The initial step in development of a motion picture (feature film, new media, television movie, television series or subscription video on demand (SVOD)) usually requires the acquisition of rights to a screenplay, or an underlying property (such as a book, novel, stage play, video game, short story, blog, magazine article, treatment, or idea) on which the screenplay will be based.
Rather than purchasing the screenplay outright, an indie producer, financier or studio will usually acquire an option from the screenwriter or owner of the literary property. This begins with the parties negotiating an Option Agreement. An “Option Agreement” usually comes in the form of two agreements: (1) the purchase of the right to buy the screenplay (the “option”), and (2) the agreement for the sale of the screenplay that comes into effect upon the exercise of the option (the “purchase”). The Option Agreement may incorporate the terms of the purchase, or the purchase may be a separate document, called a Literary Purchase Agreement, attached as an exhibit to the Option Agreement. Upon the exercise of the option, the Literary Purchase Agreement becomes a fully-enforceable agreement.
In general, an option allows the producer or studio the exclusive, irrevocable right to purchase the screenplay at a set price within a specified period of time (the “option period”). An option enables the producer or studio to undertake development activities, seek to attach talent or other “elements” and secure financing (although for the studio, financing is usually not an issue), without having to incur the full expense of the purchase price for the script up front.
In most cases, the owner of a script would prefer to have it purchased outright rather than optioned, so that she will receive a greater payment up front. A number of variables will be considered in determining whether a producer will buy a script outright, such as the quality, nature and uniqueness of the script, the reputation and experience of the screenwriter, and the relationship of the parties (such as, do they have a preexisting relationship?). Typically, only successful writers, especially ones with prior hit movie credits, and spec scripts involved in bidding wars will be purchased outright. A “spec script” is a screenplay that has been written without a writing or Literary Purchase Agreement in advance in the hope that it will later be optioned on “speculation”.
Option agreements serve a useful purpose, particularly for the indie producer or independent production company which does not have the cash to directly purchase a script, but must first acquire an option to enable him to spend time either in development or “shopping” the property to financial backers or selling the project to another production company or a studio. Normally, the amount paid for the option is a fraction of the price to be paid upon exercise of the option to acquire the screenplay.
Directors and actors have also been known to option screenplays, with the intention of producing, directing and/or starring in the production based on the script.
The following are some of the essential terms of an option agreement. Where the producer or studio does not bother with an option but instead immediately purchases the script, a Literary Purchase Agreement is used instead of an Option Agreement. If the Writers Guild of America Basic Agreement (“Basic Agreement”) is applicable, then the provisions of the Basic Agreement provide minimum guidelines for the purchase price, option fee, option period, writing services and representations and warranties. However, if the WGA Basic Agreement does not apply, the parties may still elect to use the WGA provisions to provide the minimums for their agreement.
The Option Agreement may enumerate certain steps which must be completed as prerequisites to the producer’s obligations under the agreement, such as chain of title review and obtaining a script clearance report.
“Chain of title” refers to any agreement or document that indicates a change of ownership in the screenplay from its inception. This may require a complete review of all of the documents related to the script, and often includes the commissioning of a copyright search at the U.S. Copyright Office and a trademarks search at the Unite States Patent and Trademark Office (USPTO). Sometimes it is necessary to employ local counsel to verify chain of title overseas, including “moral rights” (“droit moral”). If the screenplay is based on a property which has been published, such as, a novel, the producer may need to obtain a release from the publisher relinquishing any rights (other than publishing rights) that the publisher has in the underlying property.
“Script clearance” means that a clearance service will go through the script and create a report that flags potential legal problems relating to copyright, trademark, defamation, right to publicity and privacy issues. Once the producer (or studio) has this information, a risk assessment can be made and the producer will be able to decide whether it is necessary to revise any portions of the script to avoid potential problems down the line. For example, the producer may be required to get permission from the copyright/trademark owner if a pre-existing material (such as films clips, still photography, artwork, product name, business name, music, etc.) is used in the script, or if the name of an actual person (living or deceased) or location is mentioned in the script.
Option Fee: This is the first deal point to be negotiated. It is the price being paid for the right to purchase the screenplay. This is the only money the owner is guaranteed to get. It can range as low as a nominal amount of $1 and as high as 10% of the purchase price.
Option Period: This is the period of time during which the purchaser may exercise the option and purchase the screenplay or lose his rights to do so (subject to his right to extend the option period).
