General Considerations

Contractual problems arise generally from the complex nature of the distribution process and the difficulty of overseas transactions. American distributors have a hard time ensuring that foreign exhibitors will report box office revenues honestly, return films upon completion of the exhibition term, render prompt payment and generally abide by the terms of the contract. These problems are exacerbated by the use of foreign subdistributors which allow the subdistributors greater opportunity to distort revenues and costs. Moreover, American producers may not be able to insure that distributors do not pre-release films on video before the theater market has peaked.

In order to guarantee payments and adherence to the producer’s or domestic distributor’s expectations, the distribution contract must be clearly specified. Explicit definitions of all rights and obligations of the distributor, exhibitor, and other parties should be defined. In addition, agreements should include specified delivery and payment procedures, and assign all rights to censorship, artistic control, and promotion as clearly as possible. The focus should be placed on collection of compensation by means of a letter of credit or personal guarantees, protective currency clauses to allow for adjustments to prevailing exchange rates, and automatic reversion of rights in the event of a material breach by the foreign party.

There should also be some room for creative contracting to mold an agreement in light of the local market trends and viewer preferences. For example, producers should be knowledgeable about whether the territory’s audience favors big action films or independent films, video or theatrical release, and should tailor the contract to benefit from these sources of income. Moreover, general cultural, political, and economic factors must also be considered in contracting. For instance, in 1997, Chinese officials temporary halted dealing with Sony Pictures and MGM after taking offense at their respective films "Seven Years in Tibet," "Kundun," and "Red Corner"due to their political content.

Tips for Negotiation: The Distribution Contract

Title. The feature length theatrical motion picture’s name should be identified by its American title and any other title it had been given for foreign distribution. If the agreement includes several pictures, some of which have not been produced, then these unproduced pictures should be described as specifically as possible with tentative titles or other properties.

Territory. The territory should be specified as clearly as possible to avoid future disputes. For example, a French language license could not only include France but other French speaking areas such as Monaco, the French-speaking area of Andorra, Quebec and other French speaking former colonies. Additionally, territories should be defined within political borders and exclude foreign embassies, military and governmental installations, oil rigs and marine installations, airlines-in-flight, and ships-at-sea. Sometimes territories that are politically defined will be under a different territory in a distribution contract due to language differences. For example, Puerto Rico is a U.S. commonwealth but it is included under the Spanish speaking Carribean islands for film distribution purposes. Therefore, territories in a foreign distribution agreement must be specified not only by political borders, but by the linguistic requirements of each territory.

Term. The term of a foreign distribution contract is similar to domestic agreements, usually from seven to ten years. However, if a picture is successful, the producer will require a shorter term to allow for re-licensing or re-release. The producer will want a short term so that the rights can revert back to the producer and become part of his or her film library. On the other hand, if a large advance is paid, the distributor will want a longer period to allow it to recoup its advance.

Rights Granted. Typical rights granted to the distributor in a distribution agreement include the rights to distribute, advertise, and market the film, using trailers, excerpts and clips. In the foreign distribution context, distributors generally have the right to dub and subtitle the film. Additional rights may be granted to the distributor for an effective distribution campaign in the territory. Such rights include usage of any music or composition in the film, publishing rights to the synopsis of the film, and, in rare circumstances, editing rights, if the distributor can enhance the prospects of the picture by editing it to local audience tastes. Foreign independent distributors are more likely to have the knowledge and skill to edit the film according to local tastes. Local distributors can give producers the individualized attention and cater to the local audience. Thus, adding editing rights to agreements with local distributors may be advantageous for producers.

The granting of editing rights depends on the relative bargaining power of the producer and distributor. The distributor may only get editing rights subject to a powerful producer’s approval. Another additional right that may be granted is the distributor’s right to bring suit against third parties for unauthorized use, copying, release, distribution, exhibition or performance of the picture in the territory. Granting power of attorney rights to the distributor will not only motivate the distributor to protect the rights of the picture but is also more convenient for enforcement purposes because of the distributor’s location and access to the territory.

Since rights granted to the distributor are broadly defined, the producer’s rights must be expressly granted. The producer’s rights include, among others, television, pay TV, home video, soundtrack album, music publishing, merchandising, and novelization. The rights for television, pay TV, and video are usually restricted by holdback periods, which require producers to wait a period of time before distribution in these forms, in order to protect the distributor against competition. Holdback periods are usually several years for television and pay TV, and less than a year for video.

