Film

Hollywood Creative Accounting, or, How to Hide a Hit and Still Profit From It

Gollum Goes for the Gold in The Lord of the Rings: The Return of the King (2003)

From Batsuits to Lawsuits, Hollywood Studios have a long history of hiding profits to claim that enormous hits were actually flops. How do they do this, and why?

It Isn’t Merely Huge Studios That Practice Creative Accounting, Either

This wasn’t the first time Paramount allegedly worked around paying a writer for his work. Way back in 1982 humorist Art Buchwald pitched a treatment to Paramount called “It’s A Crude, Crude World”, which was later renamed King for a Day. The story was about a member of African royalty (planned to be played by Eddie Murphy) coming to the United States and his misadventures while attempting to fit in, including a stint in poverty. The screenplay went through many iterations with many writers and director John Landis was approached to direct, but the film went into development hell so Warner Bros. optioned the treatment.

But in 1987 Warner Bros. backed out of production because Paramount announced its new project, Coming to America directed by John Landis. This film was about a member of African royalty, played by Eddie Murphy, coming to the United States and his misadventures attempting to fit in, including a stint in poverty. Since this sounded exactly like Buchwald’s project, Warner Bros. dropped it like a hot tong fearing a twin film controversy. When the film was released in 1988 Murphy, not Buchwald, was given story credit. Buchwald was not paid. (One undeniable irony of this rip-off is that a subplot of the final film involves a copyright infringement investigation between a certain mega fast food chain and a burger joint called “McDowell’s”.)

Naturally Buchwald sued, as his contract with Paramount indicated he would be paid for creating the film’s story. The California Superior Court heard Buchwald v. Paramount and reached a verdict in 1990, deciding in favor of Buchwald. The court stated that a preponderance of evidence proved that Coming to America was based on Buchwald’s treatment especially because Landis and Murphy had full access to this treatment as well as the previous versions of the script. Because of the decision that the story was “based upon” Buchwald’s work, Paramount’s option agreement specified that he would be paid should a movie based on the treatment be made and Buchwald was, in fact, never paid Paramount was found in breach of the contract.

But this is a breach of contract lawsuit. Why discuss this in a film about fuzzy accounting in movie production? You should ask Paramount’s lawyers that question, because they’re the ones who brought it up. Coming to America was a huge success for Paramount, eventually earning $288 million against a $39 million budget. Yet during the second phase of the trial when the court was set to decide how much Buchwald was owed, Paramount argued that development and marketing costs had resulted in “no net profit” and backed this up with Buchwald’s own contract. The court was so outraged by this Hollywood Creative Accounting that it ruled that Paramount had used “unconscionable” means of determining a writer’s percentage and found that Buchwald could pursue a separate tort lawsuit against Paramount.

A tort suit against Paramount could have huge implications, not just for that studio, but for the entire system. If net profit formulas in studio contracts do not correspond to generally accepted accounting principles those same studios might face something as frightening as an audit from the Securities and Exchange Commission. And if that were to happen, the entire profit hiding scheme might become a thing of the past.

The court further found that such formulas effectively “double-count” many expenses of the studio and have been designed for the express purpose of making sure a net profit is mathematically impossible (and therefore no profits must be shared). This, coupled with the overwhelming evidence against Paramount that indicated a tort case would be lost (not to mention the fact that Paramount would have to open their books to fight this suit), the studio settled with the writer and his producer for $900,000 and had the previous decision vacated as part of the1990 settlement.

Naturally this threatened to shake the entire film industry as this sort of revisionist math was common practice in Hollywood. But did it, and would any real changes be seen?

In 1992 Michael Uslan and Benjamin Melniker filed Batfilm Productions v. Warner Bros. in Los Angeles Superior Court. Uslan and Melniker were the duo who purchased the film rights to the character Batman from DC Comics back in 1979 and despite popular culture still seeing the character as something campy and reminiscent of the 1966 TV show, it was Uslan’s plan to make a serious and dark version of Batman, closer to the original. Along the way several studios rejected the project, including United Artists, Columbia and Universal and two other producers, Jon Peters and Peter Guber joined Uslan and Melniker in their quest. Eventually Warner Bros. (which, again, owns DC Comics) agreed to make the movie but by this time Uslan and Melniker believed their “indispensable creative” contributions had been minimized (especially since they were the dynamic duo who bought the rights to the Dynamic Duo in the first place). The lawsuit argued that they had been cheated out of proper credits and financial rewards and that “a sinister campaign of fraud and coercion” prevented their involvement in the production of Batman (1989) and its sequels (of which, at the time of the lawsuit, there were none).

