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.

Who Wants To Be a Millionaire

Disney lawyers told the jury that Celador, the owners of “Who Wants To Be a Millionaire”, should be suing William Morris and not Disney.

First filed in 2004, Celador claimed that Disney, ABC, Buena Vista Television and Valleycrest Production conducted a series of slippery deals and secret arrangements that left the “Millionaire” creators short hundreds of millions in expected revenues and profits from the hit game show when it came to America in 1999.

Celador sought damages of around $279 million to $395 million in fees and revenues, based on two different sets of accounting methodologies the company commissioned and the number of episodes of the show; and around $11 million in lost merchandising revenues.

Judge Virginia Phillips called the case a “dispute about a contract” when the trial started almost a in June 2010. In the process, the trial became an investigation into the often shadowy world of Hollywood accounting.

The jury had two claims to consider – breach of contract and breach of the Implied Covenant of Good Faith and Fair Dealing. Out of either of these, Celador or Disney will come out the victor.

Celador claimed that the “Mouse Empire” moved the rights to “Millionaire” back and forth in backdated agreements and side deals. The only reason to move these rights around was “to shield from Celador the profits and benefits of this contract that they were entitled to” by voiding any potential profit with rising production costs and declining fees.

Celador also made sure to bring up the profitable role the William Morris Agency, who have been the piñata for both sides for different reasons throughout the trial, had in putting together a package deal to bring “Millionaire” to America.

Noting the implied incentive that ABC VP of Alternative Programming Michael Davies offered to William Morris if he could get the British game show for ABC, Celador told the jury that William Morris was working more to serve itself and Disney rather than Celador.

In terms of the sheer bulk of testimony, the jury heard from Disney CEO Robert Iger, Celador CEO Paul Smith, Michael Davies, NBC/Universal co-chair Ben Silverman and ICM VP Greg Lipstone.

Disney’s Michael Eisner never showed since he was in Italy on business.

Last up on the stand was accountant Jeffrey Kinrich. With terms like “econometrics,” “autocorrection shift” and “multicollinearity” being bandied about, the debate on how much Celador should and did make in license fees from “Millionaire” became heavily determined on whether it was number of episodes or years emphasized in reading the numbers.

The jury eventually found Disney guilty and ordered Disney to pay damages of $270 million dollars to Celador. Disney said they would "aggressively seek" to have it reversed.

Smallville

Warner Bros. TV, the studio behind the young Superman series, and the CW network, which recently renewed it for a 10th season, have responded to the self-dealing lawsuit filed by series co-creators Miles Miller and Alfred Gough and co-producer Tollin/Robbins Prods. The studio and network are trying to knock out key claims at the initial pleading stage of the dispute over profits from the show.

The Smallville producers filed a breach of contract and breach of fiduciary duty complaint in Los Angeles Superior Court against Time Warner and its divisions -- WBTV, Warner Bros. Domestic TV Distribution, the now-defunct WB network, where the show started -- and the CW, a co-venture with CBS. The lawsuit alleges WBTV made sweetheart license fee deals with the WB and the CW that were not arms-length, shortchanging the plaintiffs by as much as tens of millions of dollars.

The Warners entities argue that the claims for breach of fiduciary duty, breach of the implied covenant of good faith and fair dealing and declaratory relief must fail because sufficient facts aren't alleged to support them.

Warners is trying to kill the breach of fiduciary duty claim by arguing that no joint venture exists between the producers and the studio. That's a common tactic in Hollywood accounting litigation: A profit participant sues for both breach of contract and breach of fiduciary duty because damages can be higher, and the studio will try to eliminate the fiduciary duty claim on demurrer by arguing that it doesn't actually owe any fiduciary duties because the profit-sharing relationship doesn't amount to a partnership or joint venture.

Tollin/Robbins claims that its producers agreement with Warners actually does explicitly define a joint venture. Warners responded that the producers agreement is denominated a venture agreement not a joint venture agreement.

Content Partners

Content Partners, a movie financier, claims Paramount ran a shell game with "tens of millions" of dollars to cheat investors of movie profits. Content Partners SPV 1 claims Paramount used Hollywood accounting to underreport revenue and deduct fraudulent fees, and refused to make good on promises of profit-sharing, despite admitting that it had made enough money on the movies to trigger the profit-sharing agreement.

