Hollywood Accounting Back In Court: How Has Spinal Tap Only Earned $81 In Merchandise Sales For Its Creators?

from the the-games-hollywood-plays dept

We’ve discussed the amazing bullshit known as Hollywood Accounting many times here on Techdirt. This is the trick whereby big Hollywood studios basically get out of paying anyone royalties by claiming movies (including big, mega-famous ones) are not profitable. The most simple version of this trick is that the big studio sets up an independent corporation to represent “the film.” It then “sells” services to that corporation, which it owns, at exorbitant prices. So, for example, it will charge a “marketing and distribution fee,” which may actually be many multiples of the film’s actual budget. No cash changes hands here. It’s just a paper transaction, but because of those “fees” any money made from the film remains with the big Hollywood studio, and is not passed on to anyone who has “participation” in the net profits from the film.

Things can get more complex than that, but that’s a basic version of the scam. This has come out a lot in the past few years, thanks to a series of lawsuits. It’s how we know that a Harry Potter film that brought in basically a billion dollars in revenue still declared a $167 million “loss”. It’s why one of the highest grossing films ever, Return of the Jedi, still claims to be in the red, when it comes to paying out residuals. That’s a film that’s made $33 billion (with a b). Not profitable, under Hollywood accounting. Another film whose books were opened up in a lawsuit was Goodfellas, where Warner Bros. was not only accused of charging $40 million in interest on the $30 million cost of production, but also of hiding over $100 million in revenue.

In another bizarre case from a few years ago, two subsidiaries of Vivendi went after each other over Hollywood accounting — with StudioCanal suing Universal for pulling such an accounting trick on a bunch of famous movies. Universal hit back by claiming it actually overpaid StudioCanal.

Those companies have all come up in a new lawsuit, filed by the well known actor/singer/voice-actor Harry Shearer over the iconic and classic movie This is Spinal Tap. Shearer claims that various Vivendi subsidiaries, including both StudioCanal and Universal played various Hollywood accounting games to screw him and his Spinal Tap co-creators (Chris Guest, Michael McKean and Rob Reiner) out of millions of dollars. The complaint is pretty short and straightforward. The headline grabbing numbers that everyone’s picking up on are these:

… according to Vivendi, the four creators? share of total worldwide merchandising income between 1984 and 2006 was $81 (eighty-one) dollars. Between 1989 and 2006 total income from music sales was $98 (ninety-eight) dollars. Over the past two years, Vivendi has failed to provide accounting statements at all.

Obviously, that’s just merchandising and music royalties. But… still. Shearer claims that Vivendi played some Hollywood accounting tricks via various subsidiaries, including bundling various unsuccessful films with Spinal Tap to basically hide the profits from the film.

Those profit participation statements, Plaintiff has recently discovered, reflect anti-competitive and unfair business practices in their cross-collateralization of revenues between different Vivendi subsidiaries; unfairly bundle and cross-collateralized unsuccessful films in the Embassy catalogue with TIST; were not delivered to other creators; and fraudulently underreported the revenues owed to Plaintiff and other members of STP. Over the last two years, Vivendi and Canal have failed to account at all on TIST revenues.

Unfortunately, while there are hints and allegations about all of this, the full details are not revealed… yet. If the case continues, they may eventually come out.

There are a few other interesting tidbits in the lawsuit. Shearer, Guest and McKean created the Tap characters and many of the songs many years before the movie. But apparently one of the studios trademarked the name and has tried to block Shearer from using Spinal Tap or his character’s name Derrick Smalls, unless he pays them for a license. Shearer argues that the studios have abandoned the trademarks, because they didn’t oppose a brewery from registering “Spinal Tap” for a beer product (that’s not quite how trademark abandonment works, so this seems pretty weak). Either way, Shearer wants the court to give a declaratory judgment of non-infringement.