Option Extension(s) Term/Fee/Conditions to Extend: It is possible to have a second, third, and even fourth option period, each requiring a separate payment and each continuing to tie-up the script for a specified time (the “additional option period”). The purchaser may want to obtain such additional option periods to protect his investment of time and money in developing the project. On the other hand, the owner may want to grant an option period extension only on condition that the project is in “active development”, such as, a name talent has been given a pay-or-play offer.
Applicability of Option Fee(s): It is customary that the amount paid for the first option will be an offset against the purchase price, while any option payments made for the second, and subsequent option periods are usually not applicable against the purchase price. If the purchaser fails to exercise the option, all the option fees paid for the option, including for subsequent option extensions, are usually retained by the owner.
Force Majeure/Claims: The purchaser will usually include provision that the option period will be suspended and extended in the event of “force majeure” (an unexpected and disruptive event). The parties may negotiate specific events that may be included in the definition of force majeure. For example, natural disasters, or a strike (or the threat of a strike) by one of the guilds, which disrupt or delay development and/or production of the motion picture, may trigger the invocation of force majeure claims.
Option Period Activities: Prior to the exercise of the option, the purchaser will want to be able to carry out development activities (such as, rewriting the screenplay or putting it through a number of revisions and polishes), prepare a budget, or engage in preliminary casting in order to help in obtaining financing for the project. The purchaser may even engage in actual production activities, such as, filming a professional looking trailer or a short film from actual scenes from the script, in order to pitch the project to a producer, production company, studio or financier. None of these activities should be construed as an exercise of the option. In most cases, however, commencement of principal photography will be deemed exercise of the option, and the purchase price becoming immediately due.
A “set-up bonus” is an additional fee payable to the owner if the purchaser enters into an agreement for the development or production of the script with a studio, financier, independent production company, or television network.
To exercise the option, the purchase price must be paid. Therefore, it is desirable to negotiate the purchase price up front as part of the Option Agreement.
Percent of Budget (floor/ceiling) versus Set Amount: If the purchaser exercises the option to buy the script, a single amount, or a percentage of the final “approved” budget of the motion picture (usually with a floor (a minimum price) and a ceiling (a maximum price)), is paid for the “purchase price”. If the WGA Basic Agreement is applicable, then it is important for the parties to review and be familiar with the most current minimum compensation requirements.
Contingent Compensation: The owner usually receives a percentage of the back-end or participation in the revenues from exploitation of the motion picture. The manner of calculating the contingent compensation is usually hotly negotiated. The owner will seek a percentage participation defined on the same basis as that of the purchaser, but without any reductions or limitations that may be imposed on the purchaser, usually based upon 100% of the net profits (or net proceeds). Nevertheless, the percentage amount usually depends upon the owner’s stature and the role the owner is playing in the picture. The amount of the profit participation may also be dependent upon the owner’s credit on the motion picture if the picture is produced. In rare cases, the owner is able to negotiate a profit participation based on the “gross receipts”.
Credit refers to the billing or attribution that will be given to the screenwriter for his or her part in writing the script, if the motion picture is made. If the purchaser is a signatory to the WGA Basic Agreement, or if the screenwriter is a member of the WGA, credit will be governed by the WGA Agreement’s minimum credit requirements. In addition, the WGA rules provide guidelines when dealing with subsequent writers. Nevertheless, the parties are free to negotiate credits in excess of the WGA minimum.
If the owner is not the screenwriter, provision may have to be made to preserve the credit rights of the screenwriter and/or the credit obligation of the owner to the screenwriter. In this situation, the owner may seek a separate producer credit. Such producer credit may be part of the Option Agreement or included in a separate agreement for the owner’s producing services. As an additional protection for the owner’s, or screenwriter’s credit, the owner may require the purchaser to include in its contracts with third parties a provision requiring the third party to observe the credit provisions of the Option Agreement.
The purchaser will usually want to buy the broadest scope of rights possible. Typically, this would include the allied rights (such as sequels, remakes, merchandising, video games, toys, music publishing, and soundtrack recordings) and most ancillary rights (such as pay television, cable television, home video, SVOD, web series and non-theatrical distribution).
The owner typically reserves certain “reserved rights” which cannot be exploited by the purchaser. These specific rights include an author-written sequel, nonseries live television, interactive media, virtual reality, radio, publication and live stage rights. Due to the importance of sequel rights and franchises, careful consideration must be given by the purchaser to the extent of reserved rights granted to the owner. As such, the purchaser may attempt to obtain provisions for (1) a right of first negotiation, which gives the purchaser an opportunity to make the first deal with the owner for the acquisition of the reserved rights, and (2) a right of last refusal, which enables the purchaser to acquire any of the reserved rights upon the same terms as offered by a third party to the owner.
