Distribution 101 – Foreign Sales Agents
by Mark Litwak on May 23, 2012 in Distribution
With the start of the Festival De Cannes and accompanying Marche Du Film, one is reminded that film is both an art form and a business. The festival will exhibit approximately 22 feature films in competition, another 20 in Un Certain Regard, 6 Out of Competition and 10 in Special Screenings. Then there are the parallel sections or sidebars that are not officially part of the festival, but exhibit at the same time. Director’s Fortnight, which was created by the French Director’s Guild, will exhibit 19 features. International Critics’ Week (la Semaine de la Critique) run by the French Union of Film Critics, will show another 10 features. Add these up and you have 87 feature films in the festival and its sidebars. Only a relative handful of these films are from filmmakers based in the USA. On the other hand, the market (Marche Du Film) will screen 1465 feature films, and many of these are from the USA. Few of the market films are also in the festival. Many are more commercial fare that festivals often ignore. However, they generate substantial revenue.
With that in mind, filmmakers fortunate enough to receive distribution offers for their films are often confronted with complex deals to distribute their films. These can bewilder those unfamiliar with the customs and practices of the industry. Let’s begin with a discussion of international film sales.
International sales agents are distributors, although they usually do not own a single theater, home video label or television outlet. They are essentially distributors that license films to territory distributors (“buyers”). Territory distributors acquire rights to exhibit a film within their country although sometimes they may license rights for several different countries. They often find out about films from sales agents whom they meet at various markets held throughout the year. Sales agents and buyers typically attend the three major film markets, which are at Cannes, Berlin and Santa Monica (AFM) as well as TV markets such as Mip and MipCom. The May 2012 edition of the Cannes Market will have more than 1100 sales agents and 10,000 participants from almost one hundred different countries.
The sales agent not only licenses the films they represent, but also services their buyers by providing them with various materials and elements, including film and video masters, key art, photos and trailers. An honest and competent sales agent can be extremely helpful to a filmmaker. Most filmmakers have no clue how to go about licensing their film, for instance, to a Turkish buyer, and what terms would be acceptable. Moreover, they don’t even know who the buyers are in most territories.
According to the latest 2011 Box Office statistics, two-thirds of all film revenue now comes from abroad. International sales (those outside of North America) grew 35% from 2007 to 2011. Revenue in North America, by comparison, increased a mere 6%. So while foreign sales have been expanding quickly, domestic sales have grown modestly. Over the past four years, the number of screens in China has doubled to more than 6,200, a number that’s expected to double again by 2015. Chinese box-office receipts hit a record $1.5 billion last year, according to their State Administration of Radio, Film and Television. With China and other rapidly developing countries building thousands of new theaters, this trend is expected to continue. Indeed, for many independent filmmakers, even today, 90% or more of their revenue is derived from foreign sales. That is because the North American market is by far the toughest market to crack for a low budget indie film without stars.
It can be difficult to select a sales agent. Reputable sales agents should be willing to accept terms in their contract with filmmakers that protect their interests. Many such provisions do not cost the sales agent anything, as long as the sales agent lives up to the terms of its contract. A requirement for interest on late payments, for example, costs the sales agent nothing as long as payments are made on time. Such a clause is important because it will encourage a sales agent to live up to its commitments, and provide the filmmaker with a viable remedy in case the sales agent defaults. While a competent sales agent provides valuable services, one should always remember the importance of what the filmmaker brings to the table. Without a good film, the sales agent has nothing to sell. Most sales agents produce few if any movies themselves.
Here is a list of some of the most critical ways for filmmakers to protect their interests in contracting with sales agents. The following list should not be considered exhaustive. There are other provisions a filmmaker may want to include such as clauses dealing with advances, guarantees and reservation of rights.
NO CHANGES: The film should not be edited, nor the title changed, without the filmmaker’s approval. Editing for censorship purposes, television broadcast and changes made for a foreign language release, such as adding subtitles and translating the title and dialogue, is permissible.
MINIMUM ADVERTISING SPECIFIED: The contract should specify in writing the minimum amount the sales agent will spend on advertising and promotion of the film. These expenses are often incurred at various markets. They could include advertising in the trade papers, a billboard on the Croissette or payment for a screening room for the film. The sales agent should commit to payment for the creation of a poster, one-sheet and trailer if these items do not exist.
