Dealing With the Implications of Pay-or-Play Agreements for Talent

Some of the root causes of these controversies may be traced to the unique circumstances in which pay-or-play deals are often struck. Pay-or-play offers are apt to be made at critical times in the life cycle of a project, when the attachment of high-end talent can play a pivotal role in the ability of a producer to secure financing or in a studio's decision whether to green-light a project. By extending pay-or-play offers, producers and studios seek not only to reserve the services of artists in great demand whose schedules may be filled several months in advance, but also obtain credibility for their projects in a competitive marketplace. Additionally, the attachment of high-profile talent on a pay-or-play basis may give the producers and financial backers of a project the security and confidence they need to make further investments and commitments, or to proceed with pre-production or production. But to minimize the risk that the production may not receive the anticipated benefit of an artist's services in exchange for the guarantee of compensation, parties making pay-or-play offers routinely seek to condition their obligations on such future events as the securing of financing for the project, the artist's execution of a contract, or the artist's exercise of approval rights.

Talent's Perspective

Talent has its own considerations. Artists who receive pay-or-play offers are sometimes asked at very early stages of the creative process to commit to projects that may have long-lasting impacts on their reputations and careers. Talent lawyers and agents are frequently put in the position of having to balance their clients' needs for security and monetary guarantees with the risks of committing to projects that may or may not ultimately proceed, or in which the artists may or may not ultimately wish to participate. This tension, and the desire to maximize their clients' flexibility, may prompt artists' representatives to secure pay-or-play commitments while simultaneously seeking wiggle room to disengage from projects that may later become troubled or undesirable. At the same time, many artists, particularly the most highly sought-after talent, are likely to be reluctant or unwilling to commit to projects unless all conditions for their entitlement to their pay-or-play fees have been satisfied or removed.

One consequence of this confluence of divergent interests is that the parties to a pay-or-play deal may hold different opinions or assumptions about the details of the commitment that has been made, including the extent to which it is binding or conditioned upon future events. Such confusion is particularly apt to be present in the not unusual situation in which pay-or-play offers are made and accepted without signed agreements. There even are instances in which pay-or-play commitments are made without any meeting of minds on some of the most basic terms of an artist's engagement, such as the dates and locations of service.

Thus, it is not surprising that many pay-or-play disputes are merely aspects of wider disagreements over whether binding oral agreements were ever reached or, if so, what their terms were. In other cases, the parties, while not disputing that some agreement was made, will feud over the nature or meaning of the pay-or-play commitment, whether it ever was triggered or excused, or whether one or both parties defaulted. Despite the widespread agreement in the industry of the basic meaning of a pay-or-play obligation, the attachment of conditions to the pay-or-play obligation ' and differing assumptions about the circumstances that can trigger or excuse pay-or-play commitments ' can lead two parties to a deal to reach opposite conclusions regarding whether compensation or services are owed.

Pay-or-Play Scenarios

Take the following case: A studio is in negotiations to secure the services of an actor in a motion picture. After the parties agree on the actor's fixed compensation and start date, the studio agrees to make the actor pay-or-play. The parties, however, subsequently fail to reach agreement on several material terms of the actor's contract. The studio replaces the actor, citing a failure to reach any binding agreement. The actor demands his pay-or-play fee. Is the actor entitled to be paid? The answer depends, in part, on whether the pay-or-play commitment constitutes an enforceable agreement in and of itself, or is merely one term in the overall deal between the actor and the producer. The actor might argue that the commitment should be enforced because he had committed to perform and had relied on the pay-or-play promise by declining other offers for the relevant time period. If there is evidence that the studio represented to third parties that the actor was attached to the project, the artist might argue that this evidence demonstrates the studio's knowledge that the pay-or-play commitment was binding and that the deal conferred benefits upon the studio irrespective of whether the actor performed in the picture. Conversely, the studio might argue that no compensation is owed because the absence of an agreement on all material terms means that the actor was never legally bound to perform in the picture and that the pay-or-play commitment was therefore illusory and not supported by consideration.

