Recent Development in Entertainment Law

According to a recent CMPA update:

The deal applies to the entire life cycle of a show — from first pitch, through to development, production and broadcast on all platforms. Key areas covered by the deal include:

• Development and evaluation

 
• Licensing conditions

 
• Editorial control

 
• Licence term

 
• Rights

 
• Equity

 
• Super-licence fees

 
• Producer tax credits

 
• Time frame and administration

The CMPA's President and CEO, Norm Bolen, described the importance of the Agreement as follows (Playback Daily, July 8, 2011):

"This deal changes everything. It forever redefines the relationship between producers and broadcasters. But it isn't worth the paper it is written on unless all independent producers show solidarity and strictly follow the terms of the agreement in their individual negotiations with broadcasters."

To ensure that Canadian producers fully understand and comply with the Agreement, the CMPA organized a national "road show" in July and August of 2011 to discuss and explain the Agreement and CMPA senior staff met with Canadian producers across the country.

The business model of Canadian independent producers is predicated on the optimal commercial exploitation of their programs across multiple formats and media. If Canadian broadcasters were able to use their tremendous bargaining power to acquire rights to independent productions on inequitable terms the viability of many Canadian independent production companies could be threatened.

The idea behind the Agreement is to restore a measure of balance in the negotiating power between the Broadcasters and the Canadian producers. In effect, the CMPA is acting much like a guild or union in setting minimum "scale" provisions for Canadian producers.

Given this rationale, it is not surprising that the focal points of the Agreement include a maximum licence term, a prohibition on producers deferring their fees and overhead, the retention by producers of a share of film tax credit monies and an efficient mechanism for producers to licence the Broadcasters programming distribution rights in multiple formats on terms that are fair to both producers and the Broadcasters.

"The Commission recognizes the importance of [terms of trade] agreements in this era of consolidation and of the new platforms upon which content can be accessed. [It will] only consider [license] renewal applications from the [private corporate broadcast groups] for seven years with finalized Terms of Trade Agreements in place."

The CRTC was therefore instrumental in creating a conducive environment for the Broadcasters to enter into the Agreement.

There are certain situations where the Agreement does not apply. For example, the Agreement does not apply to programs produced in-house by a Broadcaster or by its affiliate or to Broadcaster "service productions", including productions where development is substantially undertaken by a Broadcaster or where the format rights are exclusively acquired by a Broadcaster and assigned to a producer or to digital productions that are unrelated to a television program.

CMPA Handbook: The Agreement excludes four specific categories of production, namely: (i) after sales/acquisitions, (ii) broadcaster-affiliated productions, (iii) broadcaster in-house productions, and (iv) service productions. According to the CMPA, after sales and acquisitions exist where the broadcast licence is outside of the locked financing plan, and where the Broadcaster is not involved in development, production or postproduction; in contrast, a broadcaster-affiliated production is one where the Broadcaster directly or indirectly owns 30% or more of the equity in the production company.

Each of these categories is subject to exceptions; for example, where an independent producer's control over production elements is subject to standard Broadcaster approval rights, the Agreement still applies. Audiovisual productions not intended for television (such as webisodes) are also not subject to the Agreement, except to the extent that they migrate to television.

While the CBC is not included in the Agreement, the CMPA notes that negotiations with CBC are ongoing, that any producer facing difficulties with CBC should contact the CMPA directly, and that further agreements with other broadcasters may come in the future.

The Broadcasters must make reasonable efforts to communicate with producers across Canada about the types of projects in which they are interested. They must identify on their websites their programming services and their personnel in charge of responding to program proposals with their applicable contact information.

CMPA Handbook: The CMPA strongly encourages independent producers to submit pitches in writing, and notes that exclusivity is only granted through the execution of a development agreement between the parties.

The confidentiality of producers' program proposals is safeguarded by the Agreement and a Broadcaster cannot request a waiver of any existing rights that a producer may have in its program proposal.

The rights to a program proposal are owned solely by the producer, unless there is a signed development agreement to the contrary. A Broadcaster may not require a producer to commence development before a development agreement is executed. However, once a development agreement is signed, a Broadcaster's financial participation entitles it to certain exclusive rights, including the right to negotiate a licence agreement. The development agreement may not incorporate the terms of a licence agreement. These terms are only to be negotiated once the project has been fully developed or the Broadcaster has made an order.

