BY:Neil J. Rosini, Michael I. Rudell
(Originally published in the Entertainment Law column in the New York Law Journal, June 23, 2006)
Custom and practice in the motion picture industry; the prerogatives of motion picture distributors to choose video-first release over theater-first release; “implicit obligations” in a rights acquisition agreement; and the covenant of good faith and fair dealing, all flow together in LaHaye v. Goodneuz Group, LLC, 34 Med. L. Rptr. 1390 (9th Cir. 2006, unpublished).
The issue in LaHaye treated in this column is whether a producer/distributor is obligated to release a film initially in theaters as opposed to home video or another small-screen medium. In La Haye, the plaintiff did not obtain that contractual commitment and the producer chose not to distribute in theaters first. But by a 2-to-1 vote, a Ninth Circuit panel said the theater-first obligation could be implied in the parties’ contract and reversed a grant of summary judgment in favor of the producer.
The LaHaye Decision
The contract in question was made in April 1997 between plaintiff Tim LaHaye and his co-author Jerry Jenkins with defendant Goodneuz Group. LaHaye and Jenkins had written a series of well-known Christian-themed books based on the authors’ conception of the “Rapture” and its aftermath in accordance with the Book of Revelations. The authors knew that the principals of the Goodneuz Group, Joseph E. Goodman and C. Robert Neutz, had limited experience in film production when the contract was made. Under the agreement, the authors conveyed film production rights to Goodneuz in the first and second books in the series, entitled Left Behind and Tribulation Force.
Those rights included “all motion picture, television and allied rights in and to the [two novels]. . .for the development of one or more possible motion pictures.” The conveyance embraced all forms of television, videocassette and videodisc rights, as well as interactive and multimedia rights. The District Court found that the agreement gave Goodneuz virtually “sole discretion … to adapt, use, change and modify the story, characters, plot, theme, scenes and dialog as [Goodneuz] considered necessary.” (The only exceptions were not in issue: adherence to the main themes of the two books, a PG-13 or less restrictive rating and no gratuitous swearing.) Moreover the contract explicitly conveyed all distribution rights and the right to assign the foregoing rights in the producer’s discretion. The agreement did not specifically require the producer to distribute its production first in theaters, as opposed to video.
Before conveying the rights to Goodneuz, the authors and their agent, Rick Christian, met with Goodman and Neutz on several occasions. The authors and Christian also met with representatives of a video production company to whom they considered granting movie rights in Left Behind. The District Court found that the authors ultimately decided to grant the rights to Goodneuz because of its “shared theology” as well as Goodman’s “expressed enthusiasm for the project.” They did not rely upon “discussions of the style, scope or medium” of any future production.
Goodneuz assigned another production company, defendant Cloud Ten Productions, a 50% interest in its rights under the contract. Several months later, a principal of Cloud Ten informed the authors that he intended to release the film first as a video and then theatrically. The District Court found that, notwithstanding this disappointing news, the authors continued to cooperate with both production companies, periodically reviewing proposed treatments. The authors’ agent cashed a check in the amount of $350,000 — with which the producers exercised their option to make a movie of Left Behind — and after deducting his commission, he distributed the funds to the authors. And in an interview, co-author Jenkins noted that Goodneuz had kept the authors “in the loop throughout the production process.”
The authors were not pleased with the quality of the film, however, and chose to have their names removed from the film’s credits. LaHaye subsequently sued the producers alleging, among other claims, that Goodneuz breached the implied covenant of good faith and fair dealing in their contract by failing to release the film initially in theaters. The District Court granted summary judgment to the defendants. On appeal to the Ninth Circuit, however, the grant of summary judgment on this claim and others was reversed. The Court held that the contract itself as well as surrounding circumstances required the reinstatement of the plaintiff’s claim that defendants breached the covenant of good faith and fair dealing by failing to release the film initially in theaters.
