Thursday, February 19, 2015

When An Option Agreement Expires

Entertainment Lawyer Question and Answer Forum:

Welcome to this week's Entertainment Lawyer Q&A, published by The Film & Television Law Quarterly and the entertainment law firm of BLAKE & WANG P.A. Each week an entertainment lawyer will respond to reader questions and publish the best discussions.

Have a question for an entertainment lawyer? Post it on our website at blakewang.com and get the answers you need.

Question:

I had an option agreement on a book, did the script. The option expired, but the writer of the book and myself entered into a co-producer agreement on the project. Will we need to do another option agreement once we get funding for the project?

Answer by Brandon Blake - Entertainment Lawyer:

Figuring out what happens to an option agreement after it expires is always a difficult question for producers. Of course the terms of the actual option agreement that you signed with the writer will govern, but I will give you some ideas about what usually is included in an option agreement.

First, it is important to remember what an “option agreement” really is, because for many producers and writers it becomes a short hand for a “rights acquisition agreement”, but in fact it is only half of an actual rights acquisition agreement.

Originally option agreements were not supposed to transfer any rights at all to the producer. Instead, the producer is buying time, or an “option”, to actually purchase the story rights at a later time.

However, over time I have seen that gradually the producers are acquiring more than just time when they purchase an option on a book or a screenplay. Typically independent producers what to get their money’s worth, so as soon as the work is optioned the producer will either write a script based on the property, or if the property is already a script, will produce development materials such as business plans, websites, posters, storyboards, teaser trailers and for animation, will develop characters and produce whole animated sequences.

The problem is that the option only lasts for 12 to 18 months typically. So what happens to the rights in these materials once the option expires?

That question really depends entirely on how the option was drafted, but typically at the end of the option all of the material produced based on the underlying work will be unusable. Although there is an independent copyright in the work that was produced, it is all characterized as derivative work, work based on another copyrightable work. So without exercising the option, those subsequent development materials and scripts are not usable.

However, I have also seen independent producers begin to try to make claims to these materials in the options, which is a big problem for the writer. The writer is agreeing to a small or sometimes no fee to give the producer a chance to develop the work. But generally a writer would not knowingly allow permanent rights to be granted through the option agreement. However, it can happen depending on how the option is drafted.

In specific answer to this question above, the ownership of the rights should be determined by the co-production agreement. If the co-production agreement did not deal with the underlying rights, then a new acquisition agreement will need to be signed before anything else can be done with the project.

As with any legal matter, please do not make a decision about complex matters without consulting an experienced entertainment attorney first. I have been representing feature film projects and television series for more than 14 years. Please feel free to contact my office about a quote.

- By Brandon Blake, Entertainment Lawyer

About the Editor:

Brandon A. Blake is an entertainment lawyer and producer who works with Academy Award winning actors, directors and filmmakers. A complete biography is available online.

About the Entertainment Lawyer Q&A: The Entertainment Lawyer Q&A does not create an attorney-client relationship, nor is the information treated as confidential. Responses to selected questions will be made public and shared with our subscribers. All entertainment law information is informational in nature and is not intended to be acted on without entertainment lawyer counsel.

Friday, January 9, 2015

Submitting Projects to Studios

Entertainment Lawyer Question and Answer Forum:

Question:

Why do television networks and film studios require film producers and television producers to submit projects through either agents or an entertainment lawyer?

Answer by Brandon Blake - Entertainment Lawyer:

There are a number of different rationales for why entertainment companies of all kinds require film producers and television producers to submit new projects through an agent or entertainment lawyer, which range from the practical to the obstructionist.

For practical purposes, entertainment companies have a legitimate concern about liability. Copyright infringement suits are common, and once an entertainment company has received a pitch for a television series or film production it is going to be potentially more liable for a copyright infringement lawsuit. In order to reduce this risk, entertainment companies want a trusted third-party to have documented the pitch. If the film producer or television producer has a well-known agency or an entertainment lawyer submit the project, there is going to be a record of exactly what was submitted, by whom, and when. If a lawsuit ever materializes, there will be a third-party with evidence as to what happened. That is also beneficial for the film producer or television producer.

From a convenience stand point, television networks and film studios have another motive. This rationale is based on understanding what it is like to receive 10 to 20 thousand submissions per year from film producers or television producers, looking to get an entertainment project made. It is a daunting task to review so much material, so television networks and film studios want the agent or entertainment lawyer to do some of the work for them. By requiring submission through an agent or entertainment lawyer, the television network or film studio is making the producer do part of the work, having an experienced entertainment representative review the material and quite probably make suggestions and changes before the materials is submitted.

Finally, the requirement to submit through an agent or entertainment lawyer creates another hurdle to surmount before the material gets reviewed. This reduces the number of submissions as some percentage of television producers and film producers will lack the time and financial resources to obtain an entertainment representative to submit the project.

Rightly or wrongly, agent or entertainment lawyer representation has become a necessity when dealing with the large, bureaucratic media companies today.

How to Set Up a Record Label

Entertainment Lawyer Question and Answer Forum:

Question:

How do I set up a record label? How do I sell my music?

Answer by Brandon Blake - Entertainment Lawyer:

I represent a lot of record labels as an entertainment lawyer and this is one of the most common questions I get when helping to organize a record label for clients. This is a multi-part question, but I will start with what an entertainment lawyer does in setting up a record label company, and then address music representation and sales.

Over the past few years the dominance of music delivered over the Internet, versus through retail stores or music clubs, has opened up access to the music business to both recording artists and clients seeking to start their own record labels. Most simply a record label signs recording artists who record music, which the record label then sells.

