10 Legal Basics for Getting a Distribution Deal
After you complete your film, you ideally want to get a distribution deal with a distributor or find a sales agent or producers rep to help you find a distributor. In some cases, a sales agent may also act as a distributor. Seeking a distribution deal is generally better than trying to do your own distribution, since this will help you get into the regular channels for distributing films, since the distributor will already have established channels of distribution. You will also have the reputation and prestige of that distributor, especially if it’s a larger distributor, standing behind the film. So you have more authority, credibility, and visibility in the marketplace, and doing your own distribution can be very costly and time-consuming.
Yet there are certain factors to consider in deciding whether you are getting a good deal from a distributor. Understandably, if you are just getting started with only one or a few feature films or documentaries and don’t have any named talent in your film, you will not be likely to get any money upfront. In addition, when you are first seeking a distributor, you will commonly have some costs for E&O (errors and omissions) insurance, and the distributor is likely to tack on its marketing costs before you receive any earnings less the distributor’s commission — usually 25–30%.
For example, if your first year’s earnings are $20,000, and the distributor has a marketing fee of $10,000 and the commission is $5000 based on a 25% commission, those have to be applied against the $20,000, leaving you with balance of $5000. Then, the following year, with the marketing fee paid off, the distributor will only deduct its commission. In the event of a negative balance, that would reduce the amount you have to receive to begin earning money.
Thus, check over the distributor’s contract to see what these marketing fees are, if any. And there are other provisions to check to make sure you are getting a good deal. Sometimes certain provisions can be negotiated, while others cannot be changed.
So what should you do? And what are the best choices to make if you have two or more offers?
Following are some considerations, though any suggestions are not meant to be taken for legal advice. Consult an entertainment lawyer who has handled distribution contracts for advice in your particular case. Or it may also be worth hiring a lawyer who is a skilled negotiator to negotiate for you.
The main provisions in a distribution agreement include the following, along with my suggestions, if any, for requesting changes.
1) In the agreement, the producer is referred to as the Licensor; the distributors as the Licensee. The agreement may start out with the name of the film, its length, any stars, the writer, and the director. It may specify that the Picture shall be capable of receiving an MPAA rating that is no more restrictive than an “R.” The first clause my also state that the purpose of the agreement is for the Licensor to license certain rights in the Picture to the Licensee in the territory specified below under the conditions set forth in the agreement.
2) The agreement will specify the term, and commonly, the Licensor has to notify the Licensee in writing by a certain time (commonly 30 to 90 days) before the termination date, if the Licensor wants to terminate the agreement. If Licensor does not send this written notice, the term will automatically renew for a consecutive period (such as for another 3 years). The time of the initial term can vary for different distributors, such as for 5, 7, or 12 years, as in the contracts I and my partners have received.
This is one of the contract provisions you might seek to negotiate in order to reduce the length of the term or provide some conditions, such as requiring the earnings to be at least $100/$1000 a year after 3 years, and if they don’t meet that minimum, you have a right to request a termination of the agreement. A reason for shortening the term or asking for some kind of requirement to continue beyond a certain period is that otherwise you could tie up the film with a distributor who is not having success in distributing your film, so you might want a release so you can find another distributor or consider self-distribution as a last resort. After a term ends for whatever reason, any sales and schedule of payments already set up continues. But now you can make other sales.
3) Another provision establishes the territory for distribution. Commonly, the territory requested is the world or entire universe, though some distributors with limited distribution may ask for rights to certain territory, such as North America or the United States. Ideally, you want to give a major distributor world rights, but if you are assigning rights to a new or smaller distributor, you might negotiate this provision to reflect the distributor’s major areas of distribution and reserve other territories for yourself. This way, you might be able to get one or more distributors for other territories, or a sales agents or producers rep might help you do this.
4) Another key provision specifies the rights you are granting to the distributor. This might be set forth in the main agreement or included in a separate schedule. The particular placement does not matter.
For example, one of our distribution contracts placed the rights requested in a separate exhibit and schedule, which stated that these rights include all formats of digital/internet delivery, home video, pay TV, free TV, theatrical, and ancillary rights.