The other interesting tidbit is that the complaint twice mentions that Shearer is filing for copyright assignment termination on the songs and the film itself. We’ve written many times about termination rights in copyright as well. These are the rights (which cannot be contracted away) that allow the original creators to reclaim any copyrights that they have assigned to others after 35 years. The recording industry has been freaking out about this over the past few years, and now it looks like Hollywood may need to wake up to the issue as well. It’s not entirely clear why it’s even relevant to this lawsuit, but it is a potentially big deal. Shearer (and, I assume, the other Tap creators) may soon be able to take back the copyright on the film and the music themselves.

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Companies: studiocanal, vivendi

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Comments on “Hollywood Accounting Back In Court: How Has Spinal Tap Only Earned $81 In Merchandise Sales For Its Creators?”

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70 Comments
Anonymous Coward says:

Re: Re: Re:

Because no tax is dodged. How it works is as follows (I know, example numbers)

Subsidiary Net Profit – 100,000
Hollywood Net Profit – 1,000,000

Hollywood issues fees of 200,000

Subsidiary Net Loss – (100,000)
Hollywood Net Profit – 1,200,000

In the end, the IRS gets the EXACT same amount of tax, so they don’t care. What it screws over is payments that are based on the net profit of the film, which is 100% allocated to the subsidiary.

Same goes for all other bundling techniques, its moving the profit number around, but the end tax payment is exactly the same.

Anonymous Coward says:

When you make a deal with the devil...

Don’t act surprised when you get burned.

I sadly do not feel sorry for anyone getting hurt by these guys. Their reputation most certainly precedes them! I also believe that IP infringement is a natural extension of their batshit greed as well.

I will never feel sorry for that industry or the people getting screwed when they bend over for it!

Anonymous Coward says:

Re: Re: When you make a deal with the devil...

So the moral of the story is…

“Don’t read the contracts you sign and expect good things?”

Perhaps you are not familiar with things and how they go when you get the lawyers involved. Those that signed knew what they were doing, they just let themselves be dazzled and intentionally ignored all the “green” warning signs and instead treated them all as “green” GO signs.

Sure, I am even willing to give the first round of suckers a pass myself, but the first round of suckers are already pushing up daisies.

I think, at this point, we can avoid bringing them up as a distraction on this topic.

Thad (user link) says:

Re: Re: Re: When you make a deal with the devil...

Bullshit.

The contract entitled Shearer, Guest, McKean, and Reiner to a combined 40% share of gross. Universal is lying about what the film and soundtrack have grossed.

The contract is not the problem. The company that they signed the contract with is not the problem either. The company that, decades later, bought the rights to the film is the problem.

Yeah, obviously before they signed that contract they should have known that, in the future, the film and soundtrack rights would be bought by a completely different company that would then lie about the gross. What a bunch of rubes.

Anonymous Coward says:

Re: Re: Re:2 When you make a deal with the devil...

The contract is always the problem. When you sign your life or rights away to someone that can “hide” shit from you cannot remove blame from yourself.

Sure it’s not fair or even legal in many cases, but they STILL signed contracts that makes it easy for these companies to lie and therefore difficult to receive legal remedy. Additionally, they come to the defense of these companies like the paid whores they are and are active participants in the corruption of copyright laws. If these poor rich and out of touch cock gobblers wanted they could write congress en masse and likely get something done, but this does not happen.

They are perfectly happy with their “fucked over a barrel” millions. We just happen to have a little bitching and moaning about the devil having their souls is all!

Thad (user link) says:

Re: Re: Re:3 When you make a deal with the devil...

The contract is always the problem. When you sign your life or rights away to someone that can "hide" shit from you cannot remove blame from yourself.

You’ve just described 100% of all legal agreements.

This is completely baffling Bizarro logic. The purpose of a contract is to prevent a partner from violating an agreement. If there is no contract, then there is no proof that there was any agreement in the first place.

Any time anyone does anything, whether it’s marriage or registering to vote or browsing a website with a ToS button at the bottom or buying something with a credit card, they’re signing their rights away to someone who can hide things from them. Your suggestion that they’re then responsible if the other party breaches the contract is crazy, man-bites-dog gibberish.

