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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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On The Farmer Wants a Wife, the journalist on whose life story the film was to be based agreed to sign an agreement which gave the film makers exclusive rights to portray, represent or impersonate her in the film. Although it is generally much simpler, the life rights deal works very much like any other form of rights’ assignment or licensing in that the producer commits to making a payment against the assignment of the rights. In some cases, the person on whose life the film is to be based may also negotiate other, non-financial advantages. In this particular case, not only was the journalist offered a flat fee as a consultant but she was also guaranteed a screen credit if the film was produced. Furthermore, she did not assign her life rights in perpetuity and chose instead to license those to the film makers for a limited period of time. This approach ensured that she could remain in control of those rights and re-license them to another producer in the event that this project would not go into production.

Scenario Two – adapting a best-selling book The same company made a film entitled Dead Babies, a quirky, darkly comical mystery. The film’s underlying material was the eponymous novel by the celebrated British writer Martin Amis.

A previous attempt to adapt one of his earlier books – The Rachel Papers – into a film had resulted in critical and commercial failure. Consequently, there was now a widespread perception in the film industry that his books were a challenge to adapt into films. As a result, the price of the license on the book’s rights in no way reflected Amis’ high status as a successful literary figure and the producers were able to secure it for a modest sum. This is a good generic example of how the value of the underlying rights of an established novelist will generally be based on the performance of previous screen adaptations more than the performance of the original work in the bookshops.

Rights, Camera, Action! – IP Rights and the Film-Making Process As is standard, the novelist’s agent also negotiated a further payment to be made by the producer at the start of production, if the film were ever produced (the “production bonus”) as well as a 5 percent share of the producer’s net profit.

However, the 5 percent was never paid out because the finished film did not make a profit. Regrettably, very few ever do.

Scenario Three – the original script

In this case study, a French film director had an original idea of her own and approached a producer. The film, Oh là là!, (French title: Seconde Chance) produced in 2006, was to be based on an original screenplay inspired by the private correspondence of Madame Du Défant, an influential 18th Century female aristocrat who hosted a fashionable literary salon, which attracted some of the most eminent French philosophers of the era.

The film charts Madame Du Défant’s relationship with Julie l’Espinasse, a poor orphan adopted by the lady who, as she blossoms into a woman, becomes her rival, opening her own popular high society salon. The letters, being historical archive, were in the public domain and consequently, no clearance of underlying work was required.

The approach to the development required hiring the director and a co-writer at the same time, to develop the script together. Both writers assigned all commercial exploitation rights to the producer. Although each writer was contracted independently, each agreement acknowledged that the writing of the script was to be a collaborative effort between the two.

The director’s contract and that of her co-writer also acknowledged that she was the designated director for the film to be made.

In droit d’auteur regimes, such as France, both the screenwriter and the director are deemed to be the authors of the resulting film. (Very often, and unlike in this example, the director is also the sole author of the script.) In that system, the way in which authorship translates into financial terms is that any payment the producer makes to the authors before and during production, as remuneration for writing and/or directing, is treated as an advance against a share of all commercial revenues from the film, to which they are entitled by law. Part of the sum paid in advance may also be treated as salary.

Rights, Camera, Action! – IP Rights and the Film-Making Process So, in the case of Oh là là!, the contracts signed with each of the two writers set out the precise list of rights purchased through the contract and meticulously laid out the percentage they were to receive from the separate revenue streams derived from the commercial exploitation of the film (cinema, video, foreign revenues, free TV, payper-view TV, etc.).

Another way in which the presumption of original authorship is expressed is in the fact that the purchase of the rights constitutes a limited license, not a full assignment.

In this particular case, both writers agreed to a license period of 32 years, standard in the French industry. However, a sub-clause ensured that all rights would automatically revert to the writers after four years from the signing of the contract, should the producer be unsuccessful in making the film within that period of time.

This type of clause, known as turnaround is common currency in the film industry.

While development is taking place, the producer is already engaged in the difficult business of testing the interest of key talent (directors, lead actors) in the concept of the film (or a draft script) and approaching potential financiers. The following chapter looks at the means of financing a feature film today and looks in some detail at the notion of the value chain, which any producer must understand if he is to embark successfully on the uncertain journey of trading intellectual property rights against financing for the film.

Rights, Camera, Action! – IP Rights and the Film-Making Process Financing Films – On the Merry-go-Round of Debt, Equity and Rights When distilling film financing to its most basic substance, a combination of some – or all – of three ingredients, is invariably present. These are: debt, equity and rights.

This section is primarily concerned with the use of intellectual property rights as they relate to the discipline of creating and financing films from original idea to the screen. However, it is important for all newcomers on the perilous journey of film production to understand the broad principles of forms of film financing which do not utilize rights and to gain insight into how these may relate to rights-based transactions. We hope this will help readers develop a strategic approach to combining sources of finance so that they may always strive to control the revenues and/or the rights to the greatest possible extent.

2.i Sink or Swim – the trials of debt financing

The term debt financing is a general term which encompasses a complex set of different realities. In its crudest form, debt financing is distinguishable from equity or rights in that the lender is not entitled to either a share of the revenues from the exploitation of the finished film, or a share in its profit, or in any part of the intellectual property in the film. The debt financier typically provides a loan repayable before the film is completed and/or in first position in the exploitation revenues of the film – i.e. before any equity investor begins to recover his/her money. This type of loan is no different from a standard bank loan and the lender will be merely seeking to make money out of the interest and fees charged on the loan.

