Entertainment & Media Law Signal 

The long road to bringing a piece of intellectual property (IP) to the screen often begins, from a legal point of view, with securing rights to develop and produce the material. Traditionally, the owner of a script, format or other piece of IP and a producer enter into an option agreement, whereby the producer pays an initial option fee for the exclusive right to purchase the property within a specified period of time. That window is intended to give the opportunity to the producer to get the project off the ground.

“Shopping agreements” (sometimes referred to as “producer attachment agreements”) are increasingly used as alternatives to option agreements. They are often regarded as convenient substitutes as they typically require less time and expense to negotiate. Though shopping agreements are functionally similar to option agreements, writers and producers shouldn’t be misled by the notion that they’re equivalent in all aspects. A central function of a contract is to allocate risk between the parties. Shopping agreements and option agreements, by their nature, involve different configurations of risks and their suitability depends on the interests of the parties, the material being sought and other circumstances of the transaction. Whether to structure the deal in the form of a shopping agreement or option agreement should be carefully considered with an eye to some of the factors discussed below.

What is a shopping agreement?

A shopping agreement is an agreement between the owner of IP and a producer. Under a shopping agreement, the producer obtains the right from the owner to “shop” the property for a defined period of time to studios, networks, distributors, financiers and other potential buyers or backers. In doing so, the owner typically does not receive any payment from the producer for the right to shop the property. Rather, the owner benefits from a producer using their network, track record and sales experience in pitching the property.

During the term of the shopping agreement, the producer obtains the right – and is generally contractually obligated – to pitch the property to prospective buyers or financiers with the aim of getting it through the development and production pipeline. If the producer is successful and a buyer or financier expresses interest in the property, a shopping agreement allows the owner and producer to each negotiate and enter into separate agreements concerning the project with the interested party. The owner will negotiate the sale of rights to the property, while the producer will negotiate its attachment to the project.

Compensation

For a producer, a shopping agreement is an attractive approach to attach themselves to the project at no cost, whereas under an option agreement, a producer must make an initial outlay to acquire the option right. In this regard, the producer eschews the risk of making an upfront investment in IP that they ultimately may not be successful in selling or producing. By the same token, without any upfront compensation received by the producer, the producer arguably has no “skin in the game”. They may be less invested in setting up the project and may focus their energies elsewhere, having no financial investment at stake.

A shopping agreement may, however, be more favourable for an owner in the event that the property gains heat and stirs up interest after it is shopped around. Without a pre-negotiated purchase price attached to the property, as in the case of an option agreement, an owner under a shopping agreement is free to negotiate a purchase price directly with the buyer and to benefit from the upside, including any bidding war that might arise. Yet, the inverse also applies. For example, a screenwriter might enter into a shopping agreement for a well-written script with commercial potential, yet a movie with a similar premise is released shortly thereafter and becomes a box office bomb. Film and television trends being fickle as they are, the script may suddenly become dead in the water with no interested buyers due to the risk of repeating the same failure. The owner would miss out on any proceeds they would have otherwise received if they had entered into an option agreement.

Term

The term of a shopping agreement is typically shorter than an option agreement – 6 to 12 months as opposed to 12 to 18 months under an option agreement – since the producer is essentially receiving a free opportunity to shop the IP. If the shopping agreement is exclusive – shopping agreements can be both exclusive and non-exclusive – the owner has an even greater incentive to keep the term short so that the rights to shop are not tied up with only one producer.

A shopping agreement will usually contain a clause that protects the producer from a situation where the agreement expires while the producer is in the midst of negotiating with an eventual buyer, leading to a deal over the property with the owner but with no benefit accruing to the producer due to the expiry of the agreement. Such a clause would automatically extend the term for a period during which the producer is in meaningful negotiations with a prospective buyer. The owner may insist on a cap to that extended period so that it is not excessively prolonged.

A producer should also be mindful of the scenario in which the producer does the leg work in pitching the IP to a buyer, but the owner then strikes a deal with that same buyer only after the shopping agreement has expired. Language may be added that precludes the owner for a specified period following the expiry of the agreement from completing a deal with any buyer that the producer had previously submitted the IP to, unless the producer is also attached. Such a clause is often caveated that a deal may be reached without the producer’s attachment if the property was substantially changed since it was last pitched. If significant revisions were made to the IP or influential talent becomes attached to the project after the expiry of the agreement, the project’s marketability might improve and justify why a deal was reached only after the producer’s departure.

Ownership rights to property

Unlike an option agreement, a shopping agreement confers no rights to the producer on the property itself. In this regard, a shopping agreement is fundamentally an agreement for services, rather than an agreement for the purchase of property rights. Without any rights attaching to the property, a shopping agreement is arguably easier to breach by the owner and therefore accords less protection to the producer. An owner could go behind the producer’s back and sell the rights to another party. The producer would have no recourse but to make a claim for a breach of contract. Conversely, under an option agreement, the producer has acquired an interest in the property which reverts back to the owner only after the expiry of the option. If the owner wants to sell or option off the same interest in the property, another buyer would expect representations and warranties from the owner that the interest to be acquired is legally unencumbered and that no other person holds any contingent ownership rights in the property.