Another agreement set forth these rights in the contract and indicated that these Distribution Rights include the right to manufacture, sell, advertise, market, promote, exhibit, transmit and/or exploit the picture by any and all means and methods now known or hereafter devised, including but not limited to:
- EST (delivery and exhibition of a picture through streaming or downloading where the user can select the time),
- VOD (delivery and exhibition of a picture where the picture is available for a limited period of time, such as 48 or 72 hours),
- SVOD (delivery and exhibition of a picture as part of a package where the consumer is charged a recurring fee or periodic access charge or is available on an advertiser supported basis),
Additionally, this agreement went on to state that these rights include the right to make foreign (i.e. non-English) language versions and closed caption versions. Plus the agreement gave the distributor the right to make other types of material for marketing and promoting the picture, subject to any paid ad restrictions, such as creating trailers and any bonus, B roll, or other ancillary material, with the understanding that the distributor’s trademark, trade name, and/or logo can be included to indicate that they are the distributor. In addition, the distributor has the right to authorize others to exercise any rights on behalf of the distributor.
It is also helpful when the distributor lists the rights excluded from the licensing agreement, and if not, you can request these be listed, in order to clarify what you have the right to do yourself.
For instance, one contract for one of our films indicated that the following rights, also known as reserved rights, were excluded from the agreement: music publishing rights, soundtrack record rights, prequel, sequel, remake, TV series, and other spin-off rights, including internet TV and webisodes, merchandising, sponsorship and commercial tie-up rights, including creating video games, interactive games, and other types of games, toys, or ancillary products using computer technology. This contract also excluded any clip licensing rights used to promote the picture, as well as screenplay rights, book publishing rights, and all other allied, ancillary, and derivative rights. The advantage of having these excluded rights specified in the contract is that this makes it very clear what you can do. If a list of exclusions is not in the contract, ask about including this, and ask for specific rights which you would like excluded. If the distributor doesn’t expect to license participate rights to buyers, they will usually be agreeable to exclude those rights. But if they want to include those rights, generally it’s best to agree to what they want if you want that deal — and usually you do when starting out, since you are initially in a relatively weak negotiating position.
5) Deductions from Gross Receipts: Expenses. This is one of the clauses you should pay particular attention to, since the cost of marketing and promotional materials has a major impact on your potential earnings. This provision describes how the Licensor and Licensee shall split the amount of the Gross Receipts remaining after deducting various expenses, such as, expenses for the following:
- Deductible Costs, which may include many items that are either broken out separately or grouped together. These costs are any and all actual, verifiable, third party out-of-pocket charges, fees, costs, and expenses paid by the distributor in connection with acquiring, distributing, and otherwise exploiting the picture through any means and methods permitted by the agreement. For example, deductible costs might include costs paid or incurred for manufacturing, replicating, delivery, conversion, encoding, transcoding, distribution, marketing, advertising, publicity, packaging, retail placement, and taxes for sales, use remittance, and value added taxes. Since the amount of these costs can seem very uncertain, the distributor may provide a package price or cap, such as $10,000, $15,000, or $25,000.
- Delivery. These are the expenses incurred by the Licensee to create any necessary technical elements required by its customers, such as tapes, digital files, conversions, authorizing, transcoding costs, and taxes.
- Duplication and Shipping. These are expenses incurred by the Licensee to duplicate the video of the Picture for the Licensee’s customers, such as making duplicate copies, title page inserts, creating DVD cases and disc art, and shipping expenses.
- Promotional Materials. These are expenses incurred by the Licensee to create a trailer and artwork design, if needed.
- Cost of Marketing. This is commonly stated as a fixed sum for marketing and promoting the Picture. It provides that the Licensee shall, during the term of the agreement, deduct a non-accountable fee of a certain amount (ie: $2,500 to $25,000) per year or as a one-time fee for all expenses incurred by the Licensee for marketing and selling the picture (or for each Picture if more than one Picture covered by this agreement). If the Licensee receives the Gross Receipts sufficient to recoup the entire fee for the term during one accounting period, the Licensee can recoup the entire fee then and not charge additional marketing fees.
- MPAA Rating. This refers to expenses incurred by the Licensee to secure an MPAA Rating if required by its customers, and commonly, these expenses will be pre-approved by the Licensor before the Licensee incurs these expenses.
- Administrative Fee. As provide in some agreements, the Licensee shall deduct a one-time administrative fee (ie: $1000) for each title.