Sounds easy. But looking at it from a business standpoint the first thing that makes a record label is a record label company, which might be filed as a music corporation or music LLC (limited liability company). Besides hiring an entertainment lawyer to set up the company, the record label should consider whether music investors are going to be a potential. Many of my record label clients are organized to raise a certain amount of investor money, and there are many music investors looking for opportunities to get involved in a record label. So when the entertainment lawyer sets up the record label company, consider the possibilities for music investors.

Once the record label company has been filed, it is time to consider contracts with the people that are going to make music with the record label. The different parties involved will be music producers, the music studio, sound engineers, recording artists, musicians, as well as songwriters and others. Each of these parties will need a different contract prepared by the entertainment lawyer. If these parties want to participate in the sales of the album or tracks then a music royalty or music percentage will need to be worked out as well.

The most critical music contract will be the recording artist contract. This deal might take on several different shapes. A “360 Deal” is when a record label decides to manage all parts of a recording artist’s career. A 360 Deal would include music management, music publishing and recording, allowing the record label to position the recording artist’s career for success. However, that is also a tremendous amount of work for the record label and the record label should remember not to stretch its manpower to thin.

Once the music has been recorded and mastered it is time for the record label to address music sales and marketing. While many record labels want to sign artists to major labels, it is now mandatory to show verifiable sales of a substantial level before approaching major labels. There are many music distributors available to work with record labels to get music out both online and also into retail stores. Of course sales and marketing online is critical and working with the right partners will ensure the success of the label and the career of the recording artist. Finally an entertainment lawyer can represent a record label and help set up the necessary connections.

Crowdfunding and the JOBS Act

Entertainment Lawyer Question and Answer Forum:

Question:

How do I set up a PPM for my film? What is the JOBS Act? Can I raise investment money from crowdfunding sites?

Answer by Brandon Blake - Entertainment Lawyer:

There is no doubt that private equity investment is a major source of financing for independent feature films. In fact, investors in Rule 506 offerings invested $895 billion dollars last year alone. Yes, almost a trillion dollars was raised in 2011 under Rule 506 for all different investment types. That is more than five times the $169.9 billion that was raised in IPOs globally for 2011. So the money is out there, the question is how to bring that funding to feature film budgets.

Our law firm has been setting up Rule 506 offerings, as well as other offering types, for feature film producers for more than 12 years. We expect the next 12 months to be the best period we have ever seen for producers raising private equity financing.

The Jumpstart Our Business Startups (JOBS) Act was passed in April of 2012, and is being implemented now by the SEC. The JOBS Act was designed to make raising money easier for small businesses, including feature film producers. The best feature of the JOBS Act is Title II, which will allow start ups and film producers to advertise their investments to the general public for the first time, provided the offering only allows “accredited investors” to invest.

This new provision will overcome the only real disadvantage to exempt offerings, which was the restriction on general advertising. By providing for general advertising of film investment opportunities, the SEC is going to exponentially increase the success rate of private investor financing, unlocking groups of investors who have probably never been approached about feature film investing.

While the SEC seems to be doing everything right on the JOBS Act, Title II, it has disappointed many micro-financing entrepreneurs with the failure to fully implement the JOBS Act, Title III, which was supposed to allow for crowdfunding sites like Kickstarter.com and others to raise investor money, not just donations.

The SEC has greatly complicated that process, among other things requiring any crowdfunding website to be a member of FINRA, the same securities regulator that major brokerages and investment banks have to join. The regulatory and reporting requirements are so steep that there would be no way to profit from running a crowdfunding site in the United States. The SEC has also stepped up enforcement of crowdfunding sites, making them risky for both the owners and the users.

So the SEC is both giving and taking this Holiday season, but there is a good chance that with the new JOBS Act Title II in effect in the coming months, startups and film producers could more than double last years haul from Rule 506 offerings, which will make a great Holiday gift for the film industry.

Screenplay Option and Acquisition Price

Entertainment Lawyer Question and Answer Forum:

Question:

For an unpublished screenplay writer what should one expect as a rule of thumb if a major studio wants to option the screenplay and the total cost of the film, if produced, might exceed $20 million?

Answer by Brandon Blake - Entertainment Lawyer:

The question of the proper screenplay writers’ fee or screenwriter salary is always difficult because it varies so much from project to project. The question above was very specific about the budget level of the project so I will respond regarding a high budget project. I have had more than 15 years of experience negotiating on behalf of screenwriters and producers so I have seen just about every offer that can be made.

One of my clients worked with a well-known production company that will go nameless here. That production company pays first-time screenwriters $50,000.00, regardless of the budget of the intended film. It was the producer’s opinion that packaging the director and actors was where the value was added to the project, so he stubbornly refused to pay any more. You will find that sometimes the larger the production company and the more famous the producers and directors working for that company, the less they will pay, at least for first-time screenwriters. And by “first-time” I mean a screenwriter who has never had a screenplay produced by a studio.

Fortunately, there are a few rules of thumb that can help when negotiating with a production company. The first common one is that a screenplay should be sold for 2% to 3% of the budget. Of course this is referring to a “spec script sale” and usually writers are hired to write bigger budget scripts and assigned the material, rather than bringing in a finished script. In actually negotiating this percentage you might find a number of problems. The first being that nobody can agree on or even knows what the budget is going to be before a feature film is shot. I even had a producer suggest that no writer fee would be paid until the end of principal photography because that was when the final budget would be known. Typically there will also be a floor and ceiling with this method.

Alternatively, it often makes sense to refer to the Writers Guild of America minimums in order to figure out how much a writer should be paid. The WGA Basic Agreement is only binding on WGA signatory production companies and eligible writers, but if the budget is $20 million then most likely the production company is a WGA signatory.

As of the date of this article the WGA minimum for an original screenplay on a high budget project would be $89,417.00. However, the WGA actually discourages “spec script sales” and the real substance of the negotiations typically involve what else the writer may be providing, or might have provided before. Is there a treatment or a first draft? Are there going to be subsequent drafts, rewrites, revisions or polishes? Will the writer stay involved with script consulting or get a producer credit? These all bring in different fee structures. And of course this is a minimum, meaning that writers will try to be paid more than these figures.

