February 25, 2011 5:03 pm

Lights, camera, accounts!

To watch Harvey Weinstein walk into a Hollywood party is to receive a lesson in how to work a room. A 58-year-old bear of a man with greying, cropped stubble, the film producer speaks in a low growl, greeting friends and acquaintances as he moves through the crowd, shaking hands and slapping backs, while his eyes rake the room for the next big deal.

Weinstein has been working a lot of rooms lately. For at the 83rd Academy Awards on Sunday night at the Kodak Theatre in Hollywood, the man responsible, with his brother Bob, for thrusting independent film into the mainstream in the 1980s and who won a best picture Oscar for Shakespeare in Love (1998), once again has one of the year’s strongest contenders.

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The King’s Speech, starring Colin Firth as King George VI, has already picked up a display cabinet’s worth of prizes at the Baftas and Golden Globes. Weinstein is a seasoned Oscar strategist yet, as he has plotted his campaign to woo the Academy’s voters, an unwelcome distraction has emerged from the unlikeliest of places.

In Los Angeles earlier this month Michael Moore, the leftwing film-maker and formerly a staunch Weinstein ally, filed a lawsuit against the producer, claiming $2.7m in unpaid royalties from Fahrenheit 9/11 (2004), the controversial film about the Iraq war that became the highest-grossing documentary ever, taking more than $200m worldwide.

At the heart of the lawsuit is a dispute about Hollywood accounting practices that have for decades been a source of contention between the studios that release movies and “the talent” – the actors, directors and writers – who make them. Claiming he is the victim of “classic Hollywood accounting tricks and financial deception”, Moore alleges the Weinsteins improperly deducted expenses from his share of the film’s profits – including the cost of a private jet to fly Weinstein from the US to Europe. It’s a suit which pits Larry Stein – Moore’s lawyer and veteran of several high-profile film accounting cases – against Bert Fields, Weinstein’s attorney and an accomplished Hollywood litigator.

Stein alleges the Weinsteins failed to honour a contractual agreement to split the film’s profits 50/50: “We know the film grossed $228m theatrically. When you take DVD and television sales into account, you have to assume it generated as much as $500m.” Moore earned $19.8m from the movie, so, asks Stein, “where’s the rest of it?”

“There are issues of interpretation [of the contract] on which we disagree,” Fields tells me. He denies Stein’s claim that Moore and the Weinsteins were joint venture partners on the film. Instead, Moore was, says Fields, a “profit participant” and the Weinsteins had the right to deduct expenses associated with the production from the money they paid him.

Whatever the outcome of the case, Hollywood has a poor reputation when it comes to sharing the profits of successful movies or television shows. “Hollywood accounting is an oxymoron, like airline food,” says Pierce O’Donnell, the trial lawyer who represented the columnist Art Buchwald in a landmark suit against Paramount over the writer’s share of profits in the hit Eddie Murphy comedy Coming to America (1988).

At the root of the Buchwald case and numerous others are “net profits”. In any normal industry these would refer to profits after tax and other related costs. Not so in Hollywood, where the term has the status of an in-joke: the lowly writer, director or actor who has negotiated a percentage of net profits will usually end up with nothing.

This is because the studio will include an array of costs in profit statements sent to the talent. As a result, even wildly successful movies will fail to generate any net profits, on paper, at least. “I was taking a deposition from Eddie Murphy in the Buchwald case,” recalls O’Donnell, “and he described ‘net profits’ as ‘monkey points’ ... because when you get the statement from the studio, you laugh like a monkey.”

Paramount, in turn, claimed that it had spent so much marketing and developing the film that it had earned no net profits – despite having generated a box office of $289m. The judge on the case, however, described this formulation as “unconscionable”, and the studio settled out of court.

Since then, though the term “net profits” has given way to phrases such as “adjusted gross receipts”, the practice of including everything in the profit statements sent to low-ranking talent has continued. Multiple accounts are compiled for every film, with each profit participant receiving a statement particular to the contract they have negotiated. “We used to say that the studios kept three sets of books,” says O’Donnell. “One they gave to the government and the Internal Revenue Service; [one was] their own set of accounts for executive compensation and bonuses; and a third set [was] for the net profit participants.”

