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Shopping Agreements: The Pros and Cons as Compared to Option Agreements

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.

Shopping Agreements: The Pros and Cons as Compared to Option Agreements