Hollywood Accounting - Case Studies

Note from Jeffrey : This section highlights abuses of Hollywood Accounting standards and their misapplication

To review major FASB and GAAP concepts which should be applied to all movie and film projects please visit Hollywood Accounting.

Actor Tommy Lee Jones is suing Paramount Studios over the gross receipts income for the 2007 Oscar winning film, "No Country for Old Men." The film, which took the 2008 Academy Award for Best Motion Picture of the Year, starred Jones as Sheriff Ed Tom Bell.

Jones claims that more than $10 million of unpaid bonuses from starring in the west Texas drama are due to him.

In the lawsuit, Jones claims that he was promised "significant box-office bonuses" and other compensation depending on the success of the film.

The suit says Jones was paid a reduced fee upfront and that there were known errors in his contract that weren't corrected before the movie was made. Jones also wants an outside forensic auditor to review the financial records.

Hollywood Accounting Cost Him $12 Million, Allen Hints

Director Jon Favreau revealed that he made $4 million for the first film and has a NET profit deal which would give him a very small percentage of the money once the film begins to turn a profit. But Farveau says he won’t see any money of that Net profit money for years, if at all. Jon claims that while Elf cost only $32 million to film, and made over $125 million at the box office, the film technically still hasn’t made a profit yet. Favreau estimated that Iron Man was probably made for around $140 million.

New York-based Marvel, whose spring movie hit Iron Man featured Robert Downey Jr. as the scientist-genius-egomaniac Stark, reported a jump in second-quarter profit, thanks mainly to a surge in revenue from licensing of merchandise tied to Iron Man.

As a result of Hollywood accounting, Marvel didn’t record any domestic revenue for Iron Man or The Incredible Hulk in the second quarter. It did, however, record $28.9 million in revenue for foreign pre-sales of the movies.

What seems to have unnerved investors was the company’s warning that the domestic payoff from the films, including DVD sales, won’t come until 2009 -- after Marvel's distributors have subtracted promotional costs.

NBC Universal claimed that Quincy M.E. has accumulated over $66 million in net losses -- this after we all know that the 1976-1983 series is a classic shown all over the world even to this day. Through his Beverly Hills attorneys Johnson & Johnson, Klugman said: "I don’t want their money. I want my money. I can’t believe they’ve collected over $250 million dollars and they say they are still in the hole. I have 28% of the net and they won’t even give me a copy of my contract. I worked for them for almost 8 years. I got up at 4 o’clock in the morning. I would rewrite. I did a ton of work. It’s on every day. I haven’t gotten a penny for years."

Worse, the lawsuit claims that when Klugman asked to see his paperwork with NBC Universal, the network and studio "refused to give Plaintiffs a copy of the contract". So Klugman’s attorney wrote a letter to NBC Universal requested "a copy of any and all contracts pertaining to Klugman and Quincy M.E."

NBC Universal responded that it's “unable to comply with your request … because it is NBC Universal’s policy not to provide copies of talent contracts or other confidential documents.” The lawsuit notes that, under the terms of the contract, Klugman and his company Sweater Productions are entitled to a “Participant Share” of 25% of all “net profits” attributable to Quincy M.E. But NBC is required to "properly account" for the net profits to Sweater/Klugman which has a right to audit the records if a dispute arises.

On March 5, 2008, Klugman’s attorney gave notice of Klugman’s intent to audit the TV series.

It was a battle scene potentially as dramatic as anything from Lord of the Rings. Peter Jackson’s dispute with New Line Cinemas, a division of the world’s largest media monolith, Time Warner, was like a troll taking a fiercely-held belief to Mordor.

It looks like the troll won, pocketing a $40 million settlement and a lucrative deal to co-produce two “Hobbit” movies, starting pre-production next year.

Jackson settlement ends an acrimonious battle that saw him pitching himself against the largest media company in the world, Time-Warner, together with the chief of one of the most powerful film companies, Time-Warner’s New Line Cinema and their co-chairman Bob Shaye.

Luckily for Jackson he had the support of major players, like MGM’s Harry Sloan, who wanted Jackson to direct ‘The Hobbit’ over anyone else.

