10 May 2005

If Loving Contracts Is Wrong, I Don't Want to be Right!

I love contracts.

Transactional work is a considerable part of what I do day-to-day, but I'm certain that if that weren't the case, I'd love contracts anyhow. Even amongst lawyers, I'm a contracts geek. I read adhesion contracts before I sign them, just to see how they turn out.

Thus, when someone tells me that contracts are boring, I tend to take the criticism personally. I always stick up for my contracts and take pride in my boilerplate. I'm like Norma Desmond with a J.D. -- "My contracts are interesting! It's the subject matter that got boring!" Still, while I do try to find the beauty in routine transactions, I have to admit that larger-than-life clients and provocative subject matter tend to make for more interesting contracts; I was reminded of this fact by two stories yesterday:

Contracts, like rules, records, and Hummel figurines, are made to be broken.

A dispute between no-longer-starving artists and "The Man" with a hint of "best efforts" contract law thrown in was reported by the New York Times yesterday:
Linkin Park, which Edgar Bronfman Jr., the chairman of Warner Music, has described as "the biggest rock band in the world," says it is researching how it might legally sever its contract with Warner, which calls for the band to deliver four more albums. The band has released two full-length albums and three additional recordings through Warner, selling an estimated 17.9 million copies in the United States alone, according to Nielsen SoundScan. But the musicians say cutbacks at Warner have hurt the company's ability to market future Linkin Park recordings.

. . . .

[T]he feud brewed rapidly after the band's legal team sent Warner a letter a month ago in which Linkin Park appeared to express interest in receiving a cut of the proceeds of the anticipated stock offering, according to sources involved in both sides of the talks. While top executives batted around the concept of paying the band in stock - a radical departure from the industry's usual compensation - Warner ultimately decided it would be too awkward and rejected the idea, said someone on Warner's side of the table.

In response, the band's representatives said the musicians did not want a piece of the stock offering after all, but had become increasingly anxious that the company's cost reductions would prevent Warner from matching the marketing muscle it had put behind the band's previous albums. They said that the band deserved an upgraded contract, and asked for $60 million in advances and half of the profits on their new recordings.

Warner Music executives responded by offering a $15 million advance against 50 percent of the profits, and asked the band to extend its deal to five more albums instead of four.

That offer was poorly received. People involved in the talks said that the band's representatives sent another letter, this time accompanied by a draft of the biting press release they said the band would release within days. A Warner executive who request anonymity to avoid personally inflaming the dispute, described the letter as a "blackmail" tactic.
For contracts aficionados, this back-and-forth illustrates that disputes are very likely to occur in three types of agreements:
  1. long-term agreements;
  2. agreements for personal services which are difficult to measure objectively; and
  3. agreements between two or more parties.
As an attorney who deals primarily with personality-free software transactions, I have a great deal of admiration for those entertainment and sports attorneys for whom a signed contract just designates the start of the next round of negotiations. When an apparently-binding contract for "four more albums" is really just a letter of intent signifying the parties' mutual expectation that, at some unknown point in the future, they may choose to collaborate to produce and market one or more records, but only if a) they both feel like doing so; b) neither party feels unappreciated by the other; c) neither is preparing for an initial public offering of stock; and d) cold fusion is demonstrated to be a reliable source of nearly-limitless power, what is a hard-working attorney to do except continue billing by the hour until his client's headache begins to subside?

He who has the gold makes the rules and becomes governor of California.

In Slate, author Edward Jay Epstein explained how, for every dollar in box office revenue generated by Terminator 3: The Rise of the Machines, Arnold Schwarzenegger earned $1.01:
For starters, Schwarzenegger got a $29.25 million "pay or play" fee, meaning he would be paid whether or not the movie was made. (At the time, that figure was a record for guaranteed compensation.) The first $3 million would be delivered on signing and the balance during the course of principal photography. For every week the shooting ran over its 19-week schedule, Schwarzenegger would receive an additional $1.6 million in "overage." Then there was the "perk package"— a lump sum of $1.5 million for private jets, a fully equipped gym trailer, three-bedroom deluxe suites on locations, round-the-clock limousines, and personal bodyguards.

. . . .

[Producers Mario] Kassar and [Andrew] Vajna had no real choice but to accept Schwarzenegger's terms (and they themselves would earn $10 million if the deal went through). Schwarzenegger's demands did not stop with the guarantee of $29.25 million. He also insisted on —and got —20 percent of the gross receipts made by the venture from every market in the world— including movie theaters, videos, DVDs, television licensing, in-flight entertainment, game licensing, and so forth— once the movie had reached its cash break-even point.

. . . .

But Schwarzenegger's contract, thanks to the ingenious lawyering of Jake Bloom, allowed for no such evasion. In the case of DVD and video royalties, the contract specifies: "For purposes of calculating Cash Break even only, Adjusted Gross Receipts shall include a 100% home video royalty (i.e. home video revenues less costs)." So unlike weaker players, Schwarzenegger could count all the money taken in from DVDs and video, $20 million, less their actual cost, toward reaching the threshold where he gets his cut.

. . . .

Schwarzenegger also could decide who worked with him. The contract "pre-approval" clause gave him choice of not only the director (Jonathan Mostow) and the principal cast, but also his hairdresser (Peter Toothbal), his makeup man (Jeff Dawn), his driver (Howard Valesco), his stand-in (Dieter Rauter), his stunt double (Billy Lucas), the unit publicist (Sheryl Merin), his personal physician (Dr. Graham Waring), and his cook (Steve Hunter).

Finally, Schwarzenegger had the contract structured to give him every possible tax advantage. All the money was to be paid not to Schwarzenegger but to Oak Productions Inc., a corporate front he controlled. Oak Productions, in return, "lends" Schwarzenegger's services to the production. Since Schwarzenegger didn't get any money personally from the movie itself, he had more flexibility managing his exposure to taxes.

. . . .

The negotiation of this contract did not come cheaply— the legal and accounting budget for the movie was $2 million— and, by the time all of Schwarzenegger's demands were met, the budget of the film had risen to $187.3 million, making it the most expensive independently produced movie in history.

Archimedes is reputed to have said, "Give me a fulcrum and a place to stand, and I will move the world." This is likely apocryphal, since it is well-established that Archimedes did not speak English. Nevertheless, the point is a good one, and one which the governator has learned well -- leverage is the key to everything. It's undeniably tough to sit on the side of the negotiating table with the desperate folks who have to make the deal happen at all costs; "all costs" have a way of making their way onto the compensation exhibit rather quickly. Recognizing your opponent's vulnerability is the first step to dominating the contest, and Schwarzenegger has proven himself time and again to be a competitor par excellence.

I voted for him to be California's governor for several reasons -- in part because I respected his personal qualities; partly because I agreed with his positions on the major issues. Mostly, though, I voted for him because even if I didn't, I was legally obligated to pay him a substantial "pay or govern" fee plus twenty percent of my salary.

I love contracts.

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