First, the Court drew attention to one paragraph from the contract which sets forth the consideration the producer must pay for each type of production. That provision, noted the Court, “exclusively prescribes consideration for a ‘theatrical motion picture’ – not for any other kind of motion picture.” Further, another provision provided that the purchase price set forth in the first provision pertained to a “theatrical motion picture.” The Court held that these terms suggested “an implicit obligation to release the film theatrically.”
In addition to the contractual terms, the Court reviewed the circumstances surrounding the making of the contract, interpreting the facts presented by the plaintiff in the light most favorable to him. It held that a material question was raised as to whether “the video-first distribution strategy breached the implied covenant.” The Court said the facts suggested that distribution initially in theaters was what “the parties intended and expected the contract to require,” if the option were exercised and the film produced.
Further, the Court held that a material question of fact was raised as to whether a theater-first release of a film was “so integral to film distribution that it was understandable not to include an express contractual term requiring a theater-first release, and whether the producers could have in good faith chosen to distribute the film initially on video.” Lastly, the Court decided that parol evidence could be considered to explain the terms of the agreement.
First in Theaters or Video?
There are many reasons why the holders of underlying rights, like the authors of Left Behind, would prefer to see their work in theaters prior to a home video release. A film that is first released theatrically usually achieves greater recognition than one licensed initially for home video exhibition or television broadcast. The advertising, promotion and marketing expenditures for a theatrical release elevate public awareness and enhance the stature of those who wrote, acted in, produced, and directed it. Such promotional efforts also serve to increase the value of the film for subsequent exploitations, like home video and television. Some motion picture executives have referred to the theatrical release of a film as the primary means of advertising home video releases. Because the home video revenue from a film plays an increasingly greater role in its overall success, this factor can prove to be important.
Producers and creative talent associated with a film that is initially released in home video may see their bargaining power diminished in subsequent negotiations. Further, those entitled to contingent compensation derived from a picture that is not released theatrically would lose, in most instances, whatever slim chance they initially had to receive contingent payments. It is difficult to conceive of a film that, without an initial theatrical release, could generate enough gross proceeds to trigger a participation for anyone sharing in net proceeds. For these reasons, rights holders, creative talent in all categories, producers, and sometimes investors, would prefer to be associated with a film that has as its first exploitation a theatrical release.
Though mindful of the advantages of a theatrical release, producers and distributors still prefer having a choice as to how to exploit a project. Their ultimate decision could depend on a film’s quality, marketing prospects, and other considerations that cannot be foreseen before the film is made. Accordingly, they will usually try to reserve the right to choose the medium for initial exploitation despite the objections of investors and creative talent.
If an agreement is to provide for a theatrical release, or for additional compensation triggered by such a release (e.g. bonuses based on the occurrence of a U.S. or foreign theatrical release), the meaning of the word “release” itself may come to the fore. The variables in such a definition may include the number of markets in which the film must be released, whether the release schedule includes a minimum number of “major” markets, and the amount of advertising monies that must be spent in connection with each. Releasing a film in major markets requires significant advertising expenditures; a full page advertisement in a large circulation newspaper is costly.
Further, even these criteria — such as the one relating to advertising monies — can be drafted at heightened levels of refinement. Advertising monies may include only third party media purchases, or may include the costs of creating the advertising. Another issue is whether advertising costs include internal charges by the distributor or only those paid to outside third parties.
The negotiations concerning a contractual obligation to release a film initially in theaters may pit a rights holder or actor who has the leverage to demand such a provision against a producer/distributor eager for as much flexibility as possible in connection with its handling of a film. The distributor who believes that the cost of releasing the film theatrically could outweigh its potential revenue benefits will want the right to license the project for initial exploitation by any means it chooses. However, the implications of being involved in a film that is not released in theaters may prove so unacceptable to rights holders and talent of a certain status that they will insist on a clause requiring initial release in theaters.
As in most agreements involving difficult and sensitive subjects, the respective leverage of the parties will play a decisive role in resolving the question. But as the La Haye decision demonstrates, deferring or ignoring the issue may prove to be costly.