Many independent filmmakers are surprised at the amount of effort and skill required to secure an equitable distribution agreement. With the dramatic increase in independent production, it is apparent that many filmmakers have mastered the skills needed to secure the money and equipment needed to produce a film. The major obstacle facing many filmmakers is how to secure distribution for their motion picture. This article explores the tactics and strategies that can be used to obtain a favorable distribution deal for the indie filmmaker.

In negotiating the distribution deal, the relative bargaining power of the parties is determined by the perceived desirability of the film and how much risk each party is willing to take. With a major studio project, the studio has often borne most, if not all, the financial risk. Typically, the studio pays for development, production and distribution. The director/producer is employed by the studio, receives a fee for his services, and may be entitled to a small share of net profits. "Net Profits," however, are defined in a such manner that there is little likelihood the employee will ever realize anything from this "back-end" compensation.

On the other hand, when a film is developed and produced by an independent Filmmaker, as an entrepreneur the filmmaker bears the risk of failure. Often the distributor will not have any involvement in the development of the script, or the production of the film. Since the distributor screens a completed work before deciding whether to acquire it, the distributor assumes less risk. The distributor knows exactly what it is obtaining. Consequently, if the Filmmaker has skillfully made a script into an appealing film, the filmmaker may be able to obtain a better deal. Under such a film acquisition agreement, the distributor may agree to share revenue according to a formula that will actually generate monies on the back end, assuming the distributor accounts fairly. If the filmmaker stumbles and creates a film with little appeal, however, no distributor may acquire it, and the loss will be borne entirely by the filmmaker and his investors.

INCREASING YOUR LEVERAGE

When a distributor negotiates to acquire film rights, the distributor often has more clout than the filmmaker. This is a vulnerable position for the filmmaker. The filmmaker, or his representative, must know how to orchestrate the release of the film into the marketplace to achieve maximum leverage. This may entail generating competition through positive word of mouth within the industry. Such "buzz" or "heat" can be encouraged by filmmakers who work the festival circuit and mount a campaign on behalf of their film.

From the filmmaker's point of view, one will obtain a better deal if there is more than one distributor competing for the film. It is not difficult to alert acquisition executives to the existence of a film. Once a start date has been announced, filmmakers begin receiving calls. Acquisition executives track the progress of each film so that they can try to view it as soon as it is completed, and before their competitors see it.

To ensure that acquisition executives are aware of a film, one can send a press release announcing the project to the trade papers and magazines (Hollywood Reporter: (213) 525-2000, Daily Variety: (213) 857-6600, FILM MAKER: 213-932-6060, Moviemaker: 310-234-9234, The Independent: 212-807-1400). These publications will include your film in their listings of motion pictures in development, pre-production and production. Likewise, one should alert Film Finders at (310) 657-6397, a company that tracks films for many distributors.

Here are some other ways to create competition and maximize your leverage:

1) NO SNEAK PREVIEWS: Do not show your film to distributors until it is complete. Executives may ask to view a rough cut. They will assure the filmmaker, "Do not worry. We are professionals, we can extrapolate and envision what the film will look like with sound and titles." Do not believe them. Most people cannot extrapolate. They will view an unfinished film and think it amateurish. First impressions last. The community of acquisition executives is small, and they frequently mingle at screenings and festivals where they compare notes. One acquisition executive bad-mouthing your film, can cause a lot of damage.

The only reason to show an unfinished is if one is desperate to raise funds to complete it. The terms one can secure under these circumstances will be less advantageous than what could obtain for a finished film. If you must show a work-in-progress, exhibit it on a Moviola or flatbed editing table. People have lower expectations watching a film on an editing console than when it is projected in a theater. If you must send out cassettes of an unfinished film, prominently label it so that your viewers are reminded that they are seeing a work-in-progress.

2) SCREEN IT BEFORE A CROWD: It is usually better to invite executives to a screening than to send them a videocassette. If you send a tape to a busy executive, he will pop it in his VCR. Ten minutes later the phone rings and he hits the pause button. Then he watches another ten minutes until his secretary interrupts. After numerous distractions, he passes on the film because it is "too choppy."

You want the executive to view the film in a dark room, away from distractions, surrounded by a live audience enjoying the film. You can rent a screening room at Paramount or other convenient locations, invite all the acquisition executives you can, and pack the rest of the theater with friends and relatives.

Perhaps the best venue to exhibit a picture is at an important film festival. If the film is warmly received, your bargaining position will be enhanced. Another benefit of a festival showing is that it may generate positive reviews. Most publications have a policy of only reviewing films about to be released theatrically. Films seeking distribution are not reviewed. But trade papers and selected publications review films exhibited at major festivals. A positive review can influence distributors.

When you prepare an invitation list, include only those distributors appropriate for the film. If foreign rights are taken, there is no reason to invite foreign sales companies. You are being inconsiderate by wasting their time. Likewise, do not invite an art house distributor to view a beach blanket bingo movie. As soon as the acquisition executive realizes that your film is not for him, he will depart. Do you think a stream of people leaving might adversely affect the perceptions of the rest of the audience?

3) MAKE THE BUYERS COMPETE AGAINST EACH OTHER: Screen the film at the same time for all distributors. Some executives will attempt to get an early look -- that is their job. The filmmaker's goal is to keep potential distributors intrigued. You can promise to let each see it "as soon as it is finished." They may be annoyed to see their competitors at the first screening. But this will get their competitive juices flowing.

Some diplomacy is required to orchestrate a bidding war and not alienate the bidders. You want to firmly push each potential buyer to offer their best terms while maintaining cordial relations with all. Remember, you may want to produce your next project with one of the losers.

