Entertainment Giants Say They Are Owed Millions in Merchandise Royalties

Sharknado Merchandise - P 2014

Sharknado Merchandise - P 2014

From Game of Thrones pub glasses to Shark Week tank tops, big content studios have a bit of a problem at the moment on the e-commerce front.

In September, Delivery Agent Inc., a company specializing in running digital platforms that sell licensed merchandise on behalf of entertainment companies, filed for Chapter 11 bankruptcy after testing the waters on an IPO and running into a liquidity crisis. Founded in 2005 with venture funding, Delivery Agent counts CBS, NBC, Fox, Time Warner and many other top media brands as partners, has generated more than $800 million in revenue and has recently been exploring ways to commercially leverage internet-connected televisions. But a proposed sale of the company through a bankruptcy auction led by Hillair Capital Investments is causing a fuss in federal bankruptcy court because some of Delivery Agent's partners say they are owed substantially more than the debtor is claiming.

Discovery, for instance, asserts in court papers filed earlier this month that its licensing deal provides a royalty of 14 percent on all sales at the Discovery Channel Store and an annual minimum guaranteed royalty payment of $1 million, but that it hasn't received any payments since the second quarter of 2015. Objecting to a cure amount listed as "$0.00," Discovery claims the true amount is $1.6 million.

HBO says it also is owed money. To cure obligations, the debtor proposes paying the pay TV network $619,385, but HBO responds the amount is inaccurate due to alleged overstatement of expenses and use of an incorrect revenue share percentage. After making an audit, HBO claims at least $1.2 million is due.

"Without the underlying licensed rights granted under the Agreements, any purchaser of Debtor’s assets would fail to have a license from HBO to distribute and/or sell HBO licensed goods, and in turn, any attempt by such purchaser to do so would be unauthorized and would constitute infringement," writes the network's lawyers.

Some companies like CBS and Showtime object to Delivery Agent's buyer assuming licensing agreements because the company has defaulted and can't provide adequate assurance of future performance. Other companies like Warner Music subsidiary Rhino Entertainment say they've been left without meaningful information to figure out what is really owed. 

Court papers reveal more: For items sold at the CBS Store and the Star Trek Store, Delivery Agent proposes making a $288,046 payment to cover royalty obligations. The debtor also proposes $116,899 to cover Fox, though the broadcaster says its own books indicate it should be more like $157,052. Then there's Bravado International Group, which sells merchandising for some of the biggest acts in the music business including Adele, Guns N' Roses and Lady Gaga. More than $3 million has been proposed to cover royalties due under this licensing agreement.

Maybe the most unique objection comes from NBC Universal, whose agreements with Delivery Agent have allowed the online sale of items including a Mr. Robot-inspired fsociety mask.

The entertainment giant is throwing a flag to the transfer of all material deemed to be "works made for hire" including the look and feel of store sites, URLs and customer data. According to its latest filing, "There is no valid basis for the Debtors to assert that the Work Product, URLs, or customer data under applicable nonbankruptcy law that can be sold, and the fact that Delivery Agent has commenced a bankruptcy case does not expand its property rights beyond those it held on the Petition Date."

The parties are scheduled to be in Delaware Bankruptcy Court next week to discuss all of this.