What the “This is Spinal Tap” Case Means

We are watching the lawsuit between This is Spinal Tap creators, Harry Shearer, Christopher Guest, Michael McKean and Rob Reiner, and Vivendi very closely. This case revolves around issues that we always pay close attention to for our creative clients: net profit definitions, copyright termination, and work-for-hire.

On October 20, 2017, Shearer, McKean and Reiner joined Guest in a Second Amended Complaint as individual Plaintiffs. This followed the dismissal of their loan-out companies, which were originally named as Plaintiffs, but found to have no standing. The pre-trial grappling will continue over the next months and this case is expected to have far-reaching implications for Hollywood’s “inventive” accounting practices.

Essentially, studios enter internal contracts with their own subsidiaries that fall far short from arms-length transactions. This allows the studios to deduct enormous expenses against the gross profits of a film, sometimes package them together with the expenses of poorly performing films, declare that there are no net profits in a project, and make no payouts under the net profits provisions of contracts with creatives. These accounting practices have meant that actors and writers associated with such “unprofitable” blockbusters as Return of the Jedi, Ghostbusters, Harry Potter and the Order of the Phoenix, and Forrest Gump have had to bring or threaten legal action before receiving their fair cut of royalties.

Not only have the co-creators of This is Spinal Tap requested a proper accounting of the net profits derived from the distribution and merchandizing of the film, but they are exercising their rights to terminate the copyright assignments in their works. Copyright law permits termination of rights 35 years after the assignment, and the co-creators have filed Notices of Termination. Their suit requests confirmation that the copyrights will revert to them in March, 2019. Reversion of the copyrights will entirely cut off the studio’s ability to distribute and otherwise commoditize the film and brand.

Ironically, the studio has now been placed in a position of fighting to retain interests in a “non-profitable” enterprise. The studio is fighting to retain its copyrights in the This is Spinal Tap brand by arguing that the co-creators were never copyright owners in the first place and that there is no assignment to terminate. The studio is relying on the work-for-hire doctrine to show that it was always the copyright owner of the film and music.  At issue is the timing of the development of the copyrighted material—was it already in existence before the studio stepped into the picture, or were the requirements for work-for-hire in place when the material was created?

We love these kinds of cases because they are accessible and interesting to artists, and they help the public understand some of the nuances of copyright law. And, they help the artistic community understand why it is crucial to have an attorney review your contracts and catalogue your creative works.  When we work with clients to review contracts, net profit definitions and work-for-hire provisions are often over-reaching and unfair to our clients. These are complex areas of law and are often misapplied in contract language. We work with artists to understand their rights and renegotiate fair terms. We also help our clients track creative assets and file timely Notices of Termination when the time is right.

If you need support understanding your rights under a film or other entertainment contract, contact our Arts & Entertainment Team today.

Independent Film Finance

Filmmaking is rarely a cheap endeavor.  Even a “budget” independent film may require tens or hundreds of thousands of dollars to produce, market and distribute.  Here are the most common ways an independent filmmaker can finance his or her project:

Studio Financing

 This is where a studio agrees to pay for the costs of the film in exchange for the right to distribute the film.  It is difficult to get this type of funding without some proven money-making element attached to the film, for example, a well-known director, screenwriter or actor, or valuable story rights to a bestselling novel, comic book or game.

Investor Financing

This is where the film is financed by one or more persons who either buy shares of the company through which the film will be produced, or execute some form of “investment contract” related to the future revenues of the film.

Be VERY aware of state and federal securities laws that may kick in, depending on the form of your production entity or the number of investors involved.  Even if you plan to finance your film with friends and family investors, reviewing state and federal securities laws with a knowledgeable attorney is mandatory.  Consequences of violating securities laws can include rescission (meaning you must legally give all the money back, even if you’ve already spent it!), civil fines, or even criminal liability.

