Distribution and Exploitation of the Picture
The distributor is going to want to exclusively control how the picture is marketed and distributed. You are going to have a difficult time wresting control from the distributor unless you have a track record. Notwithstanding, I attempt to negotiate for my clients to have the right of meaningful consultation if they have experience that might benefit the picture’s distribution; e.g, my client is a former studio executive, a marketing expert, etc.
Production Company’s Warranties, Representations and Indemnity
The producer will have to warrant and represent to the distributor that it has not entered into a Distribution Agreement with a third party that would limit the distributor’s rights under their Distribution Agreement; that the producer has paid for the screenplay, its underlying literary property (if any), and the music incorporated into the picture; that the picture does not infringe the copyright or trademark of a third party; that the picture does not violate the right of privacy of a third party; and, that the producer has entered into all the requisite agreements with talent and above-the-line and below-the-line personnel, locations, record labels, publishers, vendors, etc. You will, also, warrant that the picture has a valid copyright in the territory, which will be maintained by you during the term of the Distribution Agreement.
You will agree to indemnify and hold harmless the distributor, its sub-distributors and licensees for losses incurred by them due to your breach of this clause. You will have to reimburse the distributor, sub-distributor, and licensees for losses (including legal fees and court/arbitration costs) suffered by them if, for example, you produced a picture based on a book whose rights you did not acquire, and the distributor, sub-distributors and licenses are sued for copyright infringement.
Distributor’s Warranties, Representations, and Indemnity
The distributor will attempt to warrant and represent as little as possible. The distributor will warrant that it has the right to enter into the Distribution Agreement, that it will comply with laws and regulations, and that it is not in litigation that would adversely impact its obligations with regard to your picture. I always include a clause whereby the distributor warrants and represents that it is financially capable of undertaking and fully performing its obligations under the Distribution Agreement. The distributor will agree to indemnify and hold harmless the producer for losses incurred (including legal fees and court/arbitration costs) by the distributor’s breach of this clause.
This paragraph limits the circumstances under which you may terminate the Distribution Agreement due to a material breach of contract by the distributor. “Material” means a substantial breach, such as owing you money, editing the picture in a manner that is contrary to the Distribution Agreement, etc. The distributor requires that you give it an opportunity to “cure” any breaches. “Cure” is defined to mean remedy and fix. The cure period is generally up to 30 days. Some Distribution Agreements give you the right to terminate in the event of an uncured material breach, others do not. In addition, in no event will the production company be entitled to an injunction to restrain any alleged breach by distributor or its sub-distributors or licensees of any provisions of this Agreement.
The last thing any producer needs is to be in an agreement with a distributor which lacks the funds to properly run its business. There is nothing worse than a picture stuck between the distributor and its creditors. As such, I consider the distributor’s financial woes an act of default. I add into the distributor’s default clause that the production company will have the right to terminate the Distribution Agreement if the distributor becomes insolvent, makes an assignment for the benefit of creditors, seeks relief under any bankruptcy law or similar law for the protection of debtors, or suffers a bankruptcy petition filed against it or a receiver or trustee appointed for substantially all of its assets. What producers do not know is that their picture may be considered an asset of the distributor if it has financial woes.
Payments and Accounting
The distributor has to provide the producer with an accounting statement of expenses and revenues within 30-60 days after the close of each calendar quarter for the first two to three years. Thereafter the statements may be remitted on a semi-annual basis because the bulk of the picture’s revenues are earned during the first 18 months of its release. The statements have to reflect all financial transactions including license fees, box office revenues, distribution expenses, distribution fees, market fees, advance/guarantee, and reserves. The statements have to be accompanied with a check for any monies due to the production company.
The production company has audit rights, which requires the distributor to maintain full and accurate books and records of all of the picture’s transactions. As per industry standard, the production company is allowed to audit once per calendar year. All accountings rendered by the distributor are deemed conclusive unless you object in writing within two (2) years from the date of the accounting and are often required to be litigated within the same time frame. The production company is responsible for its own audit costs, however, I insert that the distributor will be responsible for the cost of the audit plus interest if it underpays the producer by more than 10% or $25,000, whichever is greater. Audits cost upwards of $25,000 and are generally cost prohibitive.
I do not trust distributors when it comes to matters of money. They have no fiduciary duty over the revenues earned by your picture, which means that they can essentially do almost anything they want with your production company’s monies. Many distributors wrongfully finance their operations via filmmaker monies—this is why they so often pay late and altogether default on payment. Set up a CAM if you do not want to deal with these shenanigans.