From the producer’s perspective, always miles away from the writer’s point of view, there is the “no-money option.” As the name suggests, this is about $89,000 less than the WGA minimum. Producers tend to desire to option projects, versus purchasing them, for little or no money for the purpose of attaching a director and A-list talent. Clearly before entering into this relationship you want to know the experience level of the Producer and you should still negotiate the purchase price before starting work with the Producer.

Finally, any writer or producer will benefit from having an experienced entertainment lawyer help to negotiate their side of the deal. I have been personally negotiating both independent and studio writing deals for more than 15 years and have seen just about every different offer that can be made. With experienced counsel, a writer or producer can get a good deal, regardless of whether this is your first or tenth feature film.

As with any legal matter, please do not make a decision about complex matters without consulting an experienced entertainment attorney first. Please feel free to contact my office about a quote.

- By Brandon Blake, Entertainment Lawyer

How to "Package" a Project

Entertainment Lawyer Question and Answer Forum:

Question:

What does it mean to “package” a project? Do big studios only look at packaged projects?

Answer by Brandon Blake - Entertainment Lawyer:

Most simply put a packaged project is a feature film project or a television series in development that has one or more well-known performs attached to the project and possibly also a famous director. A packaged project is in between the script stage and the pre-production stage. As an entertainment lawyer I have been helping filmmakers and producers package projects for many years.

While many screenwriters feel that a really great script will sell itself to a production company or studio, the truth is that the vast majority of projects that a studio or major production company will look at are already packaged projects. This is done for multiple reasons on the studio side, some of which actually make a lot of business sense.

Studios and television networks realize that getting a-list performers attached to a project takes time. Actors and actresses are looking for different things in projects. In general a-list performers want to play heroic parts, or at least parts that the audience will empathize with in the story. They usually want to be portrayed as attractive and they want a good story. If there is little money in the role, such as with an independent film, the actor or actress will want to be associated with a film that has potential for good reviews and a strong festival run. Then there are idiosyncratic traits. I once submitted a project to an actor that had recently decided he only wanted to star in a western. The agent loved our project but there was no convincing the actor otherwise.

Studios and television networks also often want to see that somebody “important” likes the script or concept before they get involved. A studio development executive might be nervous about bringing a script to his or her boss, because maybe the studio president will not like the idea. So if an a-list actor or major director is attached nobody can be blamed if the project fails.

The documentation of the attachment will vary depending on whether you are producing a feature film or television series. When it comes to television development, especially reality television, the attachment of the performer or celebrity host is even more important and is often the most important single factor. Therefore a contract may need to be signed with the host to protect the producer’s place in the television development process before going to the network.

While agents and managers are often blamed for getting in the way of the development of scripts and television series, I have found in my own practice that the opposite is true. Often agents and managers are quite excited about a variety of projects, and it is actually the talent who really makes the decisions.

When approaching agencies and management companies, most will require that the producer be represented by an agent or an entertainment lawyer, and our firm has represented many producers who have successfully packaged film and television projects.

Film Distributor Breach of Contract

Entertainment Lawyer Question and Answer Forum:

Question:

Just finished my first feature film and got it picked up for world DVD distribution. When it was sold to the UK the distributors released it with an incorrectly transferred music track causing it to sound like a jumping dirty CD throughout the entire movie. Many customers have complained about this and returned the disc. The UK distributor has warned me not to bring up the problem publicly and refused to fix it. Being a first time director what can I do? It's now affecting my second feature as my film’s quality is now being called into question.

Answer by Brandon Blake - Entertainment Lawyer:

Great question. Having worked with feature film distributors for more than 13 years, representing filmmakers and working to get the best deal possible for both independent and studio projects, this is certainly not the first time I have heard of similar problems with distributors. Once the distribution agreement has been signed there is not much that can be done unless there is some provision in the contract that guarantees some level of performance from the distributor. In order to fully address this question, I will go through some ways to prevent this type of problem from occurring and then I will discuss some ideas for how to address it after the contract is signed.

Although it seems obvious, the easiest way to deal with a problem like this is to work with a reputable film distributor. Most distributors do not like returns any more than the filmmaker and will work to make sure that the sound and video quality are as good as possible before release. In fact, I often have clients complain about having to remaster their audio tracks as part of the delivery requirements, which ends up being quite expensive. One of the things that a good entertainment lawyer should do for a client is to know the reputation of a distributor before starting negotiations. I have worked with most of the film distributors worldwide so I can generally warn a client about problems like these before even beginning to negotiate the deal.

The second thing that can be done is to make sure that the distributor duties are specified in the distribution agreement. Often at first there is little or nothing in the agreement that specifies that the distributor must do anything other than pay royalties. I worked with a major studio last year that did not even specify they had a duty to release the film! Fortunately I pointed out the issue to the business affairs person and he was happy to correct the problem, but I wonder whether he ever changed the template or just our deal. I have found that distributors are generally very amenable to making changes to agreements, but only if the problems are brought up before the deal is signed. After signing it is typically hard to get anyone to even return a call.

Finally, once the contract has been signed and the film has been released, go over the agreement carefully and see whether there are any provisions dealing with distributor duties. There should at least be an obligation to distribute the film, and you may have negotiated for the distributor to complete certain delivery items. What you will not find is any right to stop the distribution of the film, because in any commercial distribution agreement one of the most important provisions from the distributor side is what is called a “waiver of equitable relief,” meaning the filmmaker is waiving any right to get an “injunction” or to stop the distribution of the film for any reason.

Film Releases

Entertainment Lawyer Question and Answer Forum:

Question:

For a fiction feature film: How identifiable do people on the street (not in the cast) have to be to require signed releases?