Cross-collateralization. Another important clause in a foreign distribution contract is the no cross-collateralization clause. In a multi-territory or multi-film distribution agreement, cross-collateralization is usually prohibited, meaning that each picture must stand on its own and the distributor may not offset gains and losses from different territories or pictures. One exception to this clause applies to unselected pictures and is explained below.

Unselected Pictures. In multiple film deals, the distributor may have the right to select which picture to distribute and its time of release. Once the distributor has chosen which films to release, the parties should provide for a period in which the film must be released after it is properly delivered according to the contract. Usually theatrical release is required as soon as possible, or no later than six months, to capitalize on the publicity and "word of mouth" from the film’s release in the United States.

Unselected films can be released if there is a provision in the agreement for the producer to compel distribution of unselected films. In that case, the distributor would negotiate for the producer to reimburse him for expenses not recouped by the release of the unselected film. In addition, distributors could exempt unselected films from the no cross-collateralization clause, and offset selected film revenues from unselected film expenses that were not recouped.

Gross Receipts. The most important term of a distribution agreement is the definition of "gross receipts." "Gross receipts" or "film rentals" are described as all monies received by the distributor from exhibition and distribution. There are certain exclusions from gross receipts. Such exclusions are distributor-owned exhibitor receipts, rebates, refunds, adjustments that the distributor received from an exhibitor, guarantees or advances, and any amount collected as payment for taxes from a distributor.

The "gross receipts" of each film are used to calculate net profits and distribution fees. Fee percentages are specified for every film and territory. The distribution fee is calculated from "adjusted gross receipts," or gross receipts after deduction of sales taxes and other similar taxes. The net deal acquisition agreement allows for the distributor to deduct a distribution fee, a percentage of the adjusted gross receipts, before its expenses are deducted.

Major studio distributors charge about a thirty percent fee in the United States and Canada and slightly higher rates in Europe and other territories. If subdistributors are used by major studios in territories, then the subdistributor will charge an "override," or an additional distribution fee percentage. Producers should protect themselves by negotiating a cap that restricts the aggregate fees to a specific percentage of gross receipts, such as 50 percent. For example, the Disney distribution arm may charge either the higher of its, 1) discounted fees based on the total subdistributor’s gross receipts for the territory, or 2) full fee based on the amount remitted by the subdistributor after the subdistributor has taken its fee, with the combined fee of Disney and its subdistributor not to exceed 50 percent. On the other hand, in a "pass-through" arrangement, subdistributors may be compensated by taking part of the fee of the distributor without tacking on an "overide", or additional distribution fee, thus, leaving the producer with more revenues.

Expenses. After the distribution fee is collected, distribution expenses are then deducted from the adjusted gross receipts. Typical expenses for all distribution agreements include collection of monies costs, print and advertising costs, trade association fees, and insurance costs for coverage of risk of loss. In a foreign distribution contract, expenses such as the conversion cost of currency to American dollars, foreign version costs of dubbing and subtitling, transportation costs, and quota losses for distributing foreign movies required by a foreign government in order to distribute a producer’s film are standard.

Guarantees or Advances. Also included in a percentage net deal are the guarantees or advances paid to the producer. The guarantees or advances are either recoupable or not by the distributor from the "gross receipts." Advances range from ten thousand dollars for limited rights of a less successful film in a small territory to over a million dollars for all rights of a very successful film in a large territory.

Delivery of Film. Payment of the guarantee is triggered by the "delivery of the film." What constitutes "delivery of the film" is a frequently contested issue. The producer will argue that delivery to an agreed upon film laboratory of a completed film that meets the distributor’s specified terms will trigger payment of the minimum guarantee. On the other hand, the distributor will want the right to inspect all materials delivered to confirm that the material is technically acceptable or meet subjective standards of acceptability. If and when the distributor makes the determination of technical or subjective acceptability, the minimum guarantee will be paid.

The producer’s position is not acceptable for the distributor because the distributor will have to pay for defective, non-exploitable film material. In contrast, the distributor’s position will be unacceptable to the producer because it allows the distributor to unilaterally reject material as technically unacceptable or worse to reject it for subjective reasons. The producer is then left with a completed film and no foreign exploitation in the distributor’s territory.

The ability of a producer to get a technical or subjective acceptability standard for delivery depends largely on his or her bargaining power. The independent producer may need the income from a certain territory regardless of the possibility of rejection from a distributor’s subjective standard. On the other hand, foreign distributors may compete to distribute a Hollywood blockbuster and have more lenient terms for delivery and payment of advances in order to get the contract.

