When the Contract Comes to Court

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Contract of Adhesion

Is a standardized contract which imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it. Once a contract is deemed to be one of adhesion (small negotiations might not matter) then the court looks at whether it is unconscionable and whether the terms are expected by the weaker party. Look for unconscionable clauses Buchwald

Turnaround Provision

The purpose of the turnaround provision is to permit a producer to take his project to another studio if the first studio is no longer interested in pursuing it, while at the same time permitting the first studio to recoup its development costs if the project is undertaken by the second studio. Purpose- To permit the production company to recoup its costs in the event that the project is placed at another studio.

Creative Accounting

These are common problems in movies. Audits cost about 20-30K and usually pay for themselves for top grossing films. You can discover clerical errors. The other error arises out of contract interpretation. The philosophy of most studios is “When in doubt, resolve it in our favor and we will fight it out later if it is contested.” Other problems arise when improper deductions are made. For example, a studio may try to deduct the cost of an ad used to promote a different movie.

Exhibitors v. Distributors

Usually there is a deal between the distributor and the theaters, the distributors usually have a 90/10 profit for the first few weeks and then it starts to alter. The theaters usually cover the overhead expenses in the deal by gaining exclusive profits from the concession stand.

Anti-Slap Statute- To stop frivolous lawsuits. You can go beyond the pleadings unlike a 12(b)(6).

Contract v. Torts

You can get punitive damages with a tort so lawyers are always trying to turn contract breeches into torts. Fraud, breech of fiduciary duty, Intentional interference with a contract (you have to sue a 3rd party who is not a party to the contract, Viacom case), breech of the implied covenant of good faith and fair dealing, Intentional interference with prospective economic advantage (can’t sell ice because someone unplugged our ice machine).

Never offer to share profits in a contract because it will kill you.

Accounting Problems

General Accounting Principles - deciding how to categorize things will make a huge difference in whether the business looks profitable or not

  • Accrual – adding everything up all at once
  • Cash Basis – you decide profit on how much cash you have and how much you have spent
    • it isn’t revenue until you receive it

Types of profits

  • Net profits: generally considered earnings minus expenses
    • gross – distribution fees – distribution expenses – production costs = Take
  • Modified adjusted gross receipts: gross – distribution fees* – distribution expenses – production costs = Take
    • Distribution fees are limited to 10%
    • these are a set percentage at every level
  • Adjusted gross receipts: gross –distribution expenses – production costs = Take
    • Because there are no distribution fees taken out, this is close to actual net profits
    • Gross: no deductions


As the show goes on, the production costs and distribution expenses should be lower and the show should start make money. At the same time you hope that the revenue stream will go up as the show gets more popular. At some point the show stops production but goes on in syndication so maybe someday you could make money off of net profits.

Buchwald v. Paramount Pictures Corp.

(Cal. Super. Ct. 1990) J. Schneider

  • the court found “Coming to America” was “based upon” Art Buchwald’s screenplay
  • the court said using the phrase net profits when that is not really what you mean is unconscionable (so after this case companies stopped calling it net profits)


FACTS: Court determined that defendant’s film “Coming to America” was based upon plaintiff’s screen treatment; second phase of case is determining following issues: whether contract was contract of adhesion; whether contract was unconscionable; whether relationship between parties was of co-venturers; whether defendant owed fiduciary duty to plaintiff; whether defendant’s conduct breached implied covenant of good faith and fair dealing; components of contract are deal memo, turnaround agreement, additional terms and conditions and defendant’s standard net profit participation agreement with two attachments relating to royalties

DISCUSSION: Contract is a contract of adhesion even though some parts were negotiated, which allows court to strike entire contract of any provision thereof when contract is unconscionable; contract contains a number of provisions of percentages to be paid out, and court determines that several of the provisions are unconscionable for various reasons; Consultation clause not important because net profit formula is unconscionable and that third phase of trial necessary to determine appropriate compensation; Parties were not co-venturers and evidence does not show that usual components of joint venture were present

  • Third phase of trial necessary to determine damages

Brennan v. Big Ticket

in this case, they were treating income as cash and expenses on accrual (Superior Court, LA County 2002) Honorable Richard Montes and Albin I. Niles

  • FACTS: Brennan is the producer on the Judge Judy show. His contract gives him favored nation status.
    • Favored Nation Status - if another interested in defined proceeds is more favorable, the contracting party with the right to favored nation treatment is entitled to the benefit of the more favorable interest.
    • Brennan was a tabloid news guy who did Current Affair and Real TV
    • before they took Judge Judy to NATPE, they had a deal memo which stated “Plaintiffs would be entitled to be paid, among other things, the flowing:” included 12 ½ % of 100% of defined proceeds (BTP’s)
      • they are using this phrase because of Buchwald
    • Judge Judy was doing well and wanted to re-negotiate her contract and Brennan said he was entitled to more under the favored nations clause
      • if someone else was going to negotiate a change in a standard definition of net profits, everyone should get that
    • he wanted defined proceeds to be adjusted gross receipts


