BY:Richard A. Beyman
Five key terms in distribution contracts.
Congratulations! You beat the odds and found a distributor to release your independent feature film. Not only that but you stand to receive an advance or a guarantee that may go a long way toward repaying your investors.
Here are five essential areas to consider in the distribution agreement:
1. Rights/ Distribution Commitment. The distributor under a standard film distribution agreement seeks a grant of exclusive rights for the exploitation of the film in all media. In addition, the term requested will be for a significant number of years or even for the full term of copyright. These things make the distribution agreement the single most important agreement the producer will enter into concerning the film, and absent there being other viable options — e. g. another distribution suitor for territories outside the United States or for perhaps different channels of exploitation (pay or cable television, digital) — an independent filmmaker may need to make an expansive grant of rights to the distributor. But there are other aspects to consider. Is the distributor promising a theatrical release, and is there an outside date by which the release is supposed to happen? Are there any promotional, marketing or other plans for distribution which have been discussed and which may enhance the film’s chances for success? Talk is cheap and probably non-binding; any promised plans or intentions for the distribution need to be appear expressly in the contract or they should not be relied upon by the producer in determining whether to proceed.
2. Getting Paid. As to the financial aspects of the distribution agreement, in addition to the crucial concern of “how much” the producer will receive, “when” payment will be made and “how” payment is defined are critical.
If there is an advance or a minimum guarantee, it will likely be paid in installments based on milestone events. The producer needs to consider whether these milestones are within its control and achievable or if they are based on activities solely in the control of the distributor. When the milestones are within the distributor’s control (e.g. an amount of the guarantee payable upon theatrical release) the producer should insist on an outside date for the triggering event to be deemed to have occurred and by which the associated installment is payable. When the milestones are within the producer’s control, they should be carefully considered in view of the realities the producer faces, most important among them the time and cost involved in attaining them. Undoubtedly the payment milestones will include stages of delivery with an amount held back until complete delivery. The producer should avoid any possibility that the agreement would permit the distributor to release the film before having acknowledged that complete delivery has been made or at a minimum, exactly what remains to be delivered, and the consequences concerning the payments to be made to the producer.
The back end participation that a producer receives under a distribution agreement also needs to be analyzed. The revenue streams that are included (and those which are not), the deductions for fees to third party affiliates of the distributor, the percentage distribution fees, and the definition of distribution expenses all bear on whether the filmmaker can expect to share meaningfully in the success of the film. Though distributors rarely wish to make changes to these provisions and the independent filmmaker may not have much leverage to demand changes in a negotiation, the producer also must view these provisions in light of the advance or guarantee the distributor is promising and whether payment of that amount is likely to be the only proceeds the producer will receive. The provisions concerning the frequency of statements and right of inspection or audit also should be considered to determine whether there will be a later opportunity to question the accountings that are made.
3. Delivery. While delivery seems like an obvious obligation that every producer anticipates fulfilling, it entails more than merely completing and furnishing a fully edited master final cut of the film that is ready to be seen by audiences. “Delivery” in the distribution agreement is a specifically defined term referring to an extensive list of physical film elements in specific formats as well as legal instruments, and other paperwork the producer must furnish. The producer overlooks analyzing the proposed list of specific delivery items at its peril (or worse agrees to an unspecified obligation to deliver whatever the distributor reasonably requests). There may be elements that the producer has not budgeted and which it will be required to create at its cost, thus reducing the net amount to be received from the advance that was negotiated and delaying when payment will be made. While the rights granted to the distributor begin on signing of the distribution agreement, much of the distributor’s obligations may be contingent upon this complete “Delivery,” including payment of the advance or guarantee. Also, often the clock counting down the length of the term (e.g. as it may be expressed in a number of years) does not even commence until capital “D” Delivery (as defined) has been made. This creates the potential for the producer to have placed the film in a legal limbo; the producer will have granted the rights to the distributor who may have received enough to exploit it, but the producer is not able to reap the expected benefits while conditions to payment are not satisfied. It is vital that the filmmaker carefully review the delivery schedule and insist that inapplicable and impractical items be stricken, modified or otherwise addressed. A common mishap occurs when the producer is not able to deliver fully executed licenses for third party materials included in the film which allows the distributor to hold back payments until the producer has done so. For example, often licenses for third party music are negotiated and agreed by email and payment made, but full executed license agreements from the music publishers (using their form of agreement) may lag several months behind. The filmmaker should seek to have delivery acknowledged if exploitation occurs (e.g. upon theatrical release) so that no money (or only a small portion) from the advance or guarantee will be held back pending resolution of any open delivery items. Consideration should be given to seeking provisions by which the agreement can be terminated if delivery has not been acknowledged as complete by a specific date, though that may, at a minimum, require the producer to return any previously furnished installments of the advance or guarantee.
4. Future and Continuing Obligations. The producer should make certain that the distributor assumes any continuing obligations that the producer may have to third parties that arise from the exploitation of the Film. Chief among these are any obligations to pay union residuals and associated fringe benefit payments (pension and welfare). While the major studios have been approved by the unions and guilds as “qualified” (meaning they have already agreed to be responsible for union obligations directly to the unions), smaller independent distributors may not be. In addition to having the distribution agreement state specifically that the distributor assumes these obligations, the producer should seek to require the distributor to execute any separate, union required assumption agreements. This will ensure that if there is a problem with payment to a union down the road, the union will have direct recourse against the distributor. Likewise the producer should seek to have the distributor assume any other deferred or contingent obligations to third parties (e.g. bonuses that are triggered upon box office thresholds). Without doing so, the producer risks becoming drawn into making payment to the unions or other third parties arising out of the distributor’s activities without having received any revenues attributable to those activities.
5. Insurance and Liability. Errors and Omissions Insurance in specified amounts, with a specific form of coverage and without unusual exclusions, will be a key delivery item for the distribution agreement. Often even the first installment of an advance will require it. The producer should be certain to address any issues with the distributor that might result in exceptions to coverage. If the distribution agreement requires the coverage to be kept in place for the entire distribution term, the producer should seek to have the distributor undertake such renewals and bear the cost (as a distribution expense). Insurance, however, may not cover defense costs and liability in all cases, and is not a cure all. The producer also will need to carefully review the representations and warranties that it is making under the distribution agreement and most importantly, the indemnity and cross Indemnity (from the distributor to the producer). A critical concern is the defense of claims, because costs begin to be incurred when a claim is brought and will be incurred even if the claim is frivolous and it is later determined that the producer was not in breach of any of its obligations under the distribution agreement.
For more information contact Rip Beyman (firstname.lastname@example.org)