EXPENSES LIMITED: There should be a floor and a ceiling on expenses. Market expenses (the cost to attend film and TV markets) should be limited to the first year of release and capped per market. Promotional expenses should be limited to direct out-of-pocket costs spent to promote the film, and should specifically exclude the sales agent’s general overhead and staff expenses.
TERM: The term should be a reasonable length, perhaps five or even 10 years, but not in perpetuity. The filmmaker should be able to regain rights to the film if the sales agent gives up on it. Thus, it is best to have a short initial term of two or three years and a series of automatic rollovers if the sales agent returns a certain amount of revenue to the filmmaker. If the sales agent does not meet or exceed these performance milestones, all rights should revert to the filmmaker. If the sales agent is doing a good job and paying the filmmaker his share of revenue, there is little reason to switch to another sales agent. Indeed, for movies that have been out in the marketplace for a few years, it is very difficult to find a sales agent willing to take on an older film.
INDEMNITY: Filmmaker should be indemnified (receive reimbursement) for any losses incurred by filmmaker as a result of the sales agent’s breach of the terms of the agreement, violation of third party rights, and for any unauthorized changes or additions made to the film.
POSSESSION OF NEGATIVE: The sales agent should receive a lab access letter rather than possession of the original negative and other master elements. The sales agent should not be permitted to remove masters from the laboratory.
ERRORS AND OMISSIONS (E&O) POLICY: While it is generally the filmmaker’s responsibility to purchase an E & O insurance policy, sales agents sometimes may be willing to advance the cost of this insurance and recoup it from film revenues. In such an event, the filmmaker should be added as an additional named insured on the policy, which is a minor cost.
TERMINATION CLAUSE: If the sales agent defaults on its contractual obligations, the filmmaker should have the right to terminate the contract, and regain rights to license the film in unsold territories as well as obtain money damages for the default. It is only fair for the filmmaker to give the sales agent reasonable prior notice of default before exercising her right to terminate.
RIGHT TO INSPECT BOOKS AND RECORDS: The sales agent should maintain complete and detailed books and records with regard to all sales and rental of the film. Filmmakers should receive quarterly (or monthly) producer statements accompanied by any payments due the filmmaker. Filmmakers should have the right to examine the books and records of sales agent during reasonable business hours, on 10 days’ notice.
LATE PAYMENTS/LIEN: All monies due and payable to the filmmaker should be held in trust by sales agent for the filmmaker. The filmmaker should be deemed to have a lien on filmmaker’s share of revenue. The sales agent should pay the filmmaker interest on any late payments.
LIMITATION ON ACTION: The filmmaker should have at least three years from receipt of any financial statement, or discovery of any accounting irregularity, whichever is later, to contest accounting errors and file a Demand for Arbitration.
ASSIGNMENT: It is best to prohibit assignment unless filmmaker consents. If assignment is permitted, the sales agent should not be relieved of its obligations under the original contract.
FILMMAKER DEFAULT: The sales agent should give the filmmaker 14 days written notice of any alleged default by filmmaker, and an additional 10 days to cure such default, before taking any action to enforce its rights.
WARRANTIES: The filmmaker’s warranties, in regard to infringement of third party rights, should be to the best of the filmmaker’s knowledge and belief, not absolute.
SCHEDULE OF MINIMUMS: Foreign sales agents should agree to attach, to their contract, a schedule of minimum acceptable license fees per territory. The sales agent is not permitted to license the film in any territory for less than the minimum without the prior approval of the filmmaker.
ARBITRATION CLAUSE: Every contract should contain an IFTA arbitration clause ensuring that all contractual disputes are subject to binding arbitration with the prevailing party entitled to reimbursement of legal fees and costs. The arbitration award should be final, binding and non-appealable. The IFTA personal guarantee Rider can be used to bar a company’s chief executive from attending future American Film Markets if the company refuses to pay an arbitration award.
For a more detailed discussion of distribution deal terms read my article here.
Mark Litwak will next be offering his Risky Business seminar in San Francisco on June 16, 2012 through California Lawyers for the Arts. For more info, click here.