CMPA Handbook: The CMPA notes that the rights retained by a producer in the event that a development agreement is not ultimately signed include any suggested changes or enhancements that may have been discussed or even provided by the Broadcaster.

Where a Broadcaster expresses an interest, the Broadcaster and the producer must use best efforts to execute a development agreement within 60 days. The Broadcaster has no more than 18 days following the receipt of development materials to inform the producer of whether it approves the submitted development materials. If the Broadcaster turns down the proposal, the Broadcaster is only entitled to reimbursement from the producer of its cash investment in the development of the project. If the project is ultimately greenlit by another Broadcaster, this reimbursement is to be paid on the first day of principal photography or key animation. Once the final deliverables have been received, the Broadcaster has six months to decide whether it wishes to license the project. At the end of this six month period, the Agreement requires the Broadcaster to either (i) order the project, (ii) agree with the producer to continue to further develop the project, or (iii) release its interest in the project in writing.

CMPA Handbook: In terms of payment, the CMPA notes that no instalments can be tied to "acceptance" (as opposed to "delivery") of development materials.

The Agreement provides the producer with a 90-day period, once the Broadcaster agrees to order the project, to confirm all other sources of financing for the production, subject to any mutually agreed extension for funding deadlines and "exigencies of production".

The Broadcaster must sign a broadcast licence agreement at least two weeks prior to the commencement of principal photography or key animation, provided that the producer has submitted "reasonable agreed-upon deliverables".¹ The Broadcaster must then broadcast the program on a CRTC-licensed platform within 12 months of the commencement of the licence term. If a Broadcaster wishes to order additional episodes of a program for a new season, the order must be made within six months of the first broadcast of the last commissioned episode of the preceding season.

CMPA Handbook: Where a broadcast licence agreement has not been executed according to the requirements of the Agreement, the CMPA notes that the Broadcaster and producer must mutually agree on one of three available options (not to be chosen unilaterally by the Broadcaster): cash flow of the production by the Broadcaster until a broadcast licence agreement is executed; deferral of production until a mutually-agreed upon later date; or the termination of the production.

A Broadcaster's right of first negotiation ("ROFN") and right of last refusal ("ROLR") in both development and licence agreements is limited by the terms of the Agreement. A ROFN provides the Broadcaster with the first right to negotiate to develop or license a program before the producer can enter into negotiations with another Broadcaster. The Agreement requires that that a ROFN must be exercised by the Broadcaster by a fixed start date or in reference to a clearly specified timeframe identified in the development or licence agreement. If no timeframe is provided, then the timing of the exercise of the ROFN will be at the sole discretion of the producer. If negotiations with the Broadcaster are entered into as a result of the exercise of the ROFN, the duration of the negotiation will be the timeframe specified in the development or licence agreement, but cannot exceed 45 days.²

A ROLR provides the Broadcaster with the right to license a project that it previously rejected by matching the terms offered by another Broadcaster. A ROLR can significantly limit the bargaining power of the producer. As a result this type of right is limited by the provisions of the Agreement. Specifically, a Broadcaster may only be granted a ROLR to (i) acquire exclusive exhibition rights for additional programs or (ii) to obtain an extension of the licence term.

CMPA Handbook: The CMPA's view is that ROFN and ROLR rights are only retained by the Broadcaster during a licence term and any extensions.

The Agreement further addresses a Broadcaster's entitlement to share in any surplus financing proceeds beyond the original approved financing plan and/or in any production underages. Where the producer receives surplus funds for a project after the Broadcaster has approved the project's financing plan, the Broadcaster and the producer must give good faith consideration to whether the surplus funds should form part of the financing of the production. The Agreement provides that under no circumstances will the surplus entitle the Broadcaster to require a reduction in its licence fee. The Broadcaster is, however, entitled to a share of the surplus funds in proportion to any equity investment it has made. Further, where a program is produced under budget, the Broadcaster is entitled to a pro-rata share of the underages proportional to its investment in the financing.

CMPA Handbook: The CMPA recommends that a producer first satisfy itself that any production enhancements or budget overages are financed before paying surplus funds to the Broadcaster.