So what exactly did that mean? Well, as everyone knows, Batman was an enormous success, pulling in over $253 million (at the time, the final count exceeds $411 million) against a budget of $48 million, yet when it came time for profit sharing, Warner Bros. claimed a net loss of $20 million. According to the suit itself, Warner Bros’ Hollywood Accounting ensured that “'Batman' will never earn net profits for the two men who conceived the movie, acquired the rights and provided the creative blueprint for the film.”

By way of comparison, Jack Nicholson was lured to the (then-believed risky) role of The Joker with top billing a $6 million paycheck and an unspecified percentage of the gross. By the time the suit was filed, Nicholson had reportedly been paid $50 million (with estimates today suggesting up to $90 million) and even received a financial interest in Batman Returns (1992), a film he had no involvement in. Guber and Peters were said to have made up to $20 million from the film. Warner Bros. agreed with those numbers and said that this was one reason that final accounting had not been made. Uslan and Melniker’s deal was for net profits. Nicholson, at least, received a deal for “gross profits” (a percentage of the receipts before expenses were accounted for), meaning he would get a cut of the box office whether the film was successful or not. No amount of fuzzy accounting could bury a gross profit deal.

Logically, Uslan and Melniker hired Buchwald’s attorney Pierce O’Donnell and he (along with much of the industry) considered Batfilm Productions v. Warner Bros. a logical extension of Buchwald v. Paramount. So how could they lose? If such a formula was “unconscionable” for Paramount surely it must be “unconscionable” for Warner Bros. Even the press felt that this was a foregone conclusion with the Los Angeles Times reporting “Even the Joker might laugh at this accounting.”

Yet it was Warner Bros. that had the last laugh. A Superior Court judge threw out the lawsuit in 1994 (two years after Uslan and Melniker were credited as Executive Producers of Batman Returns) in spite of the fact that the pair claims to have received no money after the production of Batman because their “net profit participation has proved worthless”. Warner Bros. eventually offered the producers a settlement, which their attorney (who did not specify the amount) described as the value of “two popcorns and two Cokes”. They might need to buy a few more than two each, because while this verdict seemed to contradict the previous win against Paramount, all wasn’t lost for Uslan and Melniker. Both men have been listed as Producers on every single Batman film since the 1989 movie, whether live action or animated, including the Christopher Nolan “Dark Knight Trilogy” that kicked off in 2005.

The Batman lawsuit is hardly unique and seemed to repeat itself a decade later. Spider-Man co-creator Stan Lee, who shaped much of what we know of the “Marvel Universe” claimed to have had a deal with Marvel for ten percent of any profits from film and television programs that utilize his characters. When 2002’s Spider-Man motion picture (from Columbia Pictures) raked in over $800 million (against a $140 million budget), Lee stuck his hand out and found it slapped. According to the Marvel’s lawyers the gargantuan success somehow managed not to net any profits whatsoever, so Stan (The Man) and his company, Stan Lee Media were out of luck. Thus, Lee sued but found little luck in the courts thanks to Hollywood Creative Accounting. Since then, Stan Lee Media has sued Marvel more than once to attempt to obtain ownership of the many characters he co-created.

Similarly, Peter Jackson and Wingnut Films sued Warner Bros’ subsidiary New Line Cinema in 2005 claiming that they had been shut out of huge profits from the Lord of the Rings trilogy (specifically the first film, 2001’s The Fellowship of the Ring) due to Hollywood Creative Accounting. As if it needed to be said, the Lord of the Rings trilogy (directed by Jackson) was an enormous critical, award and financial success which brought in close to $3 billion against a cumulative budget of $281 million. How could anyone hide profits like that?

Jackson asked that very question and demanded an audit. New Line chief Bob Shaye was furious and refused to allow Jackson to ever direct another film with the company. New Line was later fined $125,000 for failing to provide its accounting documents in relation to the suit.

By 2007, after a string of flops for New Line, Jackson was brought back to the studio to first executive produce, then to officially direct the new trilogy based on J.R.R. Tolkien’s The Hobbit (all part of the same continuity as The Lord of the Rings). This reversal was partially because co-studio MGM shut down production without Jackson.

By 2008 the suit was overshadowed by a similar suit from The Tolkien Estate, claiming they were owed 7.5 percent of all profits from the films. The suit was settled for an undisclosed amount in 2009, though insiders reported that the payout was about $38 million. Their original suit was for $220 million.