Under a shopping agreement, an owner typically has more control over the property and over any eventual sale to a buyer than under an option agreement. A shopping agreement will typically give the owner a right to approve whether to move forward with a particular buyer. An option agreement generally does not impose such a restriction on the producer to close a deal. In addition, the owner may insist that they or one of their representatives are in attendance at a pitch meeting or that they are notified of any pitch meeting.

Conclusion

As surveyed above, there are drawbacks and benefits to both shopping agreements and option agreements for each of the parties. There is no universal answer as to which type of agreement is preferable. While a shopping agreement often appears attractive due to its simplicity and the parties’ desire just to “get something in writing”, it can lead to significant and unforeseen disadvantages for an owner or producer down the road if due consideration is not given to the differences between the agreements.

The Canadian Radio-television and Telecommunications Commission has published a new policy designed to ease the economic pressure squeezing local television newscasts in the same week in which a report was published clarifying how quickly young Canadians are pivoting to digital news platforms.

Under ss. 34 and 52(1) of the Broadcasting Distribution Regulations, broadcast distribution undertakings (BDUs) – think Rogers, BCE, Videotron, Telus and Shaw – must contribute 5% of annual gross revenue from broadcasting activities to a handful of funds that support Canadian programming. The CRTC’s new policy framework for local and community television (Broadcasting Regulatory Policy CRTC 2016-224) allows BDUs to devote part of this contribution to the production of local news on local television stations by providing them with the flexibility to transfer contributions from one community channel to another and to dedicate all or part of their local expression contribution to fund local news programming. The explicit intention of this flexibility is to encourage BDUs to shift funding from community stations to the production of local TV news. As CRTC Chairman Jean-Pierre Blais told the CBC this week, “Instead of putting money, year after year, into community channels . . . that money should be allowed to be flexed into news.”

The rebalancing is, in part, a response to a challenging advertising market roiled by rapidly evolving media consumption habits. “As economic pressures increase,” explains the CRTC in the Policy, “resources may decrease, threatening the integrity of editorial decisions and weakening the ecosystem for local news gathering, production and dissemination across all Canadian media.” The CRTC illustrated the economic pressure: “Conventional television stations, the primary source for the local news and information Canadians receive, are not as profitable as they were five years ago and that some may be at risk of closing.” Profit before interest and taxes (PBIT) margins for private conventional television stations have declined from 7.1% in 2011 to an estimated -8% in 2015; and PBIT margins for private conventional television stations in 2015 are estimated to be at -7.6% in markets with more than one million people, -3.5% in medium markets and -15.9% in markets with fewer than 300,000 people.

The Reuters Institute for the Study of Journalism at the University of Oxford’s Digital News Report was also published this week and it suggests that the pressure is rooted in demographically-tied changing media consumption habits that may be impossible to reverse. The Reuters/Oxford report canvassed 56,000 people in 26 countries, including Canada. It confirmed that television remains a preferred news source for older generations but is losing traction with younger people. In the three years between 2013 and 2016, the number of people under 35 in the United Kingdom who use TV as a source of news fell by 21% to 42%. The corresponding drop was 20% in France and 11% in the US. The study did not include a Canadian figure. On the other hand, fully 71% of Canadian respondents told researchers that they still turned to television as a source of news at least once a week. This compares to a high of 83% in Italy and a low of 65% in Australia. In other words, TV news may be dying but it’s far from dead.

Other highlights of the Policy in brief:

• Exhibition levels remain unchanged.  Commercial English-language stations will continue to be required to broadcast at least 7 hours of local programming per week in non-metropolitan markets and at least 14 hours per week in metropolitan markets. Local programming requirements for commercial French-language stations will continue to be assessed on a case-by-case basis, using a benchmark minimum of five hours of local programming per week. However, all licensees will be required to broadcast a minimum level of local news and to allocate a percentage of their previous year’s revenues to such programming, with the exhibition and expenditure levels to be determined on a case-by-case basis based on historical levels.
• New Independent Local News Fund.  As of September 1, 2017, a new fund, to be named the Independent Local News Fund, will replace the Small Market Local Production Fund (SMLPF) with the objective of supporting the production of locally reflective news and information by private independent television stations. It will be funded by BDUs which will contribute 0.3% – about $23 million in total – of their previous year’s broadcast revenues. As an interim measure, as of September 1, 2016, vertically integrated broadcast ownership groups will be ineligible for the SMLPF.
• Adjustments to the community television framework.  A handful of adjustments were made to ensure that the community television framework continues to promote the objectives of the Broadcast Act. These include increasing over time the minimum proportion of local expression expenses that broadcast distribution undertakings must allocate to direct programming costs from the current requirement of 50% to 75%, requiring BDUs to create citizen advisory committees for community channels in markets with a population of over one million people and encouraging BDUs and access producers to make content available on multiple platforms to all Canadians

The Federal Court of Canada recently granted three large broadcasters an order for an injunction* against retailers of pre-loaded “plug-and-play” set-top boxes.  The apps pre-loaded on the boxes allow consumers to access TV programs and movies without cable or other subscriptions.  As Madam Justice Tremblay-Lamer observed:

These boxes have several uses for consumers, some of which are perfectly legal and some which skirt around the fringes of copyright law.  This is not the first time a new technology has been alleged to violate copyright law, nor will it be the last.