While previously, a Broadcaster could negotiate an automatic extension of the original licence term for the original season if additional seasons were ordered; this is no longer permitted by the Agreement. For example, a Broadcaster can no longer automatically extend the term of Season One once it orders Season Two to ensure that the licences for both Season One and Two end simultaneously. This ensures that producers do not lose the potential value of exploiting earlier seasons as new seasons are produced and broadcast.

A Broadcaster is permitted to have a ROFN and a ROLR in order to extend the original five year term of the licence, but only if a fair market value licence fee is paid to the producer for the extension. Each subsequent licence extension is for a maximum period of up to five years. The Broadcaster may exercise its right to extend the licence as of the earlier of (i) six months prior to the expiry of the third year of the original five-year licence term, or (ii) three months following the execution of the licence agreement for a subsequent season of the program.

CMPA Handbook: In the view of the CMPA, these renewal provisions are specific to five year licence terms only, as ROLR rights do not exist for agreements with terms of less than five years.

There are circumstances where a Broadcaster may request changes to creative elements or propose additional creative elements that were not contemplated at the time the licence agreement was initially entered into. To exercise this editorial control, it must provide the producer with an enhanced licence fee proportionate to the scope of the new work required. This enhanced licence fee is meant to cover the additional costs associated with the creative changes that were not contemplated by the original approved budget. The Broadcaster is also required to give the producer written notice of its requests for creative changes or additional creative elements as soon as possible.

The Agreement also clarifies the screen credits to which a Broadcaster and its representatives may be entitled. While the Broadcaster and its personnel are entitled to recognition in the screen credits of the program, credit placement and titles must be in conformity with industry standards. Broadcaster's representatives are entitled to be accorded traditional screen credits such as "Executive in Charge of Production", but not screen credits customarily reserved for the producer such as "Producer" or "Executive Producer" credits.

CMPA Handbook: According to the CMPA, payment of a licence fee significantly below traditional licence fees for equivalent programs would breach the Agreement, including where a Broadcaster pays a reduced fee in return for an equity participation in the production.

The CMPA also seeks to further clarify each of the additional exploitation rights referred to above: (i) refers to free streaming of episodes from the Broadcaster's website, (ii) refers to cable and internet video-on-demand (VOD) viewing where the consumer does not pay for individual programs/episodes, (iii) refers to subscription-based viewing like Netflix, and (iv) excludes games and merchandising rights.

In addition to these basic exploitation rights, a Broadcaster may also negotiate to acquire additional rights. However, the acquisition of such additional rights is normally subject to a 50/50 gross revenue share between the Broadcaster and the producer.⁴ The additional rights that a Broadcaster may license are: (i) transaction based (meaning on a per episode or discrete program basis) non-linear on-demand exhibition on all platforms, where the consumer secures temporary or rental access to the content, as opposed to a permanent copy, (ii) electronic sell through or download to own on all platforms where the consumer secures a permanent copy of the content, (iii) in-flight and (iv) DVD and home video.

CMPA Handbook: The CMPA emphasizes that the acquisition of these additional rights is at the sole discretion of the producer. The CMPA also seeks to further clarify two of the additional rights above: (i) refers to VOD streaming where the consumer pays for each individual episode/program, and (ii) includes exploitation through iTunes where a consumer pays for a permanent copy of the episode/program.

If a Broadcaster acquires any additional rights, but does not exploit them within 12 months of the start of the licence term, the rights so acquired automatically revert to the producer. If the foregoing rights are retained by the producer, they are subject to a 12-month holdback commencing at the start of the licence term.⁵

In addition, a Broadcaster may acquire rights in certain types of producer-created digital content, such as websites, webisodes and mobisodes, either by paying an additional licence fee or by participating in a 50/50 revenue split with the producer. For the additional licence fee, the Broadcaster may acquire Canadian rights to free-to-consumer original digital content produced by the producer. For the 50/50 revenue split, and at the discretion of the producer, the Broadcaster may also acquire Canadian rights to revenue-generating digital content produced by the producer.

Broadcasters are precluded from acquiring or having a profit participation in "any other rights". A non-exhaustive list of these other rights that are exclusively retained by the producer is provided in the Agreement. For example, a Broadcaster may not acquire rights in: French-language and other language,⁶ format, theatrical, music publishing, non-promotional games and merchandising, all other non-theatrical, Canadian and international retransmission, Canadian and international sublicensing and distribution, and publishing of books, e-books or similar materials.