4) DO NOT GIVE AWAY YOUR FESTIVAL PREMIER LIGHTLY: Carefully plan a festival strategy. I have seen filmmakers give away their premier to minor festivals and thereby disqualify themselves from participating in major ones. You can participate in lesser festivals later. There is little reason not to apply to a festival if you think you have a chance to participate. If you are not accepted, the buyers will not know unless you tell them.

5) SELL YOUR FILM WHEN BUYERS ARE HUNGRY FOR PRODUCT: Distributors that acquire films for foreign distribution plan their activities around a market calendar. The major film markets are 1) AFM in late February in Santa Monica, 2)Cannes in May in Cannes, France, and 3) MIFED in late October in Milan, Italy. Some distributors sell at the Berlin market which has a reputation for showing art films. In addition there are a number of important television markets including NATPE in the U.S., and MIP and MIP-COM in France.

Distributors are hungriest for product before a rapidly approaching market when they do not have enough new inventory. A distributor may spend $90,000 or more to attend Cannes, and if it appears the company will have nothing new to sell, panic sets in.. This is the best time to approach a distributor. Do not wait until a week before a market, however, because you need to give distributors enough time to prepare for it. They may need to create a trailer, one-sheet, poster, screeners and advertising. The bumper editions of the trade papers have an ad deadline that is 3-4 weeks before a market. These expanded editions contain product listings by distributor, as well as extensive advertising. The best time to approach distributors is 60-90 days before a market. Assuming a distributor wants your film, it may take a month or more to negotiate the deal.

PROTECTING YOUR INTERESTS

Investigate the Distributor

Always check the track record and experience of potential distributors. Industry insiders know the reputations of executives and their companies. It is newcomers who are most likely to be taken advantage of.

Ask a prospective distributor to send you their press kit. It will likely contain one-sheets from the films they have distributed. Examine the credits. Track down the filmmakers. If you cannot find them, simply ask the distributor for a list of all the filmmakers they have done business with over the past two years. Call the filmmakers. Ask them specific questions: Did they receive timely producer reports? Have they been paid what they are due? Did the distributor spend the promotional dollars promised?

I recently established the Filmmaker's Clearinghouse, a web site devoted to disseminating information about distributors. The Clearinghouse provides filmmakers with information on distributors similar to what the Better Business Bureau reports on merchants.

PRINCIPAL TERMS OF A DISTRIBUTION AGREEMENT

Territory

The territory is the country or region where the distributor may exploit the film. Worldwide rights mean that the distributor has the right to distribute the film in any country in the world. Some distributors go further and seek rights throughout the "Universe." To my knowledge, no sales have been made to moviegoers on other planets. I once kidded a distribution executive that it was silly to ask for such rights. He conceded that it was unlikely his company would ever need rights beyond Earth. Several weeks later, however, he showed me a fax he had received from NASA asking for permission to exhibit one of his films on the Space Shuttle.

Independent filmmakers frequently enter into more than one distribution deal. Rights are typically divided into two territories: Domestic and Foreign. Domestic is the United States and English-speaking Canada. Sometimes it may include all of Canada. It may include U.S. territories, possession's & military bases. Foreign rights are usually defined as the rest of the world.

As a general rule, filmmakers should only grant a distributor rights to territories they directly service. Few distributors, other than major studios, serve both the foreign and domestic market. Even the majors use sub distributors in smaller territories. Nevertheless, distributors often try to acquire as much territory and media as they can. They will lay off rights on sub distributors, and take a fee for serving as the middle man.

Most companies that distribute domestically do not participate in international film markets. If you grant such a distributor worldwide rights, they will make a deal with a foreign distributor to handle international sales. This foreign sales company will deduct a distribution fee for its services, and from the remaining amount, the domestic distributor may take a fee as well.

This is not to say that you should never allow a distributor to use sub-distributors. But one needs to understand the kind of distributor you are dealing with, and how it plans to exploit your film. Filmmakers should always determine which media and territories a distributor handles itself, and which it lays off on other companies. Labels can be confusing. Some distributors who sell films internationally call themselves "foreign sales agents." Others prefer to be known as "international distributors." The problem of double-distribution fees can be ameliorated by placing caps on the total fees the distributor and sub-distributors may take.

Most indie filmmakers contract with a foreign sales agent, or international distributor, to take their film to the major international markets. The filmmaker will also contract with one or more domestic companies. If the film does not have any name-actors in the cast, the filmmaker may not be able to obtain a domestic theatrical release. In such a situation, the filmmaker will contract with companies that serve the television and home video markets. Care must be taken in structuring these deals so that their terms do not conflict.

Filmmakers may benefit by contracting with more than one distributor. First, the filmmaker is not putting all his eggs in one basket. If he has one distributor, and it goes bankrupt, all potential revenue is affected. Second, by using different distributors, expenses in one territory will not be cross-collateralized against revenues from another.

When expenses are cross-collateralized, expenses and revenue from different territories are pooled. For example, suppose a film generates revenue of one million dollars abroad. The distributor has incurred $100,000 in recoupable expenses. The distributor is entitled to retain 20% of gross revenues, or $200,000, as a distribution fee. The remaining $700,000 is the filmmaker's share of revenue.

But suppose that in the domestic territory, this film generated 1 million dollars in revenue, and incurred expenses and distribution fees of $1.5 million. So on the domestic side of the ledger, the distributor has a net loss. If the filmmaker has a single distributor for foreign and domestic territories, the distributor can recoup its $500,000 domestic loss from the foreign profit.

Not only can expenses from one territory be crossed against others, but expenses in one media can be crossed against revenues from another. In many instances, a distributor will lose money on a picture's theatrical release and will want to recoup those losses from revenue generated from home video and television.

Media

Media is the means of exploitation. Many motion pictures are meant for initial exhibition in theaters, the theatrical media. The time period, or "window," during which the movie will play in theaters will be short for a flop, while a blockbuster can play for many months.

