A distribution contract is a memorialization of the agreement between the owner of distribution rights in a film or video (usually the producer), and a company engaged in the business of marketing such works to users and purchasers (usually a distributor). What makes these agreements somewhat unique is that the product for sale is not a physical property, but rather intangible rights.
For simplicity I will refer to film and video interchangeably as a "motion picture." In its intangible form a motion picture should be viewed as a collection of rights that may be sold or licensed in its entirety or piece by piece.
Since motion pictures have been distributed for three-quarters of a century, and substantial precedent has developed, a producer would be well advised to have a knowledgeable entertainment lawyer assist in the negotiation and contract review process.
The role of the entertainment lawyer is to represent a client in: negotiating the terms of the distribution agreement; reviewing the distributor's contract; and counseling the producer on the entire contract process. Experienced lawyers are familiar with precedents in these matters and rely on favorable precedents to achieve a reasonable contract. However, the lawyer is not a magician and cannot assure that all of the producer 's points will be won.
The negotiation of terms is usually based on precedent and on payments distributors have paid for rights in comparable motion pictures. Producers may obtain that knowledge by asking the distributor, asking other filmmakers who may have deals with that distributor or asking an experienced entertainment lawyer.
Usually the distributor furnishes the producer with a distribution contract containing the terms and conditions of the deal. Producers should be fully aware that these contracts are written on paper and not etched in stone. Since the terms of the distribution contract will determine the financial returns of the motion picture, the producer should understand all terms of the agreement and negotiate those terms that are not to the producer's advantage. The key word is "negotiate," for it is unlikely that the producer will be able to get all of the terms changed to his or her advantage.
The most important terms of a distribution contract are the definition of rights being granted and the consideration to be paid for the grant of rights.
The rights granted to the distributor should be specific as to territory, license period and media. In most deals the distributor will require exclusive rights. The territory may be: worldwide ; limited to the United States, its territories and possessions ; or include several countries. The license period may be as short as one or two years, or as long as ten to fifteen years. The media are usually divided among: theatrical, home video, broadcast and cablecast, and non-theatrical. Since some of these media overlap, the contract should contain a definition of the scope of the media being granted. Increasingly distributors are seeking rights in all media.
It is essential for the producer to have a "reservation of rights"provision in the distribution contract. This provides that all rights not specifically granted to the distributor are reserved by the producer.
The consideration paid by the distributor for the rights may be in the form of advances, guarantees or royal ties, or a combination of the foregoing. An "advance" is a payment made to the producer on signing a contract or, more commonly, upon delivery of materials. The advance is a prepayment of the producer's royalties, which may usually be recouped by the distributor out of the producer's royalties. Although this guarantees front money to the producer, it will defer payment of royalties.
A "guarantee" is a provision of the agreement pursuant to which the distributor assures the producer of a certain amount of royalties at a specified time, and, if royalties fall short, the distributor must advance monies so that the royalties and advance equal the amount of the guarantee. Often the guarantee is recoupable by the distributor from subsequent royalties.
Royalties may be payable from the distributor's gross receipts, from adjusted gross receipts (e.g., total gross receipts less limited deductions ), or net profits (e.g., total gross receipts less all costs and expenses). In each case the terms "gross" and "net " must be clearly defined since there is no single industry standard.
Producers must analyze the kind of distribution deal that will maximize their bottom line. Most distribution deals are "gross" deals where the distributor's fee comes off the top; then distribution expenses are deducted ; then the balance is paid to the producer. In "net" deals the expenses are deducted off the top and the balance is shared in some agreed-upon proportion with the distributor (usually 50/ 50). Distribution fees for television and theatrical exhibition range from 20%—40% (before expenses ). Non-theatrical and home video deals are usually 15%—25% of gross to the producer. To determine the best type of deal the producer must make certain assumptions about income and expenses and compute whether a gross or net deal is better.
Contracts must specify when payments are made. Most agreements provide for semiannual payments, but some are quarterly and some are annual. Payments will be due thirty to ninety days after the close of the period. At the time of payment the producer is entitled to an accounting as to how the distributor arrived at the amount to be paid. The contract should assure the producer that the accounting will be in sufficient detail to permit a full understanding of how the payment was determined.
Where a producer is being paid a percentage of income, the producer should insist on a right to audit. If there are questions about the fullness or correctness of an accounting, the producer should have the right to have a representative examine the distributor 's book and records. The producer should realize that the audit will be conducted at the producer's expense. Some contracts provide that if the audit discloses errors of more than 5% - 10% in the producer's favor, the distributor must pay the cost of the audit.