CMPA Handbook: The CMPA notes that the list of rights provided in the Agreement is illustrative, not exhaustive, and that "any other rights" not listed are exclusively retained by the producer. Additionally, the CMPA seeks to clarify those rights exclusively retained by the producer are exempted from the 12-month holdback requirement.

For television programs, other than "programs of national interest", the Broadcaster will recoup its equity investment pari passu with the producer and on a "most favoured nations" basis with other equity investors. Broadcasters are only entitled to recoup following the recoupment of any distribution advance in the financial structure. It should also be noted that, for recoupment purposes, Canadian film tax credits are treated as an equity investment of the producer.

CMPA Handbook: In the view of the CMPA, the operation of the Agreement should not affect the historical levels of equity participation in programs by Broadcasters. It expects that Broadcasters will pay higher licence fees in respect of projects with a financing gap. The CMPA also notes its intention to take action where there is a clear trend towards reductions in the fair market value licence fees offered by a Broadcaster and/or increases in the Broadcaster's equity investments.

If a Broadcaster makes an equity investment in a "program of national interest" and has also paid a licence fee that is in excess of the Canadian Media Fund ("CMF") threshold licence fee for the applicable genre, different rules apply with regard to the Broadcaster's recoupment of its investment. If the equity investment is $500,000⁸ or more and constitutes 30 per cent or more of the production budget, then the recoupment terms must be negotiated with the producer. If the equity investment is $500,000 or more and constitutes less than 30 per cent of the production budget, then the Broadcaster's equity investment will be recouped as provided in the CMF Guidelines. The CMF Guidelines require that recoupment is pari passu with all other equity investors, including the producer's provincial tax credit investment but excluding the producer's federal tax credit investment, following recoupment of any distribution advance in the financial structure.

If a super-licence fee is paid, the Broadcaster may negotiate for a higher revenue share of certain rights and for a share of the profits from the producer's exploitation of rights that are otherwise exclusively reserved for the producer. The Broadcaster may obtain a higher revenue share, meaning its participation rate can be increased from 50 per cent to a maximum of 75 per cent, for the following rights: transaction-based non-linear on-demand exhibition on all platforms, electronic sell-through or download-to-own platforms, in flight, DVD and home video, and producer-created revenue-generating original digital content.

CMPA Handbook: In the CMPA's view, the payment of a "super licence fee" provides an opportunity, not an entitlement, for the Broadcaster to negotiate a higher revenue share arrangement with the producer. The CMPA provides an illustration of how a "super licence fee" is triggered within the CMPA Handbook.

Broadcasters may also, upon payment of a super-licence fee, negotiate for a share of the profits from the exploitation of the rights that are exclusively reserved for the producer, such as the exploitation of non-promotional games and merchandising. A Broadcaster's profit participation in such reserved rights may not be greater than 1.5 times its dollar investment expressed as a percentage of the budget that is over and above the combined CMF threshold licence fee for the applicable genre plus the maximum licence fee top-up for that genre, to a maximum of 30 per cent.

The Agreement similarly protects the producer by limiting its permitted investment of film tax credits. A Producer may only invest up to a maximum of 75 per cent of eligible film tax credits in a project.

In terms of ongoing administration, the CMPA and the Broadcasters have agreed to meet on a semi-annual basis to discuss new issues or current provisions of the Agreement which are no longer effective.

There will no doubt be some disagreements between the parties regarding the Agreement and the need for further clarifications (for example, the Canada Media Fund recently announced that its eligibility rules would be revised in order to conform to the Agreement as they contradicted it in several respects). However, ultimately, the Agreement benefits both Canadian producers and the Broadcasters by establishing clear legal criteria and business terms for their agreements. Most importantly, it establishes a key framework for the Canadian media industry to move forward and prosper in the age of digital distribution and multiple media formats and platforms. Finally, and as a bonus, it is good news for entertainment lawyers too (as new and complex rules always are).

* With the assistance of Adrian Frank and Sondra Rebenchuk, Students-At-Law, which the author gratefully acknowledges.