Answer by Brandon Blake - Entertainment Lawyer:

Over the years I have gotten more questions about releases than almost any other type of contract. Often among student filmmakers or first-time independent producers the release becomes one of the only documents on set. So in responding to questions about releases first I like to discuss how to define a release, second, where the legal basis for a release comes from, and third, I will comment on when a release of some kind is usually used.

At the most basic level all contracts are the same. A contract is an agreement between two parties where both want something out of the relationship. There is the concept of “consideration”, meaning both sides are getting something of value out of the arrangement. Generally courts hold there must be consideration on both sides to enforce an agreement.

So what is the releasing party getting out of the release? Theoretically, the party signing the release is getting the privilege of being in a film or TV show as some kind of background player. But to the surprise of some producers not everyone wants to appear in a movie or television show. So that is where the legal basis for releases begins.

The legal requirement for releases comes from a number of different laws. Most basically is the right of privacy. The right of privacy may be codified, as it is in California or New York, or it may be a common law principle. California Civil Code, Section 3344 addresses the rights of privacy and publicity in commercial film and television productions in California.

The right of privacy, as it relates to film and television, states that a person has the right to not have their name, voice or likeness used commercially. In addition to the right of privacy, the torts of defamation and false light are both applicable. When someone is recorded there may be certain facts implied by the production. For example, if a person was filmed outside of a demonstration, that might imply he or she was part of the protest. Finally, the right of publicity disallows use of someone’s name or likeness as an endorsement or ad without consent.

So when is a release required? States like California and New York have made it fairly clear that for commercial film and television productions, a person cannot appear recognizably without prior consent. Other states rely on common law standards, so the laws will vary by state and use. But in general, it is by far the standard that everyone appearing recognizably in a feature film should have signed a release or otherwise clearly expressed consent to being recorded.

The definition of terms like “commercial” and “recognizable” are unfortunately subject to dispute, and even in states with well-defined Codes, the application to any particular production is difficult. But producers hoping to get their project commercially distributed, and therefore requiring E&O insurance, should error on the side of more documentation and try to get signed releases from just about anyone possible. As an entertainment law firm, our firm offers a number of packages that can help make it affordable to get the contract and legal help needed on any size of film or television production. Feel free to contact me about how we can help make sure your project has the legal documentation required by distributors and E&O insurance companies.

Film and Television Development

Entertainment Lawyer Question and Answer Forum:

Question:

In the Oct. 24th, 2012 Q&A email, the answer states that: "Entertainment companies of all kinds require film producers and television producers to submit new projects through an agent or entertainment lawyer" On Dec.19th, 2012, Mr. Blake responded to a question I submitted about pitching a screenplay idea with the answer: "The minimum would be that it was written as a script. There are not going to be any producers out there that will get involved before a screenwriter has prepared the script".

My question: Is the answer on Oct. 24th regarding a "project" referring to a project with a completed screenplay, or a proposed project that is starting with simply an idea or treatment?

Answer by Brandon Blake, Entertainment Attorney:

Thank you for the very thorough question. I think it is a great question because it does get to the heart of many issues that I am asked about how to protect projects and ideas, and how to submit film and television projects. Having worked with most of the major studios and television networks, I have gained a good perspective on what development executives are looking for and how to get a project noticed. While the question here involves a feature film project, the answer is going to be equally applicable to network television as well.

When it comes to feature film development, the key is to have the project as well developed as possible. That means that it is better to have a script than a treatment. It is better to have a polished script than a rough draft script. It is even better to have prepared pitch materials like posters and websites, than to have just a script, etc. Finally, the best position to be in with a studio is to also have a-list performers attached to the project, because that will tend to get the attention of development executives. If studios know that performers, and their agents and managers like the project, then it means the executives are taking less of a chance on choosing the material over the tens-of-thousands of other scripts submitted every year.

But what about the situation where there is a great concept but it has not been written in script format, much less packaged? I have had clients in this position before and it generally revolves around true-life stories and events. There are times when a concept is so good that it can speak for itself. In such a situation the producer needs to make sure that all of the underlying rights to the project are secured before pitching it. Additionally, these are often the situations where well-known actors and actresses get involved, because the performers can see how the concept can be developed around them as the lead.

However, no matter how good the concept, there are some reasons why a producer might want to further develop the project before approaching a studio. The primary reason is copyright law. The copyright law is set up to protect “tangible forms of expression,” and right or wrong, the courts have interpreted that as meaning that mere ideas are not copyrightable. Where an idea ends and a treatment begins is a source of controversy, but no producer wants to be in court arguing why the idea pitched was more than an idea.

This copyright issue is also why most studios will not accept the submission of ideas in the first place. From their perspective, another “teen romance” or “space cowboy” idea is not going to be so unique as to differentiate it from thousands of other produced films or projects in development, but could get the studio in a lot of legal trouble if someone later claims their concept was stolen.

For network television the same rule applies, the more developed the better. But rather than a feature length script, networks are typically looking for well-developed pitch materials as well as recognizable performers or celebrity attachments. While not everyone can afford to produce a pilot, having a broadcast quality sizzle reel can also be a great addition to the pitch materials.

During 15 years of representing film and television projects I have learned a few things about the types of materials that studios and networks are looking for from producers. The key is top quality material, whether it is a treatment, screenplay, series pitch, pilot or trailer. Never ask the development executives to imagine how good the project will be with their help. Demonstrate the ability to finish the job, which will go a long way to getting the financing and assistance needed.

Non-Profit Production Companies

Entertainment Lawyer Question and Answer Forum:

Question:

I would like to get angel investors for my television pilot. Can I set up a non-profit for donations? What kind of a return can I promise if the show makes money?

