Cinema Law: What’s the Deal With Participation Fees, Residuals and Other Back End Payment?

Q: I’m an independent moviemaker currently in development on a new project. We are speaking to a pretty well-known star but don’t have the budget to necessarily pay the actor up front, so he’s requested we pay him on the back end with participation fees, residuals, etc.

However, what if my movie doesn’t do well or doesn’t ever see distribution? How do I ensure that I don’t get sued by the talent? What can I do to protect myself from this?

As a lawyer, it’s always nice (and rare) to be able to give someone good news in one of these situations. So here is the good news: The so called “back end” payments or “participations” you refer to are also commonly known by another name in the entertainment industry—“contingent compensation.” The terminology is key. An actor’s or other talent’s right to these kind of payments is contingent on the occurrence of a specific event; namely, the movie making money.

You describe a very common occurrence in the entertainment industry, and especially in the independent film context, where an actor agrees to a lesser guaranteed fee “up front” for a chance to participate in the film’s profits on the “back end,” i.e. after the film is released. Basically, the actor is gambling that the film will turn a profit, and that he or she will therefore be able to share in those profits. Actors will often do this on small independent films where, like you, the producers cannot afford to meet the actor’s major-studio “quote.” They will also often negotiate for as much of the “back-end” of a major studio release as they can, since a blockbuster film can generate tens or hundreds of millions of dollars in revenues. Not to be too reductive, but 10 percent of $100 million is a lot of money.

What your actor is banking on is that your film will actually generate a revenue stream, and at some point—whether it is from the “first dollar” the film makes (if your star is truly “A-list”), when the film actually moves into net profitability (which, under Hollywood accounting, will likely never happen), or at some point in the middle of the film’s revenue stream —he or she will share in those revenues.

However, there are no guarantees in life or in Hollywood, and there are certainly no guarantees that your film will ever earn a profit (although I certainly hope it does). But because profit participations are contingent compensation, there are likewise no guarantees that your actor will ever earn any of that compensation, since 10 percent of nothing is nothing. Your actor has no claim to money that the film does not earn, and he would be laughed out of court for suing you on the theory that you nonetheless owe him because your film should have earned a profit. (At the least, he would be laughed out of a court in Los Angeles.)

Your contract with the actor needs to spell out that his “profit participation” will be a certain percentage of the film’s net or gross proceeds as calculated by the studio that distributes your film. (I’m assuming that, as an independent producer, you won’t be self-distributing your film and will instead sell at least the distribution rights to a studio or major distributor.) All such studios have lengthy exhibits attached to their agreements that spell out, in pages upon pages of dense, single-spaced type, exactly how “Net Proceeds” or “Gross Proceeds” are calculated. It will save you immeasurable time and headaches to simply provide in your agreement with the actor that his contingent compensation will be calculated according to the studio’s methods of accounting. To be safe, your agreement should also contain a provision making it clear that you, as producer, have no obligation to exploit the film. The star then cannot claim that you “should have” sold the film to a distributor and therefore should be liable for the film’s failure to make money.

One final note: You say that your actor “requested we pay him on the back end with participation fees, residuals etc.” Residuals are entirely separate from profit participations. They are payments mandated by the guilds for reuse of a work after its initial release or airing, calculated according to formulas established by the guilds and paid (usually) by the distributor. If your actor wants to be paid in residuals—which he or she is guaranteed as a SAG member and which you most likely will not be on the hook for—you have made a great deal, and he needs a better lawyer. MM

Chad Fitzgerald, an attorney at Kinsella Weitzman Iser Kump & Aldisert, a high-profile, L.A.-based entertainment litigation firm, specializes in entertainment and business litigation as well as transactional matters for entertainment industry clients. He has represented actors, musicians, professional athletes and production and distribution entities, as well as clients in the toy, apparel, yoga and diamond industries, entertainment guilds, personal and business managers, and talent agents and agencies in disputes in California and federal courts as well as before the California Labor Commissioner and the guilds. Mr. Fitzgerald handles contract, profit participation, financing, distribution, copyright and trademark disputes in the entertainment industry as well as business litigation matters involving contracts, sales, employment, partnership and franchise disputes, fraud, trade secrets, rights of privacy and defamation. He also negotiates agreements for intellectual property rights holders, entertainment industry executives, producers and independent filmmakers.

The answers to legal questions provided by the lawyers of Kinsella Weitzman Iser Kump & Aldisert, LLP (“KWIKA”) are for general education and information purposes only, and are not legal advice or legal opinions. The information provided in the articles is not intended to create a lawyer-client relationship between KWIKA and you. The opinions expressed in the postings are the opinions of the authors and do not reflect the opinions of KWIKA, its employees or agents.

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