Since it is not always clear what the distributor spends and deducts, you should ask for clarification, if this isn’t clear, about what the distributor expects to include as expenses. Sometimes is better if the distributor indicates a pre-determined amount to apply to expenses or a cap on what these expenses might be. This way you have a clear idea of what will be deducted from the gross receipts before splitting any income with the distributor based on the distributor’s commission. For example, one distributor asked for a one-time $25,000 fee; another for $15,000, and a third asked for $2000. At times, the larger expense is justified because the distributor will more aggressively market and promote the film, whereas the distributor asking for a much smaller amount won’t devote much effort to marketing and promotion. So you could ultimately earn more with a larger upfront fee or cap on expenses. Try to avoid paying this money for expenses upfront. Preferably, it should come out of the gross receipts.
If you can, negotiate the best arrangement you can in this area, such as to get a lower yearly or one-time marketing fee or for the distributor to not include certain items as deductible expenses.
6) Allocation of Gross Receipts. This provision refers to how the receipts are split up after the distributor has deducted the indicated amounts, based on the percentage the distributor takes for different types of distribution deals. These commissions range from about 25% to 35%, though under certain situations, the distributor will take more. In some cases, the distributor will take this commission before deducting its distribution fee; in other cases, the deductions are made first, and then the distributor gets its commissions.
For example, these are the spits in two contract offers we received.
- The licensor gets 70% for home video fees but only 30% for any non-home video sales, after deducting a number of listed fees, plus a $2500 fee for marketing and sales.
- The licensor gets a distribution fee of 35% from the gross receipts and then deducts its deductible costs, with a cap of $15,000.
The actual commission itself may not be negotiable, but you want to consider what you might end up getting, based on three key factors:
- the likely expenses for or cap on the deductions,
- any yearly or one-time fee for marketing and sales expenses,
- the commission the distributor will take before you get any payments.
This kind of analysis can be particularly useful when you are comparing different offers to decide which one is best. In conducting this analysis, perhaps create different scenarios, where you figure the minimum you need to make to break even given the deductions and commission taken by the distributor. Aside from the financial return, you might factor in the pros and cons offered by a particular distributor and the likelihood of getting higher sales and earnings with one distributor compared to others. In that case, even if the distributor is getting more upfront which is deducted from any sales income, in the long run, that deal could be more profitable due to gaining more sales and income.
7) Releasing Commitments. This refers to what the distributor will do to release your film. Among other things, this provision may specify a particular time for the release, such as not occurring later than 10 months after you deliver the Picture. It may state that the distributor will commercially release the Picture in certain designated areas, such as in the United States and Canada or in its domestic territory. Additionally, it may specific a release to certain media, such as a physical home videogram in Blu-Ray or DVD formats, electronic sale, and internet transactional or cable-based video on demand. Then, too, it may indicate that the distributor will consult with the Licensor about its marketing and promotional plans for initial home video and VOD release. Generally, this statement about what the distributor will do is not something to negotiate, since it is based on the distributor’s release scheduling.
8) Marketing Materials. This section may indicate that you will provide all pre-existing advertising and promotional materials as part the deliverables, as specified in the agreement. This provision also gives the distributor the ability to create any additional materials, including the key art, poster, trailer, and any DVD packaging. While the distributor may consult with you, its decision is final. Additionally, this section may ask you to participate in a reasonable amount of marketing and publicity activities for the film, as reasonably requested by the distributor. In this case, you will probably want to take part in this marketing and publicity campaign anyway, since that will lead to more sales and income for your film.
9) Statements and Audits. This section indicates how frequently you will get statements and the length of the accounting period after a particular quarter or time period. For example, many statements are issued on a quarterly basis, though some will be issued every six months or annually, depending on the level of earnings. These statements are generally sent out within 30 to 75 days after the end of each accounting period.
For instance, in one of our contracts, the distributor provided statements within 75 days at the end of each quarter, although in the first two calendar years, no statements or payments would be issued if the payment was less than $100. In that case, the payment would be carried forward. Then, after the second full calendar year, the statements would be issued on a yearly basis. In another case, the distributor provided statements within 30 days of the close of each quarter, though provided no statement or payments if the payment was less than $250.
When you do get these statements, the distributor fees and commissions will be deducted from any earnings before you get paid. There are no guarantees, because you will only make money if the distributor makes more than beyond your break-even point, taking into account the marketing fees and the distributor’s commission.