Sure it’s not fair or even legal in many cases

Which would be why Harry Shearer is suing. Get it?

Additionally, they come to the defense of these companies like the paid whores they are and are active participants in the corruption of copyright laws. If these poor rich and out of touch cock gobblers wanted they could write congress en masse and likely get something done, but this does not happen.

Again, you’re aware that Harry Shearer is suing the company, yes?

And it’s not like this is the first time he’s vocally protested the terms of a contract. It’s not even the first time he’s vocally protested the terms of a contract in the past year.

Shearer is outspoken about creators’ rights. And in case you missed it, he’s also rich. (Because he signed payment contracts with other studios, which did honor those contracts, you see.) He’s not suing because he needs the money; he’s suing because he wants to set a legal precedent so that it’s harder for studios to continue this predatory behavior and continue ripping off creators — not just him but everybody in the business.

Chuck says:

Re: When you make a deal with the devil...

On the one hand, I agree with you. Problem is, this is a movie from the 1980’s, at a time when, unlike now, there really wasn’t any alternate path to an audience.

But yes, anyone who gets buttf**ked by a studio since about 2004 or so, I agree completely. You made your bed and now you get to sleep in it.

kallethen says:

Re: When you make a deal with the devil...

While I somewhat agree with what you are saying… I can’t get behind this sentiment. You’re saying we should let the studios get away with this and say to the artists, “You should have known better, so tough luck!”

No. Just no. That’s just victim blaming.

Just because somebody “should have known better” doesn’t mean that it’s okay.

Anonymous Coward says:

Re: Re: When you make a deal with the devil...

So when a person commits suicide are they a victim or a perpetrator?

I don’t think it is okay when someone commits suicide, but I will not feel sorry for them. Any coward willing to end it instead of spending the rest of their life in attempts to improve things or fight for what is right deserves nothing and gives up everything.

There have been actors that figured out how to protect their interests like RDJ http://www.cinemablend.com/new/Huge-Salary-Robert-Downey-Jr-Earn-Captain-America-3-67685.html

And that might not even be the best example. But at the end of the day, people need to stop rolling the fuck over, because when you roll the fuck over, you are no longer a victim, but a part of the fucking problem!

Victim blaming is blaming a woman’s short dress for getting raped… THAT is fucking victim blaming!

Blaming a person for failing to read a contract and getting fucked over in a deal with the devil? Yea, I have a difficult time finding any victims here!

Thad (user link) says:

Re: Re: Re: When you make a deal with the devil...

Wow, dude.

You should get out of this conversation and read up on depression and mental illness for awhile. As big an advocate as I am of creators’ rights, there are more important things in this world, and you’ve just bragged about your utter lack of empathy and compassion for people who are sick. I am hoping that this is a simple matter of ignorance on your part and that, if you gain a better understanding of how mental health works, you will change your views on people who are suicidal.

Anonymous Coward says:

Re: Re: Re:2 When you make a deal with the devil...

So asshole murders themselves, causes pain and misery in other people that will miss them, and I am the asshole for not having empathy?

Sir you are indeed a fucked up individual. If I run around providing empathy for people willing to cause suffering to others because they suffer as well, then I do no one any service… especially myself!

I have empathy for their plight until they take their own life, after that point I have nothing to spend that empathy on.

Read Samuel 2:12 verses 13~23

I cannot serve those that are gone, I may only serve those that are here. If you remove yourself from life, then the pain and anguish I visit upon myself over it provides no benefit. Sure, I will be sad, but sorry… not a chance! And I sure as fuck cannot empathize with that and neither can I have any compassion for it!

You need to reconsider what compassion means! If I can help a suicidal person I will, but I am not letting it rule my life, especially after they are gone, and you talking down against it probably means you need a red herring to divert the fact that you probably know I am right.

