Definition of Motion Picture Profits

February 25, 2005


Michael I. Rudell

Definition of Motion Picture Profits Held to Include Gross Proceeds

(Originally published in the Entertainment Law column in the New York Law Journal, February 25, 2005.)

A Federal Court has concluded that a contractual provision requiring a company to pay a percentage “of the profits derived .from the profits of any live action or animation or television movie” includes contingent payments in the form of gross profits or gross proceeds.1 In a decision replete with references to “Hollywood accounting,” the Court granted the plaintiff’s motion for summary judgment on this issue.

Stan Lee (“Lee”) became employed by the predecessor in interest to Marvel Enterprises, Inc. (“Marvel”) in 1940 and, almost continuously, has remained in its employ ever since. During this period, he created or co-created characters including X-Men, The Incredible Hulk, The Fantastic Four, and Spider-Man. His roles at Marvel have included editor, art director, head writer and publisher. In 1980, he moved from New York to California to establish and run Marvel’s animation studio, and to pursue its involvement with television and motion pictures. At the time of the filing of the motion for summary judgment, Lee continued to serve as Marvel’s chairman emeritus.

Marvel and its predecessors in interest started in the business of publishing comic books based upon fictional characters in 1938. By the late 1970’s, the licensing of its characters for merchandise had become a principal line of Marvel’s business. Marvel was in bankruptcy from December 1996 through October 1998. ToyBiz, Inc. ultimately obtained control of Marvel.

After Marvel emerged from bankruptcy, it executed a new agreement with Lee dated November 17, 1998 (the “Agreement”) which contained the following paragraph 4(f):

“[Lee] shall be paid a participation equal to 10% of the profits derived during [his] life by Marvel (including subsidiaries and affiliates) from the profits of any live action or animation television or movie (including ancillary rights) productions using Marvel Characters. This participation is not to be derived from the fee charged by Marvel for the licensing of the product or of the characters for merchandise or otherwise . . .”

The Agreement requires Lee to devote 10 to 15 hours per week to Marvel’s affairs for which he received a fixed annual payment until his death. Upon Lee’s death, the Agreement provides that Lee’s wife will receive survivor payments in an amount equal to 50% of Lee’s base salary as of the time of his death through the time of her death, and thereafter Lee’s daughter will receive survivor payments of $100,000 per year for five years.

In connection with a motion to compel discovery in an action commenced by Lee against Marvel in 2002, it was concluded that the proper construction of the Agreement would be best addressed in a context of a motion for summary judgment. That resulted in motions by Marvel to bar Lee from profits arising out of merchandising and by Lee to obtain profits from film and television productions and from certain film and television merchandising.

According to Marvel, paragraph 4(f) entitles Lee to a 10% participation only in those television motion picture production agreements in which Marvel has been granted a net profit participation. Lee argues that paragraph 4(f) entitles him to 10% of all profits, including gross profits or gross proceeds, derived from contingent payments to Marvel in connection with the use of Marvel characters in film or television productions.

To some extent the dispute arose because of the changes in the way Marvel has conducted business since the execution of the Agreement. In August of 1998, the film Blade, which was based on a Marvel character, was released. Although it generated considerable profits, Marvel did not participate in them based upon the terms of the applicable provision of the production agreement. This provision, which Marvel has characterized as a “Hollywood accounting” provision, entitled Marvel to share in Blade’s “net profits” as that term was defined by the language of the agreement. Marvel’s chief creative officer testified that “Hollywood accounting is – is the term used to — studio’s deduct everything possible out of film revenues, from costs of the movie to getting a star flowers to — you name it and its in there. And it’s expensive and it’s hard to monitor, and therefore I’m allergic to it.”