Now consider the following scenario: A production company promises to make an artist pay-or-play at a time when the financing for a project appears to be in place. Later, the financing falls through, the project is cancelled and the company takes the position that the pay-or-play promise was contingent on its securing of third party financing. Does the artist win her lawsuit? That depends, in part, on the exact words that the parties used. If the agreement was to make the artist 'unconditionally pay-or-play,' then the artist would have a good chance of prevailing. If the word 'unconditionally' was not used, the negotiating history between the parties could be crucial to a determination of whether there was an understanding that the pay-or-play commitment would be triggered only upon the securing of financing for the project.

To add yet another layer of complexity, there are situations in which the parties may think that they have agreed to define or limit the specific conditions for the triggering of a pay-or-play obligation, only to find out that their agreement will not be enforced. One scenario in which this may occur arises in connection with agreements that are subject to the Director's Guild of America (DGA) Basic Agreement. The DGA Basic Agreement has been interpreted as obligating signatory companies, once they have agreed to employ a director, to pay the director her agreed salary once pre-production begins ' even if the director does not actually direct the picture, and even if the parties agreed to condition the production company's obligation on specific events, such as the ability of the company to obtain financing. Because the DGA Basic Agreement only recognizes exceptions to this general rule in cases of force majeure, or the default or incapacity of the director, a DGA arbitrator could well force the production company to pay the director's compensation (and benefits) even if the production was cancelled and the parties had agreed that the director would not be entitled to compensation under these circumstances.

It also should be recalled that complications arising from pay-or-play commitments are certainly not confined to high-end talent. A number of people hired for productions will routinely receive guarantees of compensation for specified periods of time. When, as sometimes occurs, these promises are conditioned on the engagement on a pay-or-play basis of the lead actors and/or a director, these types of deals can yield their own complexities. Assume, for instance, that a line producer secures a commitment that he will be engaged for a defined period of time at an agreed-upon rate at such time as a lead actress is engaged on a pay-or-play basis to portray the female lead. The production company then engages the female lead on a pay-or-play basis, subject to the condition that she must exercise her right to approve the screenplay. When the actress and writer have creative differences, she declines to approve the script and withdraws from the project, but the line producer demands to be paid based on the pay-or-play language in his agreement. Who wins? Although common sense may suggest that the actress should not be considered pay-or-play for purposes of the line producer's compensation if the actress is not pay-or-play for purposes of her own compensation, this could be the finding if the line producer's case ever went to trial. The line producer might argue that his pay-or-play language was triggered when the studio agreed to make the actress pay-or-play, and that his agreement did not condition his pay-or-play rights on the actress' approval of a screenplay.

Lessons Learned

One lesson that may be gleaned from the foregoing examples and the surfeit of litigation arising out of pay-or-play commitments is that it is generally prudent for most parties to document precisely the terms and conditions of these understandings, particularly if no signed agreement is imminent. Additionally, to minimize the risk of misunderstanding about the circumstances in which a pay-or-play commitment will be triggered or excused, it is frequently useful in documenting a deal to describe how the parties intend the arrangement to work, and to specify both the conditions that must be satisfied to trigger the artist's right to guaranteed compensation and the duties that the artist must discharge to be entitled to that compensation. Although such explicitness may run the risk of precipitating a premature conflict that might not otherwise arise, the clear articulation of a party's understanding will generally place that party in a far better position should the relationship between the parties, or the project itself, be jeopardized or collapse.

Sunny Brenner is a partner at Loeb & Loeb LLP in Century City, CA. He specializes in entertainment-related litigation, as well as several other areas of commercial litigation, and played a role in a number of the cases referenced or described in this article.

Disputes arising out of 'pay-or-play' deals between film producers and talent are among the most fertile and reliable breeding grounds for litigation in the entertainment industry. In the last year alone:

• Sharon Stone filed a lawsuit against two producers based on an alleged pay-or-play agreement to pay her $14 million to star in a sequel to the movie 'Basic Instinct';
• Sean Connery sued Mandalay Pictures and its chairman for allegedly breaching an oral agreement ' which presumably entailed a pay-or-play or 'pay-and-play' commitment ' to pay the actor more than $17 million to star in and produce a thriller called 'End Game';
• Sean Penn and producer Steve Bing exchanged lawsuits in connection with an as-yet-unproduced motion picture, with Penn accusing Bing's company of breaching a pay-or-play commitment of $10 million; and
• Kathy Bates reportedly settled a lawsuit that accused a producer and his production company of breaching a pay-or-play guarantee to pay the actress $1.25 million whether or not her services were utilized in the film 'Carolina Torn Asunder.'

