Film remains a director’s medium, considering that the director will always give shape and vision to the writer’s words. Further, the director is frequently involved in the creation of the script, so that his or her vision may be more readily realized. The cost of first-time independent films is going down, as smartphones may be used to create all the footage. As the ability to tell a story in short form becomes more readily accepted, the director’s influence may be more important than the financier’s or the other talent.
This article discusses many of the principal terms of an agreement between an independent film production company and a film director.
As in any agreement, an understanding of who the parties are to the agreement is essential. While many films are financed through a variety of sources, and with funding from multiple companies, it is unlikely that the party engaging the director to perform services would be any company other than the one that is actually, physically producing the picture. Equity investors or lenders are not typically engaging the director. In turn, the production company must also own the rights to the script, engage the line producer, other producers, the actors, the unit production manager and other personnel, all of whom will provide services to the production company to create the single motion-picture copyright. A theatrical motion picture contains contributions from possibly hundreds of people and companies, each of whom must sign an agreement granting rights in their contributions as a “work made for hire” to the production company under the U.S. Copyright Act.
On the other hand, many directors work through a loan-out corporation (although some do not). The loan-out corporation (“lender”) will have an agreement with the director, by which the lender is entitled to the director’s exclusive services. The lender in turn contracts with the production company to provide the services of the director. The agreement is often drafted such that the “employee” of the production company is “Loan-Out Corporation f/s/o Jane Director.”
The production company will also seek an “inducement letter” from the director, individually confirming that the director personally will perform all the services required of the lender as specified under the agreement with the production company, that the director will look solely to the lender for his or her individual compensation, and that appropriate health and other insurance is in place for the director’s benefit. Under the new tax law, agent and management commissions are no longer deductible at the individual level, so many industry personnel who rely on agents and managers are forming loan-out corporations to permit deduction of those commissions.
If the director is a member of the Directors Guild of America (DGA), then the production company will also need to become a signatory to the DGA agreement and pay the director, through the lender, certain minimum compensation as well. For a high-budget picture — defined as one with a budget of over $11 million — and for the period ending June 30, 2019, the director must receive no less than $19,622 per week, with minimum prep time of two weeks, guaranteed employment for ten weeks, at least one week to cut/edit the picture after the editor assembles the footage, additional minimums for days worked beyond the guarantee and other provisions.
As a DGA signatory, the production company must only employ a DGA member director and other individuals who are also DGA members in certain capacities. Perhaps most importantly, the production entity will need to make mandatory contributions to the DGA pension and health plans based on the amount the director, or other DGA members, earn up to certain limits. The production company will contribute 5.5% of the director’s salary to the pension plan and 10.5% of the compensation to the health plan, while the director will contribute 2.5% to the pension plan. For theatrical films, the ceiling on pension contributions is $200,000 and the ceiling on the health contributions is $400,000. Additional information regarding other aspects of the DGA minimum agreements is available at the DGA website, https://www.dga.org.
The term of the director/production company agreement and the scope of exclusivity under it are vital to both parties. Film production is generally broken down into three components: pre-production, production and post-production. Sometimes “pre-pre-production” or “development” work is undertaken by the director before formal pre-production work begins. Pre-production can be as short as two weeks or as long as 12 weeks or more. Eight weeks is common. Production, when the actors are present and the footage is created, often lasts between four weeks or up to a year in some cases. Post-production — when special effects, visual effects, editing, scoring, looping, sound enhancement and other work on the film is completed — may be as short as 10 weeks or as long as another year. The director’s services are required, at various levels of intensity, during development, pre-production, production and post-production. The director is often also asked to provide promotional services in connection with the picture’s release too.
The period in which the director’s services will be exclusive to the production company is hotly negotiated. Certainly, during production the director must be exclusive to the production, because of the demands on the director’s time. During pre-production and post production, the director is not necessarily exclusive to the production company and is free to work for other companies, subject to a fully enforceable obligation to complete his or her tasks in pre-production and post-production in a professional manner, subject to the obligation to deliver the picture on time and on budget. This is often described as “non-exclusive, first call basis” such that if there are conflicting demands on the director’s time, the other commitments are put aside in favor of the commitment to the production company.
