Can the Digital Millennium Copyright Act Save the Day for Independent Filmmakers (and for the Rest of Hollywood)? 10th & Wolf v. ThinkFilm and the Legal Obligation to Pay Residuals

Before 1960, the creators of feature films – the writers, directors, and actors – worked under a “one and done” system.  They were paid once for their work and were never paid again.  After a film left the theaters, the studios subsequently showed it on network television, cable, and pay-per view, and eventually released it on home video, reaping enormous profits from these repeat showings of the film, profits in which the talent were never able to share.  While the major talent unions – the Screen Actors Guild (SAG), the Directors Guild of America (DGA), and the Writers Guild of America (WGA) – made inroads in the 1950s in allowing their members to share in profits from repeats of television programs, Hollywood film studios steadfastly resisted any attempt to allow guild members to be paid for reuse of feature films.

The issue came to a head during contract renegotiations between the studios and the guilds in 1960, and after a five week strike by the guilds, the studios relented and agreed to pay “residuals” to talent on all films made from 1960 on.  Residuals – compensation paid to a creator or performer of a motion picture or television work for use of the work after its initial release or airing – are now a major financial component of the entertainment industry and a major source of income for writers, actors, and directors.¹

Paying residuals to the guilds (who then pay out the money to their members) has historically been the responsibility of the studios and film distributors, which have the resources and accounting departments equipped to handle the task of compiling gross receipts for each film and calculating the percentages to be paid as residuals.  However, the recent rise in popularity of the “independent” film made outside of the studio system has created a problem regarding residuals.  Since independent films are made without studio financing and distribution, they must be sold to distributors who can successfully market and release them.  These distributors typically acquire the entire copyrights in the films licensed to them.  The problem then becomes who is responsible for paying residuals, the original copyright holder (i.e. the film’s creator/producer) or the distributor who acquires the rights to the film?

The guilds attempt to resolve this problem by requiring producers to obtain “assumption agreements” from the distributors, whereby the distributor assumes the producer’s obligation to make residual payments and becomes directly liable to the guilds for such payments.²  Unfortunately, distributors often resist the obligation to account for and pay residuals and simply refuse to sign the assumption agreements.  Indeed, distributors sometimes use their superior bargaining power to try to place the obligation to pay residuals back on the independent producers, who are much less able to properly account for and pay residuals since it is the distributor, not the producer, who collects the film’s revenues.  The guilds are then unable to collect any residuals on the film – the producer does not own the copyright and does not have access to the pool of revenues, and the distributor, having not signed an assumption agreement, has no contractual obligation to pay.

Enter the Digital Millennium Copyright Act (DMCA).  An obscure and, until now, untested provision in Title IV of the DMCA, inserted as a result of guild lobbying, provides that the assumption agreements required by the guilds “shall be deemed” incorporated into any instrument that transfers copyright ownership in a motion picture, and “the transferee shall be subject to the obligations under each such assumption agreement to make residual payments and provide related notices” as long as certain conditions are met.  28 U.S.C. § 4001(a) (1).³  These obligations attach as long as the distributor knew or had reason to know that the film was produced subject to one or more guild collective bargaining agreements (i.e., was produced using guild actors, writers, or directors).  Id.⁴  Since even low-budget independent films usually are produced subject to a guild agreement, in effect this provision of the DMCA requires the distributor to abide by its obligations to sign off on the guild assumption agreements and be on the hook for residuals.

Or so one would think.  At least one distributor disagrees and has been sued in federal court in Los Angeles by an independent film producer seeking a declaration that the distributor must comply with its obligations under the DMCA.  In 10th and Wolf, LLC v. ThinkFilm LLC, Case No. CV 0705131 SVW (JCx) (CD Cal.), the producer of the independent film “10th & Wolf,” starring James Marsden, Giovanni Ribisi, and Dennis Hopper, and directed by Bobby Moresco, is suing the film’s distributor, ThinkFilm LLC, a successful independent film distributor.  The complaint alleges that ThinkFilm refused to sign the guild assumption agreements and used its bargaining leverage to strong-arm the independent producer into signing a distribution agreement that expressly relieved ThinkFilm of any obligation to pay residuals.  Paragraph 11 of the distribution agreement, which is attached to the complaint, states that “Think[Film] shall not be responsible for any additional payments, including, without limitation, union or guild residuals or supplemental market payments required … or any other payments or any other amounts arising as a result of Think[Film]’s exploitation of the Rights granted hereunder….”