Last year, a financial statement for the Warner Brothers’ movie Harry Potter and the Order of the Phoenix (2007) was leaked to the entertainment news website Deadline Hollywood. According to this statement, though the film took in $938m worldwide, it made a $167m loss, once distribution fees, advertising and other costs were accounted for.

The idea that any of the Harry Potter blockbusters, which recently overtook the Star Wars movies as the world’s highest-grossing franchise (Box Office Mojo puts the series’ gross at $6.4bn), could have lost money does seem far-fetched. Even the quarterly earnings reports published by Time Warner, which owns Warner Bros, regularly mention the profitability of the films. Still, in the accounts sent to the net profit participant, the loss was legal and proper.

In the six years he spent running Fox Filmed Entertainment, releasing films including Titanic (1997) and Independence Day (1996), the producer Bill Mechanic negotiated with plenty of big stars. “The question isn’t whether a movie is profitable,” says Mechanic, who left Fox in 2000 to form a production company. “It’s whether it’s profitable by a definition of profitability. What is the definition of profits per your contract?”

The more clout the talent has, the closer they will be to a share of what the world outside the studio might consider a film’s profits. In Hollywood, historically, this has meant a share of the film’s box-office gross. “Being a film producer is a journey,” says one producer. “It’s a journey from net-net to gross-gross. It’s all about where you are on that axis.” The sweet spot on that axis is to be entitled to “first-dollar gross”, ie, a percentage of the first-dollar receipts as calculated before any cost deductions.

Some deals have led to bizarre instances of stars earning more from the movies than the studios that made them. Tom Cruise’s first-dollar gross deal on Mission: Impossible III (2006), for example, entitled him to 22 per cent of the film’s box-office – a payday of about $80m. But, with the film performing below expectations, Paramount is reported to have barely broken even on its investment.

In recent years, though, thanks to the collapse of DVD sales and the financial crisis, such first-dollar gross deals are increasingly rare. “Now, unless you’re Will Smith, first-dollar deals have gone the way of the dodo,” says one leading Hollywood agent.

The talent can still negotiate huge deals. The “break-even” agreement reached by the director Todd Phillips with Warner Bros on his 2009 comedy The Hangover gave him a share of the film’s gross after the studio had recouped its costs. Generating $467m in box-office receipts on an estimated production budget of just $35m, it became one of the best-performing comedies ever and earned Phillips, according to a person familiar with the deal, an eye-watering $51m. It is perfectly legal for studios to prepare several sets of accounts and come up with their own definitions of what constitutes profits because as long as the writer, director or star signs a contract, there is little they can do. “If you believe it’s unfair, try to modify the contract beforehand or don’t sign it,” says Weinstein’s lawyer Fields.

The problem is that with the talent often so anxious to get their movie made that they’re ready to agree to almost any terms, the studios often have the advantage. Of course, the talent could try another studio but Hollywood contracts tend to be remarkably similar. “It’s like spontaneous creation,” Moore’s lawyer Stein says wryly.

It’s a similarity that did not go unnoticed by the estate of the late Jim Garrison, a tenacious former district attorney whose 1988 best seller On the Trail of the Assassins formed the basis of Oliver Stone’s JFK (1991). When Warner Bros acquired the rights to the book, Garrison – played by Kevin Costner in Stone’s film – negotiated a separate deal to receive a portion of the net profits. But, when Garrison died aged 71, a year after the film’s release, his family was infuriated to discover that he had never received any net profits and in 1995 filed a class-action lawsuit against seven Hollywood studios, describing the film industry as a “never-never land of illusion” and net profits as “a scam that has endured nearly half a century”. Though the case was dismissed on the grounds that it did not qualify for class action status, the court did not rule on the basic issue Garrison’s family was claiming – that net profits, as they are defined in Hollywood, are illegal.