In its complaint in Los Angeles Superior Court, Content Partners claims that Paramount agreed to use a specific formula to calculate loan repayments, so that profit-sharing on movies that did well at the box office would balance out losses on less financially successful movies.

Content Partners says it funded five slates of movies for Paramount between 1996 and 1998. Each slate consisted of four to six movies.

For the first slate of movies, Paramount agreed to pay Content Partners all "net receipts" from "Truman Show," according to the complaint. For the other four slates, Content Partners claims Paramount promised 60 percent of net receipts from certain movies within the slate that were expected to perform well commercially.

Content Partners claims Paramount owes it more than $46 million in profits from the following movies: "Varsity Blues," "Kiss the Girls," "Payback," "Double Jeopardy," "Runaway Bride" and "Election."

Content Partners claims Paramount overstated its expenses in making the movies and wrongfully claimed it was allowed to deduct the expenses from the money it owed the plaintiff.

After years of frustrated efforts for an audit, Content Partners says, an independent auditor in 2007 confirmed Paramount's improper accounting practices in the fourth and fifth slates of movies Content Partners financed.

The audit found $30 million in unsubstantiated video costs, $13 million in improper theatrical costs, "improper allocation" of $12 million in indirect video costs, $8 million in frivolous overhead costs and about $10 million in underreported foreign TV revenue, according to the complaint.

Content Partners demands more than $202 million, plus punitive damages, alleging breach of contract and fraud.

Hurt Locker

The war against movie piracy is getting downright explosive. Producers of the Oscar-winning "The Hurt Locker" are preparing a massive lawsuit against thousands of individuals who pirated the film online. Voltage Pictures, the banner behind the best picture winner, has signed up with the U.S. Copyright Group, the Washington D.C.-based venture that has begun a litigation campaign targeting tens of thousands of BitTorrent users.

According to Thomas Dunlap, a lawyer at the firm, the multi-million dollar copyright infringement lawsuit should be filed this week. He declines to say exactly how many individuals will be targeted, but expect the number to be in the tens of thousands, if not more. "Locker" first leaked onto the web more than five months before its U.S. release and was a hot item in P2P circles after it won six Oscars in March. Despite the accolades, the film grossed only about $16 million in the U.S.

"Locker" litigation could shake things up, and force ISPs to match IP addresses with illicit behavior on BitTorrent. After unmasking individuals who have illegally downloaded films, the U.S. Copyright Group then sends a settlement offer.

Alice in Wonderland

Despite it’s $662MM worldwide box office Alice in Wonderland has still not made a profit. This is typical of Hollywood Accounting. The major players (who also may be producers) still get paid. The investors and anyone paid on "net profits" does not see a penny. Based on the following assumptions:

1 50% is standard
2 The average studio film costs $40 million in Prints and Advertising, plus 25% interest (an estimated amount, every studio is different, 25% is about average)
3 The distributor takes a 25-40% fee, average is 35%, even if the film is financed, produced and distributed by the same company.
4 Likewise to the Distributors fee, the Producers must pay back the budget to the investors (in this case, the studio) before they see a profit. Plus 25% interest (an estimated amount, every studio is different, 25% is about average)
5 On top of recouping both the Production Budget and Prints and Advertising Budget, and being owed an additional $67,000,000

Box Office Gross: $662,000,000
Exhibitor Share: -$331,000,000 1
Distributor Gross: $331,000,000
Distributor Recoups P&A Budget: -$50,000,000 2
Distributor Adjusted Gross: $281,000,000
Distributor Fee: -$98,350,000 3
Producers Gross: $182,650,000
Investors Recoup Budget: -$250,000,000 4
Producers Net Profit: -$67,350,000
Studio/Distributor/Investor Profit: $91,000,000 5

Of course, this all takes into account that there are no gross players. Each distribution deal is different, and the producers each probably got $6.25M as well as the primary casting getting $10-20M and Tim Burton getting $10-20M. So it’s not like the Producers are completely out of money, they just haven’t received any profits from the box office yet.

