BY:Neil J. Rosini, Michael I. Rudell
(Originally published in the Entertainment Law column of the New York Law Journal October 23, 2009)
Even in this year of diminished activity, the pulses of buyers at Sundance were quickened by films considered to be potential box office winners. In the case of “Precious: Based on the Novel ‘Push’ by Sapphire”1 (“Precious”), the story of a young black woman’s hardships, frenetic negotiations led to a lawsuit in which one distributor claimed to have won exclusive rights in a film before its producer granted those rights to another.
That negotiations at Sundance and other film festivals could lead to litigation is not surprising. The process might begin with a distributor making an offer that includes a handful of principal terms and telling the sales representative for the picture that if he or she leaves the table, the offer is withdrawn. The representative then might take that “withdrawn” offer to the next distributor to try to do better. If the representative accepts a distributor’s opening proposal, they hurriedly negotiate a written deal memo using the distributor’s “standard form.” The form has blanks and check-off boxes but covers a relatively small number of major deal points: e.g. rights, term, territory, minimum guarantee, some brief terms relating to calculation of the producer’s share of income (beyond the guarantee), a fleeting reference to a standard “delivery schedule,” and little else. A more formal agreement to be prepared by the distributor in subsequent weeks is contemplated, but the parties intend the deal memo to bind. The agreement then is announced by the producer and the victorious distributor to its competitors and to the public.
In this atmosphere it may be difficult to know one’s legal standing during a negotiation to a certainty. Both sides generally accept, however, that if an agreement is not made by the end of the festival, a buyer’s emotions may cool upon removed, analytic reflection and place a deal in jeopardy.
In the case of Precious, Judge Naomi Reice Buchwald was asked to determine whether negotiations carried on through a meal, a phone call, and a flurry of overnight e-mails created a binding contract–or at least a binding agreement to negotiate exclusively–for the benefit of The Weinstein Company, LLC (“TWC”), a film distributor. Sales agents for the defendant producer, Smokewood Entertainment Group, LLC (“Smokewood”), did not believe it did and sold rights to another bidder, Lions Gate Entertainment. In dismissing TWC’s suit for money damages against Smokewood last month, the Court’s decision2 illuminates both best practices and pitfalls for negotiators on both sides of the table.3
Precious offered much in potential box office value. It was endorsed by Oprah Winfrey and Tyler Perry.4 It was praised by critics at Sundance and it won the prestigious grand jury prize in addition to the audience award in the U.S. dramatic competition – only the third film in Sundance history to win both according to the Court’s decision.
Shortly after the film’s screening at the festival, TWC executives arrived in Park City to negotiate for rights. They dealt with sales agents of Smokewood, John Sloss (“Sloss”) and Bart Walker (“Walker”) of Cinetic Media. Three days later, according to TWC’s complaint in the action, Cinetic proposed four deal terms to TWC over the course of breakfast and a phone conversation: a minimum fee payable on a fixed schedule, a distribution fee (different in different territories), bonuses for box office performance and awards, and “preservation of editing rights.” The complaint alleged that TWC accepted the offer.
A deal “for worldwide distribution rights” was purportedly confirmed that same evening in an e-mail from David Glasser of TWC to Sloss and Walker. It referred to a “customary deal memo” being drafted by TWC attorneys, but did not specify deal terms. Walker responded by e-mail: “…I have been on a call with the producers and financiers…I will call you after.” Glasser sent another message saying, “…I am glad to confirm that we have a deal…” and offered to work to accommodate “additional needs” in connection with a third distributor with whom Smokewood said it made a prior agreement for international distribution. That same evening, Walker responded that he was still “explaining every detail” to the producers and financiers and taking their comments.
At 2:04 a.m. the next morning, Glasser reiterated TWC’s acceptance of the Smokewood offer and its agreement to offer “assistance” in connection with the international distributor. Glasser also declared TWC’s intention to “enforce the deal…with or without written documentation.” Then Glasser sent a follow-up e-mail maintaining that TWC “would take whatever action is necessary.” Sloss and Walker answered at 4:42 a.m.: “[e]ssential points” had not been agreed, such as the division of profits and whether or not rights in international territories could be granted, and there was no deal. Glasser characterized that e-mail as a “repudiation of the agreement which [they] definitely did reach.”
TWC’s first theory of liability was that it acquired an exclusive license to distribute the film either orally or through the exchange of e-mails or by both means. The Court rejected that theory on several grounds. Under the Copyright Act, the exclusive rights sought by TWC could only be conveyed in a writing “signed by the owner of the rights conveyed or such owner’s duly authorized agent.” 17 U.S.C. §204(a). TWC did not allege the existence of any “written, legally binding agreement” much less a “clear and unequivocal” writing that showed Smokewood’s “intention…to transfer an ownership interest.” Only e-mails from TWC – not Smokewood – showed an “unambiguous desire to enter into the deal.”
Nevertheless, in support of its theory, TWC contended that the complimentary close to Walker’s e-mails – “Best, bw,” – effectively “recorded his agreement” that a valid contract had been made. The Court rejected that argument out of hand. TWC also relied unsuccessfully on two cases holding that check endorsements could constitute a signed writing for purposes of Section 204(a) in conjunction with parol evidence. The Court noted that “the very act of accepting payment from an alleged licensee can corroborate a copyright owner’s intention to transfer its rights,” which was one distinguishing factor. Further, those checks bore endorsements like “Purchase of rights…” and “Bonus on … recording agreement” or referred to an assignment of copyright, resulting in “far stronger” facts.
