Suit By Author Michael Connelly Is Good Reason to Take Close Look at Film Turnaround Provisions

One type of reversion clause imposes a time period during which the book author must exercise his or her right to repurchase rights ' failing which the reversion opportunity is forever lost. This aspect of the clause, sometimes referred to as a “turnaround provision,” is described in a recent lawsuit brought in Los Angeles Superior Court by the highly successful author Michael Connelly. Connelly v. Paramount Pictures Corp., BC434358. The complaint in that action furnishes an occasion for a close look at reversion clauses and their consequences.

Michael Connelly and Hieronymus Inc., his successor in interest, sued Paramount Pictures in March 2010 for breach of contract, for breach of the implied covenant of good faith and fair dealing, for an accounting and for certain declaratory relief, all relating to the interpretation of a reversion provision in a 1992 agreement. That agreement gave Paramount an exclusive option, which Paramount exercised in 1995, to acquire film rights in two of Connelly's books.

The books in question were Black Ice and The Black Echo. Both draw from the author's real-life experience as a crime reporter and feature the character Hieronymus (a/k/a Harry) Bosch, a Los Angeles police detective who undertakes to solve murders. Connelly explained in The Wall Street Journal that he named the character after the famous 15th century painter because the Bosch books ' like the painter's pictures ' have “many different stories going on” that at first might not appear connected but when seen as a whole fit together. Connelly wrote a good many stories featuring Bosch. More than a dozen other books in the Bosch series followed the first two.

Connelly's lawsuit alleges that the 1992 agreement contained a turnaround reversion clause: if Paramount did not commence principal photography of a motion picture based on either of the books within 15 years after the option was exercised, then during the next 12 months ' specifically from Jan. 27, 2010 through Jan. 26, 2011 ' the author could recover all of the rights conveyed by reimbursing Paramount for “out-of-pocket development costs, advances and payments incurred by [Paramount] with respect to the Pictures,” plus interest.

Allegedly unbeknownst to the plaintiffs, Paramount made a co-production/joint venture deal with Columbia Pictures to exploit film rights in the books, which ultimately resulted in Paramount's quitclaiming to Columbia all of Paramount's rights in Black Ice in 2002 and Columbia's quitclaiming to Paramount all of its rights in The Black Echo. As a condition of reversion, Paramount allegedly informed the plaintiffs' counsel earlier this year that ' in addition to Paramount's direct costs ' reimbursement would need to cover expenses paid by Columbia including the cost of a “term deal” with an independent producer at Columbia and overhead.

The plaintiffs allege that these costs not only lay outside the bounds of the reversion mechanism contemplated in the 1992 agreement, but also, in the absence of proper accounting backup, there was no way to determine their accuracy. In addition to damages, the complaint seeks a declaration that the repurchase price should not include Columbia's costs or overhead.

Repurchasing Reversion Rights

As the Connelly scenario suggests, the reversion provisions of typical film rights agreements are not simple. It is rarely the case that an author's motion picture rights revert without the author's having to repurchase them. In fact, an author would need a great deal of leverage even to limit the reversion price to reimbursement of what the studio paid the author. Instead, reversion clauses generally require reimbursement of the studio's direct costs plus interest, commonly calculated at 125% of prime. With this interest factor, the repurchase price continues to escalate even years after the studio stopped incurring costs.

If the book author has to repurchase rights in order to get them back, it is important from the author's perspective to have a clear description of the costs to be reimbursed and other terms of repurchase. The more money spent on development by the studio, the higher the repurchase price and, in turn, the more difficult it will be to interest another entity to finance and produce a film after reversion. (And if a new entity is not willing to cover the repurchase cost, the author will have limited economic incentive to repurchase the rights.)

Reimbursable costs to the studio may include the purchase payment to the author, payments to a writer or writers for multiple treatments and screenplay drafts, other development costs like location scouting and sometimes payment to outside producers who become involved in development. (The matter became even more complicated in the Connelly situation because of the co-production/joint venture agreement made between Paramount and Columbia, which we have not seen.)

In general, the practical effect of the obligation to repay is that the original studio ' which has had the opportunity to produce a film for years and hasn't acted ' may be the only one for which a production is feasible, either on its own or in a joint venture. The repurchase cost has become an insurmountable financial barrier to everyone else.