However, to guard against a distributor holding onto your film for a long time despite low sales and no earnings, you might be able to negotiate getting some minimum payment within a certain period of time, such as within 3 years, or you have the right to terminate the contract. For some distributors, this term won’t be negotiable, and it may be better to take the deal than not if you don’t have a better option. That’s because each film you have in distribution opens the door to bigger distributors and better agreements in the future. So think of producing films and getting distributors as a long term strategy, not as a way to get rich quick, although occasionally some first film does strike it rich.
You do have the right to annually audit the books and records of the Licensee, with the audit limited to your picture within a certain time period of receiving the statement (i.e.: within a year), and you have to give the Licensee at least a certain number of days written notice (i.e.: 20 to 60 days). Then, the audit occurs at the Licensees principal place of business during regular business hours, and it shouldn’t interfere with the distributor’s normal business activities. Moreover, it has to be performed by a CPA who is experienced in auditing film sales and distribution or is otherwise approved by the Licensee in writing. You have to conduct this audit at your own cost, unless the audit shows an underpayment of more than a certain amount (i.e.: 10% to 15%) and is not less than a certain amount (i.e.: $2500 or $5000). Then, if there is a big discrepancy, you can be reimbursed for the cost of the audit up to a maximum amount (i.e.: $5000) along with the underpayment.
10) Other terms. Finally, there are assorted mostly legal boiler plate provisions in these contracts, though the format and language differs from contract to contract. These include the following:
- Termination rights. You or the other party have to give each other a written notice of a failure to perform, and it has to be corrected within a certain period of times (i.e.: 30 or 60 days) or either party can give notice to the other to terminate the contract, though sometimes the termination could be subject to arbitration, such as if the Licensee objects. But commonly the written notice is all you need. Once the agreement is over, the Licensor can regain all of its rights in the Picture, subject to any third party license agreements, and potentially may be able to claim monetary damages or other appropriate relief, except for lost profits. Should the distributor go bankrupt, you just have to file a written notice to terminate the agreement and you get back the rights, subject to any third party license agreements.
- No Warranty or Representation of Level of Gross Receipts. This basically states that you acknowledge that the marketing of the Picture is speculative and involves a high degree of risk, so there is no guarantee of the Picture’s commercial success.
- Controls. This provides that subject to the terms of the Agreement, the Licensee has the sole, exclusive, unfettered, and complete discretionary control over exploiting the rights to the picture in every form, so the Licensee can chose to market, advertise, publicize, promote, create marketing materials, exploit, sell, and otherwise seek to commercialize the picture as it sees fit.
- Failure of Delivery. This provides that if you don’t provide the required deliverables for any reason, then the Licensee has the option but not the obligation to create, repair or replace any deficient element, and deduct the cost of this from any payments. Or if the Licensee rejects any delivery item more than twice, it can terminate the agreement and then has no further obligation, without limiting its other rights and remedies. To make sure you don’t fail to provide what is required, consult with your editor to ensure that you can deliver the itemized deliverables according to the required specs and timeline. If you find you can’t make the current specs, many times you can negotiate adjustments to the delivery schedule and required items, although if you don’t negotiate ahead of time, you may be liable to pay additional costs, fines, or fees for the distributor to provide these deliverables. Or you non-performance could be the basis for the Licensee cancelling the contract, and possibly there might be some penalty fees to you.
- Logo. This provides that the Licensee may at its sole discretion and cost add its name and or logo to the Picture’s credits, billing block, and artwork.
- Press Releases. This provision gives the Licensee the right to send out a press release announcing the main (non-financial) elements of the agreement and the release of the picture.
- Notices. This states that all notices, requests and other communications have to be in writing and are deemed received on the date of their receipt on a business day or the next succeeding day if received after 5 p.m. or on a weekend.
- Governing Law. This indicates that the agreement will be construed and interpreted based on the laws of the state where the Licensee is located.
- Arbitration. This provides for any controversy or claim to be resolved by arbitration, according to the rules of the IFTA (International Film and TV Alliance).
- Residuals and Third Party Payments. This provides that all profit participations, residuals, performance, mechanical fees, and other license fees are the obligation of the Licensor. This means that you as the Licensor should deliver the picture free and clear of any claims, liens, or encumbrances other than those specifically acknowledged. If the Licensee has to pay or chooses to pay any third party payments, these will be deducted from Licensor’s share of Gross Receipts.