Over the next several years, the film will definitely make all the producers a lot of money, with huge fees from DVD, VOD, PPV, Rentals, Pay TV and Free TV.

Heirs of Jack Kirby, Famous Artist, Take on Marvel

3/22/10 - When Disney agreed to pay $4 billion to acquire Marvel, the comic book publisher and movie studio, it snared a company with a library that includes some of the world’s best-known superheroes, including Spider-Man, the X-Men, the Incredible Hulk and the Fantastic Four.

The heirs of Jack Kirby, the legendary artist who co-created numerous Marvel mainstays, were also intrigued by the deal. Kirby’s children had long harbored resentments about Marvel, believing they had been denied a share of the lush profits rolling out of the company’s superheroes franchises.

They spent years preparing for a lawsuit by enlisting a Los Angeles copyright lawyer, Marc Toberoff, to represent them. When the Marvel deal was struck, Toberoff — who helped win a court ruling last year returning a share of Superman profits to heirs of one of that character’s creators — sprang into action.

Toberoff, using a provision in copyright law that gives authors or their heirs the right to regain ownership of a product after a given number of years, sent copyright termination notices to Marvel and Disney, expressing the family’s intent to regain copyrights as early as 2014.

Marvel and Toberoff entered settlement talks. In retaliation, Marvel surprised the Kirbys with a lawsuit seeking to invalidate the notices. The family has since filed a lawsuit against Marvel and Disney. Aside from seeking dismissal of Marvel’s lawsuit, Mr. Kirby’s children accuse the company of depriving the Kirby estate of credit — and thus profits — from movies like “X-Men Origins: Wolverine,” which took in $373 million at the global box office.

The dispute is emblematic of a much larger conflict between intellectual property lawyers and media companies that have made themselves vulnerable by building franchises atop old creations. So-called branded entertainment — anything based on superheroes, comic strips, TV cartoons or classic toys — may be easier to sell to audiences, but the intellectual property may also ultimately belong in full or in part to others.

Experts say cases like the one involving Marvel are only the tip of an iceberg. A new wave of copyright termination actions is expected to affect the film, music and book industries as more works reach the 56-year threshold for ending older copyrights, or a shorter period for those created under a law that took effect in 1978.

With the Kirbys, Toberoff will square off against a squadron of corporate lawyers that includes Mr. Quinn, whose most recent claim to fame was quashing Dan Rather’s $70 million breach-of-contract suit against CBS. Disney is no stranger to intellectual property fights, having spent 18 years battling a rights-infringement case involving Winnie the Pooh and ultimately winning. The company pushed so hard for an extension of copyright terms in 1998 that the resulting law was derisively nicknamed the Mickey Mouse Protection Act.

In many ways, the Marvel case is simple. It turns on whether Kirby was working as a hired hand or whether he was producing material on his own that he then sold to publishers. The Copyright Revision Act of 1976, which opened the door to termination attempts, bans termination for people who delivered work at the “instance and expense” of an employer.

Toberoff and Marvel disagree on the circumstances under which Mr. Kirby created or co-created the trove of characters.

DAVY CROCKETT

3/19/10 - The star of “Davy Crockett” and “Daniel Boone,” Fess Parker has passed away at 85 years of age. His portrayal of frontiersman Davy Crockett was a phenomenon.

Davy Crockett lunch boxes, toy Old Betsy rifles and buckskin shirts and caps filled the stores. The show's theme song, “The Ballad of Davy Crockett” was a hit song.

But Parker was a trailblazer in the courtroom. After his "Daniel Boone" television show went into syndication, Parker sued Fox Studios for a share of the net profits.

According to Parker, his suit went on for 10 long years and cost him more than $350,000. Once the case was scheduled for a trial the studio settled, but his 19 year career as an actor abruptly ended.

DICK TRACY

A federal bankruptcy judge in Delaware lifted a stay that prevented actor Warren Beatty from suing Tribune Media Services over movie and television rights to the famous detective character.

Beatty bought rights to Dick Tracy from Tribune in 1985 and later directed and starred in a Dick Tracy film. However, Tribune claimed that Beatty made no productive use of his rights for more than a decade, and under the rights agreement, this meant that they reverted back to Tribune, which originally published the comic in the 1930s.