In practice, debt financing for film is often more complex. Here are three standard

examples borrowed from different practices across the world:

Rights, Camera, Action! – IP Rights and the Film-Making Process (i) Pre-production loans – these loans are offered to producers who have already covered their entire production budget through contracts with investors but are unable to start production because they cannot obtain the cash from those investors until after the start of principal photography on the film, i.e. the start of filming (typically because the legal paperwork demanded by the investors has not yet been completed). Pre-production loans are seen by financial institutions and banks as high-risk, because – at the point where he applies for the loan – the producer often has no way of guaranteeing that the film will effectively start production or whether it will be completed. Consequently, lenders often insist on taking a charge on some – or all – of the asset value constituted by the film’s intellectual property, as collateral for their risk. Collateral is anything of value that the bank may be given the right to sell in the event that the borrower is unable to reimburse the loan.

(ii) Gap financing – some institutions in the West specialize in what is sometimes known as gap financing. Contrary to ordinary debt financing, or pre-production loans, the lending is against the “gap” in the budget which has yet to be covered by financiers. In today’s market, the gap covered by such lenders will typically not exceed 10 to 15 percent of the overall budget. Gap financiers will also insist that the value of the gap should have been assessed by a credible international film exporter known in the business as a sales agent. In this analytical exercise, the sales company will estimate the sale value they believe the film could fetch in the countries where the rights have yet to be sold – and make several pre-sales to demonstrate the film’s appeal. The lender will rarely consent to cover the gap if the sales agent’s estimates do not cover up to 150 to 200 percent of the value of the gap. For example, imagine the film’s budget is US$4 million (a typical mean average for a low-budget independent North American or European film with no stars) and the gap the producer needs to cover is US$600,000. The sales’ agent handling the film has yet to pre-sell or sell in much of Eastern Europe, as well as valuable territories such as Japan, Germany, Korea, Russia and Spain. Its total estimated sales figures for those territories come in at US$920,000.

Unless the gap lender disagrees with the estimate, the figure meets his Rights, Camera, Action! – IP Rights and the Film-Making Process Is there a downside to laboratory debt, from a producer’s point of view? Most definitely. In India, laboratories expect re-payment in full before the film’s postproduction is completed. Since the laboratory is generally in possession of the film’s negative and the producer must agree to a charge on it until repayment, the laboratory may easily proceed and sequester the negative until payment is forthcoming, thereby stalling any chance of the film being released. Unfortunately, this kind of undesirable outcome is still frequent and the vaults of most of India’s leading studios and laboratories are overflowing with films (finished or unfinished), awaiting settlement.

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the lender’s terms may result in a shift in the control of IP assets locked into the film. Therefore, debt financing is not only very onerous for the producer (rates are invariably high because of the perceived nature of film as a high-risk enterprise), but potentially disastrous in enabling a confiscation of the rights by a third party with no interest in the film reaching an audience. It would be flippant, however, to suggest that producers should stay away from debt finance: the option may not exist, as is so often the case with the use of laboratory debt in the Indian low-budget industry.

We only hope this publication will have helped some readers undertake such action with full awareness of the risks involved.

2.ii Cutting the Cake – the basics of equity financing Unlike debt financing, equity financing consists in an investment being made with an expectation of returns through an ongoing share in the revenues generated by the film or films.

A fledgling film maker needs to start with the basic understanding that equity investment falls into two broad categories: investment in an individual film and investment into a company’s film activities.

The second category – equity investment in companies – is still a relatively rare occurrence in the cinema sector almost everywhere.

The authors of this booklet recently asked a number of senior corporate financiers in India to summarize the key factors that are – in their view – keeping equity investors

away from film companies. These are the four main observations on which they all agreed:

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(ii) A lack of stable cash earnings – the predominant company model in the film industry remains that of a cottage industry, the single producer with Rights, Camera, Action! – IP Rights and the Film-Making Process What is striking about this Indian equity investors’ survey is how remarkably convergent their analysis of the film industry’s core weaknesses is with those made by similar experts about the film industries in Europe or North America. All over the world, with few exceptions, film companies are considered to be too small, too poorly managed and unable to concentrate sufficient revenues over a period of time to attract most investors.

Anyone looking for an equity investor to support their film company’s business plan needs first to be aware of this universal perception because it is a considerable barrier. Film entrepreneurs will perhaps argue that the reluctance of the investment community to support them leaves the sector in a double bind: on the one hand, they need capital in order to support a move towards consolidation, become able to develop entire slates of films and control IP and revenues; on the other hand, the equity markets are waiting for bigger, more stable companies to appear before taking the risk of supporting the sector.

For the film-maker/entrepreneur hoping to raise equity to support his company’s midterm or long-term strategy, it is important to be realistic about investment prospects:

the newer the film company, the lesser the chances of obtaining this type of financing. The business plan will need to be of outstanding quality, with considerable clarity on the company’s objectives, the genres of films it wishes to make and a detailed strategy for distribution and revenue sharing.

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