MAY 1998


The Side Letter

Producers/Distributors Beware!

The Directors Guild of America's "side letter" could be considered a "saving" element on an independent film, but as Greg Bernstein pointed out in a 1998 article for the Cannes Film Festival, producers need to be aware and scrutinize the "side letter" before it's signed -   if at all.

Greg S. Bernstein


Pity the poor indie producer who successfully financed a low budget (under $3 million) theatrical film via international presales and, while not getting that hoped for U.S. theatrical release, was lucky enough to get an HBO or Showtime premiere which allowed the film to breakeven.

What's the problem you say? Possibly as much as $250,000.

Most likely, the producer, in order to reduce the budget, listened to his line producer when the suggestion was made to make the film a "low budget theatrical" under the DGA's side letter. The provisions of this side letter allow the producer to pay the director, assistant director, UPM and other DGA members 65% or less of the normal guild services for a feature film, depending on the budget, of what they otherwise might have had to pay.

Typically, this can be a savings of about$100,000. Not small change in the scheme of a $1 million or $2 million film.

The side letter, however, contains a clause which states that if the film appears on U.S. cable or free television before it has any substantive U.S. theatrical release, the film is considered to be a television film or cable film (as the case may be) for purposes of the DGA agreement. The side letter goes on to say that if this happens, the producer will owe the difference between what he has paid the DGA members (65% of the theatrical rate) and what the cable or television rate (as the case may be)would have been. In the case of an HBO or Showtime premiere, this usually results in a $50,000 or $60,000 bill from the DGA to the producer.

But it doesn't quite end there.

When making the international presales, or for that matter, even post-sales, the international sales agent has likely made all rights deals. Alternatively, the agent may have made video/theatrical deals with one buyer and television deals with another buyer in each territory.

If the film ends up being shown on HBO or Showtime, it is not unusual that one of the international territorial buyers might view the film as a theatrical film and, therefore, release it theatrically in their territory. Here is where another problem is created.

The film that once started out as a theatrical film, by virtue of the fact that the producer signed the DGA low budget theatrical side letter, is now considered to be a cable film. Cable films, under the DGA agreement, enjoy a special provision which provides for a bonus residual payment to the director equal to 100% of the theatrical minimum salary if the film is theatrically released anywhere in the world (if you really want to drive yourself crazy, release the film theatrically in the U.S. after its cable run and pay 150% of the theatrical rate on top of what you already paid the director). In other words, that small theatrical release in Turkey, for which the producer only received a $10,000 license fee, can result in a bill from the DGA for residuals in the amount of approximately $125,000 (the typical guild theatrical rate for films of these budgets), plus the already discussed bill for additional fees to the director and below the line personnel.

So, what started out as a $100,000 budget savings tactic, has now resulted in a $250,000 disaster.

If this is not bad enough news, look at what would happen to the international sales agent in this situation. Sometimes, distributors or sales agents sign what's called an assumption agreement. What this means is that the distributor agrees to pay residuals to DGA, or SAG, as the case may be based on the sales of the film. These assumption agreements are usually not restricted in terms of time or amount, or any other factor. Many times distributors and sales agents have no choice but to sign these documents or face a shut down of the production. Most distributors who have signed these documents think that all the document means is that they will owe residuals on the sales that they make.

Not true.

Because the DGA agreement makes the special theatrical "bonus" payment a residual payment, the sales agent or distributor who signed the standard DGA assumption agreement will now find himself confronted by the guild asking for this money.

But it gets even worse for the sales agent. As it is likely that the sales agent deferred his sales fee and expense reimbursements until the bank was repaid its production loan, the sales agent gets the privilege of paying these residuals before he has likely recouped any expense or made any of his fees. Residuals are due even if the film doesn't break even. Residuals are due on the sales that were used to finance the film.

The poor international sales agent, who signed an assumption agreement with the guild (because the guilds threatened to shut down production unless the sales agent signed the assumption agreement), deferred his fees to the bank until the production loan has been paid, finds only enough sales to repay the bank and maybe recoup a little bit of his expenses, and now gets hit with a bill from the guilds for a couple of hundred thousand dollars of residuals.

Recently, I experienced this example with a client who signed an assumption agreement on a film that he had just picked up. The film had been completed a couple of years earlier and the distributor was picking up rights that had previously been with another distributor. Unfortunately, the client did not consult me about the assumption agreement, having signed it under pressure from the producer.

Within six months of signing the assumption agreement, the client received a demand from one of the guilds for residuals that the guild insisted were due based on certain activities that took place two years previous (in other words, years before this distributor ever acquired this film). In another case, a distributor client received a bill because of the DGA's theatrical side letter. The distributor didn't know how the producer had made the film and went on to license rights, which included theatrical rights in a particular territory. When the film was released theatrically in a territory (and only did about $20,000 at the box office in that country), low and behold the DGA held out its hand for additional payments on behalf of the director - even though the director had been paid full theatrical rates. (The producer had signed the side letter to save on the cost of the other guild members)

It is my understanding that the DGA has only recently begun enforcing the provisions of the theatrical side letter. I also understand that to the extent that arbitrations have taken place on this issue, the arbitrators have judged in favor of the DGA despite what clearly appears to be a significant equity argument to the contrary.

The point I wish to make in this article is that a sales agent/distributor should not sign an assumption agreement under any circumstance. Pressure or not. Production shutting down or not. Given the financial severity of signing such a document, unless the sales agent/distributor completely understands the extent of the financial obligation that they are undertaking, I would highly suggest against it. Maybe if enough sales agents/distributors refuse to sign the agreements or, refuse to sign them unless the guild conceded certain points so that the sales agent is not put in these predicaments, the guilds will finally change their methods.

As to the indie producer who wants to avail himself of the theatrical side letter: understand the ultimate cost. As the guilds do not typically negotiate the terms of these side letters, it would be my recommendation that the producer find different means to save $100,000 of production costs, as the real cost is certainly not worth this savings.

Finally, I say to the studios and AMPTP who negotiate contract renewals with SAG and DGA, remember the indie producer. The indie producer is not in the same business as the studios. It finances and exploits its films differently. It is time for the guilds to recognize the difference and allow for a completely different structure to be worked out. Maybe AFMA should be the indies' advocate, as it certainly understand these issues as they affect the indies.

Also, let not the guilds forget that the bulk of their members most likely work or started work on indie films. Don't kill the indie business. Don't drive productions out of California or the U.S. Make an agreement that fits the indie business.

Reprinted with permission by The Business of Film

Law Offices of GREG S. BERNSTEIN, A Professional Corporation
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