Also undermining this first theory, according to the Court, was the fact that Walker’s e-mails didn’t mention any parameters of the deal. Accordingly, the e-mails “lack[ed] the suggestion of finality” that might have been found in a completed deal memorandum. The Court rejected TWC’s suggestion that ambiguity in Walker’s e-mails should open the door to admission of extrinsic evidence because no ambiguity was found; and it rejected inferences that “strain[ed] credulity” being drawn by TWC from Walker’s e-mails in support of a grant of an exclusive license. Finally, the Court noted that even if it were customary in the entertainment industry to negotiate deals orally and follow up with a confirmatory writing as TWC argued, “Congress did not exempt parties in the film industry from the requirements of the Copyright Act.”
In the alternative, TWC offered a second theory: it contended that Smokewood granted an implied non-exclusive license for which the Copyright Act requires no writing. The Court found this argument “even more defective” than the first because an implied non-exclusive license “will only be found when a copyright owner creates a work at the request of the licensee and with the intention that the licensee exploit it,” a set of facts not alleged. The Court also noted in a footnote that TWC’s apparent position “that a non-exclusive license should function as a sort of consolation prize” would, if accepted, “undermine copyright owners’ statutory rights by turning every failed negotiation for an exclusive license into a potential claim for a non-exclusive license.”
TWC’s final theory was that Smokewood breached “a binding preliminary commitment to negotiate with TWC in good faith.” The Court rejected that theory, too, and its analysis should be of particular interest to those who negotiate in an intense bidding atmosphere and either do—or do not—wish to lock the other side into an exclusive discussion.
The Court observed that under New York law, there are two types of binding preliminary contracts. In Type 1, all essential terms have been agreed upon, no remaining disputed issues are perceived, and a further contract is envisioned primarily for the sake of formalities. This type is “preliminary only in form” and formalization is not necessary to bind the parties fully; but no such agreement was alleged by TWC. Instead, TWC argued that a Type 2 agreement had come into existence: “where the parties recognize the existence of open terms, even major ones, but, having agreed on certain important terms, agree to bind themselves to negotiate in good faith to work out the terms remaining open.” Citing Teachers Insurance & Annuity Ass’n v. Tribune Co., 670 F. Supp. 491 (S.D.N.Y. 1987), the Court reviewed five factors to determine whether a Type 2 preliminary contract had been made.
The first factor looks to “the language of the alleged agreement” for an indication of “whether the parties considered it binding or whether they intended not to be bound until the conclusion of the formalities.” This factor favored Smokewood because Walker’s e-mails – in which he stated repeatedly that he was discussing the deal with producers and financiers – “do not suggest any intention … to enter into a preliminary binding commitment to conclude the deal.” The second factor, “the context of the negotiations,” weighed for neither party because of conflicting precedents: although Tribune suggested that the plaintiff would need to allege a reason that the defendant “would have found it advantageous to have a preliminary binding commitment to negotiate in good faith,” other courts have taken a “more lax approach” that simply asks whether the parties were at such a preliminary stage of negotiation that they could have shown no intent to be bound to a preliminary commitment. The third factor, the existence of open terms, also favored neither party on the facts as alleged because the plaintiff did not assert that all major terms had been resolved or that significant terms had yet to be worked out. The fourth factor, “partial performance,” also favored neither party because the plaintiff didn’t allege it and, under the circumstances, a lack of partial performance was “understandable.”
The fifth factor, however, “the necessity of putting the agreement into final form,” was the one that “weigh[ed] decisively in favor of defendant” owing to Section 204(a), which as noted above requires a signed writing for a transfer of exclusive rights. The Court did not “conclusively rule out” that a binding preliminary contract might arise either from a copyright owner’s unambiguous signed letter of intent to finalize a licensing deal or an explicit assurance that it was negotiating only with the plaintiff “at a particular moment in time.” But here there were no such “indicia” and in light of “decidedly non-committal e-mails” from Smokewood’s agents, the Court held that TWC failed to state a claim for breach of a preliminary binding commitment.5
The numerous and variable terms that come into play during a negotiation over film distribution rights are difficult to cover in a festival’s highly charged atmosphere and relatively short duration. (Some important terms, like requisite delivery elements that can vary considerably from film to film, are generally left for the long-form contract even when there’s a signed deal memo.) Festival deal-making may be assisted by a high level of trust between parties born of a long history of prior business relations. But with or without that advantage, the parties must achieve a clear mutual understanding that a deal exists and commit the terms to writing or else face the likelihood that at least one party’s expectations will be dashed, followed by a lawsuit.
1 This is the current title of the film. A previous title, referred to in the Court’s decision discussed below, was “Push: Based on the Novel by Sapphire.”
2 The Weinstein Co. v. Smokewood Entertainment Group LLC, 09 Civ. 1972 (S.D.N.Y.), decided September 24, 2009. The decision was published in The New York Law Journal on October 5, 2009.
3 The dismissal in the Southern District did not end the matter. There remained three other litigations relating to the same dispute. Goldstein, Patrick, “Harvey Weinstein’s ‘Precious’ lawsuit dealt a big setback,” The Los Angeles Times, September 25, 2009.
5 The Court did not reach the question of damages. Had the Court found a breach of a preliminary binding contract, the plaintiff’s recovery would have been limited to reliance damages, excluding lost profits. Goodstein Construction Corp. v. City of New York, 80 N.Y.2d 366 (1992).