Last November, Beatty sued Tribune in California court, arguing that he was in the midst of producing a television special on Dick Tracy. The following month, Tribune declared Chapter 11 bankruptcy, freezing claims by creditors. In March, Tribune claimed in bankruptcy court that Beatty had begun work on a TV special only to preserve his rights and that the property was worth potentially millions of dollars to its creditors.

Delaware bankruptcy court is now allowing both parties to pursue their claims.

SAHARA

A California Court of Appeal has torpedoed novelist Clive Cussler's latest attempt to recover money from the 2005 boxoffice bomb "Sahara." But the court also has taken away a $5 million award to Cussler's archnemesis, Philip Anschutz's Crusader Entertainment.

Cussler has been feuding for years with Anshutz's Crusader (now Bristol Bay). In 2004, the popular novelist filed suit claiming up to $140 million in damages from Crusader breaching a licensing agreement and failing to properly include him in the development of the "Sahara" film.

Crusader then countersued, arguing that Cussler had hurt the film's boxoffice prospects by, among other things, telling his fans not to see it.

The 14-week trial in the case became a national fascination thanks to the light it shined on Hollywood accounting (the Matthew McConaughey bomb, directed by Breck Eisner, is estimated to have lost about $80 million after expenses).

A jury ultimately awarded Crusader $5 million. However, an appeals court took away the $5 million award to Crusader, remanding the case back to the trial court.

WINNIE THE POOH

The family of Steven Slesinger, the marketer who brought Winnie the Pooh to American culture, has asked a federal court to help it recover what it says could be upwards of $1 billion in lost royalties from Disney. Stephen Slesinger, Inc. filed a notice of appeal to obtain unpaid past royalties from Disney as well as redress for Disney's past improper business practices. The family says Disney has essentially been cooking the books to get out of making the royalty payments.

Stephen Slesinger, a television and film producer, purchased the Pooh rights from author A.A. Milne. In 1930, Slesinger gave Pooh his iconic red shirt and helped turn him into an American personality. In the 1950s and 1960s, Stephen's widow, Shirley Slesinger Lasswell, helped establish Pooh's retail success by placing Pooh Corners in department stores across the country.

In 1961, the family licensed Pooh rights to Walt Disney to develop Pooh for television.

The parties had updated their TV agreement in 1983, saying Disney would retain 98 percent of gross worldwide royalties, while Slesinger would get 2 percent, but that deal went sour and Slesinger’s estate filed a lawsuit claiming it was being underpaid. A judge terminated that lawsuit when it was discovered that a Slesinger investigator had stolen evidence.

THE PASSION OF THE CHRIST

A settlement has been reached between Mel Gibson and a screenwriter who co-wrote the screenplay for the 2004 blockbuster “The Passion of the Christ”.

Benedict Fitzgerald had sued Gibson for $10 million last February, claiming that he was deceived about the overall expense of the film’s production budget, which was around $30 million – not up to $7 million, as he was allegedly told.

In his complaint, Fitzgerald accused Gibson of engaging in a "chronic and conspiratorial pattern of deceit", adding that he agreed to a salary that was "substantially less than what he would have taken had he known the true budget of the film".

"Gibson preyed monetarily on Ben, taking advantage of his unbridled enthusiasm for the project and with full cognizance of Ben's fundamental personal and spiritual beliefs," alleged the original suit, filed in the Los Angeles Superior Court.

According to Gibson’s legal team, however, the “Braveheart” star did not know the intricacies of the budget for “The Passion of the Christ” and Fitzgerald had been "handsomely compensated – a very significant amount of money for any writer on any project".

For feature length films, Hollywood screenwriters initially earn an average minimum of $40,000 for a screenplay.

Fitzgerald, according to the original court documents, agreed to a "relatively small salary", a $75,000 production bonus, and another $75,000 if Gibson's project broke even at the box office. But Fitzgerald claims that he only received $75,000 and that he was refused extra money when the movie became a blockbuster, grossing over $611 million worldwide.

MARVEL COMICS

When Marvel began its makeover early in the decade, the company generated revenue from its comic books, toys, and license fees Hollywood studios paid to make some of those comics into films – the biggest being the Spider-Man series. Seasoned investors liked this model because the movie business is insanely risky and it guaranteed Marvel would generate revenue without taking any risk.