He also had lawyers who had previous experience in dealing with cases involving dubious Hollywood accounting practices, where profits and revenue streams can be obfuscated through a variety of accounting devices.

The lawsuit involved a so-called ‘vertical’ action, which involves the potential for a large media group like Time-Warner to secure various streams of income from different sources through publishing, films, merchandising, recordings and other entertainment media without putting the rights up to the highest bidder.

Peter Jackson’s claim was launched in 2005 when he claimed the studio had miscalculated his share of receipts from the “Lord of the Rings” trilogy, which had grossed nearly USD3 million worldwide. An application to have the lawsuit thrown out was itself thrown out by a US District Judge in September this year.

MGM’s role in the suit is its involvement with New Line in helping to finance and distribute the films, but powerful MGM chairman Harry Sloan, whose company holds the film rights to “The Hobbit” and who wanted Peter Jackson and Fran Walsh to make the movies.

An earlier example of such litigation occurred in 1999 when X-Files actor David Duchovny, now appearing in Californication, sued 20th Century Fox for his share of profits from the X-Files. A settlement occurred in 2000 with a $20 million settlement.

The lawyer in both cases was Stanton “Larry” Stein, from LA law firm Dreier Stein & Kahan, who is rated as an “A-List” entertainment litigator.

New Line’s defense was handled by mega-firm O’Melveny & Myers, who have represented the defence for a number of large entertainment companies including not only Time-Warner, but also Sony.

Under the deal agreed between Jackson and New Line and MGM, the “Hobbit” movies will be financed by New Line and MGM, the latter now being a privately owned company whose shareholders include Harry Sloan, Sony’s media division and Comcast Corp.

Crash director Paul Haggis is suing one of his co-producers on the Oscar-winning movie over $4.7 million in unpaid royalties. Haggis claims he is owed the millions in profits from the 2005 box office hit and has accused Bob Yari of breach of contract.

The filmmaker is disputing an agreement signed in 2002 regarding the distribution of royalties, which depended on the film's financial success. Crash, which went on to win three Academy Awards was originally made on a budget of just $6.5 million plus $1 million in financing, but went on to gross over $100 million worldwide - more than 10 times its original cost.

However, Yari has argued in court documents that the movie was not as profitable as it seemed, because various additional production costs had not been taken into account. Haggis is not the only person suing Yari over Crash's financial issues - legal suits have also been launched by Bobby Moresco, who co-wrote the film, and co-producer Cathy Schulman.

Producer Martin Richards sold Miramax an option to the movie rights to the musical in 1994. In papers filed in New York State Supreme Court, he said that he has been cheated out of $10 million in profits due to underreporting of revenues.

Court papers said that his contract called for him to be paid several fees, including $500,000 after the movie reached its initial break-even point.

Mr. Richards, who is 74, produced the musical "Chicago" on Broadway in 1975, and then began a 27-year quest to make a movie out of it, he said in the suit.

The film, which opened in December 2002, starred Richard Gere, Catherine Zeta-Jones and Renee Zellweger, and won six Academy Awards, including one for best picture. The court papers said that the film was budgeted at $47 million and went over budget by about $10 million.

The lawsuit claims that "Chicago" was the highest-grossing film ever released by the studio and that the movie generated gross receipts of about $300 million, including $170 million during its initial domestic release, and many millions more from DVD, video and foreign distribution.

The suit offers something of an exegesis on accounting practices in the film industry, including the observation that there are at least two forms of accounting used by major studios, financial accounting and contingent compensation. Financial accounting, the papers say, somewhat archly, "tends to be rather run of the mill, reflecting the mundane efforts of Hollywood's C.P.A.'s to match movie revenue with movie costs."

Contingency accounting, the lawsuit says, is "reined in only by the avarice of the studios and the leverage they hold over the talent they hire, is opaque, confusing and leads to patently absurd results."