In the case of a relatively simple reversion clause, the producer's rights revert to the author automatically at the end of the specified time period if film production has not begun, subject to a lien covering the repurchase costs. The question then arises as to what event triggers an obligation for the author to make the repayment. The author would prefer to have the repurchase amount paid solely from the first proceeds the author receives from a third party, as and when they are received. At the other end of the spectrum is the studio's favored approach: that the amount be paid as soon as a development deal is in place with a third party. This imposes, however, a great burden on the author because the commencement of development usually does not result in a large payment to him or her and certainly not an amount equal to costs that have accrued with interest over many years.

In the case of a “turnaround” reversion arrangement, the costs must be reimbursed to the studio within a specified time period ' one year in the Connelly agreement. This makes it necessary for the author to act quickly to find a new studio willing to pay for repurchase.

A middle ground approach ' which still presents a difficult hurdle for the author to overcome ' would require repayment at the time the property is purchased by another producer. This differs from the turnaround mechanism in the Connelly case, which requires repayment during a one-year period even if another producer willing to fund the repayment has not been found.

Although the brief complaint in the Connelly suit does not tell us what motivated the author to invoke the turnaround provision, one can speculate given the structure of most literary purchase agreements and the great popularity of the Bosch character.

Literary Purchase Agreements

Ordinarily, the definition in a literary purchase agreement of the “Property” in which the producer secures exclusive rights includes not only the book itself but also the themes, plots and characters contained in the book. The purchase agreement customarily allows the producer to make “Producer Sequels” that feature the same characters in new plots devised by hired screenwriters. These new stories are differentiated from “Author Written Sequels,” which are books (not films) written by the author that place the same characters in new situations.

If the author wishes to license audiovisual rights to an author-written sequel to a third party, then he or she is likely to be contractually bound to negotiate with the initial producer that now controls the characters for those purposes and possibly to give it the opportunity to match an offer from a third party. Typical contracts further provide that:

• If the author and the initial producer can't agree on terms, then the author may not authorize another audiovisual production based upon the Author-Written Sequel during a holdback period; and
• If the author licenses a third party the right to produce a motion picture based upon an author written-sequel, he or she may not permit use of the characters who were in the initially acquired book.

This usually eradicates the author's ability to make a meaningful disposition of audiovisual rights in an author written-sequel to a party other than the one that controls audiovisual rights in the initially acquired book. (We discussed the interplay between author-written sequels and studio film rights in “Provisions in Book Author/Studio Contracts Covering Motion Picture Sequels,” published in the August 2009 issue of Entertainment Law & Finance.)

If provisions like these appeared in the agreements covering Black Ice and The Black Echo, then the valuable Bosch character may be unavailable for Connelly to license for motion pictures based on any book in the series, even though the 1992 grant to Paramount conveyed film rights only in the first two. A producer who might desire the right to produce a film based on a popular recent Bosch book, and possibly start a Bosch franchise, would have sufficient financial incentive to repay Paramount the repurchase amount only if it doesn't present an insurmountable obstacle to obtaining a return on investment.

Conclusion

Reversion and turnaround provisions can prove to be important when film rights are sold but unused. Understandably, these clauses might not get a great deal of attention when negotiations extend for a lengthy period and the parties have finally agreed on basic terms like the purchase price, contingent compensation and the author's reserved rights.

The natural tendency is to try to finish the deal that makes film production possible ' and gets the author paid ' rather than dwell on the bleak possibility that principal photography never will begin. But there is value in focusing on a potential reversion and the details that pertain to it, such as the length of time for the producer to commence principal photography, what items will or will not be included in the repurchase price, and what conditions trigger the obligation to repay when there is no fixed turnaround period. The Connelly suit also shows the utility of providing for a tolling of the payback period in the event of a dispute, and for an expedited method of conflict resolution should there appear a prospective buyer of reverted film rights who is not willing to wait for the end of a court case.

It takes a good while for a producer to develop a motion picture based on a book. A screenwriter must be engaged, decisions must be made about how to adapt the book into a film, the screenplay must be written and revised, and then an entire creative team must be assembled. For this reason, the producer attempts to structure the acquisition agreement with the book author in the form of an option coupled with a self-executing purchase agreement. The option period gives the producer time to complete development activities, and if the option is exercised, the purchase agreement transfers audiovisual rights without further discussion.

