Entry dated :: December 23, 2005
Century City


In December 2005, I became an expert witness in a Hollywood
lawsuit that in nearly five years managed to
consume over $20 million in legal fees. (And, as
of 2010, an appeal is sill pending.) The heart of
this Dickensian litigation was a contract between
an author and producer for the making of Sahara,
a $130 million action movie released in 2005
that starred Penelope Cruz and Matthew McConaughey,
and was directed by Breck Eisner (the
son of ex-Disney chairman Michael Eisner). The
plaintiff was the author Clive Cussler, who had
sold the film rights to his 1992 bestselling book
Sahara for $10 million, and charged in his suit that
his right to approve the final script had not been
honored. He was represented in this suit by Hollywood
lawyer Bertram Fields, who, according to his
legend, had never lost a case (which is less impressive
than it sounds because most Hollywood cases
are settled out of court and the results are sealed).
The defendant was Crusader Entertainment, a
production company owned by oil tycoon Philip
Anschutz, who, aside from his media properties,
owned the majority stake in Regal Entertainment,
America’s largest movie theater chain. Anschutz,
who was listed by Forbes as the thirty-sixth richest
man in America with $8 billion in assets, was
represented by O’Melveny & Myers, a legal powerhouse,
which according to American Lawyer, had
the top-rated litigation department in the country.
The two law firms were located almost directly
across the street from one another on the Avenue
of the Stars in Century City, which once was the
back lot of 20th Century Fox.
O’Melveny & Myers star litigator Alan Rader,
who co-managed the Sahara case, retained me as
an expert witness in 2005. He said that he wanted
me to objectively lay out for the jury, possibly
in a PowerPoint presentation, the economic reality
behind the movie business. I worked with him and his associate Kevin Vick.
To prepare, I had to review a vast array of contracts, distribution
deals, financial analyses, and other paperwork that
might help me explain the requisites of the movie
business. I also had to provide a lengthy deposition
in Bert Field’s offices. Then, after years of
convoluted maneuvering, the case actually went to
trial, a rarity in Hollywood law. Six weeks later, the
jury provided a surprise ending to the drama: Bert
Field, the man who putatively never lost a case,
lost big for his client. Clive Cussler was ordered
not only to pay Anschutz’s company $5 million
for undermining the success of the movie, but he
had to pay him a staggering $13.9 million to cover
his legal costs. In addition to this $18.9 million,
Cussler also had to pay his own legal bill to Bert
Fields, which presumably was also sizable.
Leaving aside the brilliant lawyering on both
sides, the material I reviewed provided me with a
key insight into how Hollywood works: the movie-
business is a fee-driven business. When viewed
from the outside, movies, which are almost always
set up as separate off-the-books entities, rarely, if
ever, show a profit. Nevertheless, when viewed
from the inside, they serve as vessels for collecting
and dispensing billions of dollars in fees. In 2008,
the fees from studio movies alone exceeded $8 billion.
And these fees support a large part of the
Hollywood community, including directors, stars,
producers, and screenwriters, as well as the talent
agents, business managers, and lawyers who represent
them. But most of these fees are paid only if
the production is approved, or green-lit, by a studio
willing to finance it. So the big players in Hollywood,
and their representatives, have a powerful
incentive to use whatever means at their disposal
to pressure studio executives into green-lighting
their projects. For their part, studios also get a rich
fee, a distribution fee, which allows then to take
a percentage off the top from every dollar that
comes from every source including theaters, inflight
entertainment, DVDs, and television licensing.
This percentage can be as high as 33 percent
or as low as 10 percent depending on the relative
negotiating strength of each party. Before giving
the green-light, studios run the numbers to make
sure that their distribution fee has a good chance
of covering their outlay, even if the film itself is
unprofitable for others. Once a studio provides a
green-light, the studio deposits money in its account,
and the production can pay all the fees and
salaries necessary to make the movie.
How do studios get the money to finance this
fee-driven economy? To begin with, they raise a substantial
part this sum by wheeling and dealing with
outside parties. This includes negotiating tax credit
deals around the world with financial groups needing
tax relief, lease-back deals on copyright of the
titles, pre-sales agreements to sell rights to foreign
markers, product placement deals with corporations
to insert their product or brands in their films, and
hedge fund investments. This deal-making employs
a large part of the entertainment law establishment
who churn out the necessary paperwork. It also
often provides, depending on the film, between 20
and 60 percent of the budget. For the balance of
the money, studios either use their cash flow from
previous films or borrow from banks through their
revolving lines of credit at banks, called “revolvers,”
assuming, based on their financial analysis, that they
will earn back this portion of the outlay from their
own distribution fee.
Of course, sometimes studios miscalculate
and lose money. So do independent production
companies, which lack the fee rake-off. And Sahara
famously lost money—at least for its production
company and its owner, billionaire Philip
Anschutz. But not for everyone who worked on
it. The actors, extras, make-up artists, hair stylists,
costumers, assistant directors, set designers,
animal wranglers, carpenters, cameramen, grips,
editors, musicians, dialogue coaches, sound engineers,
caterers, drivers, and publicists all got paid.
The stars, director, and writers also got their fixed
compensation (though they may never see any
part of their contingent compensation, or profit
participation). Paramount, which distributed the
movie, got its fee. Clive Cussler even got his $10
million. And of course the lawyers on both sides
got their fee, as did this expert witness

Questions? Email me at edepstein@worldnet.att.net
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