  • ISSUE: Judge Judy re-negotiates her contract, now Brennan wants the same deal.
  • Brennan is currently getting a part of the defined proceeds.
    • Defined Proceeds is a generic term - usually used for the worthless kind of proceeds.
    • Judge Judy gets a lawyer and gets Adjusted Gross Receipts instead of Net Profits.
      • Brennan wants the same definition as Judge Judy
        • Brennan gets 12.5% of Net Profits, if they changed to AGR - he would get more than Judge Judy
    • so Big Ticket gives him the same as Judge Judy
  • LESSON: Favored Nations will amplify problems - it's a bomb that will go off later
    • If you anyone besides major talent, you want Favored Nations

Notes

  • Attorneys will often turn contract disputes into tort actions because punitive damages are available with tort actions and not available with contract actions
  • Intentional interference with contract: problem is that one cannot interfere with own contract; available only when suing third parties
    • Party to contract will only be able to be sued for breach of contract
  • Intentional interference with prospective economic advantages
  • Fraud
  • Breach of fiduciary duty
    • Fiduciary duty needed
  • Lawyer/Client; Trustee/Beneficiary; Agent/Principal (depends); Officers and Directors/Corporation; Partner/Partner; Joint Venturers
  • Breach of the implied covenant of good faith and fair dealing
    • In CA, allowed in insurance matters only

Contract Torts

  • turning a breach of contract into a contract tort allows plaintiff to recover punitive damages

Kinds of Contract Torts

Intentional Interference with Contract
  • suing someone not a party to the contract
    • Ex. Brennan v. Big Ticket – Viacom was also a party as the parent company of Big Ticket
Intentional Interference with Prospective Economic Advantage
  • this is the same sort of thing as the one above
    • Ex. ice sales at competing gas stations
Fraud
  • you need some sort of detrimental reliance
    • Ex. Brennan thought he was getting good profits when the company all along knew he was getting bad profits
Breach of Fiduciary Duty
  • this one is important and comes up all of the time in business litigation
  • Types of Fiduciary Duties
    • lawyer-client
    • trustee-beneficiary
    • agent/principle
    • officers & directors/ corporation
    • partner to partner (a bit fuzzier and more dangerous)
    • joint venturers (a bit fuzzier and more dangerous (April v. KTTV)
April Enterprises, Inc. v. KTTV

(Ct. of Appeals of CA, Second District 1983) Johnson J.

FACTS: Contract dispute based upon contract entered into for production of a television show; appellant was unwilling to make deal for subsequent use of show and then filed suit several years later after discovering that videos of show had been erased.

  • Plaintiff is April Enterprises which entered into an agreement to do the Winchell-Mahoney show
  • KTTV was to own the tapes and they had the right to erase the tapes within six months of the show
  • if the show went into syndication – they split profits 50/50
  • there was a new contract which altered the rights of the parties and KTTV no longer had the rights to destroy the tapes
  • April tried to negotiate syndication agreements and purchase the tapes
  • KTTV tried to renogiate and there was a warning that the tapes would be erased unless there was an agreement to the terms
  • the tapes were erased
  • April’s grounds – breach of an implied covenant of fair dealings and breach of fiduciary duty of a joint venturer
  • she appeals from a dismissal without leave to amend


DISCUSSION: Respondents exhausted its own syndication rights then deprived appellant of its rights by destroying the tapes, which could be aggravated breach of covenant of fair dealing, Court finds that a joint venture existed, does not buy respondents’ argument that appellant was independent contractor or that the contract negates creation of joint venture


Ct. finds sufficient allegations on both causes of action Implied Covenant

  • the terms of the 1965 contract are contradictory – they wouldn’t erase the tapes which negotiating syndication
  • this can be reconciled by construing the erasure close to only take effect if syndication is not possible
  • the 1968 contract also provides a cause of action

Joint Venture:

  • “A joint venture ... is an undertaking by two or more persons jointly to carry out a single business enterprise for profit.”
  • elements
    1. joint interest in a common business;
    2. with an understanding to share profits and losses; and
    3. a right to joint control
  • this may be shown by parol agreement or assumed as a reasonable deduction from the acts and declarations of the parties

Ct says whether a joint venture exists depends on the intention of the parties (which makes it a factual question not ripe for summary judgment)

  • seeking syndication
  • sharing profits
  • the 1968 agreement didn’t extinguish the earlier agreement

EJ says this is a bit scary because ct. said a person who contributes labor in return for profits may be a joint venturer


  • Necessary elements of joint venture:
    • Joint interest in common business
    • Understanding to share profits and losses
    • Right to joint control
  • Existence depends on intention of parties and may take parol evidence into account and may be shown by reasonable deduction from acts and declarations of parties



Breach of implied covenant of good faith and fair dealing
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