Following the box office success of Blade, Marvel made a determination to avoid “Hollywood accounting” treatment for the use of its Marvel characters. In accordance with this philosophy, the contract between Marvel and Sony for the use of the character Spider-Man (generally regarded as Marvel’s most valuable asset) contained a provision granting Marvel a gross profit participation. Spider-Man: The Movie, which was released in May 2002, generated more than $800 Million in worldwide gross box office receipts. The profit participation provision that Marvel negotiated with Sony has yielded more than $50 Million to Marvel.

The Court reviewed various articles and releases issued by Marvel officials which comment on profit participations. The opinion quotes a statement by a Marvel official which appeared in a 2000 Business Week article in which he stated, “[Marvel will] be participating in the profits from dollar one.” It also refers to the Marvel 2001 Annual Report in which a letter to shareholders stated that “Marvel’s agreements include either gross profit participation ‘dollar one,’ a real profit participation, or equity (ownership) interest in the films themselves.”

In a November 18, 2003 presentation to financial analysts that allegedly was attended by all of the Marvel officers who provided testimony in connection with the instant action, Marvel described its current film production deals as providing to Marvel “gross profit participation ‘dollar one.’” A presentation to investors prepared in the last quarter of 2003 included a graphic depiction of an “Example of First Dollar Gross Profit Participation Economics.”

However, during depositions, certain Marvel executives modified these positions. One stated that the reference to “gross profit participation” in the 2001 Annual Report was confusing to him. Another testified that he would not characterize the statements contained in the 2001 Annual Report as a “gross profit participation.” A co-author of the letter to shareholders contained in that Annual Report stated that the statement in the letter concerning the nature of Marvel’s production agreements was not accurate. In a deposition, a Marvel witness, questioned about the use of the term “gross profit participation” in a presentation by Marvel’s chief financial officer, stated that the use of the term “gross profit participation” was neither correct nor incorrect. However, between the date of his deposition and December 17, 2003, when the chief financial officer was deposed, the word “profit” was removed from Marvel’s presentation to analysts. That officer testified he had no idea how the change had come about.

A well-respected certified public accountant, who testified as an expert for plaintiff, indicated that the grant of a profit participation simply means that the recipient is entitled to a share of some defined amount: “whether that sharing is net profits, defined proceeds, gross after break-even, rolling break-even or adjusted gross receipts, it is still a profit participation as that term is used in the motion picture and television business.”

However, this definition of “profit participation” was disputed by another experienced certified public accountant who indicated that it is understood in the entertainment industry that the participant in a profit participation agreement “will not receive any compensation unless the project is profitable to the studio (i.e., unless the studio is able to recoup its production and distribution costs from gross proceeds) . . .”

Marvel argues that Lee is not entitled to share in profits arising from the contingent compensation provision in the Spider Man agreement (and others like it) because such provisions entail participation in gross receipts and not profits. The Court rejects this position, stating that the first sentence of paragraph 4(f) does not indicate that this participation is limited to net profits earned by the producer or studio. Nor is the word “profits” defined in the Agreement.

The Court cites the first, and therefore preferred, dictionary definition of “profit” as “an advantageous gain or return; benefit” or “a valuable return: gain.” As demonstrated by the evidence put forth by Lee, these dictionary definitions conform with Marvel’s own consistent practice in treating all forms of contingent compensation as profit participation.

The Court holds that the first sentence of paragraph 4(f) is not ambiguous. (In a footnote it notes that even if the first sentence were ambiguous, the extrinsic evidence proffered by Lee would permit interpretation of the Agreement as a matter of law.) That sentence provides that Lee is entitled to share in the results of Marvel’s arrangements for movie and television productions involving Marvel characters, however those arrangements may have been characterized as between Marvel and a third party, as long as there is a valuable gain or return, a benefit to Marvel.

Ordinarily, a participant in the contingent compensation of a motion picture will have to possess significant leverage to receive a percentage of gross proceeds. The instant decision illustrates why studio definitions incorporating the “Hollywood accounting” provisions are more of the norm.


1 2005 U.S. District Lexis 587 (January 21, 2005)