Net Profits Accounting

Jokes about motion picture hits, and successful television series that made no “profits,” can fill a volume of Hollywood gossip. But the truth is that many stars, directors and producers of major motion pictures have simultaneously found themselves with a blockbuster hit garnering many millions revenue, and no check for profit participation. This is because distributions most often follow financial records based on contractual definitions. Contract provisions and complex business practices can effectively eliminate profits from “net profits accounting.”

Though the meaning of “Net Profits” may differ on a case-by-case basis, litigation over the definition is common and obscure contract clauses often dictate the outcome. Most net profits accountings do start with revenues derived from an entertainment venture, but then from there, various expenses are subtracted. Whether advertising, production costs, distribution expenses, overhead, salaries, distribution fees, and potentially many arcane categories of expenses, are subtracted in calculating “net” profits, depends upon contract construction and interpretation. Definitions of Net Profits, or Gross Receipts, in fact can be custom-tailored and defined for a specific project through the language and provisions found in the contract. For example, a contract might provide, as it did in one leading case, that net profits are “gross receipts less the aggregate of distribution fees and expenses, interest on production loans, other expenses and the cost of production of the picture,” which includes “all sums paid pursuant to percentage of gross receipts agreements.” Alperson v. Mirisch Co. (1967), 250 Cal. App. 3d 84, 86-87. Normally, these gross receipts are paid out after an “artificial breaking point,” sometimes twice the cost of production, has been reached. Id.

When these gross profits and net profits definitions are ambiguous, or differ for different projects and can be complex, the courts look both to extrinsic evidence and expert testimony in order to determine how a royalty or profit participation in specific situations should be calculated. In the Alperson case, for example, an experienced theatrical agent testified as an expert witness to what he argued were industry “standards.” It is industry and accounting legend that the superhero blockbuster “Batman,” at the time the highest grossing movie in Warner Brothers’ history, was “unprofitable;” and yet two producers who optioned the material to the studio still did not see any net profits promised under their contract because of the language used to define “net profits.” Batfilm Prods. v. Warner Bros. (1994), Cal. App. LEXIS 1333.

Not only does the Boesch Law Group succeed in helping talent, artists and entertainment professionals collect their rightful profit participations and royalties, but also diligent representation prepares clients how better to plan in the future for a negotiated net profits accounting. Depending upon the negotiating power or leverage, steps can be taken to ensure that the contractual definition is the most favorable that is obtainable, or that upfront payments not be compromised for elusive participations that likely will not be realized.

The Boesch Law Group has extensive experience defending and recovering profits and royalties for and from various entertainment artists, executives and industries, including major composers, rock bands, television executives and producers, animation programming, as well as film star rights. The Boesch Law Group helps clients navigate the complex and often times confusing professional world of accounting.


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