The Subdistributor Agreement and Producer’s Rights

Producers should be aware that distributor agreements with subdistributors may be upheld in court even if they violate the original agreement between the producer and distributor. In Recorded Picture Company v. Nelson Entertainment Inc., the California appellate court ruled that Recorded Picture Company (Recorded Picture), the producer of "The Last Emperor," could not compel the subdistributor, Nelson, Inc.(Nelson), to pay Recorded Picture the 70 percent of home video gross receipts as agreed by Recorded Picture and its distributor, Hemdale Film Corporation (Hemdale.)

Nelson and Hemdale agreed to allow Nelson to retain 50 percent of the home video proceeds rather than 30 percent as contemplated by the original distribution agreement between Recorded Picture and Hemdale. Recorded Picture did not trust Hemdale and required all subdistributors to pay Recorded Picture directly, but Hemdale did not instruct Nelson of this obligation. Hemdale went bankrupt and Recorded Picture sued Nelson to compel payment of 70 percent of video gross receipts not just the 50 percent that Nelson agreed to a pay Hemdale.

The appellate court ruled that Nelson was not an assignee of Hemdale’s distribution agreement with Recorded Picture; Nelson was a mere licensee. As a licensee, Nelson did not benefit from Hemdale’s distribution agreement, and was not bound by its obligations. Nelson knew of the distribution agreement between Hemdale and Recorded Picture but did not know that producers were entitled to 70 percent of proceeds. The court ruled that there was no fiduciary duty between producers and distributors much less between producers and subdistributors. Finally, the court rejected the producer’s claim that Nelson failed to review the Hemdale distribution contract with Recorded Picture noting that the producers mistrusted Hemdale and could have protected themselves expressly through a contract.

This ruling shows the court’s reluctance to protect producers’ contracts with distributors when unknowing subdistributors agree to terms inconsistent with the original agreement. Further, this case emphasized the importance for producers to draft agreements which expressly protect them by requiring disclosure of the original distribution terms to subdistributors. Moreover, the court imposed on the producer the burden to contact the subdistributor before the final contract was signed, while holding that the subdistributor had no duty to check up on the original distribution agreement. Because of this burden, the producer should require the distributor to get the producer’s approval before signing the final subdistributor agreement. In the foreign subdistributor context, it will be more difficult for the producer to contact the subdistributor, but it may well be worth the effort, in light of the court’s reluctance to impose liability on the unknowing subdistributor for breach of the original distribution contract.

Recorded Picture Company v. Nelson Entertainment Inc., 53 Cal.App.4th 350, (Cal.App. 1997).

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