An ideal compromise to this problem usually allows for the distributor to inspect the film material and determine if it is technically acceptable and if so pay the minimum guarantee. If it is not technically acceptable then there are specified cure periods for the producer to cure all objections identified by the distributor. Ultimately, if the parties cannot agree then the issue is submitted to arbitration pursuant to the arbitration clause of the contract.

Even if the amount due to the producer is clearly specified in the contract, collection of the producer’s compensation from foreign distributors or subdistributors may be difficult. Collection of funds should be protected by a letter of credit, or a personal guarantee, and a protective currency clause to adjust for fluctuating exchange rates.

Blocked Funds. Blocked funds exist when foreign governments will not allow theses funds to be removed from the territory. Thus, parties should provide for this contingency through contract by having the distributor deposit the funds in a bank account in the territory under the producer’s name. This provision will remove the distributor from the blocked funds problem and leave the producer to get his or her money out of the territory. Moreover, with this provision, "gross receipts" cannot be manipulated to exclude blocked funds because these funds cannot be remitted to the producer outside the territory.

Censorship. Censorship is another typical issue included in foreign distribution agreements. Usually, the distributor is responsible for censorship clearing because the distributor is in the best position to acquire such clearances. Because many producer warranties require that the film will not have any censorable material, producers should aim for a "best or reasonable efforts" standard than an absolute standard. Given the wide range of censorship standards in foreign territories, producers do not want to guarantee absolute non-censorable material for all territories. Usually if censorship is seen as a problem to distribution, producers may grant editing rights to distributors to cure the problem. In most agreements, if distribution is interrupted because of censorship problems, the producer has to reimburse the distributor for distribution costs up to that point.

Force Majeure. The force majeure clause protects against unforeseen liability. This clause holds neither the distributor nor the producer liable for each other’s breaches of the contract if there is an act of God, or war, or strike, and other circumstances out of the control of both parties. This clause is crucial for foreign distribution agreements, in light of the political and economic instability of some countries. In the event of a material breach by the foreign distributor, not caused by force majeure, the contract should provide for automatic reversion of rights to the producer. This rights reversion will allow the producer to continued exploitation of the film in the territory without disruption from an incompetent or breaching distributor.

Conflict of Law. When dealing in foreign territories, resolutions for conflict of law should be agreed upon in writing. Clauses usually state that if there is a conflict of law between the territory’s government and the provisions of the contract, the government’s law would prevail and the agreement would be modified to remove such conflict but will continue in full force once modified. This clause serves to allow uninterrupted distribution and exploitation of a film in cases of conflicts of law.

Other Provisions. Other clauses that apply in foreign distribution agreements are prohibition of licensing to the distributor’s affiliates without producer approval to avoid sweetheart deals, audit rights, statute of limitations on incontestability of financial records, choice of law and forum clauses, and arbitration clauses.

Given the steady growth of the overseas film market and the growing importance of the international box office, American producers and distributors should welcome the global market. Regardless of whether a film is independent or a major blockbuster, careful assessment of each film’s potential market in the territory involves analysis of each territory’s social, economic and political factors. Consideration of these factors should give you an guideline as to what provisions to pay special attention to in the foreign distribution contract. If the necessary assessments are made, American filmakers should be able to reap the benefits of the international motion pictures industry.

Author acknowledges the contributions of Donald C. Farber, Entertainment Industry Contracts: Negotiating and Drafting Guide; John W. Cones, The Feature Film Distribution Deal: A Critical Analysis of the Single Most Important Film Industry Agreement; David Nochimson, Contingent Compensation for Theatrical Motion Pictures, Entertainment, Arts, and Sports Law; Jan D’Alessandro, A Trade Based Response to Intellectual Property Piracy: A Comprehensive Plan to Aid the Motion Picture Industry; Howard M. Frumes, Twelfth Annual International Symposium ‘International Media Law In the 90's and Beyond’: Distributing Motion Pictures Around the World: The International Nature of the Film Industry; Thomas F.R. Garvin, Counseling Clients in the Entertainment Industry; Matthew C. Thompson, When a Movie Goes Abroad; Triggering the Minimum Film Guarantee Obligation.

The above provisions are not exhaustive nor strictly standard provisions, because the relative bargaining power of distributors and producers can lead to negotiations for more favorable clauses for the party with greater bargaining power. These provisions do not constitute legal advice, they are given merely for informational purposes, consultation with legal counsel is recommended before entering into any agreement.