And for every dispute that results in the filing of a lawsuit, one can safely assume that there are several more being fought out behind the scenes, and either arbitrated or settled.

From a practitioner's standpoint, it might be asked why the same basic deal point gives rise with such frequency to high stakes lawsuits, particularly given the widespread agreement in the industry on its meaning. Simply put, and as various courts that have been called upon to construe pay-or-play language have found, a pay-or-play commitment generally entails a promise to compensate a person whether the person's services are used or not.

Yet as straightforward as this concept may seem at first blush, pay-or-play agreements between talent and producers or studios frequently involve nuances and applications that, in combination with the monetary amounts at issue, can create flammable situations. While each pay-or-play dispute is factually unique, many conflicts in this area tend to share certain common traits that allow for some general observations about why misunderstandings concerning the meaning and effects of pay-or-play deals recur, as well as some ways that such disputes may be prepared for or avoided.

Some of the root causes of these controversies may be traced to the unique circumstances in which pay-or-play deals are often struck. Pay-or-play offers are apt to be made at critical times in the life cycle of a project, when the attachment of high-end talent can play a pivotal role in the ability of a producer to secure financing or in a studio's decision whether to green-light a project. By extending pay-or-play offers, producers and studios seek not only to reserve the services of artists in great demand whose schedules may be filled several months in advance, but also obtain credibility for their projects in a competitive marketplace. Additionally, the attachment of high-profile talent on a pay-or-play basis may give the producers and financial backers of a project the security and confidence they need to make further investments and commitments, or to proceed with pre-production or production. But to minimize the risk that the production may not receive the anticipated benefit of an artist's services in exchange for the guarantee of compensation, parties making pay-or-play offers routinely seek to condition their obligations on such future events as the securing of financing for the project, the artist's execution of a contract, or the artist's exercise of approval rights.

Talent's Perspective

Talent has its own considerations. Artists who receive pay-or-play offers are sometimes asked at very early stages of the creative process to commit to projects that may have long-lasting impacts on their reputations and careers. Talent lawyers and agents are frequently put in the position of having to balance their clients' needs for security and monetary guarantees with the risks of committing to projects that may or may not ultimately proceed, or in which the artists may or may not ultimately wish to participate. This tension, and the desire to maximize their clients' flexibility, may prompt artists' representatives to secure pay-or-play commitments while simultaneously seeking wiggle room to disengage from projects that may later become troubled or undesirable. At the same time, many artists, particularly the most highly sought-after talent, are likely to be reluctant or unwilling to commit to projects unless all conditions for their entitlement to their pay-or-play fees have been satisfied or removed.

One consequence of this confluence of divergent interests is that the parties to a pay-or-play deal may hold different opinions or assumptions about the details of the commitment that has been made, including the extent to which it is binding or conditioned upon future events. Such confusion is particularly apt to be present in the not unusual situation in which pay-or-play offers are made and accepted without signed agreements. There even are instances in which pay-or-play commitments are made without any meeting of minds on some of the most basic terms of an artist's engagement, such as the dates and locations of service.

Thus, it is not surprising that many pay-or-play disputes are merely aspects of wider disagreements over whether binding oral agreements were ever reached or, if so, what their terms were. In other cases, the parties, while not disputing that some agreement was made, will feud over the nature or meaning of the pay-or-play commitment, whether it ever was triggered or excused, or whether one or both parties defaulted. Despite the widespread agreement in the industry of the basic meaning of a pay-or-play obligation, the attachment of conditions to the pay-or-play obligation ' and differing assumptions about the circumstances that can trigger or excuse pay-or-play commitments ' can lead two parties to a deal to reach opposite conclusions regarding whether compensation or services are owed.