Four years ago, Marvel made a pact with Merrill Lynch (now absorbed by Bank of America and Paramount Studios (a subsidiary of Viacom, in which Merrill would provide $525 million of non-recourse financing for Marvel to make its own films from a slate of ten characters. Marvel would pick up the first 5% of gross as a producer's fee, then Paramount would recoup distribution costs and its fees, and then Marvel would keep the rest. Hollywood accounting aside, this was a fantastic deal for Marvel. However, the real genius behind the deal was that the only collateral Marvel had to put up was the rights to those same characters.

At first, Wall Street questioned both the entertainment and financial value of the characters: Ant-Man, Black Panther, Captain America, Cloak & Dagger, Doctor Strange, Hawkeye, Iron Man, Nick Fury, Power Pack, Shang-Chi, The Avengers, and The Incredible Hulk.

Marvel had already proven it could deliver in the genre, based on the success of X-Men and experts believed that Marvel had the smarts to understand what audiences wanted in a Marvel film, and how to make it mainstream. Moreover, if Marvel couldn't deliver on a creative level, it was unlikely that anyone else could, so if Marvel defaulted on the loan, Merrill would be holding the rights to ten characters that were probably worth less than $525 million.

In essence, Marvel really had nothing to lose and everything to gain.

Marvel would have complete creative control over the slate. Since then, it's delivered the phenomenally successful Iron Man and even a remake of The Incredible Hulk. Only Marvel could get away with remaking a film that had just been made five years previously, and still generate $263 million in worldwide box office.

Add to this the fact that Marvel continues to generate enormous numbers in licensing ($292 million in 2008), their publishing unit ($125 million) continues to ride the wave of the comic book – graphic novel rage that has been going on for several years, and it continues its move into animated television productions; Marvel will remain a solid company financially.

GILMORE GIRLS

Time Warner and Warner Bros. used Hollywood accounting to cheat the creators of "The Gilmore Girls" TV show of "tens of millions of dollars," the writing/production team of Hofflund/Pollone claims in Superior Court. Producer Gavin Pollone and writer Amy Palladino claim a congeries of Time Warner entities "colluded to defraud" them "with a scheme that rivals the greed and bravado of any storyline defendants could script."

Hofflund/Pollone claims that "through improper accounting gimmicks and the anticompetitive practice of 'vertical integration' - the use of subsidiaries or other affiliates to self-deal at all levels of the media cascade, from the studios that produce the television shows to the networks that broadcast them - defendants inflated their own reported profits by diverting to themselves plaintiff's rightful compensation.

When plaintiff challenged defendants' improper practices, defendants resorted to delay, avoidance and misdirection in an effort to conceal their misconduct. Only the intervention of this Court at this time can safeguard plaintiff's rights to the profits due to it."

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.

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.

Peter Jackson’s dispute with New Line Cinemas was settled for $40 million after a long, drawn out battle. 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.

J.R.R. Tolkien sold movie rights to his “Lord of the Rings” novels 40 years ago for 7.5 percent of future receipts. Three films and $6 billion later, his heirs say they haven’t seen a dime from Time Warner.

The accounting methods used by New Line Cinema, the Time Warner unit that made the movies, will face a jury’s scrutiny in October, 2009, when the heirs’ lawsuit against the New York-based media company is set for trial in Los Angeles Superior Court.

The case, if not settled by then, may provide a window into accounting practices that let Time Warner deny proceeds of the Oscar-winning films to Tolkien’s heirs. The litigation also threatens to derail two “The Hobbit” films that, if their predecessors are a guide, could generate $4 billion in sales.

Tolkien’s family and a British charity they head, the Tolkien Trust, seek more than $220 million in compensation. The Tolkiens also want the option to terminate further rights to the author’s work, as the original contract lets them do in the event of a breach.

Tolkien’s works already have a litigation history. Peter Jackson, who directed all three “Rings” films, sued New Line in 2005, claiming the studio miscalculated his proceeds from the first movie. They settled for an undisclosed sum in 2007. Jackson is in pre-production in Wellington, New Zealand, for the two “Hobbit” films.