Studios support creative accounting, the lawsuit says, because so many people involved in the production of a movie are under contracts that award contingent compensation, often including actors, the director, the producer and the writer. The most powerful independent contractors — like major stars — can negotiate contracts known as "gross deals," in which their compensation is based on gross receipts for the movie, with minimal deductions for expenses, the lawsuit says. The less powerful, the papers say, receive "net profit deals," in which, the lawsuit says, "studios typically decrease revenue and increase costs and expenses attributable to the movie."

Mr. Richards negotiated what is called a "gross after break-even deal," a contract that is somewhere in between a gross deal and a net deal.

COMING TO AMERICA

Buchwald v. Paramount (1990) was a breach of contract lawsuit filed in California in which humorist and writer Art Buchwald alleged that Paramount Pictures stole his script idea and turned it into the 1988 movie Coming to America. Buchwald won the lawsuit and was awarded damages, and then accepted a settlement from Paramount before any appeal took place.

The decision was important mainly for the court's determination in the penalty phase of the trial that Paramount used "unconscionable" means of determining how much to pay authors. Paramount claimed, and provided accounting evidence to support the claim, that despite the movie's US$350 million in revenues, it had earned no net profit, according to the definition of "net profit" in Buchwald's contract, and hence Buchwald was owed nothing.

The court agreed with Buchwald's argument that this was "unconscionable", and therefore invalid. Fearing a loss if it appealed, and the subsequent implications of the unconscionability decision across all its other contracts, Paramount settled for undisclosed terms.

In 1982, Buchwald wrote a screen treatment that was pitched to Paramount, with the intention of starring Eddie Murphy, who was under contract to Paramount at the time. Paramount optioned the treatment in early 1983 and commissioned several unsuccessful scripts from several screenwriters.

In May 1986, Paramount's rival Warner Bros. optioned Buchwald's treatment.

In the summer of 1987, Paramount began to develop a movie that was credited as being based on a story by Eddie Murphy, and which was to be directed by John Landis. The story outline seemed similar to Buchwald's story idea, and to the failed Paramount scripts that had been based on it.

In January 1988, Warner Bros. cancelled their version of Buchwald's project, citing the Paramount project.

When the movie was released by Paramount in 1988, Eddie Murphy was given story credit. Buchwald was not paid, or credited as the story writer. Buchwald sued Paramount for breach of contract, as his contract with Paramount stated that he would be paid a certain amount if his treatment were made into a film.

The California Superior Court decided in 1990 that Buchwald had demonstrated by a preponderance of the evidence that his story treatment—and Paramount's unsuccessful scripts based on the treatment—were "similar" to that of the movie. Together with the evidence that Murphy and Landis previously had access to Buchwald's treatment, the court determined that the movie's story was indeed "based upon" Buchwald's treatment. Since Paramount never paid Buchwald, as the option agreement specified would occur if a movie based on his treatment were ever released, Paramount did indeed breach the contract.

JFK - THE MOVIE

The class-action antitrust lawsuit was filed by the heirs of Jim Garrison, whose book "On the Trail of the Assassin" was the foundation of the 1991 Oliver Stone film "J.F.K." According to the suit, Warner Brothers says that the movie has not earned any money under the studio's "net profits" accounting formula.

The assassination-conspiracy film grossed more than $150 million worldwide, according to the lawsuit. But the estate of Mr. Garrison has not received any profit income, to which it is contractually entitled.

It names Warner Brothers and the six other major studios as defendants, saying that they all use the same accounting methods and nearly identical contracts.

The legal action is the latest assault against the net profits accounting system. In recent years, the studios behind "Forrest Gump," "Batman," "Indecent Proposal" and "Coming to America" have all argued that their films lost money according to the accounting method.

Late in 1990, a judge here ruled that the net profits practices were "unconscionable".

The accounting method, which varies little from studio to studio, allows a film company to assign certain, sometimes arbitrary, costs to a movie. These include distribution, advertising and overhead, and often have no real relationship to expenses.

For example, Paramount Pictures, a unit of Viacom, reaped a windfall on "Forrest Gump" even though the studio's net profits formula showed a loss. The film brought in $329 million at North American theaters, the third-highest-grossing release in United States history.