Pay-or-Play Scenarios

Take the following case: A studio is in negotiations to secure the services of an actor in a motion picture. After the parties agree on the actor's fixed compensation and start date, the studio agrees to make the actor pay-or-play. The parties, however, subsequently fail to reach agreement on several material terms of the actor's contract. The studio replaces the actor, citing a failure to reach any binding agreement. The actor demands his pay-or-play fee. Is the actor entitled to be paid? The answer depends, in part, on whether the pay-or-play commitment constitutes an enforceable agreement in and of itself, or is merely one term in the overall deal between the actor and the producer. The actor might argue that the commitment should be enforced because he had committed to perform and had relied on the pay-or-play promise by declining other offers for the relevant time period. If there is evidence that the studio represented to third parties that the actor was attached to the project, the artist might argue that this evidence demonstrates the studio's knowledge that the pay-or-play commitment was binding and that the deal conferred benefits upon the studio irrespective of whether the actor performed in the picture. Conversely, the studio might argue that no compensation is owed because the absence of an agreement on all material terms means that the actor was never legally bound to perform in the picture and that the pay-or-play commitment was therefore illusory and not supported by consideration.

Now consider the following scenario: A production company promises to make an artist pay-or-play at a time when the financing for a project appears to be in place. Later, the financing falls through, the project is cancelled and the company takes the position that the pay-or-play promise was contingent on its securing of third party financing. Does the artist win her lawsuit? That depends, in part, on the exact words that the parties used. If the agreement was to make the artist 'unconditionally pay-or-play,' then the artist would have a good chance of prevailing. If the word 'unconditionally' was not used, the negotiating history between the parties could be crucial to a determination of whether there was an understanding that the pay-or-play commitment would be triggered only upon the securing of financing for the project.

To add yet another layer of complexity, there are situations in which the parties may think that they have agreed to define or limit the specific conditions for the triggering of a pay-or-play obligation, only to find out that their agreement will not be enforced. One scenario in which this may occur arises in connection with agreements that are subject to the Director's Guild of America (DGA) Basic Agreement. The DGA Basic Agreement has been interpreted as obligating signatory companies, once they have agreed to employ a director, to pay the director her agreed salary once pre-production begins ' even if the director does not actually direct the picture, and even if the parties agreed to condition the production company's obligation on specific events, such as the ability of the company to obtain financing. Because the DGA Basic Agreement only recognizes exceptions to this general rule in cases of force majeure, or the default or incapacity of the director, a DGA arbitrator could well force the production company to pay the director's compensation (and benefits) even if the production was cancelled and the parties had agreed that the director would not be entitled to compensation under these circumstances.

It also should be recalled that complications arising from pay-or-play commitments are certainly not confined to high-end talent. A number of people hired for productions will routinely receive guarantees of compensation for specified periods of time. When, as sometimes occurs, these promises are conditioned on the engagement on a pay-or-play basis of the lead actors and/or a director, these types of deals can yield their own complexities. Assume, for instance, that a line producer secures a commitment that he will be engaged for a defined period of time at an agreed-upon rate at such time as a lead actress is engaged on a pay-or-play basis to portray the female lead. The production company then engages the female lead on a pay-or-play basis, subject to the condition that she must exercise her right to approve the screenplay. When the actress and writer have creative differences, she declines to approve the script and withdraws from the project, but the line producer demands to be paid based on the pay-or-play language in his agreement. Who wins? Although common sense may suggest that the actress should not be considered pay-or-play for purposes of the line producer's compensation if the actress is not pay-or-play for purposes of her own compensation, this could be the finding if the line producer's case ever went to trial. The line producer might argue that his pay-or-play language was triggered when the studio agreed to make the actress pay-or-play, and that his agreement did not condition his pay-or-play rights on the actress' approval of a screenplay.

Lessons Learned

One lesson that may be gleaned from the foregoing examples and the surfeit of litigation arising out of pay-or-play commitments is that it is generally prudent for most parties to document precisely the terms and conditions of these understandings, particularly if no signed agreement is imminent. Additionally, to minimize the risk of misunderstanding about the circumstances in which a pay-or-play commitment will be triggered or excused, it is frequently useful in documenting a deal to describe how the parties intend the arrangement to work, and to specify both the conditions that must be satisfied to trigger the artist's right to guaranteed compensation and the duties that the artist must discharge to be entitled to that compensation. Although such explicitness may run the risk of precipitating a premature conflict that might not otherwise arise, the clear articulation of a party's understanding will generally place that party in a far better position should the relationship between the parties, or the project itself, be jeopardized or collapse.

Sunny Brenner is a partner at Loeb & Loeb LLP in Century City, CA. He specializes in entertainment-related litigation, as well as several other areas of commercial litigation, and played a role in a number of the cases referenced or described in this article.