The distribution contract will contain a list of materials the producer is required to provide. These consist of technical materials (film and/or videotape), publicity materials and a music cue sheet. Some contracts may also require delivery of a Certificate of Errors and Omissions insurance, a script and copies of release and production contracts. The producer must assess the costs of providing the delivery materials. Distributors will want access to the producer's original materials, but the producer should insist that the original materials remain at the producer 's laboratory.
Producers will want a clause preventing any alteration of the motion picture without the producer's consent. The distributor may want the right to edit for time purposes or censorship purposes, and the right to include its distribution credit at the head and tail.
The distributor will insist that the producer gave certain "warranties and representations." These include that the rights granted to the distributor are free from encumbrances and that the exercise of the distributor's rights will not violate the rights of others. This means that the producer must assure that : all rights have been obtained, including releases and permissions from persons performing on or appearing in the motion picture; all music, film footage and photographs have been cleared ; and all underlying literary and dramatic rights have been obtained.
The producer's indemnification usually states that in the event a claim or legal action is brought against the distributor because the producer has failed to obtain all necessary rights, or because the distribution of the motion picture is otherwise violating a third party's rights, the producer shall make the distributor whole by paying the judgement or settlement and the distributor 's legal fees and expenses. Since many independent producers cannot realistically be expected to cover such costs, the distributor may require the producer to obtain errors and omissions insurance. This insurance protects the producer and distributor against claims of copyright infringement, trademark infringement, violation of rights of privacy and publicity and defamation. However, the cost of obtaining and maintaining such insurance is substantial (anywhere from $1,500 to $7,500 per year), and the producer should limit the obligation to pay for this insurance to no more than three years.
The producer should insist on a provision in the contract that would allow the producer to terminate the agreement if the distributor defaults in its obligation. The distributor's obligation is usually limited to paying the producer.Agreements usually provide for a "notice and cure" period whereby if one party is in default, the other party must send written notice of the default and the defaulting party has a period of time—usually ten to thirty days—to cure the default.
Agreements also provide for resolution of disputes. Since the cost of litigation is expensive, and the distributor may be able to afford the expense better than the independent producer, the producer should insist on an arbitration provision requiring the parties to arbitrate disputes. However, the producer will want an exception to this provision that would allow the producer to go straight to court in the event the distributor fails to pay or account. The distributor will always ask that disputes be resolved in the distributor 's jurisdiction, but the producer may negotiate for the jurisdiction of the party bringing the lawsuit.
The producer should also seek to include a bankruptcy clause in the contract. This provides that in the event the distributor becomes insolvent or bankrupt, the rights to distribute the motion picture revert back to the producer. This is important because if the distributor becomes insolvent or bankrupt, it will not be able to maintain its business and the motion picture will not be promoted or distributed.
One provision that rarely finds its way into distribution contracts is an affirmative obligation of the distributor to use its best efforts to maximize the distribution of the motion picture. A distributor interested in a motion picture will tell the producer all of the things it will do to promote and market the picture. However, when it comes time to sign the contract, those wonderful points might not be found within the four corners of the actual document. The producer may negotiate to have a general provision that the distributor will use its best efforts or, even better, attach as an exhibit to the contract, the distributor's marketing plan and make that exhibit an obligation of the distributor. If the distributor fails to conduct the promotion and marketing plan, it becomes breach of the agreement and can be possible grounds for getting the rights back from the distributor.
Some distributors use very brief deal memos that summarize the important substantive terms of the distribution deal. These are fine to highlight the major points of the deal but are inadequate in fully protecting the rights of either party in the event of a dispute during the term of the contract. The producer should insist in a complete contract, spelling out all of the terms of the distribution deal (substantive and procedural), and that the contract be in plain English with all words clearly understandable or defined.
The final consideration is that all of the issues discussed in this chapter should take place in the context of a deal with a good distributor. A "good" distributor is one who is enthusiastic about your motion picture, has suggested a credible marketing plan, can afford the expense of adequately promoting the motion picture and, most importantly, has a good track record with other producers.
Robert I. Freedman is an entertainment lawyer in New York City and is a managing partner of Levy, Rosenzweig and Hyman which specializes in entertainment related matters. He is the author of the television volume of Entertainment Industry Contracts published by Matthew Bender.
Copyright © 1989 Robert I. Freedman. Reprinted with permission from The Next Step: Distributing Independent Films & Videos, co-published by the Media Project and Ibe Foundation for Independent Film & Video.