Producer Saul Zaentz, who once owned film rights to the “Rings,” also sued New Line over his share of the receipts and settled in 2005 for $168 million.

Tolkien, a writer and professor at Oxford University who died in 1973, received $250,000 from United Artists when he signed over the film rights in 1969.

Under the contract, New Line was to pay a percentage of all gross receipts, after deducting 2.6 times the production costs, plus advertising expenses in excess of a certain amount.

Gross receipts typically consist of the studio’s share of box-office sales and revenue from sources such as home video, TV, merchandise and music royalties. New Line’s accounting included 20 percent of home- entertainment revenue, instead of the 100 percent called for in the contract. The studio excluded foreign revenue, saying Warner Bros., not New Line, received those sales for distributing the films abroad.

The heirs say New Line inflated expenses, excluded revenue from its calculation and allowed documents to be destroyed.

Warner Bros has finally settled a long-running legal dispute with the Tolkien Trust and publishers Harper Collins over profit-sharing from the "Lord of the Rings" films.

Los Angeles Times reports that two of Tolkien's children, Christopher, 84, and Priscilla, 80, sued New Line, now a unit of Warner Bros, for an estimated $150 million that they claimed was owed from the three "Lord of the Rings" movies, which amassed $2.96 billion at the worldwide box office and at least $3 billion in DVD and other ancillary sales.

The lawsuit, which alleged breach of contract and fraud, claimed that the heirs had not received any money under a licensing agreement sealed in 1969 that guaranteed them 7.5 percent of the films' gross receipts.

The parties announced that they had settled the lawsuit but declined to disclose terms. “The trustees regret that legal action was necessary, but are glad that this dispute has been settled on satisfactory terms that will allow the Tolkien Trust properly to pursue its charitable objectives and acknowledge that New Line may now proceed with its proposed films of 'The Hobbit'."

Today's resolution of the litigation between New Line Cinema and the estate of author J.R.R. Tolkien over “The Lord of the Rings” trilogy is shaping up as one of the biggest profit participation settlements in Hollywood history. Two independent sources with knowledge of the deal pegged the value to the Tolkiens and co-plaintiff Harper Collins at well over $100 million.

The settlement heads off a scheduled October trial between heirs of the “Rings” author and New Line, which released film adaptations in 2001-2003. The trilogy grossed $3 billion in worldwide theatrical boxoffice, plus an estimated $3 billion from DVD, TV licensing and merchandise sales.

The deal also paves the way for Warner Bros. and MGM to move forward with two planned films based on Tolkien’s “The Hobbit,” which will be executive produced by “Rings” director Peter Jackson and directed by Guillermo del Toro.

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.

The composer and lyricist for the hit musical "Chicago" say Disney and Miramax used Hollywood accounting to underreport the movie version's profits by nearly $200 million, cheating them of more than $12 million. Composer John Kander and lyricist Nicole Fosse say the studios underreported gross receipts by $165 million through 2006, and overstated deductions and exclusions by more than $32 million.

Kander and Fosse say they "suspect that defendants' deception runs much deeper - and, consequently, their damages are much greater," but the studios "frustrated" their audit rights by withholding documents.

They demand an accounting and more than $12 million in damages for breach of contract, intentional interference with contract, and breach of faith.

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."

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.

X-Files

In 1999, X-Files actor David Duchovny, sued 20th Century Fox for his share of profits from the X-Files. A settlement occurred in 2000 with a $20 million settlement.

Michael Connelly

Michael Connelly, best-selling creator of the Hieronymus "Harry" Bosch detective novels, claims Paramount Pictures used Hollywood accounting to overcharge him for repurchasing rights to two of his novels the studio did not make into movies.

Connelly claims Paramount wants him to pay for improper costs, improper overhead, and says its claims "contain no back-up, so that there is no way of determining the accuracy of the costs described."

The novels involved are "Black Ice" and "The Black Echo."

Connelly says he and Paramount made their original agreement in 1992, with a 15-year term after Paramount exercised its option, which it did in 1995. The 15-year option expired in January and Connelly has a year to repurchase his rights. He claims Paramount is giving him the runaround.

Connelly seeks an accounting and damages for breach of contract.