The producer of “10th & Wolf” argues that “[i]ndependent producers have long been at a disadvantage in the motion picture industry as a result of certain economic inequities” and that “[d]istributors … have abused their bargaining power over independent producers by refusing to assume the responsibility to pay residuals to the guilds.”  The producer alleges that, while it shopped its film to many distributors, only ThinkFilm would commit to a theatrical release in time for the Cannes Film Festival in May 2006, which the producer urgently wanted.  The parties thus struck a deal and, while finalizing the written contract, the producer inserted a standard clause to the effect that ThinkFilm would execute the required guild assumption agreements and pay residuals owed to the guilds.  ThinkFilm, however, flatly refused to negotiate this point.  ThinkFilm instead merely required the producer to provide a “residuals worksheet” with information on all cast and crew entitled to residuals, and the producer alleges that it therefore reasonably assumed that ThinkFilm would handle paying residuals.

Nonetheless, ThinkFilm has refused to pay any residuals, arguing that the producer is obligated to do so pursuant to the parties’ negotiated agreement.  Since no residuals have been paid, the producer has been notified by the guilds that residuals are due, that interest and penalties will accrue, and that the matter will be referred to arbitration.  The producer has thus been forced to sue ThinkFilm for a judicial declaration that Section 4001 applies to ThinkFilm, that the parties’ agreement incorporates the guild assumption agreements, and that ThinkFilm is therefore obligated to make residual payments.  Moreover, the producer seeks a declaration that the provisions of the contract relieving ThinkFilm of any obligation to pay residuals are unconscionable due to ThinkFilm’s greater bargaining power and the producer’s urgency to get the film released.  The producer also alleges a cause of action for unfair competition in violation of California Business and Professions Code Sections 17200 et seq.

Although a court will not typically rewrite the provisions of a contract to later add terms that one party now wishes were there from the start, in California a court can and will sever an illegal provision from an otherwise legal contract.  See Armedariz v. Foundation Health Psychcare Servs., 24 Cal.4th 83, 121-122 (2000); California Civil Code §§ 1599 (same) and 1667 (defining an unlawful provision as one “[c]ontrary to an express provision of law”).  The crux of the complaint is that ThinkFilm allegedly used its superior bargaining power to create an illegal contract in violation of an express provision of the DMCA.  The legal issues for the judge (Hon. Stephen V. Wilson, Central District of California) to decide will thus be whether parties can contract around the requirements of the DMCA, whether doing so creates an illegal or unconscionable contract, and whether the court will sever those provisions that relieve ThinkFilm of its legal obligations under the DMCA.

It seems likely that the court will find the relevant provisions illegal and will thus sever them from the parties’ contract.  It is less likely, however, that the Court will find the provisions unconscionable.  The producer claims that ThinkFilm’s superior bargaining power and relative economic strength allowed it to insert unconscionable terms into the agreement.  However, setting aside the difficulty of successfully arguing unconscionability, it seems unfair to let the producer claim that it was held over a barrel in this transaction.  The producer admittedly had options for selling the film to other distributors, and it admittedly knew when entering the agreement that ThinkFilm had no intention of paying residuals.  Thus, the case will likely hinge on how the court resolves the illegality issue.

In our opinion, because the distributor historically pays residuals and is usually in the better position to do so, it can and should be legally required to assume the obligation to pay.  Moreover, ThinkFilm will be hard-pressed to deny the meaning and effect of the DMCA provision or to deny its application to ThinkFilm in this case.  If ThinkFilm refuses to voluntarily abide by the requirements of the guilds’ collective bargaining agreements, it may be compelled to abide by the requirements of federal law.

Allowing ThinkFilm or other distributors to unilaterally absolve themselves of the obligation to pay residuals would hamper independent film producers and the independent film market in general by sticking the “little guy” with a bill for residuals that he cannot pay.  A ruling for the producer would also be consistent with the public policy underlying this section of the DMCA – that residuals must be paid, and the party in the better economic position to pay them should be obligated to do so.

Independent film producers often are simply unable to account for and pay residuals; they count on the distributors to do so.  Allowing ThinkFilm to shirk its responsibilities could result in less independent films produced, since independent producers would be less willing to make movies knowing they would remain on the hook for residuals and may eventually be required to litigate.  A ruling for ThinkFilm could also hurt the film industry as a whole.  Residuals are a major source of income for many artists, and, with the threat of a WGA strike looming on Hollywood’s horizon, a ruling that negatively impacts residuals could result in less films produced and less money to go around – a result that no one in Hollywood, be it an artist, independent producer, or major studio, wants to see. 

Endnotes