A Look Ahead at Profit Participation Litigation

Film and television subscription streaming services have experienced a major boom the past few years, accelerated by the COVID-19 pandemic. You can see the impact in the Motion Picture Association’s 2021 THEME Report covering 2020: Annual global theatrical revenue plummeted from $42.3 billion in 2019 to $12 billion in 2020, while digital entertainment rose to $61.8 billion from $47.2 billion, an increase of 24%. As streaming becomes a more viable alternative for film distribution, studio profit definitions will also likely evolve, generating an uptick in distribution disputes within the profit participation litigation space. In this article, Litigation partner Jim Curry explores profit participation litigation trends impacting production and studio companies and what the future may bring.

Jim is an experienced trial lawyer whose practice focuses on commercial and intellectual property litigation, with a particular emphasis on defending studios, networks and other entertainment companies. He regularly represents clients in television distribution and accounting cases as well as copyright, idea submission, libel and slander for television news and other cases.

Tell us about your work within the profit participation litigation space. What sort of matters do you generally deal with in your practice?

I’ve been handling a variety of profit participation litigation matters within the entertainment sector for nearly 35 years. I’ve litigated various types of profit participation cases over the past few decades. Profit participation cases deal with the complex structures and processes by which investors, talent and other parties involved in the development and distribution of entertainment properties are compensated. At their core, they are accounting lawsuits, but the unique nature of the entertainment industry and how projects are financed, developed and ultimately distributed domestically and internationally require a very niche understanding of not only general accounting principles but also how films and TV shows are made.

There are several types of profit participation cases, but the primary is where a profit participant disagrees with how their profit participation interest is calculated pursuant to the profit definition. A profit definition is the section within a contract that breaks down the waterfall of revenue, fees and expenses for a particular project. Disputes in these cases involve disagreements on appropriate revenues, fees and expenses to factor into the definition and the accuracy of these revenue or expense items tabulated to determine the amount of the profit participant’s interest. Often, the dispute is over the type of revenue, fees and expenses used in the calculation. 

In one example, I represented the producers of the court-oriented show Judge Judy. In this case, the plaintiffs (the profit participants) had in 1995—when the show was owned by Big Ticket, now owned by CBS—agreed to an up-front percentage of the budget and a back-end 5% of the show’s proceeds for several producers and a talent agency. The talent agency disputed the fact that CBS allocated the entirety of the major star talent’s salary as a cost of production, which, as it increased over the years, allegedly stripped the plaintiffs of their 5% participation receipts. The plaintiffs alleged that CBS’ allocating Judge Judy Sheindlin’s entire compensation as a cost of production instead of attributing some of it to back-end profit participation was in bad faith and violated its obligation to act reasonably and consistently with customary practice in the U.S. television industry. While we prevailed on summary judgment, and with the Second District of the California Court of Appeal eventually agreeing that CBS acted in good faith and had no other choice but to pay the star talent what was necessary to keep the show going, this case demonstrates one kind of issue that can arise as TV and film properties change hands.

Profit participation cases arising from distribution disputes are another common lawsuit in this space. These usually occur when a profit participant disputes the way in which a project was ultimately distributed, alleging that a change to the distribution strategy (e.g., a traditional theatrical release was scrapped for a streaming-only release) negatively impacted the profit definition. 

Finally, there are cases that involve so-called sweetheart deals. In this circumstance, the profit participant, or plaintiff, typically alleges that the production studio lost profit for using an affiliate to distribute its film or TV project as opposed to using a more financially lucrative third-party distributor. 

What are some developments in profit participation litigation that you think are going to have the biggest impact in the next three to five years?

There are two key trends that I think will impact this space in the next several years. First, as industry consolidation continues and TV and film producers and properties are bought, sold or included in mergers, I expect that we will continue to see disputes and challenges where a profit participant may have been content with the way an original owner handled a production but not with how a new owner manages it. In two recent cases, I represented the producers and star talent of Judge Judy. Several former producers and a talent agency claimed that there was a sale of the library of Judge Judy episodes, and they sued for their percentage of the sale as profit participants. In the first case to proceed, the Los Angeles County Superior Court of California dismissed the case at summary judgment, ruling that even if there had been a sale, plaintiffs’ interests were sold along with the library, such that the new buyer would continue to account for them for their interests rather than the seller paying a “buyout” of their interests.

The second key trend is distribution. When COVID-19 struck the world, streaming became a much more viable channel, and we saw studios make quick decisions to switch distribution strategies, to which profit participants disagreed. First, I think you will start to see studios have strong language in their profit definitions that gives them sole discretion to distribute the film the best way they see fit. And at the stage of negotiation of the profit definition, expect star talent to push back hard on this type of language and even push to have some sort of control over distribution, such as requiring an initial theatrical exhibition with a minimum time, a minimum amount of screens and even minimums of the print and advertising spend. Second, I think we will see continued litigation arising from sweetheart deals in distribution agreements, with studios perhaps using a pre-negotiated formula for transactions with an affiliate. With these decisions, I think you may see profit participants allege that they made less money because of the fact that the studio did not use an external, unrelated third party. 

What makes your practice in this space unique? 

While other firms are involved in profit participation cases, I don’t know anyone else who both defends these types of cases and drafts profit definitions. Not only have I served as counsel for myriad profit participation matters, but I have also drafted profit definitions for several networks and studios as well as consulted on language changes and adding clauses and provisions for many others over the years. 

This dual perspective comes in handy because, when I work on language for a profit definition, I can use my experience in lawsuits. I can make a wish list of what I would like to see as a litigator if a profit participant ever makes a claim. This experience on both sides makes me a stronger drafter of profit definitions and a stronger defender. 

The other thing I’d note is that if you say the word “math,” I think nine out of 10 lawyers will run the other way. I happen to be one of the few who actually finds math interesting. Earlier in my career, I started out handling many accounting malpractice cases. While I don’t have a math or accounting background, I actually find that I enjoy it. For me, the challenge of arguing math concepts in front of a judge or jury piques my interest and is exciting. I really get into the details and nitty-gritty and strive to understand both the profit definition and the accounting aspects.

What makes Loeb & Loeb a leader in this space? 

We have a deep bench here at Loeb. There are several partners who handle profit participation lawsuits, and there are several others who advise on the language of profit definitions. Because of the fact that we have so many major studios and networks as clients, we frequently handle profit participation cases, so we’re always on top of the latest dispute trends in this area. I have represented profit participants when they are studios or networks. In addition, a number of our Entertainment lawyers also represent clients who are profit participants, and that experience gives our firm a unique perspective in handling cases because we have greater insight into the issues that can arise in these matters.

I am very confident and certain that if a film studio is hypothetically dealing with a unique claim in the profit participation area and shopping around for a firm with the most similar experience, we’d likely be the right firm to get the job done.