Crowdfunding

This is becoming a more common and more popular avenue for film financing.  Spike Lee raised nearly $1.5 million via Kickstarter to produce his film, Da Sweet Blood of Jesus.  The team behind 1998 cult classic SLC Punk also raised money for the sequel, Punk’s Dead:  SLC Punk 2, through Indiegogo.  If you go this route, be sure you review individual website rules carefully to ensure compliance.

Self-Funding

 You may just be lucky enough to have a significant amount of spare cash or disposable income to devote to your independent film.  If so, the tales you may have heard about Hollywood’s creative accounting aside, keep in mind that only about 20% of all films actually turn a profit.  Hollywood’s multibillion dollar production companies play a numbers game – hoping a few hits can cover all the other films that lost money that year.  You probably don’t have the business model or resources to follow a similar plan.

If you do decide to proceed with self-funding however, consider taking advantage of local film tax credits. Numerous states offer tax credits for productions made, at least in part, in their state. Such tax credits can also be sold to a third party, typically at a discount, to raise cash for the production or marketing of the film.

The Colorado Office of Film, Television & Media, for example, offers a 20% cash rebate program for up to $100,000 of eligible production costs.  Nevada’s revamped film tax credit law took effect in 2014 and allocated $80 million in credits to be issued to qualifying productions over a 4-year period.  Other states offering tax incentives include California, New York, Louisiana, Georgia, and New Mexico

Limit Your Liability!

Keep in mind that, as with most other business ventures, you should ultimately work through a corporate shield for protection from personal liability.  The form and timing of establishing this shield (typically an LLC) will depend on your particular circumstances.

However, if you’ve already started some activity for your independent film, make sure that all the contracts you have already entered into (or are imminently about to enter) are freely assignable.  That way, you can assign those contracts to your new entity without problem.

If you need assistance with any of the legal issues discussed here, please do not hesitate to contact our Arts & Entertainment team at DTG!

B Corps vs. Benefit Corporations: What Are They & What’s the Difference?

As socially conscious entrepreneurship becomes more visible and viable, you may keep hearing the terms “B Corp” and “Benefit Corporation” or “Public Benefit Corporation.”  What do these terms mean and how are they relevant to a Colorado small business owner?

Many use the terms “B Corp” and “Benefit Corporation” interchangeably, but they are in fact very different things!

B Corps

A B Corp is a for-profit entity that has obtained a voluntarily certification from a certain nonprofit organization headquartered in Wayne, Pennsylvania, called B Lab.

As of the date of this posting, there are 1,925 certified B Corps in 50 different countries spanning 130 different industries.  Some nationally-recognized Colorado B Corps include New Belgium Brewing Co. and Bhakti Chai.

Obtaining a B Corp certification requires passing the B Lab Impact Assessment, which analyzes a company’s operations and provides a score based on meeting higher standards of transparency, accountability, performance and impact on the community.  Passing the assessment test requires a score of at least 80 out of 200 points.  There are many workshops and boot camps available in the Front Range area for business owners looking to hit the Impact Assessment’s various benchmarks.  After passing the assessment, B Corps must pay a membership fee based on annual revenues.

Obtaining B Corp certification allows a business to join a community dedicated to creating a more just and conscious economy yet still driven by profit motives.  B Corps organize various gatherings around the world, including an annual retreat, and such events provide opportunities to network and support other like-minded business owners.

Benefit Corporations

A Benefit Corporation is a type of business entity (i.e., a special kind of corporation) that is authorized by state law.  As of the date of this posting, 31 states  – including, as of April 4, 2014, Colorado – have recently enacted legislation to allow for these entities.   This legislation allows socially conscious entrepreneurs another entity option when starting a business.

The Benefit Corporation movement, largely spearheaded by B Lab, was to fix what many saw to be a major limitation in standard corporate law.