Answer by Brandon Blake, Entertainment Attorney:

Non-profit financing has become increasingly popular for television, documentary and feature film development. Often it is the concept or script that hooks investor interest, rather than a promise of big financial returns. So it makes sense that the tax deductibility of financing is interesting to many potential angel “investors.”

The good news is that with a properly organized tax-exempt organization it is possible to collect tax-exempt donations for a project that is otherwise a “for-profit” venture, provided that the content of the project, whether that is a film, television or music project, fits within the mission statement of the tax-exempt organization and that the finances and control of the non-profit and for-profit entities are kept separate.

However, it is not possible to mix tax-deductibility and a future interest in profits in the same transaction. Tax deductibility and profit are like oil and water, they just do not mix. I have reviewed a number of structures by clients hoping to be able to convert a donation into an investment at a later date, thereby getting the best of both worlds. The problem with this concept is that if the “donation” were re-characterized at a later point, then the deductibility of that donation would retroactively be taken away, creating a true mess for the investor’s accountant. Moreover, in the IRS’ zeal to eliminate tax shelters, any arrangement with a contractual right to profits later would most likely be characterized up front as an investment, not a donation.

Yet our firm has successfully set up many 501(c)(3) tax-exempt organizations that participate in the financing of documentaries, television, and feature film projects. And those projects have gone on to be commercially distributed. The key to the proper use of the non-profit in entertainment finance is to understand that donations can be used to finance any project but that profits cannot flow to the donors.

A proper structure can take several different shapes, including the use of a conduit organization to receive the donations or the creation of a viable non-profit that might assist in the development of feature film, documentary or television projects.

Other options exist as well, including the use of crowd funding websites. However, it is important to note that crowd funding websites neither provide for tax deductibility, nor do they allow for any return on profits to the investor/donors. In many ways crowd funding is currently the worst of both worlds in terms of tax treatment. The donors are required to record the funds provided as non-deductible gifts, which then reduces the donor’s lifetime limit on other such gifts to family, and at the same are blocked by the SEC from participating in any future profits from the venture.

However, there are a number of creative ways to try to create benefit for donors while still utilizing the benefits of crowd funding. One such technique is to use crowd funding in conjunction with forming a non-profit organization.

I have been working with non-profit organizations ranging in size from public universities to galleries, theater groups and documentary production companies for more than 15 years with the law firm of BLAKE & WANG P.A. We can assist clients in organizing solid, broad based tax-exempt 501(c)(3) organizations that gain the broadest tax-deductibility for the donors. Properly organized, a tax-exempt organization is an ideal way to unlock capital for projects that have an appeal based on the message and cause promoted, rather than the potential box office returns.

As with any legal matter, please do not make a decision about complex matters without consulting an experienced entertainment attorney first.

- By Brandon Blake, Entertainment Lawyer

Entertainment Loan-Out Company

Entertainment Lawyer Question and Answer Forum:

Question:

As a feature film editor my wife has the option of working as a loan-out company. There are several confusing aspects in making a decision. Such as, can she collect unemployment when not working? Are pension benefits accrued under her name or does she give them up? Are there other welfare benefits she would give up by working as a loan out company?

Answer by Brandon Blake, Entertainment Attorney:

Loan-out companies are a great way to reduce tax exposure and to avoid the pitfalls of the alternative minimum tax and self-employment taxes. Generally the only reason that people working in the entertainment field do not form loan-out companies is when the hiring company does not allow them. Before electing to work as a loan-out, you will need to have an entertainment law firm like ours organize the loan-out company.

In this question the studio has already provided the option of working as a loan-out. Although particular facts vary from case to case, and there is not going to be a way to provide one answer to every different situation, I would say that in almost every case I have reviewed it has been substantially to the benefit of the client to choose loan-out status rather than employment status.

The primary reason comes down to taxation, and more specifically the issue of business expenses. When you are an employee you do not have the option of taking business expenses out of your calculation of income. The amount reported on your W-2 is your income and the only way to reduce your tax bill is through deductions. There are various deductions for business expenses, such as the home office deduction, and others. But the problem is that these deductions are only partial, allowing you to take a portion of the expenditure off of your tax bill, but not allowing you to reduce the size of the income figure itself. Moreover, higher income individuals will reach the alternative minimum tax, in which case most of the business deductions are then eliminated, meaning that money spent on things like vehicles, business supplies, inventories, and office space is being paid for with after tax money. Essentially you are being taxed on your revenue, not on your profit.

The loan-out company allows the individual to run in the same way that a company runs, which means the costs of doing business are taken out and the company only pays tax on the profits. This makes sense because no one expects a major corporation to be paying income tax on money it is paying out for office space or for the raw materials it uses in the course of business. So why should an individual be forced to pay tax on the materials that he/or she must purchase in the course of business?

When I counsel clients who have always worked as employees on the differences between loan-out and employment status, it often takes a while for the client to get his or her head around just what a big difference it will make to the tax bill. Then once the client gets it, there is often regret at not having switched years earlier.

I have spent a lot of time talking about the upside, but there are a few downsides too. One of those is unemployment insurance. In order to maintain unemployment insurance, you will need to pay yourself a fair salary. That means a portion of the money that flows into your loan-out will need to be paid to yourself, with the traditional withholdings and deductions.

Regarding the other questions, pension benefits will depend entirely on your guild rules so check with the Pension Health and Welfare people. Regarding other types of welfare benefits, generally those are tied to showing previous employment, which would still be possible with a loan-out.

The reason to have a loan-out set up by an entertainment law firm like ours is that we can make sure you can take advantage of every possible tax benefit, and also ensure that your entertainment business is in compliance with federal and state tax law, saving you tax penalties and accounting fees in the long run. Feel free to contact us for a quote.

