In order to bring a film to its end users, production companies (licensors) enter into licence agreements with third party distributors (licensees). A licence agreement refers to a limited grant of rights to a licensee, while the licensor (i.e. the owner of the film) retains all other rights to the film. Examples of distributors include subscription-based VOD streaming services such as Netflix, cinema chains, and entertainment media buyers for large retail chains.
Types of distribution licence agreements
There are various types of licence agreements that production companies can enter into.
Under a pre-sale agreement, a distributor pays an advance payment (i.e. a fixed percentage of the estimated budget of the film) to the production company in exchange for certain rights to the film in a particular country for a limited term. A pre-sale agreement is entered into prior to the completion of the film, and the advance payment is paid upon delivery of the film to the distributor. A term of the agreement may also include contingent payments from the distributor to the producer if the film is successful.
To ensure that the distributor pays the advance payment upon delivery, the licensor would want the advance payment to be secured in some form. Thus, the licensor may require the licensee to pay a deposit, around 10 to 20% of the advance payment, upon execution of the licence. Alternatively, the licensor will require the distributor to have a letter of credit issued by the distributor’s bank. The letter of credit requires the distributor’s bank to pay the licensor’s bank the advance payment upon delivery of the film.
Unlike pre-sale agreements whereby the distributor pays an advance payment to the producer, in rent-a-system agreements, the distributor agrees to distribute the film for a low distribution fee. The producer receives the revenues collected from the distribution of the film, and the producer pays for all distribution expenses.
The benefit of this arrangement is that the producer bears the full risk and reward of the film’s success. However, the drawback of this arrangement is that the distributor has little incentive to market the film and push for its success.
In output agreements, the distributor acquires rights to a specific number of films that may be produced by the production company in the future. For each designated film, the producer enters into a separate license with the distributor.
Production / finance / distribution (“PFD”) agreements
In PFD agreements, a studio hires a production company to produce a film while the studio directly finances and distributes the film. The studio will usually have complete control over the production of the film and the studio will own the copyright in the film. The studio will agree to give the production company a percentage of the net profits generated by the film.
Terms of licence agreements
A licence agreement will usually contain the following terms set out below.
Duration – The licence agreement will state when the grant of rights commences, which will typically begin when full payment of the advance is received. The duration of the licence will typically be for a fixed term and will end on a specified date. The licence agreement may also include an automatic renewal clause, whereby the term of the licence is automatically extended if the licensee has not recouped its advance and expenses by the end of the initial term.
Termination – The licence agreement may provide that the licensor and/or licensee may terminate the licence agreement under certain conditions, for example, if a licensee breaches the terms of the licence agreement.
Hold-backs – The licensor may require the licensee to hold back on the distribution of the film until after a certain time period has elapsed. For example, a licensor may want the film to premiere in its home country first before it is released in other countries.
Territory – The licence agreement will state the geographical areas in which the licensee may distribute the film, and the accompanying penalty provisions if the film is distributed outside these boundaries.
Language restriction – The licence agreement will specify that the licensee may only exploit the film that is dubbed or subtitled in a particular language(s).
Type of media – The licence agreement will specify the type of media that the licensee may exploit the film in, such as video-on-demand streaming service or free television.
Exclusivity – If a licence agreement does not state that the grant of rights is exclusive, this means that the grant of rights is non-exclusive, and the licensor may grant competing rights to a third party.
Representations and warranties – The licence agreement will state the obligations of the production company, such as the delivery of good title to the distributor, that the film will be made within a certain budget, with particular key actors or director and based on a particular script. The licensee will be entitled to damages in the event that the licensor breaches its obligations.