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«Rights, Camera, Action! IP Rights and the Film-Making Process Creative industries – Booklet No. 2 Rights, Camera, Action! IP Rights and the ...»

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Rights, Camera, Action! – IP Rights and the Film-Making Process A large part of the development process therefore, consists in the producer making sure that all the rights on all the underlying material used to produce a completed script are duly acquired or licensed as well as the rights of the writer (or writers) commissioned to write the film’s script. The producer also needs to be able to produce written evidence that he is in control of all those rights. In the Anglo-American film business, the terminology for all this paperwork is chain of title. Why is the chain of title important? Because no bank or other source of funding in Europe or the US will put money behind a film unless they have the assurance that the production will not be forced to stop half-way through by a disgruntled author or other right holder whose work will have been used without due permission and financial compensation.

As noted in our introduction, in some other parts of the world, development may be less formally legalistic and the process may vary. For example, whereas the British or US producer often initiates the original idea, commissions a professional script writer and then proceeds to attract a director to the project, in France or Italy, it is more usual to have the director writing his/her own script and looking for a producer to raise the financing. In India, until recently, the script simply did not have the same status as it does in the US/European context: stars, and the promise of spectacular set pieces ably choreographed and directed by experienced artists, are deemed more important. Projects are most often sold to movie stars by the director literally acting out and mimicking every scene, not always with reference to a printed script.

For all the differences in the approach to script-writing, there are common characteristics and standards which are increasingly those adopted by the international independent film sector the world over. This chapter focuses primarily on these, because they are likely to be most useful to fledgling film makers in an industry that is fast becoming interconnected on a global scale.

1.ii Passion and Eloquence – attracting funds for development At first glance passion and eloquence may not seem especially relevant to films and intellectual property rights which are the topic of this booklet.

But they are! Negotiating for the licensing or acquisition of underlying rights and getting the best possible standard of work out of a commissioned script writer require Rights, Camera, Action! – IP Rights and the Film-Making Process as much emphasis on human relational skills as they do on a good working knowledge of IP transactions. The authors of the works will often want to see evidence of your passion for the project and your connection with their work before considering a deal.

Development also requires money, often quite a substantial amount. Most production companies – the world over – simply do not generate enough income to sustain their own development. As a result, producers spend a lot of their time convincing third parties (banks, broadcasters, larger distribution companies, private investors, public funds) to finance the development costs of their projects. There again, passion and eloquence are a pre-requisite.

There is a multiplicity of sources for development funding in Europe and the US.

Public sector loans are available on reasonably soft terms from national public funds set up especially to sustain local film development. The European Commission in Europe’s capital Brussels, offers to support production companies over a group (or slate) of film projects, by providing up to 50 percent of the budgeted development costs. It does so through its MEDIA Program.

For the majority of producers across the world, public funding is a limited or nonexistent option. Development loans from the private sector are a more likely prospect

and the terms tend to revolve around comparable principles wherever you are:

(i) Reimbursement – funds are loaned generally on the basis of the presentation of an itemized development budget, i.e. a budget in which every major item of planned expenditure is detailed. Reimbursement is most often required if the film reaches production, on the first day of the shoot, also referred to as principal photography;

(ii) Premium and profit participation – the financier will normally charge a premium on the money loaned, also collectible at the start of production.

Percentages vary according to the nature of the risk, the budget of the film and the term of the loan. Many lenders will additionally negotiate for a percentage of net profit from the exploitation of the finished film, typically 25-50 percent. In a later chapter, this booklet provides a definition of the notion of net profit;

Rights, Camera, Action! – IP Rights and the Film-Making Process

1.iii Buying Time – how to negotiate an option In an “option” the producer pays money to a right holder in order to be given an, exclusive period of time during which he/she may be the only person/company entitled to make arrangements to adapt the work into a potential new film. The option takes the property i.e. the book, screenplay, or other source material out of the market and gives the producer a competitive advantage over anyone else who may be interested in it. The object of the option can be any kind of underlying work, a book, say, or a pre-existing script. The option also gives the producer the exclusive choice of either buying up the rights to the underlying work – or not – at a later stage.

Paying money is much cheaper than having to purchase the rights in the work immediately. Consequently the option limits the producer’s initial development risk.

On average, only about 30 percent of film projects developed in Hollywood made it into production. Consequently, any money channeled into development is entirely at risk, because the majority of projects simply stall and are never made into films.

Millions of dollars are thus written-off worldwide each year. Considering the risk, the option allows the producer time to raise further funds and attract key talent and financiers to the project without having to spend too much at an early stage.

There is no standard duration for an option agreement. In Hollywood, these tend to be over an initial year-and-a-half, renewable thereafter for an equal period, because a lot of time is spent on developing a script – and the negotiations with the talent agents often take a long time. European option agreements tend to be shorter at Rights, Camera, Action! – IP Rights and the Film-Making Process around one initial year with possible renewal for another six months or a year (or two additional six-month terms). Before granting a renewal, the right-holder may sometimes ask to see evidence that progress has been made by the producer during the preceding option period. In such cases, it is important to ensure that the option agreement does not give the right-holder as author of the underlying work the power to decide arbitrarily what constitutes progress. Defining specific, realistic targets may help avoid misunderstandings about this aspect of the negotiation.