While film is generally considered a director’s medium, television is often considered a writer’s medium in which writers, as “show runners,” receive credit not just as a writer but also as an executive producer. Directors in film, however, under the DGA agreement, are the last credit seen on main titles, placed at the beginning of the film. Or, if credits appear as “main on end titles” at the end of the film, the director’s credit is the first credit on the screen. In addition, the director may also receive “A Film By” credit, after the title of the film. Some directors who are also producers may receive a credit for his or her affiliated production company that provides certain services to the film’s production company as well.
Whether the director or some other party is entitled to “final cut” of the picture is a very important issue in a director’s agreement. The parties interested in having final cut (i.e., the version of the picture shown to the public) include the director, the production company, the investors and the distributor, each of which has a slightly different objective in mind. Rarely does a director on a picture financed independently by third parties receive final cut.
Nevertheless, there are many established norms about who actually can contractually earn final cut. A first-time director will not receive final cut. A very successful director with award-winning features may contractually be awarded final cut, but nothing is certain. Indeed, a financier who may have invested tens of millions of dollars may seek to have “final cut.” Each of the domestic or major foreign distributors will seek to release a cut that pleases them or is specifically suited to their constituents. Recently, it was reported that the motion picture Bohemian Rhapsody, about the late Freddie Mercury and his band Queen, was edited for release in China by cutting scenes that depict Mercury’s homosexuality, leaving significant holes in the story line of that picture. But in the other countries of the world, the director, on whose vision the entire picture is based, may well require that he or she have “final cut.”
Under the DGA agreement, the director is entitled to present his or her cut to the production company. If accepted by the production company and the distributors, it is released. Often a director is granted “two cuts and two previews” such that the director may prepare a cut, preview it, respond to feedback from that preview and re-edit the picture. That version is then previewed again. If it is not acceptable to the parties at financial risk, then the production company, on behalf of the investors, or the distributors will create the final cut. Further, there may be different cuts created for North America, Europe and Asia, each by a different party.
If the director has significant bargaining leverage, the negotiations about who receives final cut may reach a stalemate, notwithstanding the norms discussed above. A frequent solution to that stalemate is to create a “bake off” where each version — the production company/distributor’s version and the director’s version — is previewed before two separate audiences and the response cards received from each audience are used to determine whose version the distributor releases. Even the negotiations of who wins that “bake off” can be intense. There are significant costs to conducting a preview, such as soliciting the proper audience, renting a theater, staff to run it and taking additional weeks to finish the picture, while interest on loans used to finance the picture grows, and delays in releasing the picture continue.
While the DGA requires certain minimum compensation on pictures under its jurisdiction, if the DGA agreement does not apply, the fee is entirely negotiable. The director’s compensation is most commonly broken down 20/60/10/10, such that 20% of the compensation is paid during pre-production on a weekly basis, 60% is paid during the period of production or principal photography on a weekly basis, 10% on delivery of the director’s first cut, and 10% on delivery and acceptance of the “final cut.”
However, a director is often involved in providing guidance to writers on a script that is being developed, well before pre-production commences. Compensation for those services is often made by making a lump-sum payment, upon receipt of a certificate of engagement or employment, signed by the lender, if any, and the director, confirming among other things that the director’s contribution to the script and the production is as a work made for hire and that the director will not bring any proceeding to enjoin the picture’s production or distribution. In consideration of that lump-sum payment, the director makes himself or herself available — on a non-exclusive basis — to the writer or writers in assisting to create the screenplay. Then, once pre-production begins, the phased compensation begins on a weekly basis.