After the theatrical release, a picture may be distributed and exploited in the so-called allied and ancillary markets, which includes home video, non-theatrical (colleges, community groups), pay television (HBO), network television (ABC) and television station syndication. The film may also generate revenue from merchandising, publication of a movie novelization and a sound track album. The nomenclature may be misleading because the so-called "ancillary" media now generate most of the revenue. In the United States, home video revenues are about five times theatrical revenues.

A theatrical release is still primary in one important respect. Although the theatrical release may not generate net revenues - because of the considerable cost of print duplication, advertising and shipping - the theatrical release creates public awareness for the film. It is the engine that pulls the train. When consumers visit video stores, the cassettes they rent or buy first, are the movies they learned about from the advertising and publicity accompanying their theatrical release.

Ancillary media tend to be much more profitable than theatrical media. When a distributor releases a film to television, there are minimal expenses. If you license a film to CBS, for example, the expenses incurred are the manufacturing cost of one video sub-master and expense of shipping it to CBS. The distributor does pay for advertising, as CBS will promote the movie. Thus, most of the revenue from television licensing flows to the bottom line.

Because a theatrical release is often not profitable, and because the ancillary media frequently are profitable, most domestic distributors will decline to acquire only theatrical rights. They do not want to take the risk of a theatrical loss, without the offsetting revenue that can be obtained from the ancillaries. Consequently, filmmakers need to exercise caution. If they license home video and television rights first, they may find they cannot obtain a domestic theatrical release.

In fashioning a grant of rights clause, filmmakers will want to retain rights to media the distributor will not actively exploit. It has become fashionable for distributors to ask for multimedia and interactive rights although few exercise these rights. Indie filmmakers normally grant a distributor three media: 1) theatrical, 2) television (all forms including pay TV, cable TV and broadcast), and 3) home video (distribution by videocassette, laser disc and DVD). Filmmakers should expressly reserve all other rights including dramatic (play), radio, electronic publishing, merchandising, music publishing, soundtrack and print publication rights, although the distributor should be granted limited radio and print publication rights in order to advertise the film. Remake, sequel and television spin-off rights are usually reserved to the filmmaker.

Term

Distributors tend to ask for long terms, often 10 years or in perpetuity. It is not in the filmmaker's interest to have an unduly long term. A distributor's enthusiasm for a film wanes as the years pass. This can be frustrating for the filmmaker, especially if he has the desire and ability to promote the film. The filmmaker may need to negotiate a reversion of rights from a distributor who has done an inept job of marketing the film.

A filmmaker is well advised to license his picture for a short term (one to three years). One can appreciate, however, that distributors who disburse large advances or spend a great deal on marketing, will want a longer term to ensure that they can recoup these costs. A good compromise is to give the distributor a short initial term followed by a series of automatic extensions if performance milestones are met. For a low-budget film, the contract might provide an initial term of two years, and if the distributor returns X amount of dollars to the filmmaker during this first period, the term would be extended. There could be a series of such rollovers, with the total number of years capped, perhaps at ten.

There is another "term" that should be addressed. This is the term of any license the distributor may grant to a third party. Unless the contract restricts the distributor, it may license rights to territory buyers for any length of time. A filmmaker is wise to limit third-party licenses to 12 years, except for Germany, which often demands 15 years. What a filmmaker wants to avoid, is discovering that a distributor near the end of its term, enters into a series of long-term agreements with third parties at fire sale prices. The distributor may figure that since it will soon lose all distribution rights anyway, it might as well take whatever it can get.

Distribution Fee

Distributors generally take a distribution fee based on a percentage of gross revenues. This maximizes their fee as it will be a percentage of a larger sum than if the fee was based on revenues after deduction of expenses. In many instances, after the distributor takes a distribution fee, and recoups its expenses, there may be nothing left for the filmmaker.

Distribution fees vary by territory and media. For a domestic theatrical release, a distributor may ask for a fee of 35% of gross revenues. For domestic home video, there are two basic approaches: either a 50/50 net deal, or a royalty deal. The 50/50 net deal allows the distributor to deduct distribution expenses from gross revenues, and then split the remaining balance 50/50 with the filmmaker. The royalty approach pays the filmmaker a royalty, often in the range of 20-25% of wholesale price for each cassette sold. Thus, for every cassette sold to blockbuster for $30.00, the filmmaker might receive six dollars. The distributor bears all distribution expenses. Keep in mind that the price charged retailers for some films are at a much lower, so-called sell-through price (e.g., $9.00 per cassette) to encourage customers to buy a cassette rather than rent it. The royalty rate may be lowered to 10-15% for such sell-through product. At other times, tapes are sold to retailers on a revenue-sharing basis. The retailer pays a nominal amount (less than $5.00) for a tape and agrees to share revenue from it with the distributor. Most of the major studios, and independent operators like Rentrack, now supply video cassettes to retailers on this basis.

From the filmmaker's point of view, the royalty approach has the advantage of ensuring that the filmmaker shares in revenue even if sales are modest. Moreover, since the filmmaker's royalty is calculated on the number of units sold, less returns, there is much less room for creative accounting. If sales are robust, however, the filmmaker might receive more under a 50/50 net deal, assuming the distributor has reasonable expenses and honestly accounts to the filmmaker.

The distribution fee for arranging for a domestic television license is often 25% of the license fee but can vary from 10-40%. Licensing a film for television may entail little more than contacting HBO and offering them the film. Delivery is accomplished by shipping a video sub-master, accompanied by artwork and perhaps chain of title documents. More effort is involved in selling to the numerous pay per view, pay cable, basic cable and broadcast outlets. A distributor may be able to arrange for a series of sales to different distributors, giving each a "window" of time to exhibit the film. Care must be taken to ensure that the windows are coordinated so that there are no conflicts, and to ensure that maximum revenue is obtained. Once a film has been exhibited on basic cable, for example, it may not be desirable to pay cable buyers.