Thursday, January 8, 2015

Copyright Infringement

Entertainment Lawyer Question and Answer Forum:

Question:

I am wondering if you can comment on this: Let's say I had some "great idea" for a story (film, TV, whatever) and I worked on it for months, perhaps a year even. I developed it and got it to a point I liked. Then, after all that, I learn about a project that was done more than 30 years ago that has a lot of the same elements. It's not exact, but the basis is extremely similar.

Now, to be clear, I had no idea this other project existed at all – and it's only by happenstance that I stumbled across it. So, LEGALLY - what do I need to do to protect the fact that I really did have the idea on my own?

Answer by Brandon Blake, Entertainment Attorney:

At one time I would sit and answer legal questions for hours in the evenings as legal advisor to IFP/West. Eventually my practice got too busy to keep helping in this way, but this question about independent development of an existing project came up fairly often.

I am going to run through several different ways to look at the question based on different areas of the law that apply. Some of these might seem obvious, but I do this because you did not provide the name of the property. Years ago I spent about a half hour explaining these same points to an eager young filmmaker who took a lot of notes. At the end of his half hour I finally asked him what property he was talking about, since he did not offer it earlier. His answer: Superman!

The first area of the law that you should consider is trademark. While copyright is an important and relevant question, many filmmakers do not know that trademarks apply to many different well-known characters. So many famous characters, whether they are from comic books, cartoons, or even live-action films can and are trademarked. Trademark law does not deal at all with authorship or ideas versus tangible expression. The sole question is whether a trademark or servicemark is a source identifier and whether the infringing work would create consumer confusion. So a man in tights with an “S” on his chest is going to be a problem, no matter what.

The second area of the law that is relevant would be the right of privacy and the right of publicity. If this work unintentionally copies or repeats elements of a real life story there may be a problem, even if there is no copyright infringement. That is the reason why clients will perform a script clearance on a project after the script has been finished. If a film that is absolutely fictional accidentally uses names or characters that are the same or similar to real life people and their stories, there can still be liability, even if the work was truly fictional. Now during trial it might be proved that you never had any relationship or knowledge of the real people involved, but by the time you have reached trial you or the distributor may have already spent hundreds-of-thousands of dollars defending what could be a frivolous suit. So filmmakers and distributors do what they can to avoid any unintentional copying of real life stories, too.

Finally, copyright will of course also be an important consideration. Again, during a copyright infringement trial, access to the infringed work is one of the elements of the test for copyright infringement. However, the access test would typically be applied after the film was released to the general public and a lawsuit had been brought. By that point, by your own admission, you would have had access to the work. Moreover, because proving or disproving real access is difficult (Can you show you just came out of a cryogenic freezer? And if so, for how long were you in?) courts generally look at whether the defendant could have theoretically accessed the work. For an unpublished work with a claim of infringement, that means showing that this unpublished work had somehow been submitted to or otherwise obtained by the producer. I once had a would-be client suggest that a producer mounted hidden cameras throughout his house. Needless to say, I did not take the case.

But when it comes to a published work, such as a feature film that has been distributed, a court would generally assume that access was possible and would not stay up late at night considering whether you had bought a ticket for this film or perhaps a different one on the weekend in question.

So the practical answer is that a work that was independently developed but ends up being similar to an existing, published work is probably going to be a candidate for litigation, and the technicalities of the Copyright Act will not protect the producer. That might seem unfair, and I happen to personally agree that copyright law is overbearing and shrinking or killing parts of the American film and entertainment industry, but producers need to know the law first. Then maybe you can join with others to help make changes.

Promoting Films at Film Markets

Entertainment Lawyer Question and Answer Forum:

Question:

Dear Sir, I have a completed feature film and I would like to know what I need before I attend a film market?

Answer by Brandon Blake, Entertainment Attorney:

Having worked with feature filmmakers for more than 13 years, I know that perhaps the busiest time is during post-production as a producer begins to think about the successful distribution of the project.

Typically the producer and director will be focused on getting the picture editing just right while the audio is second, the legal contracts are somewhere in the back of the producer’s mind, and the promotional materials end up only lightly considered. So I want to bring up a range of things that filmmakers should consider as they are completing the film, which touch on both legal issues and also film sales issues.

Most producers have a general idea about the need for contracts, copyrights and trademarks. I will not cover this ground too much in this article, although anyone interested in additional articles about film contracts as well as the film distribution agreement can visit my firm’s website at www.blakewang.com.

Entertainment legal should be handled during the production, since it is much easier to get actors and writers to sign off on agreements before they start work. At some point everyone that participates in the production will need to sign a contract, if the project is going to get a commercial release. That is because distributors require E&O insurance (errors and omissions insurance), and before the insurance company will agree to cover a film the insurer will require that all production legal has been completed.

When it comes to film sales, I routinely attend film markets around the world, including the Cannes Film Festival, AFM, Sundance, Hong Kong FilmArt and this October I will also attend the Busan International Film Festival (formerly Pusan), the largest film market in Asia. When I represent finished feature films, I am often surprised how many experienced producers spend a tremendous amount of time editing the images, without as much attention to either audio or marketing and promotions. The good news is that every film can get attention from buyers if the following materials are put together before the markets.

In my experience, more films get passes because of deficient audio than almost any other technical problem. Sound editing, sound design and audio mastering are all critical to successfully distributing a film. Moreover, often the sound elements are what cause needless additional distribution expenses if it is left to the distributor to fix.

The promotional materials are also key. Trailers are important, although many distributors will want to create their own, but the website, stills and yes, the poster are all crucial. The fact is that without an excellent website and poster, distributors will pass on the project without even reviewing it. The initial sell of a feature film comes from the poster and one-sheet, with the website and trailer being the tools to get the buyer interested enough to invest 90 minutes in the film. With the right promotional materials and of course the proper legal paperwork and documentation for the chain-of-title, every film can get noticed by buyers.