The payment of the first option period is generally treated as an advance on what will become the rights’ acquisition payment, if the producer finally chooses to exercise his option. The fee will not be refunded by the right holder if the producer chooses not to exercise the option. In the English-speaking Anglo-Saxon film industries, the fee is typically about 5-10 percent of the price of the rights’ purchase and the figure is comparable elsewhere in the world where options are used.

A second option payment is not treated as an advance on the value of the rights’ purchase, but rather as a one-off, non-refundable and non-deductible payment.

Some option agreements include a clause to ensure that a share of net profit will be paid to the right holder in the underlying work if the film is produced, (and if it is ever successful enough to return net profits). The percentage will oscillate between 2 and 5 percent depending on whether the work is a book or a script, and – if it is a script – on whether there is a sole writer or multiple writers. In the film industry, net profit is generally defined as the profit to the producer from the commercial exploitation of the film. It is made up of whatever money is left after the bank has recovered its loan(s) and interest; after the international sales company has collected its fees and deducted its marketing costs; after the financiers have recouped their investments, and any deferred fees which were not paid fully to the cast, crew, director or producer during production. However, most films worldwide do not meet with sufficient success to even recover their full costs of production and pay-back deferred salaries of fees, let alone make a net profit.

Some right holders may also choose either to waive the option fees or reduce them considerably, in exchange for a commitment by the producer to secure their active participation in the production, should the project be successful in raising finance. This is an approach which all but the most experienced and established film producers will Rights, Camera, Action! – IP Rights and the Film-Making Process normally seek to avoid: financiers may not look favorably on the underlying right holder taking a credit on the film for anything other than the authorship of the underlying work itself, especially if the author has little or no prior experience of working in film, or if the intention is only to base the film very loosely on the underlying work.

Nowhere are there are any quoted market rates for options. Depending on the degree of fame of the right holder and the work optioned, the experience of the production company or the caliber of the star expressing an interest in the project, these can range from under US$1,000 to US$35,000.

In the Anglo-American film industry, some producers manage to obtain an initial commitment from the author of an underlying work without having to sign an option agreement. The producer expresses a written interest in the work and commits to look at it more closely in order to determine whether or not it could be made into a successful movie. This type of pre-option agreement runs mostly on trust and is more suitable for established producers with existing connections in the author’s milieu.

One of the most important tasks for the producer before signing an option is to run a thorough check on the status of all the rights involved and obtain the legal assurances (warranties) from the author that there are no known obstacles to prevent his selling the rights to the producer at a later stage. An entertainment lawyer may be helpful to the independent producer at that stage. Failing this, there are specialized companies offering a tracking and checking service, and providing reports on individual copyright works.

1.iv The Big Jump – purchasing underlying rights The ink on the option agreement is dry; now the producer faces the prospect of recruiting and commissioning a writer to write a good script and to attract the interest of film financiers for the project.

Whilst the script is going through its various drafts, the producer will also need to begin making estimates of what the film may cost. This budgeting evaluation exercise has its uses if the producer finally chooses to exercise the option and purchase the rights to the underlying work.

Rights, Camera, Action! – IP Rights and the Film-Making Process The producer has completed these stages and is now ready to exercise the option, meaning that he will make an offer to buy out the underlying rights. In many cases, the rights’ acquisition price is expressed as a percentage of the estimated budget of the film to be made from the work and will be typically between 1 and 3.5 percent for smaller films. In most cases the purchase price is set at the time when the option is negotiated, because the option is expressed as a percentage of the purchase price. There are often pre-agreed “floors” and “ceilings”.

Rights’ purchase agreements require a good deal of detail if the producer is to avoid unresolved issues and legal problems further down the development and production

process. Here are a few of the strategic points to address:

–  –  –

(ii) Assignment or license? – The advantage of an assignment over a license is very clear from a producer’s point of view: a license only grants rights for a limited period of time whereas an assignment is most often a fullperiod-of-copyright term, where legally permitted. The choices available to the producer in this part of the negotiation may vary according to what his needs are (a limited license may be cheaper than an assignment), and the legal regime under which the negotiation is taking place. In the three leading common law countries, the US, UK and Ireland, the legal presumption is favorable to a full transfer of ownership from, say, the published author to the producer as a person or a company. The legal presumption simply means that – unless the individual contract says otherwise – the rights will be presumed to have been assigned. This is not the case in the so-called droit d’auteur countries (e.g. most of Rights, Camera, Action! – IP Rights and the Film-Making Process breached or that the producer chose to ignore the author’s assertion of his paternity through an end credit in the film. Conversely, although it is not described as an assertion of the paternity right, most authors of underlying works dealing with film producers in the US will find there are standard clauses to ensure that a screen credit is granted.

(iv) Reserved rights – authors of underlying works will normally want to exclude some sets of rights from the purchase agreement. The most obvious one is book publishing, especially if – as is generally the case – the book on which the film is to be based is already in the book stores.

Radio and stage versions of the work are also a standard exclusion.

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