The order of the windows for release of product is generally: theatrical, home video, followed by television. Within the television window, the order is pay-per-view, pay cable, network broadcast television, basic cable and broadcast syndication. Note that most indie films are not licensed for network broadcast. The aforementioned order can be varied. Sometimes a network is willing to pay a premium to obtain an earlier window. Likewise, HBO acquires a limited number of completed films and distributes them as HBO premiers, meaning that these films premier on HBO without a prior theatrical release.

For foreign distribution, a filmmaker will typically contract with an international distributor or foreign sales agent, who will receive a distribution fee in the range of 20-25% of gross revenues. The sales agent will be allowed to recoup certain distribution expenses after deducting its fee. The balance will be paid to the filmmaker.

Note that gross revenues are usually defined to be a sums less than true gross. Gross is receipts actually received less any refunds, collection costs, currency conversion, wire transfer and bank costs, withholding taxes and any duplication or manufacturing expense incurred to deliver materials to the foreign buyer.

Some countries may not allow licensee fees to be transferred out of the country. In this event, the filmmaker's share of the frozen funds are deposited in a separate account in the foreign country in the name of the filmmaker. If these funds cannot be repatriated, the filmmaker will have to spend them in the foreign country. Sometimes these frozen funds are spent for a foreign vacation, or to produce a film. Such a film is a revenue-generating asset that can be removed from the country.

The fee paid by a territory licensee usually does not include the cost of manufacturing film prints, video sub-masters, key art or other materials needed. Most of the time these expenses are paid separately. Either the foreign buyer will pay the laboratory directly, or the sales agent is paid for these items. Some sales agents may mark up costs in order to earn additional revenue, a practice that is often not disclosed to filmmakers. On the other hand, if duplication costs are included within the license fee, this will inflate gross revenues, increasing the distributor's commission.

Distribution And Marketing Expenses

The distribution agreement should clearly define the nature and extent of expenses the distributor is allowed to recoup. Many filmmakers are shocked to discover that much of the money generated from their film will stay with the distributor in the form of distribution fees and reimbursement of expenses. Some distributors will acquire films that they expect will sell poorly, knowing that whatever revenue is generated will help the distributor cover its operating overhead.

For example, a foreign sales company participating in the Cannes film market could incur costs of $90,000 or more. These expenses might include the rental of a suite of rooms to serve as market headquarters, airfare, local transportation, lodging and meals for staff, shipping, duplication of video cassettes, and entertainment of foreign buyers. If the foreign sales company is marketing 10 films, the cost might be apportioned equally among the films. Thus, each filmmaker could be allocated a $9,000 market expense plus whatever promotional expenses were incurred to create posters, one-sheets, trailers and advertising. These promotional expenses could easily total another $30,000. If the foreign sales company is distributing an indie film which generates $40,000 in license fees, the distributor would be entitled to retain all of this revenue. Here's the math: $40,000 gross receipts, less a distribution fee of 25% ($10,000), reduces the balance to $30,000. This sum is then applied to the outstanding $39,000 in expenses, leaving the filmmaker with less than $0.

In this scenario the filmmaker's movie benefits the distributor while the filmmaker receives little in return. The distributor gains in a number of ways: first, it earns a distribution fee; second, the distributor covers its overhead to attend markets. If the distributor has one or two of its own films to license, that revenue will not be offset by overhead expenses because these costs are covered by films acquired from indie producers. Third, the distributor benefits from the advertising paid for by the filmmakers. These ads often promote the distributor as much as any film. Fourth, the distributor may earn fees by marking up the cost of various deliverables and pocketing the profit. Fifth, the distributor may secretly receive kickbacks from poster designers, trailer makers and laboratories. Finally, the distributor may profit from various accounting games played with revenues and expenses. Expenses incurred on one film may be misapplied to another, or applied doubly. Filmmakers may find themselves "reimbursing" the distributor for more market expenses than were actually incurred.

While a filmmaker may not be able to control a distributor's expenses, the filmmaker can restrict which expenses the distributor is allowed to recoup. It is often useful to categorize expenses and restrict each type. I like to divide expenses into 1) market expenses, 2) promotional expenses, and 3) direct distribution expenses. Since these terms do not have widely accepted meanings, the drafter must precisely define each.

Market expenses include costs to attend film markets such as AFM, Cannes and MIFED, and may include television markets such as MIP, MIP-COM and NATPE. Market expenses include airfare, hotel, shipping, telephone and staff expenses to attend a market. These expenses should be recoupable for the first year of distribution only, and limited to those markets which Distributor attends. For a low-budget indie film, a distributor should be allowed to recoup between $2,500 - $10,000 per market with an overall cap of $7,500 - $20,000. The distributor should agree to attend no less than three (3) markets during the first year of distribution. No market expenses should be charged for subsequent years.

Promotional expenses include the cost of preparing posters, one-sheets, trailers and advertising. The distributor should agree to spend a minimum amount of money (the floor) and a maximum (the ceiling or cap). These expenses are limited to direct out-of-pocket expenses actually spent on behalf of the film. The agreement should provide that, at the producer's request, the distributor will provide receipts for each and every expense or forgo recoupment. Recoupable promotional expenses do not include any of the distributor's general office, overhead, legal or staff expenses, nor any of the aforementioned market expenses. The filmmaker may want a provision that requires the distributor to spend the minimum amount necessary to adequately promote the film, including preparation of a trailer, poster, one-sheet, videocassette and customary promotional material. If the filmmaker has created his own poster and trailer, for example, the cap on expenses should be lower.