Crowdfunding Film and Television Projects

Entertainment Lawyer Question and Answer Forum:

Question:

I want to use crowdfunding to get investors for my feature film project. Can I get investors through my own website or do I have to use another site like Kickstarter?

Answer by Brandon Blake, Entertainment Attorney:

Great news for everyone looking to begin promoting his or her feature film, television, and music projects to investors this year. As you may remember, back in November of 2012 I provided an update on the progress of the Jumpstart Our Business Startups (JOBS) Act, which was passed in April of 2012. Well the SEC has been working extremely slowly in enacting the JOBS Act, but things are finally starting to move forward.

The SEC just voted 4 to 1 in favor of implementing section 201(a) of the JOBS Act, known as Title II, which lifts the ban on general solicitation and permits filmmakers, television producers and music labels, among others, to openly advertise that they are raising money in private offerings.

What does all this mean for independent entertainment producers? It is a big deal, because for 80 years the SEC has prohibited any kind of public advertising of small offerings. Because of this limitation the only way to approach new potential investors was through the use of stockbrokers or, more clandestinely, finders. Now after all of these years, the era of investor “introductions” is over and producers can finally do things like buy Internet and radio advertising, use mailing lists, and even promote offerings on television.

However, this is certainly not going to be a free-for-all and there are some important limitations left in place by the SEC to keep producers in line while marketing small offerings.

First, the SEC still requires that small offerings be filed for exemption through the SEC. That means that before producers can start advertising their offerings they will have to prepare the same limited offering materials that have been required for years, and there are now additional reporting requirements with the SEC. The SEC is going to require filing 15 days before the start of general solicitation, and also within 30 days of completion of general solicitation. Both of these are new requirements and will require use of the new EDGAR filing system.

Second, state law is not going to be pre-empted, so producers will have to be even more careful planning their marketing strategy and making sure that their limited offerings are tailored to the particular states where the best investor prospects exist. Nationwide advertising campaigns will still be limited by what each State will allow under the new regulations.

Third, the SEC will restrict the investment to accredited investors only, which are high net worth individuals, companies and a few other types of investors. So the tradeoff on general advertising will be the requirement to only allow more sophisticated investors to buy in.

So how will all this impact raising money online? The good news is that once you have an offering filed with the SEC, you can openly promote the investment online, including through your own website. Sites like Kickstarter are still strictly off-limits, however. The reason is that the SEC has not enacted the crowdfunding portion of the JOBS Act, which is referred to as Title III. This is the more controversial and complicated portion of the bill and it might well be another year or more before it is enacted.

A special note of caution: The general solicitation ban will not be lifted until September of 2013, and an offering and filing must be in place before the start of advertising. The SEC has been extremely strict about deadlines and has sanctioned a wave of early JOBS Act claimants, so please do not act on this without legal guidance.

Our firm has been handling PPMs, limited offerings and investment companies for the film, television and music industry for 13 years. Feel free to contact us for a quote for affordable, high quality legal service.

Obamacare for Film and Television Productions

Entertainment Lawyer Question and Answer Forum:

Question:

How will "Obama-care" affect independent productions? Assuming the production has over 50 employees will we need to provide health insurance?

Answer by Brandon Blake, Entertainment Attorney:

The Patient Protection and Affordable Care Act (PPACA), better known to its supporters as the Affordable Care Act, or to its critics as Obamacare, will have substantial impact on film, television and music production companies, although a number of the requirements have been delayed. In addressing the Affordable Care Act (ACA) requirements, I will prioritize the information based on the schedule of provisions that are coming into effect the soonest. Like other recent legislation, there may well be provisions of the ACA that never come into effect, but there are certain requirements that are starting next month.

Starting October 1, 2013 all employers, large and small, will have to begin providing ACA required disclosures. A lot of producers are not aware that even if the bulk of the ACA does not apply to smaller production companies with less than 50 employees, the disclosure requirements will apply to almost all film, television, and music production companies.

The ACA disclosure requirements apply to all employers that are subject to the Fair Labor Standards Act (FLSA). In general, the FLSA applies to employers that employ one or more employees who are engaged in, or produce goods for, interstate commerce. There are certain exceptions, including an annual dollar volume of business, but given the broad scope of the Act it makes sense for all small production companies to provide the required disclosures.

These notices fall into the following categories:

Exchange Notices – Almost all employers will have to begin providing notices to staff regarding the existence of ACA health insurance exchanges, called the “Marketplace”, and included in this disclosure will be information about whether or not the employer is providing health insurance, whether it qualifies as the minimum health care coverage required by ACA, and how the staff member can get insurance if the employer is not providing coverage. This applies to existing staff and new hires.

Revised COBRA Notice – The Department of Labor has provided for an updated model election notice under COBRA to inform qualified beneficiaries of coverage options through the ACA exchanges.

SBC Notice – A Summary of Benefits and Coverage (SBC) is now required annually. The point of the SBC form is to make it easy for employees and their family members to compare different plans so they can choose between them. This applies to employers who are providing group health insurance coverage.

W-2 Notice – The W-2 must include the cost of coverage for employees, but an exception to the requirement is in place for employers with fewer than 250 W-2s in the prior year. However, look for this exemption to go away at some point.

So, in other words, even when a producer hires staff on a temporary, part-time, or independent contractor status basis, the producer should begin to routinely provide ACA notices to staff in their engagement contracts or face tax and legal penalties.

Starting January 1, 2014, the Marketplace health care exchanges will take effect. Enrollment is scheduled to begin October 1st 2013. These are the health insurance exchanges that are (slowly) being set up in various states.

Starting January 1, 2014, the individual mandate becomes effective, requiring all legal residents of the United States to obtain health insurance or face a tax penalty. This is especially important to many film, television and music production companies because often these are companies of one person, and so-called “self-employed” people will need to obtain coverage for themselves and their family or face a tax penalty.