And one final thing. Where in there did you think I was bragging? I am not bragging about anything, but you have terrible idea of what empathy and compassion should be since they are so misdirected! I like to save my compassion and empathy for people helping to make life better NOT for those making it worse on those around them!

Anonymous Coward says:

Re: Re: Re: When you make a deal with the devil...

Any coward willing to end it instead of spending the rest of their life in attempts to improve things or fight for what is right deserves nothing and gives up everything.

The coward is the one who is afraid to just say no and is willing to go along with anything so as long as it prolongs a measly existence. The coward is the one who is afraid to die to improve things. The coward is the one who trades quality of life for quantity of life, deserves neither and ultimately loses both.

PaulT (profile) says:

“Shearer argues that the studios have abandoned the trademarks, because they didn’t oppose a brewery from registering “Spinal Tap” for a beer product”

I’m with him all the way on the general principle here, but that seems very weak. Unless the beer has a direct reference to the movie or its fictional band, surely all the brewery would have to say is that they took the name from the same medical procedure as the band did? If I understand correctly, it should be irrelevant anyway unless either party is trading in the other’s industry.

If trademark is a real issue here (as opposed to simple copyright & cartel con games), then it has to be noted that the system that allows existing terms to be trademarked in unrelated industries is a big part of the problem.

Norahc (profile) says:

Hollywood Accounting

Let’s face it…Hollywood Accounting is the only way they can come up with their piracy cost the creators x number of dollars every year claims. Not to mention it also works in local governments so they can claim they will bring x number of dollars and y number of jobs to a local community in exchange for tax breaks.

Anonymous Coward says:

“How Has Spinal Tap Only Earned $81 In Merchandise Sales For Its Creators?”

Because the Hollywood studios will no doubt say that it’s due to piracy the amount is only $81 and if it were not for piracy the amount would be in the region of $1 billion pounds plus profit. You just got to love Hollywood accounting where they slice and dice of the profits claiming for anything they can get away with and laying the blame at piracy.

Thad (user link) says:

Re: Re: Re: Re:

Yes, and how many people do you know who bought bootleg VHS tapes?

I’ll grant that illegal music downloads got big in the late 1990’s, with illegal movie downloads following a few years later as hard drive sizes and broadband access increased. But by then, the movie had been a massive success for over a decade.

PaulT (profile) says:

Re: Re: Re:2 Re:

“Yes, and how many people do you know who bought bootleg VHS tapes?”

Lots of people. Almost every market you went to in the 80s had stalls with a good selection, especially in the time when Hollywood was shitting their pants over the format and refused to release anything legally. People would pay good money for a crappy 5th gen copy in the time when you had to pay £100 for an ex rental, if there was a 1st gen available at all.

Digital piracy increased the ease and availability, it didn’t invent the rampant piracy industry.

David says:

Re: I wonder...

No, they are not hiding it from the IRS, it’s just not the “Movie” paying the taxes. Film (the company) makes $1M, Studio charges Film (the company) $1M for reasons. Film (the company) pays no taxes because it didn’t make anything (because it was over-charged, but the money is gone). The Studios do pay taxes on net of what the $1M was charged for.

The purpose of this is to insure the Studios always make money, but spreading the failure of bad movies (the companies) across the succeeding movies (the companies), leaving the artists and investors expecting net profits to pound sand.

That’s assuming there aren’t also other off-shore “companies” overcharging the Studios for nonsense services in order to keep the profits overseas at cheaper corporate tax rates.

That Anonymous Coward (profile) says:

Gee it sounds like accounting tricks to hide income which in turn would lower their taxes. Perhaps its time someone look at the tax code and explain to someone paying 23% how a studio takes in $500 Billion and somehow pays 2% because of their losses.

The system is outdated & antiquated. A throw-back to the good old days when the fat cats in the front office held their stars captive and took the lions share. Its time to force the books open, demand clarity, and stop letting them claim to be making nothing as the money rolls in.

You ever stop to wonder if some of the Hollywood execs who scream the loudest about piracy are just looking at the balance sheets they show investors who they are shafting?

