Tolkien Estate Versus New Line Cinema

On Friday, a Los Angeles Superior Court judge barred the family of J.R.R. Tolkien from punitive damages in their lawsuit against New Line Cinema for failure to pay royalties on the Lord of the Rings film trilogy. However, Judge Ann I. Jones did clear the way for the heirs to continue their $150 million fraud suit against the studio.

Almost everyone has heard the term "Hollywood accounting," which refers to the creative accounting film studios use to turn a box office blockbuster into a financial disaster on paper.

When this happens, those writers or actors who accepted a deal for net profit percentage points are left out in the cold because--on paper--the film lost money so there was no net profit. The January 22, 1990 edition of Time magazine had this to say about net percentage points:

Hollywood's megastars demand a slice of the gross because they know that most films will never pay any earnings to holders of net-profit percentages, which [actor Eddie] Murphy has derided as "monkey points."

Probably the most well-known case of a writer suing a studio that used creative accounting was the Buchwald v. Paramount case in 1990.

Writer and satirist Art Buchwald wrote a screen treatment for a story about an African king who was overthrown while visiting the U.S. His 1983 contract stated that, if a film was made "based upon" his treatment, he would receive $265,000 and 19% of the net profit. When Paramount released Coming to America in 1988 and claimed the story of an African king who comes to the U.S. was written by its star, Eddie Murphy, Buchwald and his partner Alain Bernheim sued.

Buchwald's lawsuit was in two parts. First he had to sue for breach of contract, claiming the studio had used his treatment. In January, 1990, a Los Angeles judge ruled that Paramount had indeed used Buchwald's treatment and awarded him $250,000.

In the second phase of the trial, Paramount claimed that, although they'd had $350 million in box office receipts, the film lost money. The court found that the studio's accounting practices were "unconscionable." Paramount offered a settlement for $900,000. Buchwald accepted the deal despite the fact that he'd spent more than $2 million litigating the case.

So how does Hollywood pull off a stunt like turning a box office success into a losing proposition?

Generally a studio spins off subsidiaries to handle production, marketing and distribution. Those entities charge the parent company huge fees for their services, eating up more than 50% of the gross profits of a film as overhead charges. In the case of the Coming to America film, Time magazine said:

. . . half was kept by theaters showing the film. The rest went for shooting the picture (one cost estimate: $40 million), distribution fees charged by Paramount ($50 million), studio overhead ($5 million), film prints and promotion ($15 million), Murphy's salary ($8 million) and other expenses.

Writers would be well-advised to demand gross percentage points (before expenses are subtracted) rather than net percentage points (after expenses are taken out). Remember what Eddie Murphy implied: You're a monkey if you accept net percentage points.

Back to the Tolkien lawsuit. In February, Tolkien's son and daughter, Christopher Tolkien and Priscilla Tolkien, who had created a charity titled The Tolkien Trust after their father's death, sued New Line Cinema.

The Tolkien heirs, together with Tolkien's publisher HarperCollins, sued New Line for failing to pay royalties on the Lord of the Ring trilogy and to obtain a court order to prevent New Line from its plan to produce two movies based on The Hobbit.

In May, the London Times interviewed Christopher Tolkien, now 83 years old:

The Trustees claim that they and HarperCollins, the publishers, are owed $150m by New Line Cinema under a deal for a 7.5% share of profits that was signed in 1969, when his father reluctantly sold film rights to pay a tax bill.

The Associated Press reported:

. . . the lawsuit claims New Line sent millions of dollars to Time Warner Inc.'s AOL, improperly claiming they were for advertising expenses. The lawsuit also claims the studio built production offices and facilities in New Zealand and listed them as expenses for the "Lord of the Rings" films, although the heirs claim they are now being used for other New Line projects.

The AP also stated:

New Line's attorneys successfully argued that Tolkien's heirs had to demonstrate a "public wrong" under New York law — which governs the contracts — to claim punitive damages if they win at trial. [Judge] Jones ruled that the heirs' grievance "is clearly seeking to vindicate private wrongs."

So, while the heirs cannot sue for punitive damages, they can still sue for their actual losses incurred by the failure of New Line to pay them as stipulated in their contract.

The trial is scheduled to begin next October.