It isn’t merely huge studios with gigantic, effects-laden productions that have employed this practice, either. In spite of its name, My Big Fat Greek Wedding (2002) was actually a tiny little independent movie from Gold Circle Films; however, it soon became a Big Fat American Success at the box office, pulling in over $368 million with a budget of only $5 million. In short, this Canadian/ Greek/ American co-production (quickly labeled the “most Profitable Independent Film in History”) would be considered a hit by any accounting practice in Canada, Greece or America.

Well, yes, except for that one part of America called “Hollywood”. According to Gold Circle Films the “little movie that could” actually lost over $20 million. Thus the cast (with the exception of writer/ star Nia Vardalos) joined together to sue Gold Circle for their fair share of the pie. They weren’t alone. Executive producers Jim Milio, Melissa Jo Peltier and Mark Hufnail (of MPH Entertainment, Inc.) sued Gold Circle and other companies involved with the production including Tom Hanks’ Playtone Company and even Vardalos herself demanding three precent of the actual profits.

Undaunted, Hanks, wife Rita Wilson and Gary Goetzman (who also produced) joined with Vardalos and also sued Gold Circle (along with Big Wedding Productions, LLC and Vortex Pictures) separately. Vardalos was reportedly contracted to receive eight percent of the profits with Hanks, Goetzman and Wilson promised one third of the remaining funds after expenses. Even with Gold Circle revising the net from the negative to around $287 million, the various parties continued their suits until 2008 when the various parties requested a dismissal “without prejudice” (meaning the suits could be re-opened).

The man who would love for you to think of him as both “Mister Documentary” and “Mister Independent”, Michael Moore, also filed suit over shady accounting practices. Having made $222 million against a $6 million budget, Moore’s 2004 documentary Fahrenheit 9/11 was a big surprise debuting at #1 in the USA (a definite rarity for documentaries). Moore waited until 2011 to sue his buddies Bob and Harvey Weinstein (of the Weinstein Company) for a big, fat $2.7 million, claiming that the brothers had employed those similar creative formulas to cheat him out of his just income. A lawyer for the former Miramax executives responded that Moore had “been paid $20 million and he claims he should get $2 million more” and went on to call Moore’s claims “Hogwash”. While it might take a big screen investigation like a Michael Moore film to figure out where the real corruption here is, The Weinstein Company settled out of court with the big guy.

Even Hollywood’s television interests are not immune. Studio Celador had to sue Disney over millions in claimed lost revenue over the TV series Who Wants to Be a Millionaire. Amazingly, the British firm won that suit against the House of Mouse. Don Johnson sued the Cox Media’s Rysher Entertainment for lost income over Nash Bridges and he won that one, too.

Those are a whole lot of examples of the ramifications (and lack thereof) of Hollywood Creative Accounting. The prevalence of litigation both proves that this is a common practice and that such a practice isn’t going anywhere. So… is it legal? The answer, in the case of Hollywood Creative Accounting and just about all other things, is: “It is unless you get caught.”

Keep in mind, most of the time this practice is only known to the public when lawsuits are filed and the press gets interested. The practice is, in fact, so widespread that such contracts (unconscionable or not) are drafted every day with strange double-counting, self-paying, subsidiary sharing, sister company funding formulas that should be illegal, but technically are not (unless you get caught). On paper, at least when it comes to profit sharing numbers, virtually every movie loses money. After all, if it can happen to Harry Potter it can happen to anyone!

In an NPR interview, author Edward Jay Epstein argues that this double-edged sword can also be doubly beneficial in some cases. When an actor, director, producer or writer is given a profit sharing contract with a promised percentage of the net profits, on paper they are shown (and reported in the press) to be making incredibly huge amounts of money... even though that money will never be seen. When negotiating their next projects they can demand higher fees based on that very thing. This could be one reason that individuals rarely sue over this. Fellow production companies like Brandywine, Playtone and Celador not to mention rights holders like The Tolkien Estate and creator companies like Stan Lee Media are much more likely to sue as reports of high dollars for them mean a lot less than the actual dollars themselves.

If there is any lesson to be learned here, it's that Hollywood Creative Accounting will always be a standard practice as long as there are pieces of the financial pie to share. Studios cannot change agreed-upon percentages, so the smartest and most money-making strategy is to simply make the pie itself smaller and smaller and smaller (often along with their ethics).

Now imagine yourself finally walking into that studio meeting, finding your pitch accepted and right there on the desk in front of you is a gleaming contract that looks so golden to you that you can almost make out a rainbow arcing out of it into the heavens, obscured only by your name up in lights. Right there in black and white are the beautiful words illustrating that a full three percent of the film’s profits are yours, yours and only yours.

My advice to you? The first words out of your mouth need to be “gross or net?”

See you in The Next Reel.

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