The category of direct distribution costs includes all reasonable and verifiable costs incurred in connection with the distribution and sale of the motion picture. Such expenses might include, long distance phone charges, photocopying, fax, shipping and courier charges, clearance and brokerage fees, warehouse and handling charges, insurance, bank transfers, taxes and duties, and the cost of manufacturing any delivery item that the filmmaker fails to deliver. Duplication of screening cassettes and program master tapes, transfer to PAL format, dubbing, creating a foreign language version, and manufacturing of promotional material may be recoupable as well, provided that these expenses have not been paid for by the territory buyer, and they have not been recouped as a market or promotional expense. Direct distribution expenses can be capped at a dollar amount or on a percentage basis (e.g., 10% of Gross Receipts).

Advances And Guarantees

There are a number of reasons why filmmakers benefit from receiving an advance payment toward their share of revenues. First, if the distributor is dishonest or goes bankrupt, the advance may be the only money the filmmaker ever collects. Second, the filmmaker can immediately use the advance to pay outstanding production expenses, debts or to repay investors. An advance is useful because there is often a considerable delay from the onset of distribution to the receipt of revenue from territory licensees. Moreover, revenues are applied first to pay distributor fees and expenses. Third, if a distributor has paid a significant advance to secure distribution rights, it has a strong financial incentive to sell the film. Advances are recoupable (the distributor can recoup this payment from revenues), but they are not refundable (if the film generates insufficient revenue for the distributor to recoup its advance, the filmmaker does not have to return the advance).

Advances are either paid on execution of the distribution agreement, or after delivery, inspection and acceptance of the master materials. If the filmmaker fails to make delivery, or if the materials are defective, the distributor may refuse to pay the advance. It is best to give the distributor a limited period to inspect materials and raise objections. If materials have defects, the filmmaker should be allowed a reasonable opportunity to correct them. I like to give distributors no more than 30 days to have the laboratory run a quality control test. The distributor has a legitimate interest in ensuring that the film materials are adequate to make copies that will be acceptable to licensees. What a filmmaker wants to prevent, however, is giving the distributor a loophole to wiggle out of paying an advance by taking an unduly long time to approve deliverables, or by allowing the distributor to falsely claim the materials are defective in order to avoid paying the advance. If a distributor claims deliverables are defective, and the filmmaker disagrees, or the filmmaker cannot fix the real or purported defects, the filmmaker should be able to void the distribution deal and regain all rights to the film.

If the advance is paid in installments, then the arrangement is more properly characterized as a guarantee. Of course, a guarantee is only as good as the financial health and integrity of the guarantor. If the distributor goes bankrupt, or if sales are less then expected, the distributor may renege on its obligation to pay the guaranteed amount. Distribution agreements should always specify the deadline by which time the guarantee must be paid.

In the current marketplace, many distributors decline to pay advances or guarantees for low-budget films without name actors. Dealmakers need to be creative in devising formulas that protects the filmmaker's interests while not imposing an unacceptable burden on the distributor. I have created such a formula which I call a "50/50 guarantee." Under such a guarantee the distributor agrees to delay recoupment of its expenses and receipt of its distribution fee so that at least 50 percent of gross revenues are paid to the filmmaker. In other words, regardless of the amount of money due the distributor in the form of recoupable expenses or distribution fee, at least 50 cents of each dollar received will be remitted to the filmmaker. An unrecouped distributor may recoup the balance owed from future revenues, if there are any.

For example, if $100,000 in gross revenue is received by the distributor, and if the distributor is owed a total of $60,000 in recoupable expenses and distribution fees, the distributor would only be permitted to recoup $50,000 from the first $100,000 in revenues. The outstanding $10,000 balance due the distributor, could be recouped from the next $20,000 of revenue.

This 50/50 guarantee is advantageous to the filmmaker because it ensures that at least 50% of all gross revenues flow down to the filmmaker. This device will preclude the scenario where a distributor acquires a film, makes minimal sales, and retains all the revenue. The 50/50 guarantee ensures that the distributor takes some financial risk (in the form of recouped expenses and distribution fees), if the film under performs.

Consultation Rights

Distributors often grant filmmakers consultation rights. This right may include consulting the filmmaker about the artwork, selection of theaters, and the amount and type of advertising purchased. Consultation rights usually do not mean much because the distributor is only obliged to consult the filmmaker, not follow his suggestions.  Distributors often insist on having the final say because: 1) they have more expertise on distribution matters than the filmmaker, and 2) they are advancing marketing costs.

In those instances where filmmakers agree to pay for print and advertising (P&A) costs, distributors will grant filmmakers decision-making authority. These deals are often referred to as "service deals," or "rent-a-distributor," deals. They permit the filmmaker to use the distribution apparatus of a distributor for a fee, often a percentage of the revenues generated. The distributor might receive a distribution fee of 17.5% (compared to a customary distribution fee of 35% for a theatrical release) with the filmmaker bearing all costs of advertising and marketing.

In those instances where filmmakers do not have control over marketing, they may still be able to restrict the distributor from editing or changing a film or title without the filmmaker's consent. The distributor may be limited to editing for censorship purposes, adaptations for television broadcast (e.g., by allowing insertion of inserting commercials), and addition of sub-titles/dubbing for foreign use.

Warranties And Representations

Distributors routinely require filmmakers to warrant certain facts, and indemnify the distributor for any loses or legal fees incurred from a breach. Since the distributor was not present when the script was written, or the movie produced, the distributor doesn't know whether the filmmaker secured all the rights needed to exploit the film. The distributor wants to ensure that the filmmaker has a clean "chain of title" to his work. To fully own a film, the filmmaker needs to secure film rights to the script and any underlying literary property, obtain depiction releases from the actors, and secure work-for-hire agreements with the director, editor, cinematographer and anyone else who makes a creative contribution. The distributor will also ask the filmmaker to warrant that the film doesn't violate any third party rights, including actions for copyright or trademark infringement, invasion of rights of privacy and publicity, and defamation.