In fact, most disputes of this kind are settled out of court, as NBC did in 1989 after a legal battle with actor James Garner, who sued the television network for his share of profits generated by The Rockford Files series. Others never reach court, partly because plaintiffs lack the will or the financial muscle to handle a lengthy trial. “The graveyards of Hollywood are strewn with the bones of talent who have sued the studios over net profits contracts,” says O’Donnell.

Studios have an arsenal of sophisticated tactics at their disposal to frustrate auditors and lawyers acting for disgruntled talent. One is to bundle a successful film with several others when selling the rights to international television. If a hit is sold in a bundle of five along with four flops, the international distributors would primarily be paying for the successful film, says Alan Schwartz, a partner in the Greenberg Traurig law firm. But if a hit film is part of a bundle of five, the studio can pay a 20 per cent fee to the film-maker or producer – rather than a larger amount that would reflect its proportionate success at the box office success compared to others in the bundle.

Home entertainment is a particularly contentious area. Because videocassettes were expensive to produce, the studios came up with a formula whereby the talent would be entitled to a royalty based on 20 per cent of video revenues, while the studio would keep the remaining 80 per cent. However, when video was succeeded by DVD and costs fell, the studios continued to pay royalties based on 20 per cent of revenues, which sparked furious negotiations between the studios and agents representing the talent. “Understandably, the agents would look for as much upfront as possible,” says James Clayton of Ingenious Investments, an investment firm with interests in both Avatar (2009) and Night at the Museum (2006). “That would bump up the cost of production, which wasn’t helpful to anybody.”

But on Monday night, despite the uneasy relationship that often exists between the talent and the studios that pay them, Hollywood will present a united front at the 83rd Academy Awards. The stars will flash their smiles on the red carpet and talent and creativity will be celebrated, as it always is at the Oscars, with tears and gushing speeches. But behind the scenes, other, less starry film industry folk will be working on spreadsheets and income statements. “I’ve been in Hollywood for 30 years,” says O’Donnell. “And the most creative people have always been the accountants.”

Matthew Garrahan is the FT’s Los Angeles correspondent. Follow him on Twitter at twitter.com/mattgarrahan

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Who gets what: allocating the profits

The King’s Speech – with a production budget of £8m ($15m) and worldwide ticket receipts of $211m (a figure that should get a further substantial boost if the film does well at the Oscars) – is one of the more profitable movies of recent times. But the process of allocating the profits could take a while as money trickles in from the countries where it is being shown.

The film was produced by the London- and Sydney-based See-Saw Films, and its stars Colin Firth, Geoffrey Rush and Helena Bonham Carter are in line for a hefty payday.

Speaking at breakfast in West Hollywood earlier this month, Emile Sherman, co-founder with Iain Canning of See-Saw, said: “We own and control it ... it’s our film.”

The film’s executive producer, the Weinstein Company (founded in 2005 by Harvey and Bob Weinstein after they left Miramax Films), should also do well, having contributed a sum equivalent to about half of the film’s production budget in return for the north American distribution rights.

Sherman is grateful for the Weinstein Company’s support. “When other people were equivocating, Harvey came to the party. It paid off ... he deserves every credit for putting his money on the line.”

Another of The King’s Speech’s key investors will not, however, be around to benefit from the film’s success. The UK Film Council, which contributed £1m in funding towards The King’s Speech, is due to close in April after falling victim to spending cuts ordered by the UK government. It is currently unclear whether the UK Film Council’s possible share of the profits will eventually flow back into the British film industry – or be spent elsewhere. MG

‘The King’s Speech’ has 12 nominations for this year’s Oscars in the following categories: Best picture; Actor in a leading role (Colin Firth); Actor in a supporting role (Geoffrey Rush); Actress in a supporting role (Helena Bonham Carter); Art direction; Cinematography; Directing; Film editing; Music (original score); Sound mixing; Writing (original screenplay)

‘Oscars: The Highlights’ is on Sky Living, Monday, 7.30pm

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