Starting January 2015, the employer mandate will begin. This is the centerpiece of the legislation, which requires employers with 50 or more full-time-equivalent employees who have not met the ACA’s minimum health care coverage and affordability guidelines to pay “shared responsibility” payments (tax penalties).

Starting January 2015, the 6055 and 6056 notice requirements begin. These are the IRS notice requirements set out by the Internal Revenue Code (Title 26) – Section 6055 and Section 6056. This part of the ACA has also been delayed along with the employer mandate until 2015. These IRS reporting requirements are currently envisioned to be required both of large and small employers and by the self-employed.

So as the Affordable Care Act timeline shows, there are a number of things to begin doing this month for existing and new hires. Our firm has been handling employment agreements and production legal for film, television and music clients for more than 13 years. Feel free to contact us for a quote for affordable, high quality legal service.

NOTE: This timeline is not a comprehensive outline of all ACA requirements. Because of the changing nature of the ACA and potential amendments in the future, a complete summary of the Patient Protection and Affordable Care Act is beyond the scope of this newsletter.

Section 181 Film and Television Tax Incentives

Entertainment Lawyer Question and Answer Forum:

Question:

I'm trying to fully understand the implications of the Section 181 Film and TV Tax Deductions expiring at the end of this year. We are planning on shooting a few days of our film in 2013 so that we can possibly offer section 181 tax deductions to future equity investors if section 181 does not get renewed.

If we continue to raise equity for our film in 2014, after our project has begun principal photography in 2013, can we offer these section 181 tax deductions to our investors who invest in 2014?

Answer by Brandon Blake, Entertainment Attorney:

Note that the Section 181 film and television tax incentives were extended once again in December of 2014, but this time only retroactively, so Section 181 is no longer going to be available in 2015, barring new legislation.

Flashing back to the start of 2013 with the “fiscal cliff” negotiations, the America Taxpayer Relief Act was passed at 2 am in late night negotiations. Well, the drama of the moment has passed but we did get Section 181 extended for one additional year.

However, there is good reason to believe that this might in fact be the last year for the Section 181 deduction, since the White House seems less and less able to press through additional “stimulus” measures and the various stock indexes are all at record highs.

According to the extended section 181 of the American Jobs Creation Act, this revised domestic film production incentive program, covering the first $15 million of costs of all productions -- will be in effect for qualifying productions commencing before January 1, 2014.

If this really is the last year for Section 181 then film and television producers should consider starting at least a few days of principal photography this year, as well as meeting the other criteria needed to preserve the opportunity to offer the section 181 tax deduction to qualifying investors.

Moreover, it is not enough to simply start principal photography, because as Section 181 is drafted it is actually a tax election that must be taken by the investment company. So therefore an investment company and offering needs to be set up in 2013 and there must be the proper election taken on the company tax return that is filed on March 15, 2014, to preserve the status of the production.

As with any federal tax deduction, the regulations can and do change and it is possible for there to be mid-year changes in tax policy. Contact an attorney before making financial, tax, or business decisions. Our firm has been handling securities, limited offerings and PPMs for film, television and music clients for more than 13 years. Feel free to contact us for a quote for affordable, high quality legal service.

News Footage in Documentaries

Entertainment Lawyer Question and Answer Forum:

Question:

Question about using news clips in a documentary: We're producing a documentary about a major criminal case revolving around a bank robbery ten years ago and one of our producers has been collecting news clips for years about the case from CNN, America's Most Wanted, Geraldo, etc.

We plan to use only a few seconds from each in a sequence to show how much interest the case generated. Can we just use the clips that were "ripped" from TV recordings, or do we need to get permission/pay/for each one individually?

Answer by Brandon Blake, Entertainment Attorney:

It certainly seems ubiquitous in feature films and documentaries to have the montages of breathless news reports about this or that subject as an easy way to introduce the audience to the topical or “real world” nature of the story.

Much of the confusion about the use of news footage actually comes from some of the special exceptions to copyright law that are available for the production of news footage provided for under the fair use doctrine of the U.S. Copyright Act. For television producers producing news programming, you can see one of my former articles here: http://www.blakewang.com/fairuse_lawyer.htm for information about whether the fair use doctrine might be applicable.

For the most part fair use is beneficial to the producer of news programming, rather than those seeking to license news footage. While certain factors of the test would support the fair use of news footage, given that news programming is hopefully factual work rather than fiction, the greatest problem for documentary filmmakers is that a market currently exists for licensing news footage, which tends to negate the other three factors of the fair use test.

From a practical standpoint, the fair use defense is just that, a defense. That means that to prove that a usage of copyrighted material is fair use you have to go to trial. Most film and television distribution companies do not want to go nearly that far defending the distribution of a property, and generally do not want to take any risk at all.

For that reason unlicensed use of news programming, even a few seconds worth, will typically prevent a producer from getting E&O insurance. Over the years I have noticed that a lot of E&O insurance providers no longer review films and documentaries they cover, and so therefore a lot of unlicensed footage does end up getting into distributed works. Producers should not assume there is no risk, however, because the insurance companies are relying on the blanket warranties that the producer is signing. If it turns out the producer breached these warranty clauses in the E&O insurance contract, the insurance company will not cover the loss or claims, leaving the costs and liability with the producer of the project.

So although there is some gray area, generally anyone producing a film or documentary intended for commercial release needs to license third-party news footage. Some alternatives would be to check with stock footage houses to find similar, royalty-free footage, or to produce the footage in-house. Commercial news footage, especially from the major networks, is expensive and it is licensed by the minute, meaning that 5 or 10 seconds is not a de minimis use. My firm has helped a lot of documentary film producers negotiate more reasonable rates, often substantially below the initial quote. Feel free to contact my firm for a quote if you decide to negotiate licenses with the networks.