiating leverage and philosophy, a typical one begins with a small advance for an exclusive option to produce the play for a period of time, during which the theater may present readings, or a workshop, or both, in order to “develop” the play.
Assuming the option is exercised, a limited run is presented during which the author receives a royalty or a flat, weekly fee. If the play actually is presented by the theater for a specified number of weeks, the theater will often become entitled to a percentage of subsidiary rights income earned by the author from subsequent dispositions of rights by the playwright, made during a period of five to ten years (as negotiated) after the last performance of the nonprofit’s production. That percentage can be as much as 40% at certain theater companies in New York and a fraction of that at smaller venues.
The playwright’s obligation to share subsidiary rights income can grow by accretion. For example, a production by a local or regional nonprofit that entitles the theater to a 5% share of 100% of subsidiary rights revenues, can be followed by a production at another nonprofit theater for which a second participation attaches. The greater the cumulative entitlements, the less is payable to the playwright.
In addition to a share of the author’s subsidiary rights income from subsequent exploitation, a nonprofit which produces a new play usually will receive a royalty based on box office receipts– most often 1% to 2% — and sometimes a share of net profits – usually 5% (but sometimes more) — from dispositions of rights to produce professional productions during those same five to ten years. These participations are expected to be borne by the subsequent producer or series of producers, not the playwright. Sometimes, however, subsequent producers ask the playwright to bear the cost as a condition of mounting another production. If a nonprofit theater has sufficient leverage, it also may obtain from the playwright the right to mount a commercial production or to license those rights to a commercial producer.
Nonprofit-Commercial Producer Deal
A nonprofit theater may acquire from a playwright the right to act as an agent and license its production – or just the play itself — to a commercial producer. This might not be the playwright’s first choice, but the nonprofit may insist as it takes advantage of another opportunity to generate income and continue to associate its name with the play.
A nonprofit theater that makes a deal with a commercial producer for the latter’s subsequent production is apt to negotiate for itself at least 1% to 2% of gross weekly box office receipts, except in the event of a royalty pool, which provides an alternative means of computing the playwright’s share2. The nonprofit also will receive 5% of net profits from each company of the play produced by the commercial producer, and perhaps an additional 5% share of the play’s subsidiary rights. This is substantially what the nonprofit could have obtained from the playwright, but in a deal with a commercial producer, the nonprofit may obtain greater benefits, such as a larger share of revenues, or a co-producer role, or Tony Award eligibility. The commercial producer’s share of subsidiary rights is almost always 40% for Off-Broadway, assuming a negotiated number of performances are performed; the nonprofit likely will get its share of subsidiary rights income from the commercial producer’s share.
In addition, the nonprofit theater can attempt to structure a deal in which it maintains a level of artistic control in the commercial production. Another recent article in the New York Times3 reported that the Public Theater licensed rights to last summer’s revival of “Hair” at the Shakespeare in the Park festival, to a commercial producer for a Broadway premiere in March. However, in that deal, the Public reportedly retained an equal say in all artistic and business matters, in addition to a much greater percentage of the net profits than it received under previous royalty agreements, while the commercial producer bore the economic risk.
A nonprofit theater also can enhance its balance sheet by soliciting the interest of a commercial producer before or after it has licensed rights from a playwright but before the nonprofit mounts its own production. This boost comes in the form of “enhancement” funding: the nonprofit seeks an early relationship with the commercial producer and gives the latter an option to produce a first-class or other production, as well as use of the nonprofit’s sets, scenery, costumes and props. In return, the commercial producer pays “enhancement money” which may be in the hundreds of thousands or more than a million for a major musical. The regional nonprofit theater will use this money to mount a workshop, or a fully realized production “enhanced” with better sets, costumes and heightened production values. In addition to the option to produce, the commercial producer gets the opportunity to see the production professionally produced, better to assess its chances of commercial success.
Another typical part of the nonprofit-commercial producer deal is the attachment of the regional nonprofit’s credit to the commercial production. For example, the agreement might provide that whenever the title of the play appears in connection with the commercial production with the producer’s, director’s, or author’s name, a credit for the nonprofit as the source of the production also would appear. The nonprofit regional may even have approval over the final logotype of the combined title treatment.
Playwright-Commercial Producer Deal
What if the playwright somehow achieves a deal directly with a commercial producer rather than starting with a nonprofit? Does this give the playwright an economic advantage?
Commercial producers do tend to pay playwrights more in terms of advances, box office receipts, and a share of net profits, compared to nonprofit regional theaters. But they might not proceed directly to a commercial production. Instead, a commercial producer may reserve for itself the right to involve a regional nonprofit first, to produce a workshop and then full-fledged production — perhaps one “enhanced” by funding from the commercial producer. This, too, serves the purpose of permitting the commercial producer to see the play professionally produced and assess its possibilities.
Even by this circuitous route, the nonprofit theater will become a participant in box office receipts from the commercial production and other dispositions of rights by the commercial producer. It likely will obtain a share of net profits earned by those productions as well and probably take up to 5% of subsidiary rights income. In this scenario, however, that share most often will come “off the top” and not directly from the playwright’s remainder.
In the current economic climate, the plight of nonprofits, like that of most arts organizations, is likely to worsen as fundraising becomes more difficult. Playwrights, whose fortunes are affected in part by the fortunes of producers, also may be looking for higher levels of income. The controversy over whether or not nonprofits will maintain their share of playwrights’ subsidiary rights income or in any revenue earned by subsequent productions — and, if so, by how much — is apt to continue.
1 Goodwin, Joy, “Far From the Spotlight, a Brewing Fight Over Theatrical Rights,” New York Times, November 22, 2008, New York City Edition, at C3.
2 Approximately 25 years ago, producers modified the gross receipts mechanism in response to investor concerns, and introduced royalty pools — a concept by which the playwright, and other income participants share in operating profits of the play during weeks when there are profits, and the playwright receives a minimum payment each week whether or not profit is achieved. Over time the royalty pool concept became more sophisticated by, for example, incorporating concepts such as amortization of the production capitalization in the computation of operating profits.)
3 Cohen, Patricia, “Broadway Gets ‘Hair;’ ‘Hair’ Gets New Deal,” December 3, 2008, newyorktimes.com
Jonathan Lonner, a partner in the firm, assisted in the preparation of this article.