The practice of “bizarre” accounting by Hollywood studios and the corresponding resentment of this perceived injustice by the creative artist community are nothing new. And from all indications, the passage of time has done little to ease the tension and confrontation between the two sides, as is demonstrated by the latest David and Goliath-like confrontation involving some artists and yet another Hollywood studio. In its June edition, GQ magazine did something rather interesting with comedy: it featured in its self –styled Comedy Issue a report on the rather surprising lawsuit filed against French company Vivendi SA by the quartet behind the seminal 1984 comedy movie This is Spinal Tap.
At issue here (as usual) is the divvying up of the proceeds accumulated by the movie over the years. Vivendi claims the film has brought in revenues of only $5million over the 30-plus years since it was released. To the contrary, the Spinal Tap plaintiffs (Harry Shearer, Christopher Guest, Michael McKean and Rob Reiner) claim that the Hollywood studio is vastly underreporting or lowballing the actual figures. In fact, the plaintiffs are claiming to be entitled to a whopping $400 million dollars in the lawsuit that they filed last October against the studio in which they alleged fraud, breach of contract and abuse of power. In addition, the plaintiffs made the obligatory demand for an accounting from Vivendi.
Incidentally, as indicated above, a lawsuit by aggrieved artists arising out of a high grossing movie, surprisingly reported by the studio as a net loss, is an all too familiar scenario in Hollywood. For instance, the Return of the Jedi movie from 1983 was reported as a loss by the studio despite grossing well over $500 million worldwide even though it cost just around $43 million dollars to produce. Same bizarre accounting formula was employed with the Lord of the Rings trilogy; Coming to America and many other successful movies in order to portray their revenue status as net losses. Only in Hollywood!
In perspective, therefore, this case is a pretty big deal for artists’ rights, since a victory here could create a whole new paradigm in studio-artists relations, especially in how box-office and other movie-related revenues are divvyed up between the two sides. Hence, Shearer, one of the present plaintiffs, boldly declared in a Rolling Stone magazine op-ed in April that his team is on a “mission for fairness” and that their desire is to “highlight the long standing and improper accounting practices in the music and film industries…an opaque world of film financing, revenue accretion and minimal profit share.”
Of course, the artists are not the only ones with a dog in this fight. Perhaps Vivendi (read Big Hollywood), considering its stature and modus operandi, may well deem itself to have the bigger dog in this fight. Certainly, a defeat in this litigation will likely force Vivendi to involuntarily change its business culture and, who knows, it could even cause other aggrieved parties from its past business dealings to seek a present redress of past wrongs. This is the proverbial slippery slope nightmare that anyone in Vivendi’s position would rather avoid. Thus, for prudential reasons, the studio would rather continue keeping the door closed on these matters, by either clearly prevailing in this lawsuit or at least appearing not to have lost.
So, what does the future hold for this case? Well, for starters, the accounting issues will be the heart of the case. By comparison, the other claims are easier for the plaintiffs to navigate under black letter law: for breach of contract, for example, they need only show that they made a valid contract with the studio and that while they did their own part, the studio reneged on its own part. Concerning the fraud claim, they need to show an intent to deceive or actual deception on the part of the studio. For abuse of power, well, if it actually occurred, then that shouldn’t be hard for the plaintiffs to establish, given the unequal strength and bargaining power between the two sides in the movie business. Here, any acts of overreach by the studio could be a significant consideration in the proof department.
Thus, in a manner of speaking, the accounting issue is really where the rubber meets the road in this case because at the end of the day, this is a case about money. A lot of money, indeed. Aside from ticket sales, there are other revenue streams like VHS/DVD sales, merchandising, music sales, concert tickets and more. And the vastly differing claims of both sides further complicate the matter: for example, while the Spinal Tap plaintiffs claim $400 million dollars as owing to them, Vivendi counters that the entire revenues earned so far is just $5million and that ‘revenues from other sources and territories have been similarly modest.” (And oh, as long as we’re talking about Vivendi’s pushback against the plaintiffs, it is worth mentioning the arguably cynical suggestion of some that Vivendi could spring a copyright defense at the plaintiffs. Well, suffice it to say that that’d be an uphill battle for the studio since this case is fundamentally a breach of contract matter. Besides, speaking of copyrights, the plaintiffs themselves, reportedly, already had an actual demo of the movie prior to their contacts with the studios. )
So, anyway, the puny payments made to the plaintiffs so far is clearly indicative of Vivendi’s perspective to the matter: For instance, despite the wild popularity of the movie (which late-night show host, comedian Stephen Colbert, echoing a widespread sentiment, recently described as something that “singlehandedly created a genre….and an iconic piece of comedy”), the four artists together have reportedly received $81 as a share of merchandising revenues and another $98 for music sales revenues over a 20-year period roughly spanning 1984 -2006. This laughable figure is a very far cry from the 40 per cent of net receipts from the movie’s revenues and 50 per cent of gross receipts from the music sales revenues that the plaintiffs are claiming. The sheer gulf between these conflicting claims is breathtaking and untangling them in a litigation context will be an eye-glazing ordeal.
In any event, as the court enters upon the arduous task of plumbing the numbers on the accounting issues (naturally with the assistance of the accounting and other experts), it is foreseeable that some heads of expenditure claimed by the studio may either be allowed in part or disallowed as a whole, if found unreasonable or otherwise to be abusive of its dominant position to the detriment of the artists. Usually a higher burden is placed on the studio in these circumstances since it is deemed to be the stronger party because of its position. In other words, the balance of knowledge and information power on the accounting issue weighs heavily in the studio’s favor since it controls the movie’s production budget including sales and expense figures, which are matters the plaintiffs would ordinarily not be in a position to control. Plus, the studio’s control over these matters would have required it to exercise discretion and business judgment over them in a manner that would have a direct bearing on how much profit is ultimately made by the movie. And so on. All the while in this process, the guiding principle for the court will be the studio’s obligation to “deal fairly” with the artists.
Though their burden may be lighter, the plaintiffs’ side has some difficult work to do as well; for instance, they may have to justify their not-too-obvious formula for deciding that net receipts are OK for the movie revenues whereas gross receipts apply to the music revenues. Plus there will be other questions and possibilities that will inevitably arise in the push and pull of litigation.
In the end, this case like others before it will be decided mostly by practical considerations, regardless of the posturing on both sides and the bold statements of principles. One is the desire of the studios not to wash their dirty linen in the public or, worse, to actually lose the case. The other is the concern of the little guys (the artists) not to spend themselves into the poor house while going up against the hardball tactics of deep-pocketed studios in complicated and accounting-heavy disputes with an uncertain outcome. Incidentally, these rival motivations do reduce the odds of an actual trial of this case on the merits, and thus favor the settlement of the case pre-trial. Yet, for the broader artist community, it would seem that an actual “judgment” with a declaration of the rights and obligations of both sides will be a big help in their future collaboration with the studios. Needless to say, a “settlement” of the case will be considered by many as a familiar ending to an old script as opposed to the dramatic step of actually getting a judgment following a trial on the merits. Anyhow, only time will tell if we’re watching the re-play of an old script or witnessing the start of a brave new world in artists’ rights and Hollywood accounting.