In addition to the specified credit and fixed compensation discussed above, a director often receives contingent compensation as well. This is usually expressed as a percentage of “net profits” or “net proceeds.” Again, directors with significant negotiating leverage may seek to participate in revenue based on adjusted gross receipts, or even more rarely on gross receipts. Relying on net proceeds, however, is common. That frequently means the director shares in an agreed portion of whatever the production company receives from the distribution of the picture and all rights in the picture paid to the production company, minus marketing costs (i.e., print & advertising), distribution fees, various guild residuals, costs of collection and other similar costs — after the loans secured to produce the picture have been repaid with interest and the equity investors receive their investment back in full, plus a premium that is often calculated as a fixed percentage of the investment (e.g., 20%) in lieu of an annual interest rate.
The amount of profit participation can range anywhere from zero to approximately 10% of 100% of the net proceeds. Typically, the investors share 50% of 100% of the net proceeds. Thus, the net proceeds paid to the director, as well as actors, writers, sometimes the composers and others are borne by the producer. The director’s agreement should specify whether the percentage is based on 100% of net profits, as is most common, or whether the percentage is based on a percentage of the producer’s share of net proceeds. The difference is significant, and could result in payment of one-half the amount expected to be paid to the director or other talent.
As a result of the time lag for payment of net proceeds, which could be several years, directors and other participants in net proceeds frequently negotiate and receive a cash bonus, based on domestic or worldwide box-office gross receipts. If the picture is not released theatrically, these box office bonuses are not paid. These are arbitrary bonus amounts, paid at different levels, based on those receipts. China is a large entertainment market, with different customs than North America and Europe and, as such, typically only one-third or one-half of the gross box-office receipts will be counted in determining whether the threshold to make a bonus payment is reached. Directors may also receive a bonus for a Golden Globe, Academy Award or other nomination, or award. The amount of the bonus and the categories (“Best Picture,” “Best Director”) are also specified.
Internet-based services such as Netflix, Amazon, Hulu and the like, have established a norm whereby they pay a flat fee for a buyout of rights in the picture, such as in perpetuity or for a lengthy term of, for example, 20 years. This effectively eliminates the ability or the need for any calculation of net proceeds. If the price paid by the service exceeds the cost of production, then profit will exist and should be shared with the profit participants. If the picture is financed by the service, then only the producers may receive benefit in excess of their standard fees and the director’s ability to secure a share of that revenue will be tied to the nature of the relationship between the producers, the buyer and the director.
A director will also want to be certain that he or she will be paid for setting aside the time and doing the work. As with many creative personnel, a director will seek a “pay-or-play” commitment from the production. Pay-or-play in this circumstance means that on a particular day, the production company commits to pay the director, even if the picture does not move forward, or commits to use the director and pay for the director’s services in accordance with the director’s agreement.
Obviously, a commitment like that cannot realistically be made by a production company unless it has the funds to make that payment. As a result, difficult negotiations may well ensue about when the director becomes pay-or-play. The production company will want to delay that commitment until such time as all the funds are available. The director will seek that commitment as soon as possible, as early as the execution of the agreement. A frequent solution is that the director does his or her work, and is paid for it, in the ordinary course in accordance with the agreement, and becomes pay-or-play when the completion bond for the film issues. A completion bond will only issue if the bond company is convinced that the picture can be delivered on time and on budget, which is often the date when all the funds are in hand and can be as late as the first day of principal photography, or even after.
Until the director achieves pay-or-play status, the director will frequently seek to have the right to accept another engagement to direct another picture, if that offer was made on a pay-or-play basis. The production company will seek to secure the right to preempt that offer by agreeing to make the director pay-or-play — which often means the production company must put the entire director’s salary in escrow, along with the pay-or-play commitment. The director will be obligated to notify the production company of the other offer and indicate that the director will accept it. The production company then needs to act or lose the director.
If the picture does well, the opportunities for derivative works increase, such as television shows, prequels and sequels. Compensation to the director for these subsequent creations is specified in the DGA agreement, but that merely sets forth the minimum that a DGA director will receive. Of course, the DGA director and a non-DGA director can negotiate for better terms.
Marc Jacobson is the owner of Marc Jacobson, PC, a boutique New York City entertainment law firm focused on the film and music industries. He can be contacted at marc@marcjacobson.com or 516-459-0436.
Reprinted with permission from the May 2019 edition of Entertainment Law & Finance. © 2019 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.