Astute filmmakers will demand that the distributor make some warranties of its own. Filmmakers may want the distributor to warrant that it will diligently promote and license the film, that it is solvent and not in danger of bankruptcy, and that there are no outstanding suits or government investigations that would preclude the distributor from fulfilling its contractual obligations. The distributor may be asked to promise that it will obtain all rights needed to use artwork or advertising materials created at the direction of the distributor, that the distributor will not edit the film without prior written approval from the filmmaker, and that the distributor will not accept any undisclosed consideration or favors in return for licensing the film. Finally, filmmakers may demand warranties to preclude such unsavory distributor practices as the misallocation of revenue from package sales, the receipt of hidden rebates, and the mark up of duplicating costs so as to profit from the manufacture of deliverables.

Warranties can be "absolute," or to "the best of one's knowledge and belief." With an absolute warranty, one is warranting a fact absolutely, and a good faith mistake is no defense. Conversely, if the filmmaker warrants a fact to the best of his knowledge and belief, he is making a lesser promise. He is only stating that as far as he knows the statement is true. This difference can be important in a creative enterprise such as movie making where the filmmaker is relying on facts which he may not have any personal knowledge. For example, the filmmaker may have purchased a script from a writer who purports to own all underlying rights. The filmmaker makes a movie based on the script, enters into a distribution deal, and now discovers that the script was plagiarized from another work. If the filmmaker made an absolute warranty, he will be liable to the distributor, irrespective of the fact that the filmmaker reasonably believed he had secured the rights and was lied to by writer. On the other hand, if the filmmaker believed in good faith that he had obtained the necessary rights to the script, and he only promised that he had such a good faith belief, he would not be liable.

Accounting

When a filmmaker receives up-front, complete payment of all monies he will ever be due, there is little need for a right to inspect the distributor's books and records. Under such a buy out deal, the filmmaker may be selling his copyright outright for a flat fee. Most of the time, however, filmmakers prefer to retain ownership and license distribution rights for a term of years. Under such a license, the distributor has a continuing duty to account to the filmmaker for a portion of the revenues derived from the film. The filmmaker must have the ability to review the distributor's records to ensure that he is receiving his fair share of the receipts.

The customary accounting clause requires the distributor to maintain books and records with regard to all sales and rentals of the motion picture. Monthly or quarterly accounting statements, accompanied by any amounts due, are required to be sent to the filmmaker. The distributor should be obliged to provide a detailed breakdown by territory and media of all licenses made, with an indication of how much revenue has been received and what remains to be collected. An itemized description of all distribution expenses should be given. Sometimes the distributor is required to supply the filmmaker with copies of all license agreements.

Some agreements compel the distributor to establish a separate bank account for revenues received from the filmmaker's motion picture. The account may require the filmmaker's signature to make withdrawals. The shortcoming of such an arrangement, is that an unethical distributor may accept cash or refuse to deposit checks in the special account. It is advisable for the distribution agreement to state that the distributor is holding the filmmaker's share of funds in trust. If the distributor runs off with the money, criminal liability may ensue.

It is wise to provide for interest on any overdue amounts. The general American rule is that prejudgement interest is not awarded the prevailing party. Until the filmmaker wins an award, the interest clock does not begin to run. If the distribution agreement provides for interest on late payments, however, the courts will enforce such a provision. Therefore, filmmakers should demand a proviso that the distributor will pay interest on late payments from the date monies are due, or after a short grace period. The interest rate should be specified (e.g., 10% per annum), and should not violate state usury laws. Without such a provision, the distributor has a financial incentive to hold onto the filmmaker's money and earn interest on it while in sits in the distributor's bank account.

The filmmaker should have the right to examine the distributor's books and records on reasonable notice, at least once a year. Records should be kept in accordance with generally accepted accounting principles. On completion of an audit, the filmmaker may be required to furnish the distributor with a copy of the results. Some agreements provide that in the event an audit discloses that the filmmaker has been underpaid a certain amount (e.g., $1,000.00 or 5%), the distributor is obliged to reimburse the filmmaker audit costs. Otherwise, audit expenses are borne by the filmmaker.

Distributors often try to restrict a filmmaker's right to raise objections. The filmmaker may be deemed to have consented to the accuracy of reports unless he objects, or initiates legal action, within a year or two of his receipt of an accounting statement. Such a provision shortens the otherwise applicable statute of limitations. The difficulty, from the filmmaker's point of view, is that while he may suspect a report contains errors, he may not be able to determine the facts without an audit. Incurring the expense of an audit may not seem prudent if the amount of money at stake is small. On the other hand, if the filmmaker decides to wait, he may waive his right to object.

Rather than force the filmmaker to object and conduct an audit in order to preserve his rights, a better solution is simply to require the filmmaker to inform the distributor of objections before initiating legal proceedings. This gives the distributor an opportunity to review records and resolve the dispute informally, while preserving the filmmaker's right to remedy errors.

Arbitration

It is important for filmmakers to demand an arbitration clause because they invariably are the financially weaker party. The independent filmmaker, if not poor when production begins, often is broke when the film has been completed. He cannot afford to pay attorney and court costs to enforce his rights. If the filmmaker doesn't a have a viable means of protecting his interests, he may be forced to watch from the sidelines as a distributor blatantly breaches the distribution contract, and pockets all revenue.

The arbitration clause should provide that the prevailing party is entitled to reimbursement of costs and reasonable attorneys' fees. Without such a provision, the prevailing party in litigation or arbitration may not recoup these expenses.

Binding arbitration awards are difficult to overturn. The grounds for vacation are limited to such instances as when an award is procured by corruption or fraud, or if the arbitrator lacked jurisdiction (Sec. 1268.2 California Code of Civil Procedure). A party cannot reverse an arbitration award simply because the party does not like the outcome.

