In a recent decision, a California appellate court upheld a lower court holding in favor of Paramount Pictures against a private equity source of financing for a slate of the studio's films.
In Marathon Funding LLC v. Paramount Pictures Corporation, the court enforced the provisions in the investment agreement which stated in several ways that there was no joint venture between Paramount and the investment group, and that Paramount had no fiduciary obligation to the investment group. As a result, the investor group was not able to recoup an accounting charge Paramount had assessed as a result of an error by Paramount's outside law firm. In addition, a contractual provision providing for attorneys' fees to prevailing parties was also enforced against the investor group. While the legal conclusions did not surprise us, the case does serve as an important reminder to entertainment law practitioners.
First, because contractual formulas for contingent compensation have become more and more complicated, it is imperative for practitioners to run numerical examples based on contract language to see what amounts would be payable by applying the language as drafted. In this case, Paramount's written contract with the investment group contained a box office bonus provision that – owing to a drafting error by outside counsel — did not reflect the terms negotiated at the deal stage. Under the erroneous formula present in the contract, the actor Tommy Lee Jones was entitled to a box office bonus of $17.5 million for his role in No Country for Old Men. If the formula agreed to at the deal stage had been applied, Mr. Jones would have received approximately $5 million. (The formula which had been agreed upon when the deals were struck provided that fixed bonuses would be paid when either domestic box office reached certain levels, or when worldwide box office receipts reached twice the domestic trigger amounts. The attorney, however, drafted the provision so that the bonuses would be paid once worldwide box office, when multiplied by two, reached the level prescribed for the domestic box office triggers.) The box office bonus provision applied not only to Mr. Jones's bonus, but also to the producer's and the writer/director's bonus. Paramount obtained a settlement in malpractice litigation against the drafters of $2.75 million, which it used toward Mr. Jones's box office bonus of $17.5 million. Paramount then allocated the error among itself and the investors (according to their proportional ownership interests in the film). Paramount thus charged the investor group approximately $2 million more than it would have charged the group absent the error.
Second, when representing investor groups, an attorney as part of due diligence should review all contracts which provide for payment of any contingent compensation other than studio-defined net profits. Again, numerical examples should be run based on the contract provisions to see what the impact might be on repayment to investors. The problem for Marathon's representatives in this case was that if they had reviewed the box office bonus provisions in the agreements for the producer, writer/director, and principal cast, the numbers would have reflected the higher payment than the one negotiated as part of the deal terms.
On the other hand, had Marathon's representatives discovered the error after proper due diligence and notified Marathon, the investment group would have expected to see higher box office bonus payments than had been negotiated. That's because when Paramount advised the producer and the writer/director that the language as drafted did not reflect the deal, the producer and writer/director agreed to reform their contracts — resulting in lower payments to them than contractually required. (Mr. Jones, however, refused to vary from the language in the agreement, insisting on the higher payment, and winning it in a separate arbitration). Put another way, had the investor group seen in the accountings lower payments to the producer and the writer/director than the group expected to see, they arguably would have been pleased. As a result, they might not have brought a lengthy lawsuit they would ultimately lose – a loss that also included a post-judgment award to Paramount of more than $690,000 in attorneys fees.
This article first appeared in Entertainment Law Matters, a Frankfurt Kurnit legal blog.
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