THR Esquire

Trial offers rare view of license allocations

As anyone with a stake in a film's profits knows well, studios guard their accounting procedures as if they were the final "Harry Potter" manuscript. But a trial unfolding in downtown Los Angeles is providing a public window into the common yet controversial studio practice of allocating revenue from the licensing of library films in packages to domestic and foreign TV broadcasters.

Producers Alan Ladd Jr. and Jay Kanter, who were big enough players in the early 1980s to receive a 5% gross participation in films they produced for Warner Bros., sued in 2003 claiming the studio's allocation of lump-sum package fees undervalued the films for which Warners owed a percentage to participants. (Disclosure: In 2004-05, I worked on this case in its early stage as an attorney for the plaintiffs.) Their theory is that the studio charges fees that can reach $100 million for groups of mostly low-value films and some high-value titles like Ladd and Kanter's films ("Chariots of Fire," "Blade Runner," "Night Shift" and the "Police Academy" movies, among others) but for accounting purposes assigns lower values to films on which it owes a percentage to participants, costing Ladd and Kanter about $9 million.

The case is a subtle variation on the typical "Hollywood accounting" charge that studios rig their books to underreport "contingent compensation" to profit participants. But it's unusual that a case like this would reach a jury trial with such specific allegations challenging the way studios conduct a lucrative part of their business.

"In my experience, license allocation claims by participants in such top films are usually settled, sometimes for large sums, without acknowledgment of their validity," says Ken Kleinberg, a talent lawyer and frequent critic of studio accounting. Kleinberg is surprised Warners is fighting the case because such allocations "are usually ones that a studio distributor does not want to have to defend in court."

Warners lead counsel Michael Bergman of Weissmann Wolff told a jury last week that the studio employs a meticulous formula to determine the license value of each film, using objective criteria like boxoffice performance, television ratings and previous license fees, and assigning letter-grade valuations based on its analysis. By the end of the trial, Bergman promised jurors, "You will see every 'T' was crossed, every 'I' was dotted and every conceivable thing that could possibly happen was negotiated by the lawyers. This was not the case of a big, bad studio against people who had no position at all."

Unlike many participants, "Laddie and Jay," as their lawyer, John Gatti of Greenberg Traurig, introduced them to the jury, were sophisticated film executives turned A-List producers (Ladd famously greenlighted "Star Wars" when he ran Fox). But Gatti told the jury he planned to show that "Night Shift," which was awarded an "A" under Warners' own valuation system, was packaged with unknown B-grade and C-grade films like "Battle of Hogue" and "Carny," and each was assigned an $80,000 license fee in bad faith. "Helen of Troy," a 1956 film Gatti described as old and not very good, was assigned a $100,000 fee.

It's an interesting case that, if it gets to a verdict, could impact the way films are packaged and the manner in which studios divvy up their license revenue.