- Representations and Warranties of Licensor and Licensee. This provision states that the Licensor owns and controls all of the rights given to the Licensee, that none of the rights have been previously exploited, and that there is no outstanding contract, commitment, restriction or arrangement which could conflict with the agreement or which might limit, restrict or interfere with the Licensee’s rights. Also, the Licensee agrees not to engage in any conduct that would deprive the Licensee of the benefits of the agreement. Additionally, the Licensor agrees that the rights granted do not violate or infringe upon the trademark, trade name, copyright, artistic, privacy, or other right of anyone else. The Licensor further warrants that he or she has properly obtained any musical rights and the rights from any performers, producers, writers, or persons whose names, voices, photographs, works, services, or other materials were used in making the picture. Then, too, the Licensor agrees to obtain and maintain all necessary licenses for producing, exhibiting, marketing, and exploding the picture. In turn, the Licensee affirms that it is in good standing and will not make any changes to the Picture, except for censorship requirements, that will expose the licensee to liability. Finally, the Licensee agrees to indemnify the Licensor and its associates and hold them each harmless from any loss, liability, cost or damage or expense due to any breach it makes or is alleged to have made.
- Relationship of Parties. This provision refers to the fact that the parties agree they are independent contractors and have no employee-employer, special, of fiduciary relationship.
- Confidentiality. This asserts that neither party shall disclose any confidential information to anyone else, unless required to provide information to its attorneys or accountants, banks, or in response to a subpoena.
- Force Majeure. This means that if there is an Act of God, such as a strike, fire, flood, adverse weather, act of war, or other condition outside the control of Licensee or Licensor, any failure to comply will not be considered a material breach. However, if the event exceeds 30 days, both parties have the right to terminate the remaining portion of the agreement.
- E&O (Errors and Omissions Insurance). This refers to one of the certificates or documents that the Licensee has to turn over to the Licensor. The minimal cost for this insurance is about $500 to $1000 a year. Often this requested item can be negotiated, in that you can ask the distributor to waive or pick up these costs. Sometimes distributors will picked up these costs, apply them to the distribution costs, or not require this insurance after the first year. We have gotten some waivers as a result of making a request. It can be worth trying to negotiate this requirement, but don’t consider this a deal breaker if the distributor says no, since the annual cost is fairly low.
In sum, if a distributor is interested in your film, you will get a fairly detailed contract, with much of it legal boilerplate that details the various rights and obligations of each party. Importantly, you need to be able to supply the deliverables required in the agreement and understand the risks of a distributing a film, since there are no guarantees. However, any distributor who picks up your film will hopes for its success as much as you do and will do what is possible to market and promote the film so it succeeds. Mostly, in reviewing any distribution offer, you just need to understand the various contract provisions, since most of these are not negotiable. However, you can ask for some changes, such as to reduce the term of the contract, to require some minimum sales to maintain the agreement after a certain number of years, and to lower the charges for marketing expenses.
If you have multiple offers, weigh the advantages of different distributors based on their power in the market, their plans to market and promote your film, and your likely financial returns, based on their marketing costs, commission, and likely sales. Then, whatever you decide, do what you can to support the chosen distributor and hope for the best.
GINI GRAHAM SCOTT, Ph.D., J.D., is a nationally known writer, consultant, speaker, and seminar leader, specializing in business and work relationships, professional and personal development, social trends, and popular culture. She has published 50 books with major publishers. She has worked with dozens of clients on memoirs, self-help, popular business books, and film scripts. Writing samples are at www.changemakerspublishingandwriting.com.
She is the founder of Changemakers Publishing, featuring books on work, business, psychology, social trends, and self-help. The company has published over 150 print, e-books, and audiobooks. She has licensed several dozen books for foreign sales, including the UK, Russia, Korea, Spain, and Japan.
She has received national media exposure for her books, including appearances on Good Morning America, Oprah, and CNN. She has been the producer and host of a talk show series, Changemakers, featuring interviews on social trends.
Scott is active in a number of community and business groups, including the Lafayette, Pleasant Hill, and Walnut Creek Chambers of Commerce. She is a graduate of the prestigious Leadership Contra Costa program. She does workshops and seminars on the topics of her books.
She is also the writer and executive producer of 10 films in distribution, release, or production. Her most recent films that have been released include Driver, The New Age of Aging, and Infidelity.
She received her Ph.D. from the University of California, Berkeley, and her J.D. from the University of San Francisco Law School. She has received five MAs at Cal State University, East Bay, most recently in Communication.