If the losing party does not voluntarily comply with an arbitration award, the prevailing party can have the award confirmed by the court after a short hearing. Once confirmed, the award is no different from any court judgment. A judgment creditor can have the Sheriff seize the judgment debtor's assets to satisfy the award.

The arbitration clause may provide that the award is final, binding and non-appealable. Otherwise, the filmmaker may avoid trial costs only to incur large legal bills on appeal. The parties should specify the venue for any arbitration. The parties may agree on the number of arbitrators and their qualifications. It is common for the parties to have disputes resolved by a single arbitrator who is an entertainment attorney.

Most entertainment industry arbitrations are conducted under the auspices of either the American Arbitration Association (AAA), or AFMA, a trade organization representing international distributors. The AAA has a well-defined system of procedural rules and numerous offices across the nation and in many foreign countries. AFMA is the entity which organizes the American Film Market (AFM). AFMA arbitrations usually occur in Los Angeles, but they can be held during an international film market or in a foreign city. All AFMA arbitrators are experienced entertainment attorneys.

Under AFMA rules, if a filmmaker wins an award, and the distributor refuses to comply with its terms, the filmmaker can have that distributor barred from participation in future AFM's. This remedy is particularly useful if the distributor's assets are abroad and difficult to reach under the authority of U.S. law. The threat of being barred from AFM, may persuade an otherwise obstinate distributor to comply with an arbitration award. Some disreputable individuals, however, have sought to avoid awards by abandoning their distribution company, which may be a shell corporation with no assets. Continuing their business under a new company, they exploit another wave of filmmakers, fully expecting to abandon this entity when the law catches up with them.

To preclude such behavior, AFMA has created a personal binder that can be enforced against distribution executives. If the filmmaker is able to persuade an executive to sign such a binder, and his company fails to comply with an arbitration award, the executive can be barred from future AFM's.

Insurance

U.S. distributors often include as a delivery item a policy of Errors and Omissions (E&O) Insurance. Generally speaking, domestic licensees, such as HBO, will insist on an E & O policy. Foreign buyers are not as concerned about insurance as they operate in countries that are less litigious than the U.S.

E&O insurance is essentially malpractice coverage for filmmakers. It protects the insured from liability arising from negligence in not securing the rights, permissions and clearances needed to exploit the film. Coverage includes liability arising from invasion of a third party's rights, as might arise if the film defamed an individual. E & O insurance does not protect against any intentional misconduct by the filmmaker. Thus, the policy will not cover a lawsuit arising from the filmmaker knowingly violating another's rights.

Errors and omissions. insurance covers any liability as well as legal fees and cost of a defense. There is often a deductible, which may be ten thousand dollars or more. Before issuing a policy, insurers will require applicants to secure all necessary licenses and permissions. A copyright report and title report will be requested, and employment agreements must be in writing. Insurers typically ask that the producer's attorney to review the insurance company's clearance procedures, clear the script, and review all chain of title documents.

Filmmakers often cannot afford to purchase E & O insurance, which runs $7,000 to $10,000 for most indie films. The distributor may agree to purchase a policy and recoup the cost from gross revenues. If the distributor buys a policy, the filmmaker should be added as an additional named insured. Some distributors have their own blanket E & O policies to cover all the films they distribute.

Security Interest

Filmmakers may want to secure their right to revenues from their film by having the distributor grant them a security interest. The collateral here is often the proceeds derived from exploitation of the film. The distribution agreement should have a clause granting the filmmaker a security interest. Typically, a separate long and short form security agreement is signed by the parties, and a UCC-1 form is signed and recorded with the Secretary of State where the collateral or distributor is located. The security interest should also be recorded with the Copyright Office at the Library of Congress in Washington, D.C.

Distributors that provide production financing, or pay advances to producers, may want to protect their interests by securing and recording their own security interests. Likewise, a bank that has made a production loan will often insist on securing its interest, and unions as SAG and the DGA desire security interest to ensure that their members receive any residuals due them. In fashioning security interests care must be taken to ensure that they do not conflict. Financiers often insist on a first priority security interest. Unions may be willing to subordinate their interests to the financier.

Termination

Filmmakers like to have the right to terminate the distribution agreement if: 1) the distributor does a inept job of distributing the film, 2) the distributor doesn't pay the filmmaker his share of revenue, or 3) the distributor loses enthusiasm for selling the picture. Distributors resist giving filmmakers broad termination rights. Early termination can harm the distributor's reputation and financial health. The distributor may have contracted to deliver the film to territory buyers. Moreover, the distributor may have expended significant marketing expenses which have not yet been recouped.

Many distribution agreements severely limit a filmmaker's termination rights. Some agreements require that the filmmaker relinquish his right to rescission of the contract and any injunctive relief. The filmmaker is limited to an action for monetary damages. If the filmmaker has the right to terminate the agreement, the right is often predicated on giving the distributor prior notice of default and an opportunity to cure. When a distribution agreement is terminated, the licenses entered into by the distributor will remain in force. The distributor may have a continuing right and obligation to service these deals, and is usually permitted to take a distribution fee from fees received after termination.

A filmmaker may also have the right to terminate the agreement in the event that the distributor files a petition in bankruptcy or consents to an involuntary petition in bankruptcy or reorganization under Chapter 11 of the Bankruptcy Act. Such a provision, however, might not be upheld by a bankruptcy court.

Filmmakers should carefully consider whether it is in their interest to discharge a distributor. Switching distributors midstream may create confusion among buyers, and it may inflate distribution expenses. Moreover, it can be difficult to find a distributor willing to take a film "second-hand." Distributors do not want a reputation for handling other company's leftovers. Besides, the second distributor knows that the easy sales have been made. The territories remaining may not be remunerative.

Governing Law

The parties should specify which state's law will apply in the event of a contractual dispute. Such a provision is especially important if the parties reside in different states. A filmmaker will not want to engage a protracted procedural dispute before reaching the merits of the case.