The “holdback” prevents the owner from exploiting the “reserved rights” for a specific period of time, to protect the purchaser against competing forms of exploiting the script.
If the owner is required to provide writing or other creative services in connection with the script, the purchaser should in all instances require a provision that it has sole and exclusive ownership of the results and proceeds of such services. It is also important to include an irrevocable assignment of rights, in the event that the results and proceeds of the writer’s services are determined by a court of law not to be a “work-made-for-hire.”
If the WGA Basic Agreement is applicable, when a script is sold, or under option, a minimum payment buys only the property sold or optioned; any further writing services will require additional payment of not less than WGA minimum. Thus, under the WGA Basic Agreement, payment for a screenplay does not include a rewrite. There is an exception for writing for television, in which case, the minimum includes one revision of the script if it is requested within seven days of delivery, otherwise additional payment is due. If the purchase price exceeds minimum, monies for the purchase price may be credited (at minimum or at a negotiated amount) against monies due for such services in the event the writer’s contract provides for such crediting, but pension and health contributions must be made on such credited amounts.
The purchaser must be assured that, for example, if the owner is not also the screenwriter, the owner has a valid chain of title and owns all the rights he is purporting to grant to purchaser. The purchaser wants to be assured that he is acquiring all the rights necessary for a motion picture to be produced based upon the screenplay, and that he is not subjecting himself to any third party claims, such as, intellectual property rights infringement or invasion of rights of privacy or defamation.
First Opportunity to Write: If the owner is a professional writer, he or she will usually want a right of first negotiation to render writing services on subsequent productions, such as remakes, sequels, or television series based on the screenplay.
Passive Payments/Royalties: The owner may negotiate to receive additional payments, typically in the form of a flat dollar amount or a percentage of the original purchase price (usually fixed and contingent compensation) for sequels, remakes, television series spin-offs or reruns.
A “reversion” provision is usually found in an Option Agreement and a “turnaround” provision may be part of a Literary Purchase Agreement or Production-Financing-Distribution Agreement. The “reversion” or “turnaround” may be in the form of a separate agreement or may be in the form of a clause incorporated into the initial agreement.
Reversion: Generally, the script automatically “reverts” to the owner upon the expiration of the option period if the option has not been exercised and the purchase price has not been paid. If the purchaser exercises the option and pays the purchase price, a reversion can be used to provide for the return of rights if, for example, principal photography does not commence within a specified period of time after exercise of the option.
Sometimes, as a condition to a reversion, the owner may be required to repay the expenses incurred by the purchaser in the development of the picture, or may impose a lien for such expenses, to be paid when the picture is set up with another purchaser, if the subsequent purchaser wants to use the material created and/or paid for by the previous purchaser (or purchasers).
Turnaround: On the other hand, if a producer, studio or financier purchases the script outright or exercises the option and spends additional sums on development and possibly pre-production or even production, but later decides to abandon the project, a “turnaround” gives the owner the opportunity (for a negotiated period of time after it has been acquired and developed, or even produced) to reacquire the property. A purchaser may decide not to proceed with production, if, for example, the purchaser is unable to put together the right package of stars and director, or encounters serious problems with the script.
A turnaround provision usually provides for the initial purchaser to obtain full or partial reimbursement of his development, pre-production and production expenses, usually to be paid by the owner or a subsequent purchaser.
Most owners will not receive consultation or approval rights over creative aspects of the project (such as the cast, the director, or the screenplay). Typically, only highly successful writers and name producers will be given the right to be consulted or a certain degree of control over the creative aspects of the motion picture.
Premiere Invitations: Usually the owner and a companion will be invited to the U.S. premiere screening of the film, and depending on the level of the owner, the European premiere (if any) or even certain film festivals screenings. This usually includes first-class transportation, accommodations and a per-diem allowance.
VHS/DVD copies: It is customary for owner to receive a free DVD or Blu-Ray copy of the picture, including a copy of the soundtrack, when it is commercially available, subject to company’s private use restrictions (if any).
E&O: The owner will often seek to be added as an additional named insured to the purchaser’s general liability, worker’s compensation, and errors and omissions insurance policies. A lawyer who is recognized by the insurance carrier will be required to sign off that they have performed the necessary clearance, chain-of-title check and due diligence (as set forth above), as a precondition to issuance of a standard EO policy.
Usually, the owner will not want the purchaser to have unfettered assignment rights, but by the same token the purchaser does not want the owner to have any rights of approval that might unduly limit the purchaser’s ability to market the property.
While the execution of the agreement seems obvious, the parties must take care to ensure that not only is the agreement signed, but that it is signed by both parties.