As you may know, the business and affairs of any for-profit corporation must be managed by a board of directors.  Traditionally, the individuals on the board of directors have a legal duty to manage the affairs of the corporation in the company’s best interest.  If they do not follow this duty, they could be liable to the corporation’s shareholders for breach of their duties.

So…what does “in the company’s best interest” actually mean?  Some perceived it to mean only the maximization of shareholder value.  This would severely limit the goals and the general ethos of the socially-conscious business/B Corp assessment movement.  If a board of directors was trying to decide between two options, with Option 1 promising high profits but harm to the environment and Option 2 resulting in lower profits but no harm to the environment, the maximization of shareholder value theory would require the board of directors to pick Option 1.

Benefit Corporation legislation has thus been enacted to address this limitation in traditional corporate law.

Beyond corporate doctrine, however, forming a business as a Benefit Corporation may be important for reasons of marketability, relaying a message to current and potential employees and customers, and signaling participation in the socially-conscious business movement.

Colorado Public Benefit Corporations

The Public Benefit Corporation Act of Colorado (“PBCA”)[1] contains the relevant provisions for those electing to operate their corporations as a Public Benefit Corporation (a “PBC”).  A Colorado PBC is a for-profit corporation that is “intended to produce a public benefit or public benefits and to operate in a responsible and sustainable manner.”[2]

What would be considered a “public benefit”?  The PBCA defines public benefit as “one or more positive effects or reduction of negative effects on one or more categories of persons, entities, communities, or interests other than shareholders in their capacities as shareholders, including effects of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific, or technological nature.”[3]

A key thing to realize is that PBCs are still subject to the rules and requirements contained in the regular corporate statutes, including the Colorado Business Corporations Act and the Colorado Corporations and Associations Act.  The PBCA merely imposes “additional or different requirements, in which case such additional or different requirements apply.”[4]  The primary differences are:

  • A PBC’s Articles of Incorporation must list one or more public benefit which the company must strive to achieve.[5]
  • A PBC’s name must contain the words “public benefit corporation” or the abbreviation “PBC” or “P.B.C.”[6]
  • A PBC’s board of directors must manage the company to balance (1) the pecuniary interest of the shareholders; (2) the best interest of those affected by the company’s conduct, and (3) the public benefit(s) listed in the Articles of Incorporation.[7]
  • A PBC must prepare an annual benefit report with (1) a description of how the company promoted the benefits listed in the Articles of Incorporation and any obstacles the company faced in promoting those public benefits and (2) an assessment of the overall social and environmental performance of the company against a third-party standard.[8] This annual report must be provided to each shareholder of the PBC and posted on its website.[9]
  • Any share certificates of the PBC must consciously state the company is a public benefit corporation.[10]

A PBC is formed the same was a traditional Colorado corporation would be formed – by filing Articles of Incorporation with the Colorado Secretary of State.  Thereafter, all other documentation used to organize a PBC is extremely similar as what is used to organize a traditional Colorado corporation.

The PBCA specifically protects directors of a PBC from lawsuits by third parties who are interested in the public benefits listed in the Articles of Incorporation and by people who may be affected by the PBC’s conduct.[11]

This section is meant to be a general summary of the PBCA and if you are thinking of creating such an entity or converting your current corporation to a PBC, consulting with an attorney is strongly advised.


[1] Section 7-101-501 et cet., C.R.S. Added by Laws 2013, Ch. 230, § 1, eff. April 1, 2014.

[2] Section 7-101-503(1), C.R.S.

[3] Section 7-101-503(2), C.R.S.

[4] Section 7-101-502, C.R.S.

[5] Section 7-101-503(1)(a)-(b), C.R.S.

[6] Section 7-101-503(4), C.R.S.

[7] Section 7-101-506(1), C.R.S.

[8] Section 7-101-507(1)(a)-(b), C.R.S.

[9] Section 7-101-507(4), C.R.S.

[10] Section 7-101-505, C.R.S.

[11] Section 7-101-506(2), C.R.S.