Reversion Rights

Most authors are elated when an option is exercised because it means that the purchase price will be paid and there's a good likelihood that a film will go forward. But what happens when the option is exercised, the rights are assigned, years go by and no film ensues? If the author has bargained for a right of reversion, he or she will have an opportunity to get the film rights back. But reversion is almost never an absolute right; conditions usually must be satisfied before audiovisual rights will return free of encumbrances.

One type of reversion clause imposes a time period during which the book author must exercise his or her right to repurchase rights ' failing which the reversion opportunity is forever lost. This aspect of the clause, sometimes referred to as a “turnaround provision,” is described in a recent lawsuit brought in Los Angeles Superior Court by the highly successful author Michael Connelly. Connelly v. Paramount Pictures Corp., BC434358. The complaint in that action furnishes an occasion for a close look at reversion clauses and their consequences.

Michael Connelly and Hieronymus Inc., his successor in interest, sued Paramount Pictures in March 2010 for breach of contract, for breach of the implied covenant of good faith and fair dealing, for an accounting and for certain declaratory relief, all relating to the interpretation of a reversion provision in a 1992 agreement. That agreement gave Paramount an exclusive option, which Paramount exercised in 1995, to acquire film rights in two of Connelly's books.

The books in question were Black Ice and The Black Echo. Both draw from the author's real-life experience as a crime reporter and feature the character Hieronymus (a/k/a Harry) Bosch, a Los Angeles police detective who undertakes to solve murders. Connelly explained in The Wall Street Journal that he named the character after the famous 15th century painter because the Bosch books ' like the painter's pictures ' have “many different stories going on” that at first might not appear connected but when seen as a whole fit together. Connelly wrote a good many stories featuring Bosch. More than a dozen other books in the Bosch series followed the first two.

Connelly's lawsuit alleges that the 1992 agreement contained a turnaround reversion clause: if Paramount did not commence principal photography of a motion picture based on either of the books within 15 years after the option was exercised, then during the next 12 months ' specifically from Jan. 27, 2010 through Jan. 26, 2011 ' the author could recover all of the rights conveyed by reimbursing Paramount for “out-of-pocket development costs, advances and payments incurred by [Paramount] with respect to the Pictures,” plus interest.

Allegedly unbeknownst to the plaintiffs, Paramount made a co-production/joint venture deal with Columbia Pictures to exploit film rights in the books, which ultimately resulted in Paramount's quitclaiming to Columbia all of Paramount's rights in Black Ice in 2002 and Columbia's quitclaiming to Paramount all of its rights in The Black Echo. As a condition of reversion, Paramount allegedly informed the plaintiffs' counsel earlier this year that ' in addition to Paramount's direct costs ' reimbursement would need to cover expenses paid by Columbia including the cost of a “term deal” with an independent producer at Columbia and overhead.

The plaintiffs allege that these costs not only lay outside the bounds of the reversion mechanism contemplated in the 1992 agreement, but also, in the absence of proper accounting backup, there was no way to determine their accuracy. In addition to damages, the complaint seeks a declaration that the repurchase price should not include Columbia's costs or overhead.

Repurchasing Reversion Rights

As the Connelly scenario suggests, the reversion provisions of typical film rights agreements are not simple. It is rarely the case that an author's motion picture rights revert without the author's having to repurchase them. In fact, an author would need a great deal of leverage even to limit the reversion price to reimbursement of what the studio paid the author. Instead, reversion clauses generally require reimbursement of the studio's direct costs plus interest, commonly calculated at 125% of prime. With this interest factor, the repurchase price continues to escalate even years after the studio stopped incurring costs.

If the book author has to repurchase rights in order to get them back, it is important from the author's perspective to have a clear description of the costs to be reimbursed and other terms of repurchase. The more money spent on development by the studio, the higher the repurchase price and, in turn, the more difficult it will be to interest another entity to finance and produce a film after reversion. (And if a new entity is not willing to cover the repurchase cost, the author will have limited economic incentive to repurchase the rights.)

Reimbursable costs to the studio may include the purchase payment to the author, payments to a writer or writers for multiple treatments and screenplay drafts, other development costs like location scouting and sometimes payment to outside producers who become involved in development. (The matter became even more complicated in the Connelly situation because of the co-production/joint venture agreement made between Paramount and Columbia, which we have not seen.)

