By Larry Iser and Chad Fitzgerald of Kinsella Weitzman Iser Kump & AldisertBefore 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
| 1 |
The guilds’ Basic Agreements contain complicated
formulas for computing residuals; suffice it to say here that residuals are generally calculated as a
percentage of a film’s gross receipts from distribution in secondary markets such as television
and home video. See SAG Codified Basic Agreement, Sections 5-5.2; DGA Basic
Agreement, Article 18; WGA Basic Agreement, Articles 15, 51, and 58. |
| 2 |
The assumption agreements are spelled out verbatim in the
guilds’ Basic Agreements as templates for producers to provide to distributors. See
SAG Codified Basic Agreement, Section 6; DGA Basic Agreement, Article 22; WGA Basic
Agreement, Article 65. |
| 3 |
Section 4001, entitled “Assumption of contractual obligations related to transfers of
rights in motion pictures,” provides in pertinent part:
(a) Assumption of obligations.—(1) In the case of a transfer of copyright ownership
under United States law in a motion picture … that is produced subject to 1 or more collective
bargaining agreements negotiated under the laws of the United States … the transfer instrument
shall be deemed to incorporate the assumption agreements applicable to the copyright ownership being
transferred that are required by the applicable collective bargaining agreement, and the transferee
shall be subject to the obligations under each such assumption agreement to make residual payments
and provide related notices, accruing after the effective date of the transfer and applicable to the
exploitation of the rights transferred, and any remedies under each such assumption agreement for
breach of those obligations, as those obligations and remedies are set forth in the applicable collective
bargaining agreement, if –
(A) the transferee knows or has reason to know at the time of the transfer that such
collective bargaining agreement was or will be applicable to the motion picture; or
(B) in the event of a court order confirming an arbitration award against the transferor
under the collective bargaining agreement, the transferor does not have the financial ability to satisfy
the award within 90 days after the order is issued.
|
| 4 |
Section 4001 contains two exceptions not relevant here: one
for transfers of public performance rights only, and the other for grants of security interests in motion
pictures. Id., subsections (b) and (c). |