In her view, the allegations in this particular instance were strong enough to support a prima facie case of copyright infringement and the injunction order.  The matter will proceed to trial at a later date to resolve the various copyright and related issues.

A focus on the copyright issues

Bell, Rogers and TVA/Videotron each have exclusive rights under the Copyright Act to – in lay terms – broadcast, deliver and copy a range of TV programs and movies in Canada.  The television business model relies on broadcasters’ ability to exploit these rights.  The Plaintiffs argued that

pre-loaded set-top boxes represent an existential threat to [their] line of business as piracy is one of the top causes for declining subscriptions for television services in Canada and leads to annual decreases in revenue.

A central question before the Court was whether the set-top box retailers were simply the “conduit” for consumers’ infringing activities, or were instead themselves infringing copyright.  The Copyright Act does provide a limited shield for “conduit” services that provide only the means to deliver copyright-protected programs, images or music:

2.4(1) For the purposes of communication to the public by telecommunication, […] (b) a person whose only act in respect of the communication of a work or other subject-matter to the public consists of providing the means of telecommunication necessary for another person to so communicate the work or other subject-matter does not communicate that work or other subject-matter to the public.

The Court found that this statutory defence was not available to the Defendants.  They had, said the Court, deliberately encouraged consumers to use the set-top boxes to circumvent the broadcasters’ subscription-based services.  They had promoted their set-top boxes to consumers as a means to cancel their cable subscriptions (using slogans such as “Original Cable Killer”), and had also offered tutorials on how to use the pre-loaded apps to obtain “free” programming.   The Court said that these activities “went above and beyond” selling a simple piece of hardware, and instead related to the content of the copyright-protected programming.  This constituted prima facie infringement.

The Court also agreed with the broadcasters that inducing and authorizing consumers to infringe copyright was an additional serious issue to be tried.

The Court’s order not only enjoins the five named retailers from continuing to configure, market and sell the pre-loaded set-top boxes; it allows the broadcasters to serve the order on other retailers who are engaged in the same activities.

 *Thanks to Smart & Biggar for making the link to the decision available online.

On May 2, 2016 the government of British Columbia announced significant changes to the province’s film, television and digital media tax credit programs. While the changes remain to be approved by the provincial legislature, they will involve the following:

• the Basic Production Services tax credit (PTSC) will drop from 33% to 28% of eligible expenditures
• the Digital Animation or Visual Effects tax credit (DAVE) will drop from 17.5% to 16% of eligible expenditures

Note that the Film Incentive British Columbia tax credit (the “Canadian content” credit) will not be altered by the changes.

The changes will become effective on September 30, 2016, thereby allowing a significant transition period.

For a full run-down of the specifics of the announced changes, see this detailed Dentons client alert.

The Department of Canadian Heritage has launched a review of the federal government’s cultural policy toolkit that could bring significant changes to the governance framework that underpins the broadcasting, media and cultural industries.

Announced this past weekend by Heritage Minister Mélanie Joly, the review is a response to the digital shift that is transforming the creative sector. The stated goal of the review is to ensure that Canadian content is positioned to succeed in an increasingly global marketplace which, as stakeholders well know, has been buffeted by the rapid evolution of new technologies that have changed the ways content is created and consumed.

Minister Joly made it clear in an interview with the Globe and Mail that each of the main governance levers – laws, policies, institutions and programs – will be evaluated. She told the Globe that she believes “the current model is broken, and we need to have a conversation to bring it up to date” and that “everything is on the table”.

Beyond a generally “digital approach”, it’s anyone’s guess as to what the policy outcomes of the review will be. The minister has indicated that she doesn’t want to go into consultations with preconceived notions of what they might yield, and has refused to speculate about eventual changes. However, the “drivers of change” articulated in the announcement of the review provide some sense of the likely focus:

1. A fluid environment that blurs traditional categories like “creator” and “user”, “artists” and “audience”, and “professional” and “amateur”;
2. The emergence of new players and intermediaries that have disrupted traditional business models;
3. An increasingly open and interconnected world in which access to a global marketplace comes at the price of stiff competition in formerly local cultural markets; and
4. Changes in consumer expectations driven by increased digital connectivity and mobility.

The consensus from the commentariat is that the review will be the most comprehensive re-evaluation of the industry since the Mulroney government revised the Broadcasting Act in 1991.

Content producers and other stakeholders should note that an online “pre-consultation questionnaire” can be accessed on the ministry’s website until May 20, 2016. The pre-consultation will help define the scope of the public consultation which will begin this summer and wrap up by the end of the year. An expert advisory group will be struck to shepherd the review, which is officially called Strengthening Canadian Content Creation, Discovery and Export in a Digital World.