In general, the practical effect of the obligation to repay is that the original studio ' which has had the opportunity to produce a film for years and hasn't acted ' may be the only one for which a production is feasible, either on its own or in a joint venture. The repurchase cost has become an insurmountable financial barrier to everyone else.

In the case of a relatively simple reversion clause, the producer's rights revert to the author automatically at the end of the specified time period if film production has not begun, subject to a lien covering the repurchase costs. The question then arises as to what event triggers an obligation for the author to make the repayment. The author would prefer to have the repurchase amount paid solely from the first proceeds the author receives from a third party, as and when they are received. At the other end of the spectrum is the studio's favored approach: that the amount be paid as soon as a development deal is in place with a third party. This imposes, however, a great burden on the author because the commencement of development usually does not result in a large payment to him or her and certainly not an amount equal to costs that have accrued with interest over many years.

In the case of a “turnaround” reversion arrangement, the costs must be reimbursed to the studio within a specified time period ' one year in the Connelly agreement. This makes it necessary for the author to act quickly to find a new studio willing to pay for repurchase.

A middle ground approach ' which still presents a difficult hurdle for the author to overcome ' would require repayment at the time the property is purchased by another producer. This differs from the turnaround mechanism in the Connelly case, which requires repayment during a one-year period even if another producer willing to fund the repayment has not been found.

Although the brief complaint in the Connelly suit does not tell us what motivated the author to invoke the turnaround provision, one can speculate given the structure of most literary purchase agreements and the great popularity of the Bosch character.

Literary Purchase Agreements

Ordinarily, the definition in a literary purchase agreement of the “Property” in which the producer secures exclusive rights includes not only the book itself but also the themes, plots and characters contained in the book. The purchase agreement customarily allows the producer to make “Producer Sequels” that feature the same characters in new plots devised by hired screenwriters. These new stories are differentiated from “Author Written Sequels,” which are books (not films) written by the author that place the same characters in new situations.

If the author wishes to license audiovisual rights to an author-written sequel to a third party, then he or she is likely to be contractually bound to negotiate with the initial producer that now controls the characters for those purposes and possibly to give it the opportunity to match an offer from a third party. Typical contracts further provide that:

• If the author and the initial producer can't agree on terms, then the author may not authorize another audiovisual production based upon the Author-Written Sequel during a holdback period; and
• If the author licenses a third party the right to produce a motion picture based upon an author written-sequel, he or she may not permit use of the characters who were in the initially acquired book.

This usually eradicates the author's ability to make a meaningful disposition of audiovisual rights in an author written-sequel to a party other than the one that controls audiovisual rights in the initially acquired book. (We discussed the interplay between author-written sequels and studio film rights in “Provisions in Book Author/Studio Contracts Covering Motion Picture Sequels,” published in the August 2009 issue of Entertainment Law & Finance.)

If provisions like these appeared in the agreements covering Black Ice and The Black Echo, then the valuable Bosch character may be unavailable for Connelly to license for motion pictures based on any book in the series, even though the 1992 grant to Paramount conveyed film rights only in the first two. A producer who might desire the right to produce a film based on a popular recent Bosch book, and possibly start a Bosch franchise, would have sufficient financial incentive to repay Paramount the repurchase amount only if it doesn't present an insurmountable obstacle to obtaining a return on investment.

Conclusion

Reversion and turnaround provisions can prove to be important when film rights are sold but unused. Understandably, these clauses might not get a great deal of attention when negotiations extend for a lengthy period and the parties have finally agreed on basic terms like the purchase price, contingent compensation and the author's reserved rights.

The natural tendency is to try to finish the deal that makes film production possible ' and gets the author paid ' rather than dwell on the bleak possibility that principal photography never will begin. But there is value in focusing on a potential reversion and the details that pertain to it, such as the length of time for the producer to commence principal photography, what items will or will not be included in the repurchase price, and what conditions trigger the obligation to repay when there is no fixed turnaround period. The Connelly suit also shows the utility of providing for a tolling of the payback period in the event of a dispute, and for an expedited method of conflict resolution should there appear a prospective buyer of reverted film rights who is not willing to wait for the end of a court case.