MY BIG FAT GREEK WEDDING

In yet another lawsuit challenging Hollywood's accounting practices, Tom Hanks, his wife Rita Wilson, and writer-actress Nia Vardalos have sued Gold Circle Films, claiming the company has cheated them of millions of dollars. The lawsuit, filed in Los Angeles, claims that their film grossed about $370 million, while the studio has indicated its gross receipts total $287 million. Gold Circle Films principal Scott Niemeyer responded: "Gold Circle has fully complied with its contractual obligations and has already paid plaintiffs a combined total of over $44 million in profits."

LORD OF THE RINGS

In his lawsuit, Mr. Jackson claimed that New Line committed fraud in its handling of the revenues generated by 2001's "The Fellowship of the Ring," and as a result, he was underpaid by millions.

The suit does not specify a damage award. His lawyers said that, after New Line applied its contract interpretation to his movies, Mr. Jackson was underpaid by as much as $100 million for the trilogy.

The suit charges that the company used pre-emptive bidding (meaning a process closed to external parties) rather than open bidding for subsidiary rights to such things as "Lord of the Rings" books, DVD's and merchandise. Therefore, New Line received far less than market value for these rights, the suit says.

Most of those rights went to other companies in the New Line family or under the Time Warner corporate umbrella, like Warner Brothers International, Warner Records and Warner Books. So while the deals would not hurt Time Warner's bottom line, they would lower the overall gross revenues related to the film, which is the figure Mr. Jackson's percentage is based on.

According to people on both sides of Mr. Jackson's lawsuit, the claim strikes at the heart of the modern vertically integrated media company. One of the apparent - though largely unproven - benefits of media integration is the ability of conglomerates like Walt Disney, Time Warner, the News Corporation, Viacom, Sony and GE to sell subsidiary rights to the many divisions within the company.

By painting this corporate synergy as "self-dealing," Mr. Jackson's lawsuit called vertical integration lawsuits, argue that the idea of the media conglomerate is at odds with the interests of the creative minds behind the content.

Since no studio head or corporate executive wants to be subpoenaed in a lawsuit over accounting, vertical integration lawsuits are almost always settled before reaching open court.

ROGER RABBIT

It’s been twenty years since Roger Rabbit hit the big screen. And, Gary Wolf, the science fiction author whose 1981 novel formed the basis of the hit movie, is still fighting his own crusade for cartoon justice.

Mention the Wolf case to seasoned entertainment litigators and you'll hear either a groan or a chuckle depending on which side of the talent-vs.-studios battle the lawyer fights. The case already has spawned at least two significant judicial setbacks for profit participants trying to collect damages from studios. And, a California court of appeal sent a portion of the case back to the trial court, illustrating the uphill and often unending battle facing talent who dare challenge studio accounting.

Like many authors, Wolf signed a 1983 option agreement that gave him 5% of "gross receipts" from Disney's exploitation of neurotic Roger, curvy Jessica Rabbit, cigar-chomping Baby Herman and the rest of his characters.

Unfortunately, the parties didn't bother to define "gross receipts" and Wolf later claimed that he was owed millions for his share of everything from nonmonetary promotional partnerships with McDonalds to the value of Roger Rabbit "walk arounds" at Disney theme parks.

Strike 1 against Wolf came in 2003, when the court ruled that the right to collect contingent compensation from Disney did not create a "fiduciary" relationship with the studio.

In 2004, Wolf moved forward with his claim after the appeals court ruled that "gross receipts" might include the value of tens of millions of dollars worth of noncash promotional consideration. But then a 16-week trial ensued, and Wolf won just $180,000, far less than the $8 million he had sought.

Meanwhile, Disney's lawyers claimed that they discovered an oddity in the accounting statements: Wolf had been overpaid for 10 years, they argued. More appeals came, and in 2008 the court sent the case back to the trial court to figure out what, if anything, Wolf is owed.

Wolf still could get his payday, of course. In just the past year, juries in Los Angeles returned multimillion-dollar verdicts against Warner Bros. and NBC in favor of producer Alan Ladd Jr. and the creators of "Will & Grace," respectively.

At the same time, a Writers Guild of America-backed bill in the California legislature aimed at protecting participants cleared its first hurdle in April.