I recently served as Program Chair for a panel presented by the Entertainment Law Executive Committee of the Beverly Hills Bar Association. The program, titled Backend Optics: Profit Participations Through Different Lenses, was moderated by GHJ Principal Anita Wu and offered in-depth perspectives of a negotiator, auditor and litigator.

With former experience at a major studio, Craig Wagner, Executive Vice President of Business and Legal Affairs at Paradigm Talent Agency, provided his insights on the importance of doing research prior to negotiating on behalf of clients. GHJ Entertainment Partner Steven Sills discussed possible hurdles and the dramatic effects on the auditing aspect of profit participations. Partner at Johnson & Johnson LLP Douglas Johnson, who served as co-counsel in class action lawsuits against five of the major Hollywood studios relating to the reporting of home video and digital media for profit participants in pre-1982 movies, rounded out the panel by describing how litigation plays a major role in all aspects of entertainment negotiations.

The Disruptors

The overarching theme of the panel was how rapidly the entertainment atmosphere has and will continue to change. Disruptors like Netflix and Amazon are luring talent from the studios and networks to their streaming services. In turn, the effect on profit participations is dramatic. The current streaming model is moving away from profit sharing to flat payments and/or bonuses; there is potential for bonuses and renegotiations if a series has multiple cycles and/or a major effect on subscribership. However, it is unclear if there is potential for additional backend windows.

Vertical integration, self-dealing and the questionability of professed arms-length transactions are more prevalent with the consolidation of ownership of the major media companies. A hot-topic item discussed around the television space is the expectation of what an imputed license fee should cover. Traditionally, a series would have the chance to recoup a production deficit based on its longevity and performance. With shrinking distribution windows and consolidated ownership around the world, the opportunities for a series to breakeven are seemingly becoming bleaker.

Legal Issues

Important legal cases have also affected profit participants. One example was the Wind Dancer vs. Disney case, which – among other things – addressed tolling rights. Though Disney purportedly provided the profit participant with verbal tolling extensions, the agreement stated – and the court agreed – that tolling grants could only be relied upon if provided by the studio in writing.

It is important to note though that in Wind Dancer v. Disney, while the contract indicated that only written extensions could be relied upon, the Appellate Court sent the issue back to the lower Court to determine whether Disney waived or was estopped from invoking the statute based on their prior actions. What the Court did say in their opinion was that Contractual Statutes of Limitation waive the general legal discovery rule. Even if the error is not apparent on the face of the statement, the contractual statute will apply.

Each panel member stressed the importance of clearly assigning one or more persons the responsibility of monitoring and keeping tolling up to date to preserve a participant’s audit rights. Additionally, arbitration clauses have become the norm and tend to be non-negotiable, much to the chagrin of profit participants and their attorneys who may prefer that certain “dirty laundry” accounting issues be aired in a more public forum.

Key Takeaways

The panel concluded by emphasizing how entertainment lawyers would benefit from doing their research, forming relationships with buyers, talking to the experts and tracking each step of the process by putting it in writing. Taking these necessary steps prior to negotiating on behalf of clients will help to minimize litigation issues and solve problems quickly. To stay up to date on the rapidly changing industry, contact the GHJ Entertainment and Media team here.

Sills Greg Standingweb

Greg Sills

Greg Sills, CFE, has over 15 years of entertainment accounting experience. He specializes in production and distribution audits of film and television companies on behalf of third-party participants and manages the audits at Sony, CBS and MGM. Greg worked for Sills & Gentille before they merged…Learn More