Since most entertainment industry disputes arise in New York or California, the law in those states is the most settled. Note that if the agreement has an arbitration clause, the arbitrator can make a decision without reference to any body of law.

Territory Minimums

Distribution agreements with foreign sales companies frequently restrict the distributor from licensing the film for unreasonably low amounts. The contract will have an attached Schedule of Minimums listing all the film-licensing territories of the world with the minimum amounts that the distributor can accept to license the film in each territory. The distributor cannot license the film for less than these amounts without the filmmaker's approval.

There are several reasons why a filmmaker should insist on territory minimums. The schedule establishes prices that the parties agree are reasonable to accept. If the distributor licenses a package of films, the distributor will have to allocate that fee among the films in the package. There may be some disagreement as to the relative commercial worth of each picture. Obviously, an acclaimed film with a star should be worth more than a badly-made B movie. If the B movie is owned outright by the distributor, however, the distributor does not share its revenue with others. Thus the distributor has a financial incentive to allocate as much of the license fee as possible to its own film, and allocate as little as possible to outside-acquired product. A Schedule of Minimums limits the distributor's discretion.

Another reason for stating minimum prices is to prevent the distributor from licensing the film at fire-sale prices. If the term of the distribution agreement is about to expire, the distributor may want to unload the film at whatever price can be secured.

Schedules may have separate columns for "asking" and "accept" prices. Some schedules are divided by media, listing minimums for a video only sale, a television only sale and an "all rights" deal.

Return of Materials

Upon expiration of the term, all film materials in the possession of the distributor should be returned to the filmmaker. Whatever artwork, cassettes, posters and other promotional items, have been created by the distributor should be turned over the filmmaker. Besides physical possession of these materials, the filmmaker may want the right to use these items after the term, and perhaps during the term outside the territory. For instance, if the foreign sales company has designed a wonderful poster, the filmmaker may want to have the right to let his domestic distributor use it. Since the cost of creating this material is a recoupable expense, the filmmaker is essentially paying for it.

Filmmakers should specifically provide that any advertising materials created by the distributor to promote the film, should be created pursuant to a written work-for-hire contract with the filmmaker named as the owner of all rights. Thus, if a photo shoot is commissioned to create a poster, the filmmaker will own the copyright to the photos, not the distributor or photographer.

Delivery

Distribution agreements often have an extensive schedule setting forth the technical specifications for the master materials that need to be delivered. These schedules should be carefully reviewed by the filmmaker to ensure that all the items are available, or can be manufactured for a reasonable cost. Some filmmakers may only have a completed version of their film on videotape. The cost of conforming their film negative, and the cost of manufacturing such items as an Internegative, can be substantial. Many times distributors will agree to advance the cost of needed deliverables, and recoup the expense from revenues.

Filmmakers should retain possession of their master elements. They should not give the distributor any original film negatives, video masters or sound masters. Instead, distributors should be supplied with a lab access letter which enables them to order copies of the motion picture. Likewise, the filmmaker should retain possession of all original artwork, photos and chain of title documents. The distributor receives copies.

There are a number of good reasons for filmmakers to retain possession of their masters:

1) Masters may be irreplaceable. If lost or damaged, the filmmaker will incur a substantial expense to replace these materials, if they can be replaced.

2) In the event of a dispute, it is best for the filmmaker to control his materials. If the distributor has defaulted, the filmmaker may want to terminate the agreement and arrange for alternative distribution. The filmmaker will need access to his materials in order to make delivery to the new distributor.

3) If the initial distributor goes bankrupt, one do not want to have to go to court to extricate materials from bankruptcy proceedings.

4) Several distributors may need access to the materials. Typically, independent filmmakers enter into multiple distribution deals. Often, one deal is with an international distributor (a.k.a. foreign sales agent) to distribute the film outside North America, and one or more deals may be made with a domestic distributor for distribution in the United States and Canada. The best solution, when dealing with multiple distributors is to place the materials in a professional laboratory. Each distributor is then granted a lab access letter.

5) One can discourage cheating by keeping masters in a laboratory and having the lab report how many copies have been duplicated. Suppose that at the end of one year, the lab reports that ten film prints have been made. You review the producer reports and notice only eight sales noted. This is a red flag alerting you that some sales were not reported. Distributors do not order copies of films unless they have an order in hand. Typically, they receive full payment for the film before they manufacture a duplicate and ship it.

Another means that can be used to discover which countries have licensed the film, is to place the music on the soundtrack with a music publisher (which could be a publishing company established by the filmmaker), and have the publisher enter into an agreement with ASCAP, BMI or one of the other music collection agencies. These agencies collect public performance royalties when the film is exhibited on television in the United States, and in theaters and television abroad. If the music was registered with such an agency, and royalties from Thailand, for example, are remitted, this alerts you that a sale was made to this country.

In selecting a laboratory to deposit materials, choose one that charges competitive rates and has experience duplicating films for international distribution. Buyers in certain countries, such as Germany, often reject films on the grounds of poor technical quality. It is also a good idea to select a lab that is not the lab normally used by the distributor. A lab in the habit of fulfilling orders for a distributor who is a regular client may not bother checking to see if the distributor has authority to order copies. Moreover, such a lab might inadvertently release the master to the distributor. The filmmaker should always deliver the master directly to the laboratory, after the laboratory and distributor have signed a lab access letter. If the filmmaker deliver materials to the distributor, and the distributor in turn deposits the materials with the lab, the laboratory may treat the distributor as the owner of the film.

The lab access letter should include language permitting the filmmaker to receive copies of orders or obtain a lab report disclosing the nature and amount of duplication performed. Some filmmakers insist that the laboratory ship all copies directly to the territory buyers. The distributor will likely insist that the lab access letter be irrevocable for the term of the distribution deal.