Anonymous Coward says:

Taxes and IRS

I used to wonder about this as well.
But the corporation that was created to make just the movie made no money. The studio provided services and high prices to the movie corporation. The studio, I assume still paid their taxes on that income. It’s just that anyone hitching their cart to the movie corporation is SOL.

DB (profile) says:

GAAP makes 'Hollywood Accounting' untenable

Stronge accounting guidelines (GAAP) have been around in the U.S. for about a decade. The global version, IFRS, has lagged and had more holes, but is now well established.

My guess is that the reason they haven’t gotten an accounting in at least two years is that no one will put their professional status at risk by signing off on the fiction.

Prior to a decade ago, an accountant could have claimed that some rules were ambiguous or open to interpretation. Then they could claim that they were using a now-blatantly-invalid structure during a transition period. Now they have no cover.

art guerrilla (profile) says:

Re: Re:

seriously, over 17-22 years of a fairly popular comedy ‘brand’ with some lasting power featuring a semi-well-known roster of established comedians, and LESS THAN $100 in merch and LESS THAN $100 in song royalties ? ? ?
spinal tap ? i think their anus got tapped…
what that tells you is: such ‘deals’ are worthless to the point of breathtakingly insulting…
i mean, the grifters all up and down the line getting their cut for nothing, can’t let the ACTUAL CREATORS get a taste ? ? ?
LESS THAN $100…
SPLIT 4 WAYS ! ! !
smart, talented, -presumably- professionally represented sharp guys at the top of their game, and they get screwed over; what chance do ordinary schlubs have against such a rapacious system ? ? ?
(not just the music biz, but all biz…)

Anonymous Coward says:

Re: let's try a different one

Stop wasting my time
You know what I want
You know what I need
Or maybe you don’t
Do I have to come right
Flat out and tell you everything?

Gimme some money
Gimme sone money

I’m nobody’s fool
I’m nobody’s clown
I’m treating you cool
I’m putting you down
But baby I don’t intend to leave empty handed

Gimme some money
Gimme some money

ANON says:

Still amazing...

Amazing that nobody has gone to jail or lost their accounting license over this crap. As an executive or accountant for a company, you owe a duty to the shareholders (those expecting to share in the profits – to operate in a straightforward and honest manner with their interest at heart. (Yeah, I know, I said that with a straight face.) just as it is criminal for an executive to sign a deal to buy widgets from his brother’s company at three times the price, it is criminal for the executives on the movie company to agree to “management services” at far too high a price for the services offered, and to a company they also have ties to.

We prosecute insider trading, why not these guys too?

Thad (user link) says:

Re: Smart actors

You’re right; I said "gross" elsewhere but according to page 7 it’s actually net.

Regardless, blaming the creators for falling for an unethical accounting trick tends to let the studios off the hook for pulling unethical accounting tricks.

Further, Shearer is also alleging that Vivendi hasn’t lived up to its contractual obligation to keep the creators apprised of the annual profits.

PaulT (profile) says:

Re: Re: Re:3 Smart actors

Like anywhere else, it’s all about the leverage and power you have. Robert Downey Jr. able to demand whatever he wanted to return for Iron Man 2 and the studio agreed because they needed him. However, they had no problem recasting Terence Howard’s role for the sequel when he tried getting more money than they offered.

That’s for an established role in a successful franchise, so imagine how little power these guys have when tackling new material. One or 2 stars on a project might be able to make serious demands, else the studio will always have the upper hand. If the offer on the table is “take a low upfront salary and get some net points” or “we’ll reconsider hiring you”, most actors will accept the former.

Anonymous Coward says:

Re: Re:

Will they be able to bribe their way out of this one I wonder

Typically the judge writes something very critical of the studios, implying that they’ll look closely at the finances. Then the studios quickly offer to settle with the plaintiffs, to avoid discovery